Virtus Investment Partners, Inc. (VRTS) Q2 2013 Earnings Report, Transcript and Summary

Good morning, my name is Sheena, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investments Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section of the Virtus website at www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. [Operator Instructions] I will now turn the conference to your host, Joe Fazzino. Please proceed, sir.

Thank you, Sheena and good morning, everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the second quarter of 2013. Before we begin, I direct your attention to the important disclosures on Page 2 of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. These statements may be identified by such words as expect, anticipate, believe, outlook, may and similar terms. For a discussion of these risks and uncertainties, please see the Risk Factors and the Management Discussion and Analysis section of our periodic reports that are filed with the SEC, as well as our other recent filings, which are available in the Investor Relations section of our website, www.virtus.com. In addition to results presented on a GAAP basis, Virtus uses certain non-GAAP measures to evaluate its financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our earnings press release, which is available on our website. For this call, we have a presentation, including an appendix that is accessible with the webcast through the Investor Relations section of our website. This morning, we will begin with the remarks from President and Chief Executive Officer, George Aylward, who'll review our accomplishments and operating results for the quarter. Mike Angerthal, Executive Vice President and Chief Financial Officer, will then discuss our financial results in further detail and will also review the balance sheet and capital items. We will conclude by opening the call to your questions. Now I would like to turn the call over to George Aylward. George.

Thank you, Joe and good morning, everyone. We appreciate you joining us on the call this morning. Mike and I are pleased to have the opportunity to talk about our results, which represented another very strong quarter. There were 2 different market environments in the second quarter. The quarter began with the markets continuing their upward trajectory until mid-May, when the Fed hinted that it might taper its quantitative easing. From then until the end of June, the markets reacted negatively, and any yield-focused investment was severely punished, given the uncertainty of interest rates. It was a reality check for many investors as well as for many asset management firms that were overallocated to fixed-income strategies. And with that as a backdrop, we are particularly pleased with our results this quarter. Let me start by reviewing some of our accomplishments. First, we reported our highest levels of revenues and operating earnings and an increase in our operating margin. The growth in revenues reflect the cumulative benefit of our growing asset levels from continued strong net flows. Over the past year, total assets have increased by 36% and a growth in AUM, combined with higher average net fee rates, allowed us to generate record levels of invested management fees for the quarter. The consistent increase in our revenue combined with the inherent leveragability of the business in our highly variable cost structure, led to the growth in operating earnings and the expansion of the operating margin. Second, we sustained high levels of sales and organic growth despite a challenging market environment. Our ability to offer diversified products across multiple asset classes allowed us to navigate a period when the industry experienced having net redemptions, particularly in fixed-income strategies. The industry, in general, saw changes in investor behavior as the result of the volatile equity markets and the uncertain interest rate environment. In response to the Fed's comments in May, there was a period when investors began to rebalance away from fixed-income products. There are arguments to be made about whether or not this is the start up or the next step in the great rotation out of fixed income, but we're less concerned about that because of the diversity of our product offerings. The fundamental element of our business model is to offer investment strategies across product types and asset classes that are attractive in various market cycles and as investor preferences change. The value of that approach was demonstrated this quarter as we maintained a very high level of sales and flows. As certain investors shifted into different strategies compared with the last quarter, we had attractive products to meet their changing needs, whether they were looking for downside protection, capital preservation, non-correlated strategies, et cetera. While the increased earnings and sustained high sales and flows were key accomplishments in the quarter, we also continued to expand our product offerings for the future. In June, we launched a new defense of equity fund, the low volatility equity fund, which is the first Virtus Mutual Fund managed by our Rampart affiliate. We've seen more demand for lower volatility offerings, and we think Rampart's experience in managing option strategies will be attractive in the retail market. Another new offering is a product that will be available for offshore investors. We received the approval of the Central Bank of Ireland for a usage structure that allows us, for the first time, to offer existing and new investment strategies to non-U.S. investors. Our first offering will be an alternative strategy, the Liquid Alpha Fund. The initial distribution for usage will be to international clients of US-based, financial advisors who can be supportive of our existing sales structure. Longer term, we will look at expanding into non-U.S. distribution, which will provide an additional area of growth. As I mentioned, we had very strong financial results this quarter as well as sustained high levels of sales and positive net flows. Total sales were $5.6 billion, which was an increase of 76% from the second quarter of last year, and our second-best quarter ever after the very strong results from the first quarter. We had $2.5 billion of positive net flows, which is an increase of 80% from $1.4 billion in the second quarter of last year. Our flows represented an organic growth rate of 20%, and the consistency of strong flows is the key element in the 36% increase in assets under management over the past year. Mutual fund sales were $5.1 billion in the quarter or 84% higher than the second quarter of last year. It was also our second best quarter after last quarter when we had exceptionally high sales related to the announcement of limits to the investment in our Emerging Markets Opportunity Fund. For the quarter, our fund sales rate was 67%, so we continue to have growth well above the average of the industry. Funds sales for the first half of the year were $10.8 billion or 87% of the sales for all of last year. With the market volatility in the quarter, we did see a change in which strategies were the most attractive. In the first quarter, our fixed-income and international equity strategies were the most popular. And by comparison, in the second quarter, we had increased interest in our defensive domestic equity strategies and our long/short equity fund that recently surpassed $1 billion in assets. At a time when investors' appetites were rapidly changing, given the uncertainty and the speculation in the market, our broad product line have allowed us to have a range of strategies for investors as they reposition their portfolios. In addition to the strong fund sales, we maintained positive net flows that were well above our average quarterly run rate for the past year. Even as markets fluctuated, we maintained positive net flows for each month of the quarter and had a 34% annualized organic growth rate. We're also pleased to see that mutual fund flows in July increased from June and were significantly higher than in July of last year. Operating earnings reached a record level in the quarter as a result of higher revenues from a cumulative top line growth and generally stable fixed cost. Operating income, as adjusted, was $31.7 million, an increase of 66% from the second quarter of last year. The growth in the prior year reflects the 41% increase in revenue, as adjusted over the past year, as a result of our growing assets, particularly in open-end mutual funds, where assets were up 53% over the past year. The increased profitability of the business is demonstrated by the expansion of our margin to 44% from 38% a year ago. This reflects the leveragability of the business as we benefited from higher revenue on our growing asset base, while maintaining a relatively stable fixed-cost base and a high proportion of variable costs. Earnings per diluted share were $1.91 on net income of $15.4 million, an increase of 84% from the second quarter of 2012. Net income this quarter reflected a negative $0.22 per share impact from the net unrealized mark-to-market adjustments on our marketable securities. We're very pleased with these results. The record revenue and earnings continued high sales and flows, and strong investment performance combined for a very strong quarter. With that, I'll turn the call over to Mike to provide more detail on the financial results, and then we'll open up the call for questions. Mike?

