Virtus Investment Partners Inc (VRTS) 2016 Q1 法說會逐字稿

Good morning. My name is Bridget and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call.

The slide presentation for this call is available in the investor relations section of the Virtus website, www.Virtus.com. This call is being recorded and will be available for replay on the Virtus website. (Operator Instructions)

I will now turn the conference to your host, Jeanne Hess.

Thank you and good morning, everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the first quarter of 2016.

Before we begin, I direct your attention to the important disclosures on page 2 of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those discussed in the statements. These statements may be identified by such words as expect, anticipate, believe, outlook, may, and similar terms.

For a discussion of these risks and uncertainties, please see the risk factors and management discussion and analysis sections of our periodic reports that are filed with the SEC, as well as our other recent filings which are available in the investor relations section of our website, Virtus.com. We do not undertake any obligation to update forward-looking statements.

In addition to results presented on a GAAP basis, Virtus uses certain non-GAAP measures to evaluate its financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our earnings press release, which is available on our website.

For this call, we have a presentation, including an appendix, that is accessible with the webcast through the investor relations section of Virtus.com.

Now I would like to turn the call over to our President and CEO, George Aylward.

Thank you, Jeanne. Good morning, everyone. I will start today by providing an overview of the quarter and an update on our capital strategy. Mike will then provide more detail on the financial results and balance sheet.

Now let's begin with assets and flows. We ended the quarter with assets under management of $45.7 billion, which represents a sequential quarter decline of 3.7% as net outflows offset market appreciation. Total sales were $2.8 billion, a decline from $3.2 billion in the sequential quarter, reflecting lower sales in mutual funds.

Mutual fund sales of $2.2 billion were down slightly from $2.5 billion sequentially and mutual fund outflows of $2.6 billion reflect elevated redemptions. Both the lower sales and elevated redemptions were primarily attributable to our emerging market opportunities fund, following an organizational change at the subadvisor, Vontobel, in early March, when it was announced the portfolio manager would be leaving.

In terms of redemptions in the emerging market fund, the majority of the elevated outflows in the quarter came from changes made in certain discretionary models. As we've noted in the past, the fund is widely held and had a meaningful presence in discretionary models. Outflows from traditional FA-driven business also increased after the organizational change, but have been more muted than those from discretionary models.

Vontobel continues to employ the same bottoms-up investment approach and team-based process that has made its emerging markets and other global equity strategies successful over many years. It is important to note that while there was a change at the portfolio management level, the rest of the team remains in place.

In April, the emerging market fund remained our best-selling funding and is available through all of our distribution partners. Net outflows in the fund are tracking to $600 million for the month, an improvement from the $1.1 billion of outflows in March.

Of course, the remainder of our funds relative investment performance continue to be very strong with 17 of our rated funds having four and five stars at March 31. In addition, the Virtus Global REIT Fund was recently honored with a 2016 Lipper Fund Award for the three-year period ended December 31, 2015. This performance demonstrates the institutional quality of the managers we offer, including Newfleet Asset Management, Duff & Phelps Investment Management, and Kayne Anderson Rudnick.

Our Low Duration, Global REIT, and Small-Cap Sustainable Growth Funds continue to gain investor interest and all three contributed positive flows in the quarter. In addition, the Multi-Strategy Target Return Fund, subadvised by Aviva Investors, generated $50 million-plus of positive net flows in the quarter, which we believe is a solid start for a very new fund.

The strong performance has also helped generate positive flows in other product categories, the separately-managed accounts delivering positive net flows due to the strong performance of Kayne Anderson's small-cap strategies and with ETFs also generating positive flows. While institutional was negative for the quarter, due to $115 million partial redemption of a low-fee portion of a client account, solid investment performance has resulted in the strongest pipeline that we have seen in years. Converting the pipeline to wins is key, but we are optimistic on the outlook for execution.

Turning to financial results, revenue as adjusted declined sequentially, reflecting lower average assets and a $1.8 million negative variable incentive fee for part of the quarter. The variable incentive fee was eliminated in early February.

