Virtus Investment Partners, Inc. (VRTS) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Gwen, and I'll be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section of the Virtus' website, 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.

Thank you, Gwen, 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 third 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 maybe 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 Management Discussion and Analysis sections 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 virtus.com. This morning, we will begin with remarks from President and Chief Executive Officer, George Aylward, who will 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. Mike and I are pleased to have the opportunity to talk about our strong financial and operating results. We're very pleased with the results this quarter, particularly in light of the market environment. We reported our highest level of revenue and a growing revenue, combined with the inherent leverageability of the business, resulting in record levels of both operating earnings and related margin. We ended the quarter with $55 billion in assets under management as a result of continued positive net flows and market appreciation. We also completed an equity offering that raised $192 million. The additional capital will support our product development activities by increasing our seed capital for new and existing strategies, including our efforts in the liquid alt space that I'll discuss later on. So let me review some of the specific results for the quarter. Total sales were $4.9 billion, which is an increase of 25% from the third quarter of last year, as a result of higher sales in each of our major product areas: mutual funds, separately managed accounts and institutional. Mutual funds sales continue to be the largest contributor to those sales, and we also had a significant increase in institutional sales from the prior year, as a result of our real estate securities mandate. We have $1.2 billion of positive net flows. And the consistency of positive net flows, as well as the market depreciation, resulted in a 32% increase in total assets under management over the prior year. Mutual Fund sales were $4.3 billion in the quarter, or 29% higher than the third quarter of last year. Fund sales were down on a sequential basis, reflecting general industry trends that were influenced by the volatility in the markets as a result of continued uncertainty about the tapering of the fed's quantitative easing, the Federal Government shutdown and the debt ceiling debate, and concerns about slowing growth in emerging markets. The composition of our fund sales reflected these industry trends. We had a sequential and year-over-year increase in our defensive domestic equity in long/short strategies, while sales declined in emerging markets and short-term bond funds, although they continue to be 2 of our top-selling funds. The diversity of product offerings in sales continues to be a strength of our business. We have a substantial range of distinctive well-performing strategies that are suitable for various market conditions, which allows us to maintain sales and flows as investor preferences change. We had positive mutual fund net flows of $1.1 billion, our 17th consecutive quarter of double-digit organic growth. And as with sales, fund flows reflected industry trends. The sequential uptick in redemptions reflects a total of $600 million in outflows related to asset class rebalances at 2 of our distribution partners who reduced their weightings to emerging market strategies during the quarter. We're also pleased to see that, while the month is not over, October is coming in a $500 million level for mutual fund net flows. Operating earnings reached a record level in the quarter as a result of higher revenues from our asset growth and generally stable fixed costs. Operating income, as adjusted, increased by 64% to $35.8 million from $21.8 million in the third quarter of last year. The significant growth in the prior year reflects a 39% increase in revenue, as adjusted, over the past year, as a result of our growing asset base, particularly in open-end funds, where assets were up about 45% from the prior year. The increased profitability of the business is demonstrated by the expansion of our margin to 48% from 40% a year ago. We continue to benefit from the leverageability of the business as we have maintained a relatively stable fixed cost base and a high proportion of variable costs, while significantly growing revenue. Earnings per diluted share were $2.56 on net income of $21.1 million, an increase of 81% from the third quarter of 2012. Net income increased 37% on a sequential basis. Though it's not related to our quarterly results, I will make some comments about the announcement we made this week regarding the expansion of our alternative product offerings. We have partnered with Cliffwater LLC, a leading alternatives advisory firm for institutional clients, to establish Cliffwater Investments, which will manage new multi-strategy, multi-managerial alternative funds. We have been thoughtfully evaluating the best approach to providing liquid alternatives to retail investors. We believe retail investors are starting to think more like institutions and looking at alternative strategies as an important component of their portfolios. Until recently, the lack of liquidity and transparency, as well as the high entry price, has prevented many retail investors from using alternative strategies. We believe that these strategies in a retail mutual fund structure -- a product with the benefits of daily liquidity, timely tax reporting, fund governance and access to a trusted financial advisor, have great potential. There's also a clear demand in the market. Some of the major wirehouses recommended their clients have a 15% to 20% allocation to non-correlated strategies. But by some estimates, less than 5% of client assets are in such strategies. As we consider the types of products to offer, we concluded that a multi-strategy products, that use an open-architecture approach, can have clear benefits for retail investors. We chose as our partner, Cliffwater, which is well-regarded for helping institutions develop asset allocation models, source alternative managers and integrate these strategies into a portfolio. Their institutional experience and knowledge of alternative managers and products will allow us to provide retail investors access to the same caliber of strategies that are available to institutions. We think we are particularly well-suited to provide these products because of our strong retail distribution. Our sales force takes a consultative approach to partnering with advisors to help them attract, place and retain their clients' assets, and our wholesalers are well-versed in explaining sophisticated investment strategies. We are committed to supporting financial advisors as they help their clients diversify their portfolios. The new partnership with Cliffwater also reinforces one of the benefits of our business model. Our flexible, multi-boutique model gives us broad access to distinctive investment solutions and the ability to be responsive to emerging investor preferences or changes in the market. We can quickly expand our already-broad product offerings by adding a new capability, which allows us to take advantage of our multiple opportunities for growth. We're very excited about the opportunity to introduce the new liquid alternative funds, and we're very pleased with the results we've produced this quarter. 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 and operating results, and then we'll open up the call for questions. Mike?

