Manning & Napier, Inc.
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Good morning. My name is Rachel, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manning & Napier Fourth Quarter and Full Year 2014 Teleconference. Our hosts for today’s call are Patrick Cunningham, Chief Executive Officer; James Mikolaichik, Chief Financial Officer; and [Scott Williams] [ph], Director of Financial Reporting. Today’s call is being recorded and will be available for replay beginning at 10 a.m. Eastern Time. The dial-in number is [phone] and enter PIN number 65543550. At this time all participants have been placed in a listen-only-mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to [Mr. Scott Williams] [ph].

[Scott Williams:]

Thank you, Rachel. And thank you everyone for joining us today to discuss Manning & Napier’s fourth 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 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. Jim will then take you through the key financial highlights and when Jim is done, we'll open the call up to Q& A. Before my formal comments though, I would like to let everyone know that we are incorporating slides in for this conference call in order to help deliver our message to all our listeners to better engage with us. I hope you find this useful. From the earliest days of our firm, nearly 45 years ago, our focus has always been on delivering absolute returns to meet our client’s long-term financial goals. I really cannot say this more definitively. This focus is a major reason, why we are able to measure client relationships in time-pensive decades and why our client retention rate remains over 90%. As I have said on prior calls, we believe that consistent absolute returns are the solution for most real world financial goals. As you also heard me say before, active management has consistently proven to be the most appropriate and relevant investment strategy to achieve these goals. It is precisely because of this, despite what some may read one week versus the next that we are confident that active management is here to stay. There is more than $50 trillion in global assets under management invested in active strategies. Passive management is not concerned whether you make money or loose money, but we are concerned whether our clients make money. This is evidence by the way we compensate our analysts, as well as how we price stocks for investment. Our conviction is predicated in part on our proven team-based investment approach that you heard us talk about in the past, where some active managers are close -- positive indexers with active share around 50%, we have been consistently around 90% active share across our core equity strategies, which is considered very active. If the valuations in the sector can be justified, we can be significantly overweight or underweight the benchmark. Despite a secular increase in utilization of index products, active and passive outperformance have gone through cycles overtime. Active strategies tend to underperform in periods of high correlations, narrow markets and more extreme environments driven by greed or fear. These periods include the speculative bull market like 1990s, the financial crisis in 2008 and several periods of risk-on risk-off markets since the crises. In contrast, active strategies tend to outperform in periods of lower correlation, broader markets and when fundamentals drive returns. But much of the early to mid-1990s, the period following the bursting of the technology bubble in the 2000s and from 2003 until the start of the financial crisis in 2007 are examples. Passive has been in favor since the end of the financial crisis, as many countries around the globe faced similar conditions of low growth and easier monetary policy. In fact, in 2014 only 19.9% of U.S. equity mutual funds beat their benchmark according to Morningstar. We believe the period of active underperformance maybe coming to an end as we had into an environment where global economies are starting to diverge in terms of growth trajectories, monetary policies and stock market valuations. This may be setting the stage for market fundamentals to be a more important driver of returns, which should result in a greater impact from individual stock selection. Our positions in both equity and fixed income differed from those of market benchmarks during 2014 and as a result, we underperformed on a relative basis. On the equity side, we had a meaningful overweight to the energy sector coming into the second half of 2014, which we should have reduced to a greater extent at midyear. This positioning negatively impacted us as oil prices experienced a meaningful shock in the second half of the year falling by roughly 50%. On the fixed income side, our portfolios had a shorter duration than the broad market and a higher allocation to corporate bonds, our position reflected the risk we see in the U.S. treasury market in terms of both current and expected rate levels and this positioning hurt our results as well. These investment results impacted our flows in 2014, while total flows for the full year were more than -- inflows, I should say, were $9 -- more than $9 billion, up from $8.4 billion in 2013. However, due to larger outflows, we ended the year with net outflows of $3.3 billion. Manning & Napier has gone through periods of underperformance like this before. In both 1990 and 1998, we experienced difficult returns that let us to trail our benchmark on a one year basis double-digit figures. Both of those periods were followed by improved performance and tremendous growth in our assets under management. From the beginning of 1991 through the end of 1997, our assets grew by almost 150%. From the beginning of 2003 through the end