Manning & Napier, Inc.
Q2 2014 Earnings Call Transcript

Published: 31 Jul 2014

[Operator:]

Good morning. My name is Paula, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manning & Napier Second Quarter 2014 Earnings Teleconference. Our hosts for today’s call are Patrick Cunningham, Chief Executive Officer; James Mikolaichik, Chief Financial Officer; and Scott Williams, Director of Financial Reporting. Today’s call is being recorded and will be available for replay beginning at 10

[Scott Williams:]

Thank you, Paula, and thank you everyone for joining us today to discuss Manning & Napier’s second quarter 2014 results. Before we begin, I’d like to remind everyone that certain statements made during this call, which are not based on historical facts, including any statements relating to financial guidance, may be deemed to forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Manning & Napier assumes no obligation or responsibility to update any forward-looking statements. With that, allow me to introduce our Chief Executive Officer, Patrick Cunningham. Patrick?

[Patrick Cunningham:]

Good morning and thank you all for joining us. As usual I’ll make some opening remarks before turning the call over to Jim Mikolaichik, our CFO. He will then take you through the key financial highlights and when Jim is done, we’ll then open a call to Q& A. As you know equity markets are in strong returns during the second quarter of 2014, leading to [unit] day gains of roughly 5% to 7% across domestic and foreign markets. Bonds also posted positive returns during the quarter. They’re up about 4% to 5% so far this year. Manning & Napier’s active stock picking strategies added value in this environment. Our equity series mutual fund, which represents our U.S equity investment approach, earned a return of 6.8% during the second quarter, outpacing the S&P index by 155 basis points for the quarter and 328 basis points so far this year. We’re extremely pleased with the strong recent performance of this strategy which has led to improvements in our short term comparisons to benchmarks. At the end of next quarter, the three year track record for this product will see a roll off of the third quarter of 2011 during which our product [blend] to benchmark by roughly 280 basis points. This roll-off, combined with our recent performance, has the potential to lead to further improvement in our relative comparisons. Our lifecycle strategies also continue to perform well in the current environment. For example our Pro-Blend Maximum term mutual fund, the most aggressive of our lifecycle strategies, is more than 237 basis points ahead of its blended benchmark so far this year. Nine of our eleven targeted collective investment trusts are right in the top decile of their peers over the last twelve months through June 30 and all of them right above median over the last three years. Lastly, while our world opportunities mutual fund lagged the return of both the All-Country World ex U.S. and EC indexes during the second quarter, returns for this fund continued to be in line with the All-Country World ex U.S. and slightly ahead of EC year-to-date through June 30. During the quarter, we experienced net client outflows of approximately $360 million. I’d like to point out a few things about our flows in the second quarter. First, our gross out flows were driven primarily by a single large client termination in our core non U.S equity product. This termination, which represented over $750 million in assets, was driven by the client’s decision to move to a passive strategy for all of their non U.S investments. Second, we have seen continued improvement in flows driven by mutual fund and SMA platforms, as our platform’s sub-advisory channel has been a driver of net flows in 2014, which is encouraging as these platforms were a primary source of outflows for us in 2012 and 2013. And third, while our non US equity strategy experienced net outflows, again driven primarily by that single large client that moved to a passive strategy, our multi-asset class strategies continue to experience net inflows and in the second quarter we also saw net inflows in our US equity strategy. In short, we’re seeing distinct areas of improvement in flows across products and channels in the current environment. I’ve had the opportunity to attend several client meetings recently, including a meeting with the board of trustees of a defined benefit plan, who’s been a client of ours since 1971. These clients are pleased that our time tested processes are helping them surpass their liabilities and absolute return objectives. Before turning the call over to Jim for further discussion on the financials, I want to provide a brief update on the closing and integration of our acquisition of 2100 Xenon which we discussed in our last call. As a reminder, this acquisition ranks Manning & Napier an expertise in managed futures and adds additional capability and alternatives. The transaction closed in mid-May of this year with a 100% transition appliance. Since then we have then largely completed the transition of the two organizations. One of the larger integration points we have been working on, is the addition of a fixed income managed futures allocation to our risk base and target date lifecycle of mutual funds and collective investment trusts. The funds in collectives are largely utilized by 401K plan participants to build retirement savings. Our goal in adding the managed futures allocations is to incorporate our risk management tool to protect against the potential for rising interest rates and to add a non-correlated return stream to further diversify these portfolios. We believe these new features of our lifecycle offerings, will prove distinctive and valuable and our defined contribution of long term results in sales efforts. The managed future strategy was added to our lifecycle fund last week. In addition to providing enhanced risk management features to our lifecycle funds, this move added scale by bringing our total managed futures to over $400 million, which is will be helpful as we look to distribute these strategies on a standalone basis. We anticipate more on [getting] managed futures initially through our existing direct and consulting relation sales representatives and we are currently actively recruiting for a sales professional to focus our distribution on these strategies to clients across the US. As we look ahead, we are optimistic about several areas that we believe can drive growth. Strong and improving track records across our equity strategies will be further enhanced during the third quarter due to the roll off of a period of underperformance in 2011, continued strong performance in our lifecycle products which now include differentiated risk management and diversification features, and have a more focus sales effort given our formalization of a dedicated DCIO sales team and our intermediary channel, new products and attractive asset classes such as emerging markets and global equity that are reaching key three year track records later this year. And finally, our pipeline of products that are [seeded] or live and building track records in areas such as global fixed income. With that as a background, I’ll now actually call over to Jim to discuss our financials. Jim?