Good morning, everyone. Thank you, George. In the third quarter, we generated record financial results and continued positive net flows and improved our financial flexibility by raising equity. This morning, I'm going to review our quarterly results, starting with assets under management, sales and flows, then I'll review our 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 assets of $55 billion, an increase of 32% from the prior year, and 4.5% on a sequential basis over the prior quarter. There are 3 elements that contributed to the year-over-year increase of $13.2 billion: strong organic growth, a solid market environment and assets from small acquisition. Specifically, net flows added $9.2 billion or 70% of the increase. Market appreciation added $3.1 billion, and the remaining $900 million is primarily attributable to assets added from the acquisition of Rampart that we completed late in 2012. On a sequential basis, the AUM increase reflects positive net flows of $1.2 billion and market appreciation of $1.3 billion. As a result of consistent strong flows, mutual fund assets are up 45% from the prior year and 6% from the prior quarter. Separately managed account assets are up 53% from the prior year, primarily due to the addition of Rampart, as well as market appreciation and net flows. I want to point out a new disclosure of assets under management by asset class in the tables in our earnings release. We believe it's more meaningful to present our alternative product offerings separately from equity offerings through an increased focus and growth of alternative strategies throughout the industry. The strategies we've included as alternatives are real estate securities, option strategies and long/short offerings. We've updated the prior periods to reflect the new classification. Looking at the change from the prior quarter, alternative assets increased 15% on the strength of flows into our long/short product and market activity, and equity assets were up approximately 7%, driven by both net flows and positive domestic equity markets. I would also point out that we've added additional disclosure about mutual fund flows by asset class in the supplemental appendix in our earnings deck. This quarter's flows illustrate the value of our diversified product offerings. In a quarter when fixed-income inflows were affected by investor concerns over the rate environment, and international strategies were affected by questions regarding emerging markets, we maintained double-digit annualized organic growth in our long-term mutual funds. Total sales for the quarter were $4.9 billion, an increase of 25% from $3.9 billion in the prior year quarter. Total net flows were $1.2 billion, and we have now had 18 consecutive quarters of positive net flows, as well as double-digit organic growth in our mutual funds for 17 consecutive quarters. Fund net flows were $1.1 billion, compared to $1.6 billion in the prior-year quarter and $2.6 billion in the second quarter. To provide transparency into the flow picture, let me give some general highlights by category. Specifically, domestic equity net flows were up 13% from the prior quarter, as our defensive equity strategies continued to provide investors an opportunity to increase their equity exposure, while managing downside risk. Alternative strategies net flows were up 11% sequentially, primarily attributable to continued strong demand in our long/short product offering. Taxable fixed-income flows were positive for the quarter, as our floating rate offering attracted solid flows, which more than offset outflows from our other fixed-income offerings. International flows were affected by a total of $600 million of redemptions in our emerging markets fund, due to the rebalancing of discretionary model portfolios by 2 distribution firms. One redemption occurred at the end of July and the other in early September. Finally, institutional sales increased to 155% to $287.3 million from $112.6 million in the third quarter of 2012. The increase was primarily related to a $208 million domestic real estate securities mandate at Duff & Phelps. We're pleased with the win at Duff & Phelps, but as we've mentioned before, institutional flows can be lumpy and difficult to predict. Slide 10 illustrates the continued growth in operating income, as adjusted, and the associated margin. In the third quarter, operating income, as adjusted, was $35.8 million, an increase of 64% compared to 1 year ago and 13% 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 down 2%. The substantial increase in operating income, as adjusted, over the prior year primarily reflects revenue growth from the cumulative impact of $9.2 billion of positive open-end fund net flows over the past 4 quarters, and the benefit of a highly leverageable business and our variable expense structure. The operating margin, as adjusted, was 48%, an increase of 740 basis points from the prior year quarter and 360 basis points from the sequential quarter. Our year-to-date capture ratio, which is calculated as incremental operating earnings divided by incremental revenues, was 61%, which is at the high end of our historical range. In any given quarter, there can be specific items that impact the result. Concerning GAAP results, net income attributable to common stockholders was $21.1 million, or $2.56 per diluted common share, representing an increase of $1.13 per share or 79% from the prior-year period, and $0.65 per share or 34% on a sequential basis. Excluding the impact of the unrealized mark-to-market adjustments on our marketable securities, net income would've increased $0.32 per share or $0.15 on a sequential basis. As a reminder, the supplemental appendix in our earnings deck includes a schedule of our marketable securities holdings. Finally, our effective tax rate for the quarter was 37.1%. The decrease from 38.7% in the prior quarter was primarily due to the income attributable to redeemable, noncontrolling interests, and is included in our pretax income, but not subject to income tax expense. Excluding the impact of CCEFs in both periods, the effective tax rate this quarter would be closer to 34.7%, which is in line with the prior quarter. Turning to revenues on Slide 11. Investment management fees increased to $67.1 million, up 4% on a sequential quarter basis and 40% from the third quarter of last year. Average long-term assets under management grew to $52.3 billion, up 2% from the sequential quarter, and 37% 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 49.2 basis points, an increase of 1.7 basis points from the prior year and 0.5 basis points sequentially. The increase from the prior year and sequential periods primarily reflects net flows into higher fee mutual funds. Specifically, during the third quarter, the fee rate for new sales was 53.7 basis points, which is up 1.4 bps from the prior quarter and up 2.6 bps from the prior year. Over the past 4 quarters, more than 75% of our mutual fund net flows have been into equity and alternative strategies. Total employment expenses for the quarter were $33 million, essentially flat from the prior quarter, and an increase of 28% compared to the prior year quarter. The ratio of employment expenses to revenues, as adjusted, improved to 170 basis points on a sequential quarter basis to 44%, reflecting the operating leverage of the business. Employment expenses were generally flat on a sequential basis, reflecting lower sales based compensation, offset by increased variable incentive compensation due to higher profitability. The increase over prior year was attributable to 2 main factors: First, personnel additions, related to the growth of the business, as well as the acquisition of a new affiliate in the fourth quarter of 2012. And second, higher variable compensation due to increased profits and sales. Moving to Slide 13, other operating expenses. The trend in other operating expenses demonstrates the leverageability of the business, as these expenses continue to represent a lower percentage of revenues, as adjusted. Other operating expenses in the third quarter decreased $1.8 million from the second quarter, and were flat from the prior-year quarter. Quarterly expenses will vary based on the timing and extent of certain business activities, such as sales and marketing and certain professional fees. The sequential quarter decrease was related to fewer periodic due diligence meetings held this quarter for distribution partners and lower legal expenses. Also contributing to the sequential decrease were the annual director grants that occur in the second quarter of each year. The ratio of operating expenses to revenue, as adjusted, has declined to 11.4%. The trend of this ratio reflects our ability to leverage our cost structure and expand profitability. Touching on our balance sheet and capital position. In the third quarter, we substantially enhanced our capital management flexibility with an equity raise. We issued 1.3 million shares, resulting in net proceeds of $192 million. As a result of the offering, our common shares outstanding increased from 7.8 million shares at June 30 to 9.1 million shares. And our cash and marketable securities increased by $22 per share and totaled $38 per share at September 30. The primary objective of the equity raise was to expand our seed capital program to meet the numerous growth opportunities available to the company, including the new opportunities in the liquid alt space that George discussed earlier. To that end, in the quarter, we did deploy $40 million into the Virtus Wealth Masters Fund, which was launched last year and has generated a strong performance track record and meaningful interest in the marketplace. The fund now has more than $60 million of AUM, which allows it to be considered for full distribution access at our major distribution partners. Our other seed capital investments in the quarter included the previously announced UCITS launch and an international equity strategy managed by one of our partners. Also in a quarter, we paid down $15 million that was outstanding on the credit facility, and we currently have $75 million of undrawn capacity on the credit line. In the quarter, we've repurchased 25,000 shares of common stock for $4.7 million. The purchases in the quarter completed our initial repurchase program authorization of 350,000 shares, which was executed at an average price per share of $106.92. In the second quarter, the board approved the repurchase of an additional 350,000 shares. As we've previously discussed, the purpose of our program is to generally offset dilution related to our equity compensation plans. As our track record demonstrates, we will continue to manage our capital to provide maximum operating flexibility with the overriding objective of increasing shareholder value. And with that, let me turn the call back over to George.

