Virtus Investment Partners, Inc. (VRTS) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Darren, and I will be your conference operator today. I'd 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 at www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. [Operator Instructions] I would now like to turn the conference to your host, Jeanne Hess. Please go ahead.

Thank you, 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 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 the statements. These statements may be identified by such words as expect, anticipate, believe, outlook, may and similar terms. For a discussion of these risks and uncertainties, please see the Risk Factors and Management Discussion and Analysis sections of our periodic reports that are filed with the SEC as well as other recent filings, which are available in the Investor Relations section of our website, 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. Today, we will begin with remarks from President and Chief Executive Officer, George Aylward, who will review our operating results and accomplishments 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 position. We will conclude by operating -- by opening the call to your questions. Now I would like to turn the call over to George Aylward. George?

Thank you, Jeanne, and good morning, everyone. We appreciate having you on our call with us today. Mike and I are pleased to have the opportunity to talk about our financial and operating results, which were strongest by the challenging market environment in the latter part of the quarter. Increasing concerns regarding the sustainability of global growth and the anticipated rise in interest rates resulted in heightened volatility and negative returns in most of the major market indices near the end of September, and that has continued in October. Despite this, we generated positive net flows across asset classes and achieved our highest levels of average assets, revenue, operating income and margin. These results illustrated cumulative benefit of asset growth and our leverageable and variable cost structure. Long-term assets under management excluding money market assets increased 11% to $59.5 billion over the prior year quarter. Regarding the money market funds, as we pointed out in the press release, they were liquidated in October. These funds were low-fee, noncore and an immaterial part of the business. We made the decision that the economics and requirements to offer money market funds were not compelling, so we exited that business. In terms of asset flows, we had positive flows for the quarter of $0.5 billion, with $0.7 billion in open-end mutual funds, which were balanced with positive flows across the major asset classes. International equities had higher positive net flows in the quarter, due to both an increase in sales and a lower level of redemptions for the Emerging Markets Opportunity Fund. Clients have benefited from the fund strategy of investing in high-quality companies that are expected to grow earnings faster than the market over the long term. The fund continues to deliver strong relative performance in all time periods. The continued positive net flows in fixed income strategies were primarily attributable to the Multi-Sector Short-Term Bond Fund, which had a 10% annualized organic growth rate in the quarter. This is a $9 billion fund that is managed by Newfleet and it continues to be attractive to investors due to its broad approach to investing in fixed income securities. This is a 5-star fund with strong performance, as demonstrated by its top decile relative returns for the 1-, 3-, 5-, 10- and 15-year periods. In addition to the Multi-Sector Short-Term Bond Fund, Newfleet had strong performance in its core and intermediate multi-sector strategies as well as sector-specific strategies such as high-yield senior floating rate and emerging markets. At September 30, 89% or more of Newfleet's assets were beating their benchmark and more the 97% were in the top half of their peer group on a return -- total return basis for all periods. Domestic equities were net flow positive for the quarter and unchanged on a sequential basis. Our largest domestic equity funds, our downside protection products, the Premium AlphaSector and AlphaSector Rotation funds, had $0.1 billion of positive net flows in the quarter and contributed to the organic growth rate in this asset class. The funds had positive flows in both July and August, and sales in September remained relatively unchanged from the prior month as we continue to generate sales at firms representing 97% of the assets for those strategies. However, on a net basis, we experienced modest outflows in September when we saw a few days of negative flows, particularly in the second and third weeks. And then we saw positive flows in the latter part of the month. Our long-term open-end mutual fund sales rate was 30% in the quarter. Redemption rate declined over prior periods and was 24% for the quarter, our lowest rate of mutual fund redemptions. As I alluded to earlier, October has been a challenging month for asset managers that has translated into industry outflows. To date, this month, we have experienced modest mutual fund net outflows, particularly in the earlier part of the month and when the market is especially volatile, which is sort of consistent with what we're seeing in the broader industry. On the institutional side of the business, we're pleased to have seen the funding of 2 mandates so far this month with no known material redemptions. Turning to our financial results. Investment management fees increased 18% over the prior year quarter due to higher average assets. This growth in revenue, combined with the leverageability of the business, resulted in our highest level of operating income as adjusted. The related margin was 51%, also our highest quarterly level. I would point out that we achieved this level in a quarter that was relatively clean from an operating perspective, especially when compared to last quarter. And this quarter's results allow for a good illustration of our expense structure and ratios. Net income increased 91% over the prior quarter to $37.3 million and included a $15.5 million net tax benefit, primarily related to the resolution of uncertain tax positions. Net income increased 77% from $21.1 million in the prior year quarter. Earnings per diluted share of $4.02 included $1.67 related to the net tax benefit as well as a negative $0.51 per share mark-to-market adjustment on the seed capital portfolio that reflected the impact of quarter end market levels. Excluding these 2 nonoperating items, normalized earnings per share were $2.86, an increase of 17% over the prior year quarter and 13% sequentially when making similar adjustments to normalize the prior periods. Let me discuss 2 other items: capital management and new products, before handing it over to Mike. We returned $18.2 million of capital to shareholders in the third quarter in the form of share repurchases and a cash dividend. It was our highest level in representing meaningful portion of the earnings for the quarter. As we've said before, an important element of our approach to capital management is our focus on maintaining an appropriate level of return of capital to shareholders. Regarding new products. On the last call, we discussed the status of retail distribution access for our multi-strategy, multi-manager alternative funds, and I want to provide an update on that as well as on other product initiatives. First the alternative funds. As a reminder, we launched our 3 liquid alternative open-end funds earlier this year, and the funds are available at a number of the independent broker-dealers. We have added dedicated resources who are working with our distribution partners to educate financial advisers on these products as well as how to effectively employ them in their clients' portfolios. We believe that liquid alternative strategies like these have a great opportunity in the market and will increasingly be utilized by financial advisers. We continue to expect that these funds will be available for access at many of the major distribution firms by the end of the year. We are in the early stages with our UCIT products for non-U.S. clients. Currently, we have 2 funds: a multi-sector short duration bond fund managed by Newfleet and a small-cap equity fund managed by Kayne Anderson Rudnick. We are in the process of making these funds available at our distribution partners. In terms of our product development efforts, we continue to expand our product offerings. The Virtus Strategic Income Fund is now available to investors. The fund, managed by Newfleet, leverages the successful investment process of the Multi-Sector Short-Term Bond Fund. The new fund seeks to capitalize on opportunities across undervalued sectors of the bond market by investing in up to 14 fixed income sectors and allows the managers to short securities or sectors that they believe are significantly overvalued. We also filed a registration for a new fund. The Virtus International Wealth Masters Fund. This international equity strategy, which is managed by Horizon, invests in companies that are controlled or influenced by wealthy individuals who have substantial amount of their personal wealth invested in the business. This is an illustration of extending the capabilities of an existing manager with an attractive domestic equity strategy into an international version. As you've seen over the past years, we are very active in terms of introducing new products. It is an important part of our strategy, and our new products and manager introductions have been significant contributors to our growth. We have a robust pipeline of new products, and we look forward to discussing new, interesting and differentiated product offerings in the future. In closing, we believe that these strong financial results, positive net flows and product introductions during a challenging environment affirm the strengths of the company and the benefits of our business model. With that, let me turn the call over to Mike to provide more detail on the financial results, and then we'll open up the call for questions. Mike?

