Waddell & Reed Financial Inc
Q1 2014 Earnings Call Transcript

Published: 29 Apr 2014

[Operator:]

Good afternoon and welcome to the Waddell & Reed’s Financial, Inc.’s First Quarter’s Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I’d now like to turn the conference over to Mr. Hank Herrmann, Chairman and Executive Officer. Please go ahead.

[Henry Herrmann:]

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

[Nicole 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 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 schedules have been posted on our website at waddell.com under the Corporate tab.

[Henry Herrmann:]

Thank you, Nicole. Good morning again, everyone. This year started out with great momentum, allowing us to post all our first quarter results and set new records across many key metrics. We recorded record operating revenues of $390 million, record operating income of a $117 million, record assets under management of a $131 billion and record sales of 10 billion. Our distribution channel set a number of individual records also. Wholesale saw sales of $7 billion, the Advisors channel set several records with sales of $1.4 billion, advisor productivity of 60,900 per advisor and had a competitive 2% rate of organic growth. Our Institutional channel turned in second consecutive quarter of solid sales. Unlike previous quarters which benefited from the funding of one new large mandate, the current quarter saw a strong sales from existing relationships. We continue to generate solid free cash flow and we returned 47 million to shareholders. Our financial position remained robust at $721 million in cash and investments at the end of March. We earned $0.88 per share during the quarter, a 40% improvement compared to the same period last year. Sequentially, earnings per share felt $0.04 with the entire declined attributable to the larger investment gains in the previous quarter. Operating income rose 3% sequentially despite seasonal headwinds of fewer days, reset if payroll taxes, annual merit increases and strong sales with modest market action. Asset under management of $131.4 billion rose 27%, compared to the first quarter of 2013 through a combination of $16.5 billion in market appreciation and $11.1 billion of inflows, representing an 11% rate of organic growth over the past twelve months. Sequentially, assets under management grew 4% due to organic growth rate of 15% as market action was negligible during the quarter. Sales during the quarter was $10 billion, up $0.11 sequentially and 31% compared to the same quarter last year. Inflows of 4.7 billion would just shy of the record of $4.8 billion. The number of investment strategies selling well continues to expand as thus our distribution relationships. Several investment strategies are on pace to achieve $1 billion of inflows. In all, we mange 37 distinct investment strategies, 20 of which have assets under management in excess of $1 billion. The scale we have built across our product line should provide operating leverage going forward assuming normal market actions. Operator, at this time, I would like to open the call for questions.

[Operator:]

(Operator Instructions). Our first question comes [inaudible] from Morgan Stanley.

[Unidentified Analyst:]

Good morning. Thanks for taking the question.

[Henry Herrmann:]

Good morning.

[Unidentified Analyst:]

So, first I wanted to ask about the institutional interest you’re seeing for some of your products. You commentary was helpful but in terms of strategies where you may be getting interest but not necessarily win at this point. I’d be curious if there is anything you see in the potential pipeline that hasn’t really come through yet?

[Thomas Butch:]

Hi. It’s Tom Butch speaking. We continue to see most of the activity around our large capital equities particularly the core equity strategy. I would say that, there is emerging interest and opportunity in high-yield strategy, that’s the one which if you were to ask is sort of gathering some attention as you know really in the past couple of years it’s been the mid cap growth, large cap growth and core equity strategies that have been central to the sales.

[Unidentified Analyst:]

Okay. That’s helpful Tom. Thank you. And then, following-up on that I guess high-yield capacity. Are there any fixed income capabilities? I understand that what has been mostly in equities and balance and hybrid shopper and allocation shopper should say over a period of time, but are there any fixed income strategies where you see a significant opportunity Q-o-Q it be kind of unconstrained bond some make hotter? Any other opportunities to manage assets where you think you can make sense from your perspective and you see a big market opportunity?

[Henry Herrmann:]

I’m presuming your question in that sense institutionally sort of an enterprise question, and I would say, yes and we are always looking at the market and places we can participate and obviously unconstrained has been one of those places. Tomorrow, we will launch an Emerging Markets Local Currency Debt Fund and it will be sub-advised by – for whom as you know we have sub-advised U.S. equity product from their distribution on pan-European basis. So out of that relationship has come that. They are global leader in that asset class which though having gone through a difficult patch recently certainly both at a retailers and institutional level has got an enormous potential in recent years. So, that’s a good example of gap that proceeds that has met by a partner that has a global stature in that asset class. So, I hope that’s a helpful answer. Obviously, we are looking at these things to find a solution in emerging and for your point there are a lot of other things going on outside sort of the traditional intermediate high-quality stuff and our eyes are on them.

