Waddell & Reed Financial Inc
Q3 2014 Earnings Call Transcript

Published: 28 Oct 2014

[Operator:]

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

[Henry John Herrmann:]

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, 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 statement, please?

[Nicole McIntosh-Russell:]

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

[Henry John Herrmann:]

Thank you, Nicole. Good morning, again, everyone. This morning, we reported third quarter adjusted net income of $79.6 million or $0.94 per diluted share. Adjusted results include the impact of the $7.9 million pretax charge related to the impairment of an intangible asset and are more comparable with analyst forecasts. GAAP net income in the third quarter was $74.6 million or $0.89 per diluted share. Operating revenues rose 2% compared with the previous quarter, while operating expenses adjusting for the impairment charge were flat. The adjusted operating margin was 32.5%, a sequential improvement of 160 basis points. Higher average assets under management, an additional day during the quarter, and lower sales volume all contributed to the improvement in our operating margin. Compared to the same period last year, operating revenues rose 18%, [indiscernible] rose 13%. Higher levels of us assets under management, along with continued capital cost control lead to an improvement of 270 basis points in our operating margin. Our most -- by most measures this was a strong quarter. However, elevated flows were disappointing. The quarter saw a $3 billion in net outflows, making this the first negative quarter since December of 2012. In terms of sheer size, it was the largest quarter in our history as a publicly traded company. Let me offer some context to better understand the situation. Mutual fund outflows during the quarter centered on our asset strategy and high income portfolios, which together have, for the past several years, been the largest contributor to our organic growth. Outflows from Asset Strategy totaled $1.3 billion. Current performance, confined to [ph] relative performance, continues to trail its peer group in near-term periods, while remaining competitive over the long term. Outflows from high-income fund were $1.8 billion. We believe this was principally a function of shifts in investor sentiment as the entire asset class saw similar spikes in redemption during the quarter. The fund's relative performance remained strong across all periods. Additionally, institutional flows were negatively affected by $408 million due to the internalization of certain Mackenzie financial mandates, for which we served as sub-advisor. Though its influence on flows is hard to quantify, the recent PM turnover we experienced, something very unusual for us, was clearly not helpful. We replaced the departed personnel with experienced successful managers from within our organization and believe the confusion over these departures will fade in time. Because of the sizable influence on total flows, the outflows of Asset Strategy and High Income obscured the sales results among other funds, which in aggregate, remained meaningfully positive during the quarter. So far in October, sales trends remain soft and redemptions elevated. As of last Friday, sales were $1.5 billion and outflows were $1.2 billion. Assets under management are approximately $126 billion. Our financial position remains strong. Cash and investments continue to rise up sequentially 7% to $773 million as of September 30. We purchased 614,000 shares during the quarter; an additional 450,000 shares have been repurchased so far this quarter. Let me remind you that we issued 1 million shares due to option grants. And so at the present, 2 million share repurchase run rate is meaningfully above our usual target. Operator, at this time, I would like to open the call for questions.

[Operator:]

[Operator Instructions] Our first question is from Michael Carrier of Bank of America.

[Michael Carrier:]

First just wanted to get an update on your overall...

[Henry John Herrmann:]

Mike could you talk up a little bit please? You're not coming through too well.

[Michael Carrier:]

Okay. Just wanted to get an updated view on your guidance outlook, particularly on maybe just the Asset Strategy Fund. It typically tends to be a bit more defensive just given the type of environment that we're in, relative to what we've seen over the past couple of quarters. I just wanted to get a sense on where you guys had that?

[Michael Lynn Avery:]

Well, this is -- Michael, this is Mike Avery. Thank you for the question. Our view that we have articulated to our clients is that for the foreseeable future, we're likely to be a in a slow growth global GDP environment, accompanied with low inflation for, perhaps, a very long period of time. And in an environment like that, the best strategy for our clients is to focus on alpha over beta, meaning looking for individual securities, mostly equities, that have the potential of having higher top line, bottom line growth rates than the average or a world that is likely to be low to mid-single-digit type growth. We have, at present, about 75% of the fund invested in equities. We're right about 15% cash, 4% is fixed income, all in private companies. And the remainder or about 6% is in gold bullion. What we have told our clients is that cash, which has come down since the peak in, I'm guess -- off the top of my head, say, end of May or early June, when we were at 30% cash. At that time, we told our clients to look for a reduction in cash, and look for us to use the cash that we currently have for opportunities as they come along. as have occurred in the last couple of weeks on market pullbacks.