Thank you, George. Good morning, everyone. Today, I'm going to review our quarterly results starting with assets under management, sales and flows. And then I'll review our financial results and discuss our balance sheet and capital position. Starting on Slide 7, assets under management. We ended the quarter with long-term assets of $59.5 billion, which represented an increase of 11% from the prior year and a 1% decline from the prior quarter. The $6.1 billion year-over-year increase is attributable to $4.6 billion of market appreciation and $1.5 billion of cumulative positive net flows. On a sequential basis, the decrease in assets reflects market depreciation of $1.1 billion, partially offset by net inflows of $0.5 billion. Market depreciation in the quarter represented a blended return of negative 1.7% on beginning of period assets under management in a quarter when most of the major equity market indices were down. For example, the MSCI Emerging Markets Index was down 3.5% and the Russell 2000 Index was down 7.4%. Our blended return compared favorably as a result of our balanced and diversified asset base that includes 27% in fixed income strategies. Closed-end fund assets ended the quarter at $7.6 billion, an increase of $1.2 billion or 19% over the prior year, primarily due to the Duff & Phelps Select Energy MLP, or DSE, closed-end fund that was launched in June. In the third quarter with the addition of leverage and the underwriters' exercise of the over-allotment option, we added $231 million in assets to bring DSE up to $700 million at September 30. As a reminder, assets added through leverage are not included in our flows. As mentioned in our press release, last week we liquidated our 3 money market funds, which represented a noncore component of our business. At September 30, 2014, the money market funds had $1.2 billion of assets that represented 2% of total assets. From an earnings perspective, the liquidation has no impact on run rate investment management fees due to a 0 basis point net fee rate for the quarter as a result of substantial fee waivers given the low interest rate environment. Turning to Slide 8, asset flows. Total flows were positive $0.5 billion, primarily as a result of net flows into long-term open-end mutual funds that were positive for the 22nd consecutive quarter. Total sales for the quarter were $3.5 billion, $3 billion of which were in open-end mutual funds. Sales of open-end mutual funds were in line with prior quarter sales of $3.1 billion and reflective of industry trends. Our sales continue to be very well balanced among the asset classes, with international equity representing 33% of total fund sales, fixed income representing 30% and domestic equity representing 27%. The diversity of sales was relatively consistent when compared to the sequential and prior year quarters. Open-end mutual fund net flows were $0.7 billion in the third quarter, which equates to an annualized organic growth rate of 6.5% and reflects contributions across most asset classes. To provide additional transparency into the flows, here are some general highlights by asset class: Specifically, International Equity Fund net flows were positive $0.5 billion, an increase of $0.3 billion from the second quarter. The increase in net flows was driven by higher sales in the Emerging Market Opportunities Fund. In addition, redemptions for the fund remained low and consistent with the second quarter and were down significantly from the prior year quarter. As we've mentioned on prior calls, the redemptions in our Emerging Markets Fund were elevated in 2013 due to re-weightings of Emerging Market Equities across several distribution platforms. Fixed income net flows were positive, primarily due to $0.2 billion of net inflows in our Multi-Sector Short-Term Bond Fund. Domestic equity net flows were a positive $0.1 billion and in line with the prior quarter. In this asset class, our Premium AlphaSector, AlphaSector Rotation, Mid-Cap Value and Wealth Masters Fund gathered net positive flows in the quarter. Alternative strategies net flows were negative $0.1 billion, primarily attributable to lower sales in our long/short offering. This is consistent with what we see in the industry data we look at, with the long/short category shifted to net outflows in the third quarter. As a reminder, we include detailed disclosure about mutual fund flows by asset class in the supplemental appendix to our earnings deck. Separately managed accounts had flat net flows this quarter compared with outflows of $0.2 billion in the prior quarter. The improvement in flows is attributable to higher inflows in our high net worth business at Kayne Anderson Rudnick as well as lower redemptions and option strategies. Institutional outflows were $127 million in the quarter, as positive inflows in our fixed-income strategies were offset by a partial redemption of a long-standing account that was earning a fee rate of 10 basis points. Slide 9 illustrates the record levels of operating income as adjusted and related margin that we achieved this quarter. In the third quarter, operating income as adjusted was $44.8 million, an increase of $9 million or 25% on a comparative basis to the prior year. The increase over the prior year primarily reflects revenue growth from market appreciation and the cumulative impact of net flows over the past 4 quarters, along with the benefit of a leverageable business and our variable expense structure. Operating income as adjusted increased $6 million or 16% on a sequential quarter basis. This increase reflects higher revenues as adjusted, which increased by $5.4 million related to 5% growth in