Waddell & Reed Financial Inc
Q2 2014 Earnings Call Transcript

Published: 29 Jul 2014

[Operator:]

Good morning, and welcome to the Waddell & Reed Financial Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Hank Herrmann, CEO. Please go ahead.

[Henry John Herrmann:]

Well, thank you, Emily. 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 Vice President of Investor Relations. Nicole, would you read the forward-looking statements, please?

[Nicole McIntosh-Russell:]

During this call, some of our comments and responses will include forward-looking statements. While we believe, these statements to be reasonable, based on information that is currently available to us, actual results could materially differ from those expressed or implied due to a number of factors, including but not limited to, those 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 John Herrmann:]

Thank you, Nicole. Good morning again. Early today, we reported our second quarter results. Earnings per diluted share were $0.98, 46% higher than last year's $0.67 per share, after adjusting for $0.06 per share of expenses from the launch of our first close end fund. The operating margin expanded 270 basis points to 30.9% from last year's adjusted 28.2% margin. Compared to the first quarter of 2014, earnings per diluted share and net income rose 11%. Operating income rose 6% and operating margin expanded 100 basis points. Assets under management ended the quarter at $135.6 billion, up 30% compared to the same period last year and 3% sequentially. Sales of $7.5 billion rose 10% compared with last year's second quarter but fell 25% from the previous quarter's record-setting levels. Inflows of $1.2 billion, during the quarter, rose 29% compared to last year's $935 million, but were below the record levels achieved during the first quarter. It's worth noting that our annualized organic growth rate during the quarter at 3.7% was on a par with last year second's quarter at 3.6%, and more than twice that of the industry's rate during the period. There were a few unusual items during the quarter that I want to highlight. Compensation and related cost of $48.6 million, included approximately $900,000 of expenses for several nonrecurring items. These included charge for the early vesting of restricted shares, associated with the retirement of an executive. The credit for forfeited deferred compensation, as well as adjustment to future -- forfeiture rates used to calculate the amortization on restricted share brands. General and administrative cost had approximately $1.3 million of one-time items, including an impairment charge for software, a small legal settlement with an IT vendor, and legal costs associated with newly formed c-cap [ph] funds. None of the charges were material, but in their totality because expenses to exceed previous guidance. As noted in this morning's release, the current quarter included reclassification of AUMs of $485 million. There was an exchange out of our Wholesale channel and into our Institutional channel. The reclassification was the net effective -- had the net effect of overstating organic growth rate in the Institutional channel, and understating the Wholesale channel. Adjusting for this exchange, the Wholesale channel annualized organic growth rate was 8%. There is one more topic I want to address before we open the call up for questions. Since November, we have lost 3 individuals with key portfolio management assignments, 2 PMs, who manage our High Income products, and more of the comanagers of the Asset Strategy Team. The first individual left in November to join a competitor. The second individual left and made pursuant opportunities outside the Asset Management industry. And the third individual was terminated earlier this month for reasons unrelated to this portfolio management fees [ph]. I want to stress that these individuals left right along the [ph] for 3 related reasons. Furthermore, some historical context is helping. Prior to the PM's departure in November, it had been 10 years since we have lost the PM for reasons other than retirement. Clearly, I'm disappointed with the recent departures. But as we highlighted during our Investor Day in June, the talent, culture and leadership of our Investment Management division ensures that, when necessary, we are able to fill open PM slots from within our organization. And that our successful investment process remains intact. Now, regarding the funds, which have manager changes. Our Asset Strategy Fund saw sales momentum slowed throughout the second quarter. And inflows turn to outflows, as the quarter progressed. However, at $55 million for the quarter, I would characterize the outflows as modest. July to date flow trends are similar to the month of June. The impact on the High Income Fund is still largely unknown. We saw a spike on redemptions immediately following the PM departure announcement. But these have since moderated. Though outflows have slowed, it is still too early to tell if the redemption pressure has genuinely abated. As of last Friday, the fund has experienced outflows of approximately $500 million. In aggregate, the month of July had outflows of approximately $1 billion. Operator, at this time I would like to open the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from Robert Lee of KBW.

[Robert Lee:]

Could you maybe give us a little bit more of a -- I'm just kind of curious on the sales breakdown kind of by channel. I know, overall, Asset Strategy for the quarter was about I think it was 26% sort of sales, but can you maybe break that down a little bit further as kind of where the some of the other products that you're having sales with, and how's the Advisors channel mix, compared to the Wholesale channel mix?

