Virtus Investment Partners, Inc.
Q1 2015 Earnings Call Transcript

Published: 11 May 2015

[Operator:]

Good morning. My name is Shannon 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 Web site, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus Web site. 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 first quarter of 2015. 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. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. These statements may be identified by such words as expect, anticipate, believe, outlook, may and similar terms. For a discussion of these risks and uncertainties, please see the Risk Factors and Management Discussion and Analysis sections of our periodic reports that are filed with the SEC as well as our other recent filings, which are available in the Investor Relations section of our Web site, virtus.com. We do not undertake any obligation to update forward-looking 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 Web site. For this call we have a presentation, including an appendix that is accessible with the webcast through the Investor Relations section of virtus.com. 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 by providing any overview of the quarter reviewing some of the items that contributed to the results including sales and flows, where we saw the impact of continued elevated net outflows followed by a high level discussion on capital as well as changes we made to the former AlphaSector funds that were announced earlier today. Mike will provide more detail on the financial results and the balance sheet. Also we would remind you that in April we introduced a series of new non-GAAP financial metrics. Today's commentary and our financial results presentations going forward will be on the new basis. Now let's begin with assets under management. We ended the quarter with assets under management of $54.8 billion which represents decline from year-end and the first quarter of 2014 due to net outflows that more than offset market appreciation. Total assets remained diversified by asset class with domestic equity at 37%, fixed income at 30%, international equity at 24% and alternatives at 9%. Total sales were $3.7 billion in the quarter representing a sequential 8% increase, reflecting higher sales of international equity strategies and institutional products that offset the decline in domestic equity and alternatives. Total net outflows were $2.2 billion in the quarter due to $2.9 billion of net outflows in domestic equity and alternative strategies, primarily the AlphaSector strategies which was consistent with the fourth quarter. Excluding the AlphaSector funds, open-end mutual funds sales increased 33% sequentially and open-end net flows moved from negative $200 million in fourth quarter to a positive $500 million in the first quarter. Flows into international equity were strong as our emerging markets opportunity funds continue to be attractive to investors. The fund continues to have strong relative performance on both the short and long term basis and is well positioned to benefit from any increases in allocations to emerging market equities. Fixed income flows were modestly negative in the quarter consistent with the fourth quarter and the industry trends. While we continued to see outflows in the AlphaSector strategies in April, strong flows in other products offset much of that and while they did remain negative, April's flows represented our best month since October of 2014. Excluding the AlphaSector funds we continue to have positive new flows due primarily to the benefit of significant emerging market [re-weighting] [ph] at one of our major distribution partners. The continued net outflows in the quarter impacted our financial results by reducing average assets. Revenues as adjusted declined from prior periods while operating expenses as adjusted increased due to higher employment costs including higher payroll taxes due to the timing of annual incentive compensation payments. As a result, operating income as adjusted declined to $32.2 million and while the related margin did decline, it remained strong at 40%. Earnings per share as adjusted were $2.22 compared with $2.29 in the prior quarter and $2.68 in the sequential quarter reflecting lower average assets partially offset by the variability of our cost structure and the lower share count which declined 2% and 1% from the respective prior periods as a result of our share repurchase program. Our first quarter GAAP net income and EPS were impacted by a loss contingency of $5.2 million or $0.39 per share related to a regulatory matter as described in the disclosure in our 10-Q filing this morning with respect to historical performance information of F-Squared, an unaffiliated former sub-advisor, for the period of April 2001 through September of 2008 including indices of certain Virtus mutual funds tracked beginning in September 2009 and January of 2011. Although the company has not received the Wells notice, we are in active discussions with the SEC staff with the objective of resolving this matter. However, we cannot provide any assurance that a resolution will be reached nor can we provide any additional information or answer to any related questions. Moving on to capital in our balance sheet. In the quarter we repurchased 14 million of shares consistent with the fourth quarter. Additionally, we net settled restricted stock units for $4.2 million and paid a quarterly dividend, bringing our total return of capital for the quarter to $22.2 million, a significant increase over the prior year quarter's $7.4 million. The increase reflects the commitment to returning a meaningful level of annual earnings to shareholders. Our strong balance sheet continues to provide significant operating flexibility. Cash and investments ended the quarter at $48 on a per share basis, up 14% compared with $42 in the prior year quarter. We maintained strong levels of working capital and have no outstanding debt. One of the items that I would like to mention is that in April we completed our previously announced majority interest acquisition of ETF Issuer Solutions or ETFIS, which offers a platform for listing, operating and distributing exchange traded funds. ETFIS' approach of offering investment capabilities from boutique managers in ETFs is similar to our approach for open-end funds. Our first ETF from an affiliated manager will be an unconstrained fixed income product from Newfleet Asset Management. Now I will turn it over to Mike to provide more detailed review of the financial results and balance sheet.

