Waddell & Reed Financial Inc
Q3 2010 Earnings Call Transcript

Published: 26 Oct 2010

[Operator:]

Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Waddell & Reed Financial third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the conference over to Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed. Please go ahead sir.

[Hank Herrmann:]

Thank you, Stephanie. Good morning, with me today are Tom Butch, our Chief Marketing Officer; Mike Strohm, our Chief Operations Officer; Dan Connealy, our Chief Financial Officer; and Mike Avery, our Chief Investment Officer; and Nicole McIntosh, our AVP of Investor Relations. Nicole would you read the forward-looking statements 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 actually materially differ from those expressed or implied due to a number of factors including but not limited to those referenced in our public filings 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 schedule has been posted on our website at waddell.com under the Investor Relations tag.

[Hank Herrmann:]

Thank you, Nicole. Earlier today we announced our company’s results of the third quarter. I would like to highlight a few points. Assets under management reached an all time record high of $76 billion, and have continued to rise in October and currently are just a touch under $79 billion. Net income of $40.5 million in earnings per deluded share of $0.47 increased on both a sequential and year-over-year quarterly basis. The positive impact of tax benefit investment gains recorded during the quarter complicated comparisons with net income and earnings per share versus other periods. Our operating results provide a better basis of comparison for our core business. Compared to last’s year’s third quarter, our operating margin expanded a 110 basis points primarily on higher levels of assets under management which provided both top line growth and distributional leverage. Sequentially, our operating margin fell 70 basis points as flat average assets did not fully offset higher compensation costs associated with retirement of a portfolio manager, and an increase in incentive compensation for semi-annual analyst bonus. We believe we are more than holding our own in a challenging environment. Let me make a few points. First, the industry as you know has experienced significant headwinds with equity outflows for quite some time. By contrast, Waddell & Reed experienced equity inflows in the second quarter, and very modest equity outflows during the third quarter. Year-to-date we have had an annualized organic growth rate of 5.5% in equities compared to an estimated two tenths of a percent for the industry. Second, our efforts to build subadvisory businesses within the institutional channel are going quite well and contributed nearly $800 million in sales during the quarter. Our subadvisory partnerships have created access to a broader client base since each partner is a significant distributor on its own. By the end of September, our institutional business had surpassed its previous annual best gross sales level. Finally, monthly sales in the wholesale channel have increased each month sequentially throughout the quarter, and October has improved further. Our advisor channel continues to provide steady sales and exceptional asset retention. Like many of our peers we have experienced lower sales during the quarter as investors remain particularly risk adverse. By September sales had meaningfully improved over the summer levels, and October volume has seen further improvement. Our solid performance restricted investment process and wide aggressive products positions us, we believe well for the future. Operator at this time I would like to open the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Robert Lee with KBW.

[Robert Lee:]

Hank, maybe I'd like to talk to your institutional channel if it is possible. You mentioned success you’ve had in the subadvisory businesses. It is possible just to get a feel for, if you look at the strong sales this past quarter, what proportion of that was subadvised mandate wins where big chunk of assets moves over? And what proportion of that may have been kind of what I would characterize maybe as more as recurring flow that for a mandate you've already had it in place and now you are seeing the aftermath of continued sales.

[Hank Herrmann:]

I don’t have the exact number off the top of my head Rob, but I would say the majority is flow related. There might have been one big platform move, but when you look in the aggregate relative to the $800 plus million it is a very high percentage that just flows.

[Robert Lee:]

I know you did provide some color on monthly sales trends within the wholesale channel but just generally speaking since the flash crash report came out, and obviously Waddell's name has been in the press again close to that. I mean what kind of impact of foreline have you seen, have you seen any? Has it been kind of localized maybe to adjust the asset strategy fund? I mean how would you characterize any fall on that from that?

[Tom Butch:]

Rob starting with your second question, actually if you look at the wholesale flows of the asset strategy fund, September was the second best month of the year and July and August were similarly strong. There was no fall off in the flow to the product, and so there is little affect that has been seen. Let me correct what I just said. The month of September was higher the month of August which was higher than the month of July. I think I said that those were in line with the prior months of the year that was not the case. But in a more general sense, what we have heard from the holders of the product has been broad based support, and its place in investor's portfolios remains, we believe very strong. The only month where there was a notable spike in redemption activity was in fact the month of May. And since that time redemption activity has normalized and across the quarter, July, August, September sequentially as flows as sales were increasing redemptions were decreasing. So I misspoke at the start about relative to the rest of the year because of course the first quarter was a period of great inflows for the fund. But across the quarter the trends were increasing sales, decreasing redemptions and broad base support among the investor base for the product.

