Manning & Napier, Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good morning. My name is Crystal and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manning & Napier Third Quarter 2015 Teleconference. Our hosts for today’s call are Patrick Cunningham, Chief Executive Officer; James 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 a.m. Eastern Standard Time. The dial-in number is [phone] and enter PIN 58283020. 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. Paul Battaglia. Please go ahead.

[Paul Battaglia:]

Thank you, Crystal and thank you everyone for joining us today to discuss Manning & Napier’s third quarter 2015 results. Before we begin, I would 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:]

Thank you, Paul. As many of your who follow the industry closely and manage client money yourselves are aware the third quarter was difficult for equity investors as the S&P 500 was down more than 10% for a period between mid August and late September. The quarter ended with a loss of more than 6% pulling year-to-date returns into negative territory as well. Manning & Napier was not different. Our equity and multi-asset class strategies also saw negative returns during the third quarter and lower than that at the broad market. As a result, our short term relative returns met a challenge for near term flows. Jim will get into more detail on our flows but before that I want to remind you our current strategic initiatives which we have talked about on our past calls. First, from a service standpoint, we continue to execute a detailed communication strategy primarily aimed at our equity clients. Our intention is to reiterate our disciplined investment approach and as long term benefits over full market cycles, as well as provide meaningful updates as to how this approach is being implemented in the near term. From a distribution standpoint we have several products with competitive long term track records and this is where we are focusing most of our sales efforts. Those products include our new unconstrained bond mutual fund and global quality equity and various income oriented strategies as well. Further complementing these new products we have recently seen renewed interest in our established fixed income strategies in addition to our four-star unconstrained bond fund, our high-yield bond fund it is a four-star fund as well with a competitive track record since its inception in 2009. We continue to believe that defined contribution market represents one of our more strategic growth opportunities. We are supporting this initiative with a dedicated sales team and marketing strategy as well as our broad and mature product suite. As we have noted in the past PC [ph] represents a very large opportunity where we are one of the more established players giving us a significant leg up over potential new entrants who do not have the track records and infrastructure to effectively compete. As such we remain bullish on this opportunity long-term. Last, with respect to our investment process we have multiple decades of experience executing our stock selection strategies, our pricing disciplines and analyst compensation program to ensure incentive alignment in strong and in underperforming markets. This process works over full market cycles and has met the objectives of the overwhelming majority of our clients over the history of our firm. To illustrate this, nearly 80% of our current assets under management or $29 billion are invested with us through separately managed accounts and mutual funds where our sales reps have direct relationships with the client or financial intermediary. 70% of this business has been with Manning & Napier for five years or longer, 30% has been with us for more than 10 years. Again this illustrates our ability to maintain strong client relationships throughout market fluctuations as our clients understand how our investment approach is expected to perform over the long term. And with that as background let me pass the call over to Jim now to review our financials and after he is done I will wrap up with a few closing comments. 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. I will take you through the financial highlights before returning the call back over to Patrick for a few closing remarks followed by Q&A. As in prior quarters some of my comments will include references to non-GAAP financial measures. A full GAAP reconciliation can be found in our earnings release and related SEC filings. We ended the third quarter with $37.2 billion in assets under management, a decrease of $5.9 billion or 13.8% from June 30. The decrease included net client outflows of $2.6 billion combined with $3.3 billion of market depreciation. And when compared to the third quarter of 2014 AUM has decreased by approximately $14 billion or 27%. Growth inflows for the third quarter were $1.8 billion slightly lower than the $2.1 billion of client inflows we averaged over the past eight quarters, but up from $1.6 billion we reported in the second quarter of this year. Gross client outflows were $4.4 billion for the quarter and were largely attributable to continued performance pressure on our U.S. and non-U.S. equity products. Our mutual fund and collective trust products had net outflows of approximately $1.7 billion for the quarter, with $1 billion of gross client inflows offset by $2.7 billion of outflows. By portfolio, $1.5 billion of net outflows from our mutual fund and collective trust came from our U.S. and non-U.S. equity products, while we had approximately $210 million of net client outflows from our lifecycle products. In our separate accounts, gross client inflows were approximately $780 million were offset by $1.7 billion of outflows, resulting in net client outflows of approximately $950 million for the quarter and our rolling 12-month retention rate is 91%. Turning to our third quarter financial results, we reported revenue of $77.9 million for the quarter, down 26% from the third quarter of 2014 and down 10% from last quarter. The changes in revenue are resulting from decreases in average AUM compared to prior periods and our overall revenue margins of 77 basis points in the quarter are consistent with last quarter, but down slightly from 78 basis points reported this time last year. The decrease in revenue margins is largely a result of the change in business mix, our mutual fund and collective trust away from non-U.S. equity to balance portfolios. And our operating expenses were $47.2 million in the quarter a decrease of 11% and 21% compared to the last quarter and third quarter of 2014 respectively. Compensation and related costs were $24.5 million, a decrease of $3.8 million since last quarter and $6.2 million from the third quarter last year as a result of reduced incentive compensation due to a lower asset base and absolute and relative performance through September 30. 