Virtus Investment Partners, Inc. (VRTS) Q1 2014 Earnings Report, Transcript and Summary

Good morning, my name is Lisa, 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 investors 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'd now like to turn the conference over to your host, Joe Fazzino. Please go ahead. Thank you.

Thank you, Lisa, 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 first quarter of 2014. 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 these 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 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 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 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?

Thanks, Joe, and good morning, everyone. We appreciate having you on the call with us today. And Mike and I are pleased to have the opportunity to talk about our financial and operating results, as well as the other development that we recently announced. I will review some of the items that contributed to the strong results and discuss sales and flows, where we saw the impact of the market environment, general industry trends and investor preferences. The cumulative asset growth from the strength and diversity of our product offerings resulted in higher revenue and increased operating earnings in margin compared with the first quarter of last year. Total mutual fund sales and net flows were lower on both a year-over-year and sequential basis, and that's a result of several factors. Total sales were $4.2 billion, a decrease of 32% from the first quarter of last year and 8% from the fourth quarter of 2013. The decrease in the prior year is reflective of the very high level of fund sales we achieved in the first quarter of 2013 related to our sales of the Emerging Market Opportunities Fund. As a result of the asset class being in favor, our fund having strong performance and the announcement of the soft close of that fund. The sequential decrease in total sales reflects lower mutual fund sales, which offset a 24% increase in separately managed account sales. We did have total net outflows during the first quarter, but they were primarily result of 2 items. The first was the redemption of a single option overlay account with a net management fee after all related costs of about 8 basis points. The second was a distribution partner's move to a recommended 0 weighting for emerging market strategies that drove redemptions in the fund at that front. Despite the total net outflows this quarter, assets under management were up 13% from last March, primarily on the strength of the 22% increase in mutual fund assets over the past year to $37.3 billion at March 31, from $30.5 billion a year earlier. Mutual fund sales were $3.6 billion in the first quarter. That is an annualized sales rate of 41%, which is higher than the industry average during the quarter. We maintained above average level of sales in the major asset classes, domestic and international equity, fixed income and alternatives. We had positive net mutual fund flows for our 20th consecutive quarter demonstrating that our diverse set of investment strategies provide the ability to maintain sales throughout market cycles. Positive net flows and domestic equity, fixed income and alternative strategies offset net outflows in the international equity that included a meaningful redemptions as the distribution partner that moved to the 0 weighting for emerging markets strategies. We'd also note the monthly trends with March achieving the highest net flows of the quarter, and the trend continuing into April with our fund flows for the month that look to be about the same as the total for the entire first quarter. Operating earnings in the related margin were up over the prior year, as a result of higher revenues from our cumulative top line growth and generally stable fixed costs. Operating income, as adjusted, was $36.6 million for the quarter, an increase of 46% from $25.1 million in the first quarter of last year. This reflects a 25% increase in revenue over the past year, as a result of our growing AUM, particularly in open-end funds. Sequential change in operating income as adjusted from the fourth quarter is primarily attributable to $2.5 million of additional payroll taxes related to the payment of annual incentive compensation. The profitability of the business is reflected in the related operating margin, which was 46% in the first quarter, an increase from 39% a year ago. As with operating earnings, the increase in the related margin reflects the benefit of higher revenue on our growing asset base. Earnings per diluted share were $2.34, up 35% from the $1.73 per share in the first quarter of 2013. Regarding our new alternative mutual funds, we have said that our approach is to provide a broader offering of distinctive strategies that can be changing markets and investor preferences. And last week we expanded our alternative product offerings with the introduction of 3 new multi-strategy funds. Each fund addresses a different particular investor need, and all of them are intended to give individual investors the opportunity to reduce portfolio volatility and generate more consistent returns through market cycles. The funds are managed by Cliffwater Investments, the affiliate we established last year in a joint venture with Cliffwater LLC. And we believe that their approach to portfolio construction and manager selection will distinguish our products in the market. Cliffwater employs a top down asset allocation process to select and weight the multiple alternative strategies that are incorporated in the funds portfolios, and uses an open architecture approach to source leading alternative managers based upon proprietary research. This approach gives individual investors access to the same caliber of alternative strategies and managers that are available to many large institutional investors. We introduced these funds at a time when there was a clear demand in the market. More and more financial advisors recognize that a meaningful allocation to alternatives can help their clients achieve their long-term investment goals. Institutional investors have a long history of incorporating alternative strategies to manage their risk profile and deliver consistent lower correlated returns. And financial advisors are beginning to understand the potential advantages of adding all to an investor's portfolio. We also believe the launch of these alternative funds places several of our competitive strengths, particularly our strong retail distribution, our value proposition as one point of access to distinct legit firms, and our consultative approach to partner with advisors and explaining sophisticated investment strategies. We are working closely with our distribution partners to help educate advisors on liquid alternatives and how they can be expected to perform in an investor's portfolio. The new fund added to our existing portfolio of alternative products, which has been our fastest growing asset category over about the last year, which is led by our long/short offering. So we're excited about the launch of these funds and believe we are well-positioned to continue to have compelling investment solutions for investors in current and future markets. Let me mention one other item that we referenced in the news release, which is the decision to engage SS&C to provide middle- and back-office services for our affiliated managers. Our business model is based on providing quality operational support to our affiliates, and this new relationship will give our affiliates access to best-in-class technology services that are tailored to each of the affiliate's specific needs. Our affiliates collectively selected the SS&C platform and will choose the specific services they will need for their operation. This new relationship will enhance our current investment management activities and more importantly, support our long-term growth needs. With that, let me turn the call over to Mike to provide more detail in the financial results, and then we'll open up the call for questions. Mike?