[Michael Carrier:]

Okay. That's helpful. And then you guys highlighted asset strategy and then the income fund. If I look underneath that and I look at all the investment performance overall, things are still relatively good to -- on the platforms. What products are you generating the net flows or where are you seeing still new traction on the sales side?

[Thomas William Butch:]

This is Tom Butch speaking. If you look back at last quarter, on a net flow basis, we had good results in things like International Core Equity, Balance, Muni High, Science and Technology, Energy. And so you rightly point out that there are a number of funds that, during the quarter, still were working even as the largest funds were under some pressure. If we look at growth sales in the month of October, despite the net outflows in the funds, Asset Strategy and High Income still make up the largest two gross sales products, followed by Science and Technology, Mid-cap Growth and Balance, which have all been products that have worked for some time. On a net basis though, the funds which are working, diverge from that, and again, it's International Core Equity, Core Equity, Value, Energy and the VIP, the insurance fund version of the High Income Fund. So it's a bit of a divergence between the growth sales experience and the net sales experience, both in the quarter and in the month of October. Answering your question a little more broadly, if you were to look at, say, the top 20 Morningstar flow categories on a year-to-date basis, we're represented in over half of them and have competitive product in a reasonably good span of them. And so the breadth of what we have still remains competitive. And it's a matter of shifting the sales emphasis to certain other products.

[Michael Carrier:]

Okay. that's helpful. And then, Brent, just the last one. On the expense side, this G&A and comp, both a bit lower this quarter just relative to like the guidance that you guys had given for the year. Just any adjustment on the outlook.

[Brent K. Bloss:]

Yes. On the G&A side, it was a slower quarter than we expected. On the IT side, they have more capitalized projects. So looking forward to the fourth quarter, I think we're looking at $26 million to $27 million range. On the comp side, again, we've had several nonrecurring things come up through the year with PM changes and things so right now we're looking at probably $50 million to $51 million in the fourth quarter, if the current environment stays in place. We did take a close look at our accruals in the third quarter and believe we're in line going in. So if things stay the same, we probably should be in that range of $50 million to $51 million in the fourth quarter.

[Operator:]

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

[Michael S. Kim:]

First, I may have missed what you said about quarter-to-date flow trends. I think you said, gross sales were $1.5 million thus far this quarter. And then, did you say total redemptions were $1.2 billion? Or was that total net outflows?

[Henry John Herrmann:]

Total outflows.

[Michael S. Kim:]

Okay. Got it. And then, just focusing on the wholesale channel. Any changes in wirehouse allocations for the High Income Fund during the quarter that may have driven some of the stubborn outflows?

[Thomas William Butch:]

No. It's not a really platform-driven product, Michael, as the wirehouses, so that really wasn't at issue. There were some large RAA, I believe, redemptions, but not at the wirehouses -- [indiscernible] the retail product there.

[Michael S. Kim:]

Got it. Understood. Okay. And then, finally, just more broadly, curious how you're thinking about sort of investment spending these days. I know you gave some guidance on comp and G&A, looking out into the fourth quarter. But just given sort of the broader market conditions and the more recent step up in volatility and sort of recent flow trends, just wondering if you're thinking on sort of investment spending has shifted at all.

[Brent K. Bloss:]

Yes, I think -- going into our budget season here and looking at the environment, I think, our guidance, the flow-throughs, to hold flat going into next year; at least, that's our current outlook, so I'd expect that. On the comp side, again, you would have to look at some of the nonrecurring items that have taken place this year,. One of which is our pension expense has been down in the current year. But with the interest rate environment and our investment performance within that plan, I think you could expect higher expenses around pension next year. As well as looking at the forfeiture rate adjustments on our equity comp grants in the current year, there are certainly credits going through the comp line. So you could probably expect an elevated comp line expense going into next year.

[Henry John Herrmann:]

This is Hank. I really wasn't quite sure what you meant -- when you said investment spend. Did we get you in the right direction or not?

[Michael S. Kim:]

No. That was helpful. Appreciate the color.

[Operator:]

Our next question is from Dan Fannon of Jefferies.

[Daniel Thomas Fannon:]

So I guess the -- for the capital and just the buybacks, I think last quarter, Hank, you've kind of described the terms as aggressive in terms of thinking about how you could be with buyback, and it was down quarter-over-quarter in terms of numbers. And I heard you did say the buybacks are up again in October. But just trying to think about what is, at these levels with where business conditions sit in October, how we should think about the ongoing sustainability of the repurchase program?