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 $2.2 million when compared to last quarter and by $6.3 million compared to the third quarter of 2014, which is consistent with changes in average mutual fund and collective trust assets for the respective periods. Distribution expenses were approximately 31 basis points of average mutual fund and collective trust assets for the quarter in line with prior periods and other operating expenses continued to be approximately $9 million per quarter. Non-operating losses were $6 million in the quarter compared to non-operating losses of $1.5 million last quarter and the non-operating loss includes a $2.8 million one-time expense related to amounts payable under our tax receivable agreement or TRA as well as $3.2 million of investment losses on our seeded products. As a result of the one-time TRA expense we had a corresponding decrease in the effective tax rate used to determine economic net income decreasing from 37% in prior quarters of 2015 to 30% in the third quarter and 35% for the nine months ended September 30. In total the TRA expense is offset by the tax benefit resulting in no economic impact to the company. Turning to operating results, we reported pretax income for the quarter of $24.7 million a 23% decrease from the second quarter and down 43% from the third quarter of 2014 and economic net income was $17.3 million or $0.21 per adjusted share. And we reported economic net income per adjusted share of $0.24 last quarter and $0.31 for the third quarter of 2014. With that, I'll summarize the year-to-date results. Revenues were $255.3 million down from last year's revenue of $307.1 million and year-to-date revenue margins of 77 basis points are down slightly from 78 basis points reported this time last year and our operating expenses decreased $24.6 million to $153 million in 2015. Approximately $14 million is related to compensation and related costs and specifically variable incentive compensations. Distribution, servicing and custody expenses decreased by $12 million from last year while other operating expenses increased by $1 million. And our operating income margin for 2015 is 40.1% down from 42.2% last year. Non-operating losses were approximately $6.8 million for the nine months ended September 30 compared to non-operating income of $2.1 million in 2014. An economic net income for adjusted share was $0.73 for the nine months ended September 30 compared to $0.92 per adjusted share this time last year. As of September 30, 2015 our adjusted share account stood at 83.7 million adjusted shares with our management team continuing to own approximately 10% of the company. And with respect to the balance sheet we continue to maintain a debt-free capital structure with a cash balance of $94.2 million and approximately $30.5 million invested in seeded products. And as you are aware during the quarter we declared $0.16 per share dividend to our Class A, shareholders. That concludes my discussion of the financials and I'll turn the call back over to Patrick for some final remarks. Patrick? Thank you, Jim. I'd like to conclude with a few thoughts. First, we know from our four decades of experience that asset managers can go through periods of difficult relative returns even with products that have proven strategies. One of our oldest and most profitable multi-asset class investment strategies long term growth has failed its benchmark in 40% of the rolling three-year periods and 30% of the rolling five-year periods since its inception in 1973, yet has beaten its benchmark after fees by roughly 80 basis points per year over the full time period. This has benefited many of our long-standing clients. The stock shots [ph] and strategies that we use in this multi-asset class portfolio are the same as those we use in our U.S. and non-U.S. equity strategies. While we clearly understand the importance of competitive returns on both of absolute and relative basis we are also well aware that periods like this are a reality for active managers. Second, we have the experience needed to weather periods like this. As you may know, I was a field representative and part of the sales management team with this firm for more than 15 years prior to becoming CEO. In fact, when I started at Manning & Napier we were experiencing a very difficult period where we were trailing on a three and five-year basis. So I have firsthand experience with this type of service environment. Even today I continue to service a hand full of our legacy clients' one of which dates back to 1971. In addition, nearly 50% of our existing direct client representatives have been with the firm for more than 10 years including through the global financial crisis. We have all seen markets like this before and I am confident in our ability to effectively service our diverse set of clients through this type of environment. Last, we have a loyal client base with high client retention rates for a wide range of reasons that we have worked hard to maintain. This includes the depth of our client relationships, the value added services many of our clients seek from us at various times and our ability to help to find success for our clients while being able to meet their objectives which as you know is predicated and are providing absolute returns rather than just beating a benchmark. As a result, I believe the core of our business represents a valuable franchise and remain strong. At Manning & Napier we have a long history of executing on our process and we intend to continue doing just that today and in the years to come. We look forward to speaking with you next quarter and answering any questions that you may have for us now. Crystal, we are ready for our first question.