Thank you, George. Good morning, everyone. In the second quarter, we continue to generate strong results across all our key metrics. And this morning, I'm going to review our quarterly results starting with assets under management, sales and flows, then I'll review key income statement line items and discuss our balance sheet and capital position. Starting on Slide 8, assets under management. We ended the quarter with total AUM of $52.7 billion, up 36% from the prior year and 3% over the prior quarter. The sequential increase in AUM reflects strong net flows of $2.5 billion, partially offset by market depreciation of $900 million, as international equity and fixed-income markets declined in the latter part of the quarter. There are 3 elements that contributed to the year-over-year increase of $13.8 billion, strong organic growth, a solid market environment and assets from a small acquisition. Specifically, net flows added $9.7 billion or 70% of the increase, market appreciation added $3.2 billion, and the remaining $0.9 billion is primarily attributable to assets added from the acquisition of Rampart that was completed late in 2012. As a result of consistent strong flows, mutual fund assets are up 53% from the prior year and 6% from the prior quarter. Separately, managed account assets are up 49% from the prior year, primarily due to the addition of Rampart. The composition of our assets remained relatively consistent on a sequential basis with equity assets, which include alternatives at 60.4% and fixed income up slightly to 36.3%. The percentage of combined equity and alternative assets remained consistent as net flows in domestic and international equities and alternatives were partially offset by market depreciation in international equities. The percentage of fixed-income assets was up slightly, as positive net flows offset market depreciation. In a quarter of increased volatility, we maintained solid double-digit organic growth, which demonstrates the breadth of our investment strategies, differentiated product offerings, and a continued strong investment performance across a variety of asset classes and investment styles. Total sales for the quarter were $5.6 billion, an increase of 76% from $3.2 billion in the prior year quarter. Total net flows were $2.5 billion, which is an overall annualized growth rate of 20% compared with 15% in the prior year quarter. We have now had 17 consecutive quarters of positive net flows, as well as double-digit overall organic growth for essentially the past 10 quarters. Open-end fund sales were $5.1 billion in the second quarter, an 84% increase from the prior year, but 11% lower on a sequential basis. Fund net flows increased by 87% to $2.6 billion from the second quarter of 2012. That is an organic growth rate of 34% compared with 28% in the prior year quarter and 56% in the prior quarter. Fund sales and net flows were lower on a sequential basis due to the very high sales in our Emerging Market Opportunities Fund in the first quarter related to the impact of the notification that new investments into the fund would be limited. Even with the soft close of the fund, Emerging Market sales remained solid in the second quarter, as existing investors and platforms continued to make investments into the fund. Sales of all other mutual funds increased 9% on a sequential basis, reflecting the diversity of our product offerings. The strong positive inflows in our domestic and international equity and alternative offerings gave us double-digit organic growth each month of the quarter, including June. Sales in our defensive equity and long/short strategies increased 69% over the first quarter, and net flows into those funds increased more than 100% on a sequential quarter basis. Finally, institutional sales increased to $189 million from $61 million in the second quarter of 2012. The increase is primarily related to sales and to small-cap strategies at Kayne Anderson Rudnick and Newfleet's fixed-income strategies. Slide 10 illustrates the continued growth in operating income, as adjusted, and the associated margin. In the second quarter, operating income, as adjusted, was $31.7 million, an increase of 66% compared to a year ago, and 27% on a sequential basis. The sequential increase in operating income, as adjusted, reflects continued strong growth in revenues, reflecting higher assets under management and generally stable operating expenses, as adjusted, which were up 2%. The substantial increase in operating income, as adjusted, over the prior year, primarily reflects revenue growth from the cumulative impact of $9.5 billion of positive open-end fund net flows over the past 4 quarters, and the benefit of a highly leveragable business and our variable expense structure. The operating margin, as adjusted, was 44%, an increase of 650 basis points from the prior quarter and 520 basis points from the sequential quarter. Our year-to-date capture ratio, which we define as incremental operating earnings divided by incremental revenues, was 57%, which is within our historical range. Concerning GAAP results, net income attributable to common stockholders was $15.4 million or $1.91 per diluted common share, representing a year-over-year increase of 84%, at an increase of $0.18 per share or 10% on a sequential basis. Excluding the impact of the unrealized mark-to-market adjustments on our marketable securities, net income would've