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

Financial Performance:

• Assets under management (AUM) declined 7% sequentially to $141.4 billion, driven by $6.1 billion in net outflows and $4.3 billion in negative market performance.
• Net outflows totaled $6 billion, with substantially all outflows concentrated in quality-oriented equity strategies; however, retail fund redemptions improved for the second consecutive quarter.
• Investment management fees (adjusted) were $161.9 million, down 2% year-over-year due to lower average AUM, with the average fee rate remaining stable at 43 basis points.
• Operating margin (adjusted) improved to 28.7% from 26.1% in the prior quarter, excluding a discrete employment expense item; earnings per share (adjusted) rose to $5.86 from $5.54.
• Balance sheet remains strong with $187 million in cash, $298 million in other investments (including CLOs), and $235 million of undrawn revolving credit facility capacity.
• Gross debt reduced to $411 million from $427 million, resulting in a net debt to EBITDA ratio of 0.9x.

Guidance and Future Outlook:

• Management expects the fourth-quarter employment expense ratio to range between 54% and 56%, reflecting lower average assets and a significant institutional redemption.
• The average fee rate is projected to remain around 43 basis points going forward, with performance fees varying based on market conditions.
• The company anticipates continued organic growth in ETFs (27% organic growth rate over the past year) and is launching several new active ETFs in the coming quarters.
• Long-term strategy focuses on diversifying AUM sources, with a goal for alternatives to represent a higher percentage of the total book, currently at 14%.
• Management expressed confidence in the long-term value of quality strategies as market leadership shifts away from momentum and AI stocks.

Business Segments and Product Lines:

• Quality-oriented equity strategies now represent 31% of AUM (down from 45% a year ago), while fixed income, multi-asset, alternatives, and non-quality equity strategies comprise 69%.
• Fixed income and alternatives strategies generated positive net flows, with fixed income showing 83%, 70%, and 72% of strategies outperforming benchmarks over 3, 5, and 10-year periods, respectively.
• ETFs showed 24% AUM growth over the past year, with three new actively managed ETFs launched this quarter.
• Alternatives now constitute 14% of AUM, bolstered by the addition of private market strategies and strong performance in managed futures and global listed real estate.
• Wealth management business, with $9 billion in assets, is expanding its business development resources to grow its client base organically.

Market and Competitive Landscape:

• The sector faced a challenging environment where narrow momentum and AI-driven stock performance hindered quality-oriented strategies, but this backdrop has improved relative performance for quality funds in late Q3 and early Q4.
• Several quality strategies moved into the top half, and some into the top quartile or decile, of their peer groups for the trailing 12-month period as of the end of Q3.
• October saw equity investment performance of +1.5% for the firm, outperforming the S&P (-1%) and NASDAQ (-5%), largely due to the rebound in quality equity strategies.
• Institutional net outflows were driven by a $7 billion redemption from a single low-fee quality equity mandate in October; excluding this, institutional wins and known redemptions are roughly balanced.

Risks and Challenges:

• Continued reliance on a few high-fee institutional mandates creates concentration risk, evidenced by the significant impact of a single $7 billion redemption on the quarter's results.
• Market volatility and the dominance of momentum/AI stocks continue to pressure quality-oriented equity strategies, leading to persistent net outflows in this specific segment.
• Future earnings may fluctuate with market levels, asset mix, and the variability of performance fees.
• The company faces the challenge of transitioning AUM growth from quality equity to diversified fixed income and alternatives to maintain earnings resilience.

Management Commentary and Tone:

• Tone remained confident and disciplined, emphasizing long-term strategy over short-term market noise while acknowledging the "extended period" of headwinds for quality investing.
• Management highlighted the strategic success of diversification, noting the broader mix of asset classes now insulates earnings from single-strategy volatility.
• CEO George Elward expressed optimism about the opportunity set for fixed income ETFs and the potential for alternatives to capture a larger share of client portfolios.
• CFO Mike Angerthal provided detailed clarity on expense normalization and the impact of specific discrete items on prior quarter comparisons.

Analyst Questions and Answers:

• Analysts inquired about the sustainability of performance trends; management clarified that while recent relative performance is encouraging, the focus remains on long-term peer group rankings.
• Questions regarding M&A were addressed; the company prioritizes organic growth in wealth management and will only pursue inorganic opportunities that add differentiated capabilities or distribution footprints.
• On the compensation ratio, management confirmed the Q4 guidance of 54-56% is appropriate given the revenue decline from the institutional redemption.
• Regarding alternatives, the firm views them as essential building blocks for diversified portfolios, with a target to increase their AUM percentage beyond the current 14%.
• Capital allocation priorities remain flexible, balancing investments in growth, debt repayment, share buybacks, and dividends based on market conditions and strategic needs.

Other Key Points:

• The earnings release timing was delayed to ensure the accuracy of quarterly review processes.
• A discrete, non-cash employment expense from the prior quarter and a $2.2 million GAAP restructuring cost (related to resource rationalization) were excluded from non-GAAP adjusted results.
• Capital return initiatives included a 2% dividend increase to $2.45 per share and $10 million in share repurchases.
• The company successfully issued a new CLO and launched three actively managed ETFs during the quarter.
• Retail separate account net outflows improved significantly, and retail fixed-income funds generated $0.4 billion in positive flows.