Virtus Investment Partners, Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Good morning. My name is Christie 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 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 third 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 within the webcast and on 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 an overview of the quarter followed by a discussion of capital, including an increase to our share repurchase program that was announced this morning. Mike will then discuss the financial results and balance sheet in more detail. Third quarter market conditions were challenging for the asset management industry and for us. Our ending assets under management were 47.9 billion a 9% sequential quarter decrease resulting broad market declines and the impact of investor uncertainty during the quarter. Total sales were 2.5 billion compared with 3.3 billion in the sequential quarter due primarily to lower sales of international equity as concerns on the effectiveness of emerging markets impacted investor interest in that asset class. Lower third quarter initial fund sales were consistent with what we’ve seen in the retail intermediary channel. Total net outflows were 1.6 billion in the quarter compared with 1.3 billion in the sequential quarter as outflows open end funds offset positive flows in ETFs and institutional. Current quarter mutual fund net outflows reflect an improvement in the flows of the former AlphaSector funds offset by declines in flows in international equity. Net outflows in domestic equity and alternative asset classes improved sequentially reflecting the lowest level of redemptions of the former AlphaSector funds since the third quarter of 2014. Net outflows in these funds improved 2.9 billion grew from 2.1 billion in the prior quarter. International equity was in outflows even though our emerging markets opportunity funds continue to have strong wells performance and ranked in the top-decile on a 15 and 10 year basis at September 30th. We've been pleased with the flows we've seen in this fund in October. In terms of total open-ending flow funds closed October is expected to be the best month since October 2014 with the exception of the month in the second quarter when we benefited from a significant emerging market rebalance. Given the market conditions in the quarter I wanted to share some perspective on our investment strategies. As we've stated in our previous call our products are generally quality oriented or risk management will be expected to perform well in challenging market conditions. The reason volatility provided the opportunity and our management delivered strong wells performance in the quarter and those results benefited our long-term performance rates. As of September 30th we had 19 core five-star funds representing 82% of our assets. This is an increase of 14% and 73% and 15% and 60% at September 30th. Some of our funds that have strong long-term relative performance include our emerging markets following global opportunities funds managed by Vontobel. We believe that our five-star EM on represents, an opportunity for investors looking to increase allocations to emerging markets and foreign and global ops our two top performing four star funds in other categories. Newfleet our fixed income manager has six core five-star funds that employ both its multi-sector and single-sector strategies. We see increased opportunities for our five-star and low duration funds given the current environment. Newfleet’s high yield product was upgraded to four-stars in the quarter. Our quality oriented equities manager Kayne Anderson Rudnick has had strong wells performance and managers attractive small and mid-cap offerings including a small cap core product that was elevated to four-stars in the quarter. Our Duff & Phelps Investment Management affiliate also employs a quality oriented approach. Duff’s real estate security strategies continue to perform very well and its global strategy is now a five-star fund. As we mentioned in the past the ability to offer a broad array of differentiated product offerings from boutique managers is a benefit of our multi-manager model. Turning over to the financial results. Operating income as adjusted and related margin declined in the quarter to 25.3 million and 36% respectively. The sequential quarter decline reflects a 4.6 million negative impact from a variable incentive fee which had a margin impact of 390 basis points. Excluding that fee our operating income as adjusted would have been 29.9 million and our margin would have been 40%. Third quarter earnings per diluted share as adjusted declined sequentially to $1.74 reflecting the impact of lower average assets and the variable incentive fee which had a negative impact of $0.32 per share partially offset by a lower share count which declined 1% sequentially as a result of share repurchases. GAAP earnings or net loss of 0.6 million or $0.07 per share that includes 16.6 million or $1.89 per share of unrealized losses on investments reflecting the impact of the market decline in quarter end, this compares to second quarter earnings per share of $1.08 that included $0.22 per share of unrealized losses as well as an $0.82 per share after tax loss contingency related to the previously disclosed regulatory matter. I'd point out that the loss contingency that was reserved for as June 30th was unchanged in the third quarter. In October the company reached an agreement of principal with the staff of the Securities & Exchange Commission to settle the previously disclosed regulatory matter. The agreement is subject to review and approval by the Commission and therefore we cannot provide any additional information or answer any questions. Turning to capital and our balance sheet. The quarter returned 21.2 million or 136% of our net income as adjusted through share repurchases, dividend payments and the net settlement of restricted stock units. The third quarter marked our highest level of share repurchases to-date. As a result continued repurchases our outstanding shares have declined by 4% from September 30, 2014. We announced a 1.5 million share increase to our existing repurchase program that has 256,000 shares remaining as of September 30th. The increase in the amount of shares available to repurchase enables us to even be more opportunistic as appropriate and request our commitment to returning a meaningful amount of capital to shareholders. We’ll continue to balance returning capital to shareholders with investing in the business, which remains a priority use for our capital. Now I'll turn over to Mike to provide a more detailed review of the financial results and balance sheet. Mike?