[Michael Angerthal:]

Thank you, George. Good morning, everyone. Let's start today on Slide 7, assets under management. We ended the quarter with assets of $54.8 billion, which represented a decrease of 3% from the prior year excluding money market assets and a 3% decline from the prior quarter. On a sequential basis, the $1.9 billion decrease in assets is primarily attributable to open-end funds which decreased 6% due to the net outflows which more than offset market appreciation. The $1.7 billion year-over-year decrease in assets under management is attributable to $2.9 billion of net outflows and a total of $1 billion from dividends distributed net of reinvestments and the impact of changes in leverage, partially offset by $2.2 billion of market appreciation. However, we had growth in closed-end funds, institutional and high net worth assets of 9%, 11% and 22% respectively over the prior year. Closed-end fund assets increased to $7.3 billion over the prior year quarter due to the $500 million Duff & Phelps closed-end fund launched in June 2014. Closed end fund assets were 13% of ending assets compared to 12% in the prior year and represented 17% of run rate investment management fees at March 31, up from 15% in the prior year. Turning to Slide 8, asset flows. In the first quarter we had total net outflows of $2.2 billion as a result of continued elevated redemptions in certain mutual funds. Gross sales in open-end mutual funds were $3 billion which represented an increase of 6% compared to the fourth quarter. The current quarter sales rate was 33.5%, up from 28.3% sequentially. The increase in sales was due to increased demand for international equity strategies, partially offset by lower sales in the AlphaSector funds. As mentioned earlier, the AlphaSector funds continued to experience elevated redemptions in the quarter, resulting in net outflows of $2.9 billion across the five funds. Excluding the AlphaSector funds, open-end mutual funds had positive net flows of $0.5 billion, representing an organic growth rate of 8%. Let me provide some insight into flows by asset class. International equity fund net flows were positive $1 billion, representing an annualized organic growth rate of 36%. The positive net flows reflect increased demand for emerging markets fund managed by Vontobel. As a reminder, emerging market strategies do have capacity constraints. Fixed income net outflows were $0.4 billion reflecting outflows in our largest fixed income product, the multi-sector short-term bond fund. We believe the flows were consistent with industry trends, particularly in the short duration category. Alternative strategies had first quarter net outflows of $0.7 billion and domestic equity net outflows were $2.2 billion, compared with $1.4 billion of net outflows in the fourth quarter. Both domestic equity and alternative outflows were from the AlphaSector funds consistent with the fourth quarter. Institutional had positive net flows of $221 million in the quarter at an organic growth rate of 21%. Institutional flows are always volatile and hard to forecast but the first quarter represents the second consecutive quarter of double-digit organic growth in this product category. Inflows in the quarter included the funding of significant small cap equity mandate at our Kayne Anderson Rudnick affiliate and continued sales in fixed income sub-advisory accounts at Newfleet. Turning to Slide 9. Before I begin the discussion of financial performance, I would like to review the new non-GAAP financial measures that we introduced in April. Our earnings release issued this morning includes an income statement reconciliation of GAAP results to non-GAAP results for the current quarter as well as comparative income statement reconciliations for the prior year quarter and the prior quarter. Each reconciliation provides the key financial measures on an as adjusted basis including investment management fees, employment expenses, operating expenses and operating income. Management believes these measures provide transparency into the operations of the company and appropriately reflect the operating results from providing investment management and related services. We use these measures to evaluate and report on the company's financial performance to make operational and resource allocations, determine the [impairment] [ph] levels of investments, evaluate methods and levels of capital return and determine performance-based incentive compensation. The non-GAAP were not intended to be viewed in isolation or as a substitute for U.S. GAAP financial results. With that context I will begin with investment management fees as adjusted. Investment management fees as adjusted of $70.8 million decreased 1% from the first quarter of last year and decreased 7% on a sequential quarter basis. The components of the change in investment management fees are average assets and fee rates. Average assets under management of $55.7 billion were unchanged from the prior year quarter as lower open-end fund assets were offset by higher closed-end fund, institutional and higher net worth assets. Average assets decreased 5% from the sequential quarter as a 7% decline in open end fund average assets were partially offset by increases in separately managed accounts and institutional. The average fee rate was consistent with the prior quarter as a lower open-end fund fee rate was offset by a higher fee rate on separately managed accounts and institutional. The average fee rate for the quarter was 51.5 basis points, a decrease of 0.7 basis points from the prior year excluding money market assets. The decrease is primarily attributable to a 2.2 basis point decrease in the open end fund fee rate, partially offset by a 2.9 basis point increase in the closed-end fund fee rate, primarily attributable to the closed end fund launch in 2014 and a 2 basis point increase in separately managed accounts due to a 22% increase in high net worth assets at Kayne Anderson Rudnick. Slide 10 shows the five quarter trend and employment expenses as adjusted. Total employment expenses as adjusted for the quarter were $35.6 million, an increase of $1.1 million from the prior year and an increase of $1.5 million sequentially. The increase over the prior year primarily reflects increases in fixed costs associated with higher