Virtus Investment Partners Third Quarter 2026 Investor Call - VIRTUS INVESTMENT PARTNERS INC

Financial Performance:

• Total Assets Under Management (AUM) declined 7% sequentially to $141.4 billion (from $152 billion) due to $6.1 billion in net outflows and $4.3 billion in negative market performance; average AUM was $149.5 billion.
• Investment management fees as adjusted totaled $161.9 million, down 2% year-over-year, driven by lower average assets; average fee rate remained stable at 43 basis points.
• Operating margin as adjusted improved to 28.7% from 26.1% in the prior quarter, excluding a discrete non-cash employment expense from Q2; normalized margin improved by 50 basis points.
• Earnings per share (EPS) increased to $5.86 from $5.54, driven by lower employment expenses; GAAP results included $2.2 million in restructuring costs.
• Net debt decreased to $224 million (0.9x EBITDA) with gross debt at $411 million; liquidity included $187 million in cash equivalents and $298 million in other investments.
• Total sales were $4.3 billion (down from $6.1 billion), with institutional sales declining significantly due to a large real estate mandate win in Q2 and lower equity strategy sales.

Guidance and Future Outlook:

• Q4 employment expense ratio guidance is set between 54% and 56%, reflecting lower average assets and significant redemptions; other operating expenses expected to be at the higher end of the $30–$32 million range.
• Effective tax rate for Q4 modeling is estimated at approximately 11%, reflecting cash tax benefits from amortization.
• Management anticipates continued organic growth in ETFs (27% organic growth rate over the past year), alternatives, and fixed income.
• Long-term goal is to increase the proportion of alternatives in the portfolio beyond the current 14% AUM to provide portfolio diversification for clients.
• Outlook remains positive for quality equity strategies, noting a shift away from momentum/AI leadership that previously hindered performance, with several strategies now in the top quartile of peer groups.

Business Segments and Product Lines:

• Quality-oriented equity strategies accounted for the majority of net outflows ($6 billion), representing 31% of AUM (down from 45% a year ago); other strategies now comprise 69% of AUM.
• ETFs continue to show strong momentum with positive net flows ($0.2 billion) and 24% AUM growth over the past year; three new actively managed ETFs launched.
• Alternatives grew to 14% of AUM, driven by private market strategies and global listed real estate (noting a prior $700M mandate win); managed futures also saw growth.
• Fixed income strategies generated positive net flows ($0.4 billion), led by bank loan strategies, with 83%, 70%, and 72% of strategies beating benchmarks over 3, 5, and 10-year periods respectively.
• Wealth management business ($9 billion) is expanding business development resources to grow its client base organically.
• A $7 billion redemption from an institutional listed real estate mandate (fee rate below average) transitioned in mid-October, minimizing long-term revenue impact relative to AUM impact.

Market and Competitive Landscape:

• Market environment described as challenging for quality investing due to prolonged leadership by momentum-driven and AI-related stocks; this trend has recently faded.
• Recent performance improvements in quality equity strategies (top half of peer groups) validate the approach as a component of a well-diversified portfolio.
• Fixed income and alternatives are outperforming benchmarks and generating positive flows, providing resilience against equity volatility.
• Competition in ETF space remains active, with management launching active ETFs across capabilities to meet client demand for differentiated alpha.

Risks and Challenges:

• Significant net outflows concentrated in quality-oriented equity strategies remain a primary risk to AUM growth and fee revenue.
• Concentration of market returns in a narrow group of momentum/AI stocks poses continued short-term headwinds for quality equity strategies.
• A large institutional redemption ($7 billion) highlights client concentration risk, though the low fee rate mitigates revenue impact.
• Variable incentive compensation and performance fees can cause fluctuations in employment expense ratios and revenue.

Management Commentary and Tone:

• Tone was confident and disciplined, emphasizing that recent performance improvements in quality strategies validate long-term investing philosophy despite short-term AUM declines.
• Management expressed strong optimism regarding the diversification benefits of alternatives and fixed income, viewing the shift in AUM mix as a strategic strength.
• George Elward (CEO) highlighted the resilience of the business model with 69% of AUM in non-quality equity strategies and the strategic focus on organic growth in ETFs and wealth management.
• Management emphasized financial flexibility, maintaining liquidity and the ability to balance capital allocation between investment, debt repayment, and shareholder returns.

Analyst Questions and Answers:

• Bill Katz (TD Cowan): Asked about performance trends and M&A; Management confirmed quality strategies are moving into top quartiles as momentum fades; M&A focus remains on evaluating opportunities that add differentiated capabilities or distribution, but no specific deals are announced.
• Isabella (Barclays): Inquired about comp ratio and performance fees; Management guided to 54-56% comp ratio for Q4 and confirmed average fee rate of 43 bps is appropriate going forward, with performance fees varying by strategy.
• Ben Graham (Piper Sandler): Asked about long-term targets for alternatives and capital return priorities; Management aims to increase alternatives allocation above current levels for diversification and will evaluate capital return (dividends vs. buybacks) quarterly based on liquidity and growth opportunities.

Other Key Points:

• Returned capital to shareholders via a 2% dividend increase to $2.45 per share and $10 million in share repurchases.
• Issued a new Collateralized Loan Obligation (CLO) and launched three new active ETFs during the quarter.
• Restructuring costs of $2.2 million were incurred to rationalize resources through expanded shared services usage.
• Retail separate account net outflows improved due to lower redemptions, contrasting with higher institutional outflows.
• October performance showed a positive 1.5% for equity investments, outperforming the broader S&P (-1%) and NASDAQ (-5%).