Waddell & Reed Financial Inc
Q2 2015 Earnings Call Transcript

Published: 28 Jul 2015

[Operator:]

Good morning and welcome to the Waddell & Reed Earnings for the Second Quarter 2015 Conference Call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Hank Herrmann, Chairman and Chief Executive Officer. Please go ahead.

[Henry John Herrmann:]

Thank you. Good morning. With me today are Mike Avery, President; Tom Butch, our Chief Marketing Officer; Brent Bloss, our Chief Financial Officer; Phil Sanders, our Chief Investment Officer; and Nicole Russell, our VP of Investor Relations. Nicole, would you read the forward-looking statement, please?

[Nicole McIntosh-Russell:]

During this call, some of our comments and responses will include forward-looking statements. While we believe these statements to be reasonable based on information that is currently available to us, actual results could materially differ from those expressed or implied due to a number of factors, including, but not limited to, those we reference in our public filing with the Securities and Exchange Commission. We assume no duty to update any forward-looking statements. Materials relevant to today's call, including a copy of today's press release as well as supplemental schedules, have been posted on our website at waddell.com under the Corporate tab.

[Henry John Herrmann:]

Thank you, Nicole. Good morning, again. Today we reported our second quarter results. Net income was $67.4 million and earnings per diluted share were $0.80, flat compared to the first quarter and down around 20% from the same quarter in 2014. Last year's second quarter included sizable investment gains that added $5 million to investment and other income and lowered our effective tax rate to 34.6% compared to 37.7% during the current period. These gains and related tax benefits added $0.08 per share to last year's second quarter. Operating income was $111 million during the quarter, rising 6% sequentially and providing a 110 basis point improvement to our operating margin at 28.2%. One additional day and a mix shift toward higher fee products led to a 2% increase in revenues. Our expenses rose less than 1%, mostly on higher IT costs. Compared to the second quarter of (sic) 2014, operating income declined 10%, most of which flows from lower assets under management and slightly higher compensation costs. Assets under management were $121 (sic) billion at the end of the quarter, a drop of 2% compared to the previous quarter. The decline in assets was due about equally to market depreciation and net outflows. Net outflows were $1.1 billion during the quarter, an improvement from recent levels. In July, daily sales declined slightly from June's run rate. Net outflows will finish the month higher than June's, primarily as a result of $1 billion redemptions in our Institutional channel, offset in part by $425 million yet to be funded, which were won during the second quarter. Elsewhere, net outflows rose moderately. Compared with June, Wholesale channel outflows in the Asset Strategy Fund are likely to increase modestly in July, while Wholesale channel outflows in the High Income Fund will likely moderate over the same period. As I noted last quarter, while we are moving in the right direction, we still have ground to cover before we return to a positive flow territory. Our Wholesale channel net outflows were nearly half the level of the previous quarter. Our Advisory channel also improved in the net outflows. Headcount in the Advisors channel increased 2% during the quarter, while productivity rose 3% to $68,000 per advisor. Our Institutional channel saw the funding of two net new mandates and appears to have a healthy pipeline in multiple mandates. A final note in looking back at the second quarter is that the redemption rate in the Wholesale channel at 31% dropped about 12 percentage points from the prior quarter, and it was at the lowest quarterly rate since the second quarter last year. The Advisors redemption rate remained steadily at about 9%. Institutional, whose rate trends – excuse me, whose rate tends to fluctuate more than the other two channels, was at 23%, down more than 10% from the prior quarter. The redemption rate experienced across our channels was encouraging. Keeping an eye toward the future, we announced early this month our plans to add our Ivy Funds in the next shift to its family of exchange traded managed funds. Assuming regulatory approval, we plan on introducing the Ivy Asset Strategy, Ivy International Core Equity, and Ivy Science and Tech Funds, utilizing Eaton Vance's NextShares product structure, by the third quarter of next year, and eventually all the Ivy product line over the following 18 months. We believe it is important to continue evolving our product offerings with changes in investment preferences. Accordingly, on October 1, we will be launching two new mutual funds that offer a unique income solution for investors. Investor demand for a high income remains high, as is the demand for alternative investments which provide income and diversification benefits. The Ivy Apollo Strategic Income Fund and the Ivy Apollo Multi-Asset Income Funds will be managed in partnership with Apollo, a respected private equity manager whose focused investment process is similar to our own. Operator, at this time I would like to open the call for questions.

