Virtus Investment Partners (NASDAQ:VRTS) is a diversified asset management firm that has demonstrated resilience and consistent performance amidst market volatility. With a multi-boutique model and a focus on active management, the company has navigated the challenging environment effectively, delivering solid financial results and maintaining a strong capital position.
Business Overview
Virtus operates through a multi-manager, multi-style approach, offering investment strategies from its affiliated managers as well as select unaffiliated managers. This diversified platform allows the company to appeal to a broad range of investors and provide offerings across market cycles. Virtus' earnings are primarily derived from asset-based fees charged for investment management, fund administration, distribution, and shareholder services.The company's investment strategies span various asset classes, including equity, fixed income, multi-asset, and alternatives, catering to both institutional and individual investors. Virtus' institutional products are offered through separate accounts and commingled accounts, while its retail offerings include open-end funds, closed-end funds, and retail separate accounts. Additionally, the firm provides subadvisory services to other investment advisors.
Virtus has a strong distribution presence, with institutional sales teams focused on the U.S. market and a retail distribution network that includes financial intermediaries, national and regional broker-dealers, independent broker-dealers, registered investment advisors, banks, and insurance companies.
Financial Performance
Virtus has demonstrated consistent financial performance, with annual net income of $130.6 million, annual revenue of $841.5 million, annual operating cash flow of $237.2 million, and annual free cash flow of $228.3 million.In the latest quarter (Q2 2024), the company reported total assets under management (AUM) of $173.6 billion, down 3% from the previous quarter due to $2.6 billion of unfavorable market performance and $2.6 billion of net outflows. However, on a year-over-year basis, AUM increased 3%, driven by growth in strategic areas such as Retail Separate Accounts, Global Funds, and ETFs.
Revenue Performance
Virtus' revenue performance has been solid, with the company generating $203.0 million in the latest quarter, a 6.5% increase from the prior-year period. This was primarily driven by a 2% increase in investment management fees, reflecting the 1% increase in average AUM and a modestly higher average fee rate.The company's fee rate has remained relatively stable, with the average fee rate in Q2 2024 at 42.2 basis points, up from 41.9 basis points in the previous quarter. Excluding performance fees, the normalized average fee rate was 42 basis points, unchanged from the prior quarter.
Expense Management and Profitability
Virtus has demonstrated effective expense management, with total operating expenses in Q2 2024 of $137.0 million, a 7% decrease from the prior-year period. This was primarily driven by a 7% sequential decline in employment expenses, reflecting the impact of seasonal expenses in the prior quarter.The company's operating margin in Q2 2024 was 32.5%, up from 28.2% in the previous quarter and 32.3% in the prior-year period. This improvement in profitability was driven by the higher average AUM levels and the impact of the prior quarter's seasonal expenses.
Capital Position and Shareholder Returns
Virtus maintains a strong balance sheet and generates significant cash flow, providing the company with the flexibility to pursue a balanced approach to capital allocation. During the latest quarter, the company repurchased approximately 55,000 shares for $12.5 million and paid quarterly dividends that were 15% above the prior-year level.The company's debt position remains modest, with a gross debt-to-EBITDA ratio of 0.8x and a net debt-to-EBITDA ratio of 0.2x as of June 30, 2024. This financial strength and liquidity position allow Virtus to invest in organic growth initiatives, pursue strategic acquisitions, and continue returning capital to shareholders.
Growth Initiatives and Outlook
Virtus is focused on expanding its presence in strategic growth areas, such as Retail Separate Accounts, ETFs, and Global Funds. The company's ETF platform has surpassed $2 billion in AUM, driven by 45% organic growth over the past year and positive net flows each quarter. Virtus is also actively developing new fixed income and non-U.S. equity strategies to complement its current offerings in Retail Separate Accounts.In the Institutional channel, the company continues to see a high level of interest from investors across regions and managers, as they seek out quality active managers with strong performance. Virtus' pipeline of known wins exceeds known redemptions, and the company is optimistic about the breadth of opportunities across its diverse range of strategies and managers.