Good morning. My name is Dede, 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 website, www.virtus.com. This call is being recorded and will be available for replay on the Virtus website. 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 will now turn the conference to your host, Sean Rourke.

Thank you, Dede, and good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the fourth quarter of 2023. Our speakers today are George Aylward, President and CEO; and Mike Angerthal, Chief Financial Officer. Following the prepared remarks, we'll have a Q&A period. Before we begin, please note the disclosures on Page 2 of the slide presentation. 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 news release and discussed in our 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, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for the GAAP financial results and should be read in conjunction with them. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on our website. Now I'd like to turn the call over to George. George?

Thank you, Sean. Good morning, everyone. So I'll start with an overview of the results reported this morning before turning it over to Mike to provide some more detail. Though still volatile, market has trended more favorably in the fourth quarter on views of inflation and interest rate expectations, leading to an increase in assets under management. And while we had net outflows driven by open-end funds, consistent with the industry as well as specific institutional accounts, we also had strong retail sales including the highest retail separate account sales in two years, positive net flows in retail separate accounts in ETFs, each of which had an organic growth for the full year, lower total operating expenses for the quarter, with other operating expenses essentially flat for the full year, increased return of capital including $20 million of share buybacks, attractive investment performance across strategies both long-term and for the one-year period, and repayment of debt, ending the quarter with low net leverage and a well-positioned balance sheet. Turning now to a review of the results. Total assets under management increased 6% to $172 billion, primarily due to favorable market impact, in addition to positive net flows in retail separate accounts. Sales increased 7% to $6.2 billion due to a 12% increase in retail sales, with particularly strong growth in retail separate accounts, which grew 15% led by private client. Open-end fund sales increased 9%, with sequentially higher sales of domestic equity, fixed income, and alternative strategies. Net outflows were $3.8 billion and compared with net outflows of $1.5 billion last quarter. So, by product, institutional had net outflows of $2.2 billion compared with net outflows of $0.4 billion last quarter and included redemptions related to repositioning by several retirement plan mandates. The institutional business is inherently variable on a…

Thank you, George. Good to be with you all this morning. Starting with our results on Slide 7, assets under management. At December 31st, assets under management were $172.3 billion, up 6% from $162.5 billion at September 30, due to $14.3 billion of favorable market performance, partially offset by net outflows of $3.8 billion. Average assets under management in the quarter decreased 3% to $162.7 billion with ending assets 6% above the quarter's average. Our assets under management represented a broad range of products and asset classes. Institutional, our largest product category was 37% of AUM. Retail separate accounts has delivered consistent organic growth and is that 25% of assets up from 16% five years ago. We also remained well diversified among and within asset classes. Alternatives and multi-asset in which we had limited presence several years ago, totaled over 20% of our AUM, reflecting the results of our strategic efforts to expand capabilities, particularly in less correlated strategies. In addition, on a geographic basis, non-US clients were 18% of AUM and generated 10% organic growth in 2023. We also continue to have compelling long-term relative investment performance across products and strategies. As of December 31, approximately 69% of institutional assets, 86% of retail separate account assets, and 62% of rated mutual fund assets were outperforming their benchmarks over five years. The mutual funds, 71%, outperformed the median of their peer groups over the five-year period. In addition, 69% of rated fund assets had four or five stars, and 90% were in 3, 4 or 5 star funds. We had 38 funds that were rated 4 or 5 stars, including 11 with AUM of $1 billion or more. I'd also note that our managers performed well for the full year 2023, with 58% and 90% of institutional and separate accounts…

Thanks, Mike. Okay, so we'll now take your questions. Dede, would you open up the lines, please?

Certainly. [Operator Instructions] And our first question comes from Crispin Love of Piper Sandler.