[Operator:]

Thank you. Our first question comes from Dan Fannon at Jefferies.

[Daniel T. Fannon:]

Thanks. Good morning. I guess, Hank, a little bit of clarity on kind of what you said for July, both – I think, institutionally, I think, you said there was a $1 billion redemption? If you could just kind of walk through those numbers one more time, please?

[Henry John Herrmann:]

Redemption was about $1 billion. And we've won several mandates in the second quarter that did not get funded in the third quarter, but we expect funding shortly; and that amount is approximately $425 million. So net-net outflows, putting the two together, about $500 million.

[Daniel T. Fannon:]

Great. And can you talk about the products that you're having success in on the sales side institutionally; and then, also, a little color on that sizable redemption?

[Thomas W. Butch:]

Hi, this is Tom. The sizable redemption was really just a function of a client that moved from active core to a smart beta strategy. So it wasn't performance-related. It was just restructuring the investment. Again, the span of things that are gaining traction tethers around Core Equity, Large Cap Growth, International Core and Mid Cap Growth.

[Daniel T. Fannon:]

Great. And then, now that we've had a little bit more time post the DOL announcements, I guess, any more input from you guys in terms of how you're thinking about this and the impact to your business? And does this – does the DOL potential rules have anything to do – or kind of push you more towards the NextShares kind of announcement you made, or were those decisions made separately?

[Thomas W. Butch:]

The decisions were unrelated to one another. NextShares, really, as Hank indicated in the opening remarks, is just readying ourselves for the potentiality of that becoming a product structure that's widely accepted in the marketplace. Relative to the DOL, I don't think our view has changed since the last earnings call, when we indicated that we had looked very closely at the document and understood what we thought to be its implications, and would be ready to react to them were they to be brought into fruition. We really kind of align with the FSI position, which is representative of that of the independent broker-dealers. And they – and as you know, a record number, I understand, of firms – of organizations have opined, and we're really just waiting at this point to see how it goes from here.

[Daniel T. Fannon:]

Great. Thank you.

[Operator:]

Our next question is from Craig Siegenthaler at Credit Suisse. Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker) Thanks. Good morning, everyone.

[Henry John Herrmann:]

Good morning. Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker) I wanted to see if you could provide a little more clarity around the DOL rule, to the last question. And listen, I know it's a work in progress, but if it becomes a rule, do you have any thoughts on if you'd convert your commission-based accounts to fee-based? And if you do, what do you think is the business impact from that type of change?

[Thomas W. Butch:]

I'm not sure that there's an implication in the rule, as we interpret it, that that conversion would need to take place. I believe that the wrapped proposal recognized a place for commission-based business. As you know, our business has, on its own, been migrating pretty steadily to fee-based business and the percent of fee-based business relative to revenues and sales has continued to increase steadily. It's about two-thirds of sales, now. So, we're accommodative of both structures. A fee-based environment is one that we're very comfortable with and has been a growing part of our and the broader broker-dealer industry's business. But again, I don't think our interpretation is that the DOL proposal statutorily forbids commission-based business. Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker) And, Tom, just as my follow-up, I'm wondering if you can help us out with what's the rough number of nonproprietary funds or managers that you offer today on the Advisors platform? How does that compare to the number of funds that are Waddell & Reed or Ivy branded?

[Thomas W. Butch:]

I believe we have selling agreements with about 100 fund families, and that would incorporate any name of substance in the industry. Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker) Great. Thanks for taking my questions, Tom.

[Operator:]

Our next question is from Michael Kim at Sandler O'Neill.

[Michael S. Kim:]

Hey, guys, good morning. First, I think you mentioned plans to ultimately launch NextShares versions of all of the Ivy Funds over time. So just wondering how you're thinking about incremental growth prospects for the ETMF vehicles versus the mutual fund versions, if you will.