[James Mikolaichik:]

Thank you, Patrick and thank you everyone for joining us today. Hopefully, you’ve had an opportunity to review the earnings results, which were released yesterday after market close. As Patrick, mentioned. I’ll take you through the financial highlights before opening the call to Q&A. As in prior quarters, some of my comments will include references to non-GAAP financial measures, but full GAAP reconciliations can be found in the earnings release and related SEC filings. Looking at net client cash flows and assets under management, we ended the second quarter with $54.1 billion in assets under management, an increase of $1.9 billion or 4% on a sequential basis. The growth in assets under management for the quarter was driven by investment returns of $2.2billion or a 4.2% blended investment return. When compared to the second quarter of 2013, assets under management increased by $7.8 billion or 17%. As of June 30, the composition of our client assets by investment vehicle was 51% in separate accounts and 49% in mutual funds and collective investment trusts. By portfolio, 48% of our total client assets were invested in blended assets portfolios or lifecycle products, 50% invested in a variety of equity strategies and the remaining 2% in fixed income portfolios. In the second quarter, we experienced net client outflows of approximately $360 million, with $2.5 billion as client inflows, offset by $2.9 billion of client outflows. Our mutual fund and collective trust products had net inflows of approximately $470 million, which consisted of $1.6 billion of gross client inflows, offset by $1.1 billion of outflows. Defined contribution continues to be a driver of net client inflows for us as demonstrated by positive flows of $400 million into our lifecycle products and another $93 million into our non-US equity labor collective trust. In our separate accounts, gross client inflows of approximately $900 million were offset by $1.8 billion of outflows, resulting in net client outflows of approximately $825 million for the quarter. The primary driver of gross client outflows was the cancellation that Patrick addressed earlier. This outflow has been partially offset by renewed interest in our U.S equity products which have contributed to our net inflows in the platforms of advisory channel. And our year-to-date retention rates for separate accounts now stands at 91% compared to 92% at this time last year. As of June 30, we have seen improving trends with inflows of $4.9 billion and decreased outflows by approximately $1 billion when compared to last year, resulting in approximately $275 million in net client outflows year-to-date. Transitioning to second quarter financial results, we reported revenue of $103.9 million for the quarter, an increase of 12% from $93 million reported in the second quarter of 2013 and up 5% from revenue of $98.5 million reported last quarter. The changes in revenue were generally consistent with changes in average assets under management which increased by 11% from the second quarter of 2013 and 4% since last quarter. Our revenue margins remained at 78 basis points for each of the respective periods. Operating expenses were $61.4 million in the quarter, a $12.7 million increase compared to the second quarter of 2013 and an increase of $5.2 million compared to the previous quarter. Compensation and related costs have increased over the last period and since the second quarter of 2013 as incentive compensation paid to our research team has continued to increase as a result of the cumulative impact of quality, absolute and relative investment performance over the last two plus years. And as a percentage of revenue, compensation and related costs for the quarter were 32%, up from 30% last quarter. Distribution, servicing and custody expenses, including sub-transfer agencies and 12b-1 expenses associated with our mutual fund and collected trust offerings have increased by 8% sequentially, and by 21% over the second quarter of 2013, while our average mutual fund and collected trust assets have increased by 6% and 17% for those respectively periods. Other operating costs when considered as a percentage of revenue have remained consistent with prior quarters at approximately 8%, with non-operating income at approximately $900,000. As a result, we reported economic income to the quarter of $43.4 million, a 1% decrease from the second quarter of 2013, and a 3% decrease from $44.7 million reported last quarter. However, when comparing results, excluding the impact of the first quarter and non-recurring tax law change, our economic income increased by 2% over the last quarter. Our economic income margin is 41.7% compared to 45.4% last quarter and 47.3% at this time last year. Our economic net income was $26.8 million or $0.30 per adjusted share. With that, I will summarize our results for the mid-year. Revenues for the first half of the year were $202.3 million, which were 10% ahead of last year, with operating expenses $117.7 million, a 19% increase over last year. Our revenue growth has been attributable to increased assets under management resulting from strong investment returns and high client retention, with revenue margins at 78 basis points, which is consistent with historical periods. Our economic income margin is 43.5% for the six months ended June 30, compared to 45.9% this time last year. The decrease in economic income margin is primarily attributable to the increase in compensation and related costs, and more specifically the amounts earned by our research team resulted from the continued strong investment performance, with the year-to-date economic income at $88 million, up 5% from $84.1million reported this time last year. And economic net income per adjusted share is $0.61 for the six months ended June 30 2014 compared to $0.58 per adjusted share last year. Before closing, I’d like to point out a few other items. First, our management team continues to own approximately 16% of our business and a portion of that ownership is to subject individual vesting requirement through 2014. As a result, we are continuing to record non-cash compensation expenses. And those expenses are variable n nature subject to the underlying vesting criteria, and the market value of our public stock. Second, during the quarter, the company completed a small purchase of approximately 188,000 class A units, of Manning & Napier group. In connection with the exchange, the company issued 56,000 shares of class A common stock and paid approximately $2.1 million in cash for the remaining 132,000 units. In addition, the company granted a portion, approximately 464,000 of restricted stock units anticipated to be awarded during the current year related to our long term incentive plan. The equity incentive awarded during the quarter and over the remainder of the year will increase our compensation expense to more than last year with the full expense to be determined based on the price of our stock when the awards are granted and amortized over the three year vesting period. With respect to the balance sheet, we continue to maintain a debt free capital structure, with a cash balance of $112.1 million and $30.2 million invested in new product concepts as of June 30. And as you are aware, Manning & Napier group distributed $31.3 million in cash to its members to the quarter. This distribution resulted in a quarterly dividend of $0.16 per share, which is consistent with the quarterly dividend that we had provided to shareholders in prior periods. That concludes the formal remarks and I’ll now turn the call back over to the operator and we look forward to your questions.