First-quarter operating expenses as adjusted declined as lower other operating expenses were partially offset by higher employment expenses due to incremental payroll taxes associated with the timing of our annual incentive compensation payments. Employment expenses, as adjusted, were at the low end of the range that we provided on the fourth-quarter call and other operating expenses, as adjusted, came in below our indication as we have been very focused on our expense levels.

Operating income as adjusted was $15.2 million compared with $19.4 million in the prior quarter with related margins of 24% and 29%, respectively. Excluding the impact of the higher payroll taxes and the variable incentive fee, operating income, as adjusted, was $19.3 million and $24 million and margins were 30% and 34%, respectively.

Turning to capital on our balance sheet. In the quarter we returned $19.9 million of capital through share repurchases and dividends. As a result of continued repurchases, our outstanding shares have declined by 1.7% from year-end and 7.3% from March 31, 2015. Even with that level of capital return, cash and investments at March 31 remained strong at $382 million and $46 on a per-share basis.

In terms of our capital management strategy, it remains focused on balance between maintaining adequate working capital, investing in future growth, and providing a meaningful return to shareholders. The relative balance of each of these has evolved over time. After a period of significant product introduction, including products that require a high level of seed, the new products in our current pipeline are not as seed-intensive.

In addition, as we made determinations of which products to focus our distribution efforts on, we are in the focus of liquidating three of our alternative funds and the return of seed capital is expected to generate proceeds of approximately $114 million in the second quarter. These liquidations will reduce our seed capital investments to approximately $167 million.

As a result of this level of seed and our current expectation of seed requirements, we have lowered our seed program target level in the near term to approximately $150 million, subject to change as product opportunities emerge. Given that expectation and our strong balance sheet, we expect to use the majority of the proceeds from the pending fund liquidations primarily from capital return.

With that we will turn it over to Mike. Mike?

Thank you, George. Good morning, everyone. Starting on slide 7, assets under management, we ended the quarter with assets of $45.7 billion, which represents a decrease of $1.7 billion, or 3.7%, from the prior quarter. The sequential AUM decline is primarily attributable to the $1.4 billion, or 14%, decrease in assets in our Emerging Markets Opportunities Fund. At March 31 the fund had $8.4 billion in AUM and represented 18% of our total assets.

Our emerging market assets remain diversified across distribution partners with no single client account representing 10% of total assets.

The $9.1 billion year-over-year decrease in assets under management is primarily attributable to $6.8 billion of net outflows, $1.5 billion of market depreciation, and $0.8 billion of dividend distributions and other. Lastly, total AUM remains diversified by asset class. 59% of assets are in equity, with 35% in domestic and 24% in international; 33% of assets are in fixed income, and 8% are in alternatives and other.

We also remained diversified by product type with open-end fund assets at 58% of total, separately-managed account at 15%, closed-end funds 14%, and institutional 11%.

Turning to slide 8, asset flows. In the first quarter we had total net outflows of $2.6 billion that were primarily attributable to elevated redemptions in the Emerging Market Opportunities Fund, following the organizational change at the subadvisor in early March. Following that change, emerging markets had redemptions from discretionary models that totaled $0.8 billion.

Separately, on our last earnings call we pointed out a $0.5 billion rebalance from a discretionary model in January that preceded the organizational change. Excluding the total discretionary model redemptions of $1.3 billion for the quarter, fund redemptions were approximately $1.5 billion, which is the same level of redemptions we had in this fund in the fourth quarter. For the quarter, excluding EMO, total net outflows were $1.1 billion, which is in line with the sequential quarter.

Total sales decreased 10% sequentially to $2.8 billion, reflecting lower sales in mutual funds. Sales increased 20% in SMAs, reflecting higher sales of small-cap accounts managed by Kayne Anderson Rudnick. Gross sales in open-end mutual funds were $2.2 billion, which represented a decrease of $0.4 billion from the fourth quarter. The decrease was primarily attributable to lower sales in emerging markets.