[Thomas William Butch:]

Hi, Robert, Tom. Very generally, in second quarter, the funds, which beyond Asset Strategy and High Income were next in line for gross sales were Science and Technology, mid-cap growth international core equity and variable product version have High Income. On a net basis, that order would have been High Income first, science and technology; second, debt [ph] VIP or variable product version of High Income; third, International Core Equity; fourth, then, domestic oriented products, our core equity products in our balance products, would round up, top half dozen. Again, the sales mix in the Advisors channel is and based on the way we to go to market, likely always will be, far more broadly diversified than the Wholesale channel, which can be concentrated on the basis of performance and on the basis of market sentiment, much more than it's our Advisors channel.

[Henry John Herrmann:]

Rob, I don't know if that was responsive. So maybe I could take a different crack at it from a maybe slightly different level. If you think about Asset Strategy Fund, the trend would be April, still strong net flows. May, diminished, but still positive. June, slight outflows; July, a run rate outflows about the same as June,. I think that's broadly correct. In the case of the high-yield fund, inflows in whole quarter and then outflows with the spike, kind of comment I made before. I don't think there is any question that high-yield fund outflows definitely connected to 2 departures in 5 or 6 months, whatever the timeframe is, not a good thing. Clearly, and my belief is that we have a pretty deep bench individual taking over that portfolio and has [ph] a lot of experience with us before becoming lead manager and was in process of becoming comanager when this all unfolded. I point out that portfolio performance continues to be pretty darn good relatively. In the case of Asset Strat, really the funds start to experience some outflows associated with market sentiment, as opposed to any portfolio manager change, and I find it hard to determine, whether how much and whatever outflows we're experiencing now, have much to do with departure portfolio manager at all. I think, there must be some in there. But I think it's mostly about market sentiment and recent performance, which Mike, maybe, would be asked to comment on later. Other than that I just want to remind you and others that a lot of other product that we have in the -- Mr. Butch's quiver. And I expect that at some point, [indiscernible] would start to stabilize and if we get a better tone in the marketplace, I will expect some reversal in recent trend. Kind of a broad [ph] outlined and, my thinking on it, excuse me, if I answered more than your question, or didn't answer your question, it wasn't deliberate however.

[Robert Lee:]

No, I appreciate the added color. And I apologize, Hank, if I missed this comments upfront. Could you repeat some of the comments, you made around some of the noise in comp, in other words, is a $900,000 nonrecurring items, but I think I missed the second part of it?

[Henry John Herrmann:]

Okay. I'm going to let Brent talk about that whole subject please.

[Brent K. Bloss:]

Yes. So Rob, the compensation included around $900,000 of additional expense from nonrecurring items. Hank mentioned in his comments that, that related to the retirement of an executive and vesting of shares. And some reversals of deferred compensation and an adjustment to our forfeiture rate on restricted share grants for departures during the quarter.

[Robert Lee:]

So how should we think of what would be kind of a good forward run rate over, thinking of Q3, Q4. I mean, kind of the reversals, I assume maybe with kind of the offset of the one-time items versus -- compared to the reversals, what would be a good Q3 kind of run rate to think about.

[Brent K. Bloss:]

Right, so Rob, what we've given you previously, in guidance and compensation, was some of the recent changes, we've taken another look at it that because obviously the forfeiture rate adjustment that we made, will continue to have an impact in the future quarters. So, we've guided at 8% to 9%. We're looking at more of a 5% annualized growth rate in compensation, now due to some of these factors. Also the ramp-up in our headcount hasn't materialized to date. We've also had some benefits from our pension expense, is lower than expected. So and of course, on top of that, the forfeiture rate adjustment, so we're looking at more of a 5% annualized growth rate and comp now.

[Operator:]

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

[Michael S. Kim:]

So first, you mentioned the flows slowing for Asset Strategy in the Wholesale channel. But just wondering if you're seeing any change on the institutional side in terms of existing relationships or how those dialogs may have changed with other clients.

[Thomas William Butch:]

The answer is really no. Strategy though, of sizable assets in the Institutional channel concentrates on particularly 1 in just in aggregate of a few relationships and Mike and team have met with those partners. And the dialog has been constructive.

[Michael S. Kim:]

Okay. And then on the expense side, I know you talked about the outlook for comp. But any shift in how you're thinking about investment spending these days just in light of the broader market conditions? And your more recent flow trends, I think in the past, you mentioned some flexibility in terms of being able to dial-up or dial-down some expense initiatives?

[Brent K. Bloss:]

Yes, we don't expect, at this stage, to dial anything back. You did see a ramp-up in G&A expenses, in the second quarter. We would expect that trend to continue at least for the next couple of quarters. And that's mainly due to IT type spend. We got started off, in the first quarter, at a slower rate than we expected, and that kind of ramped up in the second quarter. So we're looking at G&A expenses to stay fairly stable with the second quarter, at least for the next couple of quarters because most of the IT work that's being done right now is expense related. And as we get through that period, and move into next year, it will be more capital in nature.