increased $0.47 per share or 28% on a sequential basis. As we discussed in our last call, approximately 50% of our seed capital portfolio is invested in an Emerging Market debt strategy that is benchmarked to a global bond index that had a negative 5.6% return in the quarter. To provide clarity on our unrealized gains and losses, we've provided a schedule of marketable securities and related indices in the appendix to this presentation. Finally, our effective tax rate for the quarter was 38.7%. The increase from 37.3% in the first quarter was due to the loss attributable to redeemable noncontrolling interests that is included in our pretax income, but not subject to income tax expense. As we've stated during prior calls, the company's cash tax rate remains in the low single-digits, allowing us to retain a large portion of the cash we generate from operations. Turning to revenues on Slide 11. Investment management fees increased to $64.5 million, up 12% on a sequential quarter basis and 44% from the second quarter of last year. The 2 key elements in the growth of investment management fees are the increases in average long-term assets and fee rates. Average long-term assets under management grew to $51.4 billion, up 11% from the sequential quarter and 41% from the prior year due to strong mutual fund net flows. The increase over prior year also benefited from market appreciation and the addition of Rampart. The average fee rate was 48.7 basis points, an increase of 1.5 bps from the prior year, and the increase from the prior year primarily reflects net flows into higher fee mutual funds. Over the past 4 quarters, more than 70% of our net flows have been into equity and alternative strategies. Total employment expenses for the quarter were $32.9 million, an increase of $0.5 million or 1% from the prior quarter. The sequential increase is attributable to increased variable incentive comp due to higher profitability, partially offset by $1.8 million of lower payroll taxes related to annual incentive payments that occur in the first quarter. In terms of sales-related costs, as a reminder, the expense is variable in nature, and will fluctuate based on several factors, including the level of sales, types of products sold and how they are sold. In the second quarter, sales-based compensation was essentially flat from the first quarter despite the sequential decrease in mutual fund sales. A key employment expense metric is the ratio of employment expenses to revenues, as adjusted, which improved 460 basis points on a sequential quarter basis to 45.7%, driven by $1.8 million of lower incremental payroll taxes and the variable nature of our compensation programs. Moving to Slide 13, other operating expenses. The trend in other operating expenses demonstrates the leveragability of the business, as these expenses continue to represent a lower percentage of revenues as adjusted. Other operating expenses in the second quarter increased by $1.3 million from both the prior year quarter and the first quarter. The sequential quarter increase was due to higher sales-related activities, including the periodic due diligence meetings we hold for specific distribution partners, as well as our support for their marketing efforts. Due to the timing of these activities, the level of these expenses will vary each quarter. Also contributing to the sequential increase was the annual director grants that occur in the second quarter of each year. The increase over the prior year reflects the higher sales-related activities as well as the addition of Rampart. Excluding the impact of the annual director grant, the ratio declined 30 basis points to 13.6%. The ratios declined 340 basis points since the prior year quarter, reflecting our ability to leverage our cost structure and expand profitability. Touching on our balance sheet and capital position. In the second quarter, we generated strong cash flows from operations, which resulted in improvements in all our key liquidity metrics. We've included a new metric of working capital, as adjusted, which we believe is the most appropriate measure to evaluate the current capital available on our balance sheet to support the operations of the business. This metric is calculated as cash plus accounts receivable plus accounts payable and accrued expenses. For the quarter, working capital, as adjusted, increased $18 million or 42% due to strong cash flows from operations. The ratio of working capital, as adjusted, as a percentage of annualized operating expenses, increased to 23% from 17% in the first quarter on strong operating cash flows. By comparison, industry averages are closer to 50% to 60% of annual spend. With regard to share repurchases in the quarter, we repurchased 20,000 shares at a total cost of $4.6 million, and in May, the Board of Directors authorized an extension of the share repurchase program. So at the end of the second quarter, we have remaining repurchase capacity of 375,000 through May of 2016. In addition, in the second quarter, we utilized $2 million to net settle vesting of 8,680 restricted stock units. As we've discussed previously, we've managed our capital to provide operating flexibility and to maximize shareholder value. We will continue to strive to increase our financial flexibility to be in a position to capitalize on opportunities and maintain our growth. With that, let me turn the call back over to George.

