Waddell & Reed Financial Inc
Q3 2008 Earnings Call Transcript

Published: 28 Oct 2008

[Operator:]

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Waddell & Reed Third Quarter Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will open for questions. (Operator instructions.) I would now like to turn the conference over to Hank Herrmann, Chief Executive Officer of Waddell & Reed. Please go ahead, sir.

[Henry J. Herrmann:]

Thank you, Operator. Good morning. With me today are Tom Butch , our Chief Marketing Officer; Mike Strohm, our Chief Operating Officer; Dan Connealy, our Chief Financial Officer; Mike Avery, our Chief Investment Officer, and Nicole McIntosh, Director of Investment Relations. Nicole, would you read the forward-looking statement, please?

[Nicole McIntosh:]

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, included but not limited to those referenced in our public filing with the SEC. We assume no duty to update any forward-looking statement. Materials relevant to today’s call, including a copy of today’s press release as well as supplemental schedules has been posted on our website at waddell.com under the Corporate tab.

[Henry J. Herrmann:]

Thank you, Nicole. Good morning again, everyone. We’re reporting third quarter results this morning, net income of $33.4 million, or $0.40 per diluted share, increased 4% and 3% respectively, compared to the same period last year, while each declined 5% compared to the previous quarter. Our operating margin expanded sequentially to 23.1% from 22.4% in the second quarter. Improvement came primarily from lower sales volume in our Wholesale channel rather than the preferable growth in assets under management. The third quarter in the month of October were probably the most frustrating period in my career. The market’s downturn has been unrelenting and has shown no sign of discrimination in the punishment it has handed out. That being said, 2008 has provided important perspective on and support for the balance and stability of our business model through our retail distribution channels. We have longed believed in the benefits of a business model that combined the rapid asset gathering potential of our Wholesale channel with the proven asset retention strength of our Advisors channel. As the markets froze, it was difficult to imagine an environment less favorable to our Wholesale channel as the collapse of the material and energy space hammered the asset and performance of our leading funds. At the same time, the more stable asset base of the Advisors channel provided important ballast, substantially cushioning the outflow seen in Wholesale and tempering our overall redemption rate. In the Wholesale channel we gathered assets rapidly during the first seven months of the year and remained in meaningful positive net sales for the third quarter. Beginning in mid-August this channel began to experience a combination of lower sales volume and increased redemptions leading to net outflows during the month of September. Net outflows in October continued and are running around $700 million so far for the period. In the Advisors channel net flows remain positive for the quarter, with only the month of August slipping into slightly negative territory. Outflows in October have been relatively modest at about $100 million. The positive inflow experienced in the Institutional channel in the third quarter continued into October. We have worked hard during this period to stay visible with both our advisors and our wholesalers and arm them with as much information, insight and perspective as we possibly could. Despite the difficulties they face every day, we believe they are showing great poise and determination in staying in front of clients. Clients can adapt to about anything except neglect. Currently we are focused on managing the business with an eye towards expense control while not impairing the progress we have achieved over the past few years. We have in place a hard hiring freeze and are reviewing all expenses, both in the present and as we budget for the coming year. Our balance sheet remains strong as we have ended the quarter with cash and investments in excess of $262 million. Showing further financial strength, we renewed our backup unsecured line of credit in early October with commitments from a syndicate of banks for $175 million. We believe our current liquidity, combined with the free cash flow we are generating, positions us well to manage through this downturn. Finally, a word on share buybacks. We bought 1.1 million shares in the quarter, and a little over 350,000 shares in October. This brings our year-to-date purchases to 3.1 million shares, in line with the 2.5 to 3 million shares we estimated at the beginning of this year. Operator, at this time we would like to open the call for questions.

[Operator:]

(Operator instructions.) Your first question comes from the line of Michael Kim.

[Michael Kim:]

Hey guys, good morning. Maybe just to start off with a couple of questions for Hank and Mike. Can you just give us an update in terms of the makeup for the Asset Strategy Fund, in terms of sector weightings, and/or kind of the percentage of the portfolio currently in cash, and then more broadly, are you still positioning the portfolio kind of more defensively as it relates to equities in general?