Thank you, George. Good morning, everyone. This morning, I'm going to review our quarterly results, starting with assets under management, sales and flows. And 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 $58 billion, an increase of 13% from the prior year and unchanged from the prior quarter. The $6.8 billion year-over-year increase is primarily attributable to $3.9 billion of net flows, or 57% of the increase, and the remaining increase primarily attributable market appreciation. On a sequential basis, the asset change reflects market appreciation of $1 billion and net outflows of $0.5 billion. As it relates to mutual fund assets, which represents 64% of total AUM, consistently positive flows and generally positive market returns are the primary drivers of the 22% increase from the prior year and 3% increase over the prior quarter. Turning to Slide 9, Asset Flows. Total flows were net negative by $0.5 billion, primarily as a result of the redemption of the single low-fee options overlay account, and redemptions at one distribution partner related to a recommendation to reduce exposure to emerging market strategies. Total sales for the quarter were $4.2 billion, a decrease of 8% from $4.6 billion in the sequential quarter. Mutual fund sales were $3.6 billion in the first quarter, a decrease from 36% from the first quarter of 2013. The very high level of mutual fund sales in the first quarter of 2013 were due to strong market demand for emerging market equities and fixed income strategies, particularly our emerging market opportunities in Multi-Sector Short-Term Bond Fundies. By comparison, the current quarter reflected lower demand for both of these asset classes in the financial intermediary channel. Mutual fund net flows were positive by $0.3 billion, even after $335 million of emerging market equity redemptions at the distribution partner that went to a recommended zero-weighting. To provide additional transparency into the mutual fund flows, here are some general highlights by categories. Specifically, domestic equity net flows are positive $0.4 billion, consistent with 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 are positive $0.2 billion, primarily attributable to our long/short product offering. Fixed income net flows are positive $0.1 billion, primarily related to our Multi-Sector Short-Term Bond Fund. And International Equity Fund net flows were negative $0.5 billion, affected by continued lower demand due to market trends. Most distributor's currently have emerging markets equities at an underweight rating. And we're confident that as market sentiment changes in this category, we are well positioned to gather assets with our strong performing equity markets opportunities fund. As a reminder, we include additional disclosure about mutual fund flows by asset class in the supplemental appendix in our earnings deck. We are highest level of separately managed accounts sales, with $472 million, a 29% increase from the first quarter of last year, with growth in our small cap and international equity strategies. Net outflows of $556 million were the result of the $558 million redemption of a single options overlay account. This was a long-standing overlay on a single position in a concentrated stock, and the client made the decision based on his long-term view of the stock. The run rate financial impact of the redemption is insignificant, as the account had a net fee rate of 8 basis points after taking into account variable distribution and other costs. Slide 10 illustrates the quarterly trend in operating income, as adjusted and the associated margin. In the first quarter operating income, as adjusted, was $36.6 million, an increase of $11.5 million or 46% on a comparative basis to the prior year. The substantial increase primarily reflects revenue growth from the cumulative impact of $4.8 billion, a positive, long-term, open-end fund flows, and $3.6 billion from market appreciation over the past 4 quarters, along with the benefit of a highly leverageable business and our variable expense structure. The sequential decrease of $1.8 million, or 5% in operating income, as adjusted, primarily reflects $2.5 million of incremental payroll taxes related to annual incentive payments that occur in the first quarter of each year. The operating margin, as adjusted for the first quarter, was 46%, an increase of 680 basis points from the first quarter of 2013, and a decrease of 220 basis points on a sequential quarter basis. As noted earlier, the quarter included the payroll taxes related to annual incentive compensation that had a 310 basis point impact on the margin. Concerning GAAP results, net income attributable to common stockholders was $21.9 million, or $2.34 per diluted common share, representing a $0.61 per share or a 35% increase compared to the prior year quarter. The average number of fully diluted shares outstanding was 9.4 million in the first quarter of 2014, a 16% increase from the first quarter of 2013, as a result of our equity offering last September. On a sequential basis, earnings per share were down $0.31, or 12% per share, and the change is primarily attributable to 2 items. There was a $0.16 per share after tax expense related to the payroll tax item noted above, and a $0.15 per share decrease in unrealized mark-to-market adjustments on our seed capital portfolio. Finally, our effective tax rate for the quarter was 39%, which excludes the impact of minority interest in consolidated sponsored