Waddell & Reed Financial Inc
Q4 2014 Earnings Call Transcript

Published: 3 Feb 2015

[Operator:]

Good morning, and welcome to the Waddell & Reed Financial Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event being is recorded. I would now like to turn the conference over to Mr. Hank Herrmann, Chairman and Chief Executive Officer. Please go ahead.

[Henry J. Herrmann:]

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

[Nicole Russell:]

During this call, some of our comments and responses will include forward-looking statements. While we believe these statements to be reasonable, based on information that is currently available to us, actual results could materially differ from those expressed or implied due to a number of factors, including but not limited to, those we referenced in our public 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 Web site at waddell.com under the corporate tab.

[Henry J. Herrmann:]

Thank you, Nicole. Good morning, again, everyone. Early today, we reported our fourth quarter results. Net income was 80.9 million or $0.97 per diluted share and represents a small increase over last year’s fourth quarter and this year’s adjusted third quarter. For comparative purposes, the third quarter excludes an impairment charge of 7.9 million. Operating income of 119.1 million rose 5% compared to the fourth quarter of 2013 on higher average assets under management and capital control of expenses. Compared to the adjusted results of the previous quarter, operating income declined 10%, lower average assets under management responsible for the decline in revenues while expenses remain largely unchanged. The operating margin during the quarter was 30.0% compared to 30.2% in the fourth quarter of 2013 and on adjusted 32.5% during the third quarter of 2014. During the fourth quarter, we generated 84 million of operating cash flow for an annual total of 345 million, a 20% increase compared with the previous year. In 2014, we returned a total of 246 million to our shareholders through a combination of dividends and share buybacks. This represents $2.92 per diluted share in total. We reduced our share count by 1.6 million net shares. We raised our regular quarterly dividend to $0.43 per share a quarter for 2015. This represents a 26.5% increase over 2014’s rate. We started 2014 with strong sales momentum but then experienced significant headwinds caused by weak performance in our flagship assets strategy fund and a loss of consumer fees hedging for high yield products. We are disappointed by the substantial outflows in assets trading for high-income fund while our commitment to reversing these is unwavering. Prospects beyond the two funds are notable and 2014 funds other than assets strategy and high income had sales of 15.3 billion and net inflows of 2.9 billion. While massed by the magnitude of our outflows in our two largest funds, these results indicate the success we have had in broadening sales among asset classes and products. While recent trends are improving, fresher outflows is likely to persist until we see some improvement and relative performance of asset strategy. We are very focused on improving performance and believe we have the right talent in place to achieve our goal. Operator, at this time, I would like to open the call for questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Michael Kim at Sandler, O'Neill.

[Michael Kim:]

Hi, guys. Good morning. First, Hank, just a follow up with you. You mentioned recent trends are improving and any sense of sort of quarter-to-date flow trends in light of the seasonality that we typically see in that quarter?

[Henry J. Herrmann:]

I’ll ask Tom to address that.

[Thomas W. Butch:]

Hi, Mike. Yes, the January numbers reflect still an outflow situation across the three distribution channels though importantly in the wholesale channel at a rate, which if applied, theoretically across a full year quarter would be substantially less than that, which we saw in Q4, about 1.3 billion net out across the channels. If you look specifically at the Ivy Funds, which is obviously the largest part of that, absent strategy would be net negative, about 1 billion and everything else would effectively cancel out to 0 with all the re-pluses and minuses inherent in that.

[Michael Kim:]

Got it, that’s helpful. And then maybe in terms of capital management, obviously the share repurchase activity remains elevated and you bought back more than double sort of the annual equity grants. But just looking ahead, conceptually, has the approach may be shifted a bit in terms of continuing to buy back stock above and beyond the annual grants just given kind of the building cash on the balance sheet as well as the stocks more favorable valuation these days?

[Henry J. Herrmann:]

We’re still opportunistic given the point that you raised in terms of the stock being lower than they’ve been for a while. I would say that my tendency would be to pick and choose my spots would be a little bit more aggressive than I’ve been in the past. But I wouldn’t want to walk away from the idea that the dividend increases were still part of the game.

[Michael Kim:]

Understood, okay. And then maybe just one for Brent. Any change in thinking more recently as it relates to the outlook for expenses just in light of the AUM headwinds and ongoing market volatility? And then more specifically in terms of comp, were there any adjustments to the bonus accruals in the fourth quarter and just any color on how we should be thinking about that line as we look ahead into the first quarter and beyond?

