Manning & Napier, Inc.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Good morning. My name is Maria and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manning & Napier Second Quarter 2013 Earnings Teleconference. Our hosts for today are Patrick Cunningham, Chief Executive Officer; Jim Mikolaichik, Chief Financial Officer; and Paul Battaglia, Director of Finance. Today's call is being recorded and will be available for replay beginning at 10 o'clock a.m. Eastern Time. The dial-in number is 404-537-3406, and enter PIN number 14331769. At this time, all participants have been placed in a listen-only mode and the floor will open for your questions following the presentation. (Operator Instructions). It is now my please to turn the floor over to Mr. Paul Battaglia.

[Paul Battaglia:]

Thank you, Maria and thank you everyone for joining us today to discuss Manning and Napier's second quarter 2013 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, maybe 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, I'll introduce our Chief Executive Officer, Patrick Cunningham. Patrick?

[Patrick Cunningham:]

Good morning everyone and thank you for joining us. As usual, I will make some opening remarks before turning the call over to Jim Mikolaichik, our CFO. Jim will then take you through key financial highlights, and when Jim's done, we will open the call up to Q&A. I will start with a quick review of the markets to provide context for our results. During the second quarter, U.S. Equity market posted gains, adding to strong first quarter returns. Foreign equity markets were negative, particularly the emerging markets, which were down about 8% for the quarter. Bond markets were negative for the second straight quarter, as comments from the U.S. Federal Reserve led to investor concerns about rising interest rates in the future. Overall economic data continued to reflect the slow growth reality in the U.S., and inflation expectations actually dropped in the second quarter. The stock markets saw a return to volatility in the latter portion of the second quarter, and once again we saw preference for more defensive equity market sectors. This is a pattern that we have seen on and off for the past several years. As you are aware from my comments on previous calls, our outlook for economic growth in developed markets is modest, and so our long term investment strategies are focused on companies that we believe can achieve above average organic growth in these subpar environment. In line with our outlook, our portfolios are more concentrated in technology, information technology, media and energy, and where possible, we have exposure to emerging markets, as we believe these economies with an emerging middle class are poised for stronger growth than developed markets. We have little exposure to high dividend paying stocks, given our focus on companies that are reinvesting in their businesses to fund the future growth. Year-to-date, this positioning has helped us earn strong absolute returns across our strategies. Our U.S. Equity Strategy is up nearly 12% so far this year, while our Pro-Blend Maximum Term Series, which is the most aggressive of our lifecycle strategies, is up roughly 9%. Our World Opportunities Fund is up 3.7%, reflecting the more modest gains non-U.S. stocks. On a relative basis, we maintain strong track records over the most recent 1, 5 and 10 years for our World Opportunities Fund, and Pro-Blend Maximum Term Fund. As we discussed in past calls, our equity series track record continues to include some difficult quarters, at challenged longer term comparisons. One of the most important things for our shareholders to understand about our firm, is our strong long term track records are not the products of consistent excess returns in the quarter. Our active approach leaves us to take strong positions in areas of opportunity, and