average long-term assets, which includes a full quarter of revenue from the DSE closed-end fund and an extra day in the quarter. The operating margin as adjusted for the third quarter was 51%, an increase of 290 basis points from the third quarter of 2013 and an increase of 400 basis points from the sequential quarter. Our year-to-date capture ratio or incremental margin of 68% primarily reflects the variable structure of our incentive plans and our ability to leverage the operating infrastructure. While there are many factors that could influence the ratio at any given quarter, we continue to believe that 50% to 55% is the appropriate longer-term range. Concerning GAAP results. Net income attributable to common stockholders was $37.3 million or $4.02 per diluted common share and included 2 notable nonoperating items: A $15.5 million or $1.67 per share net tax benefit that consisted of the favorable resolution of uncertain tax positions. The uncertain tax position is related to a basis deduction from the dissolution of an inactive subsidiary. This was a discrete item, and we do not have any remaining uncertain tax positions or related liabilities. The other nonoperating item was a pretax $7.6 million or $0.51 per share negative impact from unrealized mark-to-market adjustments on our marketable securities, reflecting the market volatility in the quarter. The unrealized mark-to-market adjustments consist of $3.4 million related to alternatives, $2.4 million associated with international equity and $1.8 million related to fixed income. And to assist with modeling these adjustments, we added disclosure related to the marketable securities that we included in the appendix of our investor deck to provide the details of the unrealized mark-to-market adjustment by each investment for the quarter. Excluding these 2 items, normalized earnings per share were $2.86 in the third quarter. This is an increase of $0.32 or 13% from the second quarter result of $2.54 per share, which is also normalized to exclude $0.67 per share of closed-end fund launch costs and $0.23 per share of unrealized mark-to-market gains. Normalized earnings per share increased $0.41 per share or 17% over the prior quarter of $2.45 per share, which is also normalized to exclude $0.11 of unrealized mark-to-market gains on marketable securities. One item that I'd like to also point out was the change in our distribution and service fees. In the quarter, a major fund distributor converted all assets from the A share class to the I share class. As you know, the A share class has a 25 basis point 12b-1 fee and the I share class does not. This conversion has no earnings impact as the reduction in distribution and service fees is fully offset by a corresponding reduction in distribution and administration expenses. Notably, for modeling purposes, both distribution and service fees and distribution and administration expenses are variable and will fluctuate based on long-term open-end and variable insurance average assets. Finally, our effective tax rate for the quarter was negative 5.1%. Excluding the impact of the $15.5 million net tax benefit that I described earlier and the impact of the consolidated investment products, our effective rate was 38.3%. This rate is in line with our stated expectations. It's also worth noting that the $15.5 million net benefit has true economic value, since it has the effect of reducing our future cash tax obligations. Turning to investment management fees on Slide 10. Investment management fees increased to $79 million, up 18% from the third quarter of last year and 6% on a sequential quarter basis. The components of the change in investment management fees are average assets and fee rates. Average long-term assets under management of $60.4 billion, increased 15% from the prior year quarter and 5% from the sequential quarter due to positive net flows and market appreciation. While our ending assets declined on a sequential quarter basis due to market depreciation for the quarter, average assets increased as the market declines were primarily in September. Also contributing to the increase in average assets was the full quarter impact of the closed-end fund. The average fee rate was 50.6 basis points, an increase of 1.4 basis points from the prior year and a modest decrease of 0.1 basis points sequentially. The increase in the fee rate from the prior year primarily reflects an increase in assets in our higher-fee mutual funds. Over the past 4 quarters, 84% of our fund net flows have been into higher fee equity and alternative strategies. And an extra day in the quarter added $0.7 million of investment management fees on a sequential quarter basis. The closed-end fund fee rate for the quarter was 67.1 basis points, an increase of 3.5 basis points on a sequential quarter basis, primarily due to the full quarter impact of the DSE closed-end fund. And as mentioned earlier, $1.2 billion of money market fund assets were liquidated in October. Excluding the impact of those assets, our Q3 fee rate would be 51.7 basis points. Turning to employment expenses. Total employment expenses for the quarter were $35.2 million, an increase of $2.2 million from the prior year and generally flat compared to the second quarter. The increase over the prior year primarily reflects costs associated with personnel additions to support the growth of the business. Over the past year, our workforce has increased to support the growth we've experienced and to take advantage of future growth opportunities. We have added talents selectively throughout the organization with particular focus on further building out our distribution and