[Henry John Herrmann:]

I have my portfolio manager hat on, and I always try to find the appropriate places to take action. And, of course, I never tip my hand into the market. My conclusion is that our process will continue to be the same as it's been. We're very sensitive to capital allocation. And then we will continue to focus on our shares and where they're trading. And we will also keep thinking about dividends and what's going on there. Actually, as I mentioned, our cash position is very strong. And if you just think about what I said about the October quarter so far, you would see that we've been accelerating as the prices come down.

[Daniel Thomas Fannon:]

And are special dividends a part of the discussion still?

[Henry John Herrmann:]

They're always part of the discussion, but again, rank order, I would say share repurchases, dividends and finally, specials.

[Daniel Thomas Fannon:]

Okay. And then, just with regards to the flow dynamics. You talked about the institutional sub-advised business that was lost in the third quarter. Can you talk about if there's momentum on the positive or any changes in that looking out in either 4Q or next year? And with regards to the specific redemption rates you've seen in October, are you seeing any pickup in other funds? Or is it mostly concentrated in the two that you highlighted?

[Thomas William Butch:]

I'm answering your last question first. The redemptions on retail basis are substantially concentrated in those two funds. There's not material elevation, I don't think in others, though the sales picture in October, as I indicated, is pretty spotty. Talking about the institutional business, there were a number of new searches during the quarter, spread across a number of strategies. There was one win of substance that needs to be ratified by the board of the institution in November, but would not fund until next year. So I would call the pipeline reasonably fertile, though at a lesser rate than next year. That may not be a function of lesser interest, but just more precise searches in the consultant community, which we believe to be an industry trend.

[Operator:]

Our next question is from Bill Katz of Citi.

[William R. Katz:]

Just coming back to expenses for a moment, and maybe it's embedded in your G&A guidance. But just still looking at your relative performance in some of your flagship funds, metals is some absolute performance metrics. Any thoughts of stepping up the marketing spend to potentially combat some of the weakness that you're seeing in the so short intermediate term performance trends to try and boost the gross sales to some degree?

[Thomas William Butch:]

Bill, there's lot of levers that we're always working on. Marketing spend, of course, takes multiple forms. I'm not sure which form you're referring to specifically. But our investment has been in our wholesalers and all the things that make them successful going to market. We're making sure that the wholesaler compensation is well-aligned with opportunity funds. And also their need on an ongoing basis to defend the funds that are in outflow. If you're referring to would we ramp up, for example, advertising as a means of accelerating flow in a particular product, I don't think that'd be the avenue that we would take.

[William R. Katz:]

Okay. That's helpful. And then just to beat the dead horse. Hank, you mentioned you have -- you're basically flat on net flows quarter-to-date. And there -- it's -- further outflows in Asset Strategy and high yield offset by growth in some of these smaller funds. Is that the right dynamic?

[Henry John Herrmann:]

No. I didn't say we're flat in October. We did say that the sales in all the products have been pretty good and on positive flows. But on a net flow basis, so far, in October, it's a negative 1.2, I think.

[William R. Katz:]

That is where now [indiscernible] net before, I just want to clarify that. Okay. And then just one last question, as you think about -- what should we be looking for in possible inflection in the Asset Strategy Fund, in particular. Is it absolute return or relative return as we lookout into 2015 that might soften some of the redemption pressure?

[Henry John Herrmann:]

Well, in my opinion, it's relative performance, and you know the history of this fund as well as I do. And there have been, over a long period of time, periods when there has been below benchmark performance. And we've seen some outflows on the other hand, when relative performance picks up, you see reversal of that. And I continue to believe, and I know Mike continues to believe that this particular strategy, which is wide open mandate, continues to be very relevant in the marketplace. And given that we've gone through the transition of making portfolio manager changes and so forth. And I think, the next thing that's going to happen is we're going to see improved performance. I've got a strong belief that, that's how it's going to flow. And when performance improves, inflows will improve, in my opinion.

[Operator:]

Our next question is from Tom Whitehead of Morgan Stanley.

[Thomas Whitehead:]

On the fee rates, just real quickly, I noticed the advisors' fee rate is creeping down. I was just curious if there were any things within the equity and fixed income products that's driving that. And then, institutional fixed income, the fee rate was up quite a bit, was that Mackenzie or is there something else there that's moving the needle?

[Brent K. Bloss:]

On the institutional fee rate, that has to do with the new selector funds or IGI funds that we acquired, the Luxembourg funds. We're now getting the full fee on those products. So that's the uptick in the institutional side.

