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Manning & Napier (NYSE:MN)

Q4 2012 Earnings Call

February 14, 2013, 8:00 a.m. ET

Executives

Paul Battaglia – Director of Finance

Patrick Cunningham – CEO

James Mikolaichik – CFO

Jeffrey S. Coons – President

Richard B. Yates Chief Legal Officer and Secretary

Charles H. Stamey – Managing Director of Sales and Distribution

Analysts

Michael Kim (James)– Sandler O’Neill

Chris Harris – Wells Fargo Securities

Jeff Hoffman – Stifel Nicolaus

Cynthia Maher – Bank of America/Merrill Lynch

Ken Worthington – JP Morgan

Operator

Good morning. My name is Lori and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Manning & Napier fourth quarter and full-year 2012 earnings teleconference.

Our host for today’s call are Patrick Cunningham, Chief Executive Officer, James Mikolaichik, Chief Financial Officer and Paul Battaglia, Director of Finance.

Today’s call is being recorded and will be available for replay beginning at 11:00 a.m. Eastern Standard Time. The dial-in number is 404-537-3406 and enter PIN number 91195260. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions).

It is now my please to turn the floor over to Mr. Paul Battaglia.

Paul Battaglia

Thank you, Lori. Good morning, everyone, and thank you for joining us today to discuss Manning & Napier’s fourth quarter and year-end 2012 results.

Before we begin, I’d like to remind everyone that certain statements made during this call, which are not based on historical facts, including any statements related to financial guidance may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Manning and Napier assumes no obligation or responsibility to update any forward-looking statements.

With that, allow me to introduce our Chief Executive Officer, Patrick Cunningham. Patrick?

Patrick Cunningham

Thanks, Paul. Good morning, everyone, and thank you for joining us. As usual, I’ll make some opening remarks before turning the call over to Jim Mikolaichik, our CFO. Jim will then take you through the key financial highlights and when Jim is done, we’ll open the call to Q&A.

So let’s start with the market. As you know, global equity markets ended the year with strong returns despite continued economic and political challenges. Both the S&P 500 and the All Country World Index SUX were up more than 15%. In a reversal from 2011, bonds were in line with historic returns and stocks outperformed bonds.

For the past several quarters we’ve talked about some of the market trends that have worked against our active fundamental approach to investing five portfolios. For example, time-market correlations and a preference for lower beta and dividends have been headwinds for us.

In 2012 we saw several of these headwinds dissipate, particularly towards the end of the year. For example, high equity correlations were significantly reduced by the end of 2012. Equity dividend yields, as driving as returns, reversed during the third and fourth quarters. Yields on U.S. Treasuries were range bound for most of the year and a higher percentage of active managers were able to outperform market benchmarks this past year.

We discussed in past calls that we would expect a reduction in these headwinds to lead to improved results for our various track record. In 2012, we saw just that as many of the peer’s investment strategies delivered strong, absolute and relative returns by year end. Our World Opportunity Series earned a return of 18.8% versus 17.3% [inaudible]. Our Pro-Blend Maximum Term Series, the most aggressive of our lifestyle funds, earned a return of 16.3% versus 16% for the S&P 500 and our Equity Series, which has been our most challenged strategy in the recent market environment ended the year with a 13.4% return, while it front trailed the S&P for the year, it outpaced the S&P by 192 basis points during the last six months of the year.

Strong recent returns led to meaningful improvement in our short-term relative track records across our offerings. While our three-year numbers currently lag our benchmarks, both our short term and longer term results, including both 5 and 10-year periods are strong. Let me give you some examples.

Our World Opportunities Fund had a 10-year annualized return of 9.8% versus 8.2% for [inaudible]. Our maximum term Pro-Blend – Pro-Blend Maximum Term Series, 8.3% per year per 10 years versus 7.1% for the S&P 500 and our Equity Series, 8.2% per year versus 7.1 for the S&P.

As of the end of January, approximately 80% of our mutual fund assets were funds rated either 4 or 5 stars by Morningstar. Recent returns have also led to an improvement in the servicing environment for our sales teams, which is a positive development from the standpoint of new business development going forward.