[Michael L. Avery:]

Sure, this is Mike Avery. If you look at the portfolio, the Asset Strategy Fund today, we are right about 40% cash. Our net exposure to gold bullion is right about 10% because we have hedged a small portion of it. Our exposure to bonds in about 10% of the fund, and the remainder is in equities. We do have a hedge on our equities so that our net exposure is 25%. In terms of our sector weightings, we have changed quite a bit over the years. If you look at the fund today, what you will see is a predominance of large cap dollar denominated global brand companies where the emphasis is on dividend yield and free cash flow yield.

[Michael Kim:]

Okay, and then on prior calls I guess you had kind of talked about still being bullish long-term on energy. Any change in that thinking, or if you could just kind of give us an update on how you are thinking about kind of broader macro trends?

[Michael L. Avery:]

Well, my comments on energy would have been in the broader context of thinking about the world going forward from the perspective of a large group of people entering middle class for the first time, and I think that is still true. There is approximately, you know, 70 million people that come into emerging middle class globally, and I do not think that has changed. The pace at which they are entering may have slowed down here, but I do not – I think the underlying secular trend around the world is still in place. If that is true, then a move of a large group of people enjoying rising prosperity is not only very energy intensive but it is also very resource intensive, and I do not that that has changed long-term.

[Michael Kim:]

Okay, that is helpful. And then a question for Tom. Are you starting to see any kind meaningful shifts in investor behavior in the Advisors channel in terms of maybe risk appetites or portfolio allocations, and you know, do you think these changes, if you have seen them, will end up kind of being more short-lived or do you think there is kind of some longer-term transitions going on in terms of the way clients are thinking about investing in general?

[Thomas W. Butch:]

Well, my first response would be the one that Hank gave you, and that is that we have seen more selling here in October, but I think your question relates more to actual portfolio construction. I would say the answer is no. As you know, we go to market stressing asset allocation within a financial planning context. We have been out in front of clients as much possible, reminding them of the importance of that approach, and so we have not seen what I would call material shifts in client asset allocation or risk appetite at this point. I think the one thing that we have seen within the market context is a lot more nervousness, which requires a lot of hand-holding by advisors and our being out front and center in front of clients, but nothing that suggests the long-term portfolio construction of clients is changing materially.

[Michael Kim:]

Okay, and then just a final question. Do you have a sense of what has been kind of driving the strong inflows or the ongoing inflows in the Institutional channel? Do you think any of that is kind of related to the strengthening of the dollar, or is that not really an issue?

[Michael L. Avery:]

No, Mike, I think the dollar strengthening is certainly part of the story, and it is a reflection of foreigners’ idea that the U.S. will come out of this morass quicker than the others, and it is also a reflection of the fact that particularly European investors like to have the currency wind at their back when they make decisions about where to allocate money. You know, our partnership with Picktay and Safe (ph 00

[Michael Kim:]

Okay, thanks for taking all my questions.

[Michael L. Avery:]

Okay.

[Operator:]

Your next question comes on the line of Jeff Hopson with Stifel Nicolaus.

[Jeffrey Hopson:]

Okay, thanks, good morning. Can you comment on the Wholesale channel costs? Sales were down 18%, costs were down 4%, so can you give us a sense of how that relationship will, you know, stay the same or change in the future, and give us a sense of what the actual sales are down in October?

[Daniel P. Connealy:]

This is Dan Connealy. In the quarter, you are right, the revenue declined and expense did not quite match. I think we had a little higher indirect cost in the channel relative to some meetings and travel that had already been scheduled. So of course in that channel you have the asset fees that appear both in income and expense, so there was some – that was helpful to our margins that the sales declined, although that is not our goal.

[Henry J. Herrmann:]

This is Hank, Jeff. There are a couple of what I would call extraordinary items in the indirect portion of the expense line for Wholesale. And I do not expect those to be repeated. The long history and my often-stated point that we were going to keep the growth rate in that area lower than the growth rate in revenues will continue to be the goal, expectation, and target.

[Jeffrey Hopson:]

Okay, and then assuming sales are down in the fourth quarter, the direct expenses would fall in a close relationship to the percentage change, would you say?

[Daniel P. Connealy:]

Yes, they would. They would fall. Of course, the asset base fees will continue, but the sales-related expenses would be related to the level of sales.