[Unidentified Analyst:]

Okay. Thanks very much for taking my questions.

[Operator:]

Next question comes from Michael Kim with Sandler O’Neill

[Michael Kim:]

Hey guys, good morning. First I think in the past you’ve talked about how retail investors have often sort of gravitated towards asset strategy, when they have may lacked conviction around markets or the macro backdrop. So, just assuming the environment remains constructive and investors continue to get more comfortable moving up the risk curve. Just curious as to how you think that sort of environment could influence the trajectory or the underlying mix of your flows?

[Henry Herrmann:]

All things being equal you would assume that, there will be some shift towards or a more focus now on mandates, that’s all things being equal. Of course, we’ve seen that kind of shift in attitude. I can go only back to August and the only thing I’d know is that, it appears as if there are enough people around, we still seem to be interested in having our diversified focus because flows in strategy fund are continue to be quite good. Tom might want to add something to that.

[Thomas Butch:]

Thank you, Hen. I’d only add Mike that as we’ve talked about in the past, the word allocation category has inconstant itself as a kind of core category and I am not sure again that it is dependent on movements between asset classes or rotational factors. I am looking at a piece of paper which tells me that year-to-date despite the greater acceptance of equity and narrowed equity strategies, it’s still seventh among all Morningstar categories. And so, we’ve seen this year in and year out whether it’s fixed or equity that is in the favor of this category, I think has carved out its own place.

[Michael Kim:]

Okay. Fair enough. And then maybe a follow-up on the capital management front. I know it’s relatively early in the year and you remain committed to offsetting the dilution from the annual equity grants. But just given the consistent rally in the stock and just wondering if you are thinking on returning excess capital to shareholders has changed at all more recently particularly as it relates to maybe the mix of buybacks versus dividends?

[Henry Herrmann:]

No, it really hasn’t. The strategy outlined our approach is the same. Share buyback play an important role, dividends play an important role. Every once in a while a special dividend will play into things. Obviously, our share price action might encourage me to be a little more aggressive toward equity purchases and really steep decline might really encourage me. But at the present time, we’re on a path toward a normal buying back enough shares to offset the restricted share grants. I think in release there is an indication of how many shares we’ve bought through April. On the top of head I’m not quite sure with the number but it is in the release.

[Michael Kim:]

Got it. Okay. And then just last one for Brent. Can you maybe quantify the sequential step down in incentive comp this quarter versus the fourth quarter? And then just any guidance in terms of comp as we look out into the second quarter?

[Brent Bloss:]

Yeah. On the incentive comp side, there was a ramp up in bonus accruals in the fourth quarter. It’s more normalized in the fourth quarter given or in the first quarter given the market today. But we were also helped in the first quarter by lower equity compensation because of adjustments to our forfeiture rate, there were also less days in the quarter and our non-employee compensation related to equity comp was lower. And also benefiting in the first quarter was a lower pension expense, a higher discount rate and also the performance of the pension plan in 2013 on annualized basis, the pension expense will decline about $4 million. So, we fix some of that $4 million up in the first quarter as well. On the guidance side, I’d stick with what I talked about in the fourth quarter that being, overall we’re targeting a 9% increase to compensations given normal market environment. I think we’re still looking at that target. Off that target, I mentioned 4% of that relates to headcount growth. In the first quarter, we didn’t see any increase in headcount, so the headcount did pick up for the remainder of the year but that’s still something we can dial up and down.

[Michael Kim:]

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

[Henry Herrmann:]

I just want to follow-up on the question about capital allocation. We purchased a 666,000 shares year-to-date.

[Operator:]

The next question comes from Robert Lee at KBW.

[Robert Lee:]

Thanks. Good morning everyone.

