Good morning. My name is Michelle and I will 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 on the Investor Relations section of the Virtus website, www.virtus.com. The call is being recorded and will be available for replay on the Virtus website. [Operator Instructions] I would now turn the conference to your host, Sean Rourke.

Thank you and good morning, everyone. On behalf of Virtus Investment Partners, I’d like to welcome you to the discussion of our operating and financial results for the third quarter of 2022. Our speakers today are George Aylward, President and CEO and Mike Angerthal, Chief Financial Officer. Following the prepared remarks, we will have a Q&A period. Before we begin, please note the disclosures on Page 2 of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and as such, are subject to known and unknown risks and uncertainties, including but not limited to, those factors set forth in today’s news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today’s news release and financial supplement, which are available on our website. Now, I’d like to turn the call over to George. George?

Thank you, Sean. Good morning everyone. I will start with an overview of the results we reported earlier today, before turning it over to Mike to provide some more detail, and then I’ll provide some additional background on our announcement last week of the AlphaSimplex agreement. The equity and credit markets remained exceptionally challenging in the third quarter. Concerns over rising interest rates, inflation, geopolitical tension and heightened volatility have negatively affected investor sentiment across products and asset classes. Our third quarter results reflected this difficult environment, with year-to-date market declines meaningfully impacting assets under management and operating earnings. For the quarter, we had net outflows, primarily due to mutual funds, though we did have a significant improvement on a sequential basis. While retail separate accounts and institutional also had modest net outflows, we did have positive net flows in closed-end funds, private client and ETFs. Though the environment remains challenging in the fourth quarter, we believe these types of markets highlight the importance of active management. We are pleased with how our managers are navigating these markets, and we believe we are well positioned to provide clients compelling solutions now and as investor sentiment improves. Turning now to a review of the results, total assets under management decreased 7% to $145 billion, primarily due to negative market performance in addition to the net outflows. Sales of $5.7 billion declined from $7.9 billion in the second quarter due primarily to two large institutional client fundings in the prior quarter, as well as a generally unfavorable retail investor sentiment. In certain asset classes, however, including international equity, fixed income and multi-asset, we had increased sales in the quarter. Net outflows were $3.3 billion, a meaningful improvement from $4.8 billion in the prior quarter. Net outflows were driven primarily by mutual funds,…

Thank you, George and good morning everyone. Starting with our results on Slide 7, assets under management. At September 30, assets under management were $145 billion, down 7% from $155.4 billion at June 30. The sequential change reflected $6.6 billion of market depreciation and $3.3 billion of net outflows. Average assets under management in the quarter were $157.1 billion, down 8% largely due to market performance. Our assets under management remained well diversified by product type and asset class. U.S. retail funds represented 34% of total AUM at September 30, with institutional and retail separate accounts at 32% and 23%, respectively. By asset class, fixed income and multi-asset now represent nearly 40% of total and alternatives were 7% of AUM. We continue to generate strong relative investment performance across strategies. At September 30, approximately 67% of rated fund assets had 4 or 5 stars, and 91% were in 3, 4 or 5 star funds. We had 9 funds with AUM of $1 billion or more that were rated 4 or 5 stars, representing a diverse set of strategies from 5 different managers. In addition to strong fund performance, as of September 30, 86% of retail separate account assets and 63% of institutional assets were outperforming their benchmarks over 5 years. Also, 75% of institutional assets were exceeding the median performance of their peer groups on the same 5-year basis. Turning to Slide 8, asset flows. Total sales of $5.7 billion compared with $7.9 billion in the prior quarter, reflecting $1.8 billion from 2 significant institutional mandates in the prior quarter and continued negative investor sentiment. By product, fund sales of $2.9 billion compared with $3.1 billion, down 8% as lower, small and large cap domestic equity and alternative sales were partially offset by modestly higher fixed income and international equity…

