HARTFORD, Conn., Nov. 1, 2011 /PRNewswire/ -- Virtus Investment Partners, Inc. (NASDAQ: VRTS), which operates a multi-manager asset management business, today reported its best quarter as a public company for total sales, net flows, operating income, as adjusted, and related margin, despite the challenging financial markets in the third quarter.

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Operating income, as adjusted, was $12.8 million for the quarter ended September 30, 2011, compared with $5.7 million in the third quarter of 2010 and $10.3 million in the second quarter of 2011. Operating margin, as adjusted, was 31 percent for the current quarter, compared with 21 percent in the prior year's third quarter and 28 percent in the prior quarter. The July 27 launch of the Duff & Phelps Global Utility Income closed-end fund (DPG) contributed $0.8 million to operating income, as adjusted, which excludes $10.8 million of structuring fees and sales-related compensation. The June addition of the Newfleet Multi-Sector team contributed $1.5 million of operating income, as adjusted, excluding transition costs.

Reflecting the impact of $10.8 million of costs related to the successful closed-end fund launch, the company reported an operating loss of $2.2 million and margin of (4) percent for the current period, compared with operating income of $2.9 million and margin of 8 percent in the prior year's third quarter and $3.5 million and 7 percent in the prior quarter. Excluding the costs related to the fund launch, operating income and margin for the third quarter of 2011 would have been $8.6 million and 15 percent. The company reported a net loss of $2.8 million in the current quarter, which includes costs related to the new closed-end fund, compared with net income of $3.7 million in the prior year's third quarter and $3.2 million in the second quarter of 2011.

Operating income, as adjusted, and operating margin, as adjusted, are non-GAAP measures that exclude certain non-cash and other items, including the closed-end fund launch costs and transition costs for the Multi-Sector team. These measures are further described and reconciled to GAAP measures in the table at the end of the release.

Assets under management were $33.1 billion at September 30, 2011, an increase of 22 percent from the prior year and relatively unchanged from June 30, 2011. Long-term assets under management, which exclude cash management products, were $29.9 billion at the end of the 2011 third quarter, an increase of 28 percent from the prior year and a decrease of 2 percent from the prior quarter.

Management Commentary

"In the third quarter, we grew operating income, as adjusted, by 24 percent, maintained double-digit organic growth in our mutual funds, and increased total net flows during a period when the financial markets were extremely troubled and marked by investor uncertainty," said George R. Aylward, president and chief executive officer. "We accomplished these results by continuing to offer a number of attractive investment strategies, and by executing on several important business initiatives, including the launch of the closed-end fund.

"At a time when asset managers have been challenged raising and retaining assets, we continued our strong level of sales and net flows because of our ability to offer clients a wide range of investment options with solid relative performance in multiple asset classes and strategies," Aylward said. "Even though the third quarter was challenging, and is generally a weaker period for sales in the industry, we grew total sales by 26 percent and delivered a third consecutive quarter of more than $2 billion of long-term, open-end mutual fund sales. Total net positive flows increased by 11 percent despite an increase in mutual fund redemptions, which can be expected during difficult periods in the markets.

"In addition to maintaining the pace of mutual fund sales, we made significant strides in growing our closed-end fund business," Aylward said. In the third quarter, Virtus completed the very successful launch of the DPG closed-end fund, which is managed by its Duff & Phelps Investment Management (DPIM) affiliate, adding $979 million to assets under management. After the quarter, Virtus announced it has been selected as the investment adviser and administrator of the DCA Total Return Fund (NYSE: DCA), a closed-end fund with $103.5 million in assets at September 30, 2011, subject to the approval of fund shareholders. DCA will become a multi-asset-class closed-end fund co-managed by proprietary managers at DPIM and Newfleet Asset Management.

"Our performance in the third quarter – in terms of sales consistency, net flows, earnings and margin improvement, and the completion of important initiatives – during a very difficult market environment affirms the strengths of the company and the benefits of our business model," Aylward said. "We were able to sustain this momentum and growth because of our fundamental strengths of attractive investment strategies and effective distribution."

Asset Flows and Assets Under Management

Despite one of the most unstable periods for the financial markets since 2008, the company had its best quarter as a public company for total sales and net flows, as open-end mutual fund sales remained strong and the company launched the new closed-end fund. Total net flows increased from the prior quarter, but net flows for mutual funds were impacted by the industry-wide increase in redemptions.

