Good morning. My name is Kevin, and I will 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 of the Virtus Web Site, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus Web Site. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer period and instructions will follow at that time. I would now turn the call over to your host, Joe Fazzino.

Thank you, Kevin, and good morning, everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the fourth quarter of 2018. 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, and as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's earnings release and discussed in our annual report on Form 10-K, quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. 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 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 Web Site. Now I would like to turn the call over to our President and CEO, George Aylward. George?

Thank you, Joe. Good morning everyone. Today I'll start with an overview of the quarter before I turn it over to Mike for more detail on the financial results. Our results this quarter clearly reflect the impact of the volatile and challenging market environment that started in October and accelerated into year-end with significantly influenced investor behavior. In terms of equity markets, the quarter was one of the most difficult in recent memory with the major broad indices having negative returns and certain specific asset classes such as leverage loans and high yield was significantly impacted. With this market backdrop across the industry active mutual funds, so outflows accelerate to record levels by year-end with December being the worst month for long-term fund outflows since 2008. Given the markets investors sought to derisk and moving to cash. Asset managers were meaningfully impacted by the market dislocations and investor behavior which affected assets known to management flows and operating results. Let me review our results for the quarter. Long-term assets under management decreased 13% sequentially to $90.4 billion as a result of market depreciation and net outflows. Total assets which include liquidity strategies ended the period at $92 billion. Total sales of $4.4 billion declined from $6.3 billion in the prior quarter. Total net outflows of $4.8 billion reflected the lower sales as well as elevated redemptions both of which were significantly impacted by the market environment and this was particularly evident in open end funds. And outflows in open end funds were $3.9 billion for the quarter. Sales declined $0.9 billion as significantly lower sales in small cap domestic equity strategies offset increases in other asset classes. Open end funds had elevated redemptions in the quarter across asset classes notably leveraged finance strategies. We feel separate accounts were positive in…

Thank you, George. Good morning everyone. Starting on Slide 7 assets under management. At December 31, long-term assets were $90.4 billion, which reflects a sequential quarter decrease of 13% and an increase of 1.8% from the prior year quarter. The sequential decrease included $8.1 billion of market depreciation and net outflows of $4.8 billion. Market depreciation of $8.1 billion was reflective of the market dislocations that affected equities as well as leverage loans during the quarter. To change from the prior year reflects the addition of SGA assets of $11.3 billion partially offset by market depreciation of $4.5 billion and net outflows of $3.7 billion. AUM continues to be well diversified by product type asset class and channel. No single asset class represented more than 19% of long-term AUM and at year-end open end mutual fund AUM accounted for 42% of total long-term assets down from 48% a year ago. As a reminder, we include additional detail on our AUM by asset class in our financial supplement. Turning to Slide 8 asset flows, total sales were $4.4 billion a decrease of 29% sequentially as the market environment pressured investor demand across all asset classes except money markets. We had net outflows of $4.8 billion in the quarter primarily due to the lower sales and elevated redemptions reflected investor sentiment. Looking at open end mutual funds by asset class. Domestic equity funds had net outflows of $0.9 billion compared with net inflows of $0.8 billion in the prior quarter. The sequential change in net flows is primarily attributable to net outflows in small cap strategies, which overshadowed higher sales in mid and large cap strategies. Mid-cap strategies generated positive net flows of $0.1 billion in the quarter as sales increased 55% on a sequential basis. International equity funds which include both…

Thanks, Mike. With that, we will take all your questions. Kevin, can you open up the line please?

[Operator Instructions] Our first question comes from Ari Ghosh of Credit Suisse.

Hey, good morning everyone.

Good morning.

So just on the buyback, while you increased your allocation last quarter, curious like, what's the appetite to get more aggressive from this $15 million per quarter level that you noted? And then also maybe, just like talk about, how you're thinking about cash generation versus investment and seeding needs versus buybacks for 2019 because this looks like, you could get a lot more opportunistic here given the attractive price point.