Thanks, Mike. We're very pleased with the results this quarter, particularly the continued growth in earnings, the margin expansion and our ability to maintain solid sales and flows during a volatile market and as investor preferences change. We're very excited about the many opportunities we have to continue to generate additional growth. With that, let's take some questions. Gwen, can you open up the lines, please?

[Operator Instructions] The first question comes from the line of Michael Kim with Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First, just based on some management commentary from other firms and some of the data that we've seen across the industry more recently. It does seem like retail investors are starting to move up the risk curve a bit. So it doesn't seem like a great rotation, by any means. But assuming investors do start to come back to more traditional equity strategies, just wondering how your existing product lineup sets up in sort of that type of environment. So maybe where you could see the biggest step-up in flows. And then also, how you maybe thinking about the organic growth profile of the firm, particularly versus prior cycles.

Sure. Again, as we look at the industry, in the sales and flows that we see, we're always very cautious to remember that the aggregate impact that you see in the industry is really made up a lot of different pieces. So what we've seen, and think we'll continue to see, is long/short equity has obviously grown significantly in sales. And I think that is being attractive to certain people that have one view in terms of what they want their risk profile to be. At the same time, people that are worried about inevitable pullbacks are focused more on the defensive equity products. As we see -- sort of see the market continue to move up and people are wanting to participate in that, one of the reasons that we chose our Wealth Masters Fund as the fund to add some additional seed to is that fund would really be attractive to people that want to overparticipate in the market as it moves up. So right now, I think it's basically about 660 basis points above the S&P. So a certain type of investor would be attractive to that. So again, going back to our fundamental approach to the business is we want to make sure that we have a multiple of different products that have different return and risk profiles to be attractive to different investors, different market cycles, et cetera. So we sort of feel that we do have -- and as we've, I think, demonstrated with the long/short fund, strategies that are attractive in that type of a market cycle. Though we still fundamentally believe that people will continue to have a well-diversified portfolio, they do need to use fixed income, not as much maybe as they were using in the past. And we do think that the offerings that we have there should always be part of a well-diversified portfolio. Macrae Sykes - Gabelli & Company, Inc.: Okay, that's helpful. And then, just wanted to come back to the Cliffwater partnership. So first, can you just give us a sense of your split of the economics for the funds. Because it seems like you've got Cliffwater subadvising the construction and asset allocation of the portfolio, and then you've got another level of third-party managers below that, actually running the different sleeves of the fund. So just curious how the economics for these funds work, particularly in an environment where it seems like fee levels across kind of the fund-to-fund industry continue to come under pressure.