Thanks, Mike. As I said earlier, we're very pleased with the result this quarter, particularly the continued growth in earnings, margin expansion and our ability to maintain solid sales and flows during a volatile market. Our sales success this quarter demonstrates how our broad and distinctive products set offers clients attractive investment strategies to address their needs in a variety of market conditions. As we enter the second half of the year, we have the critical elements in place, product, investment performance, strong distribution and new opportunities to sustain our momentum. So with that, let's just open up to some questions. Sheena, can you open the lines please?

[Operator Instructions] Our first question comes from Michael Kim, Virtus. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Michael Kim from Sandler. First, maybe can you talk a little bit about the Multi-Sector Short Term Bond Fund in terms of how that portfolio is positioned, assuming rates continue to move higher? And then do you think that sort of the knee-jerk reaction to the move-in rates has been sort of a shift away from bond funds more broadly, but that ultimately, maybe the better positioned or differentiated strategies will end up recapturing at least some of those assets?

It's a good question, because people sometimes group everything together in one bucket. So when you talked about fixed income, you're really talking about very different types of strategies. So for us, if you look at the Multi-Sector Short-Term Bond Fund, it is multisector, so it's playing in 14 sectors and basically looking for the greatest value. And it's a short duration. It's about 2.5, is the duration on the Multi-Sector Short-Term Bond Fund. And over its history of 19 -- I don't know, it's like 19 or 20 years, we've had the experience of how it behaves in rising interest rates, and the fund has always done very well. So our view for that fund is, in this type of an environment with the levers that are available for Dave and his team to pull on that fund, that is the kind of place where you're going to have the most maximum opportunity to take advantage of that. So we actually feel that fund is very well positioned to be the type of place you want to be on a fixed-income product rather than other strategies, which may obviously have a longer duration and less flexibility in terms of playing different spread sectors. But again, I think as you -- you always have to be careful when you look at a big category of either "equity or fixed." That really -- there's a lot of sub-stories going between that. And I think you've seen some other examples of some other fixed-income funds that were shorter in duration, a little more flexible, generally doing better than some that are a little more focused and concentrated. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Understood. Second question. Anything on the closed-end front? It seems like some of your peers have gotten a bit more active coming to market with new funds, so just wondering how you're thinking about that business these days and the opportunity set there.