Yes, absolutely. And as we sort of indicated in my remarks, we -- very closely look at what are the relative opportunities, because with the cash flow that we're currently generating and we continue to expect to generate, we have sufficient capacity to address each of the three things in any given quarter or in any given year, some will have a higher priority or a lower priority. So as you saw in the fourth quarter, we increased from the third quarter significantly the stock repurchases to the $15 million and it was really our assessment that is based upon the relative opportunities, we have to use capital, that was a higher opportunity than the prior quarter. And in terms of seed, I think we sort of saw we actually took some actions reducing seed, unlocking some realized gains and then recycling some other things. So we feel very good that we have the cash flow that allows us to have the flexibility to do different things and we do prioritize and last quarter, clearly given how our stock was trading relative to the values that we think of. It was a great opportunity and our cash generation going forward will allow us continue to do that. In terms of seeds and other investments, again, we have a very full product set, particularly on the open end side. So really, the only thing you've seen us really doing in terms of seed have been, some of the global stuff historically, we've now built out a couple of global funds. So really our focus is really on -- we have debt, we feel very fortunate to have a leverage ratio at the lower end of the range given some of the challenges in the market. So we feel we have a lot of flexibility to take advantage of opportunistic windows in the market.

Got it. And then, maybe Mike, just on the expenses for 2019. Can you help us think about growth rates, maybe just for like comp and the core expenses? Thinking about the comp ratio, it still is 49%, still a reasonable rate for 2019, all else equal. And then on some of the core expenses, as you think about your 16.5 to 18.5 range. What's the flexibility you can managed that, is it going to be primarily driven by market factors or could you pull back any investments that you're looking at to kind of get to the low end of that range?

Yes. Thanks Ari. And I think we talked about the first quarter to be mindful of the seasonal items and as you model and I'm sure you think about that. We expect that to be 10% to 15% higher than the $6.8 million in the prior year. As we think about the range of 48% to 50%, have the employment ratio range of 49% in the fourth quarter, certainly that ratio will be affected by market conditions, but as we sit here today, that seems like as good of a modeling assumption as any from the employment side. We talked a little bit about on the operating expense side to ensure that we are still focused on strategic growth priorities and they sort of dovetail on George's outline on our product set, which is continued on ETFs, continuing on non-U.S. and institutional focus. So those remain our strategic priorities on the cost side and will enable to execute on that by looking at cost efficiencies on non-critical support areas, which enable us to keep in that 16.5 to 18.5 range. So looking forward, we are investing in key strategic priorities, continued focused on the costs and feel good about how we're positioned at this point.

Got it. Thank you very much

Our next question comes from Michael Carrier with Bank of America.

Hey, good morning guys. This is actually Sameer Murukutla on for Michael Carrier. Can you just give us some details on where you see the fee rate kind of trending in 1Q, given some of the positive 1Q markets especially in EM?

Yes. For the fee rate -- over the last few quarters as you know, we've had a positive fee rate differential, were -- so over the last four quarters, I believe, three or four quarters, we've had the differential with a much higher fee rate on the sales versus the redemptions and that's being driven by some of the equity products, particularly those that are more capacity constrained, which demand a higher fee level. And that continued in the fourth quarter, where the differential was a little lower, it was still a positive differential. As Mike sort of alluded to, when you look at the total average fee rate for mutual funds quarter-over-quarter, one part of the modest decline was just because the market impact brings down the relative value of equity assets. So you do weighted average fee rate, it technically comes down. The market has now gone up in January, been very strong month in January. So mathematically that would have the reverse impact where that would increase the relative value of equity assets to fixed assets. And then in terms of sales, as I sort of alluded to in the color I'm seeing in January, we are very pleased to see demand across actually all of our equity strategies and particularly in areas like emerging markets and some of the international strategies, which again are generally at the higher end of the fee rate. So I don't know what the rest of the quarter will look like, but the market, obviously, the equity markets have an impact on what the average fee rate is on the assets in place and the sales -- the differential between sales and redemption if they will continue with the trends we've seen in prior quarters and continue going forward, the same thing would occur, but again I can't predict what the rest of the quarter or the rest of the year will look like.