[Henry Herrmann:]

Good morning, Lee. Robert Lee – Keefe, Bruyette & Woods I had a question really on the asset strategy franchise. I know you rolled out one or two kind of related sister funds to that and which I guess has had some moderate success. But, I mean, how do you think of that franchise and trying to burden it and additional opportunities? You know, may be is there a way to – how do you think about accelerating growth of kind of related not exactly the same franchise and then maybe you have this relationship with – I am not aware if they have picked up that product for their distribution channel, but is there opportunities to kind of expand that franchise through other them or some as you said cap type strategies try to leverage distribution relationships outside the U.S.

[Thomas Butch:]

Hey, Rob. It’s Tom. We do have the Asset Strategy Fund in CCAR structure that we sub-advised and over the last 12 months or so, it’s accelerated. It’s still relatively smaller but you know quarter of a billionish. So, it has grown pretty nicely. That’s mostly through the NRC activity of our wirehouse partners and their locations in New York, Miami and other cities. But it’s definitely exportable given that CCAR structure globally if we’re able to find other placements for it. I’d like you to remember too that, we have a very sizable institutional account with a large insurer that has grown to be a hugely important relationship to us and has created daily flow on an almost uninterrupted basis for the last few years. So, that’s another sort of extension opportunity for the fund. So, it’s not really just offshore, it’s finding sub-advised opportunities and we’re always alert those.

[Robert Lee:]

And maybe following-up to that…

[Nicole Russell:]

Rob, could you talk up a little louder please.

[Robert Lee:]

Yeah. I apologize. I have a bad connection here. But, maybe following-up to that and Hank, you mentioned that in these institutional channels you saw strong sales from existing relationships. I am assuming maybe this is one of those. But I don’t know if there is any more color you can provide on that. Was that mainly, I am assuming that was predominantly from various sub-advisory relationships and so as we look at that $1.4 billion of gross sales. I mean, is there a way of kind of characterizing 75% of that was kind of these ongoing flows from existing relationships and the rest was kind of the traditional institutional businesses, just trying to get a little better feel for it?

[Henry Herrmann:]

Now if you look at it Rob on a gross basis, two-thirds was sub-advisory on a net basis a little more than three quarters was sub-advisory. So, the business now sort of has this foundational sub-advisory flavor to it, where it’s sustained by the daily bought products and the increment now has sort of flipped to the increment being the larger chunks that we’re able to win.

[Robert Lee:]

Great. That was it. Thanks for taking my questions.

[Operator:]

Our next question comes from Eric Berg with RBC Capital Markets.

[Eric Berg:]

Thanks very much and good morning. You mentioned Hank in your opening remarks you made reference to operating leverage perspectively. You don’t expect margins to improve every quarter, but what are you thinking at this point as the business continues to expand and your ability to achieve operating leverage and a higher operating leverage? What are your general thoughts please? And then I have a follow-up.

[Henry Herrmann:]

My general thoughts are operating margins will continue to rise assuming normal market action. I would just like to point out that we essentially had a flat operating margin quarterly, and that was a pretty significant positive achievement I think, given headwinds that Brent talked about and I touched on. In the environment past, I would say that, the worst thing that can happen to us is to have really strong sales and not helpful market action from a profitability point of view. And we have something close to that in first quarter and we are still able to keep operating margins essentially flat. In the previous quarter, we had strong sales and strong market actions. So, I think that’s indicative of kind of circumstances we find ourselves in as assets grow, our revenue particularly increase, tend to outgrow expense growth across the board. So, I think there is still more leverage in the margin. Last year or two, there has been a big pick up in operating margin and am not counting on that not we have budgeted a significant increase in operating market at the moment. But, I still believe we will continue to make progress. And your follow-up question is?

[Eric Berg:]

Yes. Thank you. It’s encouraging to see a continued improvement in your advisors productivity. Can you review with us just specific initiatives that you have in place, that you have under taken to get these folks to be increasingly productive?

[Thomas Butch:]

Hi, Eric. It’s Tom. I believe I will just point to one thing. That has really been the pivotal factor. There are a couple certainly infrastructurally it’s been a very best to create a context of support that provides them everything they need from a financial planning context to sales support, to superior client, superior advisory services such that they can rely on us to provide a backbone that enables them to serve their clients only not just with products but with intellectual support and good operating capability. There is a sort of a change in the business mix. It has been the movement to greater fee-based sales and the fee-base as a percentage of total sales was roughly 45% in the quarter and fee-base as a percentage of total assets is about 30% in the quarter as well. And we certainly don’t push any of our advisors to any particular business model but many have adopted this because it sort of routinizes asset allocation, re-balancing and enables them to spend a lot of their time serving their clients with a superior service. That creates an annualized revenue stream for them and to extent for us as well. And so, if you look productivity measures, I would say that, that’s one that really influences pretty substantially.