of 2007, our assets grew by almost 200%, while the market increased by less than 100%. Before I pass the call over to Jim to talk more about our flows and financials, I would like to wrap up with commentary about our 2015 strategy, which includes a two-pronged distribution plan. First, we are focusing our service efforts on the equity clients, which represent 40% of our assets that detailed service message and providing clients with access to senior management as needed. Senior sales management staff long-tenure with the firm and have been sales or management leaders through past periods of difficult underperformance. They will work to keep our sales teams focused on service and thinking opportunistically about new business. The second prong is the sales strategy. We are focusing marketing our product management areas of supporting the message, the collateral, campaigns and advertising for targeted products that can drive growth for the firm. These include our multi-asset class strategies, our life cycle funds, global quality, fixed income, Manning yield, high yield and managed futures. Each sales team has the necessary tools to focus their sales efforts on these preferred products in their specific channels. We continue to believe that the fine contribution business which can be accessed across direct and intermediary channels can be a driver of growth going forward. In these each channels, we are best positioned to offer our multi-asset class strategies which can garner the majority of assets on a specific plans menu we selected as the QDIA. With dedicated Consultant Relations and marketing resources and sales representatives working both direct and intermediary channels, we have the DC opportunity to cover from small plans to very large plans and this way we carry our focus for sales in 2015. From a product standpoint, we had two products last year, reached their three-year track records, our emerging markets equity and global quality equity strategies. In 2015, we’ll have three more products achieved in three-year track record, global fixed income, strategic income conservative and strategic income moderate. You’ve also seen us add alternatives capabilities in the form of our acquisition of Xenon and we continue to look for other opportunities to grow inorganically to complement our organic growth initiatives. In summary, our goals for 2015 as I had outlined are to preserve our equity strategy business and drive new business through our focused effort on our strongest products, across our active management spectrum and improve the performance of the products currently experiencing downward pressure. As you’ve also heard me say this morning, we remain fully dedicated to our active management approach and believe it provides the best opportunities to meet our client’s needs while also delivering returns for our shareholders. And with that, I’ll turn the 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 our 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 our earnings release and related SEC filings. I will start by providing little more color around our assets under management and client flows in Q4 and full year 2014. We ended the fourth quarter with $47.8 billion in AUM, a decrease of $3.3 billion or 6.5% on a sequential basis. The decrease was attributable to net client outflows of $2.7 billion and market depreciation of $700 million. Gross inflows for the fourth quarter were $2.1 billion which was in line with the $2.2 billion of client inflows we’ve averaged over the past seven quarters of 2013 and 2014. Gross client outflows, however, were $4.7 billion for the quarter primarily as a result of continued pressure on our equity and non-U.S. equity products and represent an increase from the $2.7 billion of the past seven quarters. Our mutual fund and collective trust product had net outflows of approximately $1.7 billion for the quarter, including $1.6 billion of gross client inflows offset by $3.2 billion of outflows. In our separate accounts, gross client inflows of approximately $521 million were offset by $1.5 billion of outflows, resulting in net client outflows of approximately $976 million for the quarter. And our retention rate for separate accounts was 92% for the full year 2014. Primary drivers of outflows for the quarter and full year were platformed in institutional channels where we saw terminations or reallocations away from our equity strategies with the greatest impact felt in our non-U.S. equity strategy. Our non-U.S. equity products represent approximately 28% of our AUM down from 36% last year due to net client outflows and market depreciation. And we anticipate continued pressure on non-U.S. net flows in 2015 as a result of underperformance during the second half of 2014. U.S. equity strategies represent approximately 16% of our AUM which showed marked improvement with more than 70% increase in new business generation for 2014 relative to 2013. However, net client flows were negative for the year. Multi-asset class strategies continue to represent over half of our total AUM, and these strategies experienced net inflows for 2014, including nearly $800 million of net inflow into our Risk Based and Target Date funds, and multi-asset class inflows were $4.8 billion, which was up approximately 10% from what we experienced in 2013, while outflows were in line with prior year results. Transitioning to fourth quarter financial results, we reported revenue of $98.3 million for the quarter consistent with $98.2 million reported in the fourth quarter of 2013 and down 6% from revenue of $104.8 million reported last quarter. The changes in revenue were generally consistent with changes in average assets under management, which decreased by 1% from the