investment products. This quarter had a discrete item that had a $0.03 per share impact on earnings. We expected the normalized rate to be closer to 38.5%. Turning to investment management fees on Slide 11. Investment management fees increased to $71.8 million, up 24% from the first quarter last year and 1% on a sequential quarter basis. The 2 elements of investment management fee changes are average long-term assets and fee rates. Average long-term assets under management of $55.7 billion increased 18% from the prior year quarter and 1% from the sequential quarter, due to positive mutual fund net flows and market appreciation. The average fee rate was 50.9 basis points, an increase of 2.4 basis points from the prior year and 0.9 bps sequentially. The increase from the prior year and sequential periods primarily reflects an increase in assets in our higher fee mutual funds. Over the past 4 quarters, over 85% of our fund flows have been into higher fee equity and alternative strategies. Specifically, during the first quarter, the fee rate for mutual fund sales was 52.7 bps, which is up 0.8 bps from the prior year. Total employment expenses for the quarter were $35 million, up 8%, or $2.6 million from the prior year quarter. The increase over the prior year reflects personnel additions related to the growth of the business and higher variable incentive compensation. On a sequential basis, employment expenses increased 5%, or $1.6 million, driven by payroll taxes related to the annual incentive payments that occur in the first quarter of each year, resulting in higher expenses of approximately $2.5 million compared to the fourth quarter. And partially offsetting this item was lower variable incentive-based compensation. The key metric to consider is the ratio of employment expenses to revenues as adjusted, which increased 190 basis points on a sequential quarter basis to 43.7%. Excluding the impact of the higher payroll taxes, the ratio would have been 40.6% or 120 basis point decrease from the prior quarter. The trend in other operating expenses demonstrates the leveragability of the business as these expenses continue to represent a relatively low percentage of revenues and adjusted. Other operating expenses of $10.5 million in the first quarter were up $1.5 million from the prior year quarter and in line with the fourth quarter of 2013. Quarterly expenses will vary based on the timing and extent of certain business activities. And the increase from the prior year was related to an increase in investment research costs related to several of our newer strategies, and increase in sales conferences and sponsorships related to Retail Distribution activities and higher professional fees related to various business activities. The ratio of operating expenses to revenue, as adjusted, was 13.1%, an improvement of 80 basis points over the prior year. The trend of this ratio reflects our ability to leverage our cost structure and expand profitability. In regard to our agreement with SS&C technologies, they will provide middle- and back-office services for approximately $20 billion of separately managed institutional and open-end, closed-end fund assets that are managed by our affiliates. Consistent with our approach to the disclosure, we will provide detail on this multiyear project to identify costs associated with the transition. Moving to Slide 14. You see that we ended the first quarter with a very strong cash and investments and working capital position. We ended the quarter with working capital of $271 million, up 12% from year end. The increase is attributable to continued strong operating results, partially offset by return of capital to shareholders. At March 31, 2014, our cash and liquid investments were $388 million, or $42 on a per share basis, an increase of $29 per share from $13 per share in the prior year quarter. Our seed capital investments, which included our portion of the net assets of consolidated sponsored investment products, totaled $124.1 million at the end of the first quarter, an increase of $72.3 million over the prior year, reflecting investments in new strategies. In the third quarter of last year, we deployed $40 million of additional seed into the Wealth Masters Fund to assist in gaining full distribution access at our major distribution partners. As a result of the fund's strong performance track record and increased distribution access, Wealth Masters now has more than $100 million of third-party assets, which has let us to begin the process of recycling the $40 million of seed capital out of the Wealth Masters Fund and into other strategies. And earlier this month, we launched the 3 new alternative funds and deployed a total of $130 million to seed those funds. The 3 funds have multiple distinctive strategies from a total of 11 different managers. So the seeding at this level allows the multiple managers in each fund to effectively execute their strategies and will facilitate distribution access at our major distribution partners. With the launch of 3 alternative funds, as well as other changes in our seed investments, we expect our seed capital program to be in the range of $200 million to $250 million at the end of the second quarter. During the quarter, we returned capital to shareholders of approximately $7.4 million through the net settlement of 42,000 restricted stock units, which represents an effective payout ratio of 21% of free cash flow. With that, let me turn the call back over to George.