Perfect. And just one follow-up, can you just talk to us of what you're seeing with SGA? How the integration is going and maybe how SGA held up relative to rest of this?

SGA is doing wonderfully. We're very pleased with the investment in SGA and having them as part of the family of boutiques. They are a great firm. They continue to execute on their investment strategies and again they have more of a high conviction orientation. So they continue to do well, perform as they historically have done, which is very strong and we're just very excited about having them part of the group and continuing to build out their institutional business.

Our next question comes from Sumeet Mody with Sandler O'Neill & Partners, L.P.

Hey, good morning guys.

Good morning,

A follow-up on, on Ari's question on seed. I appreciate you guys are looking at global strategies. Are there any particular geographies you're excited about or maybe products, alternative less liquid strategies you're more focused on expanding and going forward?

If you're speaking, just to offshore non-U.S. product structures, we had launched two -- I think two file [indiscernible] sometimes during the course of last year, which were fixed income. There are not any other filings out there for new products. So, we have a couple of good products there. What we've really been focused on is the distribution side. So we had sort of in the middle of last year, we had increased some focus on the offshore distribution here in the U.S. to get some traction with the funds. Because as you recall, we sort of set up funds few years ago, it took them a few years to build a track record. It took us a few years to get turned on in some of the distribution channels and now we've augmented that with support on the distribution side. So, it's still early in that process, but we now have track records. We now have access and we now have distribution. So we're looking to sort of, hopefully get more results, we've actually seen, it's still very, very small, but we are still seeing -- we've seen more sales in those products than we have historically and we continue to look to those opportunities outside of the U.S., either in Latin America and then ultimately further out in Europe. So they again, that is just something we'll organically try to build out with our own resources. So in terms of other product. There is nothing else that we've done any filings for, put out there that you should be thinking of in terms of -- in the short term any kind of seed needs.

Okay, thanks. Appreciate that color. Just a quick one on the CLOs. We've seen a lot of recent volatility in the high yield spreads, widening and coming back in. Just wondering, how the changing markets has impacted? How you're thinking about the timing, some of the CLOs and warehouse space, and then, maybe how it's affected the way you're approaching equity tranche investments if at all?

Yes. Sumeet, good morning, it's Mike. We have one CLO in the warehouse phase, $7.5 million investment and we entered into that warehouse in the mid part of 2018, and obviously that market was impacted in the fourth quarter of '18. There have been some transactions that have gotten done in January, the market seems to be settling down, certainly it's the technical dislocation in the fourth quarter. So our expectation would be to see execution of that structure product in the first half of 2019. As we think about the CLO investments and that comprises about $90 million of the $94 million that we talked about in other investments, that's really generating a good portion of the $4.2 million of interest and dividend income that we recognized in the fourth quarter, $3.2 million of that $4.2 million was attributable to the CLO investments. And certainly we -- or in that business as our affiliates and think the -- that market is one and sponsoring and supporting our affiliates to launch CLOs is an important aspect to be a participant in the leveraged loan market and we're certainly watching it carefully and working closely with our affiliate teams on those structured products.

The structured products as Mike mentioned in the call, have been continued to have generated cash distribution and proceeds, which while they're not included in our non-GAAP earnings, they are actually adding to the cash flow generation that we can then make available for other things like stock repurchases et cetera.

Okay, great. I'll leave it there. Thanks guys.

[Operator Instructions] Our next question comes from Jeremy Campbell with Barclays.

Hey, thanks guys. You know, obviously, just the market was pretty bad backdrop for you guys in 4Q and it was a tough year for small caps. So, just kind of wondering, is there any kind of idiosyncratic driver of some of the open end fund redemptions like, did you guys see any kind of tax loss selling element that maybe you got back here in the first quarter or is really the open end stabilization in January more just for me is stabilizing redemption rate?