[Thomas William Butch:]

Yes. The only thing I think of with the advisors' fee is it's just the diversification and the use of the fee-based asset allocation program that effectively enforces, if you will, good allocation and ensures the right mix of fixed income with equity, which maybe is the only thing I can really attribute that to.

[Thomas Whitehead:]

Okay. Great. And then just a quick follow-up. So on underwriting distribution, could you maybe talk to the sort of investment and growth in the spend on the indirect side of those line items there?

[Brent K. Bloss:]

Yes, I think the same goes for the indirect lines. We expect, at least in the fourth quarter, probably a range of 42 to 43. But as we go into next year, again, keeping that fairly flat, as we move into next year.

[Operator:]

Our next question is from Craig Siegenthaler of Crédit Suisse.

[Craig Siegenthaler:]

What specific strategies did Mackenzie internalize in 3Q '14. And then I heard the comments on the win side of the equation. But any large redemptions expected over the next few months on any institutional channel?

[Thomas William Butch:]

To answer your first question, they were -- as you may recall, we are sub-advisor for the U.S. content of many of the funds Mackenzie and its affiliate organizations distribute in Canada. And so these were both large cap growth mandates that were internalized -- 1 by Mackenzie and 1 by one of its affiliates. I'm sorry, what was your other question? No, there are no sizable redemptions that we're aware of at the moment.

[Craig Siegenthaler:]

Got it. And then I have a follow-up here for Brent on the compensation expense. As we look forward to 2015, do you see -- you kind of point out 2 headwinds, one is forfeiture rate, two is pension plan expense. Can you help us out in terms of what was the actual benefit in this 3Q expense line? Or also, what's embedded in your guidance of $50 million to $51 million for comp in terms of the forfeiture rate benefit. And then, as we think of pension plan expense, maybe you can help us on the dollar amount differential between 2013, which was higher than 2014. So any color there would be helpful as we think about modeling '15 here.

[Brent K. Bloss:]

I think on the pension side, it was a total of about a $6 million reduction, that's year-over-year. As it relates to the forfeiture rate, I think we've, in total, picked up probably a little over $3 million in the current year in credits related to departures. And so, those are just getting onetime type events. So if you take those 2 items of about $9 million and then add on pay raises going into next year, that gives you some idea of the impact that 2015 could bring.

[Craig Siegenthaler:]

And, Brent, this $3 million for the forfeiture rate only hits 3Q and probably 4Q. As we look at kind of next year, does that totally go away in the first quarter? Or we should see additional year-over-year benefit in the first quarter and second quarter?

[Brent K. Bloss:]

No. I was just talking about the onetime catch-ups related to folks leaving the organization. So the third quarter includes that run rate, however, we did have an additional person leave in that quarter. It wasn't as significant as the second quarter. So the $3 million is really for all departures during the year.

[Operator:]

Our next question is from the Chris Shutler of William Blair.

[Christopher Shutler:]

On the flow side, just curious that the channels that you're seeing, the outflows, the majority of the outflows, is it mainly broker-dealers or is it RAA?

[Thomas William Butch:]

I think, it's reasonably evenly distributed. Of course, on a relative basis, the wholesale assets are larger than the RAA assets. But I think, some of the largest single kinds of outflows have come from RAAs, so it's a little bit of both.

[Christopher Shutler:]

Okay. And then the investment in other income line was negative in the quarter. Just curious why and expectation going forward?

[Brent K. Bloss:]

Yes, that line was down due to our trading portfolio, mostly. So just the market driven, primarily, marking to market our investment portfolio. And going forward, I guess we'll have to see what the market...

[Christopher Shutler:]

Right. And then on G&A, Brent, you're saying 26 to 27 in Q4. As we get into '15, should we expect the kind of G&A expense line to stabilize? Or could it actually go down?

[Brent K. Bloss:]

No, I expect it to stabilize, at least through 2015. As we continue to have this IT initiative ongoing, expect to finalize that at the end of '15. But for '15, I'd say it's probably pretty stable at those rates.

[Operator:]

Our next question is from Eric Berg of RBC.

[Eric N. Berg:]

Just a couple of questions. Hank, for starters, could you repeat what if anything you said, I'm sorry if I missed it, about share repurchase so far during the quarter. Did you say anything about that?

[Henry John Herrmann:]

I did. Not exactly what number I said, 450,000 shares repurchased in the quarter.