Thanks. Good morning, everyone. Appreciate you taking my questions. Just first, on the institutional flow side. You mentioned that the outflows in the quarter were driven by some of the repositioning by some of the large retirement plan mandates. Can you just provide a little more detail there? I heard some of the more constructive color on January in the first quarter, but is repositioning of retirement mandates something that you would expect to see more of in 2024 through the year, or can just the institutional flows here just be lumpy based on the quarter and could trend closer to more recent levels?

Okay. Yeah. A couple of comments, and then Mike can add to that. So every retirement plan, pension plan has different attributes and is at different points in terms of funding cycles, right. So again, I think what was unusual for us is have multiple plans, each with different clients, different strategies, reaching a level of funding and giving the strength of the ending of the market share. It's not unusual to then for a plan or any client actually to kind of reposition their risk profile and kind of lock in where they are in terms of funding. So it wasn't usual to have that number of different clients from different regions and different areas do it at the same time. So, again, we would normally -- you would normally would see over the lifecycle, depending on how markets are doing, when you're talking specifically about pension plans and retirement plans, as they achieve certain of their funding requirements, or if they achieve full funding, they are going to immediately -- they should immediately lock in whatever those returns are. The general business institutional is variable in nature, because the other thing that we would normally see, and I wouldn't be surprised if it emerges more this year, is even if you're not in a retirement plan and you're not locking in funding, you're changing your outlooks for going forward, right. So plans that might be overweight, fixed income may decide to take more risk spectrum on the equity side that creates opportunities or vice versa. So it'll be very related to individual. Mike, any other color on the retirement plans themselves?

No, I think you touched on it. I think from our perspective, those redemption levels were sort of at the fee rate of our blended fee rate. So nothing unusual, other than for multiple plans to all rebalance in this relatively short period of time.

Which is unusual. Thinking of kind of what happened at the end of the year in the markets, right? So, you were in that environment where there was a nice pop in equity, so.

Okay. Great. And then just, Michael, just on the institutional fee rate increased by about 3 bps in the quarter and is at a higher level than we've seen for several quarters, is that mix of assets or anything to call out there? Does that have anything to do with the redemptions?

No, the performance fees in the quarter were $3.3 million, which ticked up a bit and really was driven by institutional accounts. So we try to normalize that in our disclosures. And looking ahead, I think 42 to 44 for our blended fee rate remains appropriate for modeling as we go forward. So looking at the adjusted fee rate on a normalized basis is a good way to think about it going forward.

Yeah. So, and we disclose the impact of the performance fees on the institutional, so it's always good to look at it with and without to kind of look at the trend of the underlying accounts.

Perfect. That makes sense. And then just one last question for me, just on the noncontrolling interest on the adjusted income statement. The dollar value here was at the lowest level for a few years. Can you discuss kind of why that was the case in the quarter and just some of the adjustments there, the GAAP to non-GAAP.

Yeah. The noncontrolling interest really relates to the portion of sustainable growth advisors that the company does not own. And you may recall, last year, we did increase our ownership from 70% to about 75% in the third quarter. So really the change primarily reflects the change in ownership. So as we look forward, I think a good way to model the noncontrolling line is taking an average really of those two quarters, third quarter and fourth quarter as a good benchmark looking forward.

Perfect. Thank you. I appreciate you taking my questions.

Thank you.

Thank you. One moment for our next question. And our next question comes from Bradley Hays of TD Cowan.

Hi. Good morning. It's Bradley Hays on for Bill Katz. How are recent takeout multiples impacting the way you're thinking about deal opportunities as well as what you're seeing in the market?

So in terms of -- I'm sorry, you said, with the impact of which multiples -- takeout multiples, I didn't hear that. Broke up a little bit.

Yeah. We continue to evaluate the opportunities that are currently out there, and multiples will sort of ebb and flow based upon the asset class and the specific opportunity sets. It kind of relates to that. So there has been some pull-in of some of those multiples. But when you're dealing with -- there's different ranges of multiples, that would be reasonable depending on whether you're talking about a traditional opportunity versus that which is in the more private or non-correlated kind of a section. But -- so, we stay cognizant of those and factor those in as we think about our opportunities.