[Mike Angerthal:]

Thank you George, good morning everyone. Starting on Slide 8 assets under management, we ended the quarter with assets of 47.9 billion which represents a decrease of 20% from the prior year, excluding money market accounts, and a 9% decline from the prior quarter. On a sequential basis the $4.5 billion decrease in assets is primarily attributable to market depreciation of 2.7 billion reflecting decline in global equity markets and net outflows of 1.6 billion primarily due to net outflows in open-end fund that offset positive flows in institutional and ETFs. The 11.7 billion year-over-year decrease in assets under management is primarily attributable to 7.4 billion of net outflows, 2.7 billion of market depreciation, and 0.9 billion from changes in leverage. The former AlphaSector funds accounted for 7.9 billion of the net outflows on a year-over-year basis while our other mutual funds had net outflows of 0.5 billion. Turning to Slide 9, asset flows. In the second quarter we had total net outflows of 1.6 billion compared with 1.3 billion in the prior quarter. Net outflows in the former AlphaSector funds improved to 0.9 billion from 2.1 billion sequentially. At September 30th, these funds had 3.3 billion of AUM which represented 7% of total assets. Partially offsetting the sequential quarter improvement in outflows from the former AlphaSector funds was a 1.3 billion decline in net outflows in our emerging market opportunities fund, reflective of overall industry trends in the asset class. Gross sales in open end mutual funds were 1.9 billion which represented a decrease 0.8 billion or 29% from the second quarter. As I noted the current quarter results primarily reflect lower sales in international equity strategies. Let me provide some insight into mutual fund net flows by asset class. International equity had net outflows of 0.3 billion compared with net inflows of 1.1 billion for the prior quarter. Our emerging market opportunities fund were essentially net flow neutral compared with 1.2 billion of net inflows in the prior quarter. Fixed income net outflows were 0.4 billion, consistent with the prior quarter. Alternative strategies had net outflows of 0.3 billion in the quarter. Domestic equity net outflows were 0.9 billion, an improvement from 1.8 billion in the second quarter. Outflows in both the domestic equity and alternative categories were primarily attributable to the former AlphaSector funds. ETFs had positive net flows of 204 million compared with 55 million in the second quarter. During the quarter we introduced the Virtus Newfleet Multi-Sector Unconstrained Bond ETF which contributed 130 million of net flows. Institutional had positive net flows of 89 million in the quarter. Inflows were primarily attributable to additional flows on existing accounts. Institutional flows are always hard to project but the quarter represents the fourth consecutive quarter of positive net flows in this product category. Turning to Slide 10. Investment management fees as adjusted of 65.2 million decreased 7% on a sequential quarter basis and 17% from the prior year quarter. The components of the change in investment management fees are average assets and fee rates. Average assets under management of 50.6 billion decreased 7% sequentially and 16% compared to the prior year quarter. The 7% sequential decline is due to a 9% decline in open end funds. The average fee rate decreased 1.3 basis points from the prior quarter as the open end fund fee rate declined 1.9 basis points. The 1.9 basis point decline in the open end fund fee rate primarily reflects the 4.6 million negative impact of the variable incentive on one mutual fund. Previously the majority of the fee was attributable to the funds former sub-advisor and is now recognized entirely by the company. The third quarter open end fund fee rate was 47.3 basis points, and excluding the variable incentive fee, it was 53.1 basis points. A quick note for modeling, for the fourth quarter, using the 47.3 basis points we reported is appropriate as the variable incentive fee continues in the fourth quarter. In terms of 2016 we do not expect the impact to continue and 52 to 53 basis points would be a good rate to use. The average fee rate on long-term assets declined 2.3 basis points from the prior year quarter as a 3.5 basis point decrease in the open end fund fee rate was partially offset by a 3.2 basis point increase in separately managed accounts due to a larger percentage of assets and gained higher fee products. In addition the average fee rate on ETFs increased to 22 basis points from 9 basis points in the prior quarter. The higher fee rate is reflective of the mid quarter introduction of the Newfleet managed fixed income ETF. We anticipate the fee rate on ETFs increasing to 30 to 35 basis points in the fourth quarter. Slide 11 shows the five quarter trend in employment expenses as adjusted. Total employment expense as adjusted for the quarter were 33.5 million, a modest decrease of 0.1 million sequentially and a decrease of 1.7 million from the prior year quarter. The decrease from the prior year reflects lower variable