Mutual funds net flows by asset class were as follows. International equity net outflows of $1.7 billion were primarily attributable to emerging markets, as previously discussed. Sales of fixed income funds were flat at $0.5 billion. Net outflows were $0.3 billion, an improvement from $0.4 billion in the prior quarter.

Alternative strategies had sales of $153 million, an increase of 8% from $142 million sequentially. Net outflows were $0.1 billion in the quarter, an improvement from $0.2 billion in the prior quarter. Both our multi-strategy target return and global REIT funds contributed positive fund flows.

Sales of domestic equity increased slightly to $120 million sequentially. Net outflows were $0.5 billion, an improvement from $0.6 billion in the fourth quarter. ETFs had positive net flows in the quarter as we continue to leverage the capabilities of the new team at Virtus ETF Solutions.

Separately-managed accounts from Kayne Anderson Rudnick contribute positive net flows of $35 million in the quarter. Institutional had negative net flows of $90 million in the quarter, due primarily to the partial redemption of a client account, but sales continued to be solid due to additional inflows from existence subadvisory mandates.

Turning to slide 9, investment management fees as adjusted of $57.7 million decreased 5% on a sequential-quarter basis and 18% from the prior-year quarter. The components of the change in investment management fees are average assets and fee rates. Average assets under management of $45.7 billion decreased 6% sequentially and 18% compared to the prior-year quarter.

The 6% sequential decline is due to a 9% decline in open-end funds. The average fee rate increased 1.3 basis points sequentially to 47.3 bps, due to a 1.3 basis point increase in the open-end fund the rate that reflects the partial-quarter benefit from the elimination of the negative variable incentive fee.

When excluding the impact of the variable incentive fee, the first-quarter open-end fund fee rate was 49.9 basis points compared with 52.1 basis points in the fourth quarter. The decline reflects both higher fund expense reimbursements and lower assets in higher fee products. Going forward, we expect the open-end fund fee rate to be approximately 49 basis points, given the current asset levels and mix of business.

The average fee rate on ETFs increased to 35 basis points from 29 basis points in the prior quarter. The higher fee rate is reflective of the continued flows into the new fleet multi-sector unconstrained bond ETF.

Slide 10 shows the five-quarter trend in employment expenses. Total employment expenses as adjusted were $36 million, an increase of $1.6 million and $0.4 million from the prior quarter and prior year, respectively. The increase from the fourth quarter reflects $2.3 million of higher payroll taxes due to the payment of annual incentive compensation, which more than offset lower variable incentive compensation.

The $0.4 million increase over the prior year reflects higher fixed employment costs associated with the addition of Virtus ETF Solutions that was acquired in April 2015 and additional resources to support quantitative strategies, including the trend funds, for which we took on additional response abilities in May 2015.

In terms of thinking about employment expenses in the second quarter, I would point out that the incremental payroll taxes will not recur, the profit-based component of variable compensation will vary based on AUM, and that the sales-based component will vary primarily with gross sales.

The trend in other operating expenses as adjusted reflects the timing of product distribution and operational activities. Other operating expenses, as adjusted, of $10.4 million in the first quarter declined $1.6 million, or 14%, on a sequential-quarter basis and $0.8 million, or 7%, compared to prior year.

The $1.6 million decrease sequentially is both a non-recurrence of $0.8 million of discrete items we noted in the fourth quarter as well as lower discretionary travel and marketing costs. We will remain disciplined in managing other operating expenses and we are lowering our expected range to $10.5 million to $11.5 million per quarter, with variability driven by the level of distribution activity, portfolio management costs, and professional fees.

In addition, as we point out each year, the second quarter will include the $0.5 million annual equity grant to our independent directors.

Slide 12 illustrates the trends of adjusted results. In the first quarter, operating income as adjusted was $15.2 million, a decrease of $4.2 million, or 22%, from the prior quarter. The decrease primarily reflects $4.3 million of lower revenues as adjusted due to lower average assets. Operating margin as adjusted for the first quarter was 24%, a decrease from 29% in the fourth quarter and 40% in the prior year.