product functions. Specifically, we have added portfolio managers and product specialists to support our efforts in the liquid alternative space, institutional sales personnel at Affiliated Managers, wealth advisers for the private client business and dedicated national sales resources for the UCITS products that we introduced last year. Employment expenses were consistent with the sequential quarter, primarily due to higher profit-based incentive compensation that was offset by lower sales-based compensation, primarily related to the second quarter closed-end fund launch. As a reminder, our compensation structure is variable, with approximately 60% of our employment expenses being variable based on earnings and sales. The key metric to consider is the ratio of employment expenses to revenues as adjusted. The ratio declined sequentially 280 basis points to 39.8% of revenues as adjusted. This ratio is in line with expectations we discussed on our prior call and reflects the growth in revenues as well as the variable structure of our incentive plans. We believe that selectively adding talent to our workforce will allow us to continue to capitalize on our multiple growth opportunities while maintaining a high level of profitability, which, again, affirms the strength and leverageability of the business. The trend in other operating expenses reflects the timing of product, distribution and operational initiatives. Other operating expenses of $11.3 million in the third quarter were up $2.8 million from the prior year and down $1.8 million on a sequential quarter basis. The increase over the prior year relates to the growth in the business, including higher retail distribution costs, primarily attributable to an increase in sales activities, such as regional and national meeting sponsorships. The $1.8 million decrease from the second quarter primarily reflects specific expenses related to new product introductions and annual board grants that did not recur in the current quarter. The ratio of other operating expenses to revenue as adjusted was 12.7% for the quarter. Regarding our transition to an outsourced middle- and back-office service provider, the current quarter expenses were $0.2 million compared to $0.5 million in the prior quarter. These costs will fluctuate from quarter-to-quarter based on the project plan. The $0.2 million, we expect to be at the lower end of the range in any given quarter. As a reminder, these costs are either transitional or duplicative to existing costs and will be a non-GAAP adjustment until the completion of the project, which we expect will occur over the next 2 years. Moving to Slide 13. We ended the quarter with a strong cash and investments and working capital position. At September 30, 2014, our cash and investments were $441 million or $49 on a per share basis, an increase of $3 per share from $46 per share that we reported in the sequential quarter. We ended the quarter with working capital of $174 million, a decrease of $12 million or 6% from the second quarter. The decrease is attributable to net seed capital activity of $20 million and $18 million of return of capital to shareholders. And those items were offset by strong operating cash flow. Our working capital to annual spend ratio ended the quarter at 55%. Our seed capital investments, which include our portion of the consolidated sponsored investment products, totaled $239 million at the end of the third quarter, an increase of $15 million or 7% compared to the second quarter. The change reflects the net activity of our seed program, primarily the seeding of the Strategic Income Fund in September, partially offset by $8 million of unrealized losses on mark-to-market adjustments. In terms of return of capital during the third quarter, we returned $18.2 million to shareholders, our highest level to date. The amount consisted of $14 million of share repurchases and $4.2 million of dividends paid. The third quarter also marked our highest level of repurchases in terms of shares with roughly 70,000 shares repurchased in the quarter. As a result of repurchases at this level, our share count declined by 47,000 shares or 0.5% from year-end as our repurchases over the past 3 quarters more than offset new shares issued. When we evaluate our level of return of capital, we view it as a percentage of our economic earnings. We generally define economic earnings as operating income as adjusted plus nonoperating income, excluding unrealized mark-to-market adjustment. That amount has been tax effected at our expected effective tax rate. We believe that presenting earnings on an economic basis enhances disclosure, provides the most transparency into our ongoing operating results and aids in comparability. We expect to provide more clarity around our use of economic earnings in future press releases. And on a year-to-date basis, which also includes the declaration of our third quarter $0.45 per share dividend, we have returned $43.7 million to shareholders through share repurchases, including net settlement of vested RSUs and dividends, which represents 55% of economic earnings. The range of capital will vary in any given quarter. However, the year-to-date level of 55% is generally in line with the range we've discussed in the past. The primary goal of our capital management strategy is to balance investments in the business with returning a meaningful level of capital to shareholders. We believe the growth and the level of capital return this quarter and the growth on a year-to-date basis demonstrate that commitment and reflects our positive outlook on the business. With that, let me turn the call back over to George.

