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

Explicit Guidance:

• Operating Expenses: Expected to be at the higher end of the $30 million to $32 million range for the fourth quarter.
• Employment Expense Ratio: Guidance set for a normalized range of 54% to 56% for the fourth quarter, driven by lower average assets and meaningful redemptions.
• Effective Tax Rate: Reasonable for modeling at approximately 11% for the fourth quarter, reflecting amortization cash tax benefits against lower pre-tax earnings.
• Dividend: Quarterly common dividend increased by 2% to $2.45 per share (announced as the ninth annual increase).
• Capital Return: No specific quantitative guidance provided for future buybacks or dividends; capital allocation remains flexible based on quarterly evaluations of investing in the business, debt repayment, and shareholder returns.

Business-Segment Outlook:

• Asset Mix: Aiming to increase the weight of alternatives (currently 14% of AUM) to a slightly higher percentage to provide building blocks for well-diversified portfolios with lower correlation to traditional equities.
• ETFs: Several new actively managed ETFs expected to launch over the next few quarters; ETFs delivered 27% organic growth over the past year and now cover the majority of capabilities.
• Wealth Management: Expanding business development resources to organically grow the client base within the $9 billion wealth management business.
• Fixed Income: Expecting continued positive net flows; focusing on creating new products and wrappers, and making existing fixed income ETFs with strong track records more available.
• Alternatives: Significant capability broadening with the addition of private market strategies; positive net flows observed across fixed income and alternatives for the last one-year period.
• Quality Equity: Recognizing that while recent quarters show improved performance (top half of peer groups), longer-term results will continue to face challenges until market conditions shift away from momentum/AI dominance.

Market and Competitive Outlook:

• Performance Trends: Anticipate continued periods where momentum-driven and AI-related stocks fade, favoring quality-oriented strategies; recent relative performance improvements in quality strategies are viewed as encouraging but not yet a full offset to longer-term challenges.
• Demand: Expecting demand to remain strong for diversified portfolios that include alternatives and fixed income to hedge against long-only traditional equity volatility.
• Competition: Strategy focuses on providing differentiated capabilities and expanding distribution footprints through wealth management partners who are currently under-allocating to alternative strategies.
• Pricing: Average fee rate expected to remain stable around 43 basis points for the fourth quarter, though performance fees will vary based on market levels and asset mix.

Macro / Industry Outlook:

• Market Dynamics: Management views the current environment as one where a "narrow group of momentum-driven and AI-related stocks" has been leading, but anticipates a shift where these strategies fall out of favor, benefiting quality investing.
• Asset Class Cycles: Positive outlook on fixed income and alternatives as investors seek diversification away from concentrated equity market leaders.
• Economic Context: No explicit commentary on macro variables (rates, inflation, GDP) beyond general references to market performance impacts on asset flows and valuations.

Strategic Initiatives:

• Product Launches: Three actively managed ETFs launched in Q3; additional launches planned for the next few quarters.
• Capacity Expansion: Expansion of business development teams within the wealth management business to drive organic client acquisition.
• M&A Strategy: Will continue to evaluate inorganic opportunities that offer differentiated capabilities complementary to existing business or expand distribution footprints, but no specific M&A targets or timelines announced.
• Capital Allocation: Maintaining flexibility to balance investments in growth, debt reduction, and capital returns; debt reduced from $427 million to $411 million in Q3.
• Operational Restructuring: Ongoing rationalization of resources through expanded shared services; recent $2.2 million restructuring costs are expected to have a modest favorable impact on the employment expense ratio going forward.

Risks and Headwinds to Outlook:

• Asset Flows: Continued net outflows in quality-oriented equity strategies remain a primary headwind; a single $7 billion institutional redemption in Q3 highlighted sensitivity to large mandate transitions.
• Market Performance: Negative market performance and narrow market leadership (AI/Momentum) pose risks to AUM growth and performance fees.
• Fee Rate Variability: Average fee rates and performance fees are expected to fluctuate with market levels, asset mix changes, and performance results.
• Flow Volatility: Retail fund sales remain consistent, but institutional flows can be volatile due to large mandates; retail separate account flows are improving but can be offset by institutional redemptions.

Management Tone on the Future:

• Confidence: Expresses "unchanged confidence" in the quality investment approach and views the diversification into fixed income, alternatives, and ETFs as a path to earnings resilience.
• Cautious Optimism: Describes recent performance improvements in quality strategies as "encouraging" but cautions that a single quarter does not offset longer-term performance challenges.
• Strategic Patience: Emphasizes a focus on long-term opportunities and building a "well-diversified portfolio" rather than chasing short-term trends.

Miscellaneous:

• Liquidity: Ended Q3 with $187 million in cash/equivalents, $298 million in other investments (including seed capital), and $235 million of undrawn revolver capacity.
• Net Debt: Net debt position is 0.9 times EBITDA.
• Share Count: Repurchased 64,666 shares for $10 million in Q3.