• Total sales of $3.3 billion in the third quarter increased by 26 percent from $2.6 billion in the prior quarter, driven by consistent long-term open-end mutual fund sales and the launch of the DPG closed-end fund.  Total positive net flows grew 11 percent sequentially to $1.6 billion for the third quarter of 2011 from $1.5 billion. Total sales and net flows exclude flows from cash management products and structured products.
• Sales of long-term open-end mutual funds, which exclude money market funds, were $2.4 billion in the third quarter, relatively unchanged from sales in the second quarter.  Sales were balanced among the major asset classes, with 35 percent of sales in fixed-income funds, 37 percent in domestic equity funds, and 28 percent in international equity funds.
• Long-term open-end mutual funds generated $1.0 billion of positive net flows in the third quarter, compared with $1.6 billion in the second quarter.  Net flows in the third quarter of 2011 were affected by a sequential increase in redemptions to $1.4 billion from $0.8 billion, as the company was impacted by the high rate of redemptions in the industry.  The organic growth rate for the company's long-term open-end mutual funds, which is defined as annualized net flows divided by beginning assets under management, was 26 percent for the third quarter, down from 48 percent in the prior quarter.
• Separately managed account sales were $144.2 million in the third quarter, a decline from $152.1 million in the second quarter.  Net flows for the quarter were flat compared with net outflows of $21.7 million in the prior quarter.  Institutional sales of $41.5 million in the third quarter compared with $44.4 million in the prior quarter, and net outflows this quarter improved to $57.8 million from $91.2 million in the second quarter.
• Total assets under management at September 30, 2011 decreased by less than 1 percent, to $33.1 billion from $33.3 billion at June 30, 2011, as the significant positive net flows of $1.6 billion were offset by market depreciation of $2.4 billion.  Long-term assets under management, which exclude cash management products, decreased by 2 percent to $29.9 billion from $30.5 billion at the end of the second quarter as a result of market depreciation.
• Average assets under management, which correspond to the company's fee-earning asset levels, were $34.3 billion at September 30, 2011, an increase of 5 percent from $32.8 billion at June 30, 2011.

Revenue

Total revenue increased sequentially as a result of increased average long-term open-end mutual fund assets under management during the quarter, the full-quarter impact of the Newfleet Multi-Sector team, and the DPG closed-end fund launch.

• Total revenues were $55.5 million in the third quarter of 2011, an increase of $6.6 million or 13 percent from $48.9 million in the second quarter.  The increase in revenue included $5.6 million of higher investment management fees and $0.5 million of additional administration and transfer agent fees related to higher average assets.
• Revenue, as adjusted, which is net of certain mutual fund distribution and administration expenses, increased by 11 percent to $41.9 million from $37.6 million in the prior quarter.  This increase was driven by higher investment management fees related to the 5 percent sequential growth in average assets under management, and the benefit of a full quarter of the Newfleet Multi-Sector team.
• Investment management fees increased 18 percent to $37.1 million in the third quarter from $31.5 million in the second quarter primarily driven by $3.4 million from the full-quarter impact of the Newfleet Multi-Sector team; $1.1 million related to the partial quarter for the DPG closed end fund; and $0.8 million from the 7 percent sequential increase in average long-term open-end mutual fund assets.
• The $0.5 million or 9 percent increase in administration and transfer agent fees resulted primarily from higher average long-term open-end mutual fund assets and the addition of the DPG closed-end fund, for which Virtus serves as the fund administrator.

Expenses

Total operating expenses increased from the prior quarter, primarily reflecting the structuring and incremental sales costs related to the launch of the DPG closed-end fund, as well as a full quarter of expenses related to the Newfleet Multi-Sector team.

• Total operating expenses of $57.7 million in the third quarter of 2011 compare with $45.4 million in the prior quarter, primarily driven by $9.6 million of structuring fees and $1.2 million of incremental sales compensation, both related to the DPG fund launch.  
• Employment expenses increased 11 percent to $25.5 million from $23.1 million in the second quarter, primarily driven by $1.2 million for sales compensation related to the DPG launch and $0.9 million for the full quarter impact of the Newfleet Multi-Sector team.
• Distribution and administration expenses were $23.3 million in the third quarter, an increase from $12.4 million in the second quarter, primarily related to $9.6 million of structuring costs related to the launch of the DPG fund.
• Other operating expenses decreased 6 percent sequentially to $7.4 million from $7.9 million.  The second quarter included $0.4 million of professional fees associated with the establishment of the Newfleet Multi-Sector team, and $0.4 million of annual equity grants for the Board of Directors.  The sequential increase in other operating expenses, excluding these items, is a result of a full quarter of other operating expenses for the Newfleet Multi-Sector team.
• Operating expenses, as adjusted, were $29.1 million in the third quarter of 2011 compared with $27.2 million in the prior quarter primarily driven by impact of a full quarter of operating expenses for the Newfleet Multi-Sector team.  This non-GAAP measure excludes distribution and administration expenses and certain cash and non-cash charges such as the Newfleet Multi-Sector transition-related costs and DPG structuring and sales costs.