staffing levels, primarily at our affiliates and in distribution. The increase compared to the fourth quarter is due to $2.5 million of higher payroll taxes associated with the annual payment of incentive compensation, partially offset by lower variable incentive compensation. Excluding the higher payroll taxes, employment expense as adjusted declined $1 million or 3% sequentially. The key metric to consider is employment expenses as a percentage of revenues as adjusted which increased to 41.6%, excluding 310 basis points of incremental payroll taxes primarily due to lower revenues as adjusted. The trend in other operating expenses as adjusted reflects the timing of product, distribution and operational activities. Other operating expenses as adjusted were $11.2 million in the first quarter, up $0.7 million from the prior year and flat on a sequential quarter basis. The increase over the prior year relates to higher investment research and occupancy costs to support new investment capabilities and higher trading system costs due to our migration to a single trading platform. The ratio of other operating expenses to revenues as adjusted was 14% for the quarter. This ratio increased 80 basis points compared to fourth quarter, again due to lower revenues as adjusted. Slide 12 illustrates the trend of diluted earnings per share as adjusted and operating income as adjusted. In the first quarter earnings per diluted share as adjusted were $2.22, a decrease of 3% from the prior year primarily due to a 4% increase in operating expenses as adjusted. The decrease in earnings was partially offset by a 2% decline in the average diluted share count as a result of our share repurchase program. In the quarter we generated operating income as adjusted of $32.2 million, a decrease of $2.2 million or 7% on a comparative basis to the prior year. The decrease over the prior year primarily reflects higher employment and other operating expenses. Operating income as adjusted decreased $7 million or 18% on a sequential quarter basis. This change primarily reflects lower revenues as adjusted which decreased by $5.5 million related to a 5% decline in average assets as well as there being two fewer days in the quarter as well as $2.5 million of incremental payroll taxes. Operating margin as adjusted for the quarter was 40%, a decrease in margin of 260 basis points from the prior year and also a 260 basis point decrease from the fourth quarter after adjusting for incremental first quarter payroll taxes of 310 basis points. Slide 13 provides a reconciliation of earnings per diluted share as adjusted to GAAP earnings per diluted share. One of the objectives of the introduction of the new non-GAAP measure was to expand our reporting from an operating income pre-tax basis to now include both after tax and per share metrics. The key adjustments to GAAP results include the exclusion of returns, both realized and unrealized gains and losses and dividends and interest from seed capital investments, the exclusion of non-cash amortization of acquired intangible assets and other adjustments that will be made with the intent to present adjusted results that best reflect the ongoing or core earnings profile of the company. There are two items in our previous non-GAAP measure adjusted for that the new non-GAAP measure will no longer adjust for. Stock-based compensation and depreciation of fixed assets. Concerning GAAP results, net income attributable to common stockholders was $19.3 million or $2.11 per diluted common share. The quarter included $0.37 per share of positive returns on the company's seed capital investments and a $0.39 per share loss contingency related to the previously discussed regulatory matter that was recorded in our GAAP other operating expenses line item. Moving to Slide 14. We ended the first quarter with strong cash and investments and working capital position and no outstanding debt, and $75 million of unused capacity on our credit facility. At March 31, 2015, cash and investments were $430 million or $48 on a per share basis. An increase of $6 or 14% from the prior year and a decrease of $4 or 9% sequentially due to the payment of annual incentive compensation during the quarter. We ended the quarter with working capital of $187 million, a decrease of $3 million or 2% from the fourth quarter. The decrease is attributable to $22 million of capital that was returned to shareholders, partially offset by results from operation. Our working capital to annual spend ratio ended the quarter at 59% within our targeted level of 50% to 75% of annual spend. Our seed capital investments totaled $242 million at the end of the first quarter, up 2% compared to the fourth quarter. The first quarter change reflects the net activity of our seed program consisting of $5 million of new investments that were funded with recycling of other seed investments. $2.8 million of realized and unrealized gains and $1 million of reinvested dividends. The first quarter marked our highest level of repurchases in terms of shares with approximately 104,000 shares repurchased in the quarter. As a result of repurchases at this level, our shares outstanding declined by 251,000 or 2.7% from the prior year as our repurchases over the past four quarters more than offset new shares issued. Our $22.2 million return on capital to shareholders represented a 109% of our net income as adjusted. For the full year 2014, we returned 66% of our net income as adjusted which is within the range we have previously stated. It is important to note that in any given quarter the return level could vary and we evaluate our payout ratio on an annual basis. As we have consistently stated, the primary goal of our capital management strategy is to balance investments in the business with returning a meaningful level of capital to shareholders. Regarding investments in the business, we finalized our majority interest acquisition of ETFIS early in the second quarter. The purchase price for a majority interest was approximately $4.8 million which will be invested in the business and used to execute on the business strategy. At the close of the transaction, ETFIS had $78 million of assets under management. The initial impact to our financial results will be modest. With that, let me turn the call back over to George.