Thank you, Mike. We're excited about our many opportunities, and I'm confident we have the right products, the right strategies and the right team in place to continue delivering long-term value to shareholders. With that, we'll take some questions. Lisa, can you open up the lines, please?

[Operator Instructions] And your first question is from the line of Michael Carrier, Bank of America Merrill Lynch.

First question. Just on the alternative side with Cliffwater, I think, given your history of launching new products, obviously, in a different strategy. But from a time gaining kind of traction and scale in those products, and then also maybe new distribution opportunities because you have that strategy in place. I just want to get some color on like the potential opportunity in the timing that we're looking at.

Sure. In generally, as we look at any new strategy to introduce specifically an open-end fund, our base assumption is that it may take up to 3 years to generate a long enough track record to be attractive. But what will alter that is how differentiated and interesting is the products, and what is the current level of demand related to that. So over the years, we've introduced a lot of funds right now. We have 49 open-end funds, some of which have taken a long time, thinking about the track record and sell, and some where we've had very early and quick success in terms of raising assets. So as I look at the alts, couple of things. We do think our approach is a very interesting approach, and that the partnership with the institutional consultants driven with their top-down approach and really sort of having of view of what is the right portfolio construction, given the certain market, and then their access to multiple underlying managers because of their work as an institutional consultant, we think that, that will be attractive. As I've said earlier today and in many other calls, we really see an incredible demand out there for these types of strategies. Most of the firms that we distribute through will recommend somewhere in the range of 15% to 20% allocation for the retail clients. But on average, we only have 3% to 6% of their clients’ assets in these funds. And while there are couple of very good offerings out in the market, there are certainly not enough compelling choices for investors. So with all those things together, we do think that these types of funds have generally a greater opportunity than a more traditional fund in a category that already has a lot of competition. We are not going to give any specific guidance in terms of our expectations, but we do think and the sense that we're getting, these people are very interested in looking at these funds. And we are working very closely with our distribution partners because we also think we have an opportunity to help them educate their clients on what these products do and more importantly, what they don't do. Because a lot of times, we think there's some misunderstandings of how people should think about alts, what's the difference between alts and liquid alts? And how they work in a portfolio? So a lot of our preparation has been working on educational materials, where you can tell the firms that we sell through, hopefully, do a good job with their clients and position in these types of products. And in terms of new distribution opportunities, the last piece of your question. We basically have selling agreements with everyone. So I don't think there will be a new "selling agreement" that will come out of having these products. But I do think the uniqueness and attractiveness of these products will may make some of the firms that we technically can sell through, maybe focus a little bit more because of these products.

Okay. And then on the emerging market side, you mentioned in terms of the one outflow, in terms of taking the allocation -- one platform taking the allocation to 0, I guess on the flip side because we have kind of been in an environment where emerging markets have been under some pressure for some time. So when you look at when allocations are, either at underperform or at 0, and you start to get that shift across platforms to a higher percent or an overweight, like how long does that typically take? Like that process, and how significant can kind of the bounce-back inflows will be?

It's a great question. And each of the firms are usually a little different in terms of the timing of when they make certain of these decisions. So over the last few quarters, we've had a couple of firms, where we sort of had these redemptions that were related to people going overweight generally to equal weight or to then going to underweight. This is the only one that we've discussed that actually went to a 0 weight. In all of those instances, our fund in our manager is still very attractive. So it was really the result of the view of the asset class. In some ways, you saw the flip side of this over the last 3 years ago and 2 years ago, when the firms went from underweight of EM to equal weight and overweight, is when you saw a lot of our high levels of flows. Those were -- while we didn't necessarily spike those out, that was really what was happening. The fund was performing very well. The -- and emerging markets and asset class was on the reverse side of being upticked. So we feel very good about our fund. It's a great fund of untowable long-term track record. It's very, very strong. People like the way they manage money. Again, it's a high quality orientation, which is a little different than other managers. So again we're very hopeful that some of these firms maybe, in the next few quarters, make different decisions about how they feel about the emerging market's sector. Our funds are still on those platforms and are still in some of those models that, yes, we lost access when they went to equal and underweight. Our hope would be that you will see the opposite. But again, we can't predict when the firms will make their choices to change their recommended allocations.

Our next question is from the line of Marc Irizarry of Goldman Sachs.