Okay. As your net debt to EBITDA sits quite low, how does this play into or change your thoughts around the cadence of capital return or deployment?

Yeah. In terms of capital, again, we're currently -- as you're pointing out, our level of leverage or encumbrance is relatively modest. We generate a good level of cash flow. We continually to evaluate how do we best deploy that, including in growing the business, which is fundamental to generating long term shareholder value, keeping the debt at reasonable and modest levels. And then again, the stock buybacks, which again, we've consistently done generally, maybe sometimes with some changes in terms of priorities within an individual quarter. So to us, they're all important. And again, they'll generally vary based upon relative attractiveness, i.e., how is our stock trading in a certain period, or what's happening with interest rates as it relates to debt? So we feel good that we're very well positioned and we have that flexibility to really avail ourselves of different opportunities. And those do include the M&A transactions, which, while not fundamental to our strategy for long term growth, is something, as you know, we've consistently done over a period of time.

Okay. Great. Thank you. And then just one more question. Where do you see the best potential for flows, perhaps either specific asset classes or funds you're feeling particularly strong about?

Yeah. We see -- it's a great question. I mean, the areas of opportunities, we do think on a -- if we go through the pendulum, right, so I think on the retail side, we continue, and we said in our prepared comments, retail separate accounts continues to be great area of growth, as is ETFs. And a lot of our product development and introduction is really focused in on those areas. And we do continue to see opportunities on the retail separate accounts as well as on the ETFs, particularly actively managed ETFs. So that's been a lot of areas. So we continue to see that great. But for us, institutional, in spite of the lumpiness that you're seeing in this quarter where the outflows were elevated, and again, we had a late deposit in January that would -- should have occurred in the fourth quarter, we see that as a good opportunity, particularly non-US. Right. And we've highlighted that before, where is many of our managers and capabilities are not as well known. And we put a lot of our resources and efforts in terms of doing that. And that's why we think we've seen some growth in the non-US client base. I think Mike cited 18% and continuing to have strong growth there. So I definitely think those are two areas that we've highlighted and we'll continue to highlight as areas of growth. In terms of strategies, we offer a broad array because you could have certain -- we're seeing clients on the retail side going to that nice January we saw, and it was really nice to see a strong January, as we did, where certain people that were hoarding cash, in the fourth quarter, were finally redeploying into equity. But simultaneously we saw strength in alternatives for people looking for non-correlated. So the reason that we try to focus on having diversity of different asset classes and strategies is because of the diversity in the client needs. So for us, in having 38 funds that are in the high star category, they'll each have opportunities depending upon different client.

Okay. Perfect. Thank you very much.

Thank you.

Thank you. One moment for our next question. And our next question comes from Michael Cyprys of Morgan Stanley.

Great. Thanks. Good morning.

Good morning.

Good morning.

Good morning. Hoping, we could maybe start off on the retail separate accounts. Maybe you could just elaborate on some of the areas that's driving the improving strengths that you guys are seeing on the separate account side, maybe you could elaborate on which some of the underlying strategies that are helping lift that higher on a gross sales basis. And then on the private client business, maybe you could talk about the opportunity set that you see over time to further expand that part of the business.

Sure. On the first piece, and then Mike will have some additional color. So retail separate accounts have been consistently strong for us. So we actually had a pretty much a nonstop series of quarters of inflows until a little bit of breakage in the doldrums of the market. So we've consistently had growth, and I think as Mike has pointed, it's gone from about 16% of our assets five years ago to a quarter of our assets today. So it's always been a growth area for us. Our greatest strength has been in the small caps, the SMIDs and the Mids. That's still a good opportunity. We're actually seeing that as well in July in term -- and January in terms of what people are looking to. We also know the reopening of some of our small cap strategies as well. What we're also then looking to expand. So we have other offerings on the fixed income space and we're continuing to develop some additional ones. So what our hope is to continue to have the strength and the continued positive flows with our existing strategies, which were probably overweight equity, but really trying to expand that offering set from some of our fixed income strategies that don't have full availability at the intermediaries yet and continue to build that out. So we're kind of very optimistic about where we think the opportunity set there is. So Mike, you want to come on to that and then private client?

