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

Explicit Guidance:

• Employment Expense Ratio: Expects a normalized range of 54% to 56% of revenue for the fourth quarter, reflecting lower average assets and the impact of a $7 billion institutional redemption.
• Other Operating Expenses: Expects to be at the higher end of the $30 million to $32 million range for the fourth quarter.
• Effective Tax Rate: Models an effective tax rate of approximately 11% for the fourth quarter, reflecting the impact of amortization cash tax benefits on lower pre-tax earnings.
• Average Fee Rate: Models a fee rate of approximately 43 basis points as reasonable for the fourth quarter, noting performance fees will vary and be disclosed as they arrive.
• Dividends: Increased the quarterly common dividend by 2% to $2.45 per share, with the expectation of a continuation of annual increases (referenced as the "ninth annual dividend increase").
• Share Count: Continued capital return program includes share repurchases (64,666 shares repurchased in Q3 for $10 million) and ongoing evaluation of buybacks vs. debt repayment vs. organic investment.

Business-Segment Outlook:

• ETF Strategy: Anticipates launching several more actively managed ETFs over the next few quarters to expand coverage across the majority of capabilities; ETF AUM grew 24% over the past year with a 27% organic growth rate.
• Alternatives: Expects to increase the percentage of AUM allocated to alternatives (currently 14%) beyond current levels to provide a "menu of options" for wealth management partners and diversify client portfolios against long-only equities.
• Fixed Income: Continues to launch new products and wrappers; maintains strong investment performance (83%, 70%, 72% beat benchmarks over 3, 5, 10 years) and consistent positive net flows.
• Wealth Management: Expanding business development resources organically to grow the $9 billion client base; no specific M&A targets announced for this segment yet.
• Quality Equity Strategies: Acknowledges a long-term performance challenge but notes encouraging recent relative performance with several strategies moving into the top half/top quartile of peer groups as momentum/AI leadership fades.

Market and Competitive Outlook:

• Performance Trends: Anticipates continued strength in fixed income and alternatives while quality-oriented equity strategies navigate the transition away from narrow momentum/AI leadership.
• Investor Preferences: Identifies a gap where individual investor allocations to non-correlated strategies (alternatives, fixed income) are below targets set by brokerage firms and financial advisors, presenting an opportunity to increase client allocations.
• Product Mix: Expects a meaningfully more diversified asset mix (currently 69% non-quality equity) to provide earnings resilience across different market environments, reducing reliance on the 31% quality-oriented equity segment.
• Institutional Flows: Notes that the recent $7 billion redemption in a low-fee quality equity mandate (transferred mid-October) reduces revenue impact relative to asset loss, but institutional outflows remain a headwind compared to wins.

Macro / Industry Outlook:

• Market Dynamics: Observes a shift where the "narrow group of momentum-driven and AI-related stocks" leading returns for an extended period is fading, creating a more favorable environment for quality investing.
• Capital Priorities: Maintains financial flexibility with $235 million in undrawn credit facility capacity to balance capital allocation between business investment, debt reduction, and shareholder returns.
• Debt Management: Net debt stands at $224 million (0.9x EBITDA); expects to continue paying down debt as cash flow allows.

Strategic Initiatives:

• Product Launches: Issuance of a new CLO (with $28 million sponsorship cost) and the launch of three actively managed ETFs in the quarter; pipeline includes several more active ETFs in the coming quarters.
• Organic Growth: Expansion of business development teams within the wealth management segment to organically acquire new clients.
• Restructuring: Completed a rationalization of resources via expanded shared services ($2.2 million GAAP restructuring cost in Q3), expected to modestly improve the employment expense ratio going forward.
• Internal Reassignments: Moved assets from unaffiliated sub-advisors to internal managers in August to improve fee capture (+0.7 bps), a tactic to be monitored for future fee rate stability.

Risks and Headwinds to Outlook:

• Market Concentration: Continued dominance of momentum/AI stocks could reverse the recent positive relative performance of quality equity strategies.
• AUM Sensitivity: Earnings and expense ratios remain highly sensitive to net flows and market performance; average AUM ($149.5B) ending 5% below quarter-end AUM ($141B) creates variability in per-unit metrics.
• Institutional Redemption Risk: Exposure to large institutional mandates (e.g., the recent $7 billion redemption) can cause significant AUM volatility, though fee impact is mitigated by the lower fee rate of such mandates.
• Performance Fee Variability: The guidance for the employment expense ratio and overall earnings assumes a stable fee rate, but actual results will vary significantly with the arrival of performance fees.

Management Tone on the Future:

• Confidence Level: Moderate-to-positive regarding the strategic pivot and diversification efforts; describes the recent shift in quality strategy performance as "encouraging" and "dramatic" in a positive sense.
• Confidence Hedges: Management emphasizes that "a single quarter does not offset the longer-term performance challenges" for quality strategies and that "longer-term numbers are what matters."
• Change vs. Prior Guidance: No downward revision to full-year guidance explicitly stated, but Q4 modeling incorporates specific headwinds (lower average assets, redemption impact), resulting in a tighter, higher-range guidance for expense ratios.
• Strategic Direction: Clear commitment to diversifying away from quality equity as a growth engine, favoring organic growth in ETFs, alternatives, and fixed income.

Miscellaneous:

• Financial Flexibility: Balance sheet includes $187 million in cash/equivalents and $298 million in other investments (seed capital) to support future growth.
• Shareholder Returns: Balance sheet allows for a "meaningful" liquidity position to balance capital priorities of investing, debt repayment, and capital return.
• Fee Rate Adjustments: Manager reassignments in August contributed a 0.7 bps increase to the average fee rate, offsetting the drag from performance fees.