Excluding the negative $1.8 million variable incentive fee and $2.3 million of incremental payroll taxes, our operating income as adjusted and margin would have been $19.3 million and 30%, respectively. While our margin is down from previous highs, we believe it is reasonable for a multi-manager model. That being said, we are very focused on having an expense base that is appropriately aligned with current AUM and revenue levels.

Earnings per diluted shares adjusted were $1.12 in the quarter and included a $0.13 impact from the variable incentive fee. Excluding the fee and the incremental payroll taxes, earnings per share would have been $1.42, all else being equal.

GAAP net income attributable to common stockholders was $12.4 million, or $1.45 per diluted share. The quarter included $2.4 million or $0.028 per share, of unrealized gains, net of tax, on the Company's investments and an effective tax rate of 39%, consistent with prior periods.

We ended the quarter with strong cash and investments, no outstanding debt, and $75 million of unused capacity on our credit facility. During the quarter we returned $19.9 million of capital, which represented 209% of our net income as adjusted. Our basic shares outstanding declined 1.7% to $8.3 million at the end of the period.

With regards to capital management, we balance investments in the business with return to shareholders. With the proceeds from the pending fund liquidations, we expect to allocate a majority of that capital to augment return to shareholders.

As we stated on prior calls, we have been comfortable with maintaining a lower level of working capital due to significant seed capital investments. Given our revised lower seed capital expectations, liquidity from the seed liquidations will move our working capital ratio closer to the 50% to 75% target level that will be important to ensure adequate levels of financial flexibility for investing in growth, both organic and inorganic.

With that, let me turn the call back over to George.

Thanks, Mike. That concludes our prepared remarks. Now let's take some questions. Bridget, could you open up the lines please?

(Operator Instructions) Michael Kim, Sandler O'Neill.

Good morning. First, so just wondering maybe sort of what some of the feedback has been from your distributors or wholesalers as it relates to the PM shift at EM ops. Obviously we saw a spike in redemptions in March and you sort of mentioned ongoing those slowing outflows into April. So just trying to get a sense of maybe further redemption risk going forward specific to that portfolio.

Sure. Good morning, Michael. The event happened almost two months ago, so it will be on March -- March 7 will be two months.

The change that was made in terms of Rajeev leaving was communicated immediately. The people we do business with, both at the home office level, which control the discretionary models, as well as our financial advisors, have been very familiar with the Vontobel approach to investing, which is a very bottoms-up research-driven methodology that has been very rigorously applied by the whole team for a period time. So in terms of the reaction I think we gave you some of the color around that, i.e., that we noted and pointed out specific redemptions attributable to the discretionary models at the firm.

And also noted that while we did see elevated redemptions in the traditional FA type of business that that was less so; gave you sort of the trend line into April where I noted the $600 million. I would also point out, of the $600 million, $150 of that was also model-related. So you have to sort of think about it in that context.

At this point, within a few days of the event happening, all of the FAs and all of the home offices and everyone was very well aware of this. Lots of meetings and on-sites with Matthew, who has taken over. So a lot of that has already gone through and FAs will continue to make their decisions of staying with the long-standing approach that Vontobel has employed. Matthew has been with the team for 17 years.

You never like to see a portfolio management change, particularly someone like Rajeev, who I consider one of the single best investors in the industry. I think very highly of him.

But in this case the portfolio manager has gone; the rest of the team is entirely in place. There are no new people being interjected into the process. No other members of the team has left; every single, solitary member of that team who had worked at Vontobel is still there and committed to the future of that.

So I think all of those things are very positive in terms of when you are trying to describe a transition and we are pleased to see the trend in April being less so than what we saw prior to that.

The other point that Mike included is if you exclude the model redemptions from the first quarter, the level of redemptions were actually the same as they were in the fourth quarter before there had been an organizational change. Yet I can't give specific guidance on what will occur, but I feel very good that everything has been communicated. Everything has been digested, and like any fund or any strategy, I'm hoping it will be judged by how well it performs and how they feel about the team.