[Jeffrey Hopson:]

Okay, and Tom, could you give us any sense of kind of the feedback you have gotten from the buyers of the Asset Fund? Clearly it has held up relatively well, but is down, obviously, on an absolute basis, so give us a sense of the reaction of clients in that particular fund, if you can.

[Thomas W. Butch:]

Well, the Fund is in redemptions, and I would say that that is one way to judge reaction. I think what we have tried to do is to stay out in front of clients with constant communication. We have had monthly conference calls, and we are working hard to keep them alert to what is going on in the portfolio and have been very visible to them, and so that is the answer I can give you. We are working hard to make sure that the client base and the wholesalers are well equipped to tell the story of the Fund and staying very visible.

[Jeffrey Hopson:]

Okay, thanks.

[Michael L. Avery:]

We have done – just to follow up, we have done a lot of calls, a lot of face to face meetings – it’s Mike – a lot of calls, a lot of face to face meetings. Generally we find the reaction to be very constructive. Most of the questions are focused on – just like the first caller on this call, you know, how are you currently structured, and have your long-term – has your long-term outlook changed any, and we have found the responses to be very positive.

[Jeffrey Hopson:]

Great, thanks a lot.

[Operator:]

Your next question comes from the line of William Katz with Buckingham Research.

[William Katz:]

Good morning. Just a couple of unrelated questions. Just sort of thinking about the positioning in the Wholesale channel given that your lead product had been the Global Natural Resources Fund and in the hope of cross-selling or pair trading other more mainstream products. Given the volatility of the Global Natural Resources Fund, which I guess is down even more sharply into the fourth quarter, hard to believe, but just sort of – is there any sort of adverse selection issue here as it relates to Waddell and some of these larger distribution platforms, given the volatility of this fund?

[Henry J. Herrmann:]

This is Hank. I am not sure what you mean by adverse.

[William Katz:]

Sort of wondering if your relative position is –

[Henry J. Herrmann –:]

Put a little flexure on that for Tom and then we will let him answer it..

[William Katz:]

Maybe just to clarify just whether or not your positioning has been impaired, given the very volatile returns in the Global Natural Resources and the Ivy Strategy Funds?

[Thomas W. Butch:]

I will answer that a couple of ways, the first of which is that I believe there to be no impairment to our ability to go to market with any of our partners. There is no sense of that coming back to us from any of our partners. We have good breadth of product in, as you pointed out, the position that we held with those two funds opened the door to other sales, and so I think the market is far more aware of the whole span of products that we take to market. There was one case where a distribution partner made the decision to take the Resources Fund off of a discretionary wrap product, but they moved assets of equal amount into the Asset Strategy Fund, so if anything that selects the confidence that they have in us as a partner, and the entirety of the product line. And I believe it is correct to say that is the only instance of that happening with a partner, so I would answer your question by saying there is absolutely no impairment to our ability coming out the other side of this to be very effective with our distribution partners, and we work very hard to stay in touch with all of them.

[William Katz:]

Okay, that is helpful. Hank, maybe a question for you. You say you look at the Institutional channel, which seems to be a pretty good nice, bright spot here in a tough environment. I wonder if you could talk a little bit about – in prior calls you have talked about losing market share to the alternative managers, which seems to be unraveling pretty quickly here, so I wonder if you could talk about the outlook for rebalancing between maybe equity in fixed income and perhaps long-only versus alternatives, and how you are seeing your pipeline in that environment.

[Henry J. Herrmann:]

Well, I have a vision but I do not have short-term evidence. But my expectation is that money will vacate alternatives and will gravitate back toward what I would call plain vanilla categories within Lipper, and that includes fixed and equity. At the present time it seems to me that the implied returns in the number of fixed markets are such that it is very competitive with long-term equity returns, if not more so. So I would think that some will opt for a higher mix in fixed income in the DV business, but I also think that important categories in equity will also see inflows after a couple years of going in the other direction. I think we are very well positioned to be a beneficiary of that as it unfolds. At the present time, what is unfolding is mostly defined benefit clients being very preoccupied with some big difficulties they have in some of the places where they have put money over the past few years, and I have not gotten a sense yet that the decision-making process to move back the other way has unfolded, but I believe it will.