incentive compensation, both sales and profit base, partially offset by incremental cost associated with higher staffing levels primarily in our affiliates, including Virtus ETF Solutions. The key metric to consider is employment expenses as a percentage of revenues as adjusted. The increase to 47.1% in the quarter primarily reflects lower revenues as employment expenses were essentially flat. Given current asset levels we expect the employment ratio to remain at this level in the fourth quarter all things being equal. The trend in other operating expenses as adjusted reflected the timing of product distribution and operational activities. Other operating expenses as adjusted were 11.3 million in the third quarter continue to trend within a relatively tight range on an absolute basis. Operating expenses decreased by 0.3 million or 3% on a sequential quarter basis, an increased by 0.2 million or 2% for the prior year. The decrease from the prior quarter is primarily due to the 0.7 million annual equity grant to the Board of Director that was made in the second quarter, excluding the grant in the second quarter other operating expenses as adjusted increased 0.4 million primarily due to higher profession fees. The ratio of other operating expenses through revenues as adjusted was 15.9% for the quarter. The increase in this ratio reflects the decline in revenues as adjusted. Slide 13 illustrates the trends of adjusted results. In the third quarter operating income as adjusted was 25.3 million a decrease of 6.1 million or 19% from the prior quarter. The decrease primarily reflects lower revenues as adjusted due to lower average assets and lower fee rates. Operating margin as adjusted for the third quarter was 36%, a decrease of 41% in the second quarter and 47% in the prior year. Excluding the variable incentive fee mentioned earlier our operating income as adjusted and margin would have been 29.9 million or 40% of sale. The fee also had a $0.32 impact on earnings per diluted share as adjusted which was $1.74 in the third quarter excluding the fee earnings per share would have been $2.06. GAAP net loss attributable to common stockholders was 0.6 million or $0.07 per diluted share the quarter included 16.6 million or $1.89 per share of unrealized mark-to-market adjustments, net of tax on the company’s investments of which a substantial portion has been recovered in October. And an effective tax rate of 162%. The rate was impacted by 6.2 million valuation allowance associated with the unrealized losses in the company’s investments. Excluding the valuation allowance and the impact of consolidated sponsored investment products the quarterly effective rate was 38.5% consistent with prior periods. We ended the third quarter with strong cash investments and working capital position and no outstanding debt of 75 million of unused capacity under our credit facility. At September 30, 2015 cash investments were 445 million a decrease of 2% sequentially and an increase of 1% over the prior year. Cash and investments on a per share basis were 51. Our seed capital investments totaled 277 million reflecting the two new seed investments in the quarter. Our target range for the size of our seed portfolio remains 200 million to 250 million. Working capital of 107 million decreased 79 million or 39% primarily due to 75 million of new investments. The company received 55 million in to two new open-end mutual funds, multi-strategy target return fund sub-advised by Aviva Investors and the MLP Energy Fund managed by our Duff and Phelps affiliate. In addition the company invested 20 million in the quarter to establish a CLO that will be managed by our Newfleet affiliate and we expect to launch in the first half of 2016. The key metric we evaluate with respect to working capital as working capital to spend. And we've said on prior calls that we target a range at the 50% to 75%. Given the size of the seed capital portfolio is greater than the long-term target, we believe our current level of working capital is reasonable at this time. The third quarter marked the highest level of repurchase in terms of shares and dollars with approximately 156,000 shares repurchased in the quarter. Our shares outstanding have declined by 400,000 or 4.3% from September 30, 2014. The 21.2 million of capital returned to shareholders in the quarter represented 136% of our net income as adjusted bringing the year-to-date payout ratio to 111%. As we previously indicated the return level could vary in any given quarter and we evaluate our payout ratio on an annual basis. In October the company increased the existing share repurchase program by 1.5 million shares representing a significant increase over the prior authorization of 500,000 shares. The terms of program has not changed. The company may repurchase shares at a discretion there is no specified term and it may be suspended or terminated at any time. As we've consistently stated the primary goal of our capital management strategy is to balance investments to the business with returning a meaningful level of capital to shareholders. With that let me turn the call back over to George.