George, can you just share with us, on the liquid alternative side and your alternative offerings of funds you're raising, it looks like you've been seeing a favorable shift in your fee rate. How should we think about the fees on those products overall? And also, I guess, just the economics and the sort of margin associated with selling, it sounds like some of the alternative products -- should we expect sort of an investment, an uptick, and maybe some of the expense line items associated with sort of that rollout, if you will?

On the fee side, the liquid -- our new funds, as well as the other competitive funds in those categories, generally have higher fees than many of the traditional funds. The one thing though, I'll make sure it's clear, because these funds will employ underlying managers, there will be underlying fees. You can't look at the gross management fee and assume that that's going to directly correlate to how much we retain. So there'll be underlying managers that will be paid out of those numbers. But generally, these will be higher-fee products, and so in the range of the higher fees or higher than the more recent high-fee products that we've been selling quite a bit of. In terms of on the cost side, generally, I don't think you will see any meaningful change in our cost structure per se as a result of these funds. There will -- obviously, there'll be the normal variable expenses associated with these. But since they're sub-advised to actual alternative managers, hedge fund managers and other alternative managers, we won't have that operating costs associated. We'll have the oversight and the performance measurement and all that. But Mike, I don't think those...

Yes, on a net basis, as George is describing, I think that's absolutely right from our P&L perspective. Just from a line item basis, there will be some costs that flow through other operating expenses that go to Cliffwater and their role for oversight and for a license fee to them. And then we have the effect of having a minority interest in the majority-owned joint venture. But on a net P&L basis, it'll be consistent economics with our existing sub-advised approach to product.

Right. And we'll give more clarity once those numbers start, like showing up. We'll give that clarity that Mike is pointing to in terms where things are in the line items for those products.

Okay. And then, can you just share with us kind of a little bit, I guess, of the recent, maybe it's April, I think you might have commented a little bit on flow trends or maybe they're ebbing in some of the redemptions. But what about on the gross sales side and then some of the products like AlphaSector, are you starting to see an uptick on the gross sales side as well in April?

Well, we'll talk about the quarter in general. Because the quarter did have a trend in itself, where for us, February was the weakest quarter. And the 2 elements that we looked at is really what are the sales rates looking like and then what are the redemption rates looking like, because they're both sides and they'll show up in the net. So for us, we definitely saw the weakness going in February, and that did include the period where the 0 weighting recommendation at one of our distribution partners increased the redemptions. And then that got better in March. And then, as I indicated earlier in the call, April, so far, year-to-date, is pretty much close to the total net flow of the first quarter in its entirety. I think, generally, we've seen pretty good sales across the board. And some of the weakness that we saw were periods, what I would view as periods of uncertainty in the market, where maybe you saw upticks in redemptions, other than just the EM redemption. Mike, are there any other specific...

No, it's -- I think that's right. Redemptions have moderated more in line with some of our prior historical averages. And we're seeing it broadly across the domestic equity, the alternatives and certainly, the international category has -- have been positive for us in April. So a pretty balanced month thus far.

[Operator Instructions] Our next question is from the line of Steven Schwartz, Raymond James & Associates. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Just a couple of -- a couple have already been gone over that I had. Mike, what's the accounting on the investment, looking at the balance sheet, the investment in seed capital and net assets of consolidated sponsored investment products? I noticed that the amounts are basically the same, but the categories have shifted. Is there something there?

The amounts you're alluding to were from the table in our press release. Is that the one you're pointing to, the $64.7 million? Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Yes, $64.7 million and $29.2 million, which is $124 million. The 2 for the fourth quarter were $124 million as well, but the -- as you can see...

Yes, the seed capital investments, and we spike out our portion of the consolidated sponsored investment products in our table to eliminate the third-party assets under management. Because, as you know, on a GAAP basis, for those mutual fund products where we own greater than a 50% interest, we consolidate the entire funds results and then eliminate, through the minority interest, the portion of that fund, which we don't own that is representative of the third-party assets. So the seed capital that I alluded to of $124 million is the 2 elements, the $64.7 million and the $59.4 million in our table, which combines to the $124 million. And they're really the same type of investment. However, the $64.7 million we own less than 50% of the fund, so it shows up in a direct investment of the company, and the $59.4 million shows up in the consolidated sponsored line item, inclusive of third-party assets. And the amount that we show is just our portion. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: The increase from $25.2 million to $64.7 million, there is no real change economically. What you're telling me is, say, Wealth Masters, because so much new money has got into Wealth Masters from unaffiliated [indiscernible] that changes the computation [ph]?