[William Katz:]

Okay, that is helpful. And just last question, if you look at the distribution margin on the Advisor channel, or in the Advisor channel, that looks to have deteriorated pretty sharply sequentially. Just sort of wondering if there is any unusual items either in the direct or the indirect side, and just maybe given where the level of sales are right now, what the outlook or the range of outlook might be for margin on a go-forward basis?

[Thomas W. Butch:]

Well, the distribution margin on the Advisor did deteriorate slightly in the quarter-over-quarter, but that was mainly due to the slowdown in sales late in the quarter. The redemption level stayed the same. We have seen, as Hank mentioned in his comments, redemptions pick up also in the Advisors channel, but certainly much more modestly than in the Wholesale Channel. So as this market tumult continues, I do not think our Advisor channel is immune to having increases in redemptions, but it is still being very well controlled.

[William Katz:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

[Craig Siegenthaler:]

Good morning.

[Thomas W. Butch:]

Good morning.

[Henry J. Herrmann:]

Good morning.

[Craig Siegenthaller:]

Good morning. The first question is really on the fee rate. Can you provide some color on the fee rate decline on the equity assets? Specifically, I was really interested in underlying equity fund and the business makeshift underlying the assets to what caused the fee rate decline?

[Henry J. Herrmann:]

Well, in the institutional, we’ve had some growth in the institution, those are typically lower fees and the Picktay account has been growing very well, so that affects the overall mix. That would be one of the major factors, and of course, as that strategy continues to be a strong part of our whole portfolio, and that is a lower-cost fee, so that is a factor.

[Craig Siegenthaler:]

And what about the global natural resources? Because I believe that whole fee rate charged in that item, and then backed out through expenses? Or how does that work?

[Henry J. Herrmann:]

Yes, that’s how it works.

[Craig Siegenthaler:]

What is the notional fee rate on the global natural resources fund? And I was just wondering what the fee rate was roughly on the asset strategy fund.

[Henry J. Herrmann:]

It’s around 59 on the asset strategy, and just below 80 on global natural resources.

[Michael L. Avery:]

That’s gross, and half of that–

[Craig Siegenthaler:]

That’s gross, and it’s backed out of (inaudible 00

[Henry J. Herrmann:]

Right.

[Craig Siegenthaler:]

All right, the second question really is for Tom on the adviser channel. You’re seeing a growing business makeshift towards variable annuities, and also fee-based products–or acid fee-based products. I’m wondering how the market volatility roll recently, will kind of maybe derail or maybe accelerate that trend, and also, as the baby-boomers start retiring a few years from now, we do see a growing shift towards variable annuities, and do you have any interest in the immunity bond asset?

[Thomas W. Butch:]

I think as we’ve talked about on past calls, we believe the annuity providers are out in front of the whole baby-boom retirement phenomenon, and a lot of the product that they created will be–are, and will continue to be received very well, particularly–and this goes back to one of the earlier questions–investor behavior, while not having changed materially in the near term. Past experience with markets of this kind, would suggest that there is a lag period where people do, for some period of time, seek safety and more predictable returns. And so, if you couple that with the wave of baby-boomers that’s going to come ashore here, I think it’s a correct assumption that the annuities will continue to be a growing part of our business, particularly because they provide for income guarantees, withdrawal guarantees, asset accumulation guarantees that fit well both into both the aftermath of the market, and the coming generational change. Secondly, in terms of the fee-based products, the adviser channel sales are about 25% into those products at this point, and our advisers have found those to be a very good way to go to market, and our clients have responded very favorably to them for the whole span of reasons you would imagine; asset allocation, automatic rebalancing, and the waver of the fee at the front-end of the sales process. I think both of those will remain very important, and I think they also are products whose very nature lends to greater stability of assets over the long term.

[Craig Siegenthaler:]

Got it. Thanks a lot for the detail. Actually, just one quick numbers question; I was wondering if you guys have the number of anyone that in the wholesale channel, that is not part of the global natural resources or asset strategy fund?

[Thomas W. Butch:]

We’ll get you that in just a moment. While we’re waiting to dredge that up, I would just want to make a comment on our tax rate, which hasn’t been asked about, but our tax rate was lower for a one-time credit for passing oils in one state, but is only about $250,000-dollars.

[Henry J. Herrmann:]

Operator, next question please.

[Operator:]

Your next question comes from the line of Robert Lee with KBW.