Yes, good question. And just -- as we talk about Cliffwater, and again, we're very excited about the opportunity that we'll have by partnering with them. Again, I would point out that one of the benefits of our business model is our flexibility to partner with different firms. And I would like to point out that we don't limit our opportunity set to partner to firms that will either sell themselves to us or sell a piece of us. We have the flexibility to partner with the best partner for a specific opportunity, and we really view Cliffwater as a perfect fit to bring what is generally being considered an institutional type of an asset class to the retail investor. I think if you just take a step back in terms of how the economics will work, it fundamentally will not be economically much different than a sub-advisory type of relationship. However, the visuals will be different because it does involve an affiliated manager where there will be a minority interest. But as I've said before -- and people have asked about subadvisors versus affiliated managers. Yes, there is a difference, but it's not a major difference. One versus the other affiliated managers do have a beneficial economic profile to a subadvisor. But if you sort of stream through the optics, the Cliffwater relationship will not be materially different than a subadvisor. Mike, do you want to give any additional thoughts about how they might see it, though?

Yes, I think you'll see the -- and certainly, you saw the timing of that, the expectations to be launching the funds in the first quarter -- the first half of 2014. So as the assets ramp up, we'll be recording on the line on the investment management fees, and the subadvisor element of that will be net against the gross investor management fee, which is similar to our existing subadvisor relationships. So I think it'll be similar to that. And then to the extent there, the fees to direct to Cliffwater, those will roll through our other operating expense line item, so you have the share of that rolling through other operating expenses. And we'll continue to provide that kind of transparency with respect to our non-GAAP results to ensure that you have the ability to track the progress of those funds.

And then, I just -- I do want to -- one other thing. When you talk about fund to fund, and we absolutely agree with you that the traditional fund to fund type of approach, we don't think has necessarily been as successful as it should've been. And what we're doing -- where we think the great opportunity is, is to truly have that independent institutional consultant with knowledgeable for 4,000 of the alternative managers and a rating system to select the best managers for the best strategies. And then having the knowledge of how to put together the asset allocation and portfolio construction is a significant improvement over early products. So there are some other good products out in the market, I don't want to say that. But what we're doing and what some of the newer products you're seeing are really much different than the traditional fund to funds, which many would view as having not necessarily worked as people had hoped they would. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Understood. And then maybe just one more for you, Mike. It seems like the drivers behind the ongoing margin expansion, so continued AUM growth, a more favorable asset mix and rising operating leverage. All those tailwinds seem like they have further legs to the story, assuming a constructive macro backdrop. So just wondering if you might be starting to think about ramping up some investment spending, maybe to build out your non-U.S. distribution capabilities, for example. And then more broadly, how are you thinking about margins going forward, given the 48% number this quarter?