Our overall flows were mostly negative for the 2012 calendar year, which we attribute largely to [inaudible] our 40-plus years of growth to three main commitments that we made early on.

First, building and maintaining a strong team-based research engine that will deliver results that bear clients need over full market cycles. With a research department of more than 85 people, we are committed to a team-based approach to ensure that success can be repeated over time.

Second, offering our clients full service solutions that address problems and provide positive outcomes over the long term. With more than 185 people dedicated to sales, service and product development efforts, we can remain relevant and be highly consultative with the variety of client types.

And third, maintaining a strong governance and operating culture which includes aligning our employee’s interest with clients and shareholders and avoiding operational deficiency and control gaps. Our research staff has incentives to achieve absolute returns and our sales and service representatives are motivated to maintain high levels of contact communication with our clients.

As we enter 2013, we are continuing to focus on the depth of our multi-channel distribution structure and new products and solutions. We added six new U.S. based hires to our direct sales channel over the course of 2012. We continue to integrate those new hires into the organization and we see early signs of adoption in some of the new territories already.

In 2013, we plan to continue this expansion with the focus on the West Coast. In addition, we added two dedicated service representatives this January to enhance service levels with high net worth individuals and thereby free up time for sales representatives to do more prospecting.

Within our intermediary channel we added two key accounts position, which we expect to strengthen our relationships with targeted brokers and retirement platforms. We also added a dedicated platform sales position which we expect to drive new sub-advisory and platform relationships. These hires were largely made at the end of 2012, so we expect the impact of these roles to be felt mid-to-late 2013.

Beyond deepening these current channels, we continue to look at ways to expand our global distribution including leveraging our current relationships in Europe and expanding into new markets.

We continue to incubate several alternative strategies with competitive initial results. In addition these proprietary strategies, we’re actively reviewing potential acquisition targets that would help us get up and running in the alternative space more quickly.

We also continue to develop consultative services such as healthcare reform and plan giving to meet the needs of our clients. We believe these steps will enhance our ability to attract new clients and retain our existing clients.

Lastly, I want to mention that we have completed our first year of performance-based vesting for our management team shareholders and the majority of these shareholders became 100% vested in 1/3 of their shares that were subject to performance-based vesting. These shareholders continue to have a strong set of incentives to perform in ways that will take our value to the next level. Before I pass things over to Jim, I want to summarize by saying that we are encouraged by the improvement in recent results for our investment strategies. While we believe this will lead improved flows going forward, we cannot predict exactly when this will happen. Regardless of the timing of this transition, we will continue to make investments in our business that we believe will lead to growth going forward.

And with that, let me pass it over to Jim for an update on our financials. Jim?

James Mikolaichik – CFO

Thank you, Patrick, and thank you, everyone for joining us today. Hopefully you’ve had an opportunity to review our earnings results, which were released yesterday after market close. As Patrick mentioned, I’ll take you through the financial highlights before opening the call to Q&A.

As we mentioned during previous calls, my remarks will focus on certain non-GAAP financial measures, primarily economic income – economic net income, adjusted earnings per share. We believe these measures are the best representation of our returns and cash flows and that they exclude certain non-cash accounting charges related to our initial offering.

However, our earnings release and related SEC filings do provide full GAAP reconciliations as well as additional detail related to our non-GAAP financial measures.

We ended the fourth quarter with $45.2 billion in assets under management, an increase of 900 million or 2% on a sequential basis and a 12% increase or $5 billion when compared to last year.

As of December 31, 2012, the composition of our client assets by investment vehicle was generally consistent with what we have reported previously with 55% in separate accounts and 45% in mutual funds in collective investment trusts. And by portfolio, 45% of our client’s assets were invested in blended asset portfolios or lifecycle products. 52% invested in a variety of equity strategies and the remaining 3% fixed income portfolios, which was also in line with prior periods. And as previously mentioned, the increase in our assets under management for the period was primarily attributable to strong investment performance.

For the quarter, investment performance across all of our portfolios was 2.7%, including 4.2% returns in our equity portfolios. Gross client inflows during the quarter were 5 billion, offset by 2.8 billion of gross client outflows resulting in net client outflows of approximately 271 million. This consisted of net outflows of approximately 220 million from separate accounts and 51 million from our mutual fund and collective trust product.