[Eric N. Berg:]

Okay. And this is for Mike, as you think about the performance difficulties that you have experienced in the current calendar year, is it just a matter of -- sort of a couple of related questions -- is it just a matter of you having been too defensive and having had too much cash in a rising market? Or have there been other issues? And relatedly, because the cash has come down, I think you said significantly, since June, I would've thought that performance would have improved by now. Has it?

[Michael Lynn Avery:]

Well, depends on what you mean by now. I'm not sure what date you're referring to. But if I think about, certainly the last couple of weeks the performance relative to our benchmark has improved fairly dramatically. For example, in the -- if you mean by now, let's use just October 23, in that one week, we were in the upper decile of our peer group, with an increase of 3.8%. Quarter-to-date, we're probably in the middle of the pack, our performance is about flat. And of course, what you're referring to at year-to-date, we're still trailing fairly significantly our peer group. But certainly in the month of October, which is way too short of a period of time to measure any kind of performance quite frankly, and I'm only addressing it because you asked, performance has improved. Now going back to your -- the first part of your questions, I would say that the decision by the team, late 2012, to get more defensive where we began reducing our exposure to equities and raising cash fairly significantly into 2013, which continued into about the end of May of 2014, was a drag on performance. And certainly, we -- if you look at market that's in an upward sloping trajectory when you're -- when you've got a lot of cash and you're raising cash, that's going to be a drag. In addition to that, what impacted our performance this year, at the beginning of the year, were a couple of things. We made the decision in 2013, that one of the places to get alpha was going to be Japan, on the back of aggressive monetary policy implemented by the Abe administration. We increased our exposure to Japan by about 12%. So we went into the year with 12%. And that has turned out -- that turned out to be a mistake. And we reversed that decision on the premise that the underlying fundamentals of the economy is just not going to offset some of the decisions that Abe has made in addition to try and despur [ph] demand with aggressive monetary policy. So that hurt us. The biggest detractor, which was our -- one of our biggest contributors to performance in 2013 and actually for the last couple of years, but hurt us in 2014, is our exposure to China, specifically the gaming sector in China, which was negatively impacted by the current regime's emphasis on an anticorruption campaign which reduced the desirability of the VIP sector for that industry to get any traction. What we underestimated is the impact that, that would also have on the mass market, not picking up or not going into growth. So the impact on the fund by [indiscernible] to a sector that, over the last couple of [indiscernible] big contributor hurt us. In addition, gold, which is about 6% of the fund, it out-contributed to performance. In addition, we've got investments or publicly traded [indiscernible] large exposure to the segment of [indiscernible] that appeal to the [indiscernible] of the impact globally, those assets [ph] have always, or up until recently, have not done well. Those, I think, give you a pretty good picture of why the performance has lagged the S&P or lagged, more correctly, our peer group, since the beginning of the year. In response to a question asked by Michael, [indiscernible] going forward is that we're in an environment where [indiscernible] about getting asset classes right, getting industries right, it's going to be more about individual security selection. The new team that we've assembled, I think, is uniquely qualified to address an environment that, in a low growth, low inflation world, is going to be focusing on individual companies that have balance sheets that don't require external financing and companies that have sustainability of their business model as demonstrated by their willingness and ability to increase dividend, buy back stock. And in addition, have a product or service that fits either the aspirational needs of the emerging middle class globally or fits into areas that we're finding attractive investments as it pertains to, euphemistically called, the Internet of things, the emerging consumer, which I mentioned. And the likely prospect of fiscal stimulus globally, whether it's in Europe, U.S. and other parts of the world, stepping up as the next tool that regulators, policy makers are likely to employ, as the efficacy of the monetary policy begins to wane. So I'm very optimistic that we've got a team that is going to contribute significantly. And I'm very, very optimistic about our prospects.

[Eric N. Berg:]

And again it's...

[Michael Lynn Avery:]

And just to -- even though you didn't asked. You got a statement that we -- we've had a lot of opportunities to visit with clients, either in person or over phone. We're going to have clients -- some people are going to be very short-term oriented. But the body of people that have used this product, whether it's on a platform or they've used it for a long period of time, are very supportive and are very satisfied with the long-term performance that the team has been able to deliver. I understand the way Bill asked this question. But most of the clients in this product are attracted to the product because of the flexibility to use different asset classes in order to achieve a return over a 3- to 5-year time horizon that meets their underlying needs. And that's the key. The key is not whether you win or lose in a particular quarter or year, but do you to meet the needs of the family that is looking to send their kid to school or whatever the need happens to be, without them worrying about dramatic loss of principal. And that's what we have consistently done for the last 18 years. And hopefully, we'll be able to do it for the next 18 years, hopefully longer.