Thank you, Mike. Before we take your questions, I would like to comment on our announcement last week regarding our agreement to acquire AlphaSimplex, a leading manager of liquid alternative investment solutions with $10.9 billion in assets under management at September 30. AlphaSimplex specializes in systematic investment strategies that are designed to adapt to changing market dynamics, primarily using liquid futures and forward contracts. They offer a flagship trend following managed future strategy, a multi-star hedge fund replication strategy and risk-efficient alternative solutions that seek to provide diversification to traditional portfolios. AlphaSimplex’s managed future strategy, that seeks to generate positive absolute returns over a full market cycle with low correlation to traditional stock and bond markets during periods of dislocation, is offered in multiple investment vehicles, including a U.S. mutual fund, UCITS fund, private funds and separate accounts. The firm’s 5-star $3.5 billion AlphaSimplex Managed Future Strategy Fund is the third largest U.S. fund in this category, has a strong 1-year investment return and positive flows through September 30 and is in the top decile of the peer group for each of the 3, 5 and 10-year periods. We are very excited to add AlphaSimplex to our family of affiliated managers, each of which specialize in individual strategies or asset classes. This transaction, like our previous ones, is part of our overall strategy of expanding our offerings of distinctive capabilities provided by dedicated and specialist boutique managers that collectively will provide building blocks for a well-diversified portfolio as well as more comprehensive investment solutions for clients. AlphaSimplex will significantly enhance and diversify our investment offerings by adding an attractive liquid alternative capability from a market leader with a 15-year track record that has delivered strong, uncorrelated returns over market cycles. The addition will further diversify our asset base, both by…

[Operator Instructions] Our first question comes from Sumeet Mody with Piper Sandler. Your line is now open.

Hey, thanks. Good morning, guys. Just a couple here to start on AlphaSimplex. Just on the – maybe it’s for Mike here. But on the fee rates for both the retail and institutional pieces, are those going to be in that sort of $130 million to $140 million range for revenue modeling purposes? And can you talk about the expected impacts of maybe comp or non-comp expenses as well? Just some color around those financial impacts would be really helpful.

Sumeet, what we will do – we gave the accretion on an overall basis on this call. We will go through the impact on each of the rows, the fee rate, the employment and the other operating in more detail when we get on the call at the next quarter. We just signed a transaction. We have a good sense of the accretion, as George outlined. So we will go into those line items in more detail going forward. But we’re pleased with the meaningful accretion that was outlined on the call.

Right. And even without AlphaSimplex, our employment expense ratio and fee rate will vary a lot depending upon what the market environment is. So we will also be able to then update it for whatever the market environment is impacting our ratios as well as the impact of bringing them into the family.

Okay, great. And then I guess on capital allocation, just the impact there. I mean just trying to think through the near-term impacts, kind of given not just the transaction market environment. So on the buyback side, is it safe to assume maybe the focus on the purchases continue kind of given this price action or will you try to accumulate a little capital ahead of the deal closing? And then on the dividend side not surprised to see the increase, maybe not being as large as prior hikes given the backdrop, but can you remind us how you maybe think about the – managing that level over the next couple of years? Is it more kind of yield focused or as a percentage of cash flow?

Yes. No, it’s a great question. And I think you sort of kind of highlighted an important element, which is the environment, right? So one of the number one functions of our capital on our balance sheet is to protect the business, and particularly in volatile and challenging times, right? And it kind of – it’s been an interesting year as we sort of say that. So we filter that as we make our various decisions around how to manage the capital. Again, we’ve done it in a way that we have flexibility, and we continue to balance the different alternatives and things we need to do. And as you can kind of see through what we’ve reported, we did continue to do buybacks, albeit at a lower level. We chose not to pay down debt, again, and that’s really given the backdrop of however the environment is unfolding, as well as other high uses of capital from our perspective, which include organic and inorganic growth. And obviously, now we have the announcement on AlphaSimplex. But going forward – I’m sorry. Kind of like going forward, again, I think what we’ve always said will continue to be the case, which is we want to maintain with our free cash flow generation, a balance between those three areas. And then depending upon the environment, we would then prioritize – slightly prioritize one or the other. But again, I think as we’ve demonstrated, we’ve continuously returned capital either through repurchases or through five consecutive increases in our dividend. And then when we strategically find a good use of capital via an M&A transaction, we will choose to do. Some we choose not to do. Obviously, we have just announced one. So we will continue to balance all of that.