to avoid areas of risk, and potentially over long periods of time. This is based on fundamental justifications rather than market biases. Our 40 plus years of active management has taught us, that there is money to be made when markets reach extremes, that lead to inflection points. When you consider that the lowest beta stocks, the defensive high dividend paying stock in the S&P 500 have grown to represent more than 30% of the index. By the way, that's 50% higher than it was, when the financial crisis began in 2007, and it's about the same weight of the highest beta stocks back in 1999 at the peak of the tech bubble. We think there is a reason to believe that the markets may be getting close to an inflection point. Despite our preference for growth companies, while investors have preferred what have traditionally been considered safe investments, we have largely been able to keep up with market returns. In particular, within our lifecycle and non-U.S. strategies, where we have a broader investment universe, our relative returns remain competitive. In contrast, our U.S. Equity strategy, which is more narrowly focused, has struggled in this market environment, and that struggle is reflected in our trailing period return comparisons. The natural byproduct of our investment approach is an increase in redemptions or terminations, when our differentiated positioning persists for a prolonged period of time. To address this, we are maintaining a focus on client service and communication. Generally speaking, we have been successful holding on for client relationships overall, even when we are on the unpopular side of a market trend. Year-to-date, our separate account retention rate remains high at 92%. However, some attrition is expected and this time is no different. For the quarter, we experienced net negative flows of $1.4 billion, largely driven by our U.S. Equity strategy. While Jim will provide additional commentary on our overall flows, I want to remind you that periods like this have historically been the building blocks of our strong long term track records. We believe these track records, along with high client retention rates for our separate accounts, and the strong and increasing number of sales representatives, leaves us positioned well for the future. As we look ahead, we continue to focus on the three foundations of our business, that allowed us to grow over more than four decades. First, our strong team based research engine that focuses on processes and strategies that can be repeated over time. Our adherence to this engine for more than 40 years, gives us confidence in our current positioning and outlook for the future. Second, our solutions oriented approach to prospecting and servicing. This forces to remain relevant in terms of our product offerings, as markets change. Third, a strong governance and operating structure, that aligns the incentive of our employees, with those of our clients and shareholders. We continue to enhance our deep and effective multichannel distribution structure. We added two new territories in our direct sales channel during the second quarter, one in Houston and another in New York City, and we continue to recruit for further territory expansion. Our key accounts roles, within our intermediary channel, continue to expand the scope of our mutual fund offerings across various wirehouse and RAA platforms. Additionally, we are focused on adding our new fund offerings to existing selling agreements to drive new distribution. Lastly, the Affordable Care Act, provides us additional fuel for our consultative approach within our intermediary channel, which is focused on helping retirement plan advisors, provide holistic consultation to their clients in the face of the convergence of health and wealth benefits. So with that as a brief overview, let me pass it over to Jim for an update on the financials.