[Michael S. Kim:]

Okay. That's helpful. And then just finally, can you just update us on where you stand in terms of the capital loss carryforward? And then any color on sort of the level of the realized gains in the second quarter?

[Brent K. Bloss:]

Well, where we stand with the capital loss carryforward, I believe is around $17.5 million, on a gross basis, is what we have reserved against. And then I believe it was around $6 million in realized gains, in the second quarter, that resulted in a reduction to the valuation allowance we had established against that capital loss carryforward.

[Operator:]

Our next question is from Tom Whitehead of Morgan Stanley.

[Thomas Whitehead:]

I just wanted to dig in on the institutional side a little bit. Could you maybe talk to how the pipeline has trended second quarter and then here into July I guess, if we look at the flow's x the sort of the transfer from the mutual fund to the separate account, they are closer to breakeven? So just curious to get some color on how that business is going?

[Thomas William Butch:]

Yes, the second quarter was the time of what I would characterize as strong search activity, both in its width and depth, that is, across the styles of investments that for which interest was expressed. And the span of opportunities. So there aren't at this point in the mix, any unfunded wins, we do have a couple of finals, in which we participated, where we expect to hear in the relatively near feature. But at its simplest, the activity was very strong in the quarter.

[Thomas Whitehead:]

Okay, great. And then just quickly on capital management. So the stocks pulled back quite a bit, in the second quarter, and thus far in the third quarter. So can you maybe update us on your thinking with regards to the capital management and balancing that between the different levers that you guys can pull on.

[Henry John Herrmann:]

I don't know how many levels we have. I think the queue who will indicate that at the present time, meaning as of today, 84.41 or 46.0 -- 84.6 million shares outstanding, so if you do a little math, it will be obvious that we've been buying stock. At the present time, I think when you look at valuation, it looks like a lot better deal than it has for a while. Obviously, we still have substantial cash on the balance sheet. And we will continue to pursue the normal policies of share buybacks, and dividend increases and periodically, we'll report and we'll think about whether or not we should pay a special dividend. The question will come up and I expect that it will be discussed in the October board meeting. But other than it being discussed, I don't know what the outcome will be. Any rate, we will continue to look for opportunities to acquire shares and continuing with the rest of the process we usually follow.

[Operator:]

Our next question is from, Bill Katz of Citi.

[Steven J Fullerton:]

Hi this is Steve Fullerton filling in for Bill. The direct cost in the Wholesale channel dropped quarter-over-quarter, is that just simply a function of lower gross sales or is there anything else that we should be thinking about there?

[Henry John Herrmann:]

Yes, that's just the lower sales, lower commissions associated with those sales and wholesaler commissions. Could you repeat the question for me? This is Hank, I just might have missed the point. Ask me again?

[Steven J Fullerton:]

The question was on direct cost, the drop was it just related to gross sales. I think the answer is yes.

[Henry John Herrmann:]

The answer is yes.

[Steven J Fullerton:]

Okay. And then just to get some qualitative color around conversations with consultants from the PM changes. Is this something where you're put on watch or is this something that we should think maybe if the performance is isn't there, for the next 6 months, then we see outflows. Just any color around your conversations?

[Thomas William Butch:]

I'll take the term consultant, broadly, to transcend institutional and include also the Wholesale channel, which I think, probably for this conversation, is more relevant piece. What I would say is that all of our major national channel firms have kept those funds intact. None of them has either fund on a watch list, to the extent that there has been any such activity it has been at smaller firms and miniscule or no amounts of money have been involved. And so we've been through conversations with all of our largest distribution partners. And none of them has taken the kind of action to which you refer. There was 1, candidly, which sent a note out to its advisers acknowledging the second change in a relatively short period of time on the High Income Fund. But that was the only such notice that we are aware of and we have been very proactive in reaching out. Again, because both of these products are relatively smaller assets, weights in the Institutional channel. The question is not as material that, but as I had mentioned before, to the extent that it has been important, that base been covered and has been covered constructively.

[Operator:]

Our next question is from Cynthia Mayer of Bank of America Merrill Lynch.

[Cynthia Mayer:]

A question on the revenue side. It looked like there was a bit of a decline in institutional equity fee rate and I'm just wondering what caused that? And is that shift maybe toward variable annuity or something else?

