Good morning. My name is Jeff, and I'll be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section on the Virtus website, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. [Operator Instructions] I will now turn the conference over to your host, Mr. Joe Fazzino. You have the floor, Mr. Fazzino.

Thank you, Jeff. On behalf of Virtus Investment Partners, I would like to welcome you this morning to the discussion of our operating and financial results for the second quarter of 2012. Before we begin, I direct your attention to the important disclosures on Page 2 of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance, and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. These statements may be identified by such words as expect, anticipate, believe, outlook, may and similar terms. For a discussion of these risks and uncertainties, please see the Risk Factors and Management Discussion and Analysis sections of our periodic reports that are filed with the SEC, as well as our other recent filings, which are available in the Investor Relations section of our website, www.virtus.com. In addition to results presented on a GAAP basis, Virtus uses certain non-GAAP measures to evaluate its financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results, and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our earnings press release, which is available on our website. For this call, we do have a presentation, including an appendix that is accessible with the webcast through the Investor Relations section. This morning's call will begin with remarks from President and Chief Executive Officer, George Aylward, who will review our accomplishments and operating results for the quarter, including investment performance of our mutual funds. Mike Angerthal, Executive Vice President and Chief Financial Officer, will then discuss our financial results in further detail. We will conclude by opening the call to your questions. Now, I would like to turn the call over to George Aylward. George?

Thank you, Joe. And good morning, everyone. We appreciate having you on the call with us today. And as Joe indicated, I'll start this morning by reviewing the accomplishments of the quarter, including consistent sales and flows and the growth in operating earnings and margin. Mike will then discuss the financial result in more depth, and then we'll open up the call to your questions. The strong results we reported this quarter further demonstrate 3 important themes that we've talked about in the past, specifically, we have the ability to sustain a high level of sales and flows because of the breadth of our products, strong investment performance and effective distribution. We maintained a high level of mutual fund sales during a quarter when the markets were challenging. The global markets reversed many of the gains that were achieved during the first quarter as a result of the debt crisis in Europe and a fear of a slowdown in the U.S. recovery. Even many safe haven assets such as treasury saw yields fall to multiyear lows. Despite these volatile markets, we maintained strong sales in multiple asset classes, including domestic equity, international equity and taxable fixed income. Second, the upfront strain from our consistently high level of sales is now being offset by the cumulative benefit of our asset growth. Over the past years, our sales and the related costs have been at significantly high levels in relation to the existing AUM, which funds those sales. This effect, which we refer to as sales strain, has resulted in a negative impact on our earnings. Now, we're seeing the benefit of the cumulative growth. Since the beginning of last year, we've added $8.5 billion to our asset base through positive net flows. This larger base of assets, as well as the…

Thank you, George. Good morning, everyone. In the second quarter, we demonstrated consistent strength across all the key metrics, despite the volatile and uncertain market environment. This morning, I'll provide detail around the results, starting with sales and flows, and how our strategy of new product introductions and growth initiatives has led to our ability to sustain a high level of sales inflows. Then I'll review our operating results and discuss how our growing asset base is driving profitability. Finally, I'll talk about our balance sheet and capital items. Let's start with assets under management. We ended the quarter with total assets of $38.8 billion, which was $5.5 billion or 17% higher than the year-earlier and $0.8 billion or 2% higher on a sequential basis. Long-term assets, which exclude cash management products, are up 2% on a sequential basis and grew 21% over the past year to $37 billion at June 30. The growth in AUM is particularly notable, considering the headwinds that the industry is facing with investor uncertainty and market volatility. Market declines in the second quarter resulted in asset depreciation of $ 0.2 billion, compared with appreciation of $2.2 billion in the prior quarter and $0.6 billion in the prior-year quarter. One important item to point out in our long-term AUM is the increase in closed-end fund assets. As a result of launching 2 funds and adopting a third, closed-end fund assets were $6.1 billion at June 30, representing 16.4% of assets and contributing 20% of revenues. As we've mentioned before, we find closed-end funds to be very attractive because these assets are long-lived in nature, provide stability of investment management fees and diversify our revenue and earnings. We're a top 10 provider of closed-end funds, and with our recent success introducing no funds -- new funds,…