[Operator:]

(Operator instructions). Our first question comes from, Adam Beatty of Bank of America.

[Adam Beatty:]

Thank you and good morning. Just a question on the lumpy redemption in terms of maybe outlook on your institutional accounts, what you are hearing from clients and whether or not you are starting to see passive as more of a threat. I always thought of your strategies as active and quite differentiated. Maybe that’s just a one off, I think.

[Patrick Cunningham:]

Sure. The cancellation, the $750 million non-U.S equity cancelation, yeah that is -- we’ve been tracking clients who have used, who have been using our non-U.S equity strategy and using EP as the benchmark. Our internal benchmark and what we advertise and what we managed too is the All-Country World index ex-U.S which has a portion of the portfolio in our emerging markets and when emerging markets went through their difficulty a year and a half, two years ago, that made a marked difference between the equity ex-U.S benchmark and EP. Those people who were benchmarking us to EP, we knew that there were some risks depending upon when they started with us. If they started with us soon before the 2011 period, we knew without those clients where we had to make sure we communicated very clearly the differences between the benchmarks that if you -- and that we were in fact meeting the equity ex-U.S for most of the period. But we had, we kept the list of clients that we thought we had to concentrate on including the cancelation that occurred. Now the cancelation that occurred was the result of passive strategies. It wasn’t specifically because we had performance issues and it wasn’t just [painting] a peer who’s converted to a passive strategy. It was all the active non-US managers as far as I know. But nonetheless it was probably -- we do not see a cancelation of that magnitude when we look at that list of potential cancelations. That was the biggest that we had on this list. And we see that -- we don’t see another cancellation of that magnitude in our sights. I hope that answered the first part of your question. The second question about passive strategies is that the good news is that we are not closet indexers. We are not benchmarks huggers. We have very high active share as you know in the 80 to 90 range. We do not -- we are benchmark agnostic. We believe that when people hire us they are definitely looking for someone who is very active and we would anticipate that we are less susceptible to the trend towards passive strategies than many others would be who do manage closer to the benchmark.