[George Aylward:]

Thanks Mike. That concludes our prepared remarks. Let’s take some questions. Christie, can you open the line please?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Michael Kim with Sandler O'Neill. Your line is open.

[Michael Kim:]

First, can you maybe just walk through the negative variable incentive fee that hit this quarter just in terms of which strategy that related to and sort of the underlying structure behind the financial impact if you will?

[George Aylward:]

Yes, so we have one fund that has a variable incentive element related to it and as we pointed out this is not a fund where previously that element of the fee was borne by the former sub-advisor. And generally the way you should think about the way the fee works is it does have a performance related variable element and the calculation sort of takes into consideration average historical assets. So previously the portion of the negative fee that you are seeing the impact in our quarter would have been appropriately absorbed and paid by the funds sub-advisor but fund sub-advisor is no longer that sub-advisor. So you are seeing the impact in this quarter for us. And Mike indicated in his comments, you can expect that to continue in the fourth however, we are indicating for 2016 we do not expect that impact to continue. So is that helpful?

[Michael Kim:]

It is, just to follow-up. Is that based on sort of some underperformance rolling off, is that why you kind of sort of expect that to normalize if you will, looking out to next year?

[George Aylward:]

Yes our expectation is that it won’t continue into 2016 and the reason that there is the magnitude of the number in this quarter was because of the underperformance from the previous sub-advisor prior to their termination so.

[Michael Kim:]

And then just wondering where you are sort of in terms of distribution partners reviewing the transition from F-Squared to DWA? And then just sort of in light of the slowing outflows from the trend funds which I assume have been mostly a function of slowing redemptions. Have you started to see any step up in new sales or do you think you sort of need those funds to sort of vintage a bit more if you will?

[George Aylward:]

Yes, and I will start with the end pieces. Absolutely I think with the help of the funds, the vintage and the new strategy but just to revisit the whole scenario. So upon the termination of the former sub-advisor and the introductions of the strategies where we employ input from Dorsey Wright, as you know that occurred May 11th and as appropriately all of our distribution partners invested time and work in understanding how strategies would work and how they were different than what we previously had. So it was a period of time when those funds were not available for sale. If you think in terms of we indicated in the second quarter that most of them had made it available at that point where we knew when they would be making it available. So that was in probably late August-ish time frame when that happened. So I think everyone admires the contributions that Dorsey Wright has made in their area of expertise in terms of relative strength and as we indicated when we made the change their firm in sort of very widely known, so people know what they are. I think what was very interesting for us in this quarter as you know those are risk management strategies that invest in effectively the sub sectors of the borrowing universe and then can pivot to cash based upon relative strength and whether the market is in a higher or lower risk state. And the third quarter as challenging as it was for all of us, was actually a great quarter to sort of test those types of strategies, and the larger funds, the equity trend fund and the sector fund had very strong performance over that quarter, both in the top decile I think one was probably 8 and one was in the top 1% and that’s because they did move into cash for a period of time. So it’s very good to have an opportunity to actually demonstrate the value proposition of those types of products. Now they won’t do as well obviously when the market goes up and up and up. But it was great to have an opportunity right after the introduction of the Dorsey Wright inputs and the rule changes that we made that we had a volatile quarter and the funds did what they were expected to have done. So that was very positive outcome. But absolutely the financial advisors, those who previously like the old strategy, getting comfortable with the new strategy, and again we still think that new financial advisors who maybe previously never used the old strategy would find a place for this in their finance portfolios.