[Brent K. Bloss:]

Mike, I’ll take your last question there first on the comp. Yes, there were some adjustments to bonuses in the fourth quarter. So going into the first quarter, we’re expecting a range of comp between 49 and 51. On a full year, 6% to 7% basically due to annual increases in salary as well as higher pension costs that we’re expecting. The headcount we expect to stay pretty flat until we see flows stabilize. That’s been our focus going into the – looking at our budgeting and so we’ve kept that pretty intact at least through January and expect to really focus on our resources and how we deploy those until things turn around here. Overall, expenses again we’re taking a close look at everything we’re doing. Our annual budget process, we’re looking at forecasting G&A and direct expenses 3% to 4%, but again we can dial that up and down as need be to identify a lot of discretionary items in that budget. We can flex that up and down throughout the year until things turn around.

[Michael Kim:]

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

[Operator:]

Your next question comes from Dan Fannon at Jefferies & Company.

[Daniel Fannon:]

Thanks. I guess just a follow up on that last comment on comp. I guess just looking at the comp was down in 2014 versus '13 and the prospects heading into the year changed. And I think in the middle part of the year, you were still forecasting kind of a 5% increase and I understand what happened with performance. But I guess I struggle with looking at the comment you just made of the increase in the kind of mid-single digit into next year based on some of the prospects you’re looking at today. So, wondering how flexible that is as we think about the year and the prospects for growth and flows in comp?

[Brent K. Bloss:]

Yes, the numbers that I gave you there, some of that’s flexible given how we’re going into the first quarter with bonuses, so it will depend on performance. But the things we can’t back out there is a pension increase about $6 million across the complex. That will show up in both compensation and the indirect line, as well as salary increases and adjustments, which were 3.5% to 4% going into 2015.

[Daniel Fannon:]

Okay. And then just a couple more comments I guess to flush out January and just thinking about is it more just seasonal with regards to redemption rates being lower? Are you seeing gross sales still strong in some of those other products or are those accelerating? Just trying to get a sense of what is kind of just an impact of kind of the normal seasonality of January versus anything else different in those trends?

[Thomas W. Butch:]

Boy, there’s a lot of friction in that but fundamentally January is usually a pretty good month. January of '15 did not match '14 which I would remind you is an extraordinary month for us. But if you look at '12 or '13 as proxies, it would kind of split the difference between the two of those. So, I don’t know quite what to divine from that. I would say that the sales that we’re seeing in the products that are working are strongest gross and net sales strategy in the quarter was our international for equity product and we’re seeing good flows in other products as well. The gross flows in absent strategy were just a hair behind that of international core equity, but redemptions were elevated certainly compared to a year ago. So, I would say for year-over-year not really fair comparable from last year but relative to say December, modestly favorable to December and the trend line in the products that are really focusing on looks reasonably good.

[Daniel Fannon:]

Great. Thank you.

[Operator:]

The next question comes from Bill Katz at Citi.

[William Katz:]

Okay. Thanks. Good morning. I appreciate taking my questions. Just zoning in on the wholesale distribution margin a little bit. As you think about the gross and net sale dynamics and maybe the product mix at selling, how do you think about any further improvement, if at all, for that particular margin? Is that possible or are we sort of going to flat line from here?

[Brent K. Bloss:]

Bill, this is Brent. I think with the asset base down in the channel, if anything at all flat line, it won’t get better until the asset base increases again with all the pass-through revenues. As those revenues go up, the margin improves. With a lower asset base, I would say that would be under pressure.

[William Katz:]

Okay. Thank you. And then sort of curious, Tom or Hank I’m not sure which one of you guys want to take this one, just as you sort of deal with the conundrum of good performance in certain products and struggling with the asset strategy, what are you doing from a marketing perspective, or the message still into the distribution channel around what’s salable, if you will? Just trying to think about if you need to pick up the spend a little bit or is it just redeploying card resources to try and bolster the growth sale story?

[Thomas W. Butch:]

I think it’s substantially the latter, Bill. As you know, at the end of each year, we take a good look at the market environment in looking at, at least three factors; the categories which were in favor, products we have that match up against that and the percentage of that category that is supportive of active management. And we just had our sales meeting with our whole sales team on the wholesale side and identified probably a dozen funds on which we’ll focus for the year. And that’s an amalgam of three things; franchise kind of products those more than $5 billion, things which as I just described could be the next franchise products, those which are in favorable categories and have favorable performance. And then sort of opportunity funds, which would include a number of the products that we’ve launched relatively recently and which have had a good start out of the gate and give us the opportunity to take those to market. I don’t anticipate a ramp up in spend or in the cost of wholesaling. It’s a matter of identifying the best opportunities and using resources accordingly.