[Henry John Herrmann:]

Well, it's basically because sub-advisory business is rising is the percentage of the total and has a lower fee rate. But, as I think I've pointed out in the past, that also has lower expenses associated within the sub-advise channel and, therefore, on an operating margin basis, it's an attractive piece of business.

[Cynthia Mayer:]

Got it, okay. And then on the move from funds to separate accounts, is there a fee impact for that? And is that something you just expect to see on a regular basis? I mean, we've seen it at other firms too. I'm wondering if there is any shift to more of that occurring these days?

[Michael Durwood Strohm:]

Cynthia, it's kind of uneven. I think you could say that it's an industry trend. But just when we say that we see all kinds of new opportunities in the variable mutual fund. This was a case where a long-time strategic partner of ours chose to put into its -- or use its own VIP structure and hire us as a sub-advisor versus using the funds. The net impact to us, on a financial basis, was neutral. We were able, in this process, to acquire additional assets, which effectively bridged the difference between the 2 fee rates.

[Cynthia Mayer:]

Okay. And then in the Advisors channel, the productivity is grown and grown and I'm just wondering how much more upside to that is there? Is that, do you feel like you can squeeze more out of the same headcount and also where's the headcount going these days.

[Michael Durwood Strohm:]

That's a question we talk about a lot. The short answer is yes, but at some point, as your question infers, you can't continue to rely wholly on squeezing more out of the same and headcount has to start growing productively. Certainly, we're not in any sense capped out on productivity potential. It's been a long climb to get from, effectively 6, 7 years ago, being half of the industry productivity, to being about industry productivity for independence today. And so, just being in the same range, certainly doesn't suggest we're capped out. We've done a lot of work to ensure the professionalization, if you will, of our Advisor force, and we've put a lot of things in place that, I can go on and on about, that have helped increase their productivity, and I think there's more to wring out of that. What the number is, I can't really tell you. But there's certainly more because, again, we are just at the industry productivity level. Certainly, we get to a place where growing the Advisor count is important. And again I think that will be steady incremental progress rather than any massive way of the people coming in, because our belief is that that's the right way to build and that finding the right people and bringing them in, and making them successful, rather than hiring masses of people on a less differentiated way is the way to go. So short answer, yes, there's more productivity to wring out, but we have to get moving in the right direction with productive Advisors whom we hire.

[Cynthia Mayer:]

Great, okay. And then maybe just finally, maybe you could update us on the any timing on naming a co-PM for Asset Strategy, and just once again maybe why you think it's important to have a co-PM, given the track record and the continuity there, why does that product need a co-PM?

[Henry John Herrmann:]

This is Hank. Mike wasn't sure how to answer. So he is pointing at me. It's a big portfolio, number of things are involved. Obviously, we're going to be spending more time on some of the private equity sort of stuff relative to maybe what we're doing before. And it's just sort of thing that requires a number of different eyeballs broadly speaking. It's a portfolio that's had co-portfolio manager in the past, that was an important contributor to the entire process when you're looking at the entire world and you're looking at the fixed inequities and up and down the maturity scale, up and down the geography. That's quite a burden. So that's really the answer to your question. Was there another part that I didn't touch on.

[Cynthia Mayer:]

Well, just maybe where you're in the timing of that?

[Henry John Herrmann:]

Well, we're getting there, but we're not quite ready to announce that, I would expect within reasonably the near future.

[Operator:]

Our next question is from Craig Siegenthaler from Crédit Suisse.

[Craig Siegenthaler:]

Just to clarify the last number you gave in the prepared remarks. The negative $1.0 billion, that was total flows across all channels and for the month of July to date, right?

[Henry John Herrmann:]

I believe that's correct.

[Craig Siegenthaler:]

And then just a follow up on G&A expenses. Should we expect a 3Q '14 same trend of a similar rate of change, that we saw last - I'm sorry, 3Q '14 as the same trend that we saw last year. So sort of a very large seasonal decline, probably $6 million ballpark?.

[Henry John Herrmann:]

No, I would say that the third quarter will be in line with what's reported in the second quarter.

[Craig Siegenthaler:]

Can you remind us which drove the decline in 3Q '13?

[Henry John Herrmann:]

Well, it was the closed-end fund that we had about $6 million in expenses in second quarter of 2013, as part of the closed-end fund launch.

[Craig Siegenthaler:]

Got it. Brent, [ph] so about $27 million is probably a good run rate here.

[Henry John Herrmann:]

Yes.

[Operator:]

Our next question is from Chris Shutler from William Blair.