[Eric Berg:]

That’s helpful that you highlighted there. Thank you.

[Brent Bloss:]

Eric, this is Brent Bloss. Going into the current year, we implemented a new compensation system and along with that, changes the way we are paying in Basel which really pushes for more production particularly with the managers in the field to get the advisors to a certain level in order to hit bonus targets. So, I think that’s also a factoring power trying to push production.

[Operator:]

The next question comes from Daniel Fannon from Jefferies & Company.

[Daniel Fannon:]

Hi. Thanks. Hank, I apologize if you mentioned this in prepared remarks. But, can you comment about April trends in both in Mutual Fund channel as well as kind of the institutional outlook given you’re coming off very strong quarters of inflows in that channel as well?

[Thomas Butch:]

Right. Yeah, the flows in April a little bit slower than the flows we saw in March and first quarter run rate. So, as market is kind of gotten a little more grumpy, it seems like it has some impact on all three channels. On the other hand it appears, it is true that all three channels are in – position. Brent might want to elaborate a little more on that.

[Brent Bloss:]

The only thing I would say is that, if you look at April on wholesale side, which is a dominant part of flows, it remains at high end of last three years on a gross basis but is down from Q1 at really unprecedented rate which none of us relied on being entirely sustainable. The other thing I would point out from business planning perspective is April is almost precisely inline on a gross basis with what we projected on a daily run rate basis for the year and from the basis for our sales plans. So, you are up again completely difficult comparable because the first quarter was unprecedented in our history. As said on advisor side, we take on a gross basis.

[Daniel Fannon:]

Okay. And then, just follow up on the wholesale adds in the quarter, it seems like a nice step up in terms of that build out. Can you talk about how we should expect that to have an impact both from I guess an expense and ultimately kind of ramp in sales kind of over the next 6 to 12 months?

[Thomas Butch:]

I will give a little color and I know Brent would probably like to do so as well. I think the number is slowed a little bit years the fact that we changed classification of four people who are specialist to give them wholesaler status. But, the number still reflected an increase and going back to because, we talked about the fact that our intermediate term goal for the number of wholesalers was 60. We think that’s right number to sort of pause. We’ve also talked about the fact that, we have been working to build a group of wholesaler who call us on sort of the second tier independent from, which are big users of packaged products and active managers. And so, we have built that up to about 15 people to complement the national effort and there were sort one using – and RIA a couple of others. So this was really just flushing out the group that we had envisioned. In terms of productivity, the ramp up candidly given where these people are calling might be a little bit slower than some of the others because there are many cases not going into existing channels and existing broker dealers, they are more cultivating new broker dealers in the independent sites. So, the ramp up might be a little bit slower for the people on the independent site. But ones who are in the national channel or just effect of cutting territory that almost always makes people more productive and so we would think that those couple of people would ramp up very rapidly. Brent did you want to provide any more color?

[Brent Bloss:]

No. I would just say on the expense side, as Tom said, as they ramp up the cost, obviously it will go up on volume. But for the most part, because of the reclass as we talked about, you are only talking six people. So, just an increase in base compensation which shows up in the indirect line is all you really seeing today. The real increase quarter-over-quarter is volume related on the wholesale side.

[Daniel Fannon:]

Great. Thank you.

[Operator:]

The next question comes from Bill Katz with Citigroup.

[William Katz:]

Okay, thanks very much for call. I appreciate it. Just coming back to your institutional channel for a moment. You mentioned a lot of win this quarter were from existing accounts. What is the pipeline looking like? I know you mentioned a little bit more appetite for high yield, but what’s the RMP actually looking like may be for say a quarter ago, a year ago and if you can where is that buying coming from? Is it coming from other asset classes or other competitors?

[Henry Herrmann:]

Well, I can’t give you precise answer on the last one, more often latter other competitors than other asset classes generally speaking and the pipeline remains good. We have some finance scheduled for this quarter and beyond those finance a great deal of interest and we talked about the fact in the recent past that a lot of this interest is coming from offshore that remains the case as we follow our consultants offshore. That’s the simplest way to summarize it though.