[William Katz:]

Okay, that’s helpful. And then maybe just one last one, thanks for taking my questions. Hank, maybe comment a little bit on the institutional pipeline, what you might be seeing in terms of demand? Any sort of shift back to equities more generically?

[Thomas W. Butch:]

This is Tom again. We had a number of new opportunities in the fourth quarter. Again, the strategies which were most in favor among searches were all equity-driven in the fourth quarter and the pipeline remains reasonably fertile. I think I mentioned on the last call that we have one win of substance, which we expect to fund in this quarter and we have another major finals we’ve not heard back on. But we are substantially an active equity growth and core manager in the institutional space and there is ample opportunity in that subset of the marketplace for us right now.

[William Katz:]

Okay. Thanks for taking all my questions.

[Operator:]

The next question is from Robert Lee at KBW.

[Robert Lee:]

Thanks. Good morning, everyone.

[Henry J. Herrmann:]

Hi, Rob.

[Robert Lee:]

Maybe just, Brent, a quick modeling question. It looks like G&A was a little elevated in the quarter two. I don’t know if there was anything specific there. I know that you have some technology initiatives underway. Could you maybe help us understand how we should think about that, maybe into next year?

[Brent K. Bloss:]

Yes, I think Rob it was a little elevated. There were some consulting charges around IT that were elevated in the quarter. So, going into the first quarter, I’m looking at 27 to 28 range and then, like I said before, a 3% to 4% is what we’re forecasting annual increase. A lot of that increase is due to continued IT spend, which should start tapering off in the third quarter is the plan and hopefully by then we’ll have a better idea of what that looks like going into 2016 and hopefully decelerated expense going into 2016 around IT initiatives.

[Robert Lee:]

Okay, great. And then a question for Tom. If I think of that strategy, one of the things that at least striking me is the longer term performance though pretty strong and clearly had a tough year in the past year performance wise, but the step down in sales has been pretty dramatic in redemption. Was it the co-manager leaving or is there some fundamental change just in how you kind of think of the platforms of being run that’s it on that is just making net sales and redemptions this much more evolved, but just kind of trying to get your thoughts on that?

[Thomas W. Butch:]

Yes, it’s complicated and a very good question, so I do have a few thoughts. The first would be that the category remains I think fertile. We were more than 100% of the category outflows in the fourth quarter and absent that, there’s still an investor appetite for the world allocation category and I don’t think that it is in any way in a state of disrepair or repudiation in the broker/dealer community. So that’s sort of number one. Number two, the velocity of change of what’s being consumed by investors is as you know quite rapid and we’ve seen massive swings in sentiment more than – in the last 18 months or so more than is normative. Whether that’s here to stay, I don’t know. But I think perhaps even funds that haven’t had a very good history of performance get a lesser period of leniency when they have underperformance. And as you point out, a manager changes something that always raises the concern level at the due diligence part of the broker/dealer community. All that said, I think as time goes on, that last piece especially continues to receive. And with the performance turnaround, I do believe we’ll the opportunity to market the fund effectively. But the magnitude of change is as you point out rapid and I don’t know that there’s anything afoot that is systemic around that. It’s just I think amalgam of the three things I talked about.

[Robert Lee:]

All right, great. And then maybe a follow up on the institutional channel. I know not much the pipeline but I know a lot of your sales there the last couple of years have been in subadvisory relationships getting on different – whether I guess it’s different 401(k) and other platforms. So, if we look at that today, should we be thinking that – has there been any change there with some of the changes in that strategy, any lost of shelf space or you’re still seeing relatively consistent flows come in from those kind of ongoing relationships in the institutional channel?