[Adam Beatty:]

Thank you. That’s very helpful. I appreciate it. Just one other, on the Xenon acquisition, our outlook on -- you mentioned incorporating it in the blended products or for accounts. How much do you see of that versus marketing the products standalone as mutual firm?

[Patrick Cunningham:]

We’re definitely doing both. We’ve already incorporated them. Due to operational issues we had incorporated them into our comingled vehicles initially. So with our collective trusts and our mutual funds, the pro-blend and the pro-mix, the targeted portfolios, those have been already -- we’ve already incorporated the managed futures strategies into those and obviously we are going to continue to market our life cycle strategies aggressively. In addition, we have -- particularly in the large institutional space, we have our institutional sales reps as well as our consultant relation sales folks will all be actively marketing the capability on a standalone basis. And in addition these -- there are some licensing issues. You need a series three so we are good. We are in the ramping up phase is the way I would describe that, but in addition we are actively searching for someone who is already in that space in a meaningful way. And we’ve got some very good candidates I think very close to coming to a conclusion with. So we are going to aggressively do both.

[James Mikolaichik:]

Yeah. Adam I’d just add that we -- one of the thoughts we had as we entered the process and talking with the Xenon folks is we looked at the challenges that they had as a standalone firm with a smaller asset pool and not a lot of financial stability and a very small sales team. And we are able to bring financial stability, a much larger sales team, able to continue to hire some professionals in that area, and then give them some skill in their products because as you know, in this industry, no one likes to be the first one in. So when you look at a small product even though you might like it, you can’t make a big allocation to it so it closes some of the institutional channels in the center of the larger dollars from being able to access your products. By including them in our defined contribution offerings, it immediately makes those we think better products and more attractive, and then opens up additional doors for us in that marketplace. But also has been almost at $0.5 billion now, which is a very large and scaled managed futures capability. And we can go back to the sales week that they had where they had doors closing on it that said talk to us when you have a little bit more stability and more assets in your products, and we’d love to speak to you. So we think by doing all those things in concert together gives us a lot of avenues to potentially have some success with this acquisition.

[Adam Beatty:]

Got it. Sounds like you can leverage your capability pretty well. That’s all I had this morning. Thanks very much, gentlemen.

[Operator:]

The next question comes from Michael Kim of Sandler O’Neill.

[Unidentified Analyst:]

Good morning. This is actually Andrew [inaudible] filling in for Michael Kim. I was hoping you could give us an update on performance and flow trends for the oversees and world opportunity strategies, particularly as it relates to clients benchmarking to the EASE rather than the All-country world index.

[Patrick Cunningham:]

Yeah. As I mentioned I think earlier the – did you know there has been a big disparity between EC and the All-country world index ex U.S? We have been on a relative basis performing better against the equity ex-U.S because that is our benchmarks and that is – and we do have the emerging market allocation. But this year, interestingly enough, we’re slightly behind the equity ex-U.S benchmarks, and slightly ahead of EP. And obviously that once again has to do with the performance of primarily that emerging market sector. So the performance is -- relative short-term performance is not decile. It is when I say short-term, I'm talking about the three-year number type, one-year number type. It's not high and so we would anticipate it’s a three star fund. We would anticipate that it would not be a big driver of assets necessarily, but it certainly is competitive and we think is stable enough that we can defend the performance and maintain the client base.

[James Mikolaichik:]

Yeah. And that said, we have seen positive flows to both of those funds year-to-date. So I think our international non-U.S strategies over the past two years, have continued to contribute and have been a source of a large amount of gross inflows. There’s been some frictional outflow over that period too. So generally speaking we’ve seen slightly positive and slightly negative quarters. But in spite of the large cancellation on the institutional side, we have continued to see reasonable flows into both those months.

[Unidentified Analyst:]

Great, thanks. And then one more question for you. If there’s any further color on the underlying mix of the inflows and outflows in the separately managed accounts channel so where you might be seeing accelerated demand versus which strategies are still under pressure.