Thanks, Mike. Before we open up the call to questions, I want to briefly comment on our focus to the business as we move forward for the remainder of the year. First, we believe we are well-positioned to continue on our current trajectory. In the near term, we think the single largest headwind for the rest of the year will be the uncertainty in the financial markets and how that uncertainty will affect the individual investor. However, we feel confident that we have the right mix of products and strong performance to sustain a high level of sales. Second, our distribution effectiveness continues to distinguish us. We've had a -- we have a great opportunity to take advantage of the diversity of our products and performance by further extending our distribution reach. I see us continuing to increase our retail penetration, not only in the wire house channel, but in the RIA and the independent channels as well. And for the longer-term, we continue to see our efforts in offering new strategies and products as an important part of our business strategy, and is something that will support continued high levels of growth. With that, let's take some questions. [Operator Instructions] Jeff, can you open up the lines please?

[Operator Instructions] Our first question comes from the line of Michael Kim with Sandler O'Neill.

First, just to follow up on your commentary. Assuming at some point, retail investors start to come back to more traditional U.S. core equity strategies and maybe away from asset allocation funds or emerging market or international portfolios to some degree, how does that sort of environment set up for you? Because it seems like you've got a number of more traditional funds, but they're still pretty small in the grand scheme of things, so just curious to get your comments there.

Yes, I think -- generally, if the investor is still going to have a nice well diversified portfolio, again -- and you're correctly pointing out that we don't generally focus in on, maybe, some more of the traditional plain core growth, large value kind of products. And really where we're focused in is on more of the niche-y specialty types of stuff that will be heart of a well diversified portfolio. We -- so we generally go for more of the Alpha types of strategies or those that sort of fill a different need in terms of either yield or preservation. So we continue to see that there'll be a greater opportunity for those strategies in a well diversified portfolio, and we're not looking to compete against EGF or other beta plays for some of those types of strategies. So I think we will continue to focus on, if we offer those things in those categories, they will be a more differentiated strategy. So high concentration or having -- satisfying some other type of an investor need rather than those other strategies. But if you look through the whole product lineup. Again, we have good performance in pretty much all of those general categories.

Got it. And then maybe just one for Mike. Just coming back to the incremental margin discussion. Looking past all of the noise in -- the incremental margin continues to be very strong even as mutual fund sales levels were actually pretty close to where they were running last quarter. So does that suggest we could see even greater kind of flow-through assuming a more normalized sales rate?

That was a good question, and as you know, we haven't provided specific guidance on margin levels. We've talked about how we would fare, sort of, when you look at margins vis-a-vis the industry and how we have a multi-manager model where you expect our margin. That said, our capture ratio, we talked about on the prior quarter, was unusually high. We've demonstrated the capture ratio and looked at that at around the 50% to 60% level, over time. And we think the business had been leveregable and you see that in the results. So we expect to be able to continue to add assets and leverage our business.

[Operator Instructions] Up next, we have the Steven Schwartz with Raymond James & Associates.

If I could, I think to follow-up on Mike's discussion here. The 3 areas that you really mentioned, I think, on the long-term funds side going into emerging markets, the Multi-Sector Bond funds, the AlphaSector products. How -- do you -- would you happen to know how much of sales went to those 3 areas?

Yes. Steven, this is Mike Angerthal. Good morning.

Generally those 3 have been the bigger drivers, and again, they are 3 totally distinct categories of assets. But in total, Mike?

It's a little less than 75% of total sales for the quarter, which is down slightly from the prior quarter and the prior year. As we've indicated, we've got a portfolio of a strong producing 4- and 5-star funds and we've seen success in some of the other strategies launched. But those products are well diversified from domestic equity, international equity and the bond categories, and they're managed by different managers, so we've got strong diversity there.