[Christopher Shutler:]

A couple of questions on Asset Strategy. So first, I think it's really March and April, that dragged down the performance, year-to-date. So maybe just cover exactly what happened, in terms of the performance, in that time period, I know gold was down, so that probably didn't help. But was that mainly security selection or asset allocation. And then, second part of the question would be, going forward, at the end of Q2 Asset Strategy was about 29% cash, so maybe just an update on where that number is today and where you would like it to be going forward?

[Michael Lynn Avery:]

Well, let me address your question the best as I can. March and April, I would say, if you're focused on that 60-day period of time, I would say that performance was negatively impacted by, as you pointed out correctly, a large allocation to cash, that is a drag on performance in a rising equity market. You correctly pointed out that gold did not perform well during that period of time, which was a drag on performance. Gold is about 6% of the fund. However, we did use that period of time to benefit shareholders long-term, which we are always focused on. To move the remaining portion of our holdings into an offshore account so that we now have all of our gold holdings in an account where we are much more flexible on hedging that position in the future. So that did give us an opportunity to do that and avoid, even further, some of the declines you noted in that particular asset class. Also, during that period of time, weighing on performance, was our exposure to Japanese equities. We had, going into the beginning of the year, about 12% of the fund allocated to Japan, on the premise that we initially took on the fund that of the Abenomics would be a tailwind for performance, particularly for the large exporters. And that did not come to pass and since the beginning of the year, which is added to our cash exposure we have reduced our exposure to Japan significantly. Also during that period of time, our exposure to the gaming sector specifically, Macau Gaming, which is a significant part of the portfolio and continues to be, was negatively impacted by sentiment as it surrounded the outlook for Hong Kong traded securities in general in that sector, in particular, on the back of investor's concerns about the extent and depth of the anticorruption campaign, that is currently being engaged in by the current leadership of China. There was a junket operator, who seems to have misplaced some of his customers hard earned assets, during that period of time, and other issues affecting sentiment even though the underlying fundamentals of that sector remained very strong. In all that's -- that's about half the fund that was either a drag or negatively impacted performance whereas the other half of the fund did very well. Year-to-date, the fund is essentially flat. The S&P, I believe is up about 7% or dividend reinvestments, total return on the S&P is about 8.5, 8.8, so that is a significant gap that has not helped our flows at the margin for those investors, who are focused on near-term allocation -- near-term results. Our current allocation in the fund is -- was just under 70% and equities was just about 20% in cash, our exposure to gold is about 6%, our exposure to high yield fixed-income investments is about 4% of the fund. And as a team, we're happy with the allocations where they are at the moment.

[Christopher Shutler:]

Great. Thanks, Mike. And then just one more. Another large asset manager recently announced a decision to change their wholesaler pay from being based on gross sales to metrics, they believe were more tightly aligned with profitability and longevity of those assets. So just want to get your thoughts on kind of the pros and cons of that type of move and just to what extent is why they will do that today.

[Thomas William Butch:]

There's a lot of different ways obviously to compensate wholesalers. The dominant way today still is gross sales. I would say, and I hope it doesn't sound cynical and that there's sort of a cyclical dalliance with this notion that net sales is a workable metric for wholesalers, but for lots of reasons, the industry's still sticks to gross sales, because that's the piece that is most controllable by the wholesaler. I think what we've done, over time, is to have a 3-legged stool, if you will, a base compensation, commission that is based substantially on gross sales. And then bonus, in the form of equity, which is based on different metrics, each year, sometimes including net sales. Often including particular emphasis aligned with our strategic priorities. And so it's through that mixture of those 3 things that we think we strike a pretty good balance, which fairly awards the wholesalers and does its best to align their and our corporate interest. Whether this change to a net sales focus finds traction this time, we'll see. Certainly, we've tried to incorporate it and other metrics of import, but not as the sole or dominant metric, by which we pay our people.

[Henry John Herrmann:]

This is Hank, if I can interrupt for a minute. I want to further respond to a question I was asked earlier, by Cynthia. I mean she was asking a question about co-portfolio manager sector. I should have done a better job of emphasizing that we've been carefully considering, what we need to do on the portfolio, to ensure that its future is as bright as its past, using euphemism. And although not everything is nailed down, which I indicated when I said that it would be in the not too distant future, when we make our announcements. I want to make it clear that we have discussed amongst ourselves very, very carefully what's necessary to be put in place. We understand that this is a very important product. We understand that it requires proven successful experienced PMs to join the team. And I think when we do make the announcement, when people get an opportunity to do review, what's occurred, I think you will come away very, very satisfied and pleased with the final solution. So to speak. I hope that put an exclamation point on my weaker earlier response.

[Operator:]

And our next question is from Marc Irizarry from Goldman Sachs.