[James Mikolaichik:]

Yeah. The mix that we experienced over the past couple of years, the pressure is– I think Patrick alluded to it in his comments. We saw the greatest pressure after some underperformance in 2011 in the platform and sub-advisory space and that was largely impact in our U.S equity strategy with some more modest outflow in our non-U.S equity strategy. And what we see now is actually a renewed interest in U.S equity. We’ve seen the outflows in the sub-advisory and platform space dissipate and we’re now seeing much stronger results from both of those channels. So U.S equity has probably been a bit of a surprise for us in that it turned around quite quickly and our performance has been very strong. That has been a good source of inflow. We’ve also had a continued source of inflow in multi-asset class products, your lifecycle products in the defined contribution space throughout the last few years. We’ve had very few quarters where we’ve seen a negative in multi-asset class. That continues to be a strong and steady driver, just not quite as large of an impact on a quarter to quarter basis as you get in some of the hot standalone equity strategy. US equity and multi-asset class have been the strongest most recently, but we would expect non-US to continue to be in favor. And certainly we are looking at emerging markets and global equity to contribute as it comes on in a three of track record.

[Patrick Cunningham:]

And let me add just a couple of things, I think the people who have following us closely and both from a platform and investment consulting standpoint -- what happened in 2011 wasn’t an accident. We felt that those high – though they’re paying low bit stocks, their valuations weren’t attractive. And as you know the best way, we are known for protecting people when markets get very volatile. We are known for protecting people from sustained capital losses. And so when people look at us, we said we are instead concentrating on companies that have topline growth, that have typically global topline growth that are going to go faster than the economy because the economy is going to go slowly. And so you have to have winners and losers. You have to have people who are taking market share and we are going to concentrate on those companies, but those that are attractive valuations. And that’s precisely what we’ve done and when people see that the performance has turned around because of the conviction that we had in those spaces, I think their confidence level goes up and they say yeah, these are -- we get people who are clients say you are definitely on the right direction and people who aren’t clients, but looking at it and say, yeah these folks have a conviction about what they do in a process and they stick with it even though it’s uncomfortable in the short term.

[Operator:]

Your next question comes from Ken Worthington of JPMorgan.

[Alex Kyle:]

Hi, this is Alex Kyle filling in for Ken. I have -- my first question is the share count fell by more than expected from 1.1 million shares that’s been expected in the prior quarter. I know you’ve alluded to some of the transactions. I just wanted to see if this is in any way related and if you could expand upon that.

[James Mikolaichik:]

I’m not sure I totally understood the question Alex. Do you mind ...

[Alex Kyle:]

Yes. So there was an expectation of 1.1 million share reduction expected during the prior’s quarter call and the share count fell more than the expected amounts. Just wanted to see if you could actually expand upon that?

[James Mikolaichik:]

So the $1.1 million was actually related to -- was what we expected to be issuing in new shares as part of our long term incentive plan, which were matched off against approximately 2.1 million or 2.2 million in share reductions as a result of some exchanges by our legacy shareholders that occurs on an annual basis. We did the repurchase. We repurchased about $2.1 million during the quarter and we repurchased approximately 130,000 shares that I mentioned today. What we didn’t do was issue as much as we expected in the long term incentive plan. We only issued 464,000 RFUs restricted stock units under the new incentive plan. We do still anticipate that we would issue more throughout the remainder of the year, but we have a relatively deliberate process in how we go through looking at our people and how we grant those shares. So I would expect more to come on through the remainder of the year, but the missing piece is the additional restricted stock units that have not been all awarded as of yet.

[Alex Kyle:]

Got it, thanks. And as a follow up, you mentioned some of the new city products are reaching their three year track records. What are they if you could comment on that and how is the performance?

[Patrick Cunningham:]

Sure. They are the emerging market equity series and our global equity portfolio. Those are the two portfolios that -- two funds that are reaching their three year track record and one is coming up. I don’t know the exact date.

[James Mikolaichik:]

I think August then global and November on emerging markets.

[Patrick Cunningham:]

On the 1st of those months. And the performance has been strong. If you look at the equity emerging market series, it has since inception -- I don’t have inception number in front of me. Do you have the inception number? One second. It’s public data. I think it's like 300 basis points per year out performance, something like that.