fourth quarter of 2013 and 7% from the previous quarter. And revenue margins were 79 basis points compared to 78 basis points for both the fourth quarter of 2013 and last quarter. Operating expenses were $54.8 million in the quarter, a $4 million decrease compared to the fourth quarter of 2013 and down by $5.2 million compared to the last quarter. Compensation and related costs for the quarter were $26.2 million, a decrease of $4.5 million or 15% since last quarter and down 19% from last year. The decrease is a result of reduced incentive compensation caused by negative market returns and relative underperformance during the period. And compensation related costs were 27% of revenue for the quarter. Distribution, servicing and custody expenses, including sub-transfer agencies and 12b-1 expenses associated with our mutual fund and collective trust offerings have decreased by $1.1 million, when compared to last quarter, but have increased by 6% over the fourth quarter of 2013, which is consistent with changes in average mutual fund and collective trust AUM for the respective periods. Other operating costs of $9.8 million increased by $392,000 or 4% compared to last quarter and by $1.3 million or 15% compared to the fourth quarter last year. And for the quarter, other operating costs were 10% of revenue. As a result, we reported economic income for the quarter of $43.3 million, a 1% decrease since last quarter, but up 8% over the fourth quarter of 2013. An economic net income was $26.7 million or $0.30 per adjusted share compared to economic net income per adjusted share of $0.31 and $0.28 for the third quarter of 2014 and fourth quarter of 2013 respectively. With that, I'll summarize the full year results. Revenues were $405.5 million, which was an increase of 8% compared to last year’s revenues of $376.1 million. And revenue as a percentage of average AUM was 79 basis points for the year compared to 78 basis points for 2013. Operating expenses increased 11% or $22.6 million to $232.4 million in 2014. Approximately $18 million of the increase was the result of compensation and distribution costs, each contributing approximately half of the increase. The remaining expense increase was another operating expenses, which increased by $3.9 million or 12% in 2014 and represented 9% of revenue. Non-operating income was $1.9 million for the year, up from $1.2 million in the prior year and this resulted in 2014 economic income of $175 million, up 4% from $167.5 million in 2013 and our economic income margin is 43.2% for the 12 months ended December 31, 2014, compared to 44.5% last year. An economic net income per adjusted share was $1.22 for the 12 months ended 2014, compared to $1.15 per adjusted share last year. Before closing, I'll point out a few other items. Our equity ownership, our management team continues to own approximately 16% of our business and 2014 marks the third and final year of performance testing on the portion of those ownership interests in connection with the 2011 reorganization transactions or approximately 4.1 million units. The company’s Performance Incentive Committee continues its assessment of 2014 performance and expects to conclude its process by the end of February. As of yesterday when we released our results, we have estimated that over half of the shares owned by the management team that were subject to vesting in 2014 will be unvested. And divesting accrual when coupled with the decline in the stock price during the period has resulted in a contract expense for compensation in related cost in the fourth quarter for GAAP reporting purposes. However, I would remind everyone that vesting related to these shares has no impact on our economic income or free cash flow. Once the performance incentive committee finalizes its decisions, the non-cash compensation accrual will be adjusted to reflect the actual expense and these unvested shares are expected to be reallocated. And all resulting adjustments between yesterdays release and the committees decisions will be reflected in our 10-K. Additionally, similar to prior years, we will enter in an exchange period, whereby both our founder and management team have the ability to exchange private units for cash or Class A common stock. We expect to complete this transaction by the end of the first quarter as we have in the last two years. Both divesting and exchange process I’ve just described are fully accounted for them as part of our adjusted share count and do not have a dilutive impact to our shareholders. With respect to the balance sheet, we continue to maintain a debt free capital structure with the cash balance of $125 million and approximately $30 million invested in new product concepts. And as you are aware Manning & Napier Group distributed $46.3 million in cash to its members for the quarter, including a special one time distribution of $15 million. This distribution resulted in a quarterly dividend of $0.16 per share, which is consistent with the quarterly dividend that we have provided to shareholders in prior periods and a special one time dividend of $0.08 per share. For the year, we distributed approximately $140.4 million or $0.72 per share to our shareholders. In closing, we continue to enhance shareholder value during 2014 to economic income growth, dividend payments and continued diversification of our product lineup. As Patrick stated earlier, our focus in 2015 will be to capitalize on our strength and to find contribution markets and take advantage of our new product offering while maintaining a service focus for our U.S. equity and non-U.S. equity clients. That concludes the formal remarks. I’ll turn the call back over to the operator and we look forward to your questions. Rachel?

