Virtus Investment Partners, Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Good morning. My name is [Kaily] (Ph), and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section of the Virtus website www.virtus.com. This call is also being recorded, and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer period, and instructions will follow at that time. I will now turn the conference to your host, Jeanne Hess.

[Jeanne Hess:]

Thank you and good morning, everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the second quarter of 2017. Before we begin, I direct your attention to the important disclosures on Page 2 of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And as such are subject to known and unknown risks uncertainties including, but not limited to those factors set forth in today's earnings release and discussed in our Annual report on Form 10-K and quarterly report on Form-10Q and other SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. In addition to results presented on a GAAP basis, Virtus uses certain non-GAAP measures to evaluate its financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our earnings press release, which is available on our website. Now, I would like to turn the call over to our President and CEO, George Aylward. George.

[George Aylward:]

Thank you, Jeanne, and good morning, everyone. I will start this morning by discussing the completion of the RidgeWorth acquisition which mark and report milestones for the Company. I will then provide an overview of the results before turning it over to Mike for a more detailed discussion. On June 1st we close the acquisition which added $35.7 billion of long-term assets under management. Total considerations for the acquisition excluding working capital adjustments was $533.9 million for presenting a purchase price for the business of $472 million and $61.9 million for balance sheet investments. We funded that consideration due a closing with $457.9 million of cash, which included 260 million of proceeds from a seven year term loan and 24.3 million of common equity and differed cash. Integration activities began shortly after we announced the transaction and we have made significant progress in all functional areas. On July 14, we completed the fund reorganization which formally combined the funds managed by our new affiliates into the Virtus Mutual Funds. During the quarter, we will be executing on the consolidation of fund service providers. In terms of our expected synergies of $25 million in the quarter we executed our $16 million or nearly two-thirds of the total primarily from implant related savings of $14 million through the elimination of duplicative positions. We expect the remaining synergies to be substantially realized by the end of the year with the full $25 million expected to be reflected by the first quarter of 2018. The distribution teams have completed comprehensive product training on the new managers and strategies and are prepared to offer the additional investment solutions to clients in both the retail and institutional channels. Financial and accounts and wholesaling teams have been working with the distribution partners to introduce the additional offerings from Ceredex, Seix and Silvant to home offices and financial advisors. Our new institutional resources including the international team have been educated on the strategies from Duff & Phelps, Kayne Anderson and Newfleet and Rampart and are focused on identifying opportunities in that channel. The RidgeWorth acquisition illustrates the benefit of our multiply cheap model which enables us to diversify and expand our offerings of differentiated strategies by adding new affiliates. We believe our model is attractive and to affiliate giving the alignment of interest, distribution strength and access to capital for investments in growth that we provide. In addition our shared services allow investment professionals to focus on managing client assets and not be distracted with other activities. By having a diverse line of our differentiated asset managers we are able to offer them distinctive capabilities in multiple markets, channels, and product forms while maximizing leveragability of the business. With $85 billion of long-term assets under management that are diversified by product category, asset class, distribution channel, we believe the combined companies will position for long-term success. We have the scale, strength and resources necessary to compete in today’s environment and our model provides additional opportunity for future growth. So now let me review the results. I will start by noting that given the timing of the close on June 1st and a resulting partial quarter impact we recognized comparability of results will be impacted. So Mike and I will isolate the June results for the contributions in the quarter where appropriate. Now that the businesses have been combined, we do not expect to provide this information in future periods. Long-term assets under management increased 77% sequentially and 88% from the prior year to $85 billion, primarily reflecting the addition of assets from the acquisition. Flows for the quarter include those generated by our new affiliates for the month of June. Total sales were $3.5 billion, an increase of 6% on a sequential quarter basis and 44% from the prior year quarter. The second quarter included $0.5 billion of sales in products managed by our new affiliates. Total net flows were modestly negative at $0.2 billion in the quarter compared with net inflows of[0.5 billion] (Ph) sequentially. Positive flows in retail separate accounts and ETFs were more than offset by net outflows in structured and institutional. Net outflows of $0.7 billion in the month of June were attributable to the acquired business and primarily reflect principal pay downs of the CLO and the impact of institutional clients rebalancing between asset classes. Our relative investment performance continues to be very strong with 83% of our rated fund AUMs having four and five starts as of June 30th. In terms of what we are seeing in July for flows, mutual fund flows are flat. As for the other product categories, the only thing of note is that Seix priced a $500 million CLO that is expected to close in the third quarter. Moving to the financial results, operating income as adjusted increased 68% from the prior quarter which included $4.9 million of specific employment expenses. Second quarter operating income included approximately $5.1 million contributed by the acquired business. In the month of June the combined Company generated an operating margin adjusted of approximately 32%. Second quarter. Second quarter earnings per share as adjusted increased 79% to $1.61 from $1.16 in the prior quarter which included $0.41 per for the specific employment expenses. Now, I will turn it over to Mike to provide a more detailed view of the financial results and balance sheet. Mike?