Thanks, Mike. So that concludes our prepared remarks. Now let's take some questions. Darren, can you please open up the lines?

[Operator Instructions] Question is from the line of Michael Carrier from the Bank of America.

First question. Just on the flow outlook and some of the trends that you've been seeing. I just want to focus on the AlphaSector products. And just given some of the issues that have been out there with the subadvisor, just wanted to get an update on how you guys had been working with your distributors with the platforms and how that's been going; and probably more importantly, at this point, any of the questions or the concerns that clients are having versus understanding what the product is, what they're in it for; and as long as the performance is there, you still have demand and interest for it.

Sure. There's a couple of things there. So just in terms of sort of flows and what we're sort of seeing there, right now, as I sit here, in October -- I think everyone would join me in saying October has been a really challenging month in terms of what we're seeing in the equity markets, and how investors have reacted. So right now in terms of what we're seeing in October, it is really about what are the equity markets doing; what is volatility doing; and how are individual investors reacting to that; and just as importantly, how our financial advisers thinking about repositioning their portfolio? So a lot of what we see, at least as we sit here right now, in October, that really is the big thing. As it relates to some of the AlphaSector strategies, there's really not a lot I have to obviously add in terms -- as it relates to the subadvisor for that fund. It's all been in the media related to that. But as you look at those strategies, again, they're domestic equity strategies, so they will be looked at in terms of being domestic equity strategies. And I think as you sort of allude to, these are risk-managed products. And the financial advisers who have utilized them and have utilized them in their clients' portfolios utilize them as generally a risk-managed portion of the portfolio. And we'd like to think -- and the way that these should be looked at is in terms of risk-adjusted statistics, so in terms of standard deviation, Sharpe ratio or max drawdown. And if you look at the biggest -- the largest fund, which is the Premium AlphaSector in terms of, again, standard deviation, Sharpe ratio and max drawdown, since those funds were launched, they're in literally the top decile of all 3 of those metrics and fit really well into a portfolio that you're looking at from a risk-managed perspective. As it relates to the other aspects of what's been going on there, obviously, all the firms are very well aware of what's going on, as are all of the financial advisers. Again, this is something that has again been out in reported media in October last year, May of this year and then obviously again in August. Again, the product is doing what it should be doing. The performance is -- would be in line with our expectations of what a risk management strategy would do, particularly in what has been up until now a prolonged bull market. But again, the bigger backdrop that we're sort of seeing right now in terms of flows is what's going on with the equity markets and how are investors going to react to that.

Okay, that's helpful. And then just as a follow-up, on the liquid alt products to -- I guess, I just wanted to try to understand. Once the products are on most of the platforms, and let's just say it's by year-end, then from your guys' perspective in terms of what you can do from a marketing, from an educational standpoint, when will we expect that process to be ramping up? And then obviously we'll try to gauge the organic growth and the flow outlook. But just want to get a sense on the timing of that?