And within or separate accounts we had approximately $1 billion of gross claim flows offset by 1.2 billion of gross client outflows. In spite of the case outflows during the quarter, we had continued to experience high rates of client retention at 95% for 2012.

Turning to our financial results, we reported revenue of 87.1 million for the quarter, an 8% increase from 80.4 million reported in the fourth quarter of 2011 and an increase of 2% for the revenue of 85.4 million reported in the third quarter of 2012. The changes in revenue were generally consistent with changes in average assets under management, which increased by 9% from the fourth quarter of 2011 and 3% since last quarter.

Our revenue margins continue to remain strong with revenue as a percentage of average assets under management of 78 basis points through the fourth quarter of 2012 compared to 79 basis points for both this time last year and the previous quarter.

Operating expenses were 46.7 million for the quarter, which represented a $6.2 million increase compared with the fourth quarter of 2011 and were generally in line with the third quarter results.

The expense increased in the quarter compared with the fourth quarter of 2011 are primarily caused by an increase in compensation and relating costs. The increased compensation and related costs is primarily attributable to an increase in the analyst bonus, resulting from strong absolute and relative investment returns during the quarter as well as an investment in personnel related to distribution and infrastructure as compared to this time last year.

Other sources of expense increase compared with the fourth quarter of 2011 were costs related to our mutual funds and collective trust offerings including sub-transfer agency fees, 12B1Cs and fund fee caps.

Other operating costs when considered as a percentage of revenue have remained consistent with prior quarters had approximately 12%. As a result, we’re reported economic income for the quarter of 40.5 million, an increase compared to 40 million reported in the fourth quarter of 2011 and 39.6 million reported on a sequential basis.

Economic net income was 25 million or $0.28 per adjusted share compared with 24.7 million or $0.27 per adjusted share for the fourth quarter of 2011 and 24.4 million or $0.27 per adjusted share on a sequential basis.

With that, I’ll turn it to the full-year results.

As Patrick mentioned earlier, we experienced strong absolute and relative performance during 2012 resulting in a $5.8 billion increase in assets under management for market appreciation. This increase was offset by outflows of nearly 800 million, which lead to an overall increase in our assets under management since this time last year was 12%.

The increase in assets under management for the year drove an increase in revenue as compared to 2011. The revenues for the year were 339.1 million, an increase of 3% compared to 2011. Revenue margins remain consistent at 78 basis points for both the current and prior year.

Operating expenses have increased 5% to 182.7 million, an increase of 9.2 million resulting from continued investment in the business and costs associated with the mutual fund and collective trust offerings.

And for the full-year 2012 economic income was 156.9 million, up slightly from 156.7 reported in 2011. Our full-year 2012 economic income margin was 46.3% compared to 47.5% in 2011. And economic net income per adjusted share for 2012 was $1.08 which is consistent with 2011.

Before closing, I will point out a few other items. Share counts have not changed from last quarter in both our outstanding common shares and adjusted share count are the same and with respect to our legacy ownership exchange process, our management team continues to own approximately 18% of our business and that ownership is subject to vesting requirements through 2014. As a result, we’re continuing to record non-cash compensation expenses and those expenses are variable in nature, subject to the underlying vesting criteria and the market value of our public stock.

Pursuant to the terms of the exchange agreement our founder and certain members of our management team have the ability to exchange units attributable to their ownership interests. These exchanges are subject to restrictions related to the amount eligible in any one given year and the timing of the exchange.

We are expecting to announce an exchange prior to the end of the first quarter. We are currently analysing the level of the current exchange in terms of the number of units and absolute dollar amounts. Once we have that information, we will release details related to the process.

I would also remind everyone that the ownership portion discussed in both the investing and the exchange process are fully accounted for as part of our adjusted share count and do not have a diluted impact to the shareholders.

Our balance sheet remains healthy, which continues to afford us the ability to invest in the business while continuing to pay reasonable dividends to our owners. To that end, we utilized approximately $9 million to seed new products doing the year. We continue to have a debt-free capital structure and we maintain a cash balance of 108.3 million as of December 31.