[George Aylward:]

Thanks, Mike. Before taking your questions, I will discuss several important changes to the former AlphaSector funds, including the use of Dorsey, Wright's technical analysis to the [five] [ph] funds that have been renamed the Virtus Trend funds. Dorsey, Wright has more than 25 years of experience providing technical analysis and quantitative research and we are very pleased to partner with the team at Dorsey. They are a preeminent company in the field of price momentum analysis and are well known by many financial advisors for their data analytics and model portfolios. The funds will maintain their rules based approach to investing and will continue to have the ability to move to cash equivalents for downside protection. The strategies of the funds will employ Dorsey, Wright's relative strength in price momentum rankings to identify eligible investments which with certain products will be expanded to include sub-industry groups rather than broad market indices. By moving to investing in a more granular level, the intention is to allow the portfolios to have the opportunity for more exposure to stronger sub-sectors and less exposure to weaker sub-sectors. The strategies of the funds will have several additional rule changes including the use of a risk indicator to determine whether the market is in a lower or higher risk based on those rules. Depending upon the risk environment, portfolio changes can be made as slowly as monthly or as quickly as daily. The funds will also utilize absolute price momentum to determine when to move to cash for defensive purposes. In addition to utilizing the strategies for the funds, we will also be offering a related SMA product for those financial advisors who find it advantageous to use an SMA instead of a fund. We have announced these changes to our distribution partners and we are working closely with them and Dorsey, Wright to inform FAs and their clients about these changes. That concludes our prepared remarks. Now let's take some questions. Shannon, can you open up the lines please?

[Operator:]

[Operator Instructions] Our first question is from Michael Kim with Sandler O'Neill. You may begin.

[Michael Kim:]

First, can you maybe just talk a bit about, sort of the decision making process in terms of the transition to Dorsey. And then any details or potential timeline for the transition in terms of reaching out to shareholders communicating with them and trying to maybe retain some of those assets.

[George Aylward:]

I will do the second part first. So in terms of timing, as we indicated in the announcements this morning it's effective immediately. A sticker has been filed, which is a mechanism to make available to the fund shareholders the firms that we -- our funds are available in. We are obviously in on notifying them of the changes and making sure they are aware of all that. And there will be information that will be made available to them on Dorsey, Wright, the changes in the fund and all of that. So it is effective. The funds have been renamed and the changes are being implemented today. So that in terms of timing is what it is and our sales force will work with our distribution partners to the extent of whatever support they need to help communicate with individual FAs etcetera, that will all be ongoing. In terms of the first question, really what I would say is we have concluded that. It's in the best interest of the fund shareholders at this time to make the change that we did to the funds and including the use of the Dorsey, Wright relative strength capabilities as well as some of the additional rule changes that we made based upon some of our observations over the last few years.

[Michael Kim:]

Okay. That’s helpful. And then you mentioned in the release, lower management fees on a few the impacted funds. So any color there in terms of the magnitude. And then more broadly, any sense of the impact to your economics, whether it's related to a potential shift in the sub-advisory split or any maybe upfront cost related to the transition.