[James Mikolaichik:]

No, I don’t have it in front of me.

[Patrick Cunningham:]

Yeah. We don’t have it in front of us, but both of those you can – that’s probably if you can look them up, they both inception numbers that are very strong. A more recent emerging market equity number is trailing, but that’s because we are not invested in the cyclical-type of companies which have left the rebound in the emerging markets recently. But we are very comfortable with that positioning on a going-forward basis. Sorry. I couldn’t be more specifically with you.

[James Mikolaichik:]

Alex, I'll shoot you a note after the call or to Ken or to both of you. We’ve got the numbers. I just don’t have them both in front of me. I think it was about 500 or so on emerging market since inception and maybe 300 on the global, but I’ll shoot you a note after the call.

[Operator:]

Your next question comes from Steven Schwartz of Raymond James & Associates.

[Steven Schwartz:]

Good morning everybody. The question on the roll off of 3Q, maybe you can do the math for us, Jim. To date, whereas at the end of June your three-year leper was 47 percentile on equity series. Do you have a sense of what that number could look like if you were simply to match the peer group this quarter and 3Q11 roll off?

[Patrick Cunningham:]

Don’t have that in front of me, but as I mentioned in my comments, the underperformance of the U.S equity strategy in the third quarter of 2011 was about 280 basis points.

[Steven Schwartz:]

Okay. I got that. Okay. And then a similar …

[Patrick Cunningham:]

So now rolling it forward, – I just can’t do it off the top of my head but …

[Steven Schwartz:]

Yeah. Okay. But undoubtedly a marked improvement. Was there -- nobody – you don’t talk about it, Patrick. You talk about the equity series, but in the World Series, was there that underperformance as well in 3Q11?

[Patrick Cunningham:]

Yes. There was underperformance in that strategy as well.

[Steven Schwartz:]

And was it as extreme?

[Patrick Cunningham:]

I don’t have the number in front of me, but …

[James Mikolaichik:]

It was similar. It was definitely similar, but I think non-U.S recovered better than U.S as we hit 2012. And then we had a little bit of a snap back I think in Q2, but finished the year reasonably strong in both non-U.S and U.S. And then 2013 was strong across the board with U.S outpacing dramatically upmarket. And then what we’ve seen at the beginning of this year is that we had a little bit of volatility in the first quarter. And we saw our active management shining and the risk management aspect shining so. You saw U.S equity really jump to the forefront. Non-U.S was right there with it. As we hit the second quarter, as things calm down a little bit again with markets I think moving in a more of a gradual up across the board. We gave a little bit back in non-U.S, but the U.S has really kept to its pace. So it was a phenomenon both of those portfolios, but U.S is back in very good stead. And we’re happy too with non-U.S, but it's got a little bit of ground to make up with what it gave back probably in the second quarter.

[Steven Schwartz:]

Okay. And then I don’t know if you can do this either, but on the compensation expense, obviously when you pay more it's a good thing because it's reflecting performance and it's going to pay off hopefully in cash flows. But could you give us, Jim maybe a sense – I don’t even know if it exists, but some type of formalized number to kind of think about maybe going in next year if you simply match?

[James Mikolaichik:]

Yeah. Normalized is more in the 28%, 29% range with comp as a percentage of revenue .What we’ve seen when we had a little bit of underperformance you saw it down in the 24%, 25% range. And lately with markets doing what they are doing and our performance being what it is, we’ve seen it jump into the 30% plus range. We have a one, two and three year rolling process. Right now we have extremely frosty markets in the second half of last year and we out performed. So you have very strong absolute and relative returns in that period and we’ve seen that again at the beginning of this year. Our one year comp number which is weighted the heaviest in the comp structure has a lot of really good performance in it. The second year also has good performance in it and neither of those years now are impacted by the 2011 underperformance. So, that’s out in the third year. We are going to see that roll off at the end of the third quarter. You’ll have really -- hopefully we’ll see as a good three year bucket of performance around the horn with most of our products. We’d expect comp to as result probably remain in a relatively elevated level in the near term but then should use its way back slightly in to the high 20s with our margins in a more normalized level being in the mid-40s, moving between 43%, 44% to 46% and 47%.

[Operator:]

(Operator Instructions) Your last question comes from the line – I apologize, we do have a follow up question from Ken Worthington of JPMorgan.

