Acadian Asset Management (AAMI) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the OMAM Earnings Conference Call and Webcast for the Third Quarter 2016. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, November 2 at 10 AM Eastern Time. I would now like to turn the meeting over to Brett Perryman, Head of Investor Relations. Please go ahead, Brett.

Thank you. Good morning and welcome to OMAM’s conference call to discuss our results for the third quarter of 2016. Before we get started, I would like to note that certain comments made on this call may constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as expect, anticipate, may, intends, believes, estimate, project and other similar expressions. Such statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These factors include, but are not limited to, the factors described in OMAM’s filings made with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed with the SEC on March 15, 2016, under the heading Risk Factors and on the company’s current report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2016. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. We urge you not to place undue reliance on any forward-looking statements. During this call, we will discuss non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release, which is available in the Investor Relations section of our website, where you will also find the slides we will use as part of our discussion this morning. Today’s call will be led by Peter Bain, our President and Chief Executive Officer; and Steve Belgrad, our Chief Financial Officer. I will now turn the call over to Peter.

Thank you, Brett. Good morning, everyone. Thank you for joining us. Today, we appreciate the time you spend with us. I’ll make some opening comments and then ask Steve to walk us through the financials in a little more detail. And then, as always we will look forward to conversation with you in Q&A on the call. If we want to just start with the overview and highlights on Slide 3. In the third quarter this year, we delivered economic net income per share of $0.32, which is up over 3% on the year-over-year third quarter of 2015, and up of almost 7% on a sequential quarter basis. Our net client cash flows were $2.6 billion negative in the quarter and the revenue flow through of that was an annualized negative $7.5 million or roughly 1% annualized run-rate based on management fees. We did continue in the quarter our trend of bringing in assets at higher fees than the assets that are going out, weighted average fees on the assets that came in quarter of 42 basis points and only 38 bps on the assets that went out. And we actually saw an increase in activity in the quarter both with respect to inflows and outflows, so more money was in motion during the quarter. We will talk a little bit more in the presentation about that fee split and trend. Our total AUM at September 30 were $234.2 billion, which is a 7% increase on a sequential quarter basis, and over 12% up from the year-ago quarter, included in that is the $8.8 billion that came in when we consummated the Landmark acquisition in the quarter as well. On the investment performance front, our long-term three and five year numbers remain strong, just under 70% of our revenue is being generated by strategies beating benchmark on a three- and a five-year basis. And the one year number remains constant at the end of Q3, from where it was at the end of Q2. And that’s - from our perspective that’s a low number at 35% and we’ve done some work on that, taken a look at it. We’ll talk about that with you as a part of this discussion, because we think that there are some pretty clear anomalous market conditions that have led to that number. And I guess perhaps strategically most importantly in the quarter, we successful closed the acquisition of Landmark Partners on August 18. I think as some of you know we also in the quarter had a successful investment-grade debt raise of $400 million that we closed in July. And we were able to deploy a chunk of those proceeds in the closing of Landmark. We are very, very pleased about the Landmark acquisition. Strategically we think it’s obviously important. Economically we think it’s attractive. And in terms of the actual execution process between signing and closing, it was very smooth, it was well received and the integration operationally since closing has also gone very smoothly. So we are very bullish on Landmark. And in fact on Slide 4, where we kind of revisit each quarter our four component growth strategy, which we believe our unique operating model enables. We’ve had depending upon the quarter, different components of this pyramid to talk about. I think this one I’m very pleased to really focus on that very top triangle on the period, which is the new partnerships. I think that the Landmark acquisition is an important proof-point of the model, of the strategy, and on how it’s appealing to very well run leading firms in the industry. When we go to Slide 5, it provides an opportunity for just a little more granular catch-up on where the business is and how it’s evolved. The top left AUM progression chart shows you the trailing 12 months and 12.2% increase in our AUM over that period. Here, we’ve added the Landmark acquisition, so that we can show and you guys can see the contribution that Landmark has made to that growth. Likewise, on the bottom left of this page, the AUM progression on a sequential quarter basis, again a 7% sequential quarter growth in AUM, including the contribution of Landmark. Likewise, on the top right of this page, you can see the diversification of our AUM by affiliate and delighted to have Landmark be a part of this chart for the first time. And again on the bottom right, you can see on an AUM basis, the diversification we’ve achieved across asset class. And with Landmark being a part of the franchise that alternative real estate and timber component is now fully 20% of AUM. And as you all know if you took this allocation by asset class and translated it from AUM into revenue, we would have an even stronger diversification across these classes. Slide 6, gives you a little more detail on this question of flow. And again, what I point out is on the AUM flow on the left, you can see that on a sequential quarter basis our net AUM flow actually improved quarter over quarter from $2.9 billion to $2.6 billion. But then when you jump to the right side, you can see the impact of revenue and that all AUM are not created equal in terms of fees. And there you can see in Q3 this most recent one, the basis points in versus basis points out was 42 in versus 38 out. And in Q2, it’s 46 in, 32 out, and that explains the underlying change