[Operator:]

Our next question is from Marc Irizarry of Goldman Sachs.

[Marc S. Irizarry:]

Just curious on any perspective in the Advisors channel, given what's going on with performance and obviously wholesale assets can prove quite fickle. How should we think about the stickiness of the advisory assets?

[Thomas William Butch:]

I think you should think of them, Marc, as steady as she goes. The October experience has been very similar to the experiences of prior months and reflective of the same experience in the prior quarter. As we sit here, the quarter is monetarily positive, gross sales are in line with prior months, and we expect it to be steady as she goes. And then, I'd like to amend one, real quickly, one of my prior responses about institutional. There have been 2 additional Mackenzie -- I had my timing little messed up in my head -- there have been 2 additional Mackenzie outflows in October, though not of the magnitude in the third quarter and included in the number Hank gave earlier. But I did want to make that clear.

[Operator:]

Our next question is from Robert Lee of KBW.

[Andrew N. Donnantuono:]

This is actually Andrew Donnantuono, sitting in for Rob. The first thing, pretty minor, but just wanted to ask, it looked like even after adjusting for the impairment charge in the quarter, the tax rate for you guys may have been a bit over 38%, slightly above recent quarters. Just wondering if you could comment on that a little bit and, perhaps, provide some guidance for us for 4Q or maybe into 2015, if possible, on the tax rate that you expect.

[Brent K. Bloss:]

Andrew, this is Brent. The elevated rate in the third quarter has to do with the investment returns. We have a capital loss carry forward that we have a valuation allowance against. So in periods where we have negative investment performance, that tax rate ticks up. So that's the main reason for the increase. And I think, we -- at 37.6, I think, is our normalized rate. And we expect that to be going into next year as well.

[Andrew N. Donnantuono:]

Okay. Great. And then just kind of one more high-level question, I wanted to, maybe get back to a quick comment that, Hank, you had made at the beginning of the call, which was basically attributing, I think, outflows in the quarter from high-income largely to secular trends, which obviously, played a big part. I was wondering if you could just kind of comment, maybe qualitatively, a little bit more on that. How you maybe concluded that PM turnover and that strategy is -- has been a bit less of a factor there? Maybe it's just client conversations you've had, but kind of anything -- any more detail on that comment you might have would be really helpful.

[Thomas William Butch:]

This is Tom, I'll take that one. I think, Hank acknowledged that it's never good to have PM turnover. And in that circumstance, we had 2 turnover events in 1 fund in a relatively truncated timeframe. However, the team is substantially in place, and the person who is running the fund has been part of the team since its current investment structure and process was initiated and has been very successful over that time. The evidence that it is in our view more market driven is the fact that if you look at all 109 Morningstar categories in the third quarter, High Income was 109, dead last. So there's no denying, I don't think, that market and investor trends were very strongly afoot in the results. At the same time, we haven't said that PM turnover wasn't at issue at all. But it happened at a time when, in our view, no matter who was at the helm, we would've been hostage to some extent to what was going on in the marketplace. More recently, the asset class has shown signs of life, 2 of the last 3 weeks have been positive, the last week substantially so. And, as I think Hank indicated, we've seen some moderation, specially in the last week or so -- very short time frame admittedly -- in the outflow trends. And so I hope that's helpful, because it's virtually impossible to swim upstream against an asset class which is in such repudiation regardless of who's at the helm of the fund.

[Henry John Herrmann:]

This is Hank. I just want to add one little comment, and that is I've been looking at the daily flows of -- since the late winter actually. And it's quite hard to miss that the second portfolio manager leaves, we get a spike. Janet Yellen says that maybe high-yield is a place for some concern, we get a spike. Bill Gross takes off from PIMCO and goes to Janus and we get a spike. And those were not -- in all 3 instances those were not modest spikes. There were 1 or 2 days of very significant outflows on each one of those relative dates. And so I can't predict whether or not we're going to have another Yellen comment or something like that. But if you put those aside and try to turn your head away from the emotionalism of it, subsequent to those or beyond those, the numbers of outflows have been very modest or moderate and there's been days of inflows. So I think, looking at the high-yield category, the spread widening that's occurred since June, put that product in a yield advantage, is pretty significant relative to treasuries, one. And two, the things that normally cause heartache in the high-yield area, credit risk, just aren't on the horizon right now, and so I think more and more people are recognizing emotionalism caused things to get a little carried away. And we're expecting or I'm expecting, a more rational environment if that's possible in our business. I don't know if that was helpful or not, but I felt like venting.