[Marc S. Irizarry:]

So Hank, maybe you can just flush out a little bit the gross sales trends for Asset Strategy and High Income, throughout the quarter. But also in July -- how those track in July versus June on gross sales trends? And then what about some of the other products outside of Asset Strategy and High Income. What have you seen in terms of gross sales trends there in July?

[Henry John Herrmann:]

Well, I have prompted Tom to be ready for this question. Thank you very much, and he will respond. We appreciate it.

[Thomas William Butch:]

Thanks a lot Marc. In terms of Asset Strategy, if you look at it, June versus July, gross sales were down about 12-ish a percent. It would be more than that for the quarter, because as Hank indicated, April was still a pretty strong month. And if you look at High Income, the decline from June to July would be 20-ish percent And again, because like Asset Strategy, April, and in this case, May were stronger months, the decline from the quarterly number would be a more pronounced. If you look at some of the other products, the places where we're seeing some gains and momentum, are International Core Equity, which as you likely know, is one of, if not the, strongest flow category, not only this year, but over the last 5. We have a very competitive product, which, candidly, we hadn't gotten to, in the context of all the things that we had to take to market. So I think we still relatively early in the opportunity to take that fund to market. Energy is starting to gain attention, particularly with what's going in North America and our energy product appears to be gaining some momentum as well. And if you look at large blend on a year-to-date basis, it to the other category, which, more than most, has some competition from passive products. The active side of it has been doing pretty well, and we have a very competitive product there and that too seems to be gaining some footing. And if you look at where, in terms of active management, a lot of the dollars are flowing. It's flowing to things like real estate and global real estate and we have newer entries there and so we still have to sort of find our footing in the product, as we do with our new emerging market's local currency debt product, get them on the platforms, but the appetite for those seems to be pretty good as well. So I kind of consider those to be on deck, but the 3, that I mentioned are the ones, where I think we're gaining some momentum right now.

[Marc S. Irizarry:]

Okay. And Mike, on Asset Strategy. I think that product, maybe historically, has been thought of by the channel, correct me if I'm wrong, as a little bit maybe more up market capture product. It looks obviously cash balance is high, so maybe there's some cash back on your performance. But maybe can you just give us some sense maybe, in history, if you've gone through periods in time where maybe there's been maybe less of market performance. The fund, like how long does it take to sort of work through any redemption patterns that you might see there, any perspective on that, thanks.

[Michael Lynn Avery:]

Well, marc, I guess, I'd go back to your underlying premise that this product is seen as an up-capture product. I know, there may be people who think, that I don't think so. I don't run into that specific observation. What I believe that people, who have over the last, well this product now is almost 20 years old. Our team has been on it almost 18 years. And during that 18-year period of time, what we have observed, in terms of what has motivated people to allocate part of their investments into Asset Strategy, is the expectation of a solution to part of their overall investment problem, which revolves around a team thinking, in terms of 3- to 5-years out, having the flexibility to make choices on their behalf, as to which asset class is likely to show the best outperformance relative to other asset classes, and put together a product that has good long-term performance in order to meet their underlying need whether that's sending a kid to school, in 3- to 5-years, or looking to retirement or whatever goal they might have in mind. People say that they're longer-term oriented than that, but I think our experience over our history is that a true time horizon is not much longer than 3- to 5-years. And so I believe that that's what people look at. You're right, though, that flows do tend to follow performance, when we have a period of underperformance, like this year. You can get negative flows at the margins or people holding back, allocating more until they see something better. I don't know what it is about in people's behavior as, it pertains to investing. When they see cars or suits or other goods on sale, they tend to get excited about that, but when they see stocks or investment products that are lagging or cheap, they tend to shy away from that. As long as humans are consistent in that way, we can capitalize on it. So I hope they don't change. But in periods where we have stronger relative performance, either to the market or to our benchmark group, flows will follow that. And again, I can't explain that aspect of human behavior, but that seem to be what it is. I'd have to really go back and think about the discrete time periods to answer your question, exactly, and Marc, let me do that and think about it, but if I understand the question. When has there ever been a period of time in the past where we've lagged performance? And how long do they take before performance from the eyes of the investor improved in order to motivate them to allocate funds back into the product that have to? I have to think about that, probably the most recent experience would be -- let's see would probably be 2012 time period, maybe 2011 time period where up. And this is dangerous because I'm talking off the top of my head. But 2011, I believe we lead not only our peer group not dramatically, but some also lagged the market. Our performance in 2012 was good, not only relative to the market, but relative to our peer group. And throughout 2012, even though we had, I believe, a very convincing story to tell our investors on why they should be over weight in equity as we were in that period of time. We had negative flows in 2012, I would say, almost every day. And maybe not literally true, but it's sure seemed like every day we have outflows, not unlike what we're seeing now, even though the performance was good on both metrics, relative to the market and relative to our benchmark group. And I think, that 2013, we saw inflows almost every day. When, is a period when performance lagged the S&P and it was based on -- the performance lagging was based on taking a more cautious view to the market, based in our view about how investors might perceive and exit from quantitative EV [ph]. We began raising cash in early 2013 and throughout that year, and our performance lagged the flows, continues to be very strong. So I suspect going to Hank's -- to a question that was posed to Hank earlier, I suspect that flows, in the beginning of the year, were okay. But I suspect the outflows relate more to your initial observations, that when investors start feeling more optimistic about the prospects for equities, they began to be rethinking about their allocations and equities relative to the fixed-income, which is now getting more difficult for them to receive or achieve their overall return expectations that the flows out of the Assets Strategy, to some extent, represents a desire to have, what might be called, a higher data play on what some investors do, as a more positive allocation, which is to get sure that on equities in general, U.S. equities in particular. But let me think more about your question, and maybe we can revisit on that later.