Great. Thank you. And then just one last one from me. On distribution, just at a high level, I just wanted to maybe get an update where you guys are in terms of expanding outside of the U.S. I know AlphaSimplex helps in that regard. But the ultimate goal there over the long-term, could you talk about that and what you expect that to come either through organic growth or more likely through acquisition? Talk about that, that would be helpful.

Yes. I will speak to distribution broadly and obviously, throw in retail there. I think on the retail side, we continue to see great opportunities expanding our offerings on the retail separate account side. Obviously, we have a very broad range of mutual funds which we continue to focus in on. But we continue to see opportunities in retail separate accounts, particularly strategies from some of the newer capabilities that we have either recently added or in the process of developing. So, that continues to be an area of focus, including certain sub-channels within retail. So, we see great opportunities to continue on the retail side. Institutional, we think those are actually larger opportunities just because of – from our history, there are certain areas of the institutional market that some of our affiliates have not been able to fully penetrate. So, as you have seen over the last quarters, except for the third quarter, we have had successful mandates particularly outside the U.S. for multiple of our managers and multiple strategies. That is an area that we continue to see great growth opportunities. Those growth opportunities will, in part, come from some of the additional resource expansion that we had as a result of the Stone Harbor transaction, where individuals with a great experience and contacts in that market are now making our other capabilities available. So, we continue on that portion of our business and continue to look at areas to grow not only the offerings in terms of institutional separate accounts, but even in offshore fund vehicles for multiple of our managers. So, generally, as you sort of see the kinds of products we are going to be introducing, you will be seeing more of them on the offshore fund side, on the retail separate account side and ETF side, and probably on the open-end side. And that’s all really just marrying our product development strategy with where we see the greatest distribution growth opportunities.

Great. Thanks guys.

Thank you.

Please standby for the next question. The next question comes from Michael Cyprys with Morgan Stanley. Your line is now open.

Great. Thank you. Good morning guys. Maybe just starting off with AlphaSimplex, strong track record clearly that they have there. Just a question around, in this market environment that’s particularly favorable perhaps for their strategy, how do you get comfortable that you are not buying this strategy, this business at the peak in terms of performance in AUM? How do you sort of de-risk that in your view? And then can you talk about, from a distribution standpoint, what sort of actions and steps you guys can take to accelerate the growth of AlphaSimplex top decile strategy? And any capacity constraints to be aware of?

Sure. On the first part of the question, I mean for any transaction, and we have done quite a few over the last few decades, you kind of really ignore the current environment in terms of either being negative or positive, right. And obviously, if we are announcing it now, you should assume we have been in conversations for an extended period of time. And throughout that entire time, they have continued to have positive flows, as I noted in the earlier comments. So, really, we look at that really as part of the strategy, which we have actually even discussed on previous calls, which is we truly and fundamentally believe that there needs to be a much more significant component in the diversified portfolio of non-correlated strategies. So, we have been looking at those, looking for those that have demonstrated performance, particularly over market cycles. So, this is really a strategic fit. And as we go through any transaction, we are very disciplined about how we sort of approach valuation because, again, we don’t need to do M&A for our long-term growth strategy, we choose to do it when there is a great strategic fit. It’s part of our plan. And the financial terms are ones that we are very comfortable with in executing that transaction. On the second part of the question, which I think was really more on the growth side, as I sort of alluded to in the comment, I think one of the many things that’s attractive about this relationship is I think there is a really strong alignment between our growth objectives and their growth objectives, right. So, as I just stated, a lot of our growth objectives do include bringing in those more non-correlated strategies and capabilities, and really expanding them through the filters of institutional as well as ETF and other offerings. And I think that dovetails well with what they have done. We have views around the opportunities that we can have together by leveraging their strategies. Obviously, there is work to be done. And as we indicated, we wouldn’t be closing on this until near the end of the first quarter.