[Operator:]

[Operator Instructions] Thank you. Our first question is from Steven Schwartz, Raymond James.

[Steven Schwartz:]

Hey, good morning, everybody. A couple, first Patrick, I’m just wondering here. I know that you have the big books detailing the investment strategies and stuff like that. And I believe that the energy investments came under the hurdle rate strategy. I’m just wondering, can you maybe discuss and maybe what you learned and maybe what went wrong relative to the manuals?

[Patrick Cunningham:]

Sure. For those who are not familiar with the hurdle rate strategy, it’s where we are investing in industries that are going through serious consolidation. What typically happens is when times are good and they have pricing power, they increase capacity in the industry and when there’s a hiccup in demand, while there is over supply then pricing collapses. And when pricing collapses then the industry starts consolidation. First, you don’t build a new plan and then you scrap the inefficient plans and then there are bankruptcies and there are layoffs and it gets ugly. And that’s when we want to buy what we consider to be the best and most solid players in that industry with good balance sheets or have the ability to withstand the downturn and actually come out stronger on the back end than they were going into it. We had a large position in energy back in the 2000s, using the hurdle rate strategy. And we really started investing again during the financial crisis when oil prices once again collapsed as result of the fear that demand and all the growth is going to go away. The issue that we have with energy this time was we didn’t sell it when it should have been sold. So we started so sell it in the middle of the year. We were liquidating our position. And all of the sudden, the prices started to collapse and the price of oil start to collapse and so did the price of the shares that we held to the point and that happens so quickly to the point where it was imprudent to sell at that time. And frankly, we are now back in the hurdle rate again and so that’s what the hope -- when we get perfect, we will let everybody know, we didn’t sell appropriately here. We’ve looked at it carefully, internally. And once again, we’ve been using the strategy for now 45 years. It’s one of the core strategies that we have. And it can turn just as it turn negative relatively quickly. We believe it can turn positive quickly as well. We are seeing signs of the hurdle rate now. Weatherford announced laying off thousands of people, which is the sign once again, the consolidation we’ve seen. Mergers occur, another indication that we are back in the energy hurdle rates. So what happens is that, when this occurs and with prices of $50 a barrel or $45 a barrel, the players who are -- it cost some $80 a barrel to get it out of the ground or lifting cost. They’re not going to pull out $80 barrel of oil and sell it for 50 bucks, which is -- so we see supply reaction, a supply response. And these prices in our opinion are unsustainable and we expect price improvement the price of oil to occur probably later this year or early next year. That’s how energy analysts view it this point.

[Steven Schwartz:]

Okay. Yeah, no, it did. Thank you, Patrick. Just one more, do you have -- I can look at them up. But do you have on hand, the three-Year track records for global fixed income and the strategic income funds?

[Patrick Cunningham:]

So, I have it in front of me.

[Steven Schwartz:]

Good.

[James Mikolaichik:]

Global fixed income is outperforming and what was the other question?

[Steven Schwartz:]

The strategic incomes?

[James Mikolaichik:]

They are pretty close to the benchmark. I don’t have the numbers right up until total today but they are global.

[Patrick Cunningham:]

Global fixed than ahead. Strategic income is a bit of a different product. It’s a add-on in our multi-asset class area. So it’s being sold more on its yields, because that is, if you recall, when we’ve talked before that, it is a combination our core, core plus fixed income, high yields, real estates and our high dividend paying stock strategy. So it is an add-on to try to take advantage of what we’ve done in the sort of dynamic balance accounts and risk-based portfolio, target-date portfolios, is to have something on the other side when people are looking to start extracting money and are thirsty for yields as they have been in the past couple of years. That’s what those products do, so it’s more of a solution-oriented saving up to your benchmark sale.

[James Mikolaichik:]

Right. With these low interest rates, obviously there is a yearning for yield and that’s how these products are sold.

[Steven Schwartz:]

Okay. Thank you, guys.

[Patrick Cunningham:]

Thank you.

[Operator:]

Your next question is coming from the line of Adam Beatty, Bank of America Merrill Lynch.