[Hank Herrmann:]

Well I would just mention that, that product in the quarter looked like it was about 60% of gross flows and that's going in the direction we've been talking about for quite a while, and the global natural researches and asset strategy fund together as a percentage continued to decline relative to the four or five other things that we've been talking about doing well. So, that’s a little bit of a wing in terms of the exact precise percentages but directionally that’s pretty accurate.

[Robert Lee:]

And if I can maybe just ask one more follow-up, again you've talked about October so far as being better on kind of a monthly sales base, just curious, are you seeing evidence with the side of this, whatever it is now six or seven week rally and the equity markets come back pretty strong. Any evidence at all that retail investors are coming out from hiding even a little bit as relates to equity products, more traditional growth products or value products?

[Hank Herrmann:]

If you measure it in terms of gross sales, from the bottom the trend has been sequentially 20%, 30%, 40% so that from the bottom October run rate for equity product sales looks like it's up 60%, and so I would say from September to October if you assume the run rate is consistent through the end of the month, you’re talking about something like a 15% improvement in gross for the month. So, I would say that's pretty good evidence that there is some improvement in risk appetite.

[Operator:]

Your next question comes from the line of Cynthia Mayer with Banc of America.

[Cynthia Mayer:]

You mentioned that the search activity for defined benefits is encouraging, I am wondering if you could give a little more color on what strategies you are seeing search is in and just generally if you are expecting the under funded status of some pensions to lead to greater allocations equity or greater contributions or greater denial or something else?

[Hank Herrmann:]

Well, what we are seeing is one or two consultants that become more interested in what we are doing. That helps. We put in an effort on the west coast where we’ve been kind of deemphasizing that for a while and that’s helping. The products that are getting interest are large cap growth, small cap growth, past the strategy fund and recently we’ve had a couple of people come forward and start to talk to us about core equity product. So, it’s spreading out most of the interest for quite a while than just basically large cap growth and now we are talking more like three or four things. I would interpret as some change in the attitude of finding different clients more than anything. But what I say, it’s dramatic. I haven’t noticed that but we are clearly in more searches than we’ve been for quite a while and they are bigger.

[Cynthia Mayer:]

And maybe you can give us an update on Pictet? Has the dollar slide impacted that and what’s your outlook on that?

[Hank Herrmann:]

Well, I think it’s a combination of investor sentiment in Europe, perhaps driven by the economic questions here. And in addition to that I also think that the performance has not been as strong as they would or we would like. So in the quarter there were pretty meaningful outflows. But I’d say Pictet at this point is about 60 to 70% in AUMs relative to its peak. Things have quieted down a little bit once the rally started, so I haven’t noticed any particular outflow issues in say the last couple of weeks, but clearly Pictet is less than helpful in terms of net gross flows.

[Cynthia Mayer:]

And then maybe just finally on average fee rate, you mentioned it went down to the money market fee waivers and I am just wondering why the money markets fee waivers now, because some peers are actually, it looks like they are having an easier time with waivers at the moment and then also on the average fee rate it looks like the average bond funds or bond product rate declined slightly and I am wondering if that’s a trend that we should pay attention to?

[Dan Connealy:]

This is Dan here. I don’t have any information on the average bond that I looked at before the call. The decline in the average field rate is principally due just to the fee waivers, fee waivers ticked up in the quarter and so that would be the issue there. We also have some fee waivers and some other products in the wholesale channel, but otherwise with flat assets our rate would have been flat, not for the fee waivers.

[Cynthia Mayer:]

Got it. Thanks a lot.

[Hank Herrmann:]

I am going to ask Dan to elaborate a tab on guidance for the fee waivers, because if I don’t ask him to do it, one of you will.

[Dan Connealy:]

It’s hard to know because right now our money market funds remain relatively conservative and with conservative investment that only go out 90 days it’s hard to get any yield. So, to the extent we keep money market assets rather flat, I would think we’d probably expect waivers to be about the same.