[George Aylward:]

Yes. My view is -- I wouldn’t over analyze it. What I would basically say is one of the things we did change and we have mentioned it. What we did on three of the funds, make a reduction in the management fee and again it's something that we just thought was an appropriate thing to do and that we wanted to do for the shareholders. And I think as it relates to these funds, remember this quarter you are going to have a lot of turmoil in terms of the transition from one to another and I think you will get more clarity once you see things emerging in the second quarter and Mike will provide more transparency as you sort of start seeing how it all settles in. I hope that’s helpful.

[Michael Kim:]

Okay. And then final question. Just given your affiliate model, just wondering if it might make sense to potentially partner with a bigger more global franchise that could maybe leverage your investment capabilities more fully from a distribution standpoint.

[George Aylward:]

Again, we will always consider things that are in the long-term interest of what we want to do. I think we are very comfortable with our retail distribution and our affiliate model with sub-advisors. So there is nothing at this point really for us to be discussing related to anything along those lines.

[Operator:]

Thank you. Our next question is from Steven Schwartz with Raymond James and Associates. You may begin.

[Steven Schwartz:]

George, you referenced turmoil, I just want to make sure that something is clear at least as I understand it. These are your assets. These are not F-Squared's assets, right?

[George Aylward:]

Yes.

[Steven Schwartz:]

Okay. So it's not a question of retaining them. I guess then the turmoil question is what I really wanted to get to. I would guess there are, whether it's Morningstar or Lipper or something like [indiscernible], there are changes that are made when a management team is changed like this.

[George Aylward:]

Well, in hindsight I don’t know why I used the word turmoil. What I was really referring to, is because we are in the middle of a quarter and because there will be a period where we have put in the 30-day notice to terminate but we have already implemented the changes. Again I apologize for the word turmoil, it will just be a little transitional and unclean in terms of the way you will see emerge in the second quarter. So again that’s because it's in the middle of a quarter effectively there will be an overlap with the ending of the old contracts and the implementation of everything new. So I am sorry, that is really what I meant. But to the other part, no, there are assets. They are Virtus funds. You know funds have changes in sub-advisors and managers somewhat frequently in the industry. So there is nothing unusual from that perspective and I think we are doing everything we can to make sure we put out a lot of information and clarity. Financial advisors will be well equipped with what we hope they need to understand the changes and the introduction of the Dorsey, Wright relative strength.

[Steven Schwartz:]

Okay. You have given outflows so it's kind of silly to ask about potential outflows but I just wanted to make sure I was clear on all this. And then one of the things, Mike -- I was taking notes, maybe you were going too fast, maybe I just missed it. But when you discussed the decline in the mutual fund fee rate, it wasn’t clear to me what the reason for that was. If you went there or if I just missed it.

[Michael Angerthal:]

Yes. We talked about the sequential change. Overall the fee rate was consistent from the prior quarter at 51.5. But the decline in long-term open end fund fee rate was primarily attributable to some of our domestic equity and alternative funds that were in -- had elevated redemptions. Those are some of the higher fee rate products that had an impact on the overall long-term open end fund fee rate for the quarter.

[Operator:]

Our next question is from Michael Carrier with Bank of America. You may begin.

[Michael Carrier:]

Just on the growth outlook. Ex the AlphaSector sector strategies, you have seen some good traction. Just one comment that you made on the international, I think the emerging markets, you mentioned the capacity constraints there can be in that products. So just wanted to get a sense on, where things stand there. And then when you look at the momentum that you are seeing in the international equity and fixed income versus some of the newer things that you are working on on the ETFIS or the liquid alternatives. Just wanted to get a sense on where you are seeing the demand in the channels on either the current products or probably more importantly over the next couple of years on some of the newer strategies that you are working on.