Yes. No, great question. And again, just in terms of our liquid alternative funds. So we launched them, I think it was late April, and there's always, say, a 6 months to 12-month period to sort of get them through the vetting that is done at the distributors in terms of allowing new products. And obviously, the more complex a product is, the longer it takes. And these are multi-strategy, multi-manager funds. So they are available, as I indicated, at some of the independents, and we still continue to expect that they'll be available at some of the larger distributors by the end of the year. So that's just sort of timing for that. The way I would look at the opportunity, and I think what we said and I believe pretty much anyone who's doing these types of strategies has been indicating, is that the demand has a very high potential. Because I think everyone believes that retail investors should move beyond some of the traditional asset classes and have strategies that have a different type of correlation in different types of markets. And I think, as you know, we sort of have 3 offerings: one, which is a total solution in terms of just a core non-correlated type of nontraditional fund; and then we have an inflation product; and an income product. So again, we think that demand is there. I think this actually dovetails back to what's going on in the markets. Because again, some of those products and how they're expected to perform will have different levels of interest depending upon how volatile the markets are and how investors are thinking. So -- but it is something you need to educate people on because these are products that may not behave in the way that people are used to seeing traditional equities or even fixed income behave. I mean, that's literally part of their appeal. So on the fixed income side, some of these strategies are meant to give you income coming from nontraditional credit sources. So there is a lot of education. I think the good news is, is that the firms all see this as an important thing for their -- distribution firms see these as important to their clients. They're trying to educate them. And then as we and a few other firms have been introducing these types of products, I think everyone is uniformly saying, "Let's first educate the financial advisers on how to really use these in your clients' portfolios because the goal of all of us is to set the right expectations for how these funds would look in different market environments and have them fit in." So we still feel that this is, long-term, going to be a big part of the retail, traditional asset allocation. We think the offerings that we have with the multi-strategies and the multi-managers and using Cliffwater to do much of the identification and the allocations are very compelling offerings that once -- the placement is there, and financial advisers that are uncomfortable on how to use it have a great opportunity.

Yours question is from the line of Michael Kim from Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First, just to follow up on F-Squared, any updates on the SEC investigation? And then from your perspective, do you have any sort of time line as it relates to your relationship with F-Squared? So any thoughts on sort of potential AUM at risk or the costs involved if you were to make a change to maybe some of the sub-advisory agreements?

Yes. And I really have nothing to add again. You've seen what's been in the media related to that. So I have no updates or anything to provide. And to be honest, I'm not going get into hypotheticals in terms of assets or all that. The funds are continuing to do what they're intended to do, and that is really what we consider very important in terms of the financial advisers understanding how to use those products in their portfolio. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay, fair enough. And then not to beat a dead horse, but just in terms of the outflows from some of the AlphaSector funds in September and October, was that more a function of slowing sales or rising redemptions? Or maybe a combination of both? And then looking ahead beyond the AlphaSector products, which strategies might be in a position to pick up some of the slack, if you will, even should the broader market volatility persist?

Well, just in terms of flows and what I had alluded to in my prepared comments, is what we saw in September, the sales for the 2 big domestic products were actually unchanged, essentially. I think there was a 1% difference between sales in August versus September. But absolutely, we did see days of negative -- of redemptions that were greater than inflows throughout that period that resulted in the modest outflows. So we saw that particularly in the second and third weeks of September for that. October, I would actually look at very differently. I mean, October -- and I'm assuming all of our peers are sort of seeing the same thing. With some of those incredibly volatile days and particularly those real negative days, we were basically seeing, across the board, equities just having a bad day. And then the next day when the equity markets roared back, you had a really good day in all products. So we're seeing some days of positive and negatives in all of our equity products. It's not specific or related to the AlphaSector products. In terms of what opportunities are, the point of the -- of having risk-managed strategies like these is that they do have a place in a portfolio. They actually -- in an up, up, up market, you're generally going to have a different experience. So these could be based upon their -- the way they perform could be very attractive as things get more volatile. But obviously, there's a lot of other circumstances that will sort of impact that. So I'm not going to give any hypotheticals on where I think we have the potential in terms of gathering flows on that. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay. And any sort of -- aside from AlphaSector Fund, any strategies that you think might be better positioned in this type of environment?

Again, to the earlier question on alts, I think alts have a great opportunity. And fixed income, I made a couple of references to Newfleet. And I think you've heard me say before, I truly believe that Newfleet is one of the most differentiated fixed-income managers in what they do in terms of playing in the 14 sectors of fixed income, I believe is very differentiated. And the flagship product, the Multi-sector Short-Term Bond Fund, I pointed out the stats, I mean, for over -- and actually, I think it goes back over 20 years or 20 years that fund has done incredibly well at all types of interest rate environments. So we think it's just a really great and it's a compelling story. And it's a complement to some of the other mega funds, for lack of a better word. And I think there's a great opportunity for a strategy like that not only in the environment, but as there are opportunities for people that are sort of rethinking what some of their fixed-income allocations are. And as we also noted, we now extended that product line. Again, we have the Multi-Sector Short. We have an intermediate. But there's the sector-specific funds of senior floating rate, EM and high yield. And even though I've referred to the original fund as the original "unconstrained" bond fund, the new offering, the Strategic Income Fund, actually is a very similar fund, except that it goes further in terms of taking advantage of their ability to pick the right sectors by allowing them to go short. So I've always said that some of those funds and strategies are personally my favorite. And I do think that there's opportunities, particularly when there's some volatility in [indiscernible] markets. And when you're dealing with the shorter-duration fund and you have a different risk in terms of interest rates, I think those are good opportunities. And then obviously, Vontobel and the emerging market. And again, as you know, our offerings are actually overweight products that are either high-quality oriented or downside protection. So in certain volatile periods, some of our managers in Vontobel generally has a high-quality orientation, which in certain kinds of markets will sort of be countercyclical to how some other managers manage. So I think we have opportunities there. Our global REIT. There's a whole bunch of things. And that's why we're pleased. In the quarter, you see we have strong offerings in fixed income, domestic equity and international equity. And hopefully with increased availability, we'll have them on the alt side, too.

