In the second quarter of 2024, Virtus Investment Partners (NYSE: VRTS) faced challenges and experienced growth. President and CEO George Aylward reported net outflows in line with industry trends but highlighted areas of growth such as Retail Separate Accounts, ETFs, and Global Funds.
The company’s earnings and operating margins increased compared to the previous year, with significant growth in their ETF platform, which surpassed $2 billion in assets under management. Despite a decrease in overall assets to $174 billion, the company’s operating margin improved to 32.5%, and earnings per share rose to $6.53. Virtus Investment Partners maintains a modest debt position and has significant capital flexibility for future strategic initiatives.
Key takeaways include higher earnings and an increased operating margin of 32.5%, a 3% decrease in assets under management, growth in the ETF platform, and positive net flows in Retail Separate Accounts. Sales declined to $6.1 billion, with net outflows totaling $2.6 billion.
The company’s outlook includes a focus on expanding offerings in ETFs, Retail Separate Accounts, and Global Funds, with anticipated capital uses for minority interest purchases and new product introductions. Virtus Investment Partners is actively evaluating M&A opportunities, particularly in private markets.
Despite challenges, Virtus Investment Partners continues to focus on growth areas and strategic initiatives to expand its business. With an improved operating margin and earnings per share, the company remains poised for continued success in capital management and strategic investments.
InvestingPro insights provide further analysis of Virtus Investment Partners’ financial health and market position, with a focus on a market capitalization of $1.68 billion and a price-to-earnings ratio of 13.97. The company has a track record of raising dividends for consecutive years, showcasing its commitment to shareholder returns.
Investors can leverage InvestingPro Tips to gain a comprehensive understanding of VRTS’s strengths and potential areas of concern, with additional insights available through a subscription. Overall, Virtus Investment Partners’ strategic focus on dividend growth and expansion in key areas positions the company for long-term resilience in a challenging market landscape. The reconciliation of these non-GAAP financial measures to the applicable GAAP measures can be found in today’s news release and financial supplement, which are accessible on our website. Now, I will pass the call over to George. George?
Thank you, Sean. Good morning, everyone. I will begin by providing an overview of the results we reported this morning, followed by more detailed insights from Mike. In the second quarter, we experienced net outflows, which aligned with broader trends for active U.S. Retail Funds. However, we also saw growth in key areas such as Retail Separate Accounts, ETFs, and Global Funds. Additionally, we achieved higher earnings and operating margins both sequentially and compared to the previous year. Our investment performance remained strong across strategies, and we continued to return capital to shareholders through share repurchases and dividends. At the end of the quarter, we maintained a modest level of leverage and significant capital flexibility.
One area of notable growth in the quarter was our ETF platform, which surpassed $2 billion in assets under management. This growth was driven by a 45% organic increase over the past year, with positive net flows each quarter. We currently offer 18 ETFs across various strategies and managers, with plans to expand our offerings further. Retail Separate Accounts and Global Funds also showed promising growth, and we anticipate them to be key drivers of our future growth as we focus on developing and introducing new strategies to the market.
Moving on to our financial results, total assets under management decreased by 3% to $174 billion, primarily due to market performance and net outflows in U.S. Retail Funds and Institutional categories. However, we saw positive net flows in Retail Separate Accounts, ETFs, and Global Funds. Sales of $6.1 billion declined from the previous quarter, mainly driven by Open-end Funds and Institutional categories. Retail Separate Accounts saw sales of $2.2 billion, slightly lower than the prior quarter but up significantly from the previous year. Net outflows of $2.6 billion were largely concentrated in the month of April. Institutional experienced net outflows of $1.7 billion, primarily due to client rebalancing in a large-cap growth strategy.
Looking ahead, we are optimistic about the growth potential of Retail Separate Accounts, ETFs, and Global Funds, as they continue to show positive trends in July. Our focus remains on expanding our product offerings and delivering strong investment performance to meet the evolving needs of our clients. We are committed to maintaining a strong balance sheet, generating significant cash flow, and prioritizing capital allocation to drive sustainable growth.
With that, I will now turn the call over to Mike for a more detailed financial review. Thank you. The strong equity markets over the past year resulted in equities increasing to 57% of AUM from 54% a year earlier. Within equities, there is a good diversification across international and domestic strategies, with domestic equities evenly split among small, mid, and large-cap strategies. The long-term relative investment performance has been compelling across products and strategies, with a majority of rated retail fund assets performing well. ETFs have also shown strong performance, with a high percentage outperforming their peers.