[Hank Herrmann:]

The same we creep up the tab, not more than that. Next question.

[Operator:]

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

[Jeff Hopson:]

The pick up in fixed income sales and or flows in the quarter, is that all just the environment or are you doing anything differently there and if equity flows improve in October-November, would you expect a drop off on the fixed income side?

[Tom Butch:]

Jeff, it’s Tom. I think the environment certainly has created greater receptiveness to our fixed income line up, and that is we have said in the past has been one of the silver linings of the market environment in which we found ourselves because the span of fixed income which previously we were unable to take successfully to market for reasons not of performance but of focus on other products by our advisors doing business with us have now come out into the light. And so during the quarter we sustained very strong flows across this span of fixed income product, but I think it’s important to note that we also had well diversified flows by way of certain domestic equity products, internationally equity products and of course the flexible portfolio. So, we’ve said in the past and I would reiterate that we think we have the product platform that wherever the market rotates we will be able to take products to market successfully. Were we to engage a more receptive equity environment, it would be my belief that we would likely sustain the progress we’ve made in the fixed income side while reengaging investors with good equity products.

[Jeff Hopson:]

And within equities then, let’s say you’re going forward to the extent that there’s interest in international because of currency issue. I mean looks like you have a pretty full suite of products there with pretty good performance. How would you say you’ll fare if you see an increase in interest in international equities?

[Tom Butch:]

Well, we have actually fared well even as the interest ebbed here in the recent past, particularly it’s our international core equity product and as you rightly pointed out, we have three or four other products that we believe to be well positioned if we see a re-emphasis of international equities. So, I don’t mean to re-state the point unnecessarily but what we have always strived to have in the I.V. platform is a span of products that regardless of where the market goes, we will be ready to participate. And so far that’s worn out, and I think what’s happened with fixed income success we’ve had is that advisors have become much more alert to that whole span of products and regardless of where we go from here, that will only help us.

[Operator:]

Your next question comes from Roger Freeman with Barclays Capital.

[Roger Freeman:]

I guess the first, the slight decline in the management fee yield on AUM, is that a function? I guess there was some reallocation from an advisor to institutional. Was there anything related to that? Was it mainly just this money market issue?

[Hank Herrmann-:]

I don’t believe that much to do with the reallocation. The fee waivers is the basic reason for it.

[Roger Freeman:]

What was the reallocation?

[Dan Connealy:]

It was small cap growth went from the mutual funds to an institutional account for a particular client.

[Hank Herrmann:]

The portfolio manager on the retail product that was part of the small cap team when Mark Seferovich retired, and he was the lead on our institutional part of the small cap world. The retail portfolio manager moved over to take institutional responsibility. With that change, one of the clients decided that they wanted to move with him out of retail into institutional. And my recollection is, not positive as it wouldn’t be material one way or on the other but, my recollection is there was no fee give up on that move.

[Roger Freeman:]

Did you say what the actual money markets you were waving during the quarter?

[Dan Connealy:]

No I just think we said that it was principally the money market fee waivers.

[Roger Freeman:]

Then on the asset strategy front, if you look at the Lipper scores, and I know we have talked in the past about how your comp growth isn’t necessarily the right one in that, but it fell back on a one month basis and that says the market rallied. It seems like overtime when you get sharp rallies in the market that the fund on a short term basis will under perform because it's managed fairly conservatively. Is that a reasonable conclusion?

[Hank Herrmann:]

Reframe your question, you included a couple of thoughts and say it differently.

[Roger Freeman:]

I am just saying that it appears that, because we saw this in the spring of ’09 too during the short market rally that the relative performance to benchmarks as defined by Lipper, which I know you don’t think is necessarily the right comparable universe, but it falls when the market rallies strong and when markets fall you tend to outperform. And I think in the past you've talked about managing that fund with a fairly sort of conservative longer term outlook, and I am wondering if that is what we see when see short term swings in the market?

[Hank Herrmann:]

Well, I don’t know what you see when you see short term swings in the market. But what I will say is that the shareholder base that we have is a shareholder base a client base whether they're at our partners or institutional accounts or retail accounts. All appreciate the management structure which is to help them participate in up markets, avoid as much as we can declines in down markets and that is what they focus on. I don’t think there is a [tuned] as you might suspect to Lipper ratings, Morningstar ratings, benchmark ratings. I think they're more appreciative of the structure of the fund and how it functions in all kinds of markets. And they're not as disrupted as you might think by monthly quarterly changes, and recognition by the major rating agencies.

