Virtus Investment Partners, Inc.

AUM at June 30 was $152 billion to $152.2 billion, up from $149 billion, primarily due to performance. Total sales increased 5% to $6.1 billion from $5.8 billion, and total net outflows improved to $5.6 billion from $8.4 billion. Investment management fees as adjusted were $164.8 million, up 1%; adjusted operating income was $47.9 million versus $43.8 million; adjusted operating margin was 26.1% versus 24%, or 28.2% excluding a discrete noncash expense item. Adjusted EPS was $5.54 versus $5.38, or $5.97 excluding the discrete item. On the balance sheet, cash and equivalents were $176 million, other investments were $273 million, gross debt was $427 million, and net debt was $251 million, or 0.9x EBITDA. For modeling, management said a 54% employment expense ratio is reasonable for 3Q, other operating expenses of $30 million to $32 million are reasonable going forward, and a 13% to 14% effective tax rate would be reasonable; they also expect modestly lower interest expense in 3Q after repaying $20 million of revolver borrowings and expect to repay the remaining $30 million in the short term.

George Aylward emphasized that the quarter still reflected a difficult environment for quality-oriented equity strategies, but he highlighted several improving trends underneath the headline outflows. He pointed to positive flows outside quality equities, stronger institutional sales, expanding ETF offerings, and continued return of capital to shareholders while reducing debt. His tone on quality equities was cautiously optimistic: he framed the weakness as cyclical, not structural, and said the recent short period of outperformance in some quality strategies shows what can happen when the market backdrop turns more supportive.

Mike Angerthal focused on the quarter’s financial progression and the items affecting margins. He cited adjusted investment management fees of $164.8 million, a 43.1 basis point fee rate, adjusted employment expenses of $102.1 million, and a $3.8 million discrete noncash comp expense tied to retirement eligibility acceleration of multi-year stock awards. He said the second-quarter employment expense ratio of 55.6% was 53.5% excluding the discrete item, that 54% is a reasonable 3Q modeling level, and that other operating expenses of $31.9 million imply a $30 million to $32 million quarterly range going forward. He also noted gross debt fell to $427 million and that the company returned capital through a $10 million share repurchase and its quarterly dividend.

Analysts pressed management on why fixed income and alternatives are holding up while quality equities remain weak, and management answered that the strength is broad-based across capabilities like multi-sector fixed income, emerging market debt, leveraged loans, investment grade, and listed real estate, with non-quality equity strategies also growing. A key question on the lumpy comp expense was answered by saying it was a one-quarter, nonrecurring stock-based acceleration and not a sign of a new ongoing cost step-up. Analysts also asked about Keystone’s First Brands exposure and marks, and management said there is exposure but no current update or expected further impact, while noting standard mark methodologies. On the flow weakness in quality strategies, George said management views it as a cycle issue tied to style headwinds versus momentum, not a structural problem with the franchises.