[Operator:]

The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Adam Beatty with Bank of America.

[Adam Beatty:]

Contribution market as an opportunity and obviously there are some performance challenges right now. I just wanted to get your thoughts on now you are active in that market, do you have some other products, pardon me, with sufficient performance and scale that you can sell right now and then what's the outlook there? Thanks.

[James Mikolaichik:]

Did you get the whole…?

[Patrick Cunningham:]

We missed the first part of your question. I think you were asking, you were blanked out, I think it was your, well I got most of it though. You want to hear about the defined contribution marketplace and what we're doing in that, so is that…?

[Adam Beatty:]

That's right, thank you Patrick.

[Patrick Cunningham:]

Okay great, good morning. The defined contribution market continues to be a space where the competition is still somewhat limited. It is not like the large cap, value large share growth with hundred or maybe thousands of players. There are meaningful barriers to entry into that marketplace. First of all to compete you need differentiated products. We believe that our lifecycle funds, our target retirement funds along with our long and competitive track records, our custom glide range and our service teams provide us with a differentiated story. We've already built a distribution in this space based upon our various relationships with intermediaries. We have as you know a dedicated sales force in the DCIO space and we also have others who or representatives who interface with the platforms and the record keepers. So I think it is a valuable franchise and our lifecycle funds are unlike our competitors while most of the major competitors have fund-to-fund structures within 20 to 30 underlying mutual funds that don’t necessarily coordinate with each other to meet the needs of the target date client, whereas ours are as you know not large fund-to-fund type of structures. Our competitors have glide path which is a pretty rigid path that as you get closer and closer to retirement or through retirement, you get more and more conservative and they would rarely be 10% more on equities, five years from now that would rarely happen. Whereas with ours we have a glide range and that ranges can vary 15% above or below a midpoint and so we're active in both the security selection asset allocation which is a real differentiator for us and resonates. Also we know behavioral finance and people hate losing money. It hurts more to lose 10% than it feels good to make 10% and so downside protection is critical. And if you look at our portfolios, particularly look at 2007 and 2008, look at the downdraft they went down less and stayed down for a less amount of time than the majority of our competitors out there. So we continue to feel these are opportunities for us. There are certain platforms that are creating their own target date funds where they are using sleeves [ph] from outside managers. So we have embarked upon with our - with the various track records including our fixed income, our global quality, our real estate fund, our high-yield fund. We're continuing to look for opportunities where we can present those portfolios as part of someone else's construction. So we're active in that space Adam.

[Adam Beatty:]

Thank you, I appreciate the detail. Just a followup, do you have any products right now that are sort of up smaller scale, but are on the cusp of gaining the right scale and performance to be able to play in that market?

[Patrick Cunningham:]

I think to play in the institutional market you have to have some scale. Our global quality product has got hundreds of millions of dollars in it and it is scalable. Our fixed income products have got billions in them, standalone fixed income. So we believe that we have the scale even in our real estate portfolio is over $250 million. So we believe that we have the scale in those products to effectively compete clearly in the retail space but also in the institutional space.

[Adam Beatty:]

Got it, thanks for that. And then just one more, thanks for taking my questions, just an update maybe on 2100 Xenon thank you and what products are sort of active there, how are the flows and is that being implemented primarily standalone or is it mainly being incorporated in may be some of your low volatility equity products? Thanks.

[Patrick Cunningham:]

You know we've already incorporated that into our commingled vehicle target date and target risk products are lifecycles funds. So that has been already done with the commingled products. For operational reasons it is more difficult to do it with separate accounts, but it’s a whole different story. We’ve got a lot of activity with Xenon. The alternative space particularly with managed futures and with some of the unique capabilities that the Xenon team has in terms of their ability to apply managed futures to the fixed income markets, but they have multiple products and we have quite a bit of activity. There hasn’t been a lot of flows yet, but we are anticipating that that activity will eventually turn into inflows.