As discussed in last night’s SEC filing, we have now established an initial credit facility to provide better flexibility for further financing needs and this is an unsecured $10 million line of credit.

For the year, we distributed approximately 125.4 million of earnings or $0.64 per adjusted share to our shareholders. In closing as Patrick stated earlier, we believe 2013 will be a year of transition as our improved performance leads to improved client flows over time. And as that transition occurs, we will be continuing to invest in initiatives that we believe will lead to future growth potential and long-term success for our clients, shareholders and employees.

That concludes the formal remarks and I’ll now turn the call back over to the operator and we look forward to your questions. Lori?

Question-and-Answer Session

Operator

The floor is now opened for questions. (Operator instructions). Your first question comes from the line of Michael Kim of Sandler O’Neil.

Michael Kim (James)– Sandler O’Neill

Good morning. This is actually James [inaudible] filling in for Michael. You know, first I would be curious to get your take on the recent step-up in flows into equity mutual funds. So, how much of that do you guys think is more [inaudible] in nature, versus you know, more durable shifts and allocation trends? And then, assuming that investors continue to move up the risk curve, how do you see that playing out as you look across your product capabilities?

Patrick Cunningham

James, this is Patrick. You know, obviously we view it as positive that the, you know – two things we view as positive. Number one, is that people now, I think as a lot of open questions regarding the election, regarding the, you know, fiscal cliff. Some of those have been, you know, come to some sort of conclusion. Obviously there’s still a lot to be done. The market doesn’t like uncertainty. So as things become clarified, whether you personally believe they’re good or bad, they’re clear. I think that allows people to feel more comfortable moving into the equity markets in general, and more importantly moving into active management as well.

So, we view that as positive. We still think the market is going to be quite volatile. We think that the headlines will drive investor behavior as it has in the past. But, there is a greater appetite I think as the housing market subsides, people have this – you know, their financial wellbeing is a little more settled, they’ll be more comfortable going into it. So we would anticipate that to continue.

The other thing is that we’ve seen the correlations in the market go down. And that’s very important, you know. For the last couple of years, up until last two quarters, this was not people making rational decisions in our opinion about whether to go buy a good business, or a bad business. It was your jumping into equity, you’re jumping out of equities, and all equities perform pretty much the same. You know, whether you’re a good company or a bad company. Which also, you know, as that subsided, those correlations came down. Meaning that people were being discriminatory, they were making decisions to move into better businesses, and that’s exactly where our portfolios are positioned.

Michael Kim (James)– Sandler O’Neill

Great. Thank you. And then a question for Jim. If you can talk about some of the drivers behind the sequential decline and the comp ratio in the fourth quarter, as it relates to the improving performance track records?

James Mikolaichik

So, you’re talking third quarter over last year, or just the sequential base?

Michael Kim (James)– Sandler O’Neill

Of this year sequentially.

James Mikolaichik

Yeah. It’s a little difficult. There’s a reasonable amount based in, as of the third quarter. So, we’re already picking up a reasonable amount of performance coming through the third quarter with a pretty good performance shift.

So, as you think about the year in total now, we’re coming out of 2011 with a difficult quarter on the back of a September performance downdraft. We picked up pretty well in the first quarter of 2012, and gave some back in the second quarter. And that picked up again in the third quarter where we started to gather that back and really outperformed both on an absolute and relative basis, and that continued through the fourth quarter.

So you have to look at it in some ways all wrapped together. You can’t really pull them apart and think about it that way, because it’s all built from bottom up stock picking in terms of the comp ratio. So, in total for the year it came out, I think about where we would expect it to come out given what we’ve talked to you guys about with respect to the ranges it move in. But, you know, it rebounded considerably from last year where you saw the downdraft.

Michael Kim (James)– Sandler O’Neill

Okay. Great. Thanks for taking my questions guys.

Patrick Cunningham

Thanks, James.

Operator

Your next question comes from the line of Chris Harris of Wells Fargo Securities.

Chris Harris – Wells Fargo Securities

Good morning guys.