in a revenue basis of a flow of $3.4 billion negative in Q2 versus the $7.5 billion this quarter. And on Slide 7, you can drill down and I’ll do this with you for a minute in one particular example, just to give you a feel for it, where in fact even within asset classes, our mix is relevant. And one I’ll give you as an example is, if you look at on the AUM net flow graph on the left, the Q3 bar chart which is the right bar chart in that graph. You can see in the global and non-U.S. equity AUM category, we were actually $800 million positive net flow in the quarter, but when you take that AUM flow in that category, and then look to the far right bar in the revenue impact in the global and non-U.S. equity category, even within overall AUM, we had about a $100,000 worth of revenue that was a negative revenue number. That shows you that even within our global and non-U.S. category, we have multiple strategies and offerings. And what this would reflect for you is we brought in and had success in an increasingly important institutional offering, which is our managed volatility strategies. Managed volatility strategies tend to have a slightly lower fee basis than long-only emerging market and global strategies. And that’s why you can have even within global and non-U.S. a positive flow number, but a potential negative revenue number. That itself can also reverse. Again, this is a function of asset class. What matters to us is that we are present and active in as many in-demand asset classes as we can be. It speaks to the diversification of the model in multiple market environments. Slide 8 takes us into the investment performance piece. And this is one where I’ll spend a little time both on this slide and on the next. Again, what you can see here is we continue to be pretty strong on our three- and five-year performance numbers in the active asset class, which in a very challenging operating environment with strong performing benchmarks. This is important to us, but you can also see how on a sort of Q1, Q2, Q3 basis our one year number, that volatile short-term number, isn’t where we like it to be, and what I would like to do is now move to Slide 9, which is a page that we’ve done for this quarter. You haven’t seen it before, because our view is this quarter delivers some important empirical data that is worth sharing with you. In terms of what’s driven the overall market and what has driven just to a very large degree the challenge that active managers have faced in the recent kind of short-term periods of delivering benchmark-beating performance. Here’s how we want to walk through, and we talked about this on the second quarter call as well. In Q2, on the earnings call we talked about how to a very large degree the market has been driven by very narrow segment performance that was disproportionately strong and also some very narrow benchmark segment performances that were disproportionately weak and that were reflective of an interest rate environment that was anomalously low and anomalously sustained, largely because of highly accommodative central bank policy creating an ongoing low interest rate environment. What you saw and what this shows you is during the first-half of the year and I’m going to point your attention to the bottom right graph here. The bar charts the MSCI world quarterly sector returns. And here we’re providing the sectors Q1, Q2 and Q3 in the financials, real estate securities and utility sector. What we talked about at the end of the second quarter was, the story in the first-half of the year really was very strong outperformance in those bond proxy high-yield equities components of the benchmarks. And what this shows you is, in fact, in Q1 and Q2 you had very strong performance in those real estate securities and utility components, the bond proxies of the market, while at the same time reflecting the ongoing very low interest rate environment. You had meaningful underperformance by the financial securities. When we talked about this on the call, our view was that if the market sentiment were to turn and if it began to be believed in the market that we were going to enter a rising rate environment, our view was that should reverse itself. And we believe that in fact in the third quarter, there is an increase in consensus that we will be entering a rising rate environment, nothing radical, nothing extreme, but steady and likely an ongoing trend going forward of rising rates. And when you look at what happened in the third quarter this year, that’s precisely what happened which is the financial securities completely flipped at a 1,200 basis point reversal in a one quarter period of performance, while the bond proxy securities the high-yield securities in the real estate and the utilities sector meaningfully deteriorated. That’s what we thought would happen in this environment, that’s we talked a little about in Q2 and that is in fact what happened in Q3. Now, what continues to be the case and this is going to be interesting to see how this plays if you get a return to more normalized fundamentally driven overall market performance, is on the top right what we provided you here is the benchmark ranks in peer universes on a one-year basis at the end of the third quarter, and we’ve done this according to the traditional Morningstar kind of style box. So you got value, core and growth disciplines in the large, mid and small cap market segments. And what this shows you is really across the board with the exception of small cap growth the benchmarks have delivered effectively first quartile performance. And the reason that’s happened is because of the very strong over performance in very narrow benchmark segments. So our view is, we have already seen in the third quarter a shift where that over performance in the high-yield and bond proxy narrow components of the benchmarks that have driven very strong benchmark performance have turned. And the performance of financial stocks which our value managers tend to own in a very consistent disciplined way have begun to over perform because of expectations about the interest rate environment. Our view is that positions us well, but it’s also an important statement about our making sure that our managers continue to hue to their discipline, because the objective we have is to fulfill the client mandate we’ve been given to deliver alpha over a full market cycle. That makes these quarterly calls with you a challenge, because we need to talk about the performance on a quarterly basis. We’re happy to do it. But we are running a business that’s designed to deliver market cycle franchise value. So with that, I’ll turn it over to Steve and ask him to bring you all up to speed on the financials.