[Adam Beatty:]

Thank you and good morning. First, just the question on gross sales and flows, mainly around the gross sales. It’s been quite steady, as Jim noted, kind of over the trailing periods. Just wondering within that you have a few different, kind of new-ish channels and products that you are trying to come to market with, what’s been working in driving the gross sales there?

[Patrick Cunningham:]

Well, I would say, the primary driver of growth in 2015 that we are concentrating on is not a new product.

[Adam Beatty:]

Okay.

[Patrick Cunningham:]

It’s our multi-asset class life cycle funds, the DC marketplace where we’ve been players for a long period of time, have got a plugging in for all of the platforms that we think we need to be on, we’re on. We have a team now dedicated to the DCIO space. We’ve always been DCIO and we’ve always called out on the 401(k), 403(b), 457 plans specialists. But we decided couple of years ago that we were going to have a force that was dedicated to that. And we have a team that is also doing practice management conversions of help. So, we are very much concentrating on that area, so that is the primary drivers. But we also have this -- our Global Quality product, which has a three-year track record, is a very good product, very strong product. And we think we’re going to get some traction on for institutional sales. So, we’ve taken each of our sales distribution channels including the regional high net worth people, the institutional’s direct sales people, the DCIO sales people through intermediaries and the high net worth through intermediaries and high networks through intermediaries and we have identified, which products have the best ability to get traction in each of those channels and that’s in place and it’s going right now. It’s happening.

[James Mikolaichik:]

Yeah. And Adam, just to put a final point on it, the blended portfolio that Patrick mentioned, we saw up about $500 million in gross flows. We actually saw a rebound in the first half of the year in U.S. equity strategies where we started to get new allocations. And in fact, even later in the year, we got some allocations in U.S. equity with people thinking that this is a good time to probably buy some of our products, which was probably a surprise to us that we started to see the pushback into U.S. equities. And we’ve had a push on in fixed income as well but that only contributed about a $150 million of new gross flows. So it’s happened more broadly across the board but certainly in the areas that Patrick said, we have a focus on.

[Adam Beatty:]

Great. That’s helpful. Thank you. And just a broader question about the retirement markets and couple of forces out there that we see or some folks see are on one hand, the need for income which everyone is kind of talking about. But on the other hand, the idea that folks maybe don’t have the necessary balance needed to pay for those multiple decade sometimes of retirement and maybe the need for capital appreciation to get there. How do you see that playing out right now and where are the trends? Thanks.

[Patrick Cunningham:]

You are talking about the -- just the general retirees, how we are going to be able to survive the longevity risks?

[Adam Beatty:]

Yeah. Are folks going for equity to trying to get that capital, or are they just going to concentrate on income?

[Patrick Cunningham:]

Well, with our clients and their mind, we have -- I think part of the reason why our retention rates are high, particularly in the high network retiree marketplaces because we have teams of people that had the value-added services. So we have a high network team that will do a broad array of -- give lots of advice, retirement advice, the state planning advice. We have state planning attorneys on staff and that’s all part of our service as investor managers. So they come to us knowing that we are impartial. We are not trying to create billable hours. We are not trying to do tax returns for them. We are just trying to give them a clear understanding of what their options are and help them, help lead them towards those types of solutions. And those are clients that we know intimately and by and large, they are using our multi-asset class portfolios. They know there is a need for growth. You can’t -- that longevity risk is real. And so they know they need growth but they also know that they need to preserve capital. So, our most popular multi-asset class strategy is called long-term growth, which puts -- the three priorities are growth, number one. Number two is preservation to capital. Number three is beating inflation. So in the statement of investment objectives, there is no mention of beating the stock market. There is no mention of -- it’s beating those three investment objectives and that’s a strategy where we can anywhere between say, 35% equities up to 80% equities. And so our clients rely on us to make the asset allocation decisions for them to help them balance those two goals of growth of preservation of capital, which ultimately will allow them to withdraw from the portfolio on a consistent basis. So as far as the trends are concerned, I still think there is lot of -- I think there is lot of money on the sidelines. And I think people realized that they have to have some type of growth in the portfolio in order to maximize the longevity of the portfolios.

[Adam Beatty:]

That’s great detail. Thank you for taking my questions and thanks for the new slide.

[Patrick Cunningham:]

Thank you. By the way for those on the call, we apologize for the delay in getting started. It was technical issues that came up at the last minute but I’m very strict for being on time. So, I do apologize.