[Michael Angerthal:]

Thank you, George. Good morning, everyone. Starting on Slide 7, assets under management. Before reviewing the result, I wanted to highlight the changes we made to the AUM disclosures in our earnings release tables. We have added two product categories. Structured products and liquidity. Historically, we presented structured products as a component of institutional. But in the past year as CLO was issued by new fleet at sights of seasoned CLO issuer. Given that we expect to remain active in this product category, we have separated it into its own category and reclassified prior periods to confirm to the new presentation. The liquidity category reflects strategies that can have short holding periods and significant volatility inflows. Similar to how we treated cash management products, these assets are excluded from long-term AUM and net-flows. These low fee fixed income strategies are available in mutual funds and institutional accounts. We ended the quarter with long-term assets of $85 billion which represents increases of 77% and 88% from the prior quarter and prior year quarter, respectively. The sequential change reflects the $35.7 billion of assets from the acquisition and market appreciation of $1.7 billion partially offset by net dividends distributions and modest net out flows of $0.2 billion. The change from the prior year reflects the assets from the acquisition, market appreciation of $4.4 billion and positive net flows. With the additional assets from our new affiliates our long-term AUM is well diversified by product type. With $41.5 million in open-end funds, $20.6 billion in institutional, $12.4 billion of retail separate accounts and $2.9 billion of structured products. The acquisition further diversified our long-term AUM by asset class and investments style. With 37% in domestic equity for approximately 17% of that in small cap, 15% in large cap and 5% in mid-cap. Non-U.S. equity was 12% with 9% in emerging markets and 3% in developed. Fixed income was 46% with approximately 20% in leverage financed. 16% in investment grade and 10% in multi sector and alternatives were 5%. Turning to Slide 8, asset flows. Total sales were $3.5 billion, an increase of $0.2 billion or 6% sequentially. Total sales increased from the prior year quarter by 44% or $1.1 billion on higher sales in all product categories. Total redemptions were $3.7 billion which included $1.1 billion of redemptions in June from the acquired business. As a result of CLO principle pay downs and institutional client rebalances. Redemptions declined from $4.6 billion in the prior year quarter on meaningfully lower mutual fund redemptions. Net out flows were $0.2 billion in the quarter excluding $0.7 billion of net out flows from the acquired business net flows our positive $0.5 billion in the quarter and positive $1 billion on the year-to-date basis. Net flows in other product categories included $0.2 billion in retail separate accounts and $0.1 billion in ETFs. With respect to mutual funds, we were net flow neutral in the quarter and included positive contributions from small cap equity, emerging markets and floating rate products. Turning to Slide 9. Investment management as adjusted were $74.3 million and included $11.5 million earned by our new affiliates. I would note that there were no performance fees earned on structured products in June. Excluding the assets from the acquisition, average assets increased 5% in the quarter due to positive net flows and market appreciation. The acquisition impacted the fee rates for certain products including institutional and retail separate accounts. We have provided the June fee rates for those categories which was 30 and 47 basis points respectively. While annualizing one month of activity as inherent limitations, we believe it may be useful in estimating third quarter investment management fees. With respect to open-end fund fee rates going forward, we estimate that after giving effect to the fund reorganization that we completed in July, the open-end fund fee rate for the third quarter will be approximately 47 to 49 basis points, all else being equal. The decline in the rate compared to the second quarter is a result of all the new Virtus funds from the acquisition having expense caps in place that will absorb an offset any new ancillary revenue fee streams such as admin and TA fees. As we complete the consolidation of service providers, the overall expense profile of our funds will change, which will impact our net fee rate, and we will update you as appropriate. Slide 10 shows the five quarter trend in employment expenses. Total employment expenses as adjusted are $40.9 million included $4.2 million of additional expenses related to the new employees that joined the Company at the time of the close. Excluding those costs, expenses decreased $2.9 million or 7% on a sequential quarter basis. The decline from the first quarter reflected specific items of $4.9 million primarily seasonal costs that did not recur, partially offset by increased variable profit and sales based incentive compensation. As a percentage of revenues as adjusted employment expenses were 52% for the quarter. For the month of June, the employment