Yeah. And I would just add that to reiterate, the small and the SMID-cap has been a consistent area of growth. And on private client, we've really expanded. That had some good traction on that part of the business from Kayne Anderson Rudnick, as well as some fixed income flows that we saw from our team at Sykes. So you're seeing it across affiliates, and it's been a consistent area of growth for us, and it's an area we've invested in and selectively added resources and has expanded its contribution to our AUM and is an important part of the growth that we see going forward.

Great. And just in terms of capital allocation, how should we be thinking about, as we're updating our models, buybacks, debt pay down? How are you guys thinking about this -- about that? And maybe you could just remind us of any potential earn-out payments that will be a use of cash flow in the coming years.

Yeah. So in terms of the capital, again, currently at low levels of leverage, we generate significant cash flows. And as we look at in the quarter, we sort of do evaluate all the categories. One thing to highlight, as Mike had noted earlier, first quarter is one of our biggest cash utilization quarters. So if you look historically in terms of how we've deployed cash in the first quarter, you will generally kind of see that, because so much cash is used for the annual incentives which is our largest expense, that will then have an impact then on how much we might avail ourselves in other things. But we do view share buybacks as a great use of our capital and continue to have that as a priority. So I can't give you any specifics, but it will be in the context of where we are in terms of our cash needs.

Yeah. And just specifically, Michael, as you recall, the first quarter also does include a revenue participation payment annually. It's been around the $25 million mark in the last several first quarters, so I'd expect it to be somewhere in that level. So in addition to annual incentive and other cash needs in the first quarter, we will be expecting to make that payment. And then I would note, in addition to the buybacks, we've obviously raised the dividend six consecutive years and have had a nice growth rate of the dividend of close to 30% in that period of time. And while we've done that, we've also reduced the share count, probably close to about 12% or 13% over that six-year period. So that balanced approach to capital management, you're seeing it growing the dividend consistently and reducing the share count consistently over time. And we think all of that is ways to create value to shareholders. Q – Michael Cyprys: Great. Just final question for me on M&A. I was hoping maybe you could elaborate a bit on the M&A pipeline and conversations that you're having with prospective candidates in the marketplace. How would you sort of characterize those conversations today versus maybe six or 12 months ago? What are some of the properties that are coming across your desk, and where do you see some of the biggest opportunities for M&A at this point for Virtus?

Yeah. I think in terms of the conversations, again, the number of conversations and the frequency remains pretty consistent. I mean, there are a lot of conversations going on and -- but I do think they've really become much more in terms of conversations and strategic fit and alignment of interest, and much less in terms of just auction processes. So we continue to be interested in many of the conversations that we're having. But again, I think they are more in terms of trying to make sure it's a good strategic fit. Specific areas where I think we've kind of alluded to, where we and others have interest in, is in some of those areas that are less of the traditional and more of the alternative types of strategies. Our last two transactions were on the liquid alt side in terms of the AlphaSimplex, as well as the Event-Driven at Westchester. We continue to see that as an area to expand our offerings because we're -- I believe we're very well represented on the equity and fixed income spectrum. So that is an area that we're interested in. But we consider different alternatives and different opportunities as they arise. As I said before, for us, it's always important that our long term growth strategies does not require M&A to be successful. So we do focus on the organic side, but we're very excited about the number of opportunities that we do think could ultimately be out there, but only if they make sense for us and only if they are the right use of our capital at a point in time.

Great. Thanks so much.

Thank you.

Thank you.

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

Great. Thank you. So I want to just thank everyone for joining us today. And as always, we certainly encourage you to give us a call if you have any other further questions or need information. Thank you all. Have a great day.

That concludes today's call. Thank you for participating and you may now disconnect.