[Operator:]

Your next question is coming from the line of Michael Kim, Sandler O’Neill.

[Michael Kim:]

Hey guys. Good morning. So just coming back to performance more broadly, it seems like there is still demand for high active share managers and at least part of the reason why the industry broadly underperformed last year seemingly related to the amount of money into strategies tracking indices? So just wondering as you communicate with your existing clients and I know the retention rates remained high? But just wondering the extent to which those arguments are still resonating with them and if you sense there is maybe a bit of impatience, if you will starting to creep in?

[Patrick Cunningham:]

We…

[James Mikolaichik:]

Your question is, are -- do our clients come in, better have dialogue and talking to us about, perhaps, switching from active management to passive management. This was -- we had none, very little to none -- no dialogue that I’ve heard of relative to our clients doing that. We had one clients who -- a large institutional client that made that decision. But I see it more in that large institutional space. I think Calpers when they decided to go passive management, I think a lot of the large institution started to think about it as well. But in the middle market and the high net worth market, we don’t see that happening with our direct clients. I think there is a trend for intermediaries to financial advisors to use ETFs and other passive strategies for certain portion of their clients. The statistic that I have seen in more than half of financial advisors use ETFs for their clients, but represents about 7% of the assets that they have under management. So they use them, but they are not using them, not our trend is continuing to grow, but it’s -- we are firm believers that there will be, when markets go down significantly, people yet, they want someone to protect them and active management is probably the best protection that people will have in the marketplace.

[Patrick Cunningham:]

We have heard that folks want a smoother ride and I think people have maybe avoided that conversation a little bit the past couple years given the market choppiness and desire to participate as fully as possible in that. But we -- as we survey client, there is a thought to dampen volatility. They still have active management, but find ways to hedge out some of the absolute extremes as they get closer and closer to needing to use the money to retirement and then aging population, which is why we have continued to add product -- add to our product that with volatility managed products and specifically the managed futures product. They have been at favor because of the height of these markets for past couple years and the narrowness of them and the correlation of some of the return. But we started to see them come back at the tail-end of last year and they are beating in this year. So we think those types of products with active management could be very attractive as we move forward.

[Michael Kim:]

Okay. That’s helpful. And then just focusing on the Mutual Fund channel? I know, you referenced some platform reallocations that skewed redemptions in the fourth quarter and you expect continued pressure as you look into this year. Just wondering where you stand today in terms of platform AUM that could potentially be at further risk of reallocations?

[James Mikolaichik:]

Yeah. We -- when you have type of performance that we had, particularly in the second half of last year. There is going to be scrutiny and there is going to be pressure on flows. So we cannot -- we can’t predict obviously exactly who and when may redeem. But we know that, we are doing all we can to make sure that people understand, what we are doing, how we are doing it and why. When we have gone through periods like this in the past, I mean, we were at the end of 1999 we were -- we had -- we were very under weight in technology. Technology was driving the market. We were -- that’s one of those periods where we were trialing by significant amount, what seem to be insurmountable. But that set the stage for some of the best growth that we have had as a firm. And so I think that’s the kind of messaging that we are giving. It seems like every 10 years we are zigging when the market's zagging and those are typically followed by some of the best returns, number one and ultimately as you know, returns we can close. And so hopefully, we’ll see this, the hurdle rate in MNG turning around soon and some of the other sectors that we have will outperform. And I think if our clients particularly the large institutional clients who have the single asset class lead of U.S. or non-U.S. equity when they see that started to turn around, hopefully the pressure will abate.

[Patrick Cunningham:]

And Michael, I’ll just add to that, we have -- we've got a very diversified client base and a diversified channels that we distribute through as you know. And we don’t -- we're not really exposed in spite of a large cancellation or two in the fourth quarter. There is some of that, that’s spilling into January just in terms of the redemptions. But your exposure to any one given platform or client is below 5%, in fact, more around the 3% range. So we do have a fair amount of diversification in terms of where we’re distributing in and where our client relationships are.

[Michael Kim:]

Got it. And then maybe just to follow up with you, Jim, on one technical one, any updates on future RSU grants just in terms of how we should be thinking about the potential size and timing of awards for 2015?