[James Mikolaichik:]

And Adam we are looking at one or two ways to access the liquid alternative market using Xenon and potentially other products with the capabilities that we currently have within fixed income area which we think could be a nice and attractive way to bring more multi-asset class alternative solutions to the market that are keeping with our history in that space.

[Adam Beatty:]

Got it. Thank you for the extra color. I appreciate you taking my questions.

[James Mikolaichik:]

Thank you.

[Operator:]

Your next question comes from the line of Ken Worthington with JP Morgan.

[Unidentified Analyst:]

Hi this is [indiscernible] filling in for Ken. So on compensation looking forward if revenue continues to decline how much more flexibilities do you have to reduce compensation ratio?

[James Mikolaichik:]

The variable comp as you know generally moves our comp ratio from sort of the 24%, 25% as a percentage of revenue up to the below 30s. It has been in the low 30s for the past several quarters. It largely continues to be bullied [ph] by three-year absolute performance dating back to 2013 because our comp ratios or our competition with our research team is geared over three years. So we’re still have a fair amount of absolute and some relative outperformance in certain of our products on the longer timeframe. You've seen that come in the last year and we’ve seen returns just specifically with the third quarter depreciation in the markets that returns have started to move into a negative territory. And so I’d expect our expenses moving forward all things equal to start to continue to come down to the extent we’ve had some outflows that have been at an increased rate, the expense ratio has been lagging a bit in terms of coming down as quickly as the revenue rate, but I would expect them to come back in the line. As far as other measures that we've thought about, we have allowed some attrition to take place in our workforce most notably in certain operating areas in administrative areas that we thought were tied to lower asset base or lower client base. But we do continue to support our product initiatives some of which we just talked about and also continued to support our research team and sales team and tend not to want to move that around. So we could see some margin pressure for the next couple of quarters as the balance comes back in on the outflows versus the comp ratios in the returns from our research team.

[Unidentified Analyst:]

Thank you very helpful and then from your separate account side, what do you see – that you are hearing from your separate account clients any color there would be great?

[James Mikolaichik:]

Would you, what was the question, I'm sorry?

[Patrick Cunningham:]

Feedback from separate account clients…

[James Mikolaichik:]

Sure and I was with one of our separate account clients yesterday morning. The feedback is, there is, the short term performance is a concern. It is that simple. I would say that’s across the board. It is more exacerbated with our equity and with our U.S. and non-U.S. equity portfolios. When you have that type of portfolio there is a single benchmark that is used. Even though when we present to our clients we clearly state to them that we’re not going to look and act like the benchmark, that we are going to deviate both positively and negatively. But when the experience that that's a little different story and so we have I would say challenged it across the board, but clearly in the single asset sleeve. For the multi-asset class portfolios, there are three ways to add value, one is to outperform on the fixed income. The other is to outperform on the equity and the last is to outperform on the asset allocation. And so we have added the greatest value by the asset allocation. We’ve been – we've had a shorter duration in the benchmark, so the fixed income has had some challenges in our multi-asset class and the equities were not as severe as we’ve seen in the single asset sleeve have also faced some challenge. So it’s a challenging environment, but the clients that I met with, I have gone to multiple client seminars. This is our seminar season where we invite all of our clients and when we have concentrations it’s in more than 10 cities around the country and I have participated and attended those. And the people who have been with us, those clients who have seen us go through periods where we underperform, they continue to exhibit confidence from my direct feedback in our ability to work our way through this. And it’s not unusual, they have seen it before, it is subsequent to periods like this is when we typically outperform and I think we’re getting the patience and confidence of those people particularly who have been with us for a longer period of time.

[Unidentified Analyst:]

Thank you.

[Operator:]

Your next question comes from the line of Ryan Sullivan with Credit Suisse.

[Ryan Sullivan:]

Thanks for taking the questions. I just want to go back to the product discussions here, when I look at the business bigger picture, where do you see the biggest opportunity to add new products and or teams and is it the [indiscernible] business that you just reference or are there other areas that you think present opportunity here and are you acting on that?