[Robert Lee:]

Thanks, good morning everyone. Hank, I know you mentioned that there’s a hard hiring freeze in place, but does that apply to growing the adviser head count? I mean given the environment and so much turn and change among various platforms and understanding, you’re not necessarily going after a Merrill Lynch-type brokers, but, sometimes that actually opens up opportunities to get people you may not have otherwise. So is there actually an opportunity here in that business to, in some ways, even accelerate or step-up your hiring of more experienced advisers?

[Henry J. Herrmann:]

Our freeze does not apply to the advisers channel distribution, and my view, as you point out, an opportunity to grow that part of our business is being handed to us by the disruptions in the broker-dealer channel. I’ll let Tom elaborate.

[Thomas W. Butch:]

The only elaboration that I would make is that we really are equipped to successfully recruit Wirehouse and other experienced professionals, because the implementation of the Pershing Platform, which provides a more comprehensive and electronic architecture was completed in the second quarter. We’ve successfully recruited about a half-dozen folks to that; have again, that many deep into the process, and have a pretty fertile pipeline at this point. And so, you’re correct to point out that the disruption that’s taking place in the financial adviser marketplace, generally really plays into that opportunity. We’re entering the relatively slower time on the classic channel for our traditional recruiting, and you didn’t ask this question specifically, but as we sit here today, we still project a modest increase year-over-year in that channel, such that head count, as currently projected would be up a bit from the prior year-end.

[Robert Lee:]

Okay, thanks, and maybe a follow-up question on capital management. I appreciate that you continue to buy stock early into October, but just given the general pressure on asset levels and revenues, how should we be thinking of any changes, if at all, in how you’re thinking of managing capital? You have plenty of excess, but are you thinking more of between the bill bat (ph 00

[Henry J. Herrmann:]

A very fair question. I can tell you that I am giving that whole subject a lot of thought. I don’t really–I’m not ready to offer up a specific response, and I would include that also in the questions that we get in terms of other actions regarding cost. At the moment, what I’m trying to do is assess where we are, and things have changed very quickly, and I want to take a look at October, and I should have a good handle on what the October month looked like in about two weeks. At that time, we’ll sit down and think a lot harder about everything, because the world has changed. I have been purchasing stock at these depressed prices, but I am mindful of the fact that raising capital these days is a lot different than it was in the past–by the way, that’s a point I suggested would likely happen in the conversations I’ve been having over the last six-months or so. And so I’ve been going easy in terms of share repurchases. I think you’re correct to presume that the dividend is not going to be increased, and what other steps we take to try to get expenses in line with the different level of revenues is at this moment, a little uncertain. Having said that, there is nothing that is not under consideration.

[Robert Lee:]

Okay, thanks.

[Operator:]

Your next question comes from the line of Bob Glasspiegel with Langen McAlenney. Robert Glasspiegel – Langen McAlenney You anticipated what my question was Hank, because I’ve worked out that if the market is down 25% and you apply the blows, you’ve got revenue comparisons of down 16, down 26, down 31, down 27 facing you, so a hiring freeze is not sufficient, so that’s more a statement than a question. The question would be is there any room in incentive comp reversals that we could look for that would alleviate a little bit of the decline in margins if you don’t start cutting expenses?

[Henry J. Herrmann:]

I think the answer’s yes Bob. We will look at everything, everything is on the table.

[Robert Glasspiegel:]

But I guess, this is not something to look at, I’m just saying that incentive comp I thought was based on how the funds have done versus peers, and while you do have good long-term record, you’ve given up a little bit of ground in the last couple quarters. It seems like there’s already stuff baked into reverse without taking action. Maybe I’m mistaken on that.

[Henry J. Herrmann:]

Well, you know I have a long history of not liking to take away incentive comp when we get good relative (ph 00

[Robert Glasspiegel:]

Okay, well do you mean just–can you give some general categories? If you decide that the current revenue base is going to be sustainable, what are general areas that you can look at to cut expenses.

[Henry J. Herrmann:]

Well Bob, that’s a fair question, but I can’t answer it because I’m not ready to make a broad announcement to my organization. So I’m going to have to hold up. That’s why I mentioned to you that we’re going to take a look at October, and somewhere in 10 days to two weeks into October, we’re going to be able to give ourselves a better answer, and then communicate that to everybody.