Your next question is from the line of Tom Whitehead from Morgan Stanley.

Just wanted to focus on the margin for a second. You said -- I believe you said 3Q is a good illustration of the expense structure and the type of ratios we can expect. Could you maybe, I guess, give us a little more detail on that? Maybe highlight where you think you'll be able to get some of the operating leverage in the business to get up to that high end of that 50% to 55% range. And then within that, if you could help us frame employment expenses into 2015. What sort of growth we should expect maybe kind of a fixed versus variable split out there?

Yes. No, so what we were alluding to is in looking in this quarter, we're not pointing out a lot of, in the operating lines, any unusual things. And remember last quarter, we had a bunch of noise related to new product introductions and the timing of annual equity grants. So actually, the reference is there's not a lot of unusual things in the line items or expense ratios in the operating and the numbers that Mike always highlights are really the employment expense compared to revenue as adjusted and the same thing for other operating expenses. So the ratios we're talking about are you have a pretty good employment ratio and other operating expense ratio that we don't have to point out anything for you to sort of adjust. So we think that those numbers are good. Obviously, resulting in the overall non-GAAP margin of 51%, which we believe is a really strong margin. The 50% to 55% that you're alluding to is over past calls we've sort of -- Mike has given some thoughts on what is the capture ratio or how much incremental margin are we pulling from growth in revenue, and we've sort of guided to that kind of level. So now we're at the 51%. But again, a lot of that -- and that will be very heavily influenced by what's going on in the equity markets, right? Because with any kind of market dislocation, that could be impacted. And obviously, any kind of onetime expense thing could impact that. But as we continue to capture -- have a capture ratio above that 51% to 55%, it could gravitate up. Mike, do you want to go...

Yes. I think -- It's Mike. I think George articulated it well. We've talked about a range in the 50% to 55% range over the last several years, and we're particularly pleased because this is the first quarter where we've achieved an overall margin within that range. So we think we've achieved a strong level of operating leverage and scale. And I think when you look at the metrics of the employment expenses as revenue as adjusted, they're at a sound level, both that margin and ratio as well as other operating expenses. And as we look forward to the growth of the business or the change in the business looking forward, to your point, in 2015, it's important to know we highlighted that about 60% of our employment expenses are variable in nature. So at the level we're at, we would expect those ratios to sort of stay in a tight band as we're variable and able to grow the company very efficiently. So again, we're pleased with the result this quarter and I think we're well positioned going forward.

Great, that's helpful. And just one follow-up. You laid out kind of your capital return metrics going forward, the 55% there. But if you could maybe, I guess, give us some color on what to expect for the dividend there, when it could step up and the sort of magnitude it could step up. And then also with -- given where the share price is, on buybacks, are you guys going to be opportunistic? Or is it a little more programmatic?

Yes. Well, a couple of things I'd say. So you sort of start with -- what we were referring to is when we look at -- as we generate new capital, so when we see incremental earnings that generate some additional capital, we sort of are targeting a range of how much of that should be used to protect the business in terms of beefing up working capital and how much should be returned. And Mike gave you an indication that it's in the range of 50% to 55% in the return of capital bucket, right? So we already have a strong balance sheet. We're generating additional capital. We're earmarking a portion of that to return because we do fundamentally think that, that is one important thing that we need to do for shareholders. And there -- and there's 2 levers to that, right? There's the dividend and the share repurchases, both of which you're asking about. So for the dividend, as you know, that was recent for us. So we instituted our first dividend shortly. But if you take a step back and sort of say, we're earmarking a certain percentage of the economic earnings we generate and, obviously, if we stick with that ratio and as the numbers go up, we'll adjust accordingly. So that generation -- we sort of think as the company grows and changes can allow for that. In terms of share repurchases, it's really the same factor. So you're dealing with the same set of earnings that we're generating and how much we're targeting. And we do look at that -- and this quarter was our highest quarter of stock repurchases in both dollars and shares. And we already said that, that level -- and the dividend was sort of in line with that 50% to 55% economic return. So actually, that's why you actually saw -- you saw a decrease in our share count because that level -- at that level, it's greater than we're issuing in terms of equity in our compensation plans. We still do fundamentally believe that generally offsetting the equity in our comp plans to offset dilution is important, but we are focused on returning a reasonable range of that incremental capital we're generating in the range that we spoke about on an ongoing basis. Mike, do you want to elaborate?