Yes, that's exactly right, Steven. It was consolidated in the prior quarter. And as we gained third-party assets, that fund was deconsolidated this quarter, so you see the investment line increase and the consolidated sponsored line decrease. And we try to be very transparent about what goes into each of those categories in the appendix in the deck that we go through, where you can look through and see the detail of every investment that makes up those rows.

Yes. And just another thing to focus in on, I think looking at the total cash and investments is really helpful because there will be some movement between those lines as we consolidate and deconsolidate. And in the deck that went along with our presentation, we've sort of very carefully shown what the total is of that, because that really is a way to sort of look at the big picture of how much cash and investments, which again, are all liquid and could be utilized. That number is $388 million, which is really quite a sizable number. So you can see a lot of movement in some of the lines, but that might be just another metric for you to think about.

Yes, I think a good follow-up on that is, we talked about the seeding of the liquid alts occurring after the quarter. So when we think about -- we've talked about our balance sheet in terms of seed capital and working capital and return of capital. And our seed capital program is going to be in the range of between $200 million and $250 million, as we've talked about, after we've deployed the capital for these 3 alternatives. And then the pro forma working capital after we deploy that, exclusive of the seed, gets into a range between that 50% to 75% level of our annual spend, which is really what we've been targeting in that range of the industry average. So we feel like the balance sheet, in terms of having an appropriately sized seed capital program and moving our working capital to an appropriate range, has positioned our balance sheet very effectively moving forward. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. On the topic -- maybe I can figure this out from what you just said. But the moneys that are in the seed capital in -- the $40 million in Wealth Masters, will that be recycled into the $200 million to $250 million that will go to Cliffwater?

We -- not necessarily directly into those strategies. Our goal is not to hold investments in our seed capital once we have gotten to a certain level of third-party assets under management. And that fund has begun -- has over $100 million of third-party assets. And consistent with our approach to seed capital, we'll begin to, and we did begin in the first quarter, to withdraw that capital, recycling some of it, and then we'll continue to evaluate and launch additional products to the extent that we have that need, given our investment capabilities.

Yes, just to add to that and to clarify. So the total size of the program for all seeded strategies were sort of indicating we'll be in the $220 million to $250 million range. Cliffwater, just to be clear, was -- I think you used a different number. Cliffwater will be $130 million. So when you think about all of our seed, regardless of which funds that they will be in, we'll be about that total approximate number. And as money comes out of one, it will go into other opportunities. So -- but think of that as the total portion of the program, for lack of a better word, that we're setting aside. And just -- for all of these things that we've just been discussing, I think our relative size of our cash and our investments in our seed capital for a company our size, I would encourage you to look. I think it's quite large. And I'm not sure if we get the appropriate credit in terms of looking at our valuation, as people look at the amount of cash and investments that we currently have on the balance sheet. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. Just a couple more, if I may. An update on the deferred tax position, Mike?

We continue to report, certainly, our tax position, the effective tax rate from a GAAP perspective and utilize our deferred tax assets, including our uncertain tax positions. And we'll continue to record our uncertain tax positions throughout 2014. And as we go through those, the good news is the higher earnings levels have enabled us to utilize our tax attributes, and the outcome of that is in the next 12 to 18 months, we could become a federal cash taxpayer. So you'll see the uncertain tax position liability on the balance sheet, but we'll continue to disclose that as we use it. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. And then one more, if I may. George, I don't know how much you look at it, but the Emerging Markets Opportunities Fund, not good performance last year, phenomenal performance in the first quarter. Is this really all about India?

It really is -- there's 2 -- I mean, just to be clear, the Emerging Markets Funds, which is, I believe, in the 9th percentile with the 3-year number, it was on the 7th percentile for the quarter. And there were 2 quarters last year where it did underperform, given some of its weightings, given its strategy and its call on Japan and India. But now with the first quarter, those calls have ended up positioning quite well. So again, this is kind of a strategy where you could have what you did have, which was 2 quarters of performance that looked weak. But then, because of that positioning, they had the first quarter in about the 7th percentile. So the 3-year number, being in the half-decile, is very strong. So it's a great manager. They do a great job, they have a great long-term track record. The financial advisers who use the fund and the firms that we sell through think very highly of the strategy and the fund.

Our next question is from the line of Michael Kim of Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First, just to follow up on the mutual fund business, just looking at your flow trends more recently. And Mike, I think you touched on this earlier. But it does look like the breadth of flows seems to be broadening about -- broadening out a bit. So is it fair to say maybe that the sustainability or the consistency of your flow profile is evolving since you're maybe less dependent on 1 or 2 flagship funds?