[Alex Kyle:]

Hi guys, it’s Alex again. I just wanted to as a last follow up, prior to going public net sales were very strong. And if you just comment or walk through the factors that have driven such strong sales to make modest redemptions since going public.

[Patrick Cunningham:]

You’re talking about prior to going public or since?

[Alex Kyle:]

Prior to going public.

[Patrick Cunningham:]

Yeah. It’s fairly -- as a fairly straight forward answer, it has to do with relative performance. That ultimately drives flows. And we, I think what I guess I am proud of is that despite the challenges that the third quarter of 2011 brought us, is that we maintained our clients in a very meaningful way. We were able to .. our retention rate has been throughout the last couple of years when that short term performance impacted the numbers the greatest, our retention rates were North of 90% and close to our historic averages. So I think that -- but nonetheless the flows we had very strong performance in a variety of -- in fact almost all of our strategies prior to. We went public in November and the underperformance occurred two months prior. So it was the timing wasn’t great. And we’ve just been going through what we consider to be this type of transition period. There have been several times. It’s not unusual for us to have a different look than what the market is reacting to. We were back in 2000, we had less than 5% in technology in 1999 and we were, that’s -- we saw our performance is affected by that. We saw flows affected by that. That was a period until that market broke and then -- and that set the stage for another 10 years of good performance. It happened before in 1987 in our multi-asset class portfolios. We were less than 40% in equity and I’d go back to 1987, but maybe not a lot of people there in the markets on the call. But it was a time when -- we will look different than the market because we don’t manage to the market. And that will impact us in terms of the flow. It’s a flow. I think that the whole question has been relative performance impacting flows.

[James Mikolaichik:]

Yeah. I’d just add one item is it tends to b when risk management is very present in the minds of market participants. So coming out of the bubble with the technology sector with a financial crisis, you see those that have performed well and really minded risk management and stock selection and you see those that have not and that is how we manage money with a risk managed process focused on absolute returns. And when you have a market that’s just a prolonged out-market what people believe there can be no turn from that. We tend to be in a transition period, but when risk management matters, coming out of 2007 into 2008, that’s when you saw us really shine and that’s when you saw our flows really pick up. We know these markets have different trends. And as risk management goes out of the numbers and out of people’s minds, they tend to forget and they ride the ride. But we tend to stick around and make sure that we really adhere to our disciplines and mind our clients through these periods.

[Operator:]

Your last question comes from the line of John Dunn of Sidoti. John Dunn – Sidoti & Company Good morning, I wanted to ask about the past periods and you mentioned 1987. Can you talk about how the pattern or the timing of in the past when flows when poor performance rolls off an important benchmark?

[Patrick Cunningham:]

Every market cycle is so different and I would -- I don’t have a specific answer that it takes two years or three. I think it’s very conditions driven. I do know that there is a time lag between when you underperform and when you see your outflows grow. And there is a time lag between when you out perform and when you see your inflows grow. I think it’s not -- and it’s usually not a matter of quarters. It usually takes time for that information to be disseminated, to be digested, to be evaluated by a variety of intermediaries, including advisors and consultants. John, I’m sorry, I don’t have -- I can’t give you a specific number as to when you might expect to see a dramatic increase in the net inflows. John Dunn – Sidoti & Company That’s fine. And then my second question was likely much of the M&A space is going to be in the alternatives area. Can you talk about what undertakes to having conversations with shops? What they are thinking at this point?

[Patrick Cunningham:]

Jim, you want to fill that?

[James Mikolaichik:]

Sure, I think they are thinking that the markets are up and evaluations are high because there’s still a lot of flows to alternatives. It would be interesting to see how many things get done because the markets have gotten reasonably elevated and when times are good people come to the table and look to take some liquidity. Matching buyers and sellers with a price when markets are moving like this is sometimes difficult, but we continue to speak to folks in yield driven alternatives across the variety of different spectrums. And we think that yield in the future and income generating products are going to be an important part. We are launching some things internally with components that we have. And we continue to look externally for differentiated income generating products and alternatives and even in some traditional asset classes. And for the most part it’s been along the same line as how we think philosophically and culturally in the active management space. But I think what you are seeing will be some higher valuations and the risk sharing is a critical component as to how deals done as to who’s willing to share the risk on earn outs and things of that nature to get to the valuations you want to.

[Operator:]

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.