[Thomas W. Butch:]

There’s really one relationship of significant substance in the institutional channel for asset strategy and that remains firmly intact. Asset strategy apart from the subadvisory spaces and something that we marketed with great success in sort of traditional institutional. But to answer your question – to maybe take your question out one derivative, the subadvisory – particularly subadvisory insurance space is in fact where we’re seeing a lot of opportunity. What’s interesting about that of course is that we have greater capacity to sell more of the product line in that space and in that subadvisory world especially as we’re getting back to a lot of investment-only platforms in the VA space. The other thing I’d point out is that – so you didn’t ask it this way. There was a reallocation that was a meaningful hunk of the fourth quarter, outflows of about 600 million from a broker/dealer platform that just reallocated away from the asset class, which is really a quasi-institutional kind of sale. So I thought I’d just point that out.

[Robert Lee:]

Great. And then one last question on the institutional channel. I don’t think it’s come up in previous calls for a while, but with the strengthening of the dollar and I guess – I assume you still have the Pictet relationship and I guess to some – then I would have thought maybe there would be more interest from Pictet for U.S. strategies given the movement in the dollar. Are you seeing any signs that we’d get some renewed flows from that relationship?

[Thomas W. Butch:]

Well, they are active. Remember, they change from large growth to large core last year. They’re out actively marketing the product. I haven’t seen a massive swing in sales at this point.

[Robert Lee:]

Great. Thanks for taking my questions.

[Operator:]

The next question comes from Michael Carrier at Banc of America.

[Michael Carrier:]

Thanks, guys. A question on the wholesale channel and Tom, I think you hit on this a little bit in the last question, but just wanted to make sure I understood it. When I look at the level – the redemptions in the fourth quarter, when I look at the overall performance, it still seems a bit out of whack and obviously there’s a lot of reasons behind it and concentration to certain products. But just wanted to get a sense, do you have any of these lumpy moves or these reallocations of distribution platforms away from the product or anything like that, that would have driven that level. Because when I put everything together, when I look at like 78% of the assets on three-year still outperforming, like overall it still looks pretty good for that level redemption.

[Thomas W. Butch:]

Well, we’re out in the market saying the same things that you and Rob said relative to long-term performance, I assure you. Thank you for acknowledging that. As I said, the platform placement of the large broker/dealer platform, which was a discretionary home office driven platform was about 600 million. There were also – the RAA community, which obviously has a tendency to buying blocks because they buy for firm-wide allocation, we also saw some significant outflow there. There is no – I think I’m accurate in saying there is no additional asset base in the broker/dealer world in a discretionary model of the magnitude that we have seen come out. There still is substantive asset strategy, asset base in the RAA community.

[Michael Carrier:]

Okay, that’s helpful. And then maybe just one follow up for Brent. When I think about the cash level versus your net cash level, still very healthy and you guys have been active on the capital management. Just wanted to get a sense of what you’re comfortable with over time in terms of how much of a cushion do you want there, whether it’s absolute cash or net cash?

[Brent K. Bloss:]

Michael, we have the broker/dealers and also seed money which we deploy. Currently, that excess is around 600 million. We normally give the excess, I’m not sure we’ve really come out and said what we’re comfortable with, but the excess is around 600 million right now.

[Michael Carrier:]

Okay, all right. Thanks a lot.

[Operator:]

Your next question comes from Chris Shutler at William Blair.

[Christopher Shutler:]

Hi, guys. Good morning. Brent, the G&A line, I want to come back to that for a second. So it was kind of $75 million to $80 million on a normalized basis in '11 to '13; is up significantly this year and up 3% to 4% next year. I know it’s tough to say exactly where we’re going to be in '16, but how much G&A expense I guess should we look at right now as temporary that could fall out of the P&L eventually?

[Brent K. Bloss:]

We’ll have to see. Like I said, as we approach the fourth quarter and we’ve had a couple of years here where we’ve had significant IT expense. So, for instance, 2014 over '13, a large percentage of that increase is IT related. We’ve had a huge lift in our IT infrastructure that should be coming to an end again in the third quarter. That said, we’ve invested a lot in the technology, so now we’re going to have to care and feed this technology going forward. So, we would expect not a sizable decrease but it will certainly take down our expectations are starting in 2016.

[Christopher Shutler:]

Okay, got you. And then a question for Mike on asset strategy and I recognize it’s a tough question to answer but curious how you think about performance turning around and is it more about stock picking or is it more about getting a macro environment that’s more conducive to the way that you’ve positioned the portfolio?

[Michael L. Avery:]

Well, it’s certainly not a tough question. I’m not sure exactly how you mean performance turning around. I would remind you that our relative performance is very good historically. We get categorized in the alternative global macro category. On a 10-year basis, we’re the top 10% of that category; on a five-year basis, we’re in the top 16%. On a three-year basis, we’re in the top 6%, which is difficult to achieve and hard to maintain and certainly difficult to replicate. So, if there is a [indiscernible] that we have consistently gone to the clients with from the inception of this product and we’ve been managing the fund now for 18 years. So over an 18-year period of time, we’ve set out at the very beginning to focus on long-term performance. We’ve never – at least portfolio managers have never articulated a time horizon shorter than three to five years. And it was 10 years before anybody paid any attention to the product at all. So, I would say that our long-term performance, which is what a fund that started at $50 million 18 years ago that went to 40 billion is what most people sign up for, that’s what they expect and that’s what we deliver. You’re right to point that 2014, in that year, we were in the 87th percentile of the alternative global macro category, which receives a lot of attention and I don’t really anticipate that we do anything different. We did have a loss in a key member of the management team last year, which is never helpful, but we’ve had key losses before going back to the '08 time period. But a loss gives you an opportunity to add resources to improve the quality of the team, which we have. We brought in new management to work on the team that are very experienced, have track records in their own right of delivering long-term performance or distinguished by being very bottoms up fundamental analysts. And we now have an eight number team focused on asset strategy and so I have very good expectations that we’ll be able to continue our long-term track record. And for those people that are focused on how to meet their clients’ needs over a long period of time that’s what we deliver and that’s what we’re dedicated to sticking to.

[Christopher Shutler:]

Okay, understood. And certainly I appreciate the fact the long-term performance is great. And then the last question, in asset strategy and high income, I guess if you exclude those two products, just curious what you see as the potential to accelerate the flows outside of those products? I think you’ve been pretty consistently in inflows in kind of the $600 million, $700 million or $800 million range and wondering particularly with a product like international core equity that has a very strong track record, just what you see as a potential to accelerate flows? Thanks.

[Thomas W. Butch:]

I think the potential on that product is very meaningful. If you look at the position that that asset class has enjoyed in terms of sales, it’s been number one in foreign large blend at each of the one, three and five-year period. And we continue to grow share in that product and I have every reason to believe that that will continue. It’s not an asset class, which is easily disrupted because there’s not a particularly vulnerable incumbent, if you will, but we continue to take share in any case. So that’s one on which we’re focused. But as I said before, there’s really a dozen funds that will garner the lion share of our marketing and wholesaling resources and that would certainly be at the top of that pile.

[Christopher Shutler:]

All right, thank you.

[Operator:]

The next question comes from Craig Siegenthaler at Credit Suisse.

[Craig Siegenthaler:]

Thanks. Good morning, everyone.

[Henry J. Herrmann:]

Good morning.

[Craig Siegenthaler:]

So it’s tough for us to see our performance in 2014 for asset strategy has impacted its wholesale shelf space on a longer-term basis and what I’m really talking about is, has the fund been getting removed from large platforms, subadvisory relationships, kind of consultant recommended list? And what I’m wondering is performance rebounds here in 2015, has it been removed from certain areas that could prevent a sharp rebound in sales here? So any color here would be helpful.

[Thomas W. Butch:]

I think the short answer is no. I mentioned that it was not removed from but taken out of an allocation in a large broker/dealer home office driven discretionary program. There have been a couple other cases where when it enjoyed preferred space on a much smaller scale that it lost that place. I would assert again what I said before, which is with the performance turnaround and with the relative health of that category and with the long-term reputation as just discussed on the fund, we certainly should be able to turn the sales picture around. I don’t see anything that has happened relative to any exclusion from any platform impacting that materially.

[Craig Siegenthaler:]

And then two housekeeping items, I’m sorry if I missed it, but did you give any guidance on the tax rate? And also I believe there’s a large institutional win that was expected to occur in the first quarter? Any detail on that would be helpful.

[Brent K. Bloss:]

Yes, on the tax rate side, the effective rate we’re looking at is around 37.5. Now that’s without any capital – taking down any of the reserves around the capital loss, which from period to period that tax rate jumps around due to that carry-forward of our tax loss. So if we have investment gains in our portfolio, we get a tax benefit. Currently, on a growth basis we have a tax loss of around 18 million left and that is about 7.8 million.

[Thomas W. Butch:]

On the institutional piece, yes, we did mention on the last and again on this call a win of substance that we expect to fund here in late in this quarter. We don’t normally disclose timing because it can move in order of the magnitude of expected sale until it’s in the door.

[Craig Siegenthaler:]

Thanks, Tom.

[Operator:]

Our next question is from Eric Berg at RBC.

[Eric Berg:]

Thanks very much. While I listened very tentatively and I sort of understand the fact that there are important positive developments taking place elsewhere at Waddell, I’m thinking that because of the size of the asset strategy fund that nothing really in terms of moving the needle close here need to change materially and to a lesser extent but still very importantly in the high income fund in order to change the flows picture overall. They are kind of like the big gorillas in this room. And because – I’m getting to my question, because everything depends it seems on a turnaround in performance, I’m hoping we can revisit the question what are the managers doing to try to – differently to try to turn around performance? Maybe the answer we’ve already heard is nothing. So what are you doing differently to try to turn around performance and why should we be confident that it will turn around?

[Henry J. Herrmann:]

Well, I’ll just say it again. We should be selling a process that’s been in place for a long. We sell a management team that is long-term oriented. We appeal to a client base that subscribes to that and at the same time has a world view that’s very similar to how we’ve managed the asset strategy product over a long period of time. We’re portfolio managers. You work hard, you keep your head down, you make the best calls you can. In discrete time periods, sometimes those are going to be – from the perspective of history, those are going to be short-time periods where they look wrong and over a long period of time, you look right. I get questions, maybe hard to believe, but I get questions that is short-term focused as why didn’t the fund go up yesterday. I mean that just comes with the game of having a distribution system set up to appeal to a large spectrum of needs and desires. And again, this product was built on appealing to our dedication to get the highest return we possibly can, using the flexibility to go across asset classes to achieve the clients’ goal and at the same time mitigate the downside as much as possible. One of the questions I frequently get is, oh, you’re fund’s too volatile until I remind them that if you look at rolling 10-year performance, the returns on an annualized basis is much higher than most equity-oriented indices with a lower volatility certainly lower than the S&P 500 where passive investors seem to want to move to. I think what we do need to do as portfolio managers is do a better job of communicating with the wholesalers, the advisors on how we see the world going forward, how the fund is structured in order to accommodate how the world is changing. There’s one thing that I’m certainly dedicated to do is to spend more time one-on-one with the wholesalers over the months of March and April. I’ll be out with some of them visiting clients. My two partners just spent a couple of days with the wholesalers hopefully to outline clearly what the fund is focused on and I think that will help and they as well will spend more time potentially with wholesalers, advisors communicating our process and how we manage the fund. We have laid out in a paper for the wholesalers a direction for the next quarter, which is called the focus on U.S. equities in the low growth world. And a big part of what we do as portfolio managers, which you don’t get from passive products is a big part of what we do is trying to educate people with regards to how the world has in fact changed since the beginning of the global financial crisis. We spend a lot of time doing that. The clients that are steeped, the wholesalers that are steeped with a background in macroeconomics seem to appreciate that the most. The clients that are looking for short-term, quarterly, monthly performance not so much. But again, I think as long as we stay focused on how we manage the product over a long period of time, the worst thing that could happen is to get raddled by concerns that your quarterly performance, your one-year performance is so bad, you got to do something different. I think that would be a big mistake. We’ve had one year periods, quarters, weeks, days that on a relative basis don’t look good within that discrete time period but I’ll say it for about the fourth time now, our long-term track record is exceptional. It’s difficult to replicate that. It’s not easy to achieve and extremely difficult to maintain and I am determined to maintain that focus.

[Eric Berg:]

Thank you.

[Operator:]

Our next question comes from Kaimon Chung at Evercore ISI.

[Kaimon Chung:]

Hi. Thanks. Most of my questions have been asked and answered but I just had a question about your investment in net income. I’m just looking for some color on that. How much of that was driven by the trading portfolio? If I recall, I think last quarter you had a mark-to-market loss of about 3.5 million. Thanks.

[Henry J. Herrmann:]

Yes, most of that was made up of capital gain and dividend distributions from the funds. I believe about 1 million of it was trading.

[Kaimon Chung:]

Got it. Thanks.

[Operator:]

Our next question comes from Greggory Warren at Morningstar.

[Greggory Warren:]

Good morning. Thank you for taking my questions guys. I’ve got a question on asset strategies kind of following up here. You noted they hadn’t been taken off any platforms and you did lose some premium placement. But I’m just wondering to get a sense from your conversations with your wholesale partners, there’s perhaps sort of reluctance to recommend the fund right now. Given the near-term performance issues and the manager changes, just trying to look at this from a broker/advisor point of view; most often they don’t want to put something in a portfolio if they’re going to have a lot of questions asked about it.