Yes -- no. Again, we're still obviously big fans of the closed-end fund structure, and there's been a lot of closed-end funds with a little bit of dislocation in these last few months. There's been a lot of credit deals that have been put out there. And we do -- obviously, we have the credit capabilities, and we think there's some opportunities to serve investors with other types of equity or income products. So it's an area where we continue to be active, but for us, it's very important to do the right strategy at the right time. So that's the way we sort of look at it. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Got it. And then just maybe finally, on the M&A front, can you talk about, maybe, what you're seeing in terms of opportunities or competition, pricing, et cetera? And how you're thinking about potential needs or strategic acquisitions going forward?

Yes. Well, again, I'd start with that -- given the diversity of the capabilities that we currently have and just the broad offerings, our organic growth, again, at 20% for the quarter, is high. We don't need M&A to be successful or to grow. It's not a fundamental element of our growth proposition. That being said, again, you always see cycles in the markets in the M&A front, in terms of whether there's more opportunities or less opportunities. You need to stay cognizant of those, again, as a multi-manager. In some ways, our business was sort of built to partner. And again, as you know, we partner through either pure subadvisory, through a minority, through a majority, and through other structures. Our focus is always trying to find what are the investment capabilities that we'd like to bring to market, and we're flexible on how we do that. So again, you've seen us do just the subadvisory or a minority, et cetera. I think it's an interesting market. And again, I think you're seeing a little bit more activity again, but we are primarily focused on our organic and really just raising the assets from that which we currently have.

Our next question comes from Steven Schwartz, Raymond James Associates. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: [Audio gap], but maybe you can run us through at least in the long term open-end mutual funds, what the flows were by month?

I'm sorry, Steve, we didn't hear the very beginning of that. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Yes, there was some static. You said flows in the long-term open-end mutual funds were positive each month. I was wondering if you could walk us through what those flows were for April, May and June.

Yes. We're not going to give the specifics. I mean -- but I think our experience sort of was very reflective of the dynamics in the market, of the quarter. So again, I think everyone saw one experience and sort of the April to like the mid-May or like May 22-type of period, which I think for us was -- probably I would describe it as, consistent with or slightly stronger than the very end of the first quarter, excluding Emerging Markets. Then upon the period when the -- with the comments from the Fed, I think we and the industry saw a period where particularly fixed income had a couple of very difficult days, and then sort of everything stabilized. And as I indicated in my comments, what was really interesting then was really the switch from first quarter being very heavy international equity and fixed. And for us, it was a switch into the downside, the defensive equity, which is our alpha sector, the premium products. And then our dynamic alpha sector, which is the long/short equity fund. So that sort of emerged in the second part of the month. And again, I don't think there -- not all of our competitors were maintaining positive flows in those 3 months in those periods. Mike, do you want to add any?

Yes, I think in -- Steve, it's Mike Angerthal. I think in my prepared remarks, I indicated that we did maintain double-digit organic growth in the long-term open-end funds. So it was a trajectory that we were pleased with. And I think George reiterated in his comments that we saw that trend sort of continue into July. So...

Right.

So that's sort of the color we'll put on a monthly basis. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. And I did want to just follow up on that, maybe a little bit more color on July. The trend of where the money goes or where the money is going, is that any different from where it was post the taper tantrum?

I think it's very similar. So again, I think you're still seeing the same -- for us, again, a lot of the defensive equity, the long/short, and then a couple of periods on the fixed-income, where people were sort of saying, "Hey, this is actually a good entry point." But I think that's still choppy. I think people are still trying to figure out, longer term, how they want to play their fixed income. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. Anything new in the quarter on distribution efforts, on expanding distribution?