[Thomas W. Butch:]

Michael, as I answered earlier, to a certain extent, we just want to be there if that structure proves to be one which is widely accepted by investors. And if it is going to be that at some point, it only makes sense that we incorporate the entirety of our product line there, because if you have an advisor who migrates to an ETMF-based business model, he or she needs to avail themselves of all of our products. If we don't do them all, we might miss an opportunity. But at this point, to try to project what happens is really a fool's errand, I think, because we just don't know when the adoption by the distribution community is going to take place, and the pace of that adoption, and whether that adoption over time supplants, say, the iShares business in the mutual fund world. Those are all sort of hypotheses. I think the fundamental point is we want to be there – if the structure takes off, we want to be there right when it does. And we want to – if advisor – if it's important to advisors to have that structure, it's important to us to have that structure.

[Michael S. Kim:]

Got it. Okay, and then maybe just a question or two for Brent. Just given the recent step-up in market volatility, any broad sort of shift in thinking as it relates to spending or margins? And then, more specifically, in terms of comp, how should we be thinking about that line for the back half of the year, particularly in light of the little lower equity comp costs this quarter versus, I think, higher bonus accruals?

[Brent K. Bloss:]

Yeah, so, Michael, broadly – I mean, we're still focused on managing our spending, and nothing has really changed from, really, the outlook that we've given in the past few quarters. We still look to manage our expenses through the end of the year. We did have a ramp-up this quarter in IT-related costs related to our foundation and renovation efforts, which I think I mentioned on the first quarter call that we were off to a slower start in the first quarter; but we look to those to stay about the same level over the next couple of quarters. So just a little guidance around comp and G&A

[Michael S. Kim:]

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

[Operator:]

Our next question is from Glenn Schorr at Evercore ISI.

[Glenn Paul Schorr:]

Thanks very much. Wondering if you could tell us anything about the terms of the funds with the partnership with Apollo, and how you think about any potential cannibalization of, say, the High Income Fund strategy or Ivy Global Bond?

[Thomas W. Butch:]

I'm not sure what you mean by the terms. We are using 20%.

[Glenn Paul Schorr:]

The fee structure.

[Thomas W. Butch:]

Pardon me?

[Glenn Paul Schorr:]

Fee structure, who gets what, and who pays for the marketing, and how long is the partnership in the agreement?

[Thomas W. Butch:]

Fundamentally, we pay them a fee in keeping with their role as sub-advisor, as we will for LaSalle, which also will manage a sleeve of one of the two funds. Remember, they have a 20% target allocation. And so, the fee is conscribed somewhat – the gross fee is conscribed somewhat by that. Relative to cannibalization, we expect none. High Income is a pure high income product. Each of these two products is a multi-asset class product. As you know, Glenn, buying behavior in the fixed income world has really embraced non-traditional bond structures and multi-asset income structures. And that's really our response to this. So what we're doing is responding to both the investor trend toward these kinds of products and engaging what we think is a world-class name to dip our toe into an alternative strategy while maintaining portfolio management control here. So, I think it should be a win partnership for both entities.

[Glenn Paul Schorr:]

Okay, appreciate that. And I just want to follow-up on Asset Strategy. Hopefully, it's a beginning or a continuation of a moderating trend on the outflow side. I'm not sure if that's just running its course, performance settling down, or are there specific efforts being made in any of the channels to help that effort?

[Thomas W. Butch:]

I think it's kind of all of the above. We look at the 30-day rolling average of outflows, and it has really settled into its lowest range in some time. And so, I think all three of the things you identified are part of the equation.

[Glenn Paul Schorr:]

Okay. Appreciate it. Thanks very much.

[Operator:]

Next question is from Bill Katz at Citigroup.

[William Raymond Katz:]

Okay. Thanks very much; got a couple of them this morning. First topic is on ETMFs, sort of three questions, if I could get them all out to you. Number one, I just want to clarify

[Thomas W. Butch:]

Go ahead.

[William Raymond Katz:]

All right. The second one is, one of the push-backs I think Eaton Vance has been struggling with is that they haven't had a broker-dealer, really, to sign up, yet, and they're going to probably have to spend their own money to pay for that brokerage relationship. Would you be willing to use them if they pay your expenses for that on the broker-dealer side? And then, with all these funds, how much seed cap do you think you're going to need to put to work to start funding these portfolios, if they take off?