Got it, that's helpful. Maybe just a follow-up on that. Any sense of how much of the, I think you said $8.4 billion of AUM still relates to these discretionary models at this point?

We spiked out the dollar amount that has come out of discretionary models, the $0.8 million and then I just gave you another data point of the $150 million of the $60 million. We don't give any specific guidance or detail related to the actual placement of our assets or firms. But I would also point out that what we also indicated that, as of March 31, no single client account accounted for more than 10% of the fund's assets. So hopefully that's helpful.

Got it, okay. Then, as it relates to the alternative funds that are being liquidated, if I remember correctly I think they've only been up and running for about two years. Just curious about the rationale for the decision to wind those down.

Was it mostly performance related? And then, doesn't look like it, but did any of the funds have any third-party capital or was it just seed at this point?

There was some third-party capital. The majority was seed, but there was some third-party capital.

In terms of liquid alternative funds, and it is a decision that we made, I point to a couple of factors. The whole area I think of liquid alternatives, which many of us -- many asset managers think is a really important area for retail investors to play and everyone had a lot of high expectations. I think when we launched the funds a little over two years ago, we believed that. We still believe that today.

So what has happened to make us make the decision to liquidate the funds before we even had a three-year track record? Which is actually slightly early to make a decision to liquidate fund.

One, I would say the expected demand of these types of non-correlated underlying hedge fund manager types of products did not emerge as strongly as anyone wanted. I think that you've also had a market environment that has not been overly conducive to sell more of these risk managed, risk controlled types of products.

I think, in addition to us, you've seen a lot of liquidations of these types of funds. There's a couple of high-profile ones earlier this year. I think last year in the year 2015 there was approximately 30 liquidation of liquid alternative funds, so it hasn't really been a great environment for these types of funds to bring it out themselves.

In terms of the funds that we had, they were again very differentiated and interesting in terms of the structure and the collection. They did have an overweight to real assets, which obviously in a period with commodities and oil being impacted as they were, did not give it strong performance in the more recent period. But when we sort a couple of those factors together -- and these really are funds that required a lot of resources for us to market and support and oversee.

At the same time, we had launched the Aviva-managed fund, Multi-Strategy Target Return Fund, and we have been incredibly pleased with the early reaction to that fund. It's a very different fund, but it does appeal to the same types of potential investors.

So as we look through that and the other funds we have to offer, we ultimately concluded that we really wanted to focus in on those other funds and that at this point in time, even though it's not even a full market cycle on the default funds, that the right thing to do would be liquidate that capital. And obviously I walked through some of our -- how that impacts our capital strategy in terms of what we are doing with the proceeds.

Understood. Then just one last one for Mike. Thanks for taking all my questions here.

Just coming back to compensation, I know you mentioned sort of the variable components with respect to profits and sales, but just from where you sit today, any sense of what that could translate into in terms of either an absolute dollar range or maybe a percentage of revenue ratio as we think about the second quarter and beyond?

We gave guidance on the other operating expense row, where we have taken that down specifically a little over -- about 5% with the new range. As it pertains to the employment row, we are addressing and looking at expenses in light of new assets and revenue levels as we talked about.

So the most specificity I can provide at this point in time is that the first quarter had the payroll taxes; that won't recur. So when you look at it you'll factor that in. Then certainly there's the variability with respect to asset levels and sales levels and that variability will continue. But in terms of additional guidance, we're not going to give additional guidance at this point.

Okay, fair enough. Thanks for taking my questions.

Michael Carrier, Bank of America.

Thanks, guys. Mike, just wanted to get your take on -- when you liquidate those products and you have the extra capital, when we think about the pace of the buybacks that you have done over the past couple quarters, is it likely to accelerate? Are you likely to continue that pace just it gives you more flexibility to do it over a longer period of time?

Then I just wanted to make sure I understand from a cash standpoint, in terms of what you want to keep on the balance sheet in addition to seed capital, just wanted to get an update on that level as well.