Patrick Cunningham

Morning.

James Mikolaichik

Morning.

Chris Harris – Wells Fargo Securities

First question for me is on the redemptions. Patrick, you had mentioned that some of this was driven by a few of your more mature relationships, and just wondering if you could kind of expand on that a little bit for us? You know, kind of wondering whether this is kind of performance related as you speak to these customers, or was it more driven due to kind of a change in risk preference, or is something else going on there, do you think?

Patrick Cunningham

Sure. First of all let me point out that we have, you know, we have hundreds of relationships. So we have, you know, - as we look at these platforms, you know, - when you go to a single institution it can have five, six, seven different platforms on them. So, we continue to believe that there’s tremendous growth potential on the platform side of things. Both with companies that we already have a couple of relationships we think we can expand those, and there are some companies that we don’t have any relationships currently that we’re hopefully going to penetrate over time.

That said, you know, when you get on a managed mutual fund platform where they allocated a certain amount to you, you reached the point where you have saturated that particular platform. And that’s what I mean by mature relationships. And we don’t have any – we’ve had no single relationship or mature relationship that represents a significant portion of our [inaudible]

But with those, there’s a combination with our U.S. equity of some redemptions based upon performance. There’s in the case of our non-U.S. equity, it’s more of a rebalancing. So, it’s a combination of factors that I believe have impacted some of the flows on those mature relationships.

Chris Harris – Wells Fargo Securities

All right, that’s helpful. Correct me if I’m wrong here guys, but it sounded to me a little bit in your commentary that you guys are a little bit guarded about the prospect for your flows, to start 2013 here. You know, wondering maybe why that is given the significant increase we’ve seen in some of your shorter-term performance metrics. And I’m thinking – wondering out loud here, is part of it due to the fact that you have really strong short-term performance and really strong long-term performance, but it’s kind of the three year number that’s still having some challenges. Are you a little guarded on the flows just because you need to get that three year number, you know, significantly improved before we start seeing something material, even though, you know, investors seem to be a little bit more comfortable taking on more risk here?

Patrick Cunningham

We’ve been through this, you know, we’ve been in business for almost 43 years, and so we’ve been through these, so we’ve been through these periods. As I mentioned in my commentary in 1990 and 1998 were periods where we saw underperformance, and you know, it’s a – it’s very hard to predict. And when it’s hard to predict something, we tend to be on the conservative side of things.

It’s hard to predict exactly when improved performance will lead to, you know, improved flows. So, I think it’s just a matter – we’ve been around the block a few times and we didn’t want – we certainly don’t want to lead people to believe that all of a sudden the floodgates are going to open, when there is a transition period. There’s a time lag between performance and flows.

Chris Harris – Wells Fargo Securities

How is January looking so far for you guys with flows? Is it similar to what we saw kind of last couple months, or is has it improved at all?

Patrick Cunningham

Yeah, as you know, the performance which is public to you, you can easily see that we’ve had competitive performance through the month of January, but obviously we can’t – we tracked it internally, but we can’t publicly disclose that at this point.

Chris Harris – Wells Fargo Securities

Okay, that’s fair, I got it. Okay, last question for me then, and it’s related to the expenses. So, you kind of explained a little bit on the improvement in the comp ratio here for Q4. Curious about how you guys think about comp in 2013. It sounds like you had a lot of new hires on the back half of the year there. How should we think about the effect of those new hires on the comp? And do you guys still think a comp ratio between 30 and 31% is kind of a reasonable number to use?

James Mikolaichik

Yeah I think the comp honestly we have continued the hire on the infrastructure side, and we’ve hired some product and client service people. I think the things that we were hiring more on the blocking and tackling and administrative elements of either going public or supporting some of our infrastructure started to slow. But we continued to make sure that we pulled those pieces up along with the growth of the business.

The comp ratio, they’re still going to be driven largely in part and the variability in them are going to be driven by the performance of our analyst team, you know, on the research side, and whether or not we’re gathering meaningful and new client assets more than we are just servicing existing assets. So, that change from sort of that 24 to 25% on the low side up into the low 30s on the high side, I think it’s still a reasonable range that we’ve seen historically, and probably of reasonable operating range depending on whether or not we make any other changes in the business as we move forward.