[Michael Kim:]

And then maybe just one for Mike, just at high level, curious to get our take on the outlook for margin looking out to next year just assuming more normalized flow in market assumptions. And then sort of related to that, does the 50% to 60% incremental margin range still hold sort of at these AUM levels?

[Mike Angerthal:]

Yes, it's a good question and certainly we've talked about the incremental margins at 50% to 60% I think that’s still a good target to think about. And when we’re looking ahead and the assumption is based on sort of current asset levels and current revenue levels certainly the third quarter was somewhat tumultuous environment, but we look at the three key elements when we do the modeling and it’s on the investment management fees and provide some insight with respect to the fee rate to think about and the open-end fund fee rate. So when we just sort of get into 2016 and that gets into a more normalized environment when this variable incentive fees sort of runs off early in 2016 I think 52 to 53 basis points is probably a good way to think about your modeling. And then that sort of drives the employment expense row as we talked about there is a significant degree of variability in employment expenses and as profits change and sales change we should expect to see that on the employment row and I would think about that at about this quarter it was 47% as the fee rate gets normalized you are at about a 45% level of your revenues, I think that’s a good way to think about it. And then other operating expenses we've talked about that in an absolute dollar range, and we've been between 11 million and 12 million consistently over period of time I think in any given quarter we would vary within that range but I think that’s a good way to think about modeling going forward. And again that’s all else being equal on the sort of current asset levels.

[Operator:]

Thank you. And our next question comes from the line of Ryan Sullivan with Credit Suisse. Your line is open.

[Ryan Sullivan:]

I just wanted to take big picture here on the ETF business, I mean I know the Newfleet product seems to be doing really well there, is there anything else near-term and maybe I missed this in the prepared remarks but, is there anything near-term that you would also consider using that as a distribution tool for?

[Mike Angerthal:]

ETF's we completed our investment in majority ownership from Newfleet Virtus ETF Solutions because we fundamentally think that, that is a critical opportunity and product set for us to employ and financial advisers I think you see some reporting where in many firms the first times sales in ETFs were sort of greater than mutual funds. And in the ETF space I think as we said before we’re not focused on the fewer data lower cost type of product we think they are so very differentiated either smart data type products or as you have seen the Newfleet a true actively managed ETF. So we want to make sure that we have that offering available to financial advisers to find the benefits of ETF versus an open-end fund we want to make sure we have that available to them. So we made that investments because they are an important part of our strategy we've a great team at Virtus ETF Solutions, they have introduced that product in addition to their existing products, and again we don't have any specific in terms of the next products but our goal there has been to build out our capabilities which we've in a little bit of that in our employment expense but we've a very robust plan in terms of the product introductions that we intend to execute over the next few quarters.

[Ryan Sullivan:]

And are those going to be mostly fixed income type products or is there consideration to introduce an active equity product into that as well?

[Mike Angerthal:]

Well the issue with the active is the transparency of ETFs because there is not yet a solution in terms of how to not be too transparent and own equity manager but have more sensitivities about being front run on their strategies. So when we actively manage [Technical Difficulty] fixed incomes will probably the more likely of those introductions. And so there is a solution on the transparency side of the equation for equity managers.

[Operator:]

Our next question is from Michael Carrier with Bank of America/Merrill Lynch. Your line is open.