[Thomas W. Butch:]

I think that’s an ongoing process with any fund. It’s really hard to sort of answer that specific to conversations relative to asset strategy, which are very broad based. I would remind you again that it was the second largest gross selling fund in the complex, still has very wide support among financial advisors. So, I did my best to explain what’s happening sort of at the due diligence level within the brokers/dealers, at the advisor level. Our team is still very committed to taking the product to market effectively and we’ll be executing upon that.

[Greggory Warren:]

Okay. And I appreciate the problem you guys are having here because it’s almost like a perfect storm where you’ve got really good three, five, 10-year performance numbers. You’ve got a near-term performance hiccup and the manager changes as well. I’m just wondering how do you expect these conversations to go? I mean, how do you expect marketing to be spent within particular areas? How do you expect the education process to go?

[Thomas W. Butch:]

I’m not sure I understand your question.

[Greggory Warren:]

Well, I’m just looking to – I mean we’ve been looking at some of these issues for a couple of quarters now and I’m assuming you probably talked to some of these folks. But I’m just wondering, how do you convince those in the wholesale channel that things are going to turn around, that the fund performance is going to get better, that the new managers that are in place are going to continue to produce the long-term track record that the fund’s been known for?

[Thomas W. Butch:]

I just think per what Mike just spent quite a bit of time talking about, you assert the process, you asset his leadership of the portfolio over a 17-year period, you assert the firm’s unique ability to support a product of this kind, which necessarily engages the totality of what we do as an investment manager and renders unique our ability to do it. You assert our being a pioneer in the asset class and you asset the capability and the entirety of our enterprise and the quality of the team that is in place and the unique capability each of them brings to management of the fund. And then articulate in as much as possible as clearly as possible the positioning of the portfolio and its outlook for the future. And all that sounds just like what we do all the time. Again, I would say that the issues you’re indentifying near-term performance and a change in management recede over time with the change in performance and the recognition of the new team what’s it seeking to accomplish and what it’s able to do in a market.

[Greggory Warren:]

Okay. Well, thanks for the clarity there. It was a little bit more of a muddled question, but it just seems like you guys are on the right path to trying to get things fixed. Thanks, again.

[Operator:]

The next question comes from Mac Sykes at Gabelli.

[Mac Sykes:]

Good morning, gentlemen.

[Henry J. Herrmann:]

Good morning.

[Mac Sykes:]

Maybe an echo here, but I think we recently saw Neuberger embrace the new ETMF structure with Eaton Vance. I was just curious if you had given any consideration to this type of vehicle and maybe if you had any feedback on what you thought on the potential success for it in terms of an industry product?

[Henry J. Herrmann:]

I think it’s premature for us to comment on will it or won’t it. We certainly have taken a look at it and are still studying it. But other than that, there’s not too much for me to say at the moment.

[Mac Sykes:]

Okay. And then in the past I think IS [ph] hasn’t been involved with some private less liquid transactions and we’ve heard BlackRock talk about some of the potential regulations. I was just curious if you think that there might be a future of regulatory landscape where these type of investments might be limited in an Act '40 fund?

[Henry J. Herrmann:]

I’m not sure I heard you question. Could you ask me again, please?

[Mac Sykes:]

So some of the private transactions, I believe I said some allocations to – off-exchange private transactions. Is that correct?

[Henry J. Herrmann:]

Yes.

[Thomas W. Butch:]

Yes, if you’re referring to asset strategy.

[Mac Sykes:]

Yes, asset strategy. So my point is that there’s been some talk about regulations in terms of less liquid, maybe putting some restrictions in different funds, et cetera. I was just curious if – have you done any work on that where that might be impacted going forward?

[Michael L. Avery:]

This is Mike. Those issues get discussed by all kinds of people in all quarters all the time. I’m not aware of anything near term that would affect how we’re currently managing the fund.

[Mac Sykes:]

Great. Thank you very much. Good luck.

[Operator:]

At this time, we show no further questions. I would like to turn the conference back to Mr. Herrmann for any closing remarks.

[Henry J. Herrmann:]

We thank you very much for your attention and attendance and we look forward to talking to you at the end of the first quarter. Thank you so much for your time.

[Operator:]

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