[Roger Freeman:]

And just as you manage that fund and I guess others in light of the focus around your hedging strategy and asset strategy, it's fair to assume there has been no change in the way that you approach risk management and managing your funds.

[Hank Herrmann:]

That is a fair statement.

[Roger Freeman:]

And lastly, is there any reason you think that the SEC didn’t actually name you in the report? Do you think it is just because it's a pretty weak argument and they didn’t actually name you?

[Hank Herrmann:]

Well, I don’t know. I wasn’t asked to participate in the drafting of their document, so I really can't say why things were included or not included.

[Operator:]

Your next question comes from Bill Katz with Citigroup.

[Bill Katz:]

Just sort of looking at some of the individual channels, I'm looking at some of the margin dynamics within there, the folks in the wholesale channel, bit surprised didn't see a little bit better margin improvement sequentially given just the dynamics of assets growing and sales decelerating. Just sort of wanted you to comment a little bit broadly about where you think margins are trending in a distribution channel, or may you consider walk through them.

[Dan Connealy:]

It really depends on several factors. First the rate sales growth because we have talked about on many calls before, strong sales growth will help put some downward pressure on that wholesale distribution margin. But also, we have the dynamics of the asset, the AUM fee is there, and that’s what occurred this quarter where assets went up quite a bit. Our 12b-1 fees were higher. We did have less comp to our wholesalers because of the raise in sales. And so I don’t know what you factored into your percentages, but these are about what we expected.

[Hank Herrmann:]

Just keep in mind that the average assets were helped in September, but were definitely a drag in July and August. So if you just smooth that out a little bit, definitely the margins would have looked a little different too. But I am thinking that the better asset performance coupled with still less than robust gross sales has positive margin implication. We'll just have to see as the quarter goes on, but we haven't changed our view on the distribution margin in any of the channels at the moment. And there was a slight increase in the negative number in the retail channel, but still well within the range we've talked about. We're still well within the range that you are familiar with in the wholesale business, and institutional off the top of my head I just don't have a thought on it.

[Bill Katz:]

Second question is as you think about the advisory business, I know that you passed a greater growth in the wholesale channel. What kind of environment do you think you are going to need to see a more decisive reengagement on the advisory side? I presume your comments around gross sales were on the wholesale side. And then as I look at some of the sequential change in the performance, they do seem to be somewhat mixed second to third quarter. How does that dynamic play out in terms of potential for third party sales becoming a greater percentage of overall volume in that channel?

[Tom Butch:]

Let's start I guess with your questions relative to the advisors channel. The advisors channel has been in very much a steady phase throughout this year, very reliable if you will in terms both of gross sales and asset retention. We do believe that we will reach the sales target for the year and we certainly expect over the next several years to continue to grow the business at a healthy rate. What would it take for the investors in that channel to reengage, or I guess that was your question or it may have been the advisors. Certainly the investors in that channel are by their nature relatively conservative and not unlike other distributors with whom we interact on the other side of the business. It’s been our belief that it will take a sustained equity market performance, and one which provides them a basis for comfort for moving back into the equity market. I would tell you though that a considerable amount of sales in that channel is less dependent on what’s going on from a product perspective, and it's very much a focus on asset allocation. A couple of other things to keep in mind relative to that channel are that recruiting has been off a bit this year and that that has been partly a function of the environment and partly a conscious effort on our part to focus our recruiting managers on quality over quantity, and so that transition is taking place. And the third point I would make relative to happenings in the channel if you will, is that we put in place a brokerage platform capability which is intended to attract new advisors of experience into the business where in the past we were focusing entirely on career changers. And that has effectively been reformed in a way that we are now very comfortable that that will start growing for us. So there is sort of a lot of things going on. The net, leading to your next question I guess is that we don’t expect it to be channel that breaks out hugely in the future, but continues to provide what it has over the past many years which is reliable sales and even more reliable asset retention, though it is our hope to grow the sales at a greater rate. Relative to wholesale be coming a larger part that's almost to mathematical immutability when you are working with 40,000 or 50,000 financial advisors doing business with Ivy when you have a addressable universe about 10 times that size versus the sales force which is at present a little less that 2,000 and whatever plus minus that for some time to come. And so, if your question is will wholesale likely be a larger part of sales relatively? The answer is likely, yes.