[William Katz:]

That’s helpful. And then just one for Brent. I apologize. Can you just repeat what your comp guidance is? Was that 7%, was that a year-on-year in the second quarter? Was that a 2014 or the 2013 and is that net of the incremental wholesaler additions?

[Brent Bloss:]

Well, Bill, on the wholesale addition that shows up in U&D. It’s not in the compensation line. So, the salaries for wholesalers are included in the indirect line and then their variable commission show up in the direct expense line. So that wouldn’t have any affect. The 9% I just discussed was ‘14 over ‘13 annual.

[William Katz:]

Was it 9%?

[Brent Bloss:]

Yes.

[William Katz:]

Okay, perfect. Thank you for taking my questions.

[Operator:]

Next question comes from Cynthia Mayer, Bank of America Merrill Lynch.

[Cynthia Mayer:]

Hi. Thanks a lot.

[Henry Herrmann:]

Good morning.

[Cynthia Mayer:]

Good morning. So, I guess just a follow up on expenses. You gave some guidance on the comp, I am wondering if you are expecting any changes in G&A ahead? Do you sort of see that just is rising I don’t know 2% or 3%, 5% a year. How do you normally think about G&A in the annual budgeting?

[Henry Herrmann:]

Well Cynthia, what we have targeted right now is about 11% increase year-over-year. That includes the indirect line and G&A combined and direct U&D line and G&A combined. Now a lot of that increase relates to the cost of IT, the renovation effort that’s going on here. So, that’s that also a lot of that can be dialed up and down depending on how the market performs. So, a lot of that work is being done through contractors. So, we can we are not adding a lot of headcount to take on that effort.

[Cynthia Mayer:]

Well, aside from distribution, how do you think about G&A?

[Henry Herrmann:]

Our private distribution, probably, well lot of the IT cost show up in there. So, I would look at as more at as more of 8% to 9% increase year-over-year.

[Cynthia Mayer:]

Okay, got it. And then I guess question a little bit more in the flows. The growth in the sub-advisory flows and I am sorry if this is just too many question on this but they are pretty good lately, is there a change in the underlying business you think where the sub advisors are simply selling more or are you just winning more share there?

[Henry Herrmann:]

Try again, I am not quite sure I understood your question

[Cynthia Mayer:]

Well, for instance, if that – I don’t know how much of that is like variable annuity business. Has that business improved somehow for the sub-advisors or do you think you are just winning more share of it?

[Thomas Butch:]

I am going to give you an imprecise answer, but my answer would be both.

[Cynthia Mayer:]

Okay.

[Thomas Butch:]

Based on what we know from distributors for whom we sub-advise I think it’s both.

[Cynthia Mayer:]

Okay, fine. And then just a quick question on the Advisor channel, it looks like the investors there are getting out of equity in the quarter and more into fixed and money market. Any particular reason there particularly conservative at this point?

[Thomas Butch:]

No. I don’t think generally speaking that they react to changes in market condition. We talked about the fact that third of the assets are in the asset allocation program and those that are not and not to trade dramatically. So I don’t know what to be a fact but I suggest that there is some anomaly at work there.

[Cynthia Mayer:]

Okay.

[Thomas Butch:]

It’s not a channel that swings one way based on what the market is doing generally.

[Cynthia Mayer:]

Okay. And then may be just last question, I think this has come up before, but you have really robust flows but there is a temporary lag in performance as you have in some of your key strategies now. You tend to see an impact all at the margin or because people buy say asset strategy for a particular place in their portfolios and they are looking for long-term performances that really not have an impact?

[Thomas Butch:]

I would take door two. I think it’s generally doesn’t have as near-term performance issues and that’s what they remain as if they are in fact near-term don’t tend to change investor behavior in our largest product.

[Henry Herrmann:]

I guess I want to jump in here and just point out that, I am not sure where we are coming up with the ideas near-term performance lagging or something like that. As I look at all the universe that all our mandates are in, the difference between being at the top and be at the bottom is small and the rankings change quickly given market psychology, which as you know has really been volatile. I don’t think that at the present time we are sensing any concern that we feel from performance issues.

[Cynthia Mayer:]

Okay, great. Thanks a lot.