This is George. I will just give you some thoughts slots and Mike will get into that.

As we sort of indicated in the release, as well as the comments, we've reset sort of our expectations of how much of our capital we need to set aside for the seed in the near term. And with that, the proceeds from the liquidation of these funds will allow us really to augment what we've been doing in terms of return of capital.

We've traditionally targeted return of capital as a percentage of our net income as adjusted and we've been at very high levels of that. But having these additional proceeds and not having a short-term or a near-term need for the seed does give us additional capital to, as we make through our decisions on the exact levels and timing and magnitude and in what form, to be honest, in terms of the return of capital.

Mike, do you want to --?

I think that's correct. We have certainly been above our earnings in terms of the level of capital we've returned and this enables us to provide additional return of capital to shareholders, which there's no specific timeframe. We just made decisions to do liquidation, so we will evaluate all of that and multiple factors when we do the returns.

I think as it relates to working capital as a percentage of our spend, we have for a while targeted the 50% to 75% range and have dipped below that over the last several quarters as we have had the seed program being higher than the levels that we have targeted about as we have had products in the pipeline that required high levels of seed commitment. As the seed capital level gets down to the level we indicated at that $150 million level, we would expect to start that working capital as a percentage of spend to direct back closer to our longer-term historical targets of 50% to 75%.

So those are all the elements we consider in terms of having the financial flexibility, which we pointed to, to also invest in the business, both organically and inorganically, as opportunities arise. We will continue to manage the business to have that financial flexibility and the working capital level is something we're focused on as well.

Okay, that's helpful. Then maybe just taking a longer-term kind of growth outlook. Obviously over the last two years you had a couple hiccups with some of the products, but you still have products that have good performance and there is -- you mentioned on the highlights some of the products having inflows.

When you think over the next couple years, with that seed level and with some of the initiatives that you have in place on some of the new product development, just wanted to say get a sense of where do you see the avenues of growth for Virtus? Given the DOL rule, does that impact anything in terms of your exposure to certain channels or are you relatively well positioned?

Yes, one thing -- I just want to make sure I was very clear. In terms of our seed capital expectations for the near term, we do have a very robust pipeline of new products. It's just the nature of those products is not as seed intensive as some of our more recent launches. Generally, for more traditional equity types of strategies you need very low levels of seed, for fixed income you need a higher level of seed, and it's really the much more comprehensive or alternative types of strategies that need a lot of seed.

Basically what we are saying is there's really no change in terms of the potential for new strategies or new products, just the nature of those will not be seed intensive. I actually feel very good about some of the stuff that we may be doing going forward, but it just won't be seed intensive.

In terms of where are those opportunities for potential growth and more robust, returning back to our previously strong levels of flows, correctly point out we have two products, both of which were strong drivers of flows. One which is no longer and then the market problem which we are talking about now, which again is still our best-selling fund. And if all our funds had the same level of sales as that fund we would be very happy.

So that fund is still doing well. We still believe that fund and the foreign opportunities fund and the other Vontobel funds absolutely can still be opportunities for us to grow. But as you also correctly point out, we have always been very fortunate that even though there's two or three or four products that you have heard a lot of and seen a lot of flows from, beneath that we actually have had a large number of other funds that were also very strong performing funds, albeit they didn't get as much of the flows and the focus.

So we named a few of the funds that we do feel very good about. And obviously just in terms of our resources and our focus, obviously -- they have always gotten attention but will obviously get a lot more attention, a lot focus.

Some of them it's a great environment. Kayne Anderson Rudnick, their strategy and how their performance numbers ended the year are a great testament to a manager with an incredibly long track record and you are seeing some of the receptivity that we would've liked to have seen a couple years ago in those strategies.

Again, I turn to ETFs. Again, it was a very small business for us and it's still in the early stages, but in terms of new products and efforts going forward, I think there's a lot of time and effort being spent there. That has become increasingly a much more important part of the retail investors' diversified portfolio. We want to assist with that, so I think there's a great opportunity there.