[Patrick Cunningham:]

Yes, we have right now, we – one of the fears that people have, lack of income, fear of rising interest rates. Those are real fears and they are valid. And so we have with regards to the rising interest rates, that was one of the reasons that we acquired Xenon and we believe that will provide the type of protection that our clients are going to need particularly in our comingled target date and risk based vehicles. So we are - the unconstrained bond fund we purposely this is interesting how that worked. We had a Core Plus Bond fund for many, many years. And I would argue that it wasn’t unconstrained bond fund and I have evidence to prove that and back in 2007 that fund, the Core Plus Bond fund was almost all in treasuries as was the fixed income portion of our multi-asset class portfolios. And as you know in 2007 to 2008 the only asset class that did not get hurt and in fact made money because people ran for safety were the U.S. treasuries, corporate, high-yield, everything else, any sector of the market you talk about got hurt. After that that portfolio was converted and it just transferred into all corporates and mortgage backed securities and predominantly corporates. As those spreads widened we saw that is great opportunity and took advantage of that and we have been basically in the similar posture since then. Well Morningstar when they rate you and they evaluate you and they determine what category you’re in they don’t do so based upon necessarily what you say you do in your portfolio, they base it upon your holdings. And so we had been in corporates for long enough that we got recategorized as a corporate bond fund which we aren’t, and we weren’t. We are an active manager. We do active duration management. We do active sector management, issue management and so we were able to convert that fund to the unconstrained bond fund. And I believe that is what the market is looking for is to have the flexibility to maximize what you can do across the globe with fixed income. So we have – we have that is a product that we think has no capacity constraints whatsoever nor there is a global quality equity product. We don’t - any foreseeable products, the global quality equity is just shy of $300 million. So obviously there is tremendous capacity there and a couple of the niche products we also think our good and strong. By the way our global quality product for the one year ending September was beating its benchmark by over 500 basis points and three-year number is about a 150 basis points for three years. So it is good absolute three-year number is 10.23% per year. So good absolute returns, very good relative returns. So we think that those products are – the passive products, so they are going to help drive flows going forward and obviously the DC space is also the space that we - I believe we need to see improved performance and we will see improved flows even though the flows have been - good positive flows have been there. We have seen of the $1.8 billion that we brought in which is shy of our eight quarter average of $2.1 billion were better than last quarter which was $1.6. The majority of that was in the multi-asset class products and lifecycle funds.

[Ryan Sullivan:]

That’s great, thank you. And then actually that was my, you kind of led me to my question, about sales activity, it looks like 2Q was really the bottom here and we saw reacceleration of 3Q in all the businesses, but equity was particularly strong when it came to gross inflows and I was wondering what drove that. I mean was there a few lumpy inflows there, was it more broad-based and just a little color on that will be helpful?

[Patrick Cunningham:]

It wasn’t - I would say it is broad-based across all of our products. Yes there are some folks who and I would say there are people who if they have confidence in your product they know that one of the best times to invest is when the product is out of favor and I think we have seen some of that because we did see inflows into the non-U.S. equity product and our U.S. equity product despite the lagging performance issues.

[Ryan Sullivan:]

That’s great. And then lastly, just on, I know Jim you already touched on comp margin going forward, but is there a number that we should be targeting the model for 4Q and then first half of 2016?

[James Mikolaichik:]

Yes, it’s probably a little hard to say. I think we are, like I said we are - I would guess at I think 31% roughly for the quarter and my expectation is that you’re going to start to see the results of 13 rolling off and some of that outperformance in the big sort of absolute return of market. So, I would guess that we may see that elevated levels compared to revenue because of the drop that we've had in assets and the pullback on the markets from a depreciation standpoint. And so, from a percentage standpoint I think we are going to - we may see some elevated percentages and levels depending on how the returns shapeup through the end of the year and into next year, but on an absolute basis we have seen compensation come down and I think we will continue to see a little bit of download pressure on comp, but it is a balancing act between the flows, the markets and then the performance pieces. But I think the general sentiment is probably some continued pressure down on margins for the near term.

[Ryan Sullivan:]

Great, okay thanks a lot guys. I appreciate you taking the questions.

[Patrick Cunningham:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Kim with Sandler O’Neill.

[Andrew Disdier:]

Hey Patrick, hey Jim, this is actually Andrew Disdier sitting in for Michael. So first related to Will's question from before, just would appreciate any color on client reaction to the recent in-house changes and maybe more specifically have you seen any shifts in terms of your legacy and maybe your kind of wait and see clients just given more recent performance trends? And any other color on the underlying assets that fall into kind of the three buckets, the legacy what you will see and somewhat of the more challenged or dissatisfied clients that you have highlighted in the past?