[James Mikolaichik:]

Thank you, Patrick, and thank you everyone for joining us today. Hopefully, you had an opportunity to review our earnings results which were released yesterday after market closed. As Patrick mentioned, I will take you through the financial highlights and welcome the call for Q&A. As we've mentioned during previous calls, I will focus my remarks on certain non-GAAP financial measures, primarily economic income, economic net income, and adjusted earnings per share. We believe these measures are the best representation of our returns and cash flows, and that they exclude certain non-cash accounting charges related to our initial public offering. However, our earnings release and related SEC filings do provide full GAAP reconciliations, as well as additional detail related to our non-GAAP financial measures. With that I will turn it to net client cash flow and assets under management. We ended the second quarter with $46.3 billion in assets under management, a sequential decrease of $1.8 billion or 4%. However, when compared to this time last year, our assets increased $3.9 billion or 9%. As of June 30, 2013, the composition of our client assets by investment vehicle was consistent with what we had reported previously, with 54% in separate accounts and 46% in mutual funds and collective investment trusts. By portfolio, 47% of our total client's assets were invested in blended asset portfolios or lifecycle products. 50% invested in a variety of equity strategies and the remaining 3% in fixed income portfolios, which was also in line with prior periods. Gross client inflows during the quarter were $1.9 billion, but were offset by gross client outflows of $3.3 billion, resulting in net client outflows of approximately $1.4 billion. By investment vehicle, we experience net outflows of $104 million from our mutual fund and collective trust products, combined with $1.3 billion of net outflows from our separate accounts. Within our separate accounts, we had approximately $475 million of gross client outflows, offset by $1.8 billion for gross client outflows, and our 2013 retention rate remains above 90% and 92% year-to-date, but is down from the 95% retention rate reported this time last year. The remainder (inaudible) in assets under management since March 31, resulted from market depreciation of approximately $326 million. Transitioning for our second quarter financial results, we reported revenue of $93 million for the quarter, an increase of 14% from $81.5 million reported in the second quarter of 2012, and an increase of 3% from revenue of $90.3 million, reported in the first quarter of 2013. The changes in revenue were generally consistent with changes in average assets under management, which increased by 12% from the second quarter of 2012, and 1% since last quarter. Our revenue margins were consistent with revenue, as a percentage of average assets under management of 78 basis points for the second quarter of 2013, compared with 76 basis points this time last year, and 78 basis points for the previous quarter. Operating expenses were $48.8 million for the second quarter, which represented a $4.5 million increase compared to the second quarter of 2012, and a decrease of $1.7 million compared to the previous quarter. The majority of the operating expense decrease was due to compensation and related costs. The decrease compared to the prior quarter was attributable to decreases in sales commissions and analyst bonuses. Distribution, servicing and custody expenses have increased in line with average assets under management, with the increase primarily due to sub-transfer agent and 12b-1 fee expenses. Other operating costs in the second quarter of 2013 were in line with the previous quarter, and modestly up from second quarter last year. As a percentage of revenue, other operating expenses for the quarter were 8%. As a result, we reported economic income for the quarter at $44 million, a 20% increase or $7.3 million from the second quarter of 2012, and a $3.9 million increase from the last quarter. Our economic income margin was 47.3%, compared to 44.5% last quarter, and 45% this time last year. Economic net income was $27.2 million or $0.30 per adjusted share, compared with $0.28 per adjusted share last quarter, and $0.25 per adjusted share for the second quarter of 2012. With that I will summarize the results for the midyear; revenues for the first half of the year were $183.2 million, which are approximately 10% ahead of last year, and operating expenses were $99.2 million, an increase of 11% over last year. As a result, economic income is $84.1 million, which is 10% ahead of last year. Revenue margins are in line with the prior year at 78 basis points, and our economic income margin year-to-date was 45.9%, compared with 46.1% this time last year. Economic net income per adjusted share was $0.58 for the six months ended June 30, 2013, compared with $0.53 per adjusted share last year. Before closing, I will point out a few other items; first, our management team continues to own approximately 18% of our business, and a large portion of that ownership is subject to vesting requirements through 2014. As a result, we are continuing to report non-cash compensation expense. Those expenses are variable in nature, subject to the underlying investing criteria, and the market value of our public stock. I would also remind everyone that the vesting is fully accounted for, as part of our adjusted share account, and do not have a dilutive impact to our shareholders. As of June 30, 2013, adjusted shares outstanding were 89,912,186, which includes approximately 400,000 adjusted shares related to recently issued invested stock units. Also, we have 30,634,246 Class A common shares outstanding. Our balance sheet remains healthy, which continues to afford us the ability to invest in our business, while continuing to pay reasonable dividends to our owners. To that end, we continue to have a debt free capital structure, and we maintain a cash balance of $126.1 million as of June 30, 2013. As you are aware, Manning and Napier Group distributed $31.3 million in cash to its members for the quarter, resulting 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. Finally, on an administrative note, and in an effort to keep our shareholders better informed of our results throughout the quarter, starting with the July 31 reporting cycle, we will begin reporting month-end assets under management for the interim month. That concludes the formal remarks, and I will now turn the call back over the operator when we look forward to your questions. Operator?

[Operator:]

(Operator Instructions). Thank you. Our first question is coming from Michael Kim of Sandler O'Neill.

[Michael Kim:]

Hey guys, good morning. So just to come back to the outflows in the SMA channel, just curious if you have any insights into, were they relatively concentrated or more widespread across the accounts, and then any insights into the drivers behind the redemptions, whether it was performance related or more a function of maybe clients shifting strategies, or reallocating capacity or alternative strategies, just any color there would be helpful?