[Robert Glasspiegel:]

I appreciate the sensitivity, we have to model for 2009, and you know.

[Henry J. Herrmann:]

Yeah but Bob, in the environment we’re in, there’s going to be a huge amount of guess work in any modeling, I would caution against that whatever the redemption run rate is, is likely to be sustainable. I would think that it’s going to moderate by a lot. I would point out that if you look at the wholesale channel, that in the last 12 or 14 days, or whatever it is, the rate redemptions have moderated considerably; they’ve halved. And so, I don’t know where that’s going, but I don’t think it’s going to stay at the unusual rate, as one point. Second of all, I’m not sure whether or not we’re two minutes and forty-six seconds away from the bottom or not. And so I know, and you know I know, having done your job, that modeling is very important. If I could give you a more specific response presently, in a responsible way, I would give it to you. I cannot at the moment, but I will as soon as I can.

[Robert Glasspiegel:]

I totally understand, just my take away is that your message to us is if revenues are sustained at these levels, you will not let margins go to–you will not let the entire hit fall to margins, you will make some actions.

[Henry J. Herrmann:]

I will not let the entire hit fall to margins, on the other hand, we’ll have to be very mindful of the problem of fact in muscle. And you know this is a mean organization, it always has been. But we have–there are a number of really significant things that could impact our overall costs, and we’re going to address them.

[Robert Glasspiegel:]

Thank you very much Hank.

[Henry J. Herrmann:]

You’re welcome.

[Operator:]

Your next question comes from the line Cynthia Mayer with Merrill Lynch.

[Cynthia Mayer:]

Hi, good morning.

[Henry J. Herrmann:]

Good morning Cynthia.

[Cynthia Mayer:]

Just a little follow up on the expense control, and that is that you mentioned adjustments to deferred comp in the quarter, I’m just wondering if all of those–if the quarter showed the full quarter impact of that, or whether there’d be a little extra impact of that in 4Q? Is that something you did right at the beginning of the quarter?

[Thomas W. Butch:]

Yes, we haven’t adjusted significantly our accruals as we came into this quarter, so to an extent, we have adjustments that will follow in the fourth quarter.

[Henry J. Herrmann:]

The nature of the deferred–elaborate on that.

[Thomas W. Butch:]

So are we talking about the accrual for bonuses?

[Cynthia Mayer:]

Yes.

[Thomas W. Butch:]

So we start out the year accruing at what rate we think is appropriate given the past year, and then adjust it quarterly. We didn’t make a major adjustment this quarter, to those levels. So as we determine what the likely bonuses are, both in the executive levels, other parts of the company, and then in the investment staff, that will be reflected in the fourth quarter.

[Cynthia Mayer:]

Right, okay. So you sort of took a baby step in this quarter toward it.

[Henry J. Herrmann:]

Right.

[Cynthia Mayer:]

Okay. And just a follow up question on the currency. To the extent that currency helps Picktay sales, I’m wondering if you’ve seen any shift in Mackenzie’s sales, or if you expect to?

[Henry J. Herrmann:]

Not material. We’re talking to them constantly about it though Cynthia.

[Cynthia Mayer:]

Okay, and also, can you give the dollar amount of your mark-to-market adjustments?

[Henry J. Herrmann:]

Yes, the mark-to-market adjustments was about somewhere in the area of a million eight. This included two things; the funds that we have in our trading portfolio, and that also includes the trade portfolio that’s associated with the deferred comp that the PM’s have.

[Cynthia Mayer:]

Okay. And has there been any shift in how that’s invested? Or should we just assume that whatever happened in 3Q, a similar thing would happen in 4Q with adjusted for differences in market?

[Henry J. Herrmann:]

That’s right, and when you see our quarterly filing, you can see exactly how much is in that category for your future calculations.

[Cynthia Mayer:]

Okay, great. Thanks a lot.

[Operator:]

Your next question comes from the line of Mark Irizarry with Goldman Sachs.

[Marc Irizarry:]

Great, thanks. If you could just give just any more color on the margin, I guess if you look at the past as a prologue to what’s going to happen here in the future. You did see your operating margins decline pretty significantly. Could you just give a sense of magnitude or just approach again in terms of how we should be thinking about the operating margin?