[Thomas W. Butch:]

I'll answer the first two and, relative to seed cap, I'll let Brent talk to that one. But one thing that's important to understand is that our advisors use both the Waddell & Reed Advisors and the Ivy Funds. And so, structuring – using the ETMF structure for the Ivy Funds really enables our advisors to use them in the Advisors channel at such time as we might decide to use them there. We've not made that decision. And there's some operational complexity, as you point out, to that. And so, we don't really have a time horizon for their use or potential use in the Advisors channel. But again, our advisors use Ivy and Advisors Funds. They are, by and large, parallel portfolios with each other. Your question – the second one had to do with the broker-dealer sign-up. What was the specific dimension of that, Bill? I'm sorry.

[William Raymond Katz:]

Sure. No, it's – I think Eaton – and I don't mean to bring Eaton Vance into this discussion, but since it's their product, they had mentioned that they're having a tough time getting any broker-dealers to put their technology in place to allow for the order execution to go on. So you have a unique position of having both an asset management business and a broker-dealer. So I'm curious, now that you're willing to adopt the ETMF structure, would your brokerage business use – allow for the ETMFs to flow through? So, in other words, would you be willing to have...?

[Thomas W. Butch:]

So, let me respond to both parts of that. Eaton Vance has expressed confidence to us that the broker-dealer community adoption will take place and that their conversations are progressing. It seems to me that the industry is sort of taking a wait-and-see attitude, to a certain extent, and waiting for one or two major players to step forward. Relative to our own usage, I think I might have answered that in your first question. Operationally, there's some complexity. We're still a year out from having the product, and so that's something that's just under consideration right now.

[William Raymond Katz:]

Got you. All right. Sorry to badger you with all that. And then, just stepping back, Hank, maybe for you or, again, Tom, for yourself, it's notable that your redemptions have slowed a little bit. But if you look at your gross sales, they're down both sequentially and quarter on quarter. And I guess your guidance into July would suggest some softness still. Any more proactive stance to try and generate greater gross sales for the franchise, to try and get the net sales up a little bit more strongly? I'm thinking maybe marketing spend or communication with the distributors to try and jumpstart volumes elsewhere?

[Thomas W. Butch:]

I would say that that's always in play, Bill. We have a very targeted effort right now relative to our Ivy International Core Equity Fund that is bearing fruit and – that is a targeted effort. We have, as you know, announced a couple new products that we'll be putting a lot of energy behind. And if you look sort of at the stuff that is selling in the marketplace, if you look at the month of June, you go to maybe the top 12 Morningstar categories, we're represented very healthily in a number of them. And so, I would say that, yes, gross flows are soft right now and we are working very hard to change that circumstance.

[William Raymond Katz:]

Okay. All right. Thanks for your patience in answering my questions.

[Operator:]

Our next question is from Robert Lee at KBW.

[Robert Andrew Lee:]

Thanks. Good morning, guys. Can you maybe talk a little bit about – in the retail channel and the Wholesale channel? I mean, you mentioned institutionally where you are seeing some demand and RFP activity and whatnot. But kind of curious, in the Wholesale channel, you had mentioned – outside of Asset Strategy and High Yield outflows, where are the strategies you're seeing the most momentum? And how do you feel about – if you assume, let's just say, Asset Strategy, High Yield kind of stay around current levels – do you think there's enough potential in those asset categories to eventually kind of overcome the flow drag that you're seeing – continuing to see from those two strategies?

[Thomas W. Butch:]

That's a great question. Let me get at it the way you asked it. Where we're seeing the most traction, as I mentioned, is in our International Core Equity product, which has very good performance and is, among all the categories that Morningstar tracks across standard periods, the best-selling category. So, we should have a lot of horizon, still, with that product. Our Science and Technology Fund had a very good quarter in terms of net flows; Balanced; Emerging Markets Equity, Energy; and then, lesser, Large Cap Growth and Municipal High Income. We have, as I said in my prior answer, a lot of product in categories that are selling and that still utilize a substantial percentage of active management. Relative to the capacity of everything else to take us to positive flows, if the other two products remain sort of steady where they are, we would have to have lift in a couple other products, I think, to get us there. And that certainly is a possibility, as we've seen International Core Equity having gross flows along the lines of Asset Strategy in the quarter. If we can get a couple other funds to gross flows of that magnitude, I think that's certainly possible. It has to be in a category, again, where we have not only good performance, but active is really winning there.

[Robert Andrew Lee:]

All right. Great. And maybe one...