[Bill Katz:]

Just for me one last one. If buy back slows quarter-to-quarter and as soon as probably timing around developments with a restricted stock, a boost is given a little bit, maybe sort of an update on your free cash flow thinking from here?

[Dan Connealy:]

I am not thinking any differently about things. I think we mentioned at the end of the second quarter that as a result of share price being so depressed we accelerated our share buyback a little bit versus what our target was and so it the third quarter we’ve kind of acquired on what we repurchase. We did bump to dividend as you noted, still the same idea try to user our free cash flow to buy back shares and make key payments to our shareholders up. I would say that the 5% bump is a reflection mostly of the experience over last few years when volatility has been such a challenge. The last thing we want to do is find ourselves with a dividend that we have to reduce as a result of some development that is unforeseeable. So, we are a little bit conservative on the divided payout ratio. Obviously, cash, if you didn’t see the balance sheet, cash keeps building, but we are keeping lion share repurchases and dividends and we will continue down that road.

[Operator:]

Your next question comes from Craig Siegenthaler with Credit Suisse.

[Craig Siegenthaler:]

Could you help us quantify the impact in compensation expenses from the differed comp and also some of the other equity incentive expenses?

[Dan Connealy:]

Well, if you just compare it to the last quarter, Craig, the difference in the equity comp was about 700,000 to $800,000 because it was not just the portfolio manager, but we also have some advisors who are non-employees whose stock is variable. So, as the stock goes up and down we have a charge or a benefit. So that was a big part. And as far as the comps for our analyst bonus, it’s about 450 higher than the adjustment was. Part of that is ongoing, so I would say that maybe 300 of it is a catch up in this quarter.

[Craig Siegenthaler:]

And just on the debt, you have it delayed, I believe no going out in January. Will the impact be anything in 1Q ‘11, I'm just wondering how we should think about time new coupon on that note relative to the 5.6% on the existing note.

[Hank Herrmann:]

Well, the effect will be a reduction in our interest cost, current rate is 5.6, the combined rate of the sevens and tens will be 5.4 roughly. We include the fees in there which I think, which we mentioned before. So, it will be a slight reduction.

[Craig Siegenthaler:]

And is there any impact in costs and the refinancing of the revolver?

[Hank Herrmann:]

No. we have three year revolver, and so, it’s not much. In fact we don’t have to go do it every year, which should be a reduction.

[Operator:]

Your next question comes from Michael Kim with Sandler O’Neil.

[Michael Kim:]

Just a couple of questions. First, flows into the asset strategy fund have started to improve in the last few months but do you think you can kind of see those flows get back closer to prior run rates and what type of environment would help those flows really start to meaningfully reaccelerate?

[Tom Butch:]

It’s hard to project a particular market environment, Michael that suggests greater support for asset strategy. It has a very supportive investor base that tends to stay with it across market cycles. As Mike pointed out earlier, the fund has a history of protecting on the downside and I suspect if market conditions were to deteriorate, it’s certainly plausible that, that could be one scenario where in flows increased, but the September flows were quite healthy, and October has been very much the same. So even on a constructive market environment, they have been good. Again, it’s intended to be an all weather product. So again, I hesitate to slight market dependent market condition, dependency it’s more ensuring that the investor base is well taken care of and the story is taken more broadly.

[Michael Kim:]

And then, maybe just a follow-up on compensation. How should we be thinking about the fourth quarter? I guess you adjusted the bonus accrual a bit this quarter but any sense of where that could end up assuming performance remains about where it’s currently running?

[Dan Connealy:]

It’s Dan again. Compensation means the equity comp should edge down a bit in the fourth quarter because of the reasons we talked about, but the fourth quarter is the quarter when we would refine our estimates for bonuses and much like last year, that process happens at the end of the quarter, so it’s hard to know. We are accruing bonuses based on the level paid in the prior year and we will go through that analysis later, and I guess have no reason believe it will be significant adjustments one way or another.

[Michael Kim:]

And then just finally, maybe a question for Hank in terms of overall margins. Any update on how you are thinking about profitability going forward, maybe now that markets have become a bit more constructive here more recently?