ratio was 50%. The trend in other operating expenses as adjusted reflects the timing of product distribution and operational activities. Other operating expenses as adjusted were $14.2 million which included the additional $1.5 million of expenses for one month of the quarter following the acquisition. Excluding those costs, other operating expenses were $12.7 million, an increase of $1.8 million or 17% compared to the first quarter. The increase was primarily driven by the annual grant to the Board of Directors at total $0.7 million and $0.7 million of higher sales and marketing costs. Given our expectation of expense levels following the acquisition and the timing of additional synergies by year-end, we believe a range of $15 million to $16 million for other operating expenses as adjusted is reasonable. Slide 12 illustrates the trend of adjusted results. In the second quarter, operating income as adjusted was $22.7 million with the related margin of 29% an increase from $13.5 million and 21% in the prior quarter and $16.7 million and 27% in the prior year quarter. The current quarter included approximately $5.1 million from the acquired business. Earnings per share as adjusted for $1.61 in the quarter an increase of $0.45 or 39% sequentially and $0.37 or 30% over the prior year. Looking at the results for June. The first full month of the combined business revenues as adjusted were $33.4 million and operating income as adjusted $10.9 million and the adjusted operating margin was 32%. With respect to GAAP results, we reported a loss per share of $0.34 that included the following items. $0.11 per share of incremental interest expense for one month related to the term loan. $0.14 per share of amortization expense for one month associated with acquisition related intangible assets. $0.21 per share of discreet tax adjustments and $1.63 per share of acquisition and integration costs. In order to provide transparency into the acquisition and integration expenses, we have presented these cost separately in the reconciliation of GAAP to non-GAAP results. The category provide additional detail on four line items employment, severance, other operating expenses and interest expense. Specifically employment expenses of $2.1 million include acquisition related stock brands and compensation related to employees that have been notified of termination, but our serving in a transition capacity for a specific period of time. Severance expenses of $8.6 million reflect the cost associated with employees who’s positions were eliminated at the time of the transaction. Other operating expenses of $5.6 million include professional fees incurred to complete the acquisition as well as costs related to the mutual fund reorganizations. Interest expense of $2.3 million includes the write-off of previously differed financing costs on our prior credit facility that was terminated in June, and delayed draw fees incurred on our new term loan at the period between April 1st and the June 1st closing. The effective tax rate was approximately 99%. The quarter included discreet tax items of $1.5 million primarily related to the establishment of the valuation allowance on certain state net operating losses. Our effective tax rate for non-GAAP purposes, which excludes discreet items was 38%. Slide 13, shows the trend of our capital position and related liquidity metrics. The total consideration for the acquisition was $533.9 million equal to $472 million plus $61.9 million for certain CLO investments. At the close, we funded consideration of $482.2 million with $457.9 million of cash, 21.7 million in issued common equity, and $2.6 million in deferred cash. The remaining $51.7 million was recorded as a contingent consideration that will be paid in the fourth quarter of 2017. The cash consideration was funded in part by the issuance of a $260 million of term loan. The annualized effective interest rate for June on the outstanding debt was approximately 6.2% and reflects both the stated interest rate of LIBOR plus 375 basis points and deferred financing costs which are being amortized over the term of the loan. Under our credit agreement we had a net debt maintenance covenant of 2.5 times net debt to bank EBITDA with scheduled reductions to 1.75 times over the next 18 months. Bank EBITDA is defined in the credit agreement as operating income as adjusted excluding stock based compensation and including dividend and interest income. We ended the period with $184 million of net debt that results in a net debt to bank EBITDA ratio of 1.1 times as of June 30th. We ended the quarter with $49 million of working capital which represented 22% of annualized spend as adjusted. We also have $100 million of capacity on our credit facility that was undrawn as of June 30th. Our target range for the working capital metric is 50% to 75% and we will continue to manage our capital structure to ensure adequate financial flexibility. In terms of capital priority going forward, we believe we are well positioned with adequate levels of capital to invest in growth opportunities to support our affiliates, pay down debt and return capital to shareholders. With that, let me turn the call back over to George. George.