[Patrick Cunningham:]

Sure, the – I guess the first part of your question and I know you are looking at risk, what was the first part of your question please again?

[Andrew Disdier:]

So, just any color on the client reaction to the recent in-house changes?

[James Mikolaichik:]

Oh, in-house changes, that's right, the recent changes that [indiscernible]. By and large they have been favorable, receptive. I mean we haven’t had the - we have acknowledged that we had execution issues. I think clients wanted to see that if you have an execution issue that you improved execution. And Ebrahim Busheri, who is now the Director of Investments, he started with our firm out of graduate school in 1988 and was a valuable member for well over a decade. He grew to be one of the co-directors of Research in his last years at Manning & Napier's in the early 2000s. He then left to go to New York. He is quite the cosmopolitan person and he had, he went to New York and became Director at other institutions and finally in 2011 we reconnected and he came back to the firm and so he was a natural person. He knew our strategies because as you know our strategies are three stock [indiscernible] strategies have been intact and have been used consistently since our door was open back in the 70s. So he – it wasn’t like he was coming to a different place. He knew the strategies well and invested and picked many stocks using those strategies and managed people who used those strategies. So he was a logical candidate. We did not have a lot of turnover in terms of people leaving the department. We had the analyst who was in charge of our energy sector departed as part of that reorganization, but other than that there has been no departures that we have in our equity selection groups, our bottom up groups, even our top down groups in the equity area that were unintended.

[Patrick Cunningham:]

Now, did that answer the first part of your question, do you have a second part of your question?

[Andrew Disdier:]

Yes, it was kind of related to some of the at risk or legacy clients just given some of the more recent performance trends?

[James Mikolaichik:]

Sure, you know we clearly monitor at risk clients. We do it based upon the mandates, the mandates that are single asset class, particularly single equity asset classes or the ones that have of greater concern than our multi-asset class. We look at the shorter tenure of track records, those who have been with us for the least amount of time are the ones who have seen more of the underperformance as part of their experience with the firm. So, and then of course we talk to the client service representatives and we ask them which clients did they see at risk. So, but the summary is that our at risk continues to be concentrated in the single asset class notably U.S. and non-U.S. equity. Just by way of – to give some color on the relationships that we have, we've got nearly 8000 separately managed accounts and we've continued to maintain strong relations with many of our clients. The majority of our assets are about $23 billion, 60% of our AUM is invested in our balance strategies where we have a long track record of strong performance. We have $26 billion of our AUM with clients that have, we have traditionally served. These are [indiscernible] union relationships, high net worth individuals, middle market companies, midsized foundations, local governments. And we have a department that is we call Client Analytics Group where we have their value-added services that we provide. We don’t charge for them, but we provide them to our clients in order to strengthen that relationship. So for example, we’ve got state planning attorneys on staff who don’t write the wills, who don’t put the trust together. They just help people understand what their options are as far as timing and state planning are concerned. And so, when our - we will go to lot of, many of these high net worth individuals and their client representative, would sit down with them and explain what’s happening in the portfolio and then an additional person from our Client Analytics Group would sit down and show them how they are tracking to their life goals. So we have these value added services which I think are and we track and we are promoting those value added services across the client base, particularly in the high net worth and mid market space because those clients who utilize those additional services have got the highest retention rates of any clients that we have.

[Andrew Disdier:]

Great, I appreciate the color there and then in light of running more concentrated portfolios with lower levels of cash, how does that dynamic play out assuming redemptions remain more elevated? And maybe related to that any initial thoughts on the SEC’s new proposals around fund liquidity?

[James Mikolaichik:]

Yes, we don’t – we have got relatively diversified client base in most of our funds at this point. We probably had a couple of concentrations in a few funds coming out last year that were still relatively low and probably by some industries standards in the kind of 3%, 4% range. So for the most part I think the diversification of the client base and the platforms that are coming through our products, we generally are able to not have a terrible amount of impact resulting from any flow dynamics and cancellations out. And as Patrick pointed out earlier, we have seen inflows also that help counterbalance some of the outflows. So, we have seen some continued inflows where people have taken this as a buying opportunity to get back and so we rethink the dynamic of the concentration in the cash positions has some counterbalance just given the way our client base breaks down in that and how diversified it is.