[Hank Herrmann:]

Well, I think that the number of variables in the margin computation got a couple in it that is totally dependent upon forecasting gross sales and totally depended on asset price change. So, I’ve always been reluctant to say anything other than, we think that the direction is up, we still have the goal of 30. I would just add that on a fourth quarter basis. Market actions would continue along the lines we have experienced so far. I would expect based on everything else I know that there’d be some improvement.

[Operator:]

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

[Marc Irizarry:]

Just a question I guess for Mike and for you Hank, when you think about asset strategy and capacity and if the category that they operate in continues to be an attractive one, and sales sort of pick up again. How big is too big for that fund and how do you think about your own resources versus capacity there?

[Michael Strohm:]

The size issue has been a question that has come up for the fund I would say at least as long as my team is hedged stewardship of the fund which is now in its 14th year. This strategy adheres to a large GAAP focus in equities. We stay with large fixed income areas. Most of the things that we do tend to be in highly liquid markets, I guess is the easiest way to say it. Plus the derivative strategies that we’ve employed tend to be strategies that focus on highly liquid exchange created products. So, during our tenure we have not run into a size constraint as it pertains to the asset classes that we participate in. In addition, what has helped us from a man powered perspective is the culture of the organization. The culture of the organization is one in which we have a very collaborative process I think you may have had an opportunity to visit here and to learn more about. But it is a collaborative process where I am not constrained by my ability or my partner’s ability to see what’s going in the world. We have the ability every morning to tab into a base of 70 plus people, and that has been very helpful through the entire tenure of our team's stewardship on the product and I would expect that would continue to be the case. From time to time we will have to tuck in people with expertise in different markets, from time to time which we have been doing the whole way, but in terms of manpower constrains I don’t see it. The other issue is a category issue as you rightly pointed out. The category is getting more attention and there are certainly other fund families that have that have similar products that are multiples of what we have manage, so I have some optimism that it can be done on a larger asset base.

[Marc Irizarry:]

And then just following the law now on the institutional side, where are you in process of marking asset strategy to the institutional world? And how do you categorize the focus of asset strategy, are you competing more against the alternative universe, or where are you seeing the opportunity there to pour that the asset strategy to the institutional world?

[Michael Strohm:]

Let me also just follow-up on your prior question by pointing out that in May the 3 I believe it was, so we are coming up on our sixth month of experience with a new opportunities asset strategy fund which is designed to get at small mid cap markets that has so far has done extremely well. And we expect that product to grow in size as well also. With regards to your second question, when I have been asked to give presentations to pension consultants or potential institutional clients, they tend to look at the fund, I am not sure which category that they look at specifically, all that I can tell you is that they are very interested in the fact that the dial of the asset strategy fund does not fit neatly in 2A style box. So whether that's alternative, global, whatever you want to call that is how they look at it. But I think the key is what they like is the idea that during the history of this fund, the fund has used the flexibility that the shareholders have given to us to use different asset classes at points in time where it was efficacious to move from stocks to bonds or back and forth, and at the same time generate a more than acceptable return to our shareholders over a long period of time. Now what they call that specifically, I don't know. It's kind of like the other question I had earlier where the shareholders client at the primary level are less enamored about putting things in boxes as you might think. They just don't seem to think that way. What they're more focused on is who can meet their needs over a long period of time to obtain their objective without being unusually volatile in the process. That's what they want. Now what you call that specifically, I don't think even the client knows, but that's what they want.

[Operator:]

Our next question comes from Mac Sykes with Gabelli & Co.

[Mac Sykes:]

Just assuming that equity inflows pick up in earnest this fall, can you highlight some of the funds that you would expect to be the best sellers for Waddell, perhaps outside of Ivy?

[Tom Butch:]

Well, Ivy and Waddell are essentially one of the same from an investment management perspective. Are you talking about through distribution or the products and sales?

[Mac Sykes:]

The products and sales, the growth value, some of the other ones that you expect equity investors as they re-risk what would be sort of the first participants to those?

[Tom Butch:]

Well, if you were to use the current quarter as a proxy relative to that question, you would have seen constructive sales in our mid cap growth product and our large cap growth product, in our small cap growth product. So right up and down the right most Morningstar grid on the growth side and some specialty funds like science and technology. Our value fund has a very strong track record that we have yet to market it very aggressively. It could be something which if the market moved in that direction would be very strongly on deck. I guess it’d be easier to say, it would be hard to find a category in basic equity strategies where we could not participate. That’s a better way to say it.