In terms of expanding -- yes, I mean, we continue to again, I think, have very good rankings in all of the firms and do well. We've been just finalizing the level of stepping that we currently have. Again, I think, as we said before, we fewer wholesalers than most of our -- the people we actually compete against. The only real new thing is, again, I did speak about that we now have a usage structure, which we just got approval for. So that won't be anything in the short term on that. But as we introduce product there, we'll be able to leverage some of our existing sales force for the financial advisors who have investors that would fit that profile. But we continue -- again, I believe we look very closely at market share and we look very closely at how we're ranked within firms. And we continued to do very well for a firm our size and that's not a well-known mutual fund company. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Right. George, I was thinking here of -- I think that you're mostly strong in the wirehouses and have been talking up the opportunity in RIA. I was specifically referencing that.

No -- yes. And again, you're absolutely right. I mean, while we have some agreements with everyone, and we've been in most places for many, many years, in the last few years, a lot of our greatest focus and penetration was in the wirehouses where we achieved very high rankings. And we expanded our sales force a little over a year ago, and we've seen great results. I mean, the percentage of growth is significantly high in that channel that's coming from a smaller base. So I have to say, we've been very happy that we have truly been able to translate some of the success that we've had on the traditional wirehouses into the independents and the RIAs. Mike, anything? No? Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. Yes. And then 2 more, if I may, quick ones. The new product offerings, do you have to put seed money into either one of those?

You do, you do. So for the Liquid Alpha Fund, which is the first UCIT, there is seed of about $1 million that will be in that. And it will be similar to an open-end fund. We'll have to seed it at a minimum, at the level at which to execute the strategy. So that means if it's a diversified equity kind of product, it's a lower seed, say $1 million. If it's more capacity constrained like small international small cap, it's like $5 million. And once you do them more, the truly diversified fixed income, like we did with Emerging Market debt, we had to do $20 million.

$25 million.

It'll be a very similar type of seed capital required in the usage as opposed to the regular '40 Act U.S. funds. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay, and then one more. Mike, did you -- what was that amount of RSUs that were net settled? Did you say 860,000?

8,680.

[Operator Instructions] Our next question is from John Dunn, Sidoti & Co. John Joseph Dunn - Sidoti & Company, LLC: Could you just talk a little more on the institutional channel and if you have an idea of where you'd like that to go as a percentage of total AUM mix?

Yes. For our institutional business, again, our -- we've had a very high level of growth on the retail side, and the institutional side has not been anywhere near that level. It's been basically very stable. And we were sort of pleased with some of the gross sales that we're seeing in that place. As a reminder, for our institutional business, it's really going to be focused on our affiliated managers as opposed to subadvisories. So we don't do institutional for those strategies, which are really done through subadvisories. Such an area where we had invested some resources very early last year, I think. It's a little bit more than a year now where we invested in some resources in terms of distribution, and we've sort of been pleased with the traction that they've been able to generate. Which again, you haven't seen a significant level of flows, but it certainly has increased, the pipeline has increased, as well as the activity. So again, it's certainly not the same level of retail nor would we expect it to be, and it's a longer-tailed business. But I think a lot of the changes that were put in place and some of the work that has been done over the last year has started to pay out. John Joseph Dunn - Sidoti & Company, LLC: Great. And then just a follow-up on M&A. Could you characterize what you think the pricing environment is out there? Is it reasonable? Is it overheating?

Again, I guess it depends on which perspective you're on. I wouldn't say it's necessarily overheated. I mean, as I look through like the multiples for deals, private multiples versus public multiples, which I've sort of been looking at since the mid-'90s, it's certainly not anywhere near its high. I would actually say, if anything, I would say some of the multiples that I've been seeing are lower than some of the historicals. But again, it's all based upon the market environment that you're in. You're not going to see the same multiples as we did in '97, '98 and '99. But again, to me, valuation is very property-specific, right? The value is based upon each individual thing. So I wouldn't consider them frothy.

Our next question comes from Terry Lally of Spotlight Fund.

I'm trying to get a little more color on July. If I heard the statements correctly, it sounds like continued on the double-digit growth up from June, and then up over last year. What was last year as a baseline? And any further color, because it did seem like we had a tale of 2 markets, right? That very strong equity market in July versus the volatile market of June. I'm trying to get an idea of kind of what the trends and fund flows are for that.