Yes, good question. And I'll touch on the margin discussion, and then we could collaborate on the discussion of our expansion internationally. We've historically talked about our incremental margins are a capture ratio in the 50% to 60% range. And in the prepared remarks, I talked about the year-to-date capture ratio of 61%, which certainly is at the high-end of the range, and we've talked about the fee rate expansion that you alluded to and the mix of our sales. So we continue to feel comfortable about that capture ratio level of 50% to 60%, which reflects the leverageability and ability to scale the business. Other operating expenses, we've been able to maintain that in a relatively tight range. If you look at the last 4 quarter average of operating expenses, about $9.1 million. So we've been able to really focus on expenses while growing the business. And some of the activities that you've seen that we've announced, certainly, would point to the fact that we're continuing to think about and invest in growth and balance our short-term margin with the sustainability and long-term growth. So we certainly are cognizant of our product set and our distribution access, as we think about the business from a medium term and long term. So again, we are comfortable with the 50% the 60% capture ratio. And I'll let George sort of touch on the international business.

Yes, in terms of investing in growth of the business, we have continued to invest in the growth in the business. We've been very judicious in terms of how we do that. And that's actually included in the capture ratio. The capture ratio basically gives you how much profit are we pulling in from incremental revenue, versus how much we're spending, increasing spending, which sometimes is investments in growth in terms of a few more wholesalers or institutional. So again, as Mike said, we're sort of comfortable with that range, but that does sort of have a built-in continued investment in growth. And we think that there are opportunities outside of our current set of opportunities that we have to consider, but we still fundamentally have great opportunity to continue to execute on what we've done well, particularly, say, here in the U.S. in the wirehouses. But we have, as we've announced, we now have UCIT structure, which allows us to market in places and areas where we couldn't before. We've created some other product structures, we now have the liquid alts. Institutional, which we had invested in a few years ago has started to bear very small fruit, but we're very pleased with that. And again, we will continue to do the same thing, which is we'll judiciously invest in those growth opportunities that we see as having a higher probability of success. But at the same time, making sure that we maintain expected levels of profitability. And we actually feel good about the levels of profitability that we're generating at this point. And to the extent that we would do something that would be a more, I don't know, meaningful mover of expenses, we would give absolute transparency to that. So we want to do something that would be, maybe, above and beyond what you'd expect from our capture ratio, we would be clear about it. And we'd say, "Here's what we're doing. Here's why we're doing it." So that's helpful in terms of how I think about it.

Your next question comes from the line of Steven Schwartz of Raymond James & Association. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Just a follow-up on the last part. Michael, you didn't really talk about Europe. I mean, there was a mention of UCIT, but if there was anything going on there new to report, and distribution efforts both in the United States as well. And then, I'd also be interested in something different. The capture rate in the quarter was 146%, which was very, very high. Is there anything with regards to expenses or timing or anything like that, that we should be aware of?

Yes. And Steven, it's Mike Angerthal. The capture ratio for the quarter was certainly an anomaly, which is why I kind of framed the year-to-date capture ratio, which provides a better context over a longer period of time. At any given quarter, there can be discreet or unique items that will distort it. And certainly, in this period, where we had increasing revenues and employment expenses virtually flat and the other operating expenses coming in at the lower end of our range, yielded that result. And certainly, as we've talked about and I alluded to in the script, there was a, on the employment line, the lower sales based compensation that came through. And then on our other operating expenses, there was just timing of certain activities on the retail distribution front. So looking at it on a longer period of time for the 3 quarters, I think we're -- where we have talked about 50% or 60% really reflects over a bit longer period of time. There are certain pieces that can impact it in any given quarter. With respect to distribution, I'll turn it to George.

Yes. And the first part of the question, in terms of Europe and UCITS, et cetera, just -- so as we announced on the last call, we now have a UCIT structure, and we had one fund, which was a fund that is in existence and we now have a track record. At this point, though, we've now filed for another strategy that will make available in UCITS. But our approach is going to be in the following manner. So right now, there's an opportunity to use UCIT structures for non-U.S. citizens who make investment decisions here in the U.S. So that's sort of like the area where there's a high population. So we can use our existing sales force to market those strategies here in the U.S. Separate from that, there is the opportunity for the UCIT structure outside of the U.S., in either the European or the Asian markets where we currently are not doing anything. So now that we have the product structure and will incubate and clone some of our best-selling U.S. retail funds into that structure, we will then make some decisions in terms of -- well, one, we'll start by distributing here in the U.S. to non-U.S. citizens. And then we will look at the best way to enter the European as well as the Asian opportunity set for those products. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. And how about -- anything new here in the U.S.?

