Virtus Investment Partners
Annual Report 2012

Plain-text annual report

V I R T U S I N V E S T M E N T P A R T N E R S 2 0 1 2 A N N U A L R E P O R T BRoAd CAPABIlITIES | CoMBINEd STRENgTh 2012 ANNUAL REPORT FINANCIAL OVERVIEW Summary of Operations (dollars in millions, except per share data) Revenues Operating Income Operating Income, as adjusted* Net Income attributable to common stockholders Operating Margin Operating Margin, as adjusted* Per Share Data Weighted Average Shares Outstanding – Diluted (in thousands) Earnings per Share – Basic Earnings per Share – Diluted Assets Under Management (dollars in millions) Ending AUM 2012 280.1 60.4 81.5 37.6 22% 38% 8,073 4.87 4.66 $ $ $ $ $ $ 2011 204.7 13.9 43.7 111.7 7% 28% 6,834 17.98 16.34 $ $ $ $ $ $ $ 45,537.0 $ 34,587.6 By product (12/31/2012): l Long-term Open-End Mutual Funds l Closed-End Funds l Money Market Funds l Variable Insurance Funds l Separately Managed Accounts l Institutional Products Total $ 25,827.1 6,231.6 1,994.1 1,295.7 5,829.0 4,359.5 $ 45,537.0 By investment category (12/31/2012): l Equity l Fixed Income l Cash Management Total 16,581.7 2,029.8 $ 26,925.5 $ 45,537.0 * Certain supplemental performance measures are provided in addition to, but not as a substitute for, performance measures determined in accordance with GAAP. These supplemental measures may not be comparable to non-GAAP performance measures of other companies. “Operating Income, as Adjusted” and “Operating Margin, as Adjusted” are supplemental non-GAAP measures that net the distribution and administration expenses against the related revenue and remove certain non-cash and other identified amounts. For our definition of these terms, as well as a reconciliation to GAAP measures, see “Reconciliation of Revenues, Operating Expenses and Operating Income on a GAAP Basis to Revenues, Operating Expenses and Operating Income, As Adjusted” in the Supplemental Financial Information, included as an attachment to this annual report after the Form 10-K. This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which, by their nature, are subject to significant risks and uncertainties. Virtus Investment Partners, Inc. intends for these forward-looking statements to be covered by the safe harbor provisions of the federal securities laws relating to forward-looking statements. For a further discussion, see “Forward Looking Statements” on page 16 of the attached Form 10-K. MESSAGE TO SHAREHOLDERS Consistent Growth from a Solid Foundation Broad Capabilities, Combined Strength To our Fellow Shareholders, We are pleased to report that 2012 was an exceptionally strong year for Virtus Investment Partners, continuing our trend of growing financial and operating results since becoming an independent public company. The results – including record sales, net flows and operating earnings, and substantial growth in the value of our stock – demonstrate the value of the solid foundation we have built that has defined our company Virtus Investment Partners (NASDAQ: VRTS) is a distinctive partnership of boutique investment managers singularly committed to the long-term success of individual and institutional investors. Our multi-style, multi- manager approach gives advisors and their clients unique access to a broad array of investment capabilities from a dynamic group of affiliated managers and select over these past four years: a distinctive business model subadvisers, each with a distinct investment that generates multiple growth opportunities and the focused execution of a clearly defined operating strategy. We established these core business objectives to position ourselves for success and continue to deliver growing value for our shareholders: style, autonomous investment process and individual brand. The combined strength and disciplined, institutional-quality strategies of our investment partners offer solutions that meet a wide variety of investor needs. > Maintain the high quality of our products and expand into new strategies; > Attract and retain top talent to support our business; > Capture greater market share; and > Optimize our capital structure to position the company for further growth. We accomplished each of these objectives and generated strong financial and operating results in 2012 with a focus on continuing to produce sustainable long-term value for our shareholders. Mark C. Treanor Chairman Board of Directors George R. Aylward President and Chief Executive Officer [1] MESSAGE TO SHAREHOLDERS Recognized Investment Performance, New Strategies Specific accomplishments included: Clients look for superior products to meet their investment preferences and unique financial needs and to address changing market cycles and shifting priorities. We offer a broad array of high-quality investment capabilities that constitute a well-diversified investment portfolio, provided by boutique managers with distinct investment styles and individual brands. Our disciplined approach to product oversight, product > Competitive, high performance across diverse asset classes and strategies. Eighty-five percent of our equity mutual fund assets and 92 percent of fixed income assets were in 5- and 4-star Morningstar-rated funds (on a load-waived basis), with 95 percent of all fund assets rated 3 stars or higher at year-end.1 > Recognition in the Barron’s/Lipper 2012 Best Fund Families Ranking as the best Taxable