[James Mikolaichik:]

Nothing specific to mention right now. I did mention the fact that we have about 4.1 million units of legacy shares that are in our adjusted share count that are going through their final performance evaluation. Given the way the performance incentive community is looking at those shares, we are expecting to have a reasonable portion over half as what I said of those shares that are going to be unvested or forfeited by legacy shareholders, which would go back into the tail-end in the sense to be reallocated. And we’re looking at that -- we're working through that process right now. The contractual terms in the process runs through the end of February to give enough time to make sure that the individual valuations are extensive and appropriate and then we would be back out with any adjustments related to that with some announcement in terms of the effect on reallocating those shares. That wouldn’t add to the share count though. That’s just as I said reallocation.

[Michael Kim:]

Got it. Okay. Thanks for taking my questions.

[James Mikolaichik:]

Thank you.

[Operator:]

[Operator Instructions] Your last question comes from the line of Robert Lee, KBW.

[Andrew Donnantuono:]

Hi Jim. Hi Patrick. How are you? This is Andrew Donnantuono filling in for Rob. Thanks for taking our questions.

[Patrick Cunningham:]

Good morning.

[Andrew Donnantuono:]

I have one question. Good morning. We had a question, just kind of thinking through the fee rate a little bit, particularly, if you think over the last two quarters, Manning’s had a bit of a mix shift away from equity products and into blended asset likewise kind of a mix shift away from funds into separate accounts though the -- that being said the fee rate, it’s actually remained pretty steady, actually ticking up a bit one basis point quarter-over-quarter. I was just wondering if you could kind of provide maybe a little insight into -- in spite of that make shift how you -- which products will then -- some of those categories have enabled you to kind of maintain at 78, 79 basis point run rate for your fee realization rate?

[Patrick Cunningham:]

Sure. The mix shift, it doesn’t just -- the starting point, the mix shift doesn’t have enormous impact in terms of the overall ability to generate free cash flow because in essence, the product set has lot of similarities to it in terms of the expense structure that goes along with it. So in spite of moving from blended asset portfolios or mutual funds to separate accounts or blended to equities, the way it works itself through the variable comp structures in our sales team and our research team, still keeps us in reasonably steady state in terms of while we drop to the bottomline. But on the topline basis, you’re right, we have seen a slight improvement in terms of margins on the revenue side. And I think that’s largely due to the types of clients that we’ve been adding and maybe some of the clients that we’ve had come off the platform. So we’ve lost some larger platform relationships or large institutional mandates at that. I touched on and Patrick touched on which tends to be a slightly lower fee levels. And what we’ve been picking up are smaller and middle market on the separate account side as well as continuation into our mutual fund and collectives on the blended asset portfolios, which still maintain a reasonably high fee rates, it’s not as high as the equities, but it certainly keeps us higher than where we were. So what I think you’re seeing is just the continuation and diversification of our sales channels and additions coming in the channels that have always served as well.

[Andrew Donnantuono:]

Okay. All right. Thanks, Jim. That makes sense. And then just really quickly, you mentioned that briefly Patrick in your opening remarks just the potential for acquisitions, whether it’s this year or next year, I know 2100 Xenon closed I guess nine months ago or so now. But just wondering what you’re seeing out there, how that could potentially be a part of how could acquisitions be a part of your growth strategy this year, just kind of relative to where it’s been over the past few years? I know you did mention that kind of the emphasis is on the existing products, but wondering if you could just add a little bit more commentary on any inorganic growth potential for Manning this year.

[Patrick Cunningham:]

Sure. First of all, we continue to actively look into the marketplace for services and capabilities that we think will help solve our clients’ problems. So Jim has spent some great deal of his time and his team looking at a wide variety of potential acquisition candidates. My observation is that they are not cheap. The good track records are going at a premium. So it’s not a -- it’s a time when it’s difficult to balance both the product that you want and the kind of terms and pricing that you want. So we are active. It’s very hard to predict and I am pleased that we’re able to integrate Xenon into our organization in a meaningful way and it’s fully integrated as far as I am concerned. And so we have our first acquisition turn out the way it has, and I am pleased with that. And I think that will center stage for us being able to make acquisitions in the future and to make more acquisitions in the future. So we are looking -- we don’t have -- there is nothing that I can tell you that we expect to close in the near future, but we are active. Jim, do you want to add anything?

[Andrew Donnantuono:]

Great. Thanks, guys.

[Patrick Cunningham:]

Okay. All right. Thanks, Andrew.

[Operator:]

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