[Mac Sykes:]

And could you give an update on the, I guess there was a launch in May of the Ivy derivative fund, new launch, maybe an update on sales performance? And then again on the capacity question, what capacity might be for that fund?

[Tom Butch:]

I will just speak to sales and let Mike as part of the portfolio team address capacity issues. It was what I would call a pretty soft launch in May, and actually we will take it much more aggressively to market next year. It is growing in sales and doing pretty reliably $1 million to $2 million a day at this point. And that’s really what I would call an aggressive launch. So I think its alignment with the process of asset strategy and its ability from a capitalization perspective to focus on small and mid cap equities while on the context of a proven strategy has already I think established some roots for the fund and we have very positive expectations for it for the sales next year. And I will turn it over to Mike to comment more on the product.

[Michael Strohm:]

I was thinking with regards to Mark’s question earlier that the person that’s least capable of estimating how big a fund product could be is probably me. Fourteen years ago when we were handed the asset strategy fund it was a $50 million product somebody asked me the question how big could this ever be? And I said well, if it ever gets to $500 million that will be a big product. And now we are certainly multiples of that. So I am not a good source of how big a fund product could be. Secondly, I would say that as Tom rightly pointed out the Ivy asset strategy new opportunities fund is focused on small mid cap stocks and in less liquid fixed income credits by design. And the idea is to capture for shareholders research opportunities that we are finding on a global basis. The fact that we are focused on small mid cap names perhaps is somewhat helpful in terms of what the upside constraints might be in terms of total size. I think a product like this, once it gets past a couple of billion dollars it does become less or certainly it becomes much more difficult to manage. And I think we would be very sensitive to that.

[Mac Sykes:]

While I have you here Mike maybe you could just talk about some of your current global opportunities that you are seeing for new funds. And then just a follow-up question on that, how you expect US election or maybe tax policy this fall to impact this decision?

[Michael Strohm:]

Are you asking me? The answer to the second quarter, I'm not a political strategist but, what we have been telling our shareholders and clients and partners when I have gotten the question is to be careful in coming to the conclusion that gridlock is positive for the markets. I don’t know anymore than you do about how the election is going to turn out, but Michael a lot of people it looks like the house is going to go back to the Republicans, the Senate is too close to tell. You have an administration that seems to be focused on an ideological focus on certain issues that they just don’t want to vary from. And that speaks to the potential for gridlock. And generally in the past, the market historians would say that that has been favorable, particularly in the third year of a presidential cycle when if you look at history the third year of a presidential cycle tends to be from an SNP performance perspective the best of the four year time period that we are speaking about. However, what I warned our partners and clients about is that gridlock is good when things are going well. But if we have a situation where you have both Houses of Congress split in terms of their political loyalties, you have an administration that continues to be focused on certain ideologies. At a time when you have structural problems with the economy, I would conclude that grid lock would not be good, and in which case the market’s interpretation could go from favorable to unfavorable sometime over the next 6-12 month period of time when that outcome comes to fruition. Certainly the outcome is one of the issues that we are concerned about as we think about managing the asset strategy fund or all of our funds going into the next two year period of time. With regards to your first question, as an organization and the asset strategy fund and in the new opportunities fund, the bright spot from the secular perspective continues to be the growth opportunities that are occurring outside of the developed markets in which you have a large number of people moving into middle class for the very first time. This has been a focus of the asset strategy fund for the last seven or eight year period of time. It continues to be a focus, the new opportunities fund that the IBS strategy, new opportunities fund subscribes to that same framework by capturing small mid cap names that we come across in our research.

[Operator:]

Your next question is a follow up from Bill Katz of Citigroup.

[Bill Katz:]

Actually, two question. Hank, if I do some quick math and maybe its just that quick math and there’s rounding involved, I get about a little over 3.5% weighted average net of improvement from the end of the quarter which would put your assets about 78.6, rounded which I don’t know if that rounds to 79 near mine, I just wondering if that math was consistent, except we suggest sales have picked up. And the second question, if you sort of go back to institutional business and just work through dynamics, I'm a little confused between your comments on Pictet assets being 30% below, 40% below their peak versus good flow dynamics? Thanks.