[George Aylward:]

Thanks Mike. So that concludes our prepared remarks. Now we will take all of your questions. Kaily, can you open up the line please?

[Operator:]

[Operator Instruction]. Our first question comes from the line of Michael Carrier with Bank of America. Your line is open.

[Michael Carrier:]

Thanks guys. First question, just given the combination, George I think you mentioned the distribution teams being ramped up on different products. Just want to get your perspective on the opportunity you see with the RidgeWorth products? And then just on the fee rate, given that a lot of the funds have been combined, just want to make sure like when you look at the industry in a competitive environment, were fees by product looked at not only to minor products, but also just given some of the pricing changes that we are seeing in the industry, was that taken into consideration?

[George Aylward:]

Sure. So I will start with first question. So in terms of the opportunity I think as we said from the very beginning when we announced the transaction we were very excited about the opportunity to offer the capabilities from the affiliates at RidgeWorth. And our folks, our retail people both the internal and external wholesalers, from the very beginning of the announcement they actually did their own research and then we did a lot of our own products training including having our first combined sales meeting in June where we literally had a 100 people in the room meeting and sharing and learning each other's ideas. So we have been very excited about those opportunities and their strategies were available at many firms and had some access - the combining - the good strategies and the access they have with our resources that will help promote, augment and hopefully get more attention. We continue to see that as a great opportunity. We have not included as we said in previous calls any revenue or growth estimates and the accretion numbers that we have been previously given, we believe there is great opportunities so we have not included any of that. And then similarly on the institutional side having some resources including limited resources outside of the U.S. to be able to at least look for opportunities for our original managers is also something we see great opportunities for. So everyone I think is very excited about having the additional capabilities and working with their clients and prospects to see what we can do with that. In terms of the fee rates, Mike might go into a little more detail, but just generically the way you look at it is we task that to monitor our fee rates to make that they are competitive and then our distribution partners are comfortable with the rates that we are offering. If you go through the last 12 months you will see there had been multiple funds where we have either putting our additional cash or reduced fees primarily more recently in some of the fixed income stuff. And then it's part of the transaction with the RidgeWorth both our fund boards their fund boards and management of all are sensitive to make sure that the fee caps that are currently in place are reasonable for shareholders. So all that comes into together as we monitor that. Mike anything?

[Michael Angerthal:]

Yes, I would just add that we try to provide transparency into the June only fee rates where there was an impact of there being a larger proportion on the fixed income lower fee assets in the portfolio. So you saw that in the retail separate accounts to look to the 47 basis points institutional accounts 30 basis points. And then we gave a range in the third quarter for open-end funds given the reorganization that happened earlier in the third quarter, but importantly our view is that there is no net impact to some of that reorganization that will happen on a go forward basis.

[Michael Carrier:]

Okay, that's helpful. And then just as a follow-up. Mike just on the expenses if the comp ratio and the non-comp guidance is helpful. In terms of the synergies given that your it seems like you are realizing it maybe a little faster than recently expected, just in terms of the overall amount still like the $25 million is what you expect to achieving, there is nothing in addition other than obviously the revenue synergy opportunity?

[Michael Angerthal:]

Yes, I think 25 million is still the best assumption to you. As we indicated, we expect to see that as we move into 2018.

[Michael Carrier:]

Okay, got it. Thanks a lot.

[Michael Angerthal:]

Okay. thanks Mike.

[George Aylward:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Andrew Disdier with Sandler O'Neill. Your line is open.

[Andrew Disdier:]

Hey good morning everyone. So on the asset side, generally with the deal do you see some type of flow attrition and I know you noted the $700 million net out. Given the retail skew maybe a bit more insulated from that dynamic. just wondering could you elaborate more on that $700 million during this integration process and then second do you see anything else coming out in the pipeline?

[George Aylward:]

Just some generic comment in terms of the impact of any transaction on clients or on flows, the transaction was announced back in December and so obviously all of the clients both institutional and retail side have had a very long period of time prior to close to really sort of get understand and get comfortable with the transaction. So you really should think about it in terms of - this is something began basically on December 16. As we have indicated throughout the client consent process, we have been very pleased with the client consent process and we have effectively reached about a 100% client approval, which we are very, very pleased with and that’s a great testament to the incredible folks at Ceredex sites and Silvant in terms of working with their clients and making sure that they were comfortable with that. So I would sort of think about that in terms of deal implicated flows. Just in terms of the month of June Mike can give you some detail, but again it’s one month there is little things that go on all the time. And Mike if you just want to go through that.