[Thomas W. Butch:]

We sort of looked at that mathematically and, yes, we will get there, even at current levels, but we certainly want to hasten that by, hopefully, adding one or two other strategies to International Core Equity as ones that are carrying the wagon a little bit more.

[Robert Andrew Lee:]

All right. Great. And maybe one other question on the intermittent Wholesale distribution. I think in the past, Tom, you had kind of talked about just giving kind of the continued cost of accessing distribution, just generally. It always seems to, I guess, go up, but the pressure is always there. I think you had talked about, in the past, maybe rethinking or taking a closer look at different distributors to see if they're kind of – you're getting what you pay for, more or less. And I mean, do you envision that there could actually – that that would actually lead to some, I don't know, for lack of a better way of putting it – deemphasizing some distributors versus others? Maybe that's happened already. Maybe update us a little bit on your thinking there and how that may flow through to changes in the Wholesale channel.

[Thomas W. Butch:]

Robert, it hasn't led to massive changes. What I would tell you is we have a group that meets every week and looks at the totality of that distribution spend. And we have thresholds that we cannot breach. And so, if we come close to breaching those thresholds, we do have to make the hard decisions relative to something coming out if something else is coming in. That has led to trimming around the margin, I would say, at this point. I don't think we've made any changes that are hugely substantive, but we're very alert to it and really hold ourselves accountable to not breaching a spend threshold as a percentage of revenues attaching to the business. So might there come a day when we make a decision about a very large broker-dealer? I guess that's possible, but that's not happened today.

[Robert Andrew Lee:]

Great. Thanks for taking my questions.

[Operator:]

Our next question comes from Chris Shutler at William Blair.

[Christopher C. Shutler:]

Hey, guys, good morning. First, on the July commentary, could you just repeat the commentary specifically related to Asset Strategy? I think you said that Wholesale is getting a little bit better, but I don't know if there's anything beyond that.

[Henry John Herrmann:]

Not really.

[Christopher C. Shutler:]

That was it?

[Henry John Herrmann:]

I'm not quite sure which comment you're addressing. Try me again.

[Christopher C. Shutler:]

Sure. So, I think that you said in the Wholesale channel that Asset Strategy was seeing moderating outflows in July. I just wanted to make sure that was the extent of the July commentary specific to Asset Strategy.

[Henry John Herrmann:]

We said moderating broadly. I think the reality is that outflows in Asset Strategy in July are somewhat higher than was the case in June.

[Christopher C. Shutler:]

Okay. Got you. And then, Tom, you just mentioned wanting to add one or two strategies beyond the International Core Equity, which has been really carrying the load from the inflows side. What are the most likely candidates, in your view?

[Thomas W. Butch:]

Well, the Science and Technology Fund; the technology category is very healthy right now. Our Balanced Fund is in a category that should be fertile. Emerging Markets Equity has stepped back just a touch, but has been working so far this year. And so, it really depends on where the opportunities go from a sales perspective. European equities have sold very well this year. We have not really emphasized that product and have very good performance in that. And even something like intermediate-term Bond – our high-quality intermediate-term Bond Fund is something which, in the past, we haven't emphasized a lot. And it, too, should be able to gather assets. We have newer funds in categories like Mid Cap Blend, which was a top-five category in June. So if I were to say one or two of them, I would say Science and Technology, Emerging Markets Equity, and probably Balanced.

[Christopher C. Shutler:]

All right. Great. And then, lastly, I know that you guys have plans to upgrade your brokerage technology platform on the Advisors side of the business in the next couple of years. Maybe just talk about that move a little bit more, what specifically you are implementing and what the goals are? Thanks.

[Thomas W. Butch:]

Well, we've grown up historically here with a transfer agency-centric approach to operations, and that worked very well for the direct market and mutual fund business on a commission basis for a real long time. Changes in regulations relative to suitability have increased dramatically the amount of paper that attaches to that and has made us maybe a little less operationally efficient. Also, our move to Advisory, which, as I indicated, is a large percent of our sales and assets, has also challenged that sort of transfer agency-centric model. So our idea is to try to eliminate the paper-based environment in which our advisors have worked and go to more industry-standard electronic processing platform. And that will engage everything from the Advisory business, to CRM, to just the core operational trading part of the business with advisors, over time we hope, entering business from their desktop and rendering us much less paper-intensive. At its simplest, that is it.

[Christopher C. Shutler:]

All right. Thank you.