I'll answer that. Yes, I mean, that is -- that's our basic approach and what we try to do with our product offerings. And we've seen other areas of flows that we don't even talk a lot about in our SMAs. Part of the increase was on an international ADR strategy, which has a great track record. So we are seeing -- so I think -- I would actually think about it a little differently. I think in the past, some of the concentrated success of 1 or 2 funds were so phenomenal that I think the diversity of the overall strength, we try to point out over the years that if you look at the organic growth of not just our top 2 or 3 funds, but our top 20 funds, they were always very, very strong. So I think when the tide comes out, you can actually see things. And I think when you're not seeing the individual strength of an EM, I think you're sort of seeing that underneath that, there's a few other strategies. So between our REITs and now with the Wealth Masters, the perennial -- my perennial favorite fund, which is the Multi-Sector Short-Term Bond Fund, there is a whole set of offerings. And again, it'll all be about what people are interested in at given points in the market cycles. And I think we've now added to that the whole alternatives. And then just one last thing I'll say, I always wanted people to understand, when we talk about the alternatives, and we think it's a great opportunity, but the important thing for us is not just to sell alternative products. It is, again, for us to have all the building blocks of a well-diversified portfolio, so that whether our financial adviser is looking for fixed income or equity or now, alts, we become more of the go-to player. We have done incredibly well without being one of those go-to players. So we think that this will help us become one of those more consistently used names for all of the different choices of investment classes. Again, we think we have a lot of multiple engines for growth. That's why we think we've had good flows. Last year, you saw that the EM and fixed income being very popular. Then after May 22, you saw a shift in that, and we were able to sell downside equity, as well as long/short. That is really our entire focus of our product, and our distribution strategy is to have us be able to navigate those differences. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay, that's helpful. And then in terms of margins, I think I ask a form of this question every quarter. But just wondering if you could possibly frame the potential upside from here, just given what seemed to be ongoing tailwinds around rising AUM and revenues, maybe slowing sales rates, as well as high incremental margins.

Yes. And I think you've asked the same question each quarter, and I think we give you the same answer every quarter. So we'll try and talk about the incremental margins and our capture ratio. We -- and we've historically been in the 50% to 60% range. We still think, given our fixed cost structure that that still is a good range to consider. And we've seen our margin this quarter, exclusive of the payroll tax item, really move to about 49%. So I think you're seeing us move the margin up right to the bottom of that range. I still think that's a good way to think about incremental revenues as we move forward. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Just -- maybe just to follow up on that answer and put a different spin on it. You mentioned you're getting -- starting to bump up right against the incremental margin range of 50% at the low end. Assuming you continue to -- or the margin continues to trend higher, at some point, would you maybe think about starting to ramp up some spending just to maybe make use of that excess, if you will?

This is George. We wouldn't think in those terms. Again, we have a very variable business model. And as we're giving the range, we sort of -- or we're cognizant of what the various components of those variable pieces would sort of lead to. And again, I don't think we haven't held back on the cost that we need to run the business the way we think we should in the past. So we wouldn't -- if you're saying, if the margin is starting getting frothy, we use that as an opportunity to sort of maybe invest in things that we wouldn't otherwise invest in, the answer to that is sort of no. I think we have a very thoughtful approach to as we grow our business, as with sales, we grew our sales at incredible levels with -- and then invested in the wholesalers as opposed to the other way around. So we will continue that philosophy.

Our next question is from the line of Surinder Thind of Jefferies.

So my question is actually kind of around the dynamics of near-term investment performance versus kind of the longer term. We're beginning to see, I think, perhaps you guys have had, in the past year, a little more volatility than you probably would have liked in your near-term performance. But your long-term performance has always been very strong. Now we're beginning to see that near-term performance improve. And so I'm trying to gauge how much of an impact that has when -- in your client conversations? I mean, when you guys are in that sales process, you're talking about it. When -- how much of an impact does it make? Or how much -- how often do they come up, I guess, in there?