In terms of distribution, it's been -- we had built out the independent and RIAs about a little -- 1.5 years ago at this point. It's still an area of incredible growth for us, so we see a lot of exciting opportunities there. And we continue to focus on our efforts in both the retirement and the VIP market, which are both very high markets. The institutional's the one that, I think -- again, as you saw this quarter, we actually had a noticeable mandate that came through, and that's after a lot of work of people concentrating on some of our affiliates who have institutional strategies. But other than that, I wouldn't say anything major here in the U.S. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. And then other, if I may. With regards to Cliffwater, is there an expectation that -- I think it was 3 funds that were listed in the announcement yesterday. Is there an expectation of seed money being put into that and how much?

Yes. And again, we're -- we did file for 3 products, so they have to go through the SEC registration process and get approved. And one is an alternative total solutions product, which will basically be a foundational product for people use in a well-diversified portfolio. And then 2 other products, one, which is really about having a diversified source of income, other than the traditional sources of income. And then a real assets fund, which is really sort of focused on investors that are concerned about inflation or preserving their purchase price power. So those are the products that we've put out. By the nature of those products, they'll be multi-manager and they'll be multi-strategy. So each of the underlying strategies that will be required in those well-defined allocated portfolios will each require seeds. So if you sort of think about it, it could be 6 to 8 managers. And for those types of strategies, you generally need more seed than you would need in a traditional large-cap equity fund. So one of the primary purposes of the equity raise that we executed in September was, one, to rightsize our seed capital to be appropriate for the opportunity set that we had to execute on. And a specific use of that was for the alternative products that would require more seed than some of our other traditional products. So yes, the expectation will be after 75 or 90 days, as we bring some of those products out that some of that seed capital will be used for that. And just to give you some parameters, a traditional S&P 500 fund, you can see that with $1 million, to get a strategy going. The wirehouses wont look at it until they have $25 million or $50 million. The emerging market debt fund that we seeded 9 months ago or 6 months ago, that requires 20 -- that required $20 million to simply execute the strategy of those funds. And I would say the liquid alt types of strategies are more like a diverse fixed-income type of a product to seed, as opposed to a highly liquid equity strategy. So that will be -- the money will be used for those strategies as we move forward. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay, so I'm thinking about this. You're talking about $20 million. When you're comparing that, you're comparing each fund to the $20 million needed for the emerging debt, you're not talking about $20 million for each of the manager?

No, no. Again, there'll be 6 to 8 managers, and those managers may need, I'll make this up, $2 million to $5 million each, right? So you can get to a number that's bigger than a S&P 500 fund and more like the size or bigger than emerging debt fund.

[Operator Instructions] Our next question comes from the line of Surinder Thind with Jefferies.

It seems like a lot of the focus in the future growth is going to come from the alternative strategies, the equity strategies. But I was hoping to touch base maybe a little bit on fixed income and maybe for -- how are clients viewing fixed income in the current environment? Is it simply a matter of clients have kind of pulled back in -- from the traditional products and maybe like a floating rate is how they're to play it going forward? Or what's the level of interest that you guys are seeing?