Okay. Great. And then maybe just shifting over to expenses, just on the comp side, I hear you on the 50% to 52% comp ratio range for the fourth quarter, I think it was if I heard you right. I guess how should we be thinking about that into 2023? Maybe a little bit early for guidance there, but I guess just for modeling purposes, why would that not be a relevant range if markets remain at these levels as we think about next year? Would there be other things to be thinking about in terms of cost save initiatives that would result in that being anything different from that 50% to 52% range for next year? And then on the non-comp side, maybe you could talk to some of the initiatives that I think you were alluding to around managing discretionary costs a bit tighter. What sort of actions can you take? How meaningful could that be relative to that guidance range you gave on the non-comp side? And could we actually see that towards the lower end, if not even decline?

Yes. I will just make a couple of comments and then Mike respond can as well. As you sort of look at the employment expense, particularly to look at it in terms of the relationship between that and revenue, the primary driver of that over the years has been and will continue to be the markets and the impact of markets on our revenue. So, as we even give guidance within quarters or from one quarter to another, we do like to stress that it’s really kind of important that, that will have a big implication. Even in the third quarter, right, as you saw the markets in July versus August versus September, there is a lot of variability around that. So, I think that the comments that Mike made were sort of anchoring on if there is no change in the market that, that would be the right range and it could change otherwise. Mike, thoughts on that in the operating expenses as well.

Yes. Michael, I think George outlined it well. We are certainly impacted by market-driven revenue increases as well as market-driven revenue declines. And just based on where ending assets settled at 9/30 versus average assets in the third quarter, we highlighted the expectation for the fourth quarter. And we will update, as appropriate, moving into 2023 and that could shift. I think the view on our incremental margins is still overall in that 50% to 55% range that we have historically achieved. So, when we look at the business and we look at incremental margins, we still believe that will be the level that the incremental margins come on. So, the business should be well positioned to revert back to margin levels, at previous levels. I think on the operating expense side, we talked about the $27 million to $31 million range and initiatives underway there. The one most notably is the lease consolidation that we completed at one of our locations that will deliver savings. There were some restructuring that came through related to that item. We will continue to invest in other areas and other initiatives, and we are looking carefully at all of them. And I think what we are seeing is savings from those areas kind of keep us in that range. We have been in that $29 million to $30 million level. We kept the range the same, and we are really offsetting inflationary pressures that we are seeing across the business. So, we are really focused at a very detailed level. We are keeping our levels consistent, offsetting inflation and continuing to prudently invest in the business. We are closing on AlphaSimplex early in 2023. We are continuing to invest in the business. So, balancing all that, but being very disciplined, as we always have been, on the expense side to continue to be in a position to drive those incremental margins, like I referred to.

Great. Thank you. And if I just maybe squeeze in another question, just on the institutional pipeline, it sounds like you had some mandate fund in the fourth quarter. Maybe you can just give a little bit more color around how the pipeline overall is shaping up relative to maybe a quarter ago or a year ago. Where are you seeing sort of strength? Anything you are able to help quantify on that front that would be very helpful? Thank you.

Yes. A couple of comments, and then Mike will add on to that. So, yes, I mean as I think all of you know, the institutional business is really lumpy, and some timing can be pretty heartbreaking. So, there were, as we noted in the comments, certain things that came in right on the cusp. So, if you think about the kind of the backdrop, I mean the third quarter really was an unsettled backdrop for people to ultimately make decisions. But what we have seen though is institutional investors are continuing to do what they need to do for the long-term and have been much less impacted than the retail side. But in terms of the pipeline, Mike, do you want to give some color?

Yes. I think we have been consistently pleased with the pipeline across strategies and managers and geographies. I mean we have seen our managers outside the U.S. be considered for mandates. And what we know that has been won and not yet funded is significantly in excess of known terminations. So, we feel good about it. It’s a lumpy business, as George noted. Some of the fundings take time to come in. So, we are pleased that seven quarters consecutively before the third quarter were positive and we feel very positive about the pipeline, the activity. And then George alluded to a CLO, which will also come through in the fourth quarter, which also will generate positive flows. So, we are seeing it across multiple affiliates in different product forms and feel good about the continued progress being made there on the institutional side.

Great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward. End of Q&A:

Great. Thank you. And I just want to thank everyone for joining us today. And as we always do, we certainly encourage you to call us or send us a note if you have any additional questions. So, thank you all.

That concludes today’s call. You may now disconnect.