[Operator:]

Our next question is from Eric Berg of RBC Capital Markets.

[Eric N. Berg:]

I have 2 questions. I have 2 questions

[Michael Lynn Avery:]

Well, I think it tends to lag to be concurrent, I suppose. It just seems to me that when we've talked to investors and clients over a long period of time, and there is something about human nature that even, if you think about the questions that have been asked so far, there is almost a fixation on what has happened in the past, and even more in the recent past. And less of a focus on what the future or what the world will look like. It's not uncommon for -- in presentations, for people to say, ask the questions that you've asked to, like, "tell me about March, April." I've had it as narrow as, "Tell me about that one that last week." And it's somewhat surprising, but I think it's -- it's something that people can grab onto in terms of I can look at that particular day or that particular week or that particular quarter, and I have a memory or at least I have a perceived memory of what occurred, during that period of time and I can hold up my memory to the performance of a fund or a stock and make some sense out of that and achieve some comfort by being able to put those puzzle pieces together. And you get a lot of questions about that. But I think the strength of our organization, particularly as it pertains to Tom's wholesalers, who we spend a lot of time with, and when you get past their interest, when you get past, maybe your interest, on what happened yesterday, "Tell me what happened yesterday," then you can take them through, "Here is where we see the world headed and here is how we structure the portfolio accordingly. And if we can get to take a step back and look at the longer history of the product, if I can take you back just the last 10 years for example, as of the 25th of last month, the 10-year annual return in the Ivy Asset Strategy front was over 14%." That's hard to beat, relative to the other major asset classes and I think that if you have an opportunity, I mean that's what Tom's group spends a lot of time on, is getting people to take a step back from what they saw on CNN last night, or what they read in the paper that morning, or what they're seeing on CNBC at the day. If you can get them to take a step back, as the wholesaler, if you can get them to take a step back and remind them of what is the mission of this particular product. Is the mission of this product to beat the market everyday, is it to beat every quarter or every year. No, is to get your client, who is probably not as aware of daily gyrations of the market, as the financial adviser is, and solve their problem of having a positive absolute return that meets their needs. And that's what they want and for 20 years, we've stuck to that construct of achieving the best return that we can, relative to the underlying client's expectation, to minimize the volatility associated with achieving that so that they don't feel seasick along the voyage, and to do that in the very consistent way by using the flexibility of the assets that we are afforded to participate in. To look forward and think about what's the best structure looking ahead. And as an organization, I'm very proud of the fact that whether the entire organization thinks in terms of what's the best thing for the client in the days ahead, even though the client may not be able to fully appreciate it, I think, not in just this product, but across the breadth of products that we've managed, that we've consistently demonstrated.

[Eric N. Berg:]

That was very helpful, very comprehensive response. My second question is to Hank. Hank, you were very clear when you said it earlier, in your prepared remarks or in your comments, that you do not view these 3 departures as related, in any way to one another. That came through now being clearly. Nonetheless, I'd like to know, are you taking any new actions to improve retention?

[Henry John Herrmann:]

No. Well, after, I think in my comments, we talked about not having lost anyone, prior to this episode for 10 years. We look very, very carefully at compensation. We think our compensation structure is more than competitive. And on the basis of those things, we haven't made any plans to change the way we go about doing things. But let me remind you, first and foremost, before I got to where I am now, I did everything that everybody on this phone call has done. And I am well aware of the importance of fair compensation. Mr. Sanders, myself and Mr. Avery and Mr. Shafran and so forth, are constantly making sure that we don't shoot ourselves in the foot by putting a lot of energy into educating and developing investment talent. And then, forgetting the lessons we learned when we were in those roles years ago, this is a meritocracy, our business is a meritocracy. There is nothing more to be said. Cream rises at the top and if you don't properly reward the cream, they move on. Hope that was responsive to your question.