[Patrick Cunningham:]

Sure, good morning Michael, it's Patrick. The outflows are somewhat concentrated. When I say concentrated, clearly in the U.S. Equity Strategy, they are concentrated, and also it's the shorter term relationships in some of the platforms, where they have been with us for around the three year time period, because the three year time period is the one that has been problematic, and these are generally -- these have been -- I call them lumpy, I don't know -- we usually use different terms, these are larger redemptions or movements to other asset classes or other managers. We do -- we spend a lot of time and energy to focus our clients on market cycles, every performance review that we do, where we have a market cycle, that's the time period we concentrate on; when we present our returns to clients and to prospects, we talk about market cycles, we try to help clients understand where we will outperform and underperform, because our process will put us through periods, as we are right now, where we are not jiving with the market. We are not running to the areas where the market has run through over the past few years, and we are going into areas that we think will benefit our clients over a much longer period of time. Despite all of our efforts, not all of our clients are going to make the decisions based on full market cycle, and we have seen that as the primary driver of the redemptions so far in the last quarter. The good news though, I think we have done a good job of diversifying our business across multiple investment strategies, and multiple client types. So we still continue to have inflows through all of our channels, and through many of our investment products.

[Michael Kim:]

Got it. That's helpful. Then second, just curious to get your take on the fund flow trend across the industry, now that we have seen bond fund flows reverse course more recently. Just curious to see if you think this is sort of the catalyst that drives a more meaningful rotation into equities over time, and are you seeing any sort of evidence of that, as you look across your funds?

[Patrick Cunningham:]

I mean, obviously it's positive for an active manager or an equity manager, when all of a sudden, there's some fearing trepidation of the bond market that's going to drive flows. That's a positive thing, but ultimately, we control our destiny. I think it is our ability to speak -- we are a relationship organization, and it's our ability to build those relationships, that really is going to drive our business more than any sort of industry trend. Do you have any comments on that Jim?

[James Mikolaichik:]

No I think you've hit it.

[Michael Kim:]

Okay, then just finally, could you talk about some of the trends you are seeing across the high net worth business in terms of the competitive landscape around pricing and asset gathering trends more broadly? It seems like smaller independent firms continue to gain market share from the bigger wirehouses, so just wondering if you are seeing that trend play out as well?

[Patrick Cunningham:]

I think there is -- the high net worth space has now become a space that -- it seems like every financial services organization is concentrating on. So there has always been competition, there will always be competition. Our experience though is that, it's a relationship business. So it's getting referrals from one high net worth person to another. It's providing outstanding service, and good long term results that will drive that business. But it is a -- I think the bigger trend that I see is the fact that the advisor channel is using ETFs more and more than they have in the past. That's a trend that we have seen over the last several years, as returns have become relatively slow, the returns in the market have been relatively meager in the last 10-15 years, how does the advisor add value? Well, if they can use ETFs and put [their fee] on top of it, that's one way to do it in a lower fee basis. But, we think that there will always be intense competition in the high net worth space.

[James Mikolaichik:]

And I think luckily though or not, the business that we built has been, as Patrick said, based on relationships than really where the firm started was, it geographically focused on relationships. Either acting with individuals in the high net worth space and smaller advisors, more recently we have developed and defended the larger wirehouses and platforms, but to the extent money continues to move and you have people coming out of wirehouses and then setting up their own shops, those are places that we have had relationships, and we know how to cultivate relationships in that manner, and that's why we've continued to build out the sales force in geographic regions, so that we have the people there, present to address the marketplace. So I think the trend is one that ultimately is not a bad trend from where we sit.

[Michael Kim:]

Okay. That's helpful. Thanks for taking my question.

[James Mikolaichik:]

Thank you.

[Operator:]

Our next question comes from Robert Lee of KBW.

[Robert Lee:]

Good morning guys. First, I just wanted to maybe try to drill down a little bit more into your direct (inaudible), some of the trends there. I know you gave some color about platforms being the key driver in kind of the redemption activity, but if I slice it a little bit more, I mean, in addition to the pickup in redemptions, clearly gross sales have slowed at least this quarter. And can you maybe -- are you seeing any kind of RP activity among traditional institutional accounts and maybe you can give some color on how -- what I would think of as may be not so much the platform in large institutions, but may be little bit more of your net worth oriented business. Just trying to get a -- how that's going? Just trying to get a sense on, if that business is doing well, as you expand the salesforce and it's really the platforms and traditional institutional investors, where there is not a lot of RFP activity and that's where the sales pressure is, and can you just try to give a better sense to that?