[Operator:]

The next question is from Michael Carrier, Bank of America Merrill Lynch.

[Michael R. Carrier:]

Thanks guys. Hey, Brent, just on the underwriting distribution, it looks like the margin improved in the quarter. I know there's a lot of moving parts in any given quarter, but just wanted to understand if there is anything to that or if anything is shifting around; and then, on the outlook, what to expect?

[Brent K. Bloss:]

Like you said, there's always a lot of moving parts in there. There's nothing that really sticks out in there. We would expect, though, going forward somewhere in the 14% to 17% negative percentage there on the distribution margin.

[Michael R. Carrier:]

Okay. Thanks. And then, Tom, you mentioned just in the near-term the Institutional – some of the gives and takes. I just wanted to get a sense, when you look maybe over the next couple quarters, what you're seeing in terms of activity in that channel, given that that was kind of the beat this quarter on the flows side; just where you're seeing the demand, and maybe what that level is like in terms of the RFP activity versus a year ago, or some kind of connotation around it.

[Thomas W. Butch:]

I guess I would say that in the second quarter we had a very good number of new opportunities which, in aggregate, represented significant potential. Those really went across, as I said before, our International Core, Large Cap Growth, and Core Equity strategies. Most were consultant-driven and, if we were to look at that, it was fairly consistent with what we saw in the first quarter in terms of opportunity. And so, again, I'd say that, looking forward, those will be the strategies that will drive the Institutional business. And the pipeline looks reasonably good.

[Michael R. Carrier:]

Okay. Thanks a lot.

[Operator:]

Our next question is from Eric Berg at RBC Capital.

[Eric N. Berg:]

Thanks much and good morning. Just one question regarding the high-yield area – high-income area. I would have thought that given the strengthening of the economy and what that portends for credit quality – and given, too, that all else the same, the high coupon on a – you know, the high current cash flow on a high-income bond makes that bond less interest rate sensitive than another bond in terms of the math of duration. I would have thought that demand for high-yield securities would be increasing, that this category would be in favor. What's your sense of – what am I missing here? What's your sense of why, in fact, it has been out of favor?

[Henry John Herrmann:]

The market doesn't care what you or I think. So I agree with your point, but sentiment broadly around risk is a little difficult to judge. It seems to be broad rather than very specific. And so, when you have influential people who are experts talking about high-yield, like, for instance, the Chairman of the Federal Reserve, some percentage apparently get concerned. So I guess the shorthand version is I've been pointing to high yield as probably the first or second most attractive place to go, currently, if you are looking for income in a debt world. I don't think they are over-owned. I do think that there are some funds that are overleveraged in some weak categories, like energy, for instance. But I think, broadly, we're a long way from having a serious problem with defaults in high-yield credit. But I don't have a better answer than that. Sooner or later value will opt out.

[Thomas W. Butch:]

From a sales perspective, Eric, it's extremely frustrating. As likely is at the core of your question, the category was dead last among Morningstar categories in June, with outflows of $8 billion, more than two times the next worst outflow category. So we agree with your observation.

[Eric N. Berg:]

Thank you. That was helpful. Have a good day.

[Operator:]

Our next question is from Bill Katz at Citigroup.

[William Raymond Katz:]

Just a couple of follow-ups and, again, thanks for taking my questions. I just wanted to come back to NextShares a second. Could you just answer my question as to a seed capital? And implicit to my question is how you think about capital management on a go-forward basis, because if you're going to ramp the number of funds you're talking about, it would seem like it would be a pretty big draw on capital. I just want to better understand the dynamics there.

[Brent K. Bloss:]

Yeah, Bill, this is Brent. We're looking at the seed capital on these products. Again, it will depend on the mandate, we believe. In talking with Eaton Vance and others, we're not sure that we'll have to go to the normal $25 million per mandate to do this. But that's – there's still talks around that, given that it's an exchange-traded product. But it will depend, again, on what the brokers' expectations are for us to get the products on the platform. So at this stage, we're still noodling on that. But we're thinking at this point, at least from our research, that it's probably less than the normal $25 million to get a product started.

[Henry John Herrmann:]

At this juncture – Hank talking; I'm not anticipating that that product is going to affect our capital discipline.