So, I don’t see – we haven’t changed what we’re doing. So what you’ve seen in the past, you know, is how we’re operating today.

Chris Harris – Wells Fargo Securities

Great. Thanks very much guys.

Patrick Cunningham

Thank you.

Operator

Your next question comes from the line of Jeff Hoffman of Stifel.

Jeff Hoffman – Stifel Nicolaus

Hi. Good morning.

Patrick Cunningham

Good morning, Jeff.

Jeff Hoffman – Stifel Nicolaus

Can you – in terms of the higher new sales, can you maybe give us a sense of how much of that is your sales guys becoming less – I guess defending of the performance and now focused on sales. How much better performance? And then the increased productivity of the newer sales people that you’ve hired over the past year or so?

Patrick Cunningham

It’s a combination. Clearly we have an existing sales force that’s much larger than the new hires we made last year. So, I would say the fact that we have had, you know, for the majority of our investment strategies, and the good absolute and positive returns that we closed the year with, that there’s no question that our existing sales force has had – you know, the intense service environment has abated. So, I think that will have the, you know, the biggest impacts on new production going forward.

However, the new hires that we made, and we’ve made – you know, some of them were made early in the mid, and some in the latter part of the year. We’ve already seen production out of most of the hires that we have made through the recent past. So, they are – you know, the hires that we’ve made that are more regional in nature, meaning that they dig into a geography and will sell to individuals, endowments, small businesses, not for profits, they tend to get closing faster. They tend to close relatively smaller, you know, pieces of business, but they tend to close faster versus the institutional representative who are, you know, looking at much larger potential closes that typically have a longer sale cycle.

So, all in all we’re pleased with the progress that the new hires have made. And we’re certainly pleased with the performance allowing our existing long-term reps to once again drive new assets.

Jeff Hoffman – Stifel Nicolaus

Okay. And then a follow-up. On the mutual fund side, some of the data from third party sources suggest that there was one big outflow, or larger I guess, in one product. And otherwise flows were generally more positive. Is that accurate, and is that just a typical, you know, lumpy flow that happens in and out from time-to-time?

Patrick Cunningham

We talk about flows in general. We generally don’t speak to, you know, the nature of those flows, so I can’t address that directly. But once again, we are with the larger relationships, when they make the change in terms of doing tax/loss selling or reallocating, you know, more to another asset class, you will see, you know, lumpier type moves in those flows.

Jeff Hoffman – Stifel Nicolaus

Okay. Very good. Thank you.

Operator

Your next question comes from the line of Cynthia Maher of Bank of America/Merrill Lynch.

Cynthia Maher – Bank of America/Merrill Lynch

Good morning.

Patrick Cunningham

Good morning, Cynthia.

Cynthia Maher – Bank of America/Merrill Lynch

So, maybe a question on the other operating expense. I think you mentioned there continues to be about 12% of revenues similar to 3Q, but looked that over a longer period of time. It looks like it used to be more like 10% in 2001, and 11% in the first half of 2012. So, just looking ahead longer period of time, is it likely to stay at 12% you think? What caused that rise? And eventually, could this be a source of positive operating leverage? Thanks.

James Mikolaichik

Sure. I think as you’ve pointed out going backwards into 2011, 2011 had in it our operating expense transition, going from a private company to a public company, and you saw some changes from Q1 when we weren’t experiencing all of the offering expense, so it was even lower than I think the 11% you’re quoting. And then started to jump up in the middle of the year and tail off a bit towards the end of the year. And I think as we went through the offering, we discussed with folks that we expected that middle range where we had moves up into the sort of 11-12% range to be how we would think about operating as we move forward.

Largely in part because we were going to be transitioning external resources that were auditors and legal fees, to internal resources and undertaking [inaudible] expenses and sort of ramp up infrastructure.

And that seems to have, you know, as I said earlier in my comments seems to I think have leveled off and we’re in a reasonable space, that we continue to monitor those as we grow to make sure that we’re keeping the infrastructure consistent.