Bond Fund family of the year. We earned this distinction for the second time in three years, based on Newfleet Asset Management’s development and manager selection resulted in continued strong performance. This was also the third consecutive strong relative investment performance, an important year that Virtus was a category winner; we were the best contributor to our overall success in 2012. World Equity Fund family in 2011. Virtus – S&P 500® – Peer Companies2 Change from 1/2/09 Open to 12/31/12 Close 1330% 1130% 930% 730% 530% 330% 130% -70% | | 1/2/09 | | | | | | | | | l VRTS l Peers l S&P 500 l 1244% l 105% l 72% | | | | | | | | | | | 12/31/12 | | | | | | | | | | | | 12/31/11 | | | | | | | | | | | | 12/31/10 | | | 12/31/09 1 Additional information regarding investment performance is included as an attachment to this annual report after the Form 10-K. 2 The companies that comprise the peer composite are included as an attachment to this annual report after the Form 10-K. [2] > Morningstar and Lipper honors for international equity funds. Rajiv Jain of Vontobel Asset Management, manager of the Virtus Emerging Markets Opportunities We introduced new capabilities in open-end and closed- end funds from current managers and new subadvisers: and Foreign Opportunities funds, was honored as Morningstar’s 2012 International-Stock Fund Manager > The eight open-end mutual funds launched in 2012 included new strategies from Newfleet and Kayne of the Year and earned a Lipper Fund Award for the Anderson Rudnick; three “Virtus Disciplined” funds from Virtus international equity funds he manages. Newfound that offer rules-based equity and fixed-income strategies; an open-end fund that leverages the Distinctive new strategies ensure that we maintain a expertise of Herzfeld Advisors, one of the premier portfolio of products that are relevant to the needs of our analysts of closed-end funds; and a strategy from Horizon clients, and in 2012 we introduced new products and Kinetics that invests in companies managed by expanded our investment capabilities. successful business leaders who have created significant Several high-quality teams with innovative strategies were added as Virtus affiliated partners: wealth through their companies. [See page 8.] > The initial public offering of the Virtus Global Multi- Sector Income (NYSE: VGI) closed-end fund demonstrated > Rampart Investment Management uses systematic and disciplined options overlay strategies to provide our ability to broaden existing investment strategies into new products. VGI – our eighth closed-end fund – customized solutions for institutional and high-net-worth is managed by the Newfleet team that advises our clients. attractive multi-sector fixed income strategies. > Newfound Investments, created in partnership with Newfound Research, offers disciplined, rules-based l 1244% models to manage a variety of asset classes. strategies using proprietary research and asset allocation Effective Distribution > Euclid Advisors added a high-conviction core international equity capability that has a bias toward value and quality, but is flexible in responding to market In the highly competitive asset management industry, the most successful companies need to stand out among the crowd with their investment capabilities and distribution. conditions based on its top-down, bottom-up approach. Our well-defined and differentiated value proposition focuses on giving financial advisors one-point access to > Kleinwort Benson Investors International offers a strategy that provides exposure to the emerging equity a broad array of investment capabilities and strategies from our boutique managers. The attractiveness of this markets and an element of income. In 2012, we reached approach continued to be validated in 2012, with mutual an agreement to acquire a 24 percent stake in the funds sales that increased 30 percent from the prior year, company. and an organic growth rate that is substantially higher than industry averages. [3] | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | MESSAGE TO SHAREHOLDERS Throughout much of 2012, with a challenging and These results were not unique to 2012. Since 2009, uneven economy, a high percentage of new sales in the our fund sales and net flows have increased at industry were invested in fixed income products, and compound annual growth rates of 64 percent and 134 many companies struggled to maintain more than single- percent respectively. digit positive net flows. The broad scope of our product offerings, and our best-in-class retail distribution, enabled us to counter these market trends: Optimized Capital Structure > We delivered a 29 percent increase in both sales and net flows. Driven by mutual fund sales of $12.3 While not capital-intensive, asset managers do have specific capital needs, such as seeding new strategies billion, which increased 30 percent from 2011, sales of and investing in growth opportunities. all investment products grew to $14.4 billion from $11.2 billion. Net flows for all products were $6.7 billion in The skilled development and execution of a compre- 2012, compared with $5.2 billion in 2011, representing hensive capital management strategy has supported our an organic growth rate of 19 percent in a year when the significant, sustained growth over the past four years, industry generated low single-digit organic growth. including