[Operator:]

On next question is from Greggory Warren of Morningstar.

[Greggory Warren:]

You kind of stole my question a little bit there guys. I was going to comment that you guys sort of had a misfortune of having these manager turnovers at about the same time that the markets and the equity credit markets sort of picked up in volatility. So I was kind of wondering, you answered one part of my question, which was how much of that was tied to the management departure, how much of it was tied to the markets. But I guess, my second thought here is, as we move forward, as we get into the first quarter of 2015, which is a bigger period for advisors to reallocate positions and stuff. How much do you feel like the performance may impact flows as we go forward?

[Henry John Herrmann:]

Keep in mind, the performance and high-yield fund is very positive -- the fund's in the top quartile. It's gone through all these redemptions and headache and heartache and so forth, and the performance has continued to be there. And I'm talking about on a year-to-date basis, on a monthly basis, and a last week basis kind of thing. I would hope, as we move into the new year, performance will continue to be a helpful consideration in terms of flows. And I think Mike and I have both addressed our view on what we're expecting performance to do going forward. And I think that would also be pretty helpful.

[Michael Lynn Avery:]

Greggory, I would just add, this is Mike. I would just add that as it pertains to the Asset Strategy Fund. This is a fund that has had, during our tenure, management departures before. If I think about 2008, for example, which was a particularly tough period for the market, my partner at that time made the decision to do something else and so, during a tough year and the management departure, it certainly shines a light of skepticism over what you're doing, I suppose. However, during that period and certainly, in the days following it, again, the people who have focused on Asset Strategy as a solution to their clients' needs continued to stay with the fund, particularly as they saw how we changed the team at that time in response to where we thought the world was headed in a post-crisis or post '08 environment. This year, we had a very similar experience in that we were having a very difficult year, and then have a key portfolio manager, my partner of 7-plus years, make the decision to do something else. Totally -- in both cases, totally unrelated to the performance of the fund, but just happened to be bad timing, if you will. And again, in response to another question, I may -- maybe I'm kidding myself, but so far, the response to how we've changed the team, what we've added, our focus has been very well-received. So we'll see. And as I think about -- there's been periods of underperformance, if you will, over the last -- I don't really want to relive them I guess. But over the past 18 years, we've had periods of underperformance as any fund or any style will have over a long period of time. And we found a way to manage through it by looking towards or forward to what is the world likely to have in store for us, and how do we manage in accordance with that. And that's what we've always done. And, again, for people who have been with us for a long time, I think they have a lot of confidence in that approach.

[Greggory Warren:]

Okay. That's good. And I guess, just to sort of wrap that up then, your feeling is that the manager departures are less of a consideration as we move forward, that more of the flow picture will be determined by

[Michael Lynn Avery:]

I think so. People -- this is -- most people don't even remember even internally here. If I had a show of hands of who was the first manager on the Asset Strategy Fund other than myself and Mr. Herrmann, there'd probably be some head scratching over who that was. And when my partner left in '08, I hate to say this, but most people don't even remember who that was and they forget fairly quickly. Most people will -- I mean, when I say people, I mean clients. Clients will -- what they want to focus on is not so much the person that left per se, it's what do you do, as a organization, as a team, to replace that person if you need to. How does the process of your organization take into account management departures? And I think what -- and even though it looks not great, in terms of having a couple of key management departures happen in a short period of time, what I think it has given all of us an opportunity to do is highlight a process that is not dependent upon 1 person or 2 people. But we have in place a process that Hank has managed or the entire time that I have been here, which is over 30 years, which is based on bringing in people early in their careers, corrupting them in Mr. Herrmann's image and then moving them on to higher levels of responsibility at the appropriate time. And yes, he's laughing at the corruption. My -- our GC is not laughing, but Mr. Hermann is laughing. And that's our process. So you're going to have departures in any organization due to all kinds of reasons, but if we're doing anything right as a team and that is preparing people for the days ahead when you're going to get departures, but you can carry on the mandate of a product or investment process by grooming, growing people internally. And that's what we do extremely very well.

[Operator:]

Our next question is from Chip Oat of Tradition Capital.

[Charles Oat:]

Other than Asset Strategy and High Income and those are pretty big "other than's", but besides that, are we accurate that the rest of the firm is at worst having a pretty decent year? Is that an accurate assessment?