[Patrick Cunningham:]

And is a highly liquid portfolio. Right, in terms of the liquidity provisions from mutual funds we continue to watch these as everybody else does. We have not a very large fixed income portfolio today outside of our multi-asset class. These provisions tend to I think are going to impact most of the fixed-income areas. Much more specifically you had the money market impacts which we don’t participate in as a product set and given the type of fixed-income we're managing today we think the liquidity provisions will not have a normal impact on our mutual fund complex, but it’s something we continue to watch closely and work with our mutual fund board on.

[Andrew Disdier:]

Great, thanks and thanks for your patience. Maybe just one more, I know you spoke about gross equity inflows, but any lumpy redemptions on the SMA or the mutual fund channels that skewed the totals last quarter and then looking ahead any near term visibility into outside redemptions or unfunded wins?

[Patrick Cunningham:]

Yes, I would say that the flows that we’ve seen were not predominated by big lumpy redemptions or additions. So it’s been - it hasn’t been that and we cannot comment on what future we see, but I would expect in the past, we saw some of the larger relationships that we have, those were they washed out early on. And I would anticipate that the average sized portfolio that we have now is lower as a result of that.

[Andrew Disdier:]

Okay, great. Thanks for taking our questions.

[Patrick Cunningham:]

Yes.

[Operator:]

[Operator Instructions] Your next question comes from the line of Steven Schwartz with Raymond James.

[Steven Schwartz:]

Hi, everybody. First Patrick, I wanted to touch on a comment in the earnings release, you've probably touched on bits of this, but you know to that end we’ve seen recent improvements in portfolio positioning. Is there anything specific here that you are thinking about talking about?

[Patrick Cunningham:]

Yes, portfolio positioning it’s a couple of things. After Ebrahim took charge of research in March of this year, so he has had six months so to speak under his belt. The type of things that have happen inside the portfolio, one of the issues that we had in 2014 which began the recent underperformance was our overweight energy in the second quarter; we were selling out of that. We didn’t sell out of it fast enough and that ended up hurting our relative returns in the third quarter and really was the beginning of this period of underperformance. So one of the things that has happened is that - that went from an overweight to an underweight position. Many of the securities were sold. We have since invested primarily in the life sciences and in the technology area. We have reduced the number of holdings in the portfolio. So when I say the positioning, I'm talking about intro portfolio is where we've made I believe significant improvements. And we haven't seen that come out in terms of better relative performance, but I would say that is a yep question. I believe that will happen going forward.

[Steven Schwartz:]

Okay and then a couple of questions for Jim, Jim I think you said in your statement that the TRA adjustment was offset by the tax effect on one-to-one basis, is that correct?

[James Mikolaichik:]

Yes, that's essentially, yes we had an uncertain tax position that once the IRS cleared the year we unwound that uncertain position. So it essentially means we need to pay out the tax benefit under the tax receivable agreement so that gives rise to an expense, but it is the reason we can pay it out as it also gives a tax shield on the income at the public entity on a one-for-one basis. So it is no economic impact, but you're seeing an impact on the operating results or then the pretax income from non-operating is impacted by that, but then you get it back on the tax side.

[Steven Schwartz:]

Okay and then Jim how much was incentive stock comp in the quarter?

[James Mikolaichik:]

About $2 million I think.

[Steven Schwartz:]

$2 million? Okay and then just back to Patrick on regulatory matter, any new thoughts with regards to the department of labor and [indiscernible]?

[Patrick Cunningham:]

I'm sorry, the fiduciary regulations?

[Steven Schwartz:]

Yes, yes.

[Patrick Cunningham:]

Yes, we did submit a comment letter to the DoL stating our support for people who hold themselves as advisors as having a fiduciary standard filed to the conduct. So we were in favor of it. We also indicated that we have some concerns as the rule as proposed to me had some deterrent to smaller plans and we have some participated in education. But the rule is something that in general we have been fiduciaries for, doors open and the client that I had mentioned that goes back to 1971 as opposed to the defined benefit plan, final [ph] we ever had, so we were managing the defined benefit plans before it became law. But we clearly understand the fiduciary mantel and we welcome it and we think it is, generally speaking the right way to position an advisor.

[Steven Schwartz:]

Okay, all right, thank you guys.

[James Mikolaichik:]

Steven I just want to a point of clarification I misspoke earlier it is about $1.5 million not $1.9 million on the stock comp.

[Steven Schwartz:]

$1.5 million, okay thanks Jim.

[Operator:]

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

[Patrick Cunningham:]

Thank you.