Product

• As previously discussed, on July 27, 2011 the company launched the DPG closed end fund, adding $979 million in assets, which represents a net raise of $719 million, after the overallotment exercise and front-end sales charges, and $260 million by employing financial leverage as part of the fund's stated investment strategy.
• On October 6, 2011 the company announced it had been selected to become the investment adviser and administrator of the DCA Total Return Fund (NYSE: DCA), a diversified closed-end fund with $103.5 million in assets at September 30, 2011.  DPIM will manage the fund's equity portfolio and Newfleet Asset Management will manage the fixed income assets.  If approved by fund shareholders, Virtus will adopt the fund by the end of the year.  Terms of the agreement were not disclosed.

Preferred Share Conversion

On October 31, 2011 the company announced it had reached an agreement with BMO Bankcorp, the holder of the $35 million 8% Series B Convertible Preferred Stock, to convert its preferred stock into 1,349,300 shares of Virtus common stock. BMO Bankcorp, a U.S. subsidiary of Bank of Montreal, will receive a dividend of $8.1 million representing accrued dividends through October 31, 2011 plus the present value of dividends it would have earned through October 31, 2014, which is the earliest date Virtus could have called for BMO Bankcorp, at its discretion, to redeem or convert its preferred shares. Following the conversion, which is subject to routine regulatory approval, BMO Bankcorp will be Virtus' largest common shareholder and its interest will remain unchanged at approximately 23 percent.

Private Letter Ruling

During the quarter, the company received a favorable private letter ruling from the Internal Revenue Service concerning the treatment of a loss related to the dissolution of an inactive subsidiary. The company had previously recorded a deferred tax asset and corresponding valuation allowance for a capital loss carry-forward in the amount of approximately $93.0 million. As a result of the IRS ruling, the company recharacterized the $93 million capital loss as $89 million of net operating losses and intangible asset, with an offsetting valuation allowance. The remaining $4 million was limited due to Internal Revenue Code section 382 limitations. The company also de-recognized approximately $32 million of the previously recorded gross deferred tax assets and related offsetting valuation allowance, in accordance with GAAP rules.

Balance Sheet, Liquidity and Capital Resources

Working capital decreased by 8 percent during the quarter to $43.4 million at September 30, 2011 from $47.4 million at June 30, 2011 as launch costs for the DPG fund offset capital generation of the business.

Cash and cash equivalents ended the third quarter at $39.2 million, an increase of 7 percent from $36.6 million at June 30, 2011. Marketable securities were $11.7 million at the end of the third quarter, down $3.6 million or 24 percent from the end of the prior quarter, impacted by $1.6 million of unrealized mark-to-market adjustments and certain seed capital investments that were exited during the quarter.

In the third quarter, the company repurchased 50,000 shares of common stock. To date, Virtus has repurchased 155,000 shares of its multi-year, 350,000 share repurchase authorization, which represents 2.5 percent of common shares outstanding as of September 30, 2011.

Conference Call

Virtus Investment Partners management will host an investor conference call on Wednesday, November 2 at 11 a.m. Eastern to discuss these financial results and related matters. The webcast of the call will be available live over the Internet in the Investor Relations section of www.virtus.com. The call can also be accessed by telephone at 800-561-2731 if calling from within the U.S. or 617-614-3528 if calling from outside the U.S. (Passcode: 41538128). A replay of the call will be available through November 23 in the Investor Relations section of www.virtus.com or by telephone at 888-286-8010 if calling from within the U.S. or 617-801-6888 if calling from outside the U.S. (Conference Number: 94773210). The presentation that will be reviewed as part of the conference call will be available in the Investor Relations section of the company's Web site.

About Virtus Investment Partners

Virtus Investment Partners, Inc. (NASDAQ: VRTS) is a distinctive partnership of boutique investment managers singularly committed to the long-term success of individual and institutional investors. The company provides investment management products and services through its affiliated managers and select subadvisers, each with a distinct investment style, autonomous investment process and individual brand. Virtus Investment Partners offers access to a variety of investment styles across multiple disciplines to meet a wide array of investor needs. Virtus Mutual Funds are distributed by VP Distributors, Inc., a subsidiary of Virtus Investment Partners and member, FINRA. Additional information can be found at www.virtus.com.