[Patrick Cunningham:]

Sure, the high net worth side of our business has been very consistent. Once again, we have built out capabilities. When we have a high net worth services that we provide to them. We have state [funded] attorneys on staff, who will not create their wills and not do their taxes, but they will (inaudible) them. They will make sure, that whatever plan they have in place, that the client truly understands it, what their options are. They will make sure that they change the beneficiaries appropriately on all the various accounts that they have. And they will track how well a client is tracking to their life goals. So we take the discussion of how did you do compared to the S&P and change that to how are you doing in terms of hitting your life goals in your estate and retirement planning. So that level of service and that orientation makes that business, a business that is, what I would call just the energizer bunny, just keeps jogging along. The large institutional and the platform tends to be larger mandates, and when you do have a cancellation in that channel, it tends, as I said before, it's a lumpier type of either asset gathering or asset leaving situation.

[Robert Lee:]

Maybe a follow-up just related to that, or are you aware of any other kind of pending cancellations that you have been notified of, that we should be thinking about over the near term, and then I guess, given some of the challenge, performance on the U.S. Equity side, are you seeing any -- what's the RFP activity like maybe away from that, and some of the more global strategy?

[Patrick Cunningham:]

Yeah, the global strategies continue to be -- those are -- we have very competitive offerings in that strategy, and we continue to have activity. The activity in the U.S. Equity has declined of course. The -- I would argue, now is the perfect time to invest in that strategy. But, it has declined primarily because of the performance. People look at databases, and they look at relative performance, and that makes it problematic on that front.

[James Mikolaichik:]

Rob, we still brought in $4.6 billion year-to-date, and we actually had I think blended in our multi-asset class product. We had greater inflows this year, than last year. There is still a lot of interest over the past year and a half in total, in non-U.S. and multi asset class. But as Patrick said, when you have a three year number that really, the anchor in there has been the September fall 2011 timeframe, we think that that will take a little while to work its way through, and most of the decision making that we are seeing and hearing about, I think is focused in that space. The longer term numbers have been pretty competitive across the board, and certainly the shorter term numbers in U.S. equity been competitive, it's just working through that three year number, and investment teams making decisions and sort of having that as a cue to do a review, that has been the problem, and we continue to work hard to stay ahead of it. But that will take a little while longer to work its way through. But we have had, we still have good interest in the other products.

[Patrick Cunningham:]

Yeah, and clients have been with us longer term, who have experienced how we manage money through these type of inflection points. I happen to view a client two weeks ago, it happens to be a client who started with us in 1971, so we have been through multiple iterations and multiple market cycles, and they are -- their absolute returns are solid, and they want to make sure that they are positioned to continue those absolute returns, and they have complete confidence, that that's what they will do.

[Robert Lee:]

Great, and I appreciate your patience with all the questions. one last one, just on comp. Understanding your comp (inaudible), was around with no trailing performance in sales. Was it possible to get a feel for, we think the sequential decline, maybe how much of that was kind of driven by changes in sales volume, versus changes in analyst comps or if there is anything else and they have played in like a reversal, prior accruals, or something?

[Patrick Cunningham:]

No reversals or prior accruals, really, you hit the two. It's the analysts and sales. To be honest with you, the analyst bonuses, given our performance on the shorter term, on an absolute and relative basis, and the year-over-year performance and growth in assets. The analyst bonuses has remained fairly strong and probably ahead of where they were. It has been the sales side without a lot of net new asset coming in, where we have had lower sales commissions as a result.

[Robert Lee:]

Great. Thank you for taking my question.

[Patrick Cunningham:]

Thank you.

[Operator:]

Our next question comes from Adam Beatty of Bank of America.