The other aspect that is part of our other operating expense, which is more tied to the growth of our mutual funds, is we do have some (12B1) fees in there. And we do have some funds (B caps), and both of those move around a bit with our mutual fund and Collective Trust business. So, it does have an impact on us as we move forward, which is tied to the growth in the fund business. That’s not really, you know, operating expense. So, you kind of have those two things moving in concert with one another.

And as far as operating leverage, I think - as Patrick said during the call, we are continuing to invest in the business to make sure it’s positioned well for growth. To the extent we have abilities to be efficient at things, and manage the operating cost; we’ll certainly look to do so.

Cynthia Maher – Bank of America/Merrill Lynch

So, just looking out say two years, you think 12% is a good way to think about it, and that would be a combination of the variable part of it, and also the new investments?

James Mikolaichik

Well, I mean, we’re not really providing any guidance out that far. You know, that’s the way we’ve operated looking back without the transition expenses, and I think we’ll manage it forward in the context that I just mentioned to you.

Cynthia Maher – Bank of America/Merrill Lynch

Okay. And then, just drilling into the flows a little bit. You mentioned that the equity accounted for more of the outflows, but if you look at the sales as well and look at it on a net basis, it looked like blended had sort of a greater net outflow. And so, I’m wondering, do you think of that as lagging sales, or do you think of that as a popup in redemption, and what would account for that? Is that more of a function of the channel and the fact that there’s more blended in separate accounts? Or is it a function of the product?

Patrick Cunningham

Cynthia, I can address one point at least. You know, with our blended accounts, we have many of those accounts are lifecycle funds on 401-K plans. And so, those are, you know, a combination of institutional and retail sales right. You are being hired by the institution, but it is the retail, the individual employee’s behavior that drives where the flows are.

So, some of those flows are attributed to people – once again, I think it’s risk-on and risk-off type of thing, people moving to safety within their 401-K plans during times of uncertainty that could have an impact on those flows.

Jim, do you have anything else to add to that?

James Mikolaichik

No. I mean, in total, I think what we saw through all the channels is what Patrick said. Is the direct channel brought assets in, and that’s where we have the real direct client relationships, and we saw that in, you know, non-U.S. and in multi-asset class products. And we saw it in the intermediary space we continued to see reasonable traction, and we heard good things from the sales force in that space as well.

Where the challenges came, I think we’re more on a few platforms that were larger relationships, and they were U.S. equity relationships. So, U.S. equity across the board a bit from a performance standpoint, and a bit from the markets and the environment as a whole, not really looking to put a lot of money to work in U.S. equity and active U.S. equity. That seems to be the softer spot.

The rest, I think, we’re relatively happy with how we moved through the year, as we continue to see a lot of positive traction.

Cynthia Maher – Bank of America/Merrill Lynch

Great. Maybe just a follow-up on the relationships you mentioned. So, should we think of those as – cases where you were taking off a platform, so it might affect future flows, or should we think of those as cases where some of the assets were taken off, but could be put back as they look at your really strong recent performance?

Patrick Cunningham

Cynthia, it’s the latter.

Cynthia Maher – Bank of America/Merrill Lynch

Oh, okay. All right. And then maybe just on last very general question on industry trends, and that is, you know, as you say you’ve been through a few cycles. In times of strong equity appreciation, do you tend to see the flows go all toward equity and less into blended? Do you think that might be different this time given demographics? I mean, how do you think the blended portfolios would fair in a really strong equity rally?

Patrick Cunningham

The blended portfolios are, you know, they continue to just, I won’t say chug along; they just continue to grow on a consistent basis.

You know, when you have individual sleeve track records that get “hot” you tend to see the more dramatic flows as positive. So, I think the, you know, the positive cash flow in 401-K plans, the you know, the type of investor that likes to invest in multi-asset class portfolios, there’s a consistency there that I think has not changed over time.

Cynthia Maher – Bank of America/Merrill Lynch

Great. Thanks. That’s it for me, thank you.

Patrick Cunningham

Thank you, Cynthia.

Operator

(Operator instructions) Your next question comes from the line of Ken Worthington of JP Morgan.