And we, sort of, look at -- it's interesting is you also have to look in the backdrop of where the demand has, sort of, been in the market. And with the exception, maybe, of domestic equity, these are the products that have sort of fitting where the current demand has currently been. And I think, again, for us to have something that's effectively in a large cap core category being positive, is unusual but it's only because it's a offensive equity strategy. So again our goal is to make sure that there's different types of investment strategies go in and out of favor that we have things to meet it. So these 3 are sort of meeting the demand that's currently -- we're currently seeing at least in the intermediaries.

Okay. And then if I can follow up to the -- on the CLO side, you lost that portfolio, you had $700 million. I know it's not remaining -- I know it's not a big deal, but what leads to something like that, I don't know the word, dissolving early, and the rest of the $700 million leaving early?

Well, in some ways the CLO actually performed very well. So it was --

But paid itself off?

It performed well enough where it made sense for the trustees to sort of execute their ability to sort of early terminate. So it's -- if actually the CLO have not been performing as well, it probably would have made no sense for them to elect to do that. So -- and I think the other CLOs are also performing well, probably not maybe as well as that one.

Yes. I think the other element of that is if it was a call by some of the bondholders, specifically in the lower tranches of that CLO, and they had a majority position which they accumulated, and as George indicated, since it was performing so well, there were able to execute a call and force the early liquidation of the remaining 4 CLOs for $700 million, as you indicate. They're performing well, but we don't envision there being one holder accumulated in a position to enable a call on it.

Okay. All right. Great. And then one more for me. On the incremental capture rate, if you will, you suggested it was 88%, and as you just said in the past, normal would be more around 50% to 60%. Any particular reason why this quarter was so much higher?

Yes. We called out the items to look at in the first quarter. Where there -- the expenses were inflated by --

No. No. No. Mike, I meant in general, I thought you were suggesting that the incremental capture rate should be 50% to 60% over the long term? Or did I misunderstand that?

I thought you were asking about this quarter as being high. Yes, that -- we would expect it to be in that -- in range because that's really been our historical trend more in line over the past 2 or 3 years.

And it looks like our next question is a follow-up that comes from the line of Michael Kim with Sandler O'Neill.

Just one follow-up. It looks like flows into the premium AlphaSector Fund have slowed a bit over the last few quarters, but at the same time, you've seen a pickup in demand for the dynamic AlphaSector Fund, more recently. So do you get a sense that some investors may be rotating into the dynamic fund just given, kind of, the macro environment and the flexibility of that fund to put on leverage or take short positions?

Yes. I know, I think, you're absolutely spot on. I mean, we look at the AlphaSector strategies really as a continuum of offerings. So you have the early versions of the first funds we launched, which were really more just pure domestic equity playing the sectors of the S&P, with the ability of hiding cash. And then with the addition of the allocator, which brings in several other asset classes. And then the dynamics, which you're referring to, which then takes it to the level of having some of those same basics but adding a long shortability, it really -- people that are, sort of, attracted to those types of strategies it really, sort of, depend on how they're feeling on the risk spectrum or what they're looking for in terms of the return. So I would definitely say that people are resonating to the story, and there are absolutely people that are moving from the attractiveness of the pure premium AlphaSector, which is the domestic equity one, and being intrigued by the opportunities set in the different risk/reward profile of dynamic. And that's why we like having that nice product suite of those AlphaSector products.

Just a follow-up on that, does that suggest incremental AlphaSector funds down the road?

Again, we -- we're very focused on continuing to look at are there other expansions or additions to the product set. So we found them to be very successful, and to the extent that we could identify another logical extension of that as we work with our partner and subadvisor on that, absolutely we'd look at those, either through AlphaSector or other versions that sort of fit the same genre.

This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Aylward for closing remarks.

Great. Well, again, thank you, everyone, for joining us this morning. And we certainly encourage you to give us any call if you have any further questions, and we look forward to speaking with you next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.