[Henry J. Herrmann:]

Well obviously, when you lose the amount of assets that we have lost, and we said that it really started very heavily the end of September, it’s logical that the fourth quarter margin’s going to be affected by that, and we’ve had the continued pressure in October. So we’ll have to see how the rest of the quarter holds out, but I think that’s a good assumption on your part. It depends on what action we take to cut our expenses in that period.

[Mark Irizarry:]

Okay, then maybe Tommy can just elaborate on some of the changes that we’ve seen in terms of more of a narrowing distribution channel, and what that means maybe for shelf space, and gaining shelf space in a sort of a declining market environment.

[Thomas W. Butch:]

I’m not dodging the question, I think it’s too early to tell. At the moment, within the context of the most unusual market we’ve been in, it’s business as usual, in as much as that can be the case, given the market conditions at our distribution partners. Nothing we have seen to date suggests that there will be material changes in the way we relate to our distribution partners, but it’s too soon to tell how those organizations will be merged or not merged; managed one way, or left as they are at present. So, I think it’s kind of an incomplete grade, but there’s certainly still 400,000 plus, financial adviser’s out there, and still adequate ground for us to till, that we’ve yet to till in certain of the distribution channels. So I don’t think that that’s something that’s worrisome to us at this point.

[Mark Irizarry:]

Okay, thanks.

[Operator:]

(Operator Instructions.) Your next question is a follow up from the line of William Katz with Buckingham Research.

[William Katz:]

Thank you, just sort of following up on some of the repartee between Hank, you and someone else on the outlook for margin. When you talk about hiring freeze from here, and given the increase in FA’s, as modest as it be, does that suggest that there’s no growth in the rest of the platform? Or that there might be some net reductions as an offset to the FA increase, and I have another follow up after that.

[Henry J. Herrmann:]

Well, the financial advisers are not employees, it does not have a great cost to add financial advisers, they’re contract. So, that’s not a great part of our cost structure to add to the financial staff. If in fact we do, that’s certainly something we’re aiming at, and should be excluded from any ideas I’ve expressed about the freeze. I’m not quite sure I understood the jist of your question. Give me another shot and we’ll try it again.

[William Katz:]

I don’t seem to come across loud and clear today, so if you’re going to increase head count on the FA side, I’m just curious if you would be decreasing head count on the professional side as an offset, but I guess the answer is, to be determined.

[Henry J. Herrmann:]

Yes, they really aren’t related.

[William Katz:]

Right, okay, the other question I have is just to your comments, Hank, about in the last 10 days or so you’ve seen a deceleration of redemption rates. I just want one of you to take that one step further and give us a sense of the rate of change between the global natural resources, fund flows and also maybe the rest of the platform in that channel?

[Henry J. Herrmann:]

I’ll give you some feel for it, but I would tell you that it really jumps around. And so, we’ve seen days when it’s been sharp outflows, and we’ve seen days of inflows. So, if I lump that whole thing in, what we’re seeing is a moderation of outflows, and I just assume that the share prices of all of the components of a fund like that are so down, that people have decided that they’d rather hang in there than kick it out now. We’re in a rally, we’ll see what happens.

[William Katz:]

All right, okay, thanks.

[Michael L. Avery:]

On a gross basis, those two lead funds are still 80% of flows don’t–that’s a +/- number as we sit here today, which is about top of head 10% points lower than in the past.

[William Katz:]

Okay, that’s very helpful, thank you.

[Operator:]

There are no further questions, Mr. Herrmann do you have any closing remarks?

[Henry J. Herrmann:]

I just have one other thing that I’d like to bring up. We’ve got in a number of questions in the last couple of months about where the portfolios broadly stand, and the focus has really been on in this energy, industrials and materials, and I would just say that there’s been a meaningful downshift in our representation in those particular categories through the whole complex. In part of course, that’s a reflection of share price performance of the names inside of it, but also, a significant effort on our part to whittle it down. Other than that, I don’t have any additional comments. Mr. Connealy has one, hold on.

[Daniel P. Connealy:]

Craig, you had a question that was dangling, you said how many assets in our wholesale channel were not related to global natural resources and asset strategy, that’d be in the neighborhood of about 5.5 billion. Thank you very much.

[Operator:]

This concludes today’s conference call, you may now disconnect.

[Henry J. Herrmann:]

Thank you. [End Recording]