Yes, no, it's a great question because really, as a sort of I think through the fourth quarter, right. So they were -- there are whole bunch of factor, right. The main factor was just the backdrop of everyone de-risking and really across the board asset classes, investors were de-risking and moving to cash, so we absolutely participated in that. And then on top of that, we sort of had two elements that I would really sort of focusing on, small caps and basically leveraged loan strategies. Because as you remember, we previously had several quarters of positive flows and some of that was driven by high levels of demand in small caps, which were absolutely in favor earlier in the year. So they sort of -- we had done soft closes on those and those strategy sort of fell out of favor and then actually the Russell Index really performed poorly in the fourth quarter. significant decline in sales of the small cap, but at the same time, we actually saw an increase in large cap equity, mid cap equity and I think -- of our fixed income strategies. So we're actually seeing those sales go up, but the sharp decline in small caps stood out and then Mike sort of reference, the leveraged loan strategies, that asset class goes in and out of favor with more frequency than other asset classes. So you see some periods where a lots of money will come in that asset class and in December, as Mike alluded to, we had a huge draw down and that was about $1.1-ish billion in really in that one month. So then really January, really is almost like a different environment, right. Beginning of January we saw the residual of what I call the fourth quarter cleansing. But then really the demand for equity strategies was clearly evident. Many of those days are starting to be positive, slightly positive, slightly negative. So you saw the decline of the redemptions from the de-risking, you saw the increase in the demand on equity assets and for us, more optimistically, the emerging markets and international strategies, which had been previously out of favor. The only thing I'd say we haven't really seen yet is for fixed income. We haven't seen that gotten back to the place where we're hoping it we'll get to. So it's not redeeming, but certainly haven't -- we haven't seen that sales level quite up to where we would like it to be, given some of the really strong performance we have with several of our managers.

Got it. Great. And then, in the institutional sleeve, I think you guys had mentioned that the $1 billion net outflow was a little bit more from lower sales rate as kind of 3Q is a little bit more robust, but I guess when I kind of look at the net flow rate in institutional over the past couple of quarters and even going back several quarters. So kind of flattish to slightly negative at best, so is that wasn't really a good win-win rate environment. I know this can be chunky, but when you kind of look from here forward the setup into '19, I know you mentioned you have some stuff that you think might kind of fund in the first quarter. But, are you kind of starting -- still starting from a hole and having to dig yourself back up to even each quarter or is it just really the year that you think, OK, well redemptions may stabilize and we can -- we can use these win rates to generate net inflows?

Yes. The way I would sort of describe it is and we sort of look at the outflow rate versus the inflow rate. So really for us, it's been a relatively stable outflow rate as a percentage of AUM, the outflows has been relatively stable. Where more of the volatility has been is on the chunkiness of inflows, because we have only been building up some of the institutional pipeline for several of our managers over the last year or so. So that's why sort of still seeing primarily on the sales side. One quarter we have three managers with meaningful mandates like we did in the third quarter and then you're seeing effectively, the absence of that in the fourth quarter and have alluded to the fact that I'm aware of a couple of wins that we have coming in and only one modest outflow. So I think we have a book of business that is sort of operating as it should in terms of the stability of the assets on the redemption side, but we're still haven't yet gotten to a more regular rate of inflow. So, the pipeline continues to be bigger now than it was last quarter or the quarter before or the quarter before. The fourth quarter unfortunately, nothing landed, and even if things were scheduled to land, you might think that maybe the market scared people from funding a mandate in the middle of a horrible quarter. So, it really is about us getting up to a more normalized level of sales and so far the actual outflow rate has actually been relatively stable for the book of business that we have.

Great, thanks a lot.

Yes, you're welcome.

This concludes the question-and-answer session. I would like to turn the call back to Mr. Aylward.

Great. I just want to thank everyone for joining us today and we certainly encourage you to call if you have any additional questions. Thank you very much.

This concludes today's call. Thank you for participating . You may now disconnect.