[Michael Angerthal:]

Yes, I think we tried to provide some transparency in prepared remarks, but again of that $700 million, $200 million or $225 million was related to principal pay downs in the CLO portfolio at Seix. So that will happen from occasion and we would expect that sizable CLO portfolio that we have and again that’s one of the reasons we broke that category out separately in the AUM tables to provide the transparency. With respect to the institutional outflows, I think specifically two client accounts that rebalanced their portfolios from domestic equity exposure to international equity exposure. And as we have talked about the performance in domestic strategies remains very strong in certainly they are by rating that some of the main institutional consultants at the manager. So there is nothing there that we would read into other than the rebalance.

[Andrew Disdier:]

Got it. That helps. And then second on the expense base. I noticed there is $16 million of synergies about $14 million you said were from employment. So I guess where do you see the future synergies coming from and then on the backwards looking event, what was the timing on that, was it beginning of June or kind of towards the end of the month?

[Michael Angerthal:]

Yes, the existing synergies we sort of gave some insights into the June results and you could expect that this the entire $16 million has been sort of taken out of the June results to provide that 32% margin that we identified as the full impact of that $16 million. With respect to the additional $9 million, I think I looked at employment expenses at the ratio we gave, the 50% ratio for June is the best way to think about employment. I wouldn’t expect further synergies to come from that line. So I would expect the synergies to come from the other lines and we do expect to achieve those by the end of the year. So you will fully see it in the results going forward into 2018.

[George Aylward:]

Yes so to add to that. So I sort of think about the employment related items which were obviously didn’t most easily identified and executed on and effectively being completed. So the remaining things sort of - if you think about it relate to more of the operational IT and as we highlighted in our remarks work that needs to be done related our funds service provides. So I think Mike gave some clarity a little bit on how to look at the third quarter where there will still be some of that activity going on and that will drag them a little bit into the fourth quarter and then our expectation is you will see the full impacts of those results that could be staring in 2018. And as Mike said, the employment line is probably not going to have further impact, it will be in other lines.

[Andrew Disdier:]

Understood, thanks for taking the questions.

[Michael Angerthal:]

Thanks.

[George Aylward:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Your line is open.

[Alex Blostein:]

Greta. Hey good morning everybody. Thanks for taking the questions. Got a couple of things here. I guess so first maybe we will touch on jus capital and the balance sheet for a second. so A, can you talk a little bit about what the contingent payment is dependent on and is there anything that could move at a higher lower as we are thinking about kind of the impact on that towards the end of the year and I’m assuming it's going to be paid out with cash. And I guess more importantly it seems like there is going to be fairly large gap between your kind of adjusted earnings and cash earnings given the tax yields and kind of the effect of tax returns. So can you just help us bridge what that is on a kind of run rate basis, I guess you could use June as kind of your proxy and then ultimately where does kind of the buyback come in back into the story given that it doesn’t sound like you guys to need to delever here.

[George Aylward:]

Let me do the first and then last piece and then Mike will deal with this the middle one. In terms of the contingent the remaining currency price - the contingent purchase price was recorded as a contingent purchase prices at June 30th, but there is no other and you continue to see that numbers a lot so that number will be paid by the end of the year, so there is no variability left in that number. And in terms of the last piece related to return of capital, sort of how we think about things. I think our view is our fundamental philosophy towards capital is really is unchanged. We still want to continue to balanced between protecting the business, investing in growth and returning capital as we will continue to look at, at any point in time what is the highest and best use of our capital. I think as we have shown over the years, there have been periods where a significant share repurchases have been clearly what we thought was the best thing for our shareholders and there has been times where we have had product opportunities where we have invested there. Now that we have closed on to the loan and the debt, I think Mike gave you some indications on how we are looking at working capital and to your first point we saw contingent payment to pay. All those things needs to settle up, but we still have the very strong balance sheet as it relates to our current cash, then if you take out the contingent purchase price as well as seed it in other investments. But we are going to continue to evaluate at any point of time what is the best thing. Mike I don’t know if you want to add to that before you do the middle piece.