Yes. No, it's a good question. And taking a step back and sort of how we think about things, we do think that people should have very well-diversified portfolios. But that the traditional 60-40 kind of a view of how to distribute your portfolio may not always be the right solution for every investor. And we do think that, like many of the wirehouses are now saying, is that there should be an allocation of, say, 15% to 20% that should be in more non-correlated strategies that have a different volatility and risk profile. Our objective is to give the pieces of that whole broad portfolio. So we think alternatives are a great opportunity to raise assets and to diversify people's portfolios. But we continue to believe that they should and will have a nice allocation to appropriate fixed income and equity product. So our goal is for all of those products. Right now, there's just a big gap between demand and actual holdings on the alt side. In terms of fixed-income, fixed-income does go through certain cycles. It's always going to -- it's always part of people's core portfolios. And its influenced a lot, obviously, by people's expectations of interest rates, which is why now, I think as you point out, I think the only positive flow category or main positive flow category is a floating-rate-fund-type of category. So I think people will always have an allocation to that and they will always want to be in the right space. That's why we fundamentally believe you should be in our short-term bond fund, which plays 14 sectors. And the new fleet team that manages that has done an incredible job of being in the right sectors at the right time as interest rates change. I don't believe that people will simply stop investing in fixed-income. And as we've seen, everyone's waiting for the great rotation. We did see upsets in equity, but that money, I think, in our view, mostly came from cash, not from fixed-income. Now I think they're just more concerned about which specific types of fixed-income will perform, given where the fed is and what changes may or may not happen. So I think there'll be some back-and-forth in terms of where they want to put their money. But they will always put a portion of their portfolio, and should, into the right fixed-income types of products.

So related to the short-term bond and the -- I mean, performance in that fund remains really strong. Are you guys surprised a little bit by the fact that maybe flows have taken a pause there? And do you think it's going to take some time for that strategy to differentiate itself out before flows return there? Or what do you think?

Well, a couple of things. And fixed-income space is an incredibly competitive space, right? And I think as you look across, there are a lot of strategies that are negative, that are losing assets. And the short-term bond fund is basically flat. It was flat this quarter effectively, give or take, a little bit. It really is an incredibly well-diversified, short-duration type of product. Obviously, I always think that more people should be utilizing that product. I've been using it personally for, I don't know, 15 years in my own portfolio. So I do think it's a story that resonates well. I think what you're seeing now is not so much about our fund and our manager, it's just really more the general feeling and concern around fixed-income and people are sort of moving around. We do have a great senior floating rate fund, which has picked up flows. It's run by the same team that manages the multisector short-term. And again, we have seen more activity on the senior floating rate version, and floating-rate bank loans is one of the sectors in the multisector short-term bond fund. So we'd like them to do more multisector short, but if they just want to go into the senior floating-rate bond, we're fine with that, too.

Okay. And another quick follow-up related to that. Your growth continues to be very strong. October's off to a great start. And historically, you guys, obviously, growth has been very strong. How should we think about seasonality of flows? I mean, it seems like when we look back historically, the really strong growth has masked potentially some seasonality effects.

Yes. Again, I would start with, our real objective is to really have the diverse offering so that, as market cycles change and as investor preferences change, that we can be there with something that's attractive. And we really are pleased that when the 2 asset classes that drove a lot of our flows earlier this year, emerging markets and fixed-income, when they went out of favor, as we intended, we had other offerings on the downside equity side and long/short equity that we could then position -- because that was now what was in demand. So that is really our fundamental goal, is to make sure that as that market changes and investors are looking for different solutions, that we do have something that can be attractive to that. So I wouldn't necessarily say there's any seasonalities. Obviously, our flows will always follow what's going on in the industry. I think, generally, we've outperformed in the industry, given the breadth of our product, particularly for a company our size. So again, I think, if you think about our flows, you really should be driven by sort of how you sort of see the market and investor preferences changing. Going forward, I think it was a great question before, because a lot of our managers and products do have sometimes more of a high-quality orientation or downside protection. And part of the -- I think, one of the earlier questions was sort of saying, "Well, what about end markets where things are just getting continuously frothy?" And again, that's where I sort of said, "Wealth Masters would be our offering in that market." But you should sort of think about how diverse our offerings are. And again, because we have the -- we have small caps, we have large caps, we have all flavors of fixed-income, it's really going to just sort of match up where -- what's in demand and how competitive is our offering.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Aylward for any closing remarks. Please proceed.

I just want to thank everyone for joining us this morning. And we certainly encourage you to give us a call if you have any other follow-up questions related to what we discussed today or any other matters. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.