Total sales decreased by 19% from the previous year, primarily due to lower U.S. Retail Fund and Institutional sales. Institutional sales declined sequentially, while Retail Separate Account sales remained strong. Open-end Fund sales decreased, but ETFs and Global Funds showed positive trends. Net outflows were seen in Institutional and U.S. Retail Funds, while Retail Separate Accounts, ETFs, and Global Funds had positive net flows.
Investment management fees increased slightly, reflecting higher average assets under management and a slightly higher fee rate. Employment expenses decreased sequentially due to seasonal factors, while other operating expenses increased slightly. Operating income increased, and net income per diluted share also saw an increase.
Capital, liquidity, and select balance sheet items showed positive trends, with working capital and cash and equivalents increasing sequentially. During the second quarter, we repurchased 55,099 shares of common stock for $12.5 million and made a $5 million payment on our term loan, marking our first discretionary payment since mid-2022. Our revolving credit facility balance was paid off in the fourth quarter of 2023. As of June 30, our gross debt-to-EBITDA ratio improved to 0.8x from 0.9x at March 31, and our net debt was $69 million or 0.2x EBITDA. We generated $82 million of EBITDA in the second quarter, up from the previous quarter due to seasonal employment expenses and higher average AUM, and up 11% from the prior year. Looking ahead, planned capital uses include scheduled minority interest purchases, a potential new CLO, and other product introductions for business growth. Now, back to George for questions.
George Aylward: Thank you, Mike. We are now open for questions. Dede, please open the line for questions.
Operator: Our first question comes from Crispin Love of Piper Sandler. Crispin, go ahead with your question.
Crispin Love: Good morning, everyone. I wanted to ask about the recent market dynamics and how they may impact our flows, especially with the shift in performance from larger U.S. stocks to mid-cap and small-cap stocks. How do you expect this shift to affect our flows in the near term?
George Aylward: The recent market dynamics have been interesting, with larger-cap stocks outperforming smaller-cap stocks. Our asset base is more correlated to mid-cap and small-cap stocks, so the recent underperformance of these sectors has been a headwind for us. We are optimistic that as the market reverts, our strength in mid-cap and small-cap stocks will provide opportunities for growth. Quality versus momentum is another factor affecting our equity managers, as quality-oriented strategies have been underperforming momentum strategies. As quality reverts, we expect a positive impact on our performance. Overall, we caution against using the S&P 500 as a sole indicator of our AUM or revenue trends due to our diverse investment strategies.
Crispin Love: Thank you for that insight, George. I also wanted to ask about Institutional flows and any upcoming trends that could drive flow trends in the near term. Do you anticipate any positive developments in Institutional flows, and how do you expect these trends to evolve over the next few quarters?
George Aylward: Institutional flows can be unpredictable, but we have a strong pipeline of potential opportunities across various investment strategies. The timing of these flows is difficult to forecast, but we remain optimistic about the potential for growth in our Institutional business. We have seen interest in our AlphaSimplex offerings, adding to the diversity of our product offerings. So, we are seeing positive trends in our pipeline across affiliates and geographies. We are pleased that our known wins are outpacing redemptions. It is challenging to predict when this will reflect in our results, but we are happy with the activity and diversity across our managers. Thank you for the call, George and Mike. We continue to be active in the M&A space, focusing on strategic value for shareholders. We are particularly interested in opportunities in private markets and other capabilities. Within liquid alts, we see strength in private credit, private equity, and real assets. We aim to offer competitive fee rates while ensuring profitability and attracting new flows. Our capital allocation strategy includes share repurchases, dividend increases, debt repayment, and investments in organic and inorganic growth. In the prepared remarks, we indicated that future uses of capital could include potential CLOs and new product introductions, which we believe are good uses of capital. We have a balance sheet allocation to seed capital, including CLO capital, which has been an area of investment for us. Many of our growing products and revenue generation have come from previously seeded initiatives, highlighting the importance of investing in the future of the business. We continuously rebalance our seed capital as part of our investment strategy, with the goal of growing and drawing third-party assets. In certain instances, such as with CLOs that have a good IRR, we may utilize that capital if it meets our threshold. We have also been active in seeding actively managed fixed income ETFs and Retail Separate Accounts, particularly in the fixed income space. Our approach to capital return, including buybacks and debt pay down, varies depending on cash utilization for other purposes. We also have scheduled affiliate minority purchases and contingent consideration payments as upcoming capital uses. These strategic priorities are part of our balanced approach to investing in the business and returning capital to shareholders. I would like to hand the conference back to Mr. Aylward for closing remarks. Thank you.