[Michael Carrier:]

I guess a question on the kind of the growth outlook. And I think on one hand the third quarter was pretty volatile kind of across the board obviously not a good proxy but wanted to get a sense of where the assets has been in the form out sector fund remaining balance. And then when you look some of the momentum you're seeing kind of outside of that product in the year and for the quarter. Just wanted to get sense of you mentioned the range for your seed capital and it seems like you're in that range. But on the flip side it seems like there is still some opportunities doing work on creating some new strategies. So just wanted to get a sense on can the seed portfolio like turn meaning are some of those products getting to like a material standpoint where you can continue to innovate create and new products generating further future growth.

[Mike Angerthal:]

Yes I would break the growth opportunities the purpose of answering your question is two pieces, one being mutual funds and one being outside of mutual funds, and I will start with the latter. We have been -- the previous question in terms of the ETFs and somewhat what you’ve seen is speaking about in terms of the institutional and Mike’s color around the CLO. Our mutual fund business has clearly been -- was the strongest part of our business and where a lot of our legacy was and the expansion and the growth in the non-mutual fund areas have been more recent investments. We are very pleased that institutional albeit still being a small part of our business has now consistently generated some positive flows for several quarters at this point. I am very happy with the start on the ETF business. And as I indicated in response to the earlier question, that really is a very important part of our strategy going forward and we think we have great opportunities there. And then items like CLOs which gives us an opportunity to leverage the very strong management capabilities at our Newfleet affiliate and couple that with the fact that we have a balance sheet that allows us to make the types of investments that are really required to launch those types of structures. And again those as opposed to open end funds have sort of a finite life where you sort of have a stable book of assets and we think that’s a nice balance. So the more volatile open end fund business we have to deal with the daily investments and redemptions and obviously the cyclical periods. So for that, growing the non-mutual fund part of the business continues to be a very important area of focus. You have seen a lot of our activities and our investments on that side. But flipping back to the mutual funds which is the largest part of our business and where we’ve continued to be very prolific in terms of seeking to deploy differentiate strategies and capabilities and we think there’s lot of opportunities for us there. And as I’ve said on previous calls and I just referred to, I think once someone asked me what’s the market that’s actually worse for our products that is actually markets that literally go up and up and up and up and leave investors feeling sort of frothy and taking into in only high alpha, so this third quarter was actually good opportunity we think to remind retail investors that there is risk in the markets and that you should have a balance of products including those that are a little more quality oriented or risk managed, and I already made the references to the great strong performance that we have. So I think that gives us some good opportunity. In terms of the newer funds and how we’re using the fee. As we said when we first increased the seed programs to where we were, we have high expectations of the return on that seed program. It’s not just the return of the investments which we think should be compelling in and off themselves, but we have been successful with some of our fund launches, they all won’t be successful, that’s clear. But we feel good about a lot of the things that we’ve done that we think are differentiated. It just sometimes takes a long time for things to become available. I mean our most recent offering which is the Virtus multi-strategy target return fund that’s sub advised by Aviva and that’s the one we put the 50 million in this quarter. It’s a great strategy. We think it’s going to be very compelling because of the incredible breadth of capabilities and the legacy of the manager and the firms that’s doing it has been very positively received. But again as I’ve explained before, it does take the firms a period of time to turn on some of these types of funds. And then lastly in terms of the equity trend funds and the related suite of those, again having a really strong third quarter in a period where they should have had a strong quarter, we believe is a very good statement for us to use in terms of attracting those investors that like that type of strategy, particularly those that previously liked the older version. And at this point, they are down to 3.3 billion or 7% of our AUM. So at this point right now they are not a large part of our business. We do hope they attract new investors going forward.

[Michael Carrier:]

And then just a quick follow-up just on the buyback, given the authorization and then given the pace that we’ve seen this quarter, just wanted to get a sense, you obviously still have a decent amount of cash on the balance sheet. So just what you like to maintain or keep on the balance sheet versus how much flexibility do you have to maybe continue at this pace or take advantage given where the valuation is?

[George Aylward:]

Sure, but again I will start with as we said in terms of the increasing and the Board authorizing the increase of 1.5 million shares to the program as we said, we do think that, that is important to give us the flexibility to be more opportunistic than we had previously been. And that’s sort of just alludes the fact that generally what we’ve said, historically when we first launched the share repurchase program, where it was primarily used to offset a dilution created by issuing of equity but obviously above and beyond that there’s opportunities given where our stock is trading for us to return capital to shareholders through repurchases. And as Mike alluded to and I alluded to as well, this last quarter was the highest level we have previously done. So we increased it by 1.5 million. You may recall the last increase we made was a year ago and that was 0.5 million of shares. And we do think having that flexibility is a great thing for us to have as we balance those things. But we do balance investment and growth with the repurchases of the shares, so we continue to find things like investing in the multi-strategy sort of return fund and CLO as important uses of our capital but as you alluded to we do have $51 per share of cash in investments on our balance sheet so we do have the ability to also focus on the return of capital side and again that is important parcel reason we increased those shares outstanding. In terms of how we books a capital just few of the metrics that might pointed out on this call and we pointed out previously, we look at working capital as a percentage of annual spend, we pointed out to a little lower than the range that we normally have spoken about but because the seed capital higher than range we think when you put those things together that those are reasonable levels. But we still think the seed capital level that Mike indicated of 200 and 250 is the reasonable ongoing pipeline seed capital level that we had originally targeted and that working capital a little higher than it currently is, is a good level. And we continue to generate cash as you know on a ongoing basis and this quarter we took 137% or 136% of that and returned to shareholders. So we worked on protecting the business in terms of the working capital, investing in the business in terms of 250 million of seed as you know we've no debt and we do think that there is opportunities on the share repurchase side above and beyond offsetting dilution of equity plans.

[Operator:]

Our next question is from Surinder Thind of Jefferies. Your line is open.

[Surinder Thind:]

Let’s just start with a point of [clarification regarding the variable incentive fee. In terms of like when you talk about that you don't expect that to be a non-recurring expense or element in terms of 2016 is that that the funds will fund no longer as an incentive variable component or just that it's a getting back to kind of normalized performance level?

[George Aylward:]

Well we’re giving the indication that we don't expect that it will continue as we get into the beginning of 2016 and you get and it is the variable fee and it's not something obviously that we would want to continue in terms of having such a negative impact. So our expectation is it won't continue in the first quarter.

[Surinder Thind:]

But the fund is still subject to having the variable fee on an ongoing basis?

[George Aylward:]

Yes it is, and again that is based upon the calculations of average assets, and performance and all of that. But we would not want to continue to have that situation so we've indicated we do not expect to continue in to the first quarter.

[Surinder Thind:]

And then in terms of any update on the JV moving to the quarter and kind of may be penetration would be on any platforms with the three liquid oil products?

[George Aylward:]

No on the liquid oil product in terms of the three products that we have for the quarter and again in the third quarter when you have the volatility that you do alternative products come back in to attention I think I had mentioned on previous calls and earlier year in the year as the market was seemingly just going up and up and up a lot of investors had less interest in those risk managed and those alternative strategies but obviously there has been a few in the industry that are being able to gather significant flows based upon how they are doing. In terms of our funds we experienced that we’re having for those funds during those periods of which investors were a little less interested in those alternative strategies the firms that we do business with were also not pushing them as much. So there hasn't been a change in terms of the availability of that fund. And so the availability is still a little bit on the limited side. I think that’s really more of a function of where the firms are trying to focus their clients and their product offerings at this point.

[Surinder Thind:]

And then maybe one quick question one of the things that you mentioned there is some just on headcount over within the ETF segment, how should we think about general headcount from like going forward as we look into 2016 and beyond?

[George Aylward:]

Sure, in terms of our overall expense structure we've a very variable expense structure obviously a large part of our employment expense and even a lot of our operating expenses it's essential we can have the variable, we like that because it lets us go down you have some self-correcting. Clearly with the market declines and the impact of the order it makes everyone a little more focused and conscious on any kind of expenditure in terms of headcount what we've indicated in terms of the costs on the cost side that it really has been focused on those of our affiliates that are growing and we want to keep up with the resources for their growth ETF Virtus ETF Solutions being one of those, other than that we are being very crude in terms of any kind expenditures.

[Operator:]

Our next question is from Steven Schwartz of Raymond James & Associates. Your line is open.

[Steven Schwartz:]

I want to revisit the variable incentive fee again if we could. Looking at Page 10 of your presentation we see a net fee rate 52.7 to 51.5 through Q3 ’14 and Q1 ’15 and then it goes down in Q2 ’15. Was there -- did you have to eat some of the variable incentive fee in the second quarter?

[George Aylward:]

Yes…

[Steven Schwartz:]

It wasn’t mentioned, I am just wondering if looking back on it now.

[Mike Angerthal:]

Yes, Steve this is Mike Angerthal. If you recall in the second quarter we had multiple moving parts in the fee rate discussion. It was during that quarter where we changed the former sub advisor on the trend funds and shifted to a new model provider. So that was partial quarter impact in the prior quarter fee rate and we tried to normalize that in some of the fee rate discussion that we had. So I think the best way to think about the fee rate is as we’ve described it this quarter with the impact of the variable incentive fee this quarter’s fee rate of 47 basis points is how we recorded it and then adjusting for that is 53. And I think I alluded earlier that when I think the open end fund fee rate into 2016 52 to 53 is probably the best way to think about it for modeling.

[Steven Schwartz:]

Okay. And then one more for me, George I didn’t catch this totally. Were you indicating that you’ve reached some type of agreement with the SEC at least some type of initial agreement with the SEC?

[George Aylward:]

Yes, as I said in my prepared remarks, we reached an agreement with principal with the staff of the Securities and Exchange Commission to resolve the matter. But that is subject to the commission itself and really other than that we can’t make other comments or answer any questions.

[Steven Schwartz:]

Okay, I just wanted to make sure I understood that correctly. Thanks guys.

[Operator:]

Thank you. Our next question is from Alexander Blostein of Goldman Sachs. Your line is open.

[Alex Blostein:]

I am sorry to beat the dead horse but I guess just another one of the variable fee component. Is that ultimately measure against a benchmark or when you try to assess whether it is a positive or negative number and maybe for us to kind of think through that math on a go forward basis? I guess maybe some clarity around specifically which funds, specifically which benchmark and just kind of how to think about the mechanics of this component of your revenue stream? I understand that you prefer not to have that next year but I guess unless you change the actual structure of it, it could happen again. So just trying to understand the details there?

[George Aylward:]

Yes, and to be a little more affirmative in what we are saying is we do not expect it to continue into next year and we would not continue to incur that type of charge managing a fund. So that is what we are saying in terms of to sort of think about it in terms of I am not going to get into details of the overall calculations and all that. But it does relate to a circa periods of performance and the calculation relates to historical assets. And again I think we’ve been clear in terms of our expectation that you should expect it to continue into the fourth quarter and that we don’t expect it to continue much past that.

[Alex Blostein:]

And then just a couple on modeling nuances, when we look at I guess distribution underwriting fees and then I guess to some extent the offsetting distribution administration expenses, that ratio of expenses to revenues has been grinding higher a little bit and I guess the fee rate on the distribution underwriting fees has been coming down over the last couple of quarters. I guess what’s just driving that and where do you guys ultimately expect that to shake out? Thanks.

[George Aylward:]

Yes, in that row, as we talked about includes the fees, the distribution and administrative expenses and other asset based expenses includes the fee that we are paying to third-party technical service providers. So as those assets have sort of declined due to the elevated redemptions that we’ve talked about, that rate has drifted I think between 25 and 27 basis points and so I think that’s a good level to think about going forward.

[Alex Blostein:]

It’s a kind of stable from here?

[George Aylward:]

Yes, and you continue to think about it with respect to open end fund AUM.

[Operator:]

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

[George Aylward:]

Yes, I just want to thank everyone for joining us today and certainly encourage you to give us a call if you have any further questions. Thank you.

[Operator:]

That concludes today’s conference. Thank you for participating. You may now disconnect.