[Operator:]

The next question comes from Craig Siegenthaler, Credit Suisse.

[Craig Siegenthaler:]

Thanks. Good morning. I think you handled my question, but let me just answer it different way to just Cynthia here. But I want to see what really Mike and Tom are talking to clients about, what their message was just given the kind of more softer near-term performance in asset strategy and may be Hank if you could provide any April flow commentary related to asset strategy to that will be very helpful?

[Michael Strohm:]

Great, this is Mike. Thanks for the question. We have not seen an unusual change in the flow of question coming into our team nor have we seen anything other than positive flows on almost a daily basis for well over 16 months or so. The types of questions that people were asking tend to be macro related they are concerned or they are interested in our thoughts on changes of the leadership in China, they are interested in what we think about wealth management products. They are interested in what we think about the focus of the new regime in China on anti-corruption, changing social issues tends to be at the top of their agenda. They are interested in our thoughts about where does the Central Bank policy take the world from here. You’re right that the performance of the fund isn’t in the last quarter anywhere since year-to-date isn’t what we would like. But as Tom rightly pointed out, the shareholders that are attracted to asset strategy tend to be people that are genuinely long-term oriented. They are focused on our ability to help them over a 3, 5, 10 or longer year period of time and so they are not as I guess concerned about monthly, quarterly performance as in some of the product I suppose. But so far, the questions have been fairly standard related to macro type issues.

[Craig Siegenthaler:]

Thanks, Mike. Maybe just a follow-up here for Brent. Given the 9% year-over-year comp guidance in 2014 versus 2013 and the number you just printed in the first quarter, it looks kind of surprising because it looks like compensation is going to fall from current levels maybe the case but also on a year-over-year basis, it looks like comp will be down probably every single quarter for the rest of this year. I just want to make sure that’s right and I know the pension adjustments driving some of that but just maybe clarify the point there?

[Brent Bloss:]

Yeah. I think we will continue to look at the incentive compensation on a quarterly basis. So, normally we start out the year and like I mentioned earlier, the market action to-date we’re starting at more of a normalized accrual level, we will continue to look at that on a quarterly basis and ramp up the incentive compensation depending on the performance of our funds each quarter.

[Henry Herrmann:]

Like I just mentioned that’s a typical how we take a look at it in the second quarter. First quarter just doesn’t seem a good measurement there. There have been some instances in the past when the second quarter we made a decision to up accruals and we will just see how that goes. At the present time accrual run rate is not too much different than what we accrued for the last year.

[Craig Siegenthaler:]

Got it. Thank, Hank.

[Henry Herrmann:]

Okay.

[Operator:]

The next question comes from Marc Irizarry at Goldman Sachs.

[Marc Irizarry:]

I guess this is question both for Hank and maybe for Mike as well. I think one of themes that we’ve seen recently has been this leadership change maybe from some carriers of growth to value. I am curious what impacts do you think that’s going to have overall on your equity business. And also Hank specifically on the diversity of flows into various Waddell funds?

[Henry Herrmann:]

Let me take a shot at it. I’d tell you that, I find that action in the marketplace over the last four weeks or eight weeks as mysterious as most of you out there do. And I just look at all the inconsistencies in various parts of the marketplace either domestic or foreign, fixed income or equities and I am scratching my head. And so, with that note, I’d say from a flows point of view, we have not seen any change in terms of selection. Lots of money going into science and technology, good flows into mid cap growth, nice flows into growth period and then leadership in after strategy fund which discussion was more equity oriented. So, I am not exactly sure how to answer the question. My personal prejudice is that, the orientation has eventually has set itself out, there will be a recognition that the economic is growing may take until June before people get comfortable with the rate. And once that happens, I think that, there will be a renewed focus on equities and renewed focused on more growth part of it. Now some of the defined quality stuff price action was parabolic for six months and we were going through evaluation adjustment. But those were the headline ones that we’re all aware of if you tracked out most of those, you look around and you see reasonable evaluation. And I do think we’re having somewhat rather a reconsideration of that old technology is a leader currently and new technology is a follower. But I think it’s going to take a while to settle that in terms of conversation, but it’s a very confusing environment. Mike, you want to add some color to my commentary.