[William Raymond Katz:]

Okay. That's helpful. And then, just one last question in terms of – on the Institutional side, let's come back to that for a second. I know it's the smaller side of the business, but on the $1 billion mandate, what product was it? And as you look at the rest of your portfolio, is there any other risk of similar type of rotation?

[Thomas W. Butch:]

Those risks are really hard to determine, and there's myriad factors that can affect them. It's always hard when it's not performance related. That was the Large Cap Core strategy.

[William Raymond Katz:]

And how big is Large Cap Core at this point in that bucket?

[Thomas W. Butch:]

Stand by.

[William Raymond Katz:]

Thanks.

[Thomas W. Butch:]

We're looking.

[Henry John Herrmann:]

Off the top of my head, $4 billion.

[Thomas W. Butch:]

That'd be my guess.

[William Raymond Katz:]

Okay. That's close enough for this. And then, just last question...

[Henry John Herrmann:]

Bill, bear in mind that the product itself's performance is pretty darn good. So, I understand the underlying question. I just want to say that if you're thinking there's more exposure in that asset as a result of performance, I would discourage you from thinking that. However, I'll stick with Tom's opening remark – predictability in terms of flows in institutional are pretty tough.

[William Raymond Katz:]

Just one last one; I apologize. I was writing quickly.

[Thomas W. Butch:]

Bill, we're getting hand signals that it's $5.4 billion, still.

[William Raymond Katz:]

Okay. That's very helpful. And then, just last one – thanks, I got to ask a lot of questions today. Just going back to the July over June, I apologize; I was taking notes very quickly. Could you just review the bigger take back? I think we spent some time on the Q&A on the Asset Strategy, but, Hank, I thought maybe you gave an overall holistic view of the Wholesale channel. Could you just go over that one more time, if you don't mind – July versus June?

[Henry John Herrmann:]

Hold on a second. Okay. Ask me again, because we're shuffling papers trying – ask me the question, again.

[William Raymond Katz:]

That's okay. I thought in your opening remarks that you had provided – I got the Institutional numbers right, and I apologize to everyone on the phone for asking a second question here on this. But could you just go over the July Wholesale volumes overall dynamics versus June? I thought you had given more than just the Asset Strategy and High Yield, but maybe I'm mistaken. I just wanted to clarify that.

[Thomas W. Butch:]

I think – I'll just – quoting from the opening remarks that he indicated that the net outflows rose more modestly...

[Henry John Herrmann:]

Modestly, I said.

[Thomas W. Butch:]

...in Wholesale and the Advisors channels compared with June. Also, channel outflows in Asset Strategy are likely to increase modestly, and High Income will likely moderate over the same period. If you were to sort of just look at – extrapolate the days to date – the moderate language that Hank used would be accurate.

[William Raymond Katz:]

Okay. That's helpful.

[Henry John Herrmann:]

More shorthand – you know that, generally speaking, we're a little bit softer in July than we were in June, and most of that I would simply attribute to the tape, which has not been very helpful for psychology.

[William Raymond Katz:]

Got you. Okay. Thanks, everybody.

[Operator:]

Next question is from Greggory Warren at Morningstar.

[Greggory Warren:]

Good morning, guys. Thanks for taking my questions. Just following up on the ETMF – the move towards that structure. I know in the past you've been fairly adamant about not wanting to go into ETF's because you felt like you had a pretty good active management structure going. And I think it's probably a good vehicle for that to take it to the next level. I'm just kind of curious. At what point did the decision come into your mind to move to that structure, seeing it more as a delivery vehicle? And then, I have a follow-up on that.

[Thomas W. Butch:]

Well, it certainly wasn't any decision between active and passive. We're active. This is just a new structure to carry active in a different way. And so, it seemed a very logical extension for us.

[Greggory Warren:]

Okay. And then, I guess, as you think about it longer-term, I think Bill Katz touched on this a little bit sort of with the cost involved. But in my conversations with Eaton Vance and my conversations with some other asset managers, over the long run the thought always is what happens down the road when the third-party distributors, the broker-dealers, the advisors, whatnot, feel like they're not being adequately compensated? Who ends up paying for that, and are we basically setting ourselves up longer-term for potentially a reduction in fees for not necessarily mutual funds, but for these ETMF structures in order to compensate the distributors here?

[Thomas W. Butch:]

I think that's, obviously, very hypothetical and probably not worth our speculating on.