[Adam Beatty:]

Thank you and good morning. Appreciate the additional disclosure on monthly AUM, much appreciated. Just a two part follow-up on flows, you mentioned sort of -- over your history, there have been times where your strategies have been out of favor. In recent years, especially being a public company, you've expanded into some new channels and what have you. So if you could, can you tell us a little bit more about kind of what you are seeing is the same and may be different from past experiences like this, where your strategies might have been out of favor, and also, maybe in some of the new channels or what have you, are you finding different challenges in terms of communicating with investors, and are there different capabilities that you put into place, try to address those specifically?

[Patrick Cunningham:]

Good morning Adam. First of all, we are not really in new channels. We have been in these channels for some time. We have had intermediary distribution working through advisors for decades now. We have always had institutional clients, so we have always had senior representatives of the firm, who have done the very large institutional. So it's not a -- I wouldn't characterize it as a new distribution channel. These are -- so we've worked with these channels in the past. And what -- the key is communication. The key is, at the front end, so when you -- when someone gets hired, and you -- when someone hires you, and you explain to them exactly how you manage money, you're an active manager, you have high active share, you are not supposed to look and act like the market, and in fact, there are times when you should look and act like the market. So we communicated that if we -- if we have the ability to communicate with the clients, that's -- we believe that we have the ability to convince clients that this is still the right place to be, and in fact, it might be a good time to put more money with us. So that's a -- getting that message as effectively as you can, obviously in the direct channel, you can get that message very effectively. We certainly give that message to our institutional clients, who are direct clients of the firm. We have a team that's working extensively to make sure the communication is also being done effectively through the intermediary channel. So communication, I believe is the key, and really there is nothing significantly different than it was, several years ago, before went public.

[James Mikolaichik:]

Adam, I did say also, what we tried to do is just add debt in each of the channel that already existed to continue to build them out, and make sure that they had the right infrastructure around them. Knowing that we have experienced an outflow over the past year and half in the platform space, we have continued to add talent and personnel, that are familiar with the platforms and familiar with key account relationships. So that we are able to stay in front of the people on a timely basis, and be very efficient with helping them understand how our portfolios are changing over time with the environment, and we continue to add personnel to remain relevant in our direct channel, whether it be in the healthcare space, whether it'd be in the healthcare space, the (inaudible) [33

[Adam Beatty:]

Thank you very much. That's helpful. Then just turning to products, thank you for taking my questions. Just in terms of maybe positioning, and also to the extent that -- I know you guys are typically very flexible in your allocations. Are there limits maybe in the couple of big international funds to, say in emerging market allocation, I don't know if you are seeing opportunities there right now, or what have you. I mean, in essence, how heavily could you weight something like emerging markets, to the extent that you see opportunities, and also, just around the macro environment, it looks like I mean, I read something this morning that GDP is looking better than it might have been. What are the macro signals that we should kind of look out for in terms of being favorable to the strategies that you have?

[Patrick Cunningham:]

The emerging -- well let's talk about the emerging markets. First of all, as you are probably aware, we have an emerging markets funds that we opened, so we have a strategy, specifically for those who want to do their own asset allocation and delegate specific amounts of money to the emerging markets, and that has been doing quite well. We are very pleased with the results, as we are approaching our third year -- a three year track record. Emerging markets have been part of our non-U.S. equity strategy forever, for years. When our analysts are required to look at their industries, as if they are a business owner, and when you are a business owner, you look not only to your domestic competitors, you look at your foreign competitors, you look at the small companies with disruptive new things that are happening, that could change the industry. You look at the leaders in the industry. So when we do that, we have -- obviously you have a global scope, and that has been the way that we have operated for a long time. As I mentioned earlier, we do like companies now that have exposure to the emerging markets, whether we are contesting directly in those markets or not, we like companies that can take advantage of the emerging middle class in those areas, and obviously those we expect higher growth rates in the emerging markets than we do in developed markets. That said, on our non-U.S. equity portfolios, we don't -- we are not -- we have macro overviews. Clearly, we have -- we look at -- we have a team, a global strategies group that looks at all the markets -- across 50 markets in countries around the world, and gives an analysis of those markets, whether they are based upon politics, monetary policy, where we are in the market cycle, the economic cycle, will determine whether we think, that's a favorable place for investments. But it's not the macro that drives the allocation in the portfolio, we are stock pickers. We look at businesses. We want a business, no matter where they are located, that can grow. We want a business that can have -- where we can have a high confidence level of where we think the earnings are going to go over the next three to five years, and then we can price those appropriately, and if that happens to be in Europe, that's fine, and if it happens to be in the Far East, that's fine. We let the stock picking drive the allocation of countries around the world.