[Michael Avery:]

Marc, the only thing I would add to that is, you can tell from the questions that you received that investors are going through the process of how much to pay for growth. And I mean it in the context that investors are well aware that they have been in an environment that central bankers, particularly the Fed has gifted to them by keeping interest rates at nearly zero for over a five year period of time. And our world revolves around in some form discounted cash flow model. And so, the question that the people are asking is, well the as the discount rate goes up if we are in a rising interest rate environment and we might be able to argue whether we are or not. But the questions are, if we are in a rising interest rate environment where will growth come from and what is that worth? The flow of capital into those sectors that at least investors perceive has been clearly growth, healthcare, technology. It’s to be candid created if everybody was thinking the same way and so you have seen some backing off of valuations in those sectors with people again as part of the process who trying to figure out what growth is worth reassess. But this a year that as it was the underlying economics really pick up and that’s still an open question. At the moment, people are using the weather phenomena the first quarter is an argument or why the first quarter GDP is likely to be soft and why those that are dependent upon discretionary purchases or likely report smaller or weaker revenues. Once investors get past that particularly if the federal reserve will have a meeting today and will have some kind of decision about the pace of paper in the part of the fed. But as the investor community deals with this issue of where are rates going to what extent will the zero interest rate policy they want to be supported, that’s going to cause people largely to think about if I can no longer exist my discounted cash flow model to work on 0% interest rates that means growth has got to come much in accordance and the delta on the growth rate is going to overwhelm the delta on the interest rate change in order for me to have a chance at a buyable investment. And I think maybe I’m over generalizing, but I think that’s where the market is currently at.

[Marc Irizarry:]

Hey, great. And then just a more specific question on I guess Brent for you on the U&D margin. I mean I guess the some of the indirect expenses, I might have missed this, but do you expect that the current level we are at step up a little bit from here. Is this sort of a good run rate for the indirect expenses across wholesale and the advisors channel?

[Brent Bloss:]

It might pick up a bit just due to the IT initiatives that we’ve been talking about for a couple of quarters. But the projection is that, it won’t tick up too much more. So, I mean I think it’s a pretty good run rate.

[Marc Irizarry:]

Okay. Great. Thanks.

[Operator:]

The next question comes from Mac Sykes, Gabelli and Company.

[Mac Sykes:]

Nice quarter gentleman. My questions have been asked and answered. Thank you.

[Operator:]

And so our next question comes from Will Katz with Citigroup.

[William Katz:]

Hi, thanks. Just two follow-up questions. First a little bit narrow in scope. I apologize. If I look at the direct expense within the Advisors channel, that was about 71% of revenues this quarter and looks like it’s a substantial step up from the more recent trend lines. Was there anything unusual in the quarter that may have affected that run rate one way or the other?

[Henry Herrmann:]

Yeah. Bill, like I talked about earlier, it’s a transition to a new compensation plan. I’d think that, as the year plays out, there is a lot more incentive comp in that plan related to production. So, the bonuses were a little higher in this quarter, but I think we’re targeting more of a 30%, 31% margin in that channel.

[William Katz:]

Okay. That’s helpful. And then just coming back to the institutional pipeline for the second half, I apologize. Was there anything in missed this quarter, you mentioned just existing accounts. Was there anything lumpy in size it just seems like things have stepped up a little bit so I want to make sure I am not over thinking that a little bit?

[Brent Bloss:]

Yeah. In addition to the daily valued stuff, there were a couple of sizable wins, a couple of sizable lumps.

[William Katz:]

And just one last one, thanks for taking all those extra questions. When I think too on the go forward with the new – You mentioned that, they themselves have large capacity there. Can you range us what are your expectations might be in terms of how big this thing could get to?

[Brent Bloss:]

I’d rather not, simply because you’re coming into a period where what was one of the most widely bought asset classes is not that right now. For us, we think that’s good timing rather than having launched it at the top, but I’d be really reluctant to put a target on it. It’s what I’d say just to put little context around it is that they have global sales in this asset class. It’s selected us to be their – manager for the asset class. And they have existing relationships with many of the distributors who are important to us and have respect in this asset class for it. So, it certainly gives us an opportunity we got to be able to leverage it.

[William Katz:]

Okay. Thank you very much.

[Operator:]

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

[Henry Herrmann:]

Thank you everybody for your time and I look forward to talking to you next time. Take care.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.