[Greggory Warren:]

Okay. Well, thanks for taking the questions, guys.

[Thomas W. Butch:]

Thank you.

[Operator:]

The next question comes from Wayne Archambo at Monarch Partners.

[Wayne Joseph Archambo:]

Good morning. I just wanted to ask a question regarding – on the balance sheet. Just watching your cash balance building over the last few years, it just looks like you're hoarding cash. And just want to get your thoughts as to what the plans are for cash. That cash is earning basically nothing and the buyback seems minimal at best and any thoughts to a special dividend or somehow returning that cash to shareholders?

[Henry John Herrmann:]

Well, we've had a kind of long-standing policy that I'm not anticipating changing. So I would say three parts of that. One, occasionally we have done special dividends. Actually, we've done just one, and that was really driven by tax changes that encouraged us to take that step. The other two are – we at least buy back the number of shares to offset dilution associated with restricted share grants, and from time-to-time we buy more aggressively if we perceive the share price as sufficiently undervalued. And then, thirdly, we have a pretty Steady Eddie program of increasing the dividend, sometimes in line with earnings growth, sometimes a little faster, over the last five or six years, anyway. And I expect that all three of those things will continue to be in our thinking as we go forward. As you know, the investment business generates a pretty high return and, therefore, it's not cap-intensive and, therefore, generates a lot of free cash. From time to time, we try to think about the strategic uses for the cash, but other than that there's not too much to say.

[Wayne Joseph Archambo:]

Finally, just as an observation, you'll be approaching $1 billion in cash and your stock is at the 52-week low list. It just seems very prudent, in my opinion as a shareholder, that you should announce a significant buyback or something more significant.

[Henry John Herrmann:]

Thanks for your observation.

[Wayne Joseph Archambo:]

Thank you.

[Operator:]

Our next question is from Mac Sykes at Gabelli.

[Macrae Sykes:]

Oh, good morning and thank you for letting us ask questions. On the Apollo announcement, can you – should we expect this just to be a one-off in terms of the products, or do you expect some other coordinated efforts with them in the future? And then, secondarily, do you see these products as having some penetration in the Institutional segment after launch? Thanks.

[Thomas W. Butch:]

Our conversations with Apollo have indicated a desire, if possible and prudent, for both parties to consider other things down the road, but for now this will be our focus. We've first got to get these on broker-dealer platforms, and then coordinate our marketing effort. But we have a great relationship, and hopefully other things will avail themselves over time. But again, this is our focus for now. I'm sorry, what was your second question?

[Macrae Sykes:]

Perhaps the potential for the Institutional segment over time for these products?

[Thomas W. Butch:]

Our initial focus is wholly on the retail side.

[Macrae Sykes:]

Thank you.

[Operator:]

Our next question is from Patrick Davitt, Autonomous.

[Patrick Davitt:]

Hi, good morning. Since the last call, it's been announced that the ex-Co-PM of Asset Strategy is launching a strategy that appears to be a direct competitor to Asset Strategy. I was wondering if we could get your thoughts on to what extent you're looking at that as a direct threat to Asset Strategy. And in that vein, is there anything contractually with him that would keep him from going after existing mandates at Waddell?

[Henry John Herrmann:]

Well, I don't know exactly what the plan is, but really can't elaborate in any detail. As to whether or not he could compete against us, is there any agreement that would prevent that? No.

[Patrick Davitt:]

Okay. Thanks.

[Operator:]

Our next question is from Craig Siegenthaler at Credit Suisse. Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker) Thanks, just one follow-up here for Brent. Brent, you already gave your guidance on G&A, and 3Q and 4Q are typically seasonally high. But what we see each year is a big step down in 1Q. Any reason why this should or shouldn't occur again in 1Q 2016 from a modeling standpoint?

[Brent K. Bloss:]

Yeah. I would expect, given the IT effort supposedly coming to an end at the end of 2015, that we could see a potential step-down in the first quarter. Like I said, the first quarter we got off to a slow start with our IT spend and second quarter it picked up, and we expect that to continue through the end of the year. Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker) Got it. Thanks, Brent.

[Operator:]

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

[Henry John Herrmann:]

Thank you very much for your interest, and I look forward to talking to you next quarter. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending. You may now disconnect.