Yes. And we don't give specific month-by-month. We only release the flows for the total quarter. So I'm not going to give you the specifics on that. But where I can be helpful is, if you sort of look at the percentage increases that we had quarter over prior year quarter, you can just sort of see the kind of level of growth that we've been having on a year-over-year basis. So I mean, we're indicating that the flows are greater than they were last July, and they did increase from June. If you were to ask me to go through like a trajectory, I would say the low point -- the May 22 and the late May period was really the biggest area where there were low sales and higher outflows, and it recovered through June, and then that continued through July. So if you were sort of drawing its trajectory, the lower point would have been in the June area and then moving up towards as you enter July. So I don't know if that's helpful, but if you're trying to get trajectory, that's sort of what I would give you.

Okay. I think you mentioned that 70% of the flows, recent flows have been in the equity and alternative premium products. And we've seen a very positive mix shift with your average fee up 150 basis points. What's the average fee on the equity and alternatives? And how come we see that continue to lift your average revenue?

Yes -- no. It's a great question, because the higher fee products are the input equity in the alternative funds. And the 2 funds in particular -- one, I believe, has about 110 basis point fee and the other is 150. Again, which -- those are subadvised products, but those are obviously higher fee than the -- obviously, the fixed-income products that we're selling a lot of last quarter. So both of the products that we're selling more of this quarter. So last quarter, it was Emerging Markets, which is 100 bps, and Multi-Sector, which will land at about 42 or 43. And now we're selling these 2 products. Mike, do you have any more color?

Yes, I think that's right. In the quarter, our -- for new sales, was about 52 basis points for new product. And the other thing to keep in mind on our fee rates is they include expense reimbursements that we pay to the fund, because we net that in the revenue line. And some of the recently launched funds are currently experiencing slight reimbursements, so that will be another factor that impacts our net fee rates.

Okay, but the mix shift is positive and especially as we see funds flows into equity, the alternatives, we can see a -- continue that lift and there'll be some timing issue on, say, the startup funds on the reimbursement, but the trend line is your mixed shift to equity and alternatives.

Yes, that's correct.

You've seen that over the past year, as you noted.

Great. Well, the -- I mean, the operating leverage of the business, the correlation to the asset under management growth, you could really see the leverage of the business model. You're up 500 basis points sequentially. You referred to some of that being related to payroll taxes. Help us through that. I mean, did most of the high-compensation plays reach the maximum caps in Q1? Was it sometime in Q2? Would there be more benefit as we get into the back half of the year, or did we see most of the benefit of that in the quarter?

Yes, you -- I mean, our annual incentive comp, and we've been very clear on this, is basically in the first quarter. So you will always see for us a large number of the highly compensated people maxing out in that first quarter. So there was -- what we reported was a $1.8 million higher payroll tax in the first quarter than the second quarter. So that is -- very same -- it's been like that every year. And in terms of the margin, Mike, it was?

Yes. It was about 290 basis points on the incremental margin quarter-over-quarter. And a good way to think about it that we've pointed to is the capture ratio, where we pointed to it on a year-to-date basis, which is at about 57%. And we sort of target in that 50% to 55% range for incremental margins. And that's a good way to think about it going forward on revenue growth.

Okay, and then it looks like, then, X Q1 when you have kind of the payroll tax all hitting, given the bonus period that, at the current AUM base, you're running close to the $2 run rate. And then with AUM growth, with fee lift and operating leverage, we grow off this $2 base and leveraging the only 8 million shares out.

Well, we don't give guidance. And I think for $2, you're talking about EPS?

Your EPS, your current run rate of...

Yes, I just -- if you're going to look at the EPS, just recognize that there were $0.22 of unrealized mark-to-market in that line item that -- that's just going to fluctuate and obviously isn't a core part of the operating element of the business. So that's why we pointed it out. We provide some incremental detail on our marketable security portfolio so you can get a sense on how that can trend by looking at it versus the index. But I would just factor that into your analysis when you're looking at the business.

Yes. And again, that's why we've added in the -- there's -- in the supplemental information on the marketable securities and the related indices, because, again, that did have a negative $0.22 impact based upon what those indices and that related products did, and it could go the other way. So you should be very cognizant of that as you do any kind of projections or modeling.

You're doing a great job for a shareholder that bought your stock at $5.50.

Oh, and we're happy that you're pleased, so...

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward for closing remarks.

Thanks. I want to thank everyone for joining us this morning. And we certainly encourage you to give us any call if you have any further questions. Thank you.

That concludes today's teleconference. Thank you for participating. You may now disconnect.