[Operator:]

Our next question is from Mac Sykes of Gabelli.

[Macrae Sykes:]

Just 2 quick questions. First, could you just remind us what the gross adds for restricted stock, this year, are. And then secondly, more generally, could you just comment on investment hiring for the next 6 to 12 months?

[Henry John Herrmann:]

Repeat the question for me, so I'm sure I understand.

[Macrae Sykes:]

So, the first was just the expected gross dilution from restricted stock grants this year. And secondly, how much restricted stock will be added to the outstanding this year?

[Henry John Herrmann:]

Okay, restricted share grants reflect number of shares x share price okay? And the one thing I can't be sure is share price. Until I get to the end of the year and I can make that calculation more effectively, it's pretty hard to say. I'll let Brent.

[Brent K. Bloss:]

In April, we granted around 790,000 shares. I think that's the number you're probably looking for.

[Macrae Sykes:]

Yes, perfect. And just away from your potential announcement on the Ivy Fund, and just, maybe a little comment on investment hiring over the next 6 to 12 months. Where you may be hiring people?

[Henry John Herrmann:]

Again I'm not sure, I understood your question. Ask me again.

[Macrae Sykes:]

Just talk about, in terms of your hiring on the investment teams, do you plan to bring in more analyst, portfolio managers? What is sort of the outlook there, given your headcount in the current. You've had to hire AUM, we've some turnover, I was just curious if you planned out any more investment professionals?

[Henry John Herrmann:]

Well Brent, can ask -- answer, what we've got in the budget, in terms of comp increase for the year, the answer. And then just let me say that we recently hired several people, 2, 3, I'm not quite sure that are out of Graduate Schools, which has been keeping with the process we follow, at all times, we primarily grow from within. It doesn't mean that we don't occasionally hire an experienced person from outside. But more typical thing is it's a graduate school process. I don't have any specific thoughts, at the moment, of bringing in a particular person to add to any one of the teams that we have here. If something comes along, that's a different measure. So I think we, basically, are thinking about, in the investment division, which is in excess of 80 people at present time, and the possibility of adding another 3 to 5, over the ones that we added very recently.

[Operator:]

Our next question is from Greggory Warren of MorningStar.

[Greggory Warren:]

I know we've touched on this, quite a few times during the course of the call here, but just looking at the 2 funds with the manager changes, this past year, and sort of the concentration risk that they pose for the -- your AUM levels, especially on the wholesale side? Do you guys feel like there is, at some point, a need to go out and reeducate the advisors, within the Wholesale channel, the gatekeepers, potentially on the Institutional side, about processes, about what you're doing, about your -- a lot of things you walk us through during the Investor Day about manager retention and how you advance people within the organization. I'm just thinking similar to what Franklin did. And for different reasons, I mean Franklin had to kind of do it on a total goal bond, because of the performance issues. But with this issue here, if outflow start to get to be more troublesome, is that something you guys are potentially planning?

[Thomas William Butch:]

It's a fair question. It's really not any singular process, however, it's really going on everyday. We have national accounts people, who on a daily basis are talking to people at firms. And constantly reeducating them to use your word on process, on the current standing of the portfolio on how we manage money on our investment belief system. We have outreached all the time to our advisor base, Mike does very frequent calls with the shareholder base of the Asset Strategy Fund. A new manager for the high income portfolios did a call attended by about 300 advisors, just a couple of days ago, so this is really an ongoing process and a routine part of what we do. If your question is more, is there a misunderstanding of either the funds that would require, sort of a reorientation, I don't think that that's the case, again it's a fair question, but I don't believe that to be so. And so, I don't, I guess, you as any singular event I said, but it's an ongoing process.

[Greggory Warren:]

I was just more sort of thinking along the lines of, with the manager changes, with the disruption, and the potential misconception on some investor's parts, are these plans and programs, that have been in place historically, going to continue. The strategy going to continue the same? It sounds like that's sort of what you guys are doing already, have been doing, it's good to hear that have been having the calls with the clients, like you just talked, about the dividend income. So I guess, that was more from that direction?

[Thomas William Butch:]

Okay. Thank you.

[Operator:]

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Hermann, for any closing remarks.

[Henry John Herrmann:]

No. I think we're fine. We appreciate the questions and time we spent with you. And we look forward to talking to you in the future. Thanks, again. Take care.

[Operator:]

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