[Adam Beatty:]

That's great. Very helpful all the detail, thanks very much. That's all I had today.

[Patrick Cunningham:]

Thank you.

[Operator:]

(Operator Instructions). Our next question comes from the line of Ken Worthington of JPMorgan.

[Ken Worthington:]

Hi good morning. May be can you first talk about the seasonsing of the new hires and distribution, and maybe to what extent are they seeing success, bringing on new clients thus far? And maybe as a way to frame it, maybe what portion of gross sales are coming from relationships that are less than a year old today? Where might that have been in the past, like just a good reference point, and then how do you think that looks over the next two to three years?

[Patrick Cunningham:]

Let me start by answering the question about the product. I think you asked about the productivity of the new hires, right?

[Ken Worthington:]

Yes.

[Patrick Cunningham:]

Just to give some color to that. We have hired -- we have really three areas in our direct distribution. One is the, what we call the multistate or sort of institutional representatives. Another is what we call regional, which are people who live in a community like Cleveland or Rochester or Dallas, and they get to know the accountancy attorneys and their generalists, and they look for the small policy health businesses, endowments and just work that territory pretty hard. The people who are territorial, who do high net worth and who do small businesses, they tend to have shorter sales cycle, and therefore, tend to close business and to bring in revenue faster than most people who are the large institutional salesmen, who are longer sales cycle, could be quarters, even years before a close is made. So we are pretty much on track. We are pleased with the hires, the productivity is what we would expect, given the timeframe that they have been here, and lastly we have a tax (inaudible) group. We hired a gentleman who is working the tax (inaudible) on the West Coast, where we primarily have exposure in the Midwest and the East Coast, and he has become productive very quickly, based upon the relationships that he brought to the table.

[James Mikolaichik:]

And Ken, I'd just add, the last point I think in your question was, what's coming from new relationships versus additional contributions. We don't really break that out specifically, but the mix has been reasonably consistent with what we have experienced in the recent past, with contributions probably contributing a bit more to our gross inflow, but we have had quarters where it has been more 50-50, and so there is reasonable balance there.

[Ken Worthington:]

Thank you very much.

[Patrick Cunningham:]

Thank you.

[Operator:]

Our last question comes from the line of John Dunn of Sidoti and Company.

[John Dunn:]

Good morning guys. Just to follow-up on the distribution question, you sort of have referred to it, but could you be maybe a little bit more specific about how long that sales cycle is? You've talked about relatively, but for high net worth, I know each situation is different, but how long would a typical sales cycle be?

[Patrick Cunningham:]

The high net worth -- you are talking, it can happen relatively quickly. You meet with someone, they have a chance to share what their current investments are. We have a chance to do some analytical work on that, we will go back to them, we will report a recommendation. Then literally within weeks, you could have a close on a high net worth individual, especially someone that was referred to you by our satisfied client, which we -- obviously those are the best types of prospects to have. For the institutional, once again, if it's small institutional -- institutional we say, are kind of in plan, the planned benefit plan. If it's a relatively small institution, where it's the owner of a small business, once again you have a single person who is a decision maker, that also can be -- that can be a relatively quick close within a matter of months. When you have the large institutional accounts that operate by committee, that oftentimes have an investment consultant as intermediary, then you are talking about quarters would be the timeframe. You can do it in a couple of quarters, it can last as long as years, frankly, depending upon what's happening with that particular prospect, and what type of product set that they are looking for at any given point in time. So literally it can go from months to quarters, and in some cases, years.

[John Dunn:]

Great. Thank you.

[Operator:]

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