the introduction of new capabilities and the completion of organic and inorganic growth initiatives. > Two-thirds of our long-term open-end mutual fund sales were in equity products, and we had an organic The primary focus of our prudent approach to capital growth rate – which is mutual fund net flows as a management is maintaining an effective balance percentage of beginning-of-year assets – of 38 percent, between investments in growth opportunities with a among the highest in the industry. meaningful return of capital to our shareholders. > Assets under management grew 32 percent to $45.5 billion on the strength of positive net flows, market appreciation, and the Rampart acquisition. Long-term assets under management were $43.5 billion at December 31, 2012, compared with $32.2 billion a year earlier. > The growth in 2012 was supported by an expanded focus on the fast-growing independent broker-dealer and registered investment advisor channels. We created Consistently solid financial and operating performance has allowed us to strengthen our balance sheet and increase capital flexibility. > We enhanced our long-term capital position and increased our operating flexibility by amending an existing credit agreement to extend the term by five years, increase the capacity to $75.0 million, and provide more favorable terms, including a lower variable interest rate. a new dedicated sales team comprising experienced professionals who understand the specific needs of > A significant portion of our free cash flow in 2012 was deployed to the many growth initiatives we completed, the independent/RIA channel. Sales through the including seeding and launching nine new open- and independent/RIA channel increased 41 percent during closed-end funds and acquiring Rampart. the year, contributing to the very strong overall growth rate of 30 percent. [4] > We returned $20.9 million to shareholders in the form of share repurchases and net share settlements to mitigate shareholder dilution. For the full year we effectively repurchased the equivalent of 237,000 shares. As we continue to strengthen and enhance our balance indices and, for the third consecutive year, was the best- sheet, we will manage our capital to provide appropriate performing publicly traded traditional asset manager. operating flexibility with the overriding objective of maximizing shareholder value. Strong Results Positioned for the Future The operating and financial results we delivered in 2012, and our many accomplishments in our four years as a By leveraging our business model, value proposition and public company, demonstrate the strength of our vision the effective execution of our distinctive strategy, we and unwavering commitment to our collective success. delivered strong results in key financial metrics during the year: > Revenues increased by 37 percent to $280.1 million from $204.7 million in 2011 as a result of the significant increase in assets under management and a growing percentage of higher-fee equity assets. > Operating income, as adjusted, which is the non-GAAP performance measure that we believe best illustrates the earnings of the company, increased by 86 percent to $81.5 million from $43.7 million in 2011. The related margin grew to 38 percent from 28 percent. The increase in the margin reflects the leveragability of the business and our ability to add assets and revenues with minimal expansion of the fixed cost base. > Operating income, the comparable GAAP measure and the related margin grew to $60.4 million and 22 percent from $13.9 million and 7 percent. Net income attributable to common stockholders was $37.6 million, or $4.66 per diluted common share in 2012, compared with $111.7 million or $16.34 per share in 2011. (The 2011 result includes $15.00 per share primarily related to a tax valuation release and expenses related to the retired Series B Convertible Preferred Stock.) > Our shareholders directly benefited from the achievement of these financial results and the completion of our initiatives. With a 59 percent appreciation in our stock price during 2012, Virtus outpaced the average of our peer companies as well as the broader market Our consistent growth in key metrics is a result of our distinctive business model and value proposition and the successful execution of an effective strategy. We believe our potential is even greater. By successfully leveraging our business model and executing on our strategy, we have distinguished Virtus as a fast-growing and profitable asset management company. We have all the elements to continue to grow: a well-balanced and diversified product set, solid investment performance, effective distribution through multiple channels, a strong and flexible capital structure, and talented employees. It is this unique combination of broad capabilities that gives us such confidence in the future of our company. We thank you for joining us as shareholders, and, on behalf of the board, management team and employees of Virtus Investment Partners, we look forward to the opportunities ahead. Sincerely, George R. Aylward President and Chief Executive Officer Mark C. Treanor Chairman [5]   BOARD OF DIRECTORS From left: Diane M. Coffey, Edward M. Swan, Jr., George R. Aylward, Timothy A. Holt, Mark C. Treanor, James R. Baio, Susan S. Fleming, Hugh M. S. McKee George R. Aylward President and Chief Executive Officer