[Thomas William Butch:]

Yes. If you were to look at the third quarter on just the mutual fund side, excluding institutional separate accounts, it had gross flows approximately $2.4 billion and net flows approximately $600 million. So we appreciate the question, because I do think it points out that underneath those 2 products, which of course, have been the lead horses of the growth of the fund family over quite some period of time, underneath that there's been a lot of good momentum, though not at the same magnitude, in a pretty broad span of funds. And we've worked very hard to create that kind of diversification. We're really only a 10-year-old fund family, and I believe it's accurate, we have 13 funds of $1 billion or more in AUMs. And so there is good momentum. If you would look at that as just sort of its own fund family in the rest of the shop. But again, when you have 2 funds which have been such growers within their category and within the Ivy Funds' family, they easily mask that result.

[Charles Oat:]

Okay. And then second and last question, you started initiatives to, what I call, increase national brand recognition at the consumer level and certainly, exposure through Major League Soccer on national TV is a good start. I apologize if we missed the press release on this. But are there any other initiatives that you're able to share at this time? And more to the point, how much is it going to cost?

[Michael Lynn Avery:]

I'll be a little bit lighthearted with this one to start. But we hope you've been watching the World Series where the IV Funds' sign is quite prominent in the right field of the Kauffman Stadium. We bought it last year, because the All Star game was there. And we actually did a thorough examination of where the home runs were likely to go and where the camera was most likely to show it. We believe we provided the mojo for supporting Kansas City to win the MLS Cup. And we will, similarly, propel the Royals to win these next 2 games as we did the Phoenix Mercury at the WNBA for which we sponsored them for our IV 529 program. We just extended, by 4 -- by 5 years, our jersey sponsorship with supporting Kansas City. We have great belief in the future of professional soccer in North America. The league is expanding. If you look at the television ratings of the World Cup, for example, versus the World Series, it tells a pretty powerful story. And certainly, the engagement of millennials, which we, as an investment firm, I need to understand better, are really tethers to that sport very well. We have -- relative to sort of core marketing initiatives, we've had the world-covered campaign in the marketplace on a sustained basis, at a level spend now for 3 or 4 years, and we would expect to continue that.

[Charles Oat:]

So nothing you could -- nothing new that you're able to share at this time?

[Michael Lynn Avery:]

Other than the extension of the jersey sponsorship into '20 something, 2020 maybe, no, nothing beyond that.

[Operator:]

Our next question is from Patrick Davitt of Autonomous.

[Patrick Davitt:]

You've touched a few times on the, I guess, stickiness of some of your long and historical clients in the Asset Strategy Fund. I'm sure it's hard to give exact numbers, but can you give us an idea of the degree of mix between kind of that sticky base you're talking about and maybe the faster money that is more focused on the short-term relative performance?

[Michael Lynn Avery:]

It's hard -- this is Mike. It's hard to know. I don't even know how do you -- I mean, nobody ever raises their head and says, "Yes, I'm a speculative investor, and I'm just here for the last -- next quarter." Everybody, everybody says they're a long-term investor. I haven't had anybody in a presentation that raised a hand and said, "No I'm not long-term, I'm only here for today." But people -- since -- I'm saying it somewhat fictitiously, but I think it's true that since the global financial crisis that people are more sensitive and their time horizon has shortened up, because people with wealth don't want to find themselves in a position, particularly given where more of those people are demographically of looking at the prospect of a rapidly declining market as in '08. And so I think it's fair to say that people's time horizons, at least their sensitivity to short-term performance, has been enhanced. And there are some people that are going to make decisions that are reflective of short-term performance and their just inability to tolerate that I suppose. But in the aggregate, in the broader scheme of things, as I mentioned earlier, I, and Tom can correct this if I'm wrong, I believe that what our wholesalers are doing, what our advisors are doing, what the institutional group is doing, is a great job in searching, cultivating, teaching people. I mean, most of what we do is teaching people how to be investors or what to expect from products. And if you do that accurately, then you cultivate a clientele of real investors and not speculators, which is not a group that we've ever catered to. Sure, one of them is going to sneak in the door every once in a while. But it's not the market that we're desirous of.

[Henry John Herrmann:]

And we have internal controls and compensation policies that serve as enforcement mechanisms to that as well. It's the only other point I would make. I agree with everything Mike said.

[Operator:]

Due to the time, 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:]

Well, we thank you very much for your time today, and look forward to talking to you next quarter.

[Operator:]

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