Thanks, Peter, and good morning, everyone. While the third quarter of 2016 was a challenging one in terms of flows and investment performance, we accomplished a significant strategic milestone with the closing of the Landmark transaction and as markets have recovered the business performed well financially. Looking forward to 2017, assuming a stable economic and operating environment, we’re well positioned to drive earnings growth particularly as Landmark progresses with its business plan. With respect to operating margin, we’re expecting the addition of Landmark to improve margin by 100 basis points to 200 basis points in 2017 compared to standalone, primarily by improving the operating expense to management fee ratio and the variable compensation ratio. I’ll give more specifics as we discuss these ratios further in this presentation. One thing that I would like to point out before we get into the numbers is the additional disclosure and refinements we provided around our ENI reconciliation to U.S. GAAP on Page 18 in the appendix. Given the purchase of Landmark and seed capital in the third quarter, certain items which have always been part of our ENI definition have become more relevant and have been broken out in separate line items for all periods presented. In particular, now that our seed capital is increased, we illustrated separately in reconciliation item #4, the adjustment we make to pull out seed capital gains and losses, and the related financing. These gains and losses create volatility on the income statement, which will only become more pronounced, as purchase additional seed next summer. And these gains and losses certainly should not be capitalized with an earnings multiple in my opinion. Instead, we have provided an additional table in the earning release, table #21 that clearly lays out these benefits and costs for investors. In addition, in reconciliation to item #5, we break out the tax benefit the company receives related to the amortization of acquisition-related intangible assets over 15 years for tax purposes. In this way, we match the ENI results to the actual cash tax benefits received related to acquisition intangibles. Finally, the GAAP treatment of the Landmark earn-out and the minority equity retained by Landmark employees necessitates an additional refinement to our ENI reconciliation #2, which adds back amortization of acquired intangibles and goodwill related to acquisitions. In structuring the Landmark transaction, we took what we believe to be the prudent - excuse me, business step of requiring employees to remain employed by the company in order to receive their earn-out at the end of 2018. Likewise, we included vesting requirements for liquidity, even with respect to the 40% of Landmark owned by its employees at the time of the transaction. Because both the earn-out and minority shares have these service requirements, under U.S. GAAP, these values are considered compensation expense must be run through the compensation line over the relevant service periods. For ENI, we will add back these amortizations, which were if not for the employment requirements would be recorded as purchase consideration and non-controlling interests. This ENI treatment is also consistent with the tax treatment of these items by the IRS. While this ENI reconciliation #2 was $9.7 million in the third quarter, it’s expected to increase in the fourth quarter as we have a full period of Landmark earnings and is likely to result in larger differences between U.S. GAAP and ENI results going forward. The third quarter results of OMAM include the impact of Landmark Partners from August 18, 2016, or about half the quarter. Comparing Q3 2016 to Q3 2015, economic net income was essentially unchanged quarter over quarter at $38 million or $0.32 per share, driven by $9.9 million or 6% increase in revenue and a lower effective tax rate, offset by $6.5 million or 6.2% increase in operating expenses and variable comp, as well as financing charges on the $400 million of debt from the end of July. While market increases in the Landmark transaction resulted in a 3.9% increase in average assets from the year ago quarter, excluding equity accounted affiliates, our continued shift in asset mix toward higher fee products and the higher Landmark fee rates enable us to increase management fees by 8.5% during this period. Landmark increased our average fee rates by about 1 basis point to 34.9 basis points on average. At Landmark part of the business for the quarter, this fee rate would’ve been approximately 36 basis points. Our gains in revenue came despite a weak quarter for performance fees that declined by $4.4 million and were actually negative for the quarter due to contractual management fee rebates on certain sub-advisory accounts. Despite these performance fee challenges, the ENI operating margin of 36.5% remains stable compared to 36.6% in Q3 2015. Our adjusted EBITDA of $55.4 million increased by 3.9% in Q3 2016, primarily as a result of Landmark. Looking at the rest of the year with respect to performance fees, it’s too soon to predict with certainty the ultimate level of these fees. However, given the level of performance on certain key products, as well as fee rebates on large-cap value sub-advisory accounts, we’re currently expecting performance fees to remain depressed through 2016. And it could be breakeven for the year. Comparing the first nine months of 2016 to the first nine months of 2015, ENI income is down 6.2% to $106.2 million compared to $113.2 million in the prior year period, excluding the nonrecurring performance fee. Clearly, we have ground to make up, but we’ve made significant progress as the years advanced. And we expect this trend to hold in Q4, when we have the benefit of a full quarter of Landmark. Slide 11 gives the better perspective of our financial trends over the last 5 quarters, as well as the financial improvement since the first quarter of 2016. For each period, we show the core earnings power of the business by breaking out the impact of performance fees, and where relevant show the change of the metric on an annual quarter over quarter and sequential quarter over quarter basis. As we’ve discussed, average assets were up above 4.3% from the third quarter of 2015 to $228 billion. The growth of assets, primarily the result of market movement in Landmark combined with an increase in the average fee rate to 35.7 basis points, including equity accounted affiliates, and resulted in a 6% increase in ENI revenue or 8.8% excluding the impact of lower performance fees in Q3 2016. The ENI operating margin was unchanged period over period at approximately 36 5%, and ENI per share was up 3.2% to $0.32 benefiting in part from the approximately 1% decrease in our shares outstanding, due to buybacks in the first and second quarters. While many of the annual quarter-over-quarter trends on this chart are flat due to increased expenses and revenue, there is a notable improvement compared to the first quarter of 2016. The 8% increase in average AUM during this period, driven by market improvement, strong first quarter flows and Landmark, resulted in a 15% increase in revenue, and a 3% increase in operating margin from 34% to 37%. ENI earnings per share also improved strongly by about 18.5% as EPS grew from $0.27 to $0.32 over this period. On the right side of the chart, you can see the pre-tax ENI and after-tax ENI per share. Our 23.1% tax rate in the third quarter benefited by our UK domicile and intercompany interest was lower than the 26% to 27% we typically plan for, and compares to 25.7% in Q3 2015 and 24.4% in Q2 2016. Following the closing of the Landmark transaction, additional intercompany interest and the amortization of intangible assets for tax purposes improved our effective tax rate. On a full year basis, including the addition of Landmark for mid-August, I’d expect the tax rate to be in the 24% to 25% range for 2016. Slide 12 provides insight into the drivers that impacted management fees and revenue from Q3 2015 to Q3 2016. The overall trend during this period was a continuation of the positive mix shift towards higher fee assets, both on an organic basis and as a result of Landmark. On a combined basis, our average fee rate increased by over 1 basis point to 35.7 basis points in Q3 2016 from 34.5 basis points in Q3 2015. On the left box, you can see average assets for Q3 2015 and 2016, split out by our four key asset classes. The box on the right provides the gross management fee revenue generated by these average assets and basis points of fees also broken up by asset class. On an overall basis, average assets were up 4.3% period over period, and gross management fees including equity accounted affiliates were up 7.9% quarter over quarter. As you recall, our different asset classes have very different fee rates with global non-U.S. equities and alternatives having average management fee rates of 42 basis points and 49 basis points respectively, while U.S. equities and fixed income have average management fee rates of 25 basis points and 21 basis points respectively. The increase in the alternative fee rate from 44 basis points to 49 basis points is attributable to Landmark. During this period, the combined share of higher fee global non U.S. equity and alternative assets went up by 3% to 59% of average assets, while the share of U.S. equity decreased approximately 2% to 35%. Global non-U.S. and alternatives represent about 72% of gross management fee revenue. The average assets in gross fees in these bar charts represent all assets managed by our affiliates, including the equity accounted affiliates, Heitman and ICM. To tie back to ENI revenue, you need to subtract the average assets and management fees associated with the equity accounted affiliates, which we’ve done below each bar. Slide 13 provides perspective regarding ENI operating expenses for the three and nine months ended September 30, 2016 and 2015, and breaks out several of our key expense items. These expenses include about $3.3 million of expense related to Landmark. As we’ve discussed, despite volatile markets in the first-half, we’ve continued to invest in the business. Total ENI operating expenses grew by approximately 9% between Q3 2015 and 2016, for a total of $65.9 million for the quarter. Excluding Landmark, these expenses increased approximately 4% and were helped by lower sales based compensation. However, this benefit was partly offset by hiring at several of our affiliates. In some cases, related to new growth initiatives and a couple of one-off legal operating losses that increased depreciation and amortization. Technology spending and an affiliate office move drove the increase in D&A from $1.8 million in Q3 2015 to $2.5 million in Q3 2016. At the holding company, including Global Distribution, expenses only modestly increased over this period. On an aggregate basis, you can see the ratio of operating expenses to management fees was up only slightly, growing from 38% in Q3 2015 to 38.4% in Q3 2016. As management fee and expense growth were consistent. On a full-year basis, we continue to expect the ratio of operating expenses to management fees to be in the range of 40% to 42%, including the impact of Landmark, which has a positive scale impact relative to our standalone results. As we move into next year with the full year of landmark and growth in the business. I’d expect this ratio to improve further into the upper 30s. The next key driver of profitability is variable compensation shown in more detail on Slide 14. The table at the bottom of the slide divides total variable comp into its two components, cash variable comp and equity amortization. In this exhibit, you can see the benefit of the profit share model, which links variable compensation to profitability, variable comp increased 2% quarter over quarter, including Landmark to $45.7 million, slightly lower than the growth of earnings before variable comp, which increased 4%. The growth in cash variable comp was even more modest, growing 1% quarter-over-quarter, as performance fee payouts in the prior year period did not occur in Q3 2016. We’ve also calculated the ratio of total variable compensation to earnings before variable comp, which we call the variable compensation ratio. This ratio decreased 90 basis points quarter over quarter to 41.6% from 42.5%, primarily reflecting the benefits of scale as profitability increased and center costs were spread over a wider base with the investment in Landmark. For full-year 2016, assuming stable markets, we’d expect the variable comp ratio to remain stable in the range of 41% to 42%, with a slight downward potential next year with the full year of Landmark. Affiliate key employee distributions for the three and nine months ended September 30 2016 and 2015 are shown on Slide 15. Distributions represent the share of affiliate profits owned by the affiliate key employees between Q3 2015 and 2016 distributions increased 22% from $9.3 million to $11.3 million, while operating earnings or earnings after variable comp increased 6% quarter over quarter. Likewise, the distribution ratio or affiliate key employee distributions as a percent of operating earnings increased from 15.3% to 17.6%. While last year’s ratio was lower than usual due to the allocation of certain performance fees, the primary reason for the increase is the 40% ownership stake retained by the Landmark employees. On a go-forward basis, this ratio is expected to be 20% or higher. For full year 2016, we’d expect the blended ratio to be around 17% to 18%. Turning now to the balance sheet and capital on Slide 16, you can see the impact of the several transactions completed in the third quarter; in particular, the investment on Landmark Partners, the purchase of $40 million of seed capital from our Parent and the issuance of $400 million of long-term debt. We’ve boxed the most relevant line items mainly investments, other assets, and third-party borrowings. In anticipation of the Landmark closing, in July we issued $400 million of bonds including $275 million of 4.8% 10-year bonds in the institutional market and $125 million of 5.8% 15-year non-call 3 bonds in the retail market. The cash coupons on these financings totaled about $19.7 million annually. While the all-in costs, including non-cash amortization of fees and losses related to an interest rate hedge are about $23.7 million. The proceeds were used to fund the Landmark purchase for $242 million, purchased a $40 million of seed capital, repay the $50 million outstanding on our revolving credit facility to bring that to zero, and fund fees and hedging costs of $42 million. You can see the third-party debt outstanding of $392.2 million net of fees and the increase in the investments line to reflect the seed purchase. Most of the Landmark purchase is in the other assets line, which includes intangibles and goodwill related to the purchase. With the $400 million capital raise, our debt to EBITDA ratio for the last 12 months is 1.9 times as of September 30, including Landmark on a full year pro-forma basis, it would put this ratio closer to 1.8 times, which is generally in line with the lower-end of our target debt to EBITDA ratio of 1.75 times to 2.25 times. With approximately $50 million of unallocated cash at the holding company and nothing drawn on our 350 million revolving credit facility, our balance sheet retains significant financial flexibility to meet our financial obligations, while executing on our growth strategy and allocating capital to enhance shareholder value. On December 30, we’ll pay our quarterly dividend of $0.08 per share to shareholders of record on December 2016. This dividend rate reflects our standard 25% payout ratio, while we made no additional open market share repurchases this quarter, we continue to believe that we have the financial capacity to buy up to an additional $150 million of shares in 2016 if we desire. Given our lower public trading volumes, as well as our parent’s managed separation exit strategy, we’re more likely to use this buyback capacity to repurchase shares directly from our Parent, under the terms authorized by our shareholders at April’s Annual General Meeting. This directed buyback strategy would enable us to put more of this money to work in a more efficient manner, but it obviously depends on our Parent’s timing and objectives and cannot be guaranteed. Now, I’d like to turn the call back to the operator. And Peter and I are happy to answer any questions you may have.

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Credit Suisse. Your line is now open.

Thanks. Good morning. So first I just want to hit on fee pressure and I know you guys actually have the nice trend here with the management fee rates actually ramping up bit. Are you seeing positive fee pressure on any parts of your business? Maybe are you giving fee concessions to win new business? Maybe just provide an update on that topic.

Sure Craig. The short answer is no. We really are not experiencing fee pressure. I think that goes to our focus on the active institutionally-driven market working with very large clients with whom our affiliates have been working for many, many years. So our fee relationships with our clients and with the institutional market are well established. They’re fair, they’re competitive, and we certainly would never and the affiliates would also not simply cut a fee to get a mandate. That’s just not where they are. Their fees are fair, relative for the strategy and the mandate being met. And actually in fairness, you’re right. If you take a look at Slide 11, and you look at that fee rate, really going back five quarters we’ve been able to demonstrate a very steady increase in fee rate. And on the retail side, again, the sub-advisory mandates we hold, we hold at in essence prevailing fee rates. And we will either agree to be hired at fee levels that we think are fair or will pass on the mandate. And I think that discipline is important. So in that score we’re in pretty good shape.

Very helpful Peter, and then just a follow-up on flows, I wanted to see if you could provide us how RFP activity, finals activity were trending in 3Q in October versus prior periods. I want to see if there is any lift there or how that changed.

Yes. In 3Q, what’s interesting is in terms - I will put it in the context of the whole year so far actually. If you remember, in the first quarter we talked about, it was actually the largest inflow quarter we had in like a decade, we’re north $9 billion in. And our view was that had in fact harvested a decent part of the pipeline. That’s the downside or the upside. We thought Q2 would be a dip, it was. We thought we should engage and see those sales numbers go up in the third quarter, which they did, up from like four-and-change to north of $6 billion. So there is greater activity. And our activity in finals, it’s frustrating because just even on our Global Distribution front. Our team has gotten the affiliates to as many finals in terms of numbers and also AUM in play, as at any time in the past we just frankly haven’t won as many as we have in the past. So in terms of activity levels we are seeing reasonable amounts of money in motion, and we certainly have seen relative to where we had the conversation at the end of the first quarter. We’ve seen the pipeline replenish.

Thank you.

Yes.

Your next question comes from Bill Katz with Citi. Your line is now open.

Okay. Thank you very much. I appreciate the update and the guidance as well. Just focusing on Landmark for a moment, looks like that came in at such higher in terms of AUM today versus where it was at the time of the transaction. Can you give us a general sense? I guess, they’re in their capital raising mode right now. I’m sure you can’t speak specifically, but qualitatively is there anything that you are seeing that would dissuade you from your initial guidance when you announce transaction?

Bill, I appreciate the artful way you asked the question to save me from legal exposure, that was very kind of you and I appreciate it. Now, look - now Landmark came in just about where we thought that $8.8 billion was pretty much that was the business. So that’s steady as you go. And likewise to answer your artfully phrased question, we continue to hold our views consistent with what we articulated when we announced the transaction in terms of fundraising.

Okay. It’s very helpful. Second question at you is you highlighted you still have ample amount of buyback capacity should we get some visibility from the Parent. At the same time, it seems like M&A channel has picked up pretty significantly across the industry. I presume there is a quality versus quantity dynamic to your answer. But can you give us a sense, at what point would you reorient and just move beyond waiting for the Parent exit strategy, and maybe deploying capital, and maybe a more or accretive higher multiple outcome?

That’s actually a great question, Bill. Thank you. Look, we - and we’ve had this discussion with the market consistently. We view capital deployment in a very disciplined and very secular way. And if we believed that a simple repurchase would be more accretive in a longer-term relative to the other deployment opportunities, we would pursue it. But the flipside is, if we see a strategically meaningful accretive opportunity to deploy capital in an acquisition, where you have the opportunity to generate not just mathematical earnings accretion, but also potentially franchise strategic improvement resulting in a potential rerating of the multiple, we would absolutely pursue that. We continue that activity. We engage in meetings consistently with potential new partners, and we will never stop doing that. Now in a real world, our Parent has publicly announced they’re going to exit its holding of us. And it’s rational that a potential new acquisition candidate partner with us would have the discussion with us about where does that play out, and maybe they wait and see the endgame there before committing. And we just have to manage through that process in real time, but we will and we are.

Okay. Just one final one, thanks for taking the questions. Just to enquire with you maybe how you sort of classified it. You said you’re not winning as many mandates today than maybe have historically been the case. And maybe it’s difficult to have a full answer. But do you have a sense of what factors are going into the reason why you’re not winning? Is it price? Is it capacity? Can you give us a sense of why you’re not winning those mandates?

Yes, and that’s fair. And let me be clear. The answer and the comment I made was solely with respect to our Global Distribution team, and the competitions and finals that they are getting our affiliates to. I’m not commenting with respect to all of the core activity the affiliates are engaged in. And on that one, I wish I had a definitive empirical answer for you, Bill. It’s certainly not price, it’s certainly not price. I think to the extent we’ve gotten any visibility at all, to some degree it’s a function of the client finally, at the final stage making an ultimate determination of the specific investment process or discipline that they’re looking for. And our managers may not be that discipline. They may go in a different direction. The other one frankly is what we haven’t told is some clients have made decisions about actually their portfolio construction allocation. And in fact, they’ve moved into different asset classes away from what our managers are trying to compete for. Beyond that I don’t really have a whole lot of visibility for you.

Okay. Thank you for taking all my questions.

Yes. Thanks, Bill.

Your next question comes from Michael Carrier with Bank of America Merrill Lynch. Your line is now open.

Great, thanks, guys.

Yes, good morning, Michael.

Just on the - hi, just on the uncertainty around the Parent, and I guess, it makes sense in terms of the capital allocation what you said and maybe in terms of deals that being on hold a bit. But on the core business, in terms of the affiliates, do you think that that process or that uncertainty has much impact on the wins of the business or do you think that’s like ward-off, meaning there is not as much of an impact in terms of the flows, because of that versus the deal activity?

Yes. That’s a great sort of imponderable questions. Certainly we had the conversations with the affiliates about their businesses. I think on balance, it’s not impairing the company, because the reality is I think it’s very well known that Old Mutual plc has announced its managed separation strategy. And that’s a decision made by a strategic shareholder. But the affiliates are continuing to run their business exactly the way they have always in the past. We continue to be the management team driving strategy in the operation of the company and that’s not changing at all. And I think that the clients and the consultants actually do now look at this as a kind of two-stage removed event. So, however PLC elects to exit its holding, the management team here remains in place. The strategy remains in place. The business model remains in place, and the affiliates continue to do exactly what they are doing. So I think on balance, we are okay on that front. Now look, I think it will be useful when PLC ultimately does in fact execute on its exit strategy. I think that will settle that lingering question. But on balance, I think we are managing through it pretty effectively.

Okay. Thanks. And just as a follow-up, I know your distribution tends to be more on the institutional side, but when you think about maybe the growth outlook or the prospects and given some of the changes that we’re seeing in the U.S. market, particularly on the retail side with DOL and SEC proposals and rules. Does that change anything? I mean, in terms of where your - I don’t know, I guess, your growth plans on distribution you go from here?

Not really, because really if you look at what we’ve built. The asset classes we’ve gone into and the way we’ve structured our sub-advisory relationships on the retail side. Everything we’re doing is actually positioning ourselves to be successful in the world you’re describing. I mean, the DOL rule is going to affect pure retail business and intermediaries. We are a pure alpha provider as a sub-advisor to those intermediaries, and the classes we moved into is reflected by Landmark are in fact the alternative classes, the relatively less liquid classes, and the alpha generating classes, that investors are going to move to in a world where it becomes increasingly difficult I think on the retail side to conduct the business. So if anything, we’ve been very thoughtful about where we think that segment of the market is going and we’ve structured the business accordingly.

Okay. Thanks a lot.

Yes.

Your next question comes from Robert Lee with KBW. Your line is now open.

Great, thanks. Good morning, guys.

Hey, Rob.

Hey, a couple of quick ones. Maybe going back to Landmark, and maybe just getting a little too granular and, I mean, understanding they’re entering fundraising cycles, and Just maybe to refresh our memory, so as they start to kind of fundraise looking ahead to next year, are most of their funds kind of drawdown structure? So they’ll get the commitments. But we will actually see it hit AUM over time or is it kind of more PE without having just distinct close at some point of different funds, and we’ll see it kind of a lumpy inflow?

Yes. It’s more of the latter, and that as they - we, first of all, always to try to match our reported AUM and flows to revenue. And so, as they have a close on a fund, the flows would come in and that’s at the same time we would also begin recognizing and they would begin earning fees on that fund. There is also a dynamic this in place as you move beyond the first close of a fund into the second, third, et cetera closings that there is a catch-up on fees back to the first close. So you would have not only the lumpiness of NCCF coming in at a fund close, but you would also have a slight lumpiness of revenue, where investors would not only begin chart - begin paying currencies, but we’d catch-up back to the first close of that product.

Right. And then I assume there is some step down on the prior generation fund as well.

Over time, but that’s not really going to be terribly meaningful in the coming years.

Okay. And again with - I know if I can say specifically - but should we assume that at some point as we get deeper into 2017, we could see some of those fundraising start to affluent?

It’s funny. I’d love to answer Michael, but the lawyers were actually pretty serious about not giving targeted time and dates for first closings of funds, simply because you begin to wander into this world of are you offering securities on the call. So we’ve been kind of cautioned on giving deadlines or target dates. I’m sorry about that, but that’s we got.

Okay. Fair enough. Just one more question, may be shifting to organic kind of new organic - organically developed strategies. Can you maybe update us on where you see some newer strategies that you’ve been seeding, where you - as you look over the next year or two, you think you have - you feel like that you can start getting some traction kind of fixed income or somewhere else, maybe an update on where you see some of the incremental opportunities to raise capital?

Probably a couple standout in my mind. One, we worked with Barrow Hanley pretty consistently over the years, and put in place in emerging markets equity capability that has built a very strong track record and I think that the track record is now achieving a kind of a seasoning, we’re going into 2017. Our sense is that the bearer will likely be in a position to be able to take that strategy out to market, and I think if barrow were able to begin building some traction in the emerging market equity space that would be an important strategic moment for them, and it looks like that might be possible which is encouraging. I guess the other one would be in the alternative space, we worked with Campbell Global to put together a global fund capability with them as well, and it looks again to us like that may will reach that kind of traction point where it would be in a position to have a closing in 2017, and if that were the case again that would be an important strategic diversification movement for Campbell into the global timber space, so both of those are collaborative organic things that we worked on that look like they may will get some traction and come on line.

Great. Thanks for taking my questions.

Yes. Thanks, Rob.

Your next question comes from Patrick Davitt with Autonomous. Your line is now open.

Hey, good morning guys.

Hi, Patrick.

As a follow-up to that last Landmark question will come out from a different direction. And you probably can’t answer this either, but I’ll try.

Okay, okay.

Could you give us an idea of what percentage of the previous vintage fund is invested at this point, and how that can tracked over the last few quarters?

I think, our view is the last set of season funds which really went out in kind of 2013 to 2014. There I guess the way I characterize it, and I think I can’t answer this one, because it’s an existing fund. I would characterize that as essentially fully invested, Patrick.

Okay.

Okay.

Could you give any colors why they haven’t launched the new fundraising?

I was going to say. I don’t think, I said they haven’t launched a new fundraising.

Okay. That’s helpful.

Just that we can’t comment on any bright, on any and these are closing.

They put us in a box on this one, but for appropriate reasons which we understand.

Yes. That’s helpful. And on the management if you rebate and I apologize if you can color on this before. How much AUM is in structures with those kinds of rebate, and could you give us any kind of helping out, to think about it?

Yes, sure. It’s primarily the Vanguard sub-advisory products, which are about say 7% of revenue overall. It’s about - I think this year is probably about $8 million or $9 million of get back, which is - I think the cap out for it. So when anticipated getting going any higher, and would hope it will certainly get better. Those get backs are calculated on a three year rolling performance basis. So we’ve made up a little bit of ground, but it’s still - it’s sort of meaningfully underwater. And so I think that’s going to be something that will take a little while to rollup, because you have to again it’s a three year type of test. So as we think about going into 2017, I wouldn’t expect a significant improvement to that sort of negative 9-ish or so get back, and I guess, those through the performance of fee line.

And the benchmark is the SNP?

It has on the product the biggest one is related to Windsor II, which is the MSCI Prime 750 product, which frankly is a little bit different than the benchmark that is large cap value was managed to which is really the Russell 1000 Value. That if you compare the MSCI Prime 750, the Russell 1000 Value. For most of last year, it seem to significantly outperform the Russell 1000 Value this year it’s - underperform the Russell 1000 Value, which has helped us.

Great. Okay. That’s very helpful. Thank you.

All right, sure.

Your next question comes from Chris Harris with Wells Fargo. Your line is now open.

Thanks. Hey, guys.

Good morning, Chris.

So as a result of DOL, broker dealers are consolidating your relationships across the space. I appreciate you guys are mostly institutionally oriented. But do this trend present a risk to our sub-advisory business at all?

No. I think, it’s just the continuing reality of our business model and our view of the market, which is you’re going to have to have a real process. And you are going to have to deliver results that are consistent with the mandate for which are higher, and to the extent, the retail space consolidates it sub-advisory relationships, it’s going to give us an opportunity to win, I mean, that’s the reality, I think the managers who are going to have challenges are one whose processes are revealed to be in essence index hovers or closet benchmark hovers, and we’re extremely focused on the genuine discipline and alpha generation capability and investment process at the affiliates. And I think, that you are going to have to have that process to win going forward, and we think that’s appropriate and fair, is how we positioned to the business. So to the extent, we have conversations with our key sub-advisory sponsor platforms, I think there is a conversations we look forward to. Look, I mean, I think if you look at the way that we do the business, and particularly within global distribution, because we’re focused on this distribution channel. We are a meaningful relationship to our sub-advisory clients. And they are meaningfully sized sub-advisory - they are meaningfully sized platforms. And so I think that helps you and all these trends - maybe accelerated by DOL, but look we lift for a long, long time out of the concentration of relationships. And that’s the way we structured the business to be an important relationship to the people we are doing business with.

Right, okay. That’s a good point. Really quick question on the outlook for next year on expenses, what you guys thinking in terms of investment spend, I mean, you mentioned you’re still investing in the business, anything kind of quantitatively you can share.

Yes. I mean, I think, there are two elements of investment spend, when we think about it. One is investment spend within the existing franchise and existing products that sort of an ongoing type of area. So for instance, Acadian, a quantitative manager is always investing in their business to make sure that they are providing great return for their clients. I think you’ve seen a period of relatively higher expense growth over the last couple of years as that investment is going on. And I think within the existing part of the business, you’ll probably have lower rates of growth into 2017 than you’ve seen in 2015 and 2016. With respect to new product initiatives that the commitments we’ve made and the products we’ve talked about have been multiyear commitments and multiyear spend, and you obviously have certain products that are in different phases of investment. I think in general, it will probably go up moderately in the next year related to a couple of initiatives that are tracking where we expected them to track, but are entering a phase of more investment. But we’re not talking about numbers that are going to necessarily move the dial on any substantial way.

Thank you.

Your next question comes from Michael Cyprys with Morgan Stanley. Your line is now open.

Hey, good morning, thanks for taking the question. Just curious on manage-evolve [ph] strategies, if you could just update on how much AUM is managing that today. What sort of flow trends are you seeing, maybe just on a year-to-date basis. And just more broadly, how you are thinking about growing that part of the business out more meaningfully from here what can be done. From a distribution perspective or vehicle perspective will be great?

The manage-evolve, it is franchise across the franchise. One of the ones that’s experiencing positive inflow, it’s sort of one the top-five inflow strategies, Michael. And we think that continues to be the case. It is a multi-billion dollar business line now. Acadian really has been a leader in that space for a long period of time. They built it out across a number of different disciplines. So I think our view is to manage volatility space is one that’s important institutionally. The more people understand it, the more they realize it as a substantially greater from our perspective investment disciplined than simply trying to go passive because of the active nature of the management of the volatility please, which really is what most people are thinking about when they worry about risk in the portfolio. And we continue to believe it’s going to be capable of being an engine for growth.

Great. Any color you could share in terms of how your clients are thinking about manage-evolve strategies up in their portfolios, any color on what sort of allocation investors are kind of putting into this strategy? Which particular clients you’re seeing the greatest traction from within managed wall? And what sort of bucket does this fall into from an asset allocation perspective? Like where are you competing within the asset bucket for this year?

Well, A, I want to be honest with you in saying - no, I can’t slice it that empirically for you and I certainly haven’t studied any consultant reports about recommended allocations of overall portfolio construction metrics into managed volatility. So I don’t want to give you a false sense of precision. I think what is happening in the market and what has happened that has driven this is managed volatility when genuinely actively done through security selection by the way, which is what Acadian is a much more intelligent conversation with an investment committee that’s trying to think through market volatility and returns and risk, and thinking through risk adjusted return. I think there was a knee-jerk when people went through a process of going, gosh, we’re worried about the volatility and the risk in the portfolio, let’s just go passive. And I think what’s begun to sunk in finally, as institutional investors have in essence reached their target passive allocation. And there is an interesting piece of research done on this. In the institutional segment Casey Quirk did a piece of work, where they looked at and spoke with consultants and institutional investors and said, what are you expecting to do with your portfolio over the next five years. And the answer in the institutional space was there is going to be outflow from passive in the next five years. That tells me a couple of things. One, people have sort of hit their passive allocation. But they’ve now had experience with the passive segment and what they realized is going passive doesn’t reduce your risk at all and it doesn’t reduce your volatility at all. In fact it just locks in the same risk and volatility everyone else in the market is stuck with. And as the velocity of money goes into the passive segment more it actually increases that. And so taking a chunk of your portfolio and actually saying, look, we’re going to activity manage the volatility of this component of the portfolio is something that’s beginning to gain and has gain traction. So that’s how investors are looking at it. That’s the role it’s playing in an active institutional portfolio. And I think that’s where we have seen and Acadian has seen the greatest success.

I mean, where I think there is also good potential and you see this, I mean, we’re a sub-advisor to a emerging markets managed volatility product. That look if you think about target date funds and the need of investors to manage risk as they get closer to either retirement or meeting their objectives the way that’s traditionally been done is by moving into fixed income, which is worked out okay in a lower rated - when interest rates are going down and it’s getting more valuable. But if you think about over the long-term, to the extent that you can use equity managed volatility products in place of fixed income products, I think that’s a real opportunity as well. And we’re beginning to, as I said, we have a mandate in the sub-advisory side, which I think would benefit retail investors.

Super, thanks for all the color.

Your next question comes from Patrick Davitt with Autonomous. Your line is now open.

Thanks for the follow-up, just a quick one. Should we take your commentary around the kind of wait and see attitude to see what the Parent is doing to mean that you will kind of be on hold with the repurchase until they decide what they’re doing?

Well, structurally, Patrick, the buyback is a bilateral event, right. I mean, the Parent has to decide it wants to sell to us. So it is a function of what the Parent decides to some degree. And then the issue for our board becomes, if the parent would like to sell to us, is it at a price that we believe is value creating for our shareholders as well. So it really is - it’s not a unilateral decision point. It really is a function of where we are, where the stock is and where the parent is in terms of its execution of its exit strategy.

And look, the opportunity to be able to have the opportunity to buy something in one chunk and put the money to work that way is beneficial enough. But we think it’s worthwhile to husband the resources and not just try to go into the market and chase low volumes and take away liquidity that the market really needs. So that’s why we’re sort of holding off not going into the market and trying to execute in the public markets right now.

Great. That makes sense. Thank you.

Okay.

Okay.

Your next question comes from Michael Cyprys with Morgan Stanley. Your line is now open.

Hey, thanks for taking the follow-up question here. Just on the Global Distribution, I know you expected some challenges about winning mandates on the Global Distribution part. Can you just elaborate a little bit more in terms of how you’re adjusting your process or strategy if at all on the global side and just maybe update us more broadly on how you’re building out the Global Distribution capabilities?

Yes, actually, Global Distribution is fulfilling its mission very well, Michael. We’re not adjusting it because we just need to win more. We’ve had a couple of great years. And this year we’ve had plenty of good swings at the plate and then that’s Global Distribution’s mission. So we’re very comfortable with where it is. And in terms of building it out, we continue to look at the different ways. You either enter a new market or you bring new products into that market or you access new channels. On the new channel front we’re looking at the insurance space as an opportunity for us to build the capability to be effective in representing the affiliates in that very specific insurance channel. And in terms of bringing new products into the existing channels certainly the opportunity with Landmark is a very exciting one.

Great, thank you.

This concludes our question-and-answer session. I’d like to turn the conference call back over toe Peter Bain.

Thank you, all. Thanks for the time this morning. We ran a little over an hour. And I know that it’s a busy time. So I will simply tell you that we appreciate your engagement with us. And we look forward to seeing you on the road and elsewhere. Take care.