Virtus Investment Partners Hugh M. S. McKee Co-President and Chief Operating Officer BMO Investments Inc. James R. Baio1,2 Chief Financial Officer, Treasurer and Executive Vice President (Retired) Franklin Templeton Investments Edward M. Swan, Jr.1,3 President (Retired) FIS Group Mark C. Treanor 2,4 Non-Executive Chairman of the Board of Directors Senior Partner Treanor, Pope & Hughes Board Committees 1 Audit 2 Compensation 3 Finance and Investment 4 Governance Diane M. Coffey 2,4 Managing Director and Partner Peter J. Solomon Company, Ltd. Susan S. Fleming, Ph.D.3,4 Consultant and Executive Educator Timothy A. Holt 1,3 Senior Vice President and Chief Investment Officer (Retired) Aetna, Inc. [6] PRINCIPAL CORPORATE OFFICERS From left: Mark S. Flynn, Jeffrey T. Cerutti, Michael A. Angerthal, George R. Aylward, W. Patrick Bradley, Mardelle W. Peña, Francis G. Waltman George R. Aylward* President, Chief Executive Officer and Director Michael A. Angerthal* Executive Vice President Chief Financial Officer and Treasurer W. Patrick Bradley Senior Vice President Fund Services Jeffrey T. Cerutti* Executive Vice President Head of Retail Distribution Mark S. Flynn* Executive Vice President General Counsel, Chief Compliance Officer and Corporate Secretary Mardelle W. Peña Senior Vice President Human Resources Francis G. Waltman* Executive Vice President Head of Product Management *Executive Officers [7] NEW INVESTMENT STRATEGIES Open-end mutual funds introduced in 20123: > Virtus Disciplined Equity Style Fund (VDEAX – Newfound Investments) Identifies opportunities to tactically shift between growth-oriented and value-oriented stocks > Virtus Disciplined Select Bond Fund (VDBAX – Newfound Investments) Focuses on capturing relative outperformance in fixed income assets to reflect changes in interest rates, inflation and credit cycles > Virtus Disciplined Select Country Fund (VDCAX – Newfound Investments) Allows international equity investors to capitalize on the significant performance disparities among non-U.S. equity markets > Virtus Emerging Markets Debt Fund (VEDAX – Newfleet Asset Management) Generates total return and capital appreciation through sovereign, quasi-sovereign and corporate bonds of emerging markets > Virtus Emerging Markets Equity Income Fund (VEIAX – Kleinwort Benson Investors International) Focuses on total return with the potential for less risk through high-quality emerging market companies with above-average dividends > Virtus Herzfeld Fund (VHFAX – Thomas J. Herzfeld Advisors) Invests in closed-end funds exhibiting excessive or unusual discount patterns that have an attractive probability of narrowing > Virtus International Small Cap Fund (VISAX – Kayne Anderson Rudnick) Invests in high-quality companies that can grow consistently through different cycles and protect principal in down markets > Virtus Wealth Masters Fund (VWMAX – Horizon Kinetics) Invests in companies managed by individuals who created personal wealth in the company by prioritizing long-term shareholder value 3 Class A ticker listed. Additional information regarding risk considerations relating to these funds is included as an attachment to this annual report after the Form 10-K. [8] SHAREHOLDER INFORMATION Security Listing The common stock of Virtus Investment Partners, Inc. is traded on the NASDAQ Global Market under the symbol “VRTS.” Transfer Agent and Registrar For information or assistance regarding your account, please contact our transfer agent and registrar: Virtus Investment Partners c/o Computershare Investor Services P.O. Box 43078 Providence, RI 02940 Toll-free (within U.S.): 866-205-7273 Foreign Shareowners: 413-775-6091 TDD for Foreign Shareowners: 781-575-2300 Web Site: www.computershare.com/investor E-mail: Virtus.Investment.Partners@virtus.com Annual Meeting of Shareholders All shareholders are invited to attend the annual meeting of Virtus Investment Partners on Tuesday, May 21, 2013, at 10:30 a.m. EDT at the Hilton Hartford Hotel, 315 Trumbull Street, Hartford, CT. For More Information To receive additional information about Virtus Investment Partners and access to other shareholder services, visit Investor Relations in the “About Us” section of our Web site at www.virtus.com, or contact us at: Virtus Investment Partners, Inc. Investor Relations 100 Pearl Street Hartford, CT 06103 Telephone: 800-248-7971 (Option 2) Fax: 860-241-1113 e-mail: investor.relations@virtus.com Affiliated Companies Duff & Phelps Investment Management Co. 200 S. Wacker Drive Suite 500 Chicago, IL 60606 312-263-2610 Euclid Advisors LLC 1540 Broadway New York, NY 10036 800-272-2700 Kayne Anderson Rudnick Investment Management, LLC 1800 Avenue of the Stars Second Floor Los Angeles, CA 90067 800-231-7414 Newfleet Asset Management, LLC 100 Pearl Street Hartford, CT 06103 860-760-5828 Newfound Investments, LLC 100 Pearl Street Hartford, CT 06103 860-263-4707 Rampart Investment Management Co., LLC One International Place Boston, MA 02110 617-342-6900 Zweig Advisers LLC 1540 Broadway New York, NY 10036 800-272-2700 For more information on the Virtus Mutual Funds or other products, call your financial representative or visit our Web site at www.virtus.com. V I R T U S I N V E S T M E N T P A R T N E R S 2 0 1 2 A N N U A L R E P O R T BRoAd CAPABIlITIES | CoMBINEd STRENgTh 2012 ANNUAL REPORT 

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