[Michael Angerthal:]

I think the other items that - we will continue to focus on what capital priorities are, the common and preferred dividends and we have the excess cash flow sweep in the term loan that we have talked about where at certain leverage levels will earmark to pay down debts. So we certainly believe at the levels we have we have flexibility to manage that. With respect to the cash earnings and we referenced the bank EBITDA metric. there are two items I think to point out, some differences between the net income as adjusted metric that we report and cash flow. we have talked about the cash benefit that comes from the transaction of about $10.8 million or so part of the year at current tax rates. So we have seen people and work for some people who would like to take that on a net present value basis and describe some value that way, but certainly we will have that tax shield that will impact the cash earnings. The other items is there will be interest in dividend income that we have previously backed out of our net income as adjusted, but those balances including the CLO investments will be generating significant amounts of contribution interest in dividend income. Those items are included in the definition of our bank EBITDA. So you will see really two items that will kind of drip between our results and the term loan results that we think are important to understand and we will provide some transparency into that going forward.

[Alex Blostein:]

Got it, that’s helpful. Second question just around expenses, again I kind of appreciate all the near-term guidance and the synergies. As you guys think about just the growth opportunities for you with the combined franchise and we have seen bulk of the asset managers report earnings already, where spending is kind of going up for many of them for a variety of reasons. How are you guys thinking about organic expense growth for the business keeping synergies out of the discussion?

[George Aylward:]

Yes that’s a good question. I think one of the benefits of this transaction, while there was obviously a lot of synergies and a lot of areas where there were duplicative activities. I think as we sort of executed on this transaction, we also wanted to make sure that we had the right level of resources to really drive what we see as exciting opportunities for growth. So just even in terms of retail, employing in some [indiscernible] things, we make sure that we had in the new expense profile in terms of resources and costs that which we thought would be necessary to really be competitive in this environment, because the environment is getting competitive. So in doing this transaction, I think we have set ourselves up for making sure that we can maximize those opportunities. But I do agree with you, it gets more difficult particularly in the retail world to be competitive and to really have that what you need to really out compete some of the other competitors. Sort of think we are in a good place in terms of that. Mike, is there anything else?

[Michael Angerthal:]

Yes, just as we think about the incremental margins of the business going forward, certainly we talked a little about June, but incremental margins always are impacted by market conditions, impacted by the type of the AUM that comes in whether it’s from external managers or internal managers, but I think looking at that, the 55% range that we have historical been in overtime is still probably the way to think about the business.

[Alex Blostein:]

Got it. And then the 50% to 55% it’s excluding synergies?

[Michael Angerthal:]

That’s right.

[Alex Blostein:]

Right, okay. Great. And then just sorry I will ask one just to clean up here. Thanks for the kind of added disclosure on AUM. Can you help us just map retail SMA, institutional SMA to which kind of managers comprise the bulk of that asset, just kind of helping us align the individual managers to the way you guys are disclosing their products now?

[Michael Angerthal:]

So if you look at the bucket of assets like which managers would be the biggest participants so like for retail separates versus institutional?

[Alex Blostein:]

Yes, from a performance perspective and the flows perspective rather it will matter?

[George Aylward:]

We typically haven’t provided detailed AUM by manager, we would like to provide at a very granular level in the appendix and our earnings supplement, but we will still consider if there is any additional incremental disclosure that will be helpful and we appreciate that thought.

[Michael Angerthal:]

Yes, I mean we just pointed out say for like retail separate account are larger managers in that space would include [indiscernible] and in institutional again it seems be Seix and Ceredex. So I don’t know if that helps to a little bit. But we always keep going into whether there additional information we can provide would be helpful.

[Alex Blostein:]

I will ballpark this line, I think that's helpful. Thanks guys.

[Michael Angerthal:]

Okay. Thanks.

[George Aylward:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Ari Ghosh with Credit Suisse. Your line is open.

[Ari Ghosh:]

Hey good morning everyone. Just going back to the institutional side of it, have been notified of any upcoming redemptions. As we move forward and if you can provide any color on the institutional pipeline that would be helpful, just because it’s getting to be a little more important and as we look at the mix of flows and just your expectations for second half of the year from the institutional business.

[George Aylward:]

Yes, when we sort of gave like the indication of what we are seeing so far in July, we saw the mutual funds secularly being flat and then really of what we are sort of aware of at this point, the only thing we thought that was off note was the CLO that we spoke about that was price and should close in the quarter. In terms of the anything else that we thought was significant enough, there is nothing that we highlighted. As it relates to going forward in terms of what we will do in terms of pipeline and expectations, our goal is to provide clarity on what that which we think is important and as we roll through the next quarter we will be giving some thoughts to what information might be helpful, but from what we said so far, we are fully aware of as of July, the only thing we noted was the CLO.

[Ari Ghosh:]

Got it, and then just real quick on the expense gap. How much of this was driven by conversations that you have been having with your distribution partners versus just an internal review of where [Indiscernible] will stand and then I think maybe nine months ago only a small portion of your total retail AUM maybe 5% of it was impacted by maybe the expense gaps and can you put that in a perspective right now, the magnitude of both the AUMs that were impacted as well as the size of the reduction.

[George Aylward:]

Well I just want to be clear, the majority of funds have caps and on our side as well as on the RidgeWorth side that is just one of the things that’s sort of common in the industry to sort of make sure that you maintain industry average types of expense ratio. So we continually evaluate where our caps are so for the legacy Virtus funds there is lots of on with caps and as I indicated earlier some of those caps we actually increased in the beginning of the year I think in particular for couple of our fixed income funds. So as it relates to the RidgeWorth funds, those funds had caps and is part of a transaction, you usually always make commitments to shareholders that there won't be any negative impacts, so you sort of stand on high on those caps. So that's really what we were sort of speaking to you and then Mike was just alluding to the fact that as you do a re-org and maybe some of the structural contracts change since the fund already has a capped amount of expenses, it will get absorbed by that amount. So that’s sort of what Mike was referring to.

[Michael Angerthal:]

Yes, so you might see the lines that are impacted by mutual funding and they change a bit, but as we reiterate, there will be no bottom-line impact. To the extent the investment management fee rate is impacted and sets at the range that I indicated on the call, you would see offsets in the other rows like admin and transfer agency fees as adjusted.

[Ari Ghosh:]

Great. Thanks guys.

[Michael Angerthal:]

Okay.

[George Aylward:]

Okay.

[Operator:]

Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is open.

[Michael Cyprys:]

Hi, good morning. Just curious on the outlook for M&A, just how are you thinking about that today, where that’s being your priority stack, just given the leverage here? And then what could make sense just in terms of your outlook whether its pulling up other platforms, prioritization of distribution versus additional products?

[George Aylward:]

I think as I mentioned early in our remarks, the platform we have built really does lend itself to the ability to bring in other high quality boutique managers who really like the type of model that we have in the distribution and other things that we can bring to the table. So that is something that we do believe is just a fundamental element of who we are. That being said, we are very excited about the organic growth opportunities that we have. As we said, since the beginning of the RidgeWorth transaction by adding even more strong affiliated managers with great products and great capabilities and expanding our retail as well as institutional resources, we really see that as a great opportunity and a high priority. So that’s really where our primary focus is. That being said, our model is to build for bringing on additional affiliates. And if that were to be a good path for us to take, we would absolutely consider it. We have looked at things in the past and we would do it only to the extent that it sort of makes sense as an additive capability and that didn’t conflict with anything that we previously had. But we see multiple opportunities, but right now we feel very excited about the organic growth side, but absolutely we would continue to consider inorganic opportunities.

[Michael Cyprys:]

And as you look at over the next several years, what should we be expecting in terms of M&A, It seems like the organic growth is more of a priority in a more near-term, but just in terms of the pace of deals maybe one or two year or more of episodic than that. And if you look out three to five years, how many affiliates you kind of think your firm would have?

[George Aylward:]

Yes, where I try to be clear is I’m not trying to indicate that continuous M&A is a fundamental necessary requirement for our long-term growth strategy. It is one element of that, right. So I think for us, it would not be a specific expectation of numbers of deals over a period of time. It would always be predicated upon the timing of the opportunity, how good that opportunity we think is for long-term growth and how financially attractive we can execute that transaction on. Because archiving back to an earlier question, we have to be cognizant of being prudent custodians of the shareholders’ capital, in terms of making sure that at any point in time when we are doing a transaction that it’s something that we believe is the highest and best use of capital time. So really for us it would probably be generally more episodic I’m not sure if I’m crazy about that word, but it is certainly not something where we would be indicating to you that you should expect it to be a continuous ongoing thing that would always happen. We are right now seeing great opportunities on the organic side and we are very excited about executing on those.

[Michael Cyprys:]

Great, thanks that's helpful. If I could just sneak a last one in here. Just on the technology front we are seeing others firms across the industry use technology and digital to improve distribution. Just curious how you are thinking about that as an opportunity?

[George Aylward:]

Yes, absolutely I mean the world has changed a lot in the client basis and the intermediaries that we do business with are changing. So we continue to look for ways to be more effective in communicating, more effective in partnering with the firms that we do business with. So there are things that we are doing in the area, nothing that I would necessarily highlight, but that is increasingly becoming a more and more part of the total value prepositions that we need to have with clients.

[Michael Cyprys:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Your line is open.

[Surinder Thind:]

Good morning guys. I just like to follow-up on an earlier question about just kind of the industry going through and the investment cycle, and so when we kind of look at how that pattern has played out, it’s been mostly the vertically integrated firms where there is more centralized decision making and so part of the investments spend has gone towards things like distribution. But part of the investments spend is also going towards improving investment processes and maybe trying to incorporate big data and technology into the investment process. But with the multi-manager model, how are you guys thinking about that I mean it would seem that because the decision making is on at each manger level that it's a little bit harder to coordinate.

[George Aylward:]

Interesting question. I mean what I would say is one of the reasons we believe in the multi-boutique model and particularly in active management and my personal view is as the world is trying to determine what is the optimal mix of passive investing versus active investing. The active manager is really need to demonstrate that they can add value and differentiate themselves. And I believe fundamentally that specialized teams that culturally and philosophically have strong views and approaches to investing overtime will have more sustainable predictable results. So that's really the premise upon which we are advocates of the multi-boutique model. So I actually would not want to either influence or to homogenize any of the investment capabilities. I think our obligation is to make sure that our affiliated managers have tools and have devices and have data that they can have to execute what they do well, but really the beauty of this model is each of them has a very distinctive and differentiated approach and that's why each of them will do well or not well depending on the markets cycle on how they do. In our model to have something that would really sort of send any kind of consistency would probably undue part of the value of the model, because everyone would start looking alike. So what we really do and I personally very strongly believe that working with boutique managers, they specialize and what they do, that live in and breath it and that view it as their contribution to the industry, I really think that's a way to go in the active management side.

[Surinder Thind:]

Understood. I guess the level of investment or that of what to invest in should be done at the manager level and I think that’s what you guys are advocating for regardless of how the team does their approach.

[George Aylward:]

Well I would say it with a tweak, because again what I said was I think in terms of investing, if we were to make data sources available or technology available, that would be where to benefit our model is we can share those costs. So what I was saying is in terms of development of specific processes related to how you manage money, for us that would be more at the affiliate level.

[Surinder Thind:]

Understood. And then one quick follow-up question. I noticed during this transition period, the branding seems to have changed. Is that simply a function of the number of products you have out there, so before it used to be Virtus small cap fund or Virtus biz fund, now all of the funds basically have - they are proceeded by the actual manager themselves. So it would be like Virtus, Ceredex leverage cap and so forth. Was there a specific thought behind that or is the change from your view, historically the way that you guys have follow up branding and pushing up product?

[George Aylward:]

Yes, and you are absolutely correct there. It’s something we have actually thought about over the year, and our view is that Virtus really stands for - one point assets to a collection of individualized specialist boutiques. So previously we just used the Virtus brand in the open-end funds, actually on the closed-end funds and in other products, we have actually have used the affiliates’ brands. And we have to been thinking about changing to the co-branding approach for a long time and really the RidgeWorth transaction just made it very clear to us that we really wanted to take our opportunity to really do everything we could to sort of accentuate and focus in on the great collection of managers that we think we have that comprise Virtus investment partners. So we do change the branding of our open-end funds to really have the Virtus and then the individual affiliate that manages it. And we just think that provides a little more clarity and transparency even to end clients on the mutual fund side. So now they can very clearly distinguish which of our fixed income funds are managed by which managers and the same on equity side.

[Surinder Thind:]

Got it, that’s helpful. That’s it for me. Thank you guys.

[George Aylward:]

Okay. Thank you.

[Operator:]

Thank you. And I’m showing no further questions at this time. I would like to turn the call back to Mr. Aylward for closing remarks.

[George Aylward:]

I just want to thank everyone for joining us today and we certainly encourage you to give us a call if you have any other further question. Thank you.

[Operator:]

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