And it's nice for us. Institutional, which has not been a big driver of our flows; for us, institutionals -- really Kayne Anderson Rudnick, Newfleet, and Duff & Phelps primarily, it's good for us to see that we never really refer to our pipeline. But feel some of the things we are seeing are actually more positive than we've seen in a really long time.

So I think we still have lots of opportunities. It's up to us to try to execute on those and, again, the environment is also going to have a big impact. If you would have asked me in January or February where was our growth going to come and how the markets and how volatility was, I would've given you a different answer in early April.

But again, one of the benefits of our model is we do have enough diversity of different offerings and different managers that we generally do think there are opportunities in any of those environments.

Okay, thanks a lot.

Craig Siegenthaler, Credit Suisse.

Thanks. Just have two quick ones here. Do you have the total net flow number for April?

We didn't give out the total net flow number for April.

Okay, you don't provide that. Any color you can give on total flows in April or the EM fund separately?

For EM, we basically said it was trending towards $600 million, which is down from the $1.1 billion which we gave for the month of March. And in the $600 million is about $150 million in discretionary model dollars which compares to the $800 million of discretionary dollars that was in the post-announcement period of March.

Got it, thanks for taking my questions.

Alex Blostein, Goldman Sachs.

Question on the operating margin. Clearly, the seasonal impact was a hurdle this quarter and I guess you guys saying 30% is what it would've been. If you think about the flexibility in the operating model, assuming that AUM levels kind of stay where they are, and maybe a little bit more flow headwinds just because, again to your point, EM is still outflowing in April, what's the flexibility I guess to keep the margins around this 30% level or should we think of that coming down unless we see a more robust return in equity markets?

It's Mike Angerthal. We don't give specific guidance on margin. Certainly you've seen the leveragability of our model where we have had historically high levels of profitability.

We did point out that the current margin level, as you indicated, normalized by the variable incentive fee and the incremental payroll taxes was approximately 30%, which we believe is reasonable given our multi-manager model.

But as you said, we are cognizant of the recent change at our subadvisor and we are very focused on expenses and ensuring those expenses are aligned with current AUM and revenue levels. We will continue to focus on that and be very disciplined. You've seen that on the other operating expense line and we will continue to manage business in that fashion.

Got it, thanks for that. Then as far as capital return goes, I understand that you guys don't want to get into too much detail in terms of the timing of a buyback. But just to give us a sense, given the fact that you have a little extra cash, or actually a lot of extra cash after the decision on the seed portfolio, should we just at least think about the total amount of repurchases stepping up over the next several quarters relative to where they were, let's say, over the course of 2015?

Yes, I think both Mike and I sort of indicated that with the liquidation of these funds and the lower seed expectations in the near term, which could change beyond the near term, that that cash is additional capital that is available for returns. Again, our expectation may change after the near term of what we need for seed.

So in terms of now having the additional capital to focus in on that now, and as you point out, we still have a lot of -- we have a strong balance sheet with $46 per share of cash and investments and subtracting debt would still be $46 per share. I think some people have heard me, my view of believing we don't get a lot of credit for that cash. With our stock trading where it's trading, I think having this additional cash at this point in time does allow us to have that additional consideration to do what we think is right in terms of return of capital.

Understood. Then one last one just around the DOL. I think there was a broader question asked, but I was wondering if you guys could give any specifics in terms of exposures you have to various channels, whether it's specifically on the IRA side. I don't think there's a ton of 401(k) money, but just kind of overall bucket of exposure would be helpful.

For us, it's not a large part of our business so it's just a few percent of our business that's -- while we do have DCIO and some variable annuity money that may have some impacts related to that, it's a relatively -- we have a very small exposure I would say.

Got you, thanks so much.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward for closing remarks.

Okay. I want to thank everyone for joining us today and we certainly encourage you to call us if you have any other further questions. Thank you very much.

That concludes today's teleconference. Thank you for participating. You may now disconnect.