[George Aylward:]

Great question. And one of the things we sort of indicated in the earnings release is, we did have the elevated outflows but in many ways they sort of overshadowed some of the areas of continued strength as well as growth. And really at a gross level we actually had an increased sequential, over sequential in terms of sales. Obviously not net flows because of the outflows. And I think we have highlighted areas including obviously the non-AlphaSector funds, institutional, high net worth, etcetera. So there are a lot of other areas that again we continue to have strength and they are seeing growth. In terms of the funds, we did highlight emerging markets which has been a very strong performing fund for us and continues to have great attraction to individuals. Acknowledging that it's capacity constrained, there is no comments to made at this point in terms of that capacity but I always do like to remind people that there is capacity constraint there. And we have seen other areas and funds that clearly we have mentioned in the past that have had some more acceptance in the market. The Herzfeld Fund, while still small has certainly got some attention and we are seeing activity in several other areas and we are very excited about some of our newer and emerging stuff. One of the fixed income funds from Newfleet, a strategic income fund, a very new fund, but again it's already put up very compelling performance and I hope it's something that financial advisors will consider given the incredible record that Newfleet has had over many years. So we have seen a lot there. Institutional, which Mike sort of referred to, you may recall over the years we have made comments about having made some investments in the distributions at our affiliates for those products and that they have a long tail. So it is was pleasing to have to consecutive quarters of pretty good growth. Particularly because it's not just that one of our affiliates, it's at two of our affiliates. In terms of ETFIS, again, we are very pleased with that. There is a great team there. I think philosophically in terms of having a platform that can make product capabilities available in the ETF format, we think makes a lot of sense. I think we have an opportunity to be competitive in that space and as I indicated we have determined to make one of our affiliated managers strategies available in an [adequately] [ph] managed ETF. So I think there is areas where we see that there is opportunities. Again [indiscernible] is another area where we are new in but have been spending time and efforts trying to get a start in some of those spaces. So we have had sales people as well as portfolio managers investing some time. And that includes outside of the U.S. which as you know is not a big area or an area at all for us at this point. So we continue to believe that there are great opportunities for our existing capabilities in our existing channels and products and we are very pleased to be expanding those product capabilities and things likes ETFs.

[Michael Carrier:]

Okay. That’s helpful. And I think -- this has been asked in a few different ways and I just want to make sure there is, from your guys perspective it's just tough to predict or get a sense of the flows. But when you do make a change on funds, within your sub-advisor, do you have any, you know your experience when you look across the industry, on what you generally expect in terms of assets that you can retain versus assets that move or is each situation is different because every fund is going to be different, every investor and channel is going to be a new odds.

[George Aylward:]

Yes. And absolutely we will not make any predictions or any guidance around that. In terms of what is it that people generally see, I think you sort of hit it near the end, which is every situation is very different, right. So our view is that the equity funds and the strategies we are now employing have the same general approach objective to how they participate or protect in certain types of market environments. So these are philosophically the same value proposition. We do believe the introduction of Dorsey, Wright's relative strength and some of the rule changes which really have evolved over learnings over the six or seven years that we have had these funds, we think they would be very compelling. We will make as much information as available to those financial advisors who previously liked and have stayed in the old strategy as well as maybe some of the those who over the last few months have decided to redeem out of those funds. So absolutely we will not make any predictions. We are very excited about what the offering is. We are very comfortable that we have a lot of information and transparency to financial advisors and how these will work and how they will be different than what we previously did and we look forward to the opportunity to discussing that with them

[Michael Carrier:]

Okay. And then last one. Mike, just on the expenses, you mentioned just I think both had ratios on the comp and the non-comp, just coming up a bit. Just getting the lower revenues and the seasonal items on comp. Just going forward, anything besides the seasonality in the comp that we should expect in terms of the outlook. And then I know you guys mentioned the $0.39 or so on the regulatory reserve. Related to F-Squared and those types of matters, ex that I know because you can't talk about it, but are there any other things that are on the radar that we should be thinking about or once you deal with that aspect of it, then is it kind of moving on from there.

[Michael Angerthal:]

Yes, on the ratios and the employment expense and other operating, we have talked certainly about the variable nature of our compensation plans. So you saw the absolute employment expense go down slightly excluding for the payroll taxes on a sequential basis. So you see some of that. And it's important to note on employment expenses, variability will be impacted depending on -- each of the variability is driven by a different factor. So as sales change you could have variability based on sales levels. And then in terms of profit base, it's important to recall that each of our affiliates has discreet P&Ls and discreet profitability. So they are certainly not impacted by certain items of revenues. So I think as you model, it's just important to recall some of the elements of variability in our incentive compensation plans. And other operating, again I think you have seen a pretty tight range on an absolute basis and I think that’s continues to be the best way to think about the other operating expense line item. With respect to the contingency, certainly we can't comment on regulatory matters so there is not much I can add other than what's been disclosed in the 10-Q.

[Operator:]

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward for closing remarks.

[George Aylward:]

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

[Operator:]

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