[Hank Herrmann:]

Okay, I am not sure I’ve got the second question. As to the complicated matrix that you put together to guess what the AUMs were as I spoke, I would congratulate you on the thoroughness of your work. I would say you are not precisely correct but pretty damn close. And what was the second question?

[Bill Katz:]

I apologize of the obtuse nature of it. Just trying to understand, you mentioned before that you are seeing good leverage in some of these slow areas on the institutional side but then you also said earlier on the call that the Pictet assets are down to something like 30-40% from their peak and where the dollars was doing, you’re not seeing a lot of lift back. Just trying to understand where the flows are sort of coming from x, the institutional DB business?

[Hank Herrmann:]

I’m still not quite sure I get it. Pictet, the comment I made was down materially from its past peak and I am thinking 2.5 down to 1.5 basically. And that has mostly to do with

[Bill Katz:]

We can talk about it offline. I don’t believe at the point, I was always more concerned, trying to figure out when your say in the flow part of segments. Maybe it is a vernacular flow in flow.

[Hank Herrmann:]

In the flow part of the business, I guess contrary to what is happening in Pictet. Large Cap growth is an important part of that and also a very important part of that is access strategy fund.

[Operator:]

Your next question is a follow-up from Roger Freeman with Barclays Capital.

[Roger Freeman:]

Just a couple of follow-ups on the things you’ve been talking about here recently. The brokerage platform you made some interesting comments there, because I think you hired somebody right last quarter to formulate a new strategy and it sounds like you have something in place. Why don’t just elaborate on how you are going to kind of go after external brokers, bring them over to Waddell?

[Dan Connealy:]

Yes, we did make a hire about six months ago, Senior Executive named Karen Lare who had run the broker-dealer at WaMu and had I believe 18 years of experience at LPL which of course is one of most respected in tenant broker-dealers and her focus has been examining the platform and making changes necessary to adapted to be fully ready to take on the task of bringing people from other broker-dealers to here. And the nuance in here in my comment was where upon her arrival we weren’t perhaps as fully ready as we wished we were to bring people under the platform, due substantially to her work and the resources that have been made available to that work. We believe we are now at a place where we are ready to more aggressively take that platform to market. As the profiled person whom we are seeking to bring over, it would be pretty focused on advisors with a preponderance towards packaged product and fee-based business, so that it aligns well with the structure like existing broker-dealer and the product emphasis of our existing broker-dealer, and the value proposition we took to market when we first started this platform was very well received and we are going to go back out at this point to effectively restart or relaunch that effort in a more comprehensive manner. And so, the proof will be quarters out, but that’s where we are with the platform.

[Hank Herrmann:]

And just a shorthanded for you. At this point in time we are pretty much shovel-ready.

[Dan Connealy:]

You can then sell the election fees in hand. I’m sorry, you had a follow-up?

[Roger Freeman:]

Well, yeah, did you have to make the functionality changes to the choice platform or is it just more in terms of dealing with how to bring people into the organization and not sort of destabilize existing advisor rates?

[Hank Herrmann:]

This is more an execution issue than it is a strategy change.

[Roger Freeman:]

Okay, separately, the assets, the new opportunities fund, you talked about the sales were picking up there. Of the 100 million or so you had in at the end of September, is that all third party money or is some of that Waddell’s seed money?

[Hank Herrmann:]

There was some seed money in their, and there are some also transfers in there.

[Roger Freeman:]

How much of it is really external or organic?

[Hank Herrmann:]

Tom gave you a number as to what’s coming in on a daily basis.

[Tom Butch:]

I think roughly nine to two-third or one-third.

[Roger Freeman:]

And then just lastly, I maybe talked about this already but there was a write-down of an investment in limited partnership, what was that in the quarter?

[Hank Herrmann:]

That's an investment that was made many years ago and there was a change in the ownership of that, and we exchanged our ownership for some other listed stock on a foreign exchange, and so we had a market-to-market. So it's not that big of an investment.

[Operator:]

At this time there are no further questions. I would like to hand it back over to management for closing remarks.

[Hank Herrmann:]

Thank you operator, we appreciate very much your attention and interest, and we look forward to talking to you next quarter or sooner. Thanks for sitting in. Take care.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect.