VRTS (2020 - Q4)

Good morning. My name is Joule, 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 in the Investor Relations section of the Virtus website www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period and instructions will follow at that time. I would now turn the conference to your host, Sean Rourke. Sean Rou

Thank you, Sean. Good morning, everyone. I will start today by giving an overview of the results we reported this morning, as well as an update on the AllianzGI partnership, which has been finalized before turning it over to Mike to provide more detail on the quarter. Then before taking questions, I will make some comments on our announcement yesterday of our agreement with Westchester Capital Management. Turning to the results, we are pleased with the continued strong financial and operating performance of the business, which for the quarter included positive net flows representing an annualized organic growth rate of more than 9%, our second highest level of quarterly sales, our highest level of AUM revenues and earnings per share, continued excellent investment performance and consistent return of capital to shareholders and debt reduction. We are especially pleased with the trends over the course of 2020, which was a challenging year in many ways. In spite of that, we reported record earnings, generated positive net flows for the year with organic growth rate of nearly 5% and increased sales by more than 60%.

Thank you, George. Good morning, everyone. Starting with our results on slide seven, assets under management. At December 31st, long-term assets were $130.7 billion, up 14% from $115 billion at September 30th. The sequential increase reflected $13.4 billion of market appreciation and $2.6 billion of positive net flows. All asset classes contributed to AUM growth during the quarter led by domestic and international equity, which increased 18% and 17%, respectively, with fixed-income up 2% and alternative assets higher by 9%. Assets continued to be diversified by product type with open-end funds, institutional and retail separate accounts representing approximately 38%, 31% and 23% of long-term AUM, respectively. In terms of asset classes, equity assets represented 73% of long-term AUM, with 78% of that in domestic equity and 22% in international. Fixed-income assets as a percentage of total assets declined to 23% due to the rise in equity markets during the period. Regarding Allianz GI partnership, the assets under management totaled $29.3 billion at December 31st, having increased $3.6 billion or 14% from September 30th due to market returns and positive net flows.

Thank you, Mike. Before we take your questions, I’d like to comment on our agreement with Westchester Capital Management, a premier manager of event driven investment strategies with $4.3 billion in assets at December 31st. Westchester Capital has a 30-year track record in merger arbitrage with category leading investment performance, delivering attractive returns across market environments. The firm is a pioneer in the space having launched the first merger arbitrage fund in 1989. We are excited to add Westchester Capital to our family of affiliated managers. Their non-correlated alternative strategies invest in publicly announced event opportunities such as mergers, acquisitions, takeovers, spinoffs and other corporate re-orgs. With the addition of Westchester Capital, we would further diversify our investment strategies and nearly double our assets under management in alternative strategies. There are funds which are already available across top platforms will become available to a broader retail base through our robust distribution capabilities. In addition, consistent with our overall product strategy, Westchester Capital event driven strategies could be leveraged into other product structures. Like all our affiliated managers, Westchester Capital will continue to operate as an individual boutique retaining autonomy over its investment process and maintaining its independent structure, culture, and brand identity. Under the agreement, we would acquire 100% of the equity interests for the principals and third-party investors. The transaction structure includes an upfront payment, as well as potential contingent and future earn-out payments based upon the growth of the business. The closing payment for the transaction is $135 million, which, given our balance sheet and strong cash flow, can be funded without additional financing. We anticipate closing in the second half of this year pending customary fund shareholder approvals. The structure of the transaction provides for a strong alignment of interests in the form of employment agreements and participation in the profit pool, and the principals are reinvesting a significant portion of transaction proceeds into their investment strategies. We expect the transaction to be immediately accretive to earnings as adjusted by approximately 6% based on run rate earnings on a pro forma basis for the AllianzGI partnership. We look forward to providing more details as we get closer to closing. The addition of Westchester Capital as a boutique affiliate and the partnership with AGI is illustrative of our multifaceted approach to inorganic growth and underscores a key element of our value proposition. Our long-term growth is not dependent on M&A. However, our model allows us to partner with distinctive boutiques and support their growth by offering new strategies through our broad distribution platform and into additional product structures. Our model also allows us to selectively partner with distinctive firms for a particular investment capability or capabilities. Both of these provide for further diversification of our strategies, product lines and clients, and gives us potential for greater opportunity through changing market cycles. With Westchester Capital, we added a targeted private capability that leverages our strength as a multi boutique and our value proposition that is attractive to boutique firms that can focus on managing their clients’ assets, while getting the benefits of scale distribution and the resources of a larger organization. With Allianz GI, we significantly increased our scale with compelling and complementary products in a thoughtfully structured partnership that provides significant financial accretion. We believe our multifaceted and flexible approach to inorganic growth, combined with our ability to generate organic growth as we did in 2020, demonstrates that we are well-positioned to execute on our long-term growth strategy and create shareholder value. With that, we will now take your questions. Joule, would you please open up the lines?

Thank you. Our first question comes from Jeremy Campbell with Barclays. Your line is now open.

Hey. Thanks. George and Mike, just I want a quick clarification on the AGI accretion comment. It’s the -- at least 30% would be on this quarter’s $5.15 quarterly EPS run rate, correct?

Yes. So, again, we are -- it’s at least 30% and it has taken into account the fourth quarter and our pro-forma view of things going forward, right? Mike?

Yeah. That’s correct. It’s on this quarter’s result.

Perfect. And I guess when we are talking with AGI, George, maybe you can comment a little bit about the underlying flow trends there right now and now that the deal is closed, how quickly you think the sales force can really kind of get this in their hands and potentially accelerate that flow trend?

Sure. And on the page that we have included, a couple of things I would sort of underscore. Their products are really good and Mike spoke to some specific performance numbers. The other thing that I think it’s important to really sort of understand is the complementary nature. So, if you look at what they bring in terms of different strategies, they are really a very additive to what we have in categories of the multi-asset, some of the sustainability products. There’s just a really new addition of very attractive products. In the update that Mike provided, you can also get an indication that they have continued to grow the assets from both performance, as well as continued sales before the change-over to us. So, again, these are great products, compelling strategies, well-marketed, well-supported and we are excited now that we have been working on the integration with their team, which is a great team by the way, being prepared to hit the ground running. So I have listened in on multiple video calls as our wholesalers and our national accounts and other individuals are preparing to bring these things to market. And as I sort of indicated as well, we have had a great opportunity to bring in some additional talented individuals along with the assets under management. So we are really excited about the opportunity. I think the market will tell us what the opportunity will be, but I think we have done everything we can possibly do to be ready to take advantage of these great products.

And then just looking at your mosaic as a firm now, adding AGI in there, adding obviously some interesting non-correlated asset losses with the Westchester deal today. As you kind of look at your product offerings and how you are hoping your sales force are going to hit the market over the next year or two. Is there anything else that you see that would be an element of white space that would need to be shaded in to kind of further complement your suite of products?

Yeah. Well, I would underscore where we are going with Westchester Capital, right? Because in previous responses to that question, I will generally speak to we feel very good about our coverage of the traditional asset classes and strategies. I think the AGI partnership then fully expanded that to include multi-asset, hybrids, convertibles, sustainability products and what we have also said is that we thought there were great opportunities for less correlated strategies. So we were always of the view that those strategies are attractive. I think some of the recent market volatility underscores the need to have a portion of your portfolio in the less correlated strategies and I think that’s one of the places where Westchester Capital’s approach to investing fits in incredibly well. So we are very happy to add that to the extension of our products into less correlated strategies, continue to see that as an opportunity, continue to think that there’s other opportunities for us to grow our asset base outside of the U.S.

Great. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from Sumeet Mody with Piper Sandler. Your line is now open.

Thanks. Good morning guys. I just have a couple of big picture questions, starting with the kind of organic growth outlook for the year. Now that we have got a little bit more clarity with the kind of new administration coming in and kind of a wider vaccine coming maybe midyear. How do you view this environment, do we kind of revert back to that trend of late 2019 or is there some room for more opportunity with AGI and Westchester here to get continued strong organic growth from here across strategy offerings? Maybe touch on some of those different strategies?

Sure. Sure. No. It’s a great question. And one of the things we sort of acknowledge to ourselves is since we can’t predict the future we sort of diversify to be successful in all environments. So the primary underpinning of our overall strategy has been to have a broad array of distinctive managers that could represent all the building blocks of a well-diversified portfolio, which may be in and out of favor in different periods of time. So that has generally been our approach that as the investor needs and wants and demand changes, that we would then have something that would be attractive in those markets. So in one of the comments I made earlier, we were very happy to start seeing a changeover to -- a rotation into more of our fixed-income strategies, which we have great fixed-income strategies. The nature of those strategies were less attractive last year than they should have been. So we really have to sort of see that changeover. So I really do feel well-positioned, because whether the equity markets stay volatile, whether there’s some kind of up-draw or down-draw. I feel we have multiple strategies that could be attractive in each of those environments, which is as we sort of built that out and now with the addition of a non-core related strategy. So again, we have tried to make sure that we don’t live by feast and famine of any one market cycle or any individual strategy. That is really the fundamental purpose of the diversification of our strategy and why we partner with very different unique differentiated managers for different capabilities.

Great. Thank you. And then just one more high level question on technology and kind of how you guys think about leveraging that at the firm. Can you maybe touch on how you look at it kind of both on a firm wide basis and then on an affiliate level basis and how you think it could kind of best be used going forward maybe through areas that you are not largely in today like model portfolios or enhancing the distribution platform?

Sure. And for technology, I will assume you were also referring to data, right? So…

Yeah.

… we sort of -- for us one of the good things -- good thing, bad thing was, we didn’t have a lot of archaic technology that was hard to change. So we have been able to sort of kind of build out what we think is right for us as a business. We have been growing, obviously, with a lot of the transactions that we have done. So we are continuing to be very focused on a lot of opportunities that we have. We have a good technology. We continue to have opportunities to expand it. I think the data side is really fascinating. We pull in a lot of data. We have a long history of data particularly on the distribution side where we have been keeping track of our relationships and information that we have learned over the years. So we continue to see that as a great opportunity to leverage that even further and now in the whole digital element where we have the ability to even bring in more data. So from the firm wide perspective, we think there’s great opportunities to leverage. We think that that in some ways helps level the playing field against larger competitors, right? Because if you have as good, or better data, or way to utilize that. And I’d like to think that the success we have had in retail distribution sort of testament and it’s not only a testament I think to the quality of our wholesalers, but the leadership the strategy, as well as the underlying targeting of opportunities which is really important. And then on the other side for the affiliates, one of the benefits of our model is making available to affiliates information data or technology that they might not otherwise have. So we always do look for those opportunities where we can bring value to them to help support them in what they find important and helpful in terms of managing their clients’ assets.

Great. Thanks, George.

Thank you.

Thank you. Our next question comes from Gayathri Ramkrishnan with Bank of America. Your line is now open.

Hi, there. This is Gayathri on behalf of Mike Carrier.

Hello.

My question was -- hi. My question was on your recent deal of Westchester Investment Management. I was just curious in terms of your rationale behind the structure of the deal. In terms of acquiring 100% of equity, it was quite different from the last time you did a partnership or deal with Allianz. And more broadly speaking, I believe we have got multi-boutique firms, say, that they would like to leave some equity on the table to have interests aligned over a long period of time. So I was wondering how you think about that, as you sort of integrate more and more partners going forward as well?

Sure. So I mean what I would say is, every transaction is a little different and part of our model is we are flexible in how we partner. We don’t want to limit our opportunity set by being pigeonholed in any kind of specific type of a structure. I do think the structure that we have here is very well-aligned. Because it is not -- the element of equity ownership of the affiliate level or not, isn’t really the only way to have alignment. I mean, our structures have uncapped earnings opportunities in the profits they generate. So no matter what, in our model, even if the equity ownership is more the majority is 100%, there is a significant income participation in that. So I think this deal is structured very well. It’s right for this manager and the objectives that they are looking to achieve. It has the right alignment of interests between the leadership and the next generations as well as us. So we will continue to sort of be flexible in how we approach. Again, this is a good example of, I think, Westchester is the best in the space that they occupy, and for us it’s more important to partner with the firm that we think is the right firm for the asset class with the strategy as opposed to any kind of specific structure.

Got it. Thank you.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Aylward.

Joule, it looks like we have a follow-up question on the queue.

And that follow-up question comes from Jeremy Campbell with Barclays. Your line is now open.

Hey. Thanks for the follow-up. Just want to get your guys sense of what demand looks like inside your CLO business. I mean, everything we look at in the market-wide, it’s heating up actively. So I wasn’t sure if you guys had anything in warehouse or if there’s anything in the pipe that we should be aware of?

Yeah. Mike, do you want to respond to that?

Sure. And Jeremy, no, we don’t have anything in the warehouse currently. Obviously, our teams stay close to the market and evaluate opportunities and certainly have seen the market strengthened over the last couple of months and if there is anything that emerges from the teams on that front, we will certainly make you all aware of it, but nothing to report at this point.

And then is it fair to characterize, I guess, George, you mentioned that fixed-income as inflows for the first time in a long time and we know a lot about that prior headwind was from the bank loan strategy and I think that’s starting to percolate a little bit more in this kind of rate regime, where we are starting to grind higher a little bit. What are you guys seeing on the ground in that type of strategy?

Yeah. No. I think you are absolutely right. As we speak to fixed-income, remember we have multiple strategies in fixed-income. The one that you highlighted really the loans have clearly been out of favor. But over the last few quarters we have seen an improvement and increasing interest in that space, which again is what I am sort of referring to in January, as well as with some of our other strategies or multi-sector short-term bond fund which is nominal product, very happy to see more interest in those types of products. Again, always back to expectations of interest rates and how these things feel. So, we have seen them and we have seen some high yield. So it’s sort of nice to see a continuation of some of the strength that we have seen in some of our equity products, but then also seeing a little bit of a rotation more into some of the other maybe more credit-sensitive type of fixed incomes. So I think that is an interesting development, and again, it will be interesting to see how that plays out through the rest of the year.

Great. Thanks a lot again.

Okay. Thank you.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Aylward.

Okay. Well, I just want to thank everyone for joining us today. Certainly encourage you to call us if you have any other questions. Have a nice day. Thank you.

That concludes today’s call. Thank you for participating. You may now disconnect.