Ken Worthington – JP Morgan

Good morning. I think I’m going to re-hit some topics already brought up, but I’ll see if I can add a new twist to it. With the market environment better in 2012, having ended well for the market, I wanted to just kind of ask about investments in the business. So, you’ve been investing in distribution, you spoke about the West Coast and service hires. As we think about ’13, does the pace of investment kind of increase – sorry, the pace of incremental investment, does that pace increase, do you maintain the kind of the pace of the investing, or does it slow as, you know, some of your other targets have kind of been reached?

And then, how contingent is, you know the pace of investment on market conditions? Is this something that, you know, if the market resets, you can sell immediately, or within a quarter, or do you think about kind of the market impact as having a more longer term impact on the pace of investing?

Patrick Cunningham

Good morning, Ken. To answer your question, the first question. You know, we intend to continuously invest in our business. And we are going to continue to add to our direct channel, we are going to continue to add to our indirect channel. We’re going to continue to opportunistically look at platform and, you know, consult in relation hires.

So, we have historically if - actually during times when the market goes through gyrations. When the market goes through difficult times, is the time when you – the best talent is available. So, we typically and historically have continued to invest even when the market conditions are unfavorable.

So, that’s our history, and I would anticipate that would continue going forward.

Ken Worthington – JP Morgan

Okay, but it doesn’t go the pace. Does the pace, I guess, accelerate here, or do you just maintain the pace. So I get the fact that you’re going to continue to invest, but you know, and maybe you answered the question that you invest more heavily when things slowdown because talent is better?

Patrick Cunningham

Yeah, I would say – it’s interesting when you say the pace. I would say in a word, the pace will continue. I mean, we are, you know, we believe there’s great opportunity geographically in the United States. We think our opportunities on a, you know, global basis that we will be taking advantage of through the course of the year.

So, we think there’s plenty of room for growth, and in our case that means that we’re going to be hiring people to take advantage of various markets.

Ken Worthington – JP Morgan

All right, thanks. And you answered the other one too. In terms of the sales outlook, which distribution channels to you think are most likely to see the positive impact of sales from the better performance? In other words, which channels react most quickly to the better performance? And are there even any preliminary signs, like you know, pre-RT discussions, is the tone changing that kind of gives you, even if you don’t have a confidence or conviction in the pace increasing? Are you seeing the tone of the conversations change?

Patrick Cunningham

You know it’s interesting, we have from an RP standpoint, we’ve seen consistent activity in our RFP area. I would argue though that – and we have over 20 direct sales representatives, so that’s our largest sales force. And the good news there once again, is that the service environment has become more favorable, meaning that the number of service calls, the length of those service calls have been reduced to which – which will allow those sales people to do what they love to do, which is sell as well as service accounts. So, I think that’s a big positive.

Ken Worthington – JP Morgan

Okay. Maybe lastly, there were some changes last year to 401-K rules and regulations. Any impact that, you know, with a little bit of time here between implementation today of flow through to [inaudible] either positive or negative? And I assume there’s nothing direct. At least I can’t see anything direct, but maybe indirect or more subtle that’s worth mentioning?

Patrick Cunningham

I don’t think the regulation – you meaning disposure regulations? Is that what you’re referring to Ken?

Ken Worthington – JP Morgan

Yes.

Patrick Cunningham

No, I don’t think they’ll have any impact on our competitive positioning or our ultimate flows.

Ken Worthington – JP Morgan

Okay, but nothing in terms of, you know, consolidation of, you know, a number of products on plans, - but again, indirect, nothing like that?

Patrick Cunningham

No. We don’t see that at all. And once again, we think the more transparent that 401-K plans become, and the more fiduciary standards are used in the selection of lifecycle funds, that that’s good for us. As you know it used to be, you know, it used to be that there was a – the lifecycle funds at certain points in time, were funds that were just part of the platform. It was like a give me, and that’s changing. So, we’re pleased with the transparency, the disclosures, and we think all of that will be ultimately to our benefit.

Ken Worthington – JP Morgan

Great. Thank you very much.

Operator

At this time there are no further questions. Thank you, this does conclude today’s teleconference. Please disconnect.

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