It's a great question. It's a great question because obviously, there is a relationship between performance and sales and flows. I do sometimes think that there's a misunderstanding of how causal and how directly related they are, and then the timing associated with that. And also, for performance, increasingly -- and this is not just about our product set. There are a lot of products that don't really -- aren't thought about in terms of how they're doing against the benchmark. They're thought more about how they fit in the diversified portfolio. So sometimes, I can see -- I see people looking at headline performance numbers and they assume, okay, well, if this performance number went up, there will be more flows. When sometimes, the performance number is not the right way to look at it, and people aren't looking at short-term numbers. So a couple of things. We -- even though we've had incredible performance, we're very careful not to sell our performance. We sell managers, we sell what their strategies are and how they'll perform over the long term. So we don't highlight or pump good short-term performance. We really focus on the long-term numbers. So in most of our conversations, I'll use EM as a perfect example. There were 2 quarters last year where those absolute performance numbers looked very, very weak. But having spent 5 to 7 years, I can't even remember when we started with Vontobel, telling their story, telling their strategy and telling them about how Rajiv looks at the world. The people we do business with understood that. And I think were very, very understanding, where they wouldn't have been had they just screened the product and bought it when it was the MorningStar -- when it received an award as being one of the best funds. So I think the shorter-term numbers don't have as much impact if you sold it thoughtfully and you sold the manager versus the strategy. Though that being said, if a fund does have 2 quarters, people may take their foot off the pedal for a little bit. But at this point, I think all of those products -- I mean, we had a very good quarter in terms of the performance. And now, with the cycle changing in terms of high-quality versus low-quality, we feel really good about -- the first quarter full of Vontobel products was very, very strong. AlphaSector, people always look at, I think, the wrong way. You should really look at it -- well, I would recommend looking at it in terms of where it is in the percentiles of standard deviation and Sharpe ratio because that's what it's really being sold for, is how much volatility you're taking on the return. So that's the fund where sometimes I'll get a question people think it's underperforming, when actually, if you look at its percentile rankings, again, under standard deviation or Sharpe, you're going to see those doing incredibly well. But we also -- what I'll leave it with is, we also set expectations of when our strategies will underperform. And we think that has helped us not have some of the same levels of redemptions that you sometimes see in strong performing products that hit a rough patch. You can generally see a very big uptick in performance-related redemptions. Even with EM, I would argue, I don't believe we have seen any performance-related redemptions. They have primarily been asset class redemptions. And I think that's a testament to the manager, and I think that helps you understand how we sell the products. But again, having a strong first quarter in most of those products will certainly be a positive as we move through the rest of the year.

Okay, that's very helpful. And then on a follow-up question here. I mean, in general, you guys sell solutions. But are there periods where you go through, where you perhaps incentivize a certain product to be sold or something like, let's say, for example, your liquid alts have a great track record 6 months from now. Would you, at some point, maybe incentivize those funds to be sold? Or is there any kind of scheme like that within the sales?

Well, one of the benefits of having the diversity of products that we have is our wholesalers will always have -- have always had something in their bag that's attractive. So we -- and we don't like necessarily pushing any individual-specific products. Our preference is to be able to go into a financial advisor and try to find out whether they're looking for yield, for noncorrelation, are they looking for non-U.S. exposure, are they looking for principal protection and help them solve their -- the client need that they're currently focused in on. We think that's a better way to retain assets over time than selling our current hot 5-star fund. I think that is one of the reasons we have been successful in the retail channel. And I believe most of our distribution partners would say that, that is a differentiator for us. In terms of our compensation, we -- our compensation, it's a variable compensation. It relates to the profitability of the fund, the size of the fund. But we may have campaigns, which is a logical thing to do when you're introducing funds. But we don't, like, turn all of the pay on and off our funds or only pay for people to push certain funds, which I know other firms do. We do not do that. We want them to sell long term. We want them to have the flexibility to sell any of our products. So even if it's a product no one is thinking about, international small cap, they are highly incented to sell that product in case it comes up. I think that also helps with our diversity of sales because if you only -- if you hike the compensation on 1 or 2 funds, you're only going to sell 1 or 2 funds. But if you keep a very appropriate comp structure in place for 49 funds, you have a chance of selling more than 2 or 3 funds.

Okay. And then, hopefully, a really, really quick question. And I apologize if I missed this. But the -- for example, in the Wealth Masters Fund, you guys are beginning to withdraw the seed capital. What is the timeframe over which you would do that? Does that look like -- would you try and do that within a quarter or is it spread out a little bit more? Or you kind of -- is it done as you're getting ready to maybe seed other strategies and stuff?

It'll be -- I mean, for each of those funds, we would look at what the level of third-party assets are, and we would thoughtfully withdraw it. So we would do it in a way that made sense for the management of the fund, the asset levels in the fund. So we'd look at it. So I think, Mike, you started Wealth Masters in the third quarter.

In the first quarter.

Yes, I'm sorry, the first quarter. And...

Will continue...

And will continue thoughtfully. And one thing to sort of look at is as long as the fund's over $100 million, there's probably an opportunity for us to move that money. So that's a good benchmark for you to think about as you look at recycling of seed.

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

Okay. Just want to thank everyone for joining us, and we certainly encourage you to give us a call if you have any further questions. And thank you, and have a great day.

Thank you. That concludes today's conference call. You may now disconnect. Thank you for your participation.