And Tom, it's Mike. It's important when we think of return of capital, really, that's the evolution of our balance sheet since we've become independent. And our capital raise last year really solidified the balance sheet. And we believe moving our return of capital levels to close to or at industry average is an important step for the company. We've historically been below industry averages in terms of our return of capital as we built up the balance sheet and ensure that the company had the appropriate levels of operating flexibility. So we -- when we look at that 50% to 55% level, we're going to continue to evaluate our return level. And where we are today, I think that's the appropriate level. And the earnings growth is going to certainly drive the level of increase in terms of the form of return, as George alluded to. But again, we think the balance sheet is well positioned and returning capital is one of the important elements of our cash, and we expect to continue to focus on that.

The last question is from the line of Steven Schwartz from Raymond James & Associates. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Just I'm getting a little bit confused here on this return of capital thing. We're talking about 50% to 55% of economic income, as you defined earlier. And at the same time, we're talking about keeping working capital to annual spend at 55%, is that correct?

Yes. Steve, it's Mike. And they are kind of 2 -- 2 somewhat separate analyses and the 50% of 55% of the return will be in a given period, so we look at it either in a given quarter, where the ratio could fluctuate. But over an extended period of time, like a year, we'll look at the cash that we generate and target 50% to 55% of those earnings to be returned, with the remaining element to be either reinvested in the business or to evaluate the working capital to spend level, which is the other sort of ratio that we pointed out, which is at 55%. And that's -- that level is really a cumulative impact and a different measurement, where it's really like a point in time analysis rather than an earnings over a given period. So they're somewhat distinct but different elements of what we do with our cash generation in any given period of time. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. And then a couple of line item questions, if I could. You discussed share-based comp. I probably would have expected it to come down more since the Board of Directors gets their comp in the second quarter. It really didn't. I mean, it came down a little bit. And then I'm also interested in the expense levels for the consolidated sponsored investment products.

Yes. And the stock-based compensation year-over-year was down a bit. And the primary element in our share based, which we break out on our non-GAAP schedules, are -- we do have a component of our employment expense and our incentive compensation in share-based compensation. So that will fluctuate based on the profitability that the company experiences in any given time. So you'll have a certain level of flexibility in that for a given period of time. With respect to the CSIP expenses, again, we consolidate the CSIPs in this period. You have a full quarter impact of the alternative funds that were launched middle to late in the second quarter, so you have the natural increase of those items. And we think this reflects a good -- somewhat of a run rate, but that level will change based on the third-party assets that are gathered in those funds. And we continue to try and provide additional transparency to investors in our disclosures. There's an appendix page that reflects the company's investment in those CSIPs. So some of the expenses are -- the total fund expenses, we'll continue to try and provide transparency because it's kind of piercing through to what's -- the company's component or element of that CSIP investment that we think is important. But the short answer to your question is this quarter, the third quarter, represented a full quarter's impact on the alt funds, which are as you recall a significant component of the seed program. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Yes, that makes sense. And then George, just one for you, something I've been wondering and thinking about. The emerging -- what kind of discussion do you have with Vontobel and Rajiv Jain, with regards, I guess, to closing the fund? I mean, it is -- it got to $8.9 billion at the end of August. It's at $8.5 billion now. I think the soft close that happened in March of 2013, was it $9 billion? Are there any discussions there?

Yes. And as it relates to capacity, the real numbers -- the primary number is what is the total amount in the strategy managed by Rajiv and his team, right? Because what will drive capacity is what is the calculation from the investable universe employing their strategy and how much can they manage without having any degradation in their investment strategy, which is key to both Vontobel as well as to us. So earlier when you saw the soft close, it was at that point that, in total, the amounts being managed in that strategy were at a level that both we and Vontobel agreed was one where we wanted to start limiting that. So -- but that was before there were a lot of changes in that asset class and sort of what was going on, so we then had a reopening of the soft close. And in a lot of ways, because it's an open-end fund, there's normal redemptions, it allows you for replenishment. But we continue to have conversations with Vontobel. Our product people and the team at Vontobel are in continuous dialogue, making sure we understand what their total assets are. But right now, there is still room and opportunity to, again, continue to attract assets in that fund.

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

Great. Thank you. And I just want to thank everyone for joining us today. And I know we didn't have time to get to all the questions, and we certainly encourage you to give us a call if you have any other additional questions, and have a great day. Thank you.