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Executives

Hank Herrmann – CEO

Nicole McIntosh – Director, IR

Dan Connealy – CFO

Tom Butch – Chief Marketing Officer

Mike Strohm – COO

Analysts

Cynthia Mayer – Bank of America

Jeff Hopson – Stifel Nicolaus

William Katz – Citigroup

Michael Kim – Sandler O'Neill

Craig Siegenthaler – Credit Suisse

Robert Lee – KBW

Roger Freeman – Barclays Capital

Alex Blostein – Goldman Sachs

Mac Sykes – Gabelli and Company

Cynthia Mayer – Bank of America

Waddell & Reed Financial, Inc. (WDR) Q1 2010 Earnings Conference Call April 27, 2010 10:00 AM ET

Operator

Good morning. My name is (Christie) and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions)

I would now like to hand the program over to Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed.

Hank Herrmann

Thank you (Christie). Good morning everyone. With me today are Tom Butch, our Chief Marketing Officer, Mike Strohm, our Chief Operations Officer, Dan Connealy, our Chief Financial Officer, Mike Avery, our Chief Investment Officer and Nicole McIntosh, Assistant Vice President and Investor Relations.

Nicole, would you read the forward looking statements, please?

Nicole McIntosh

During this call some of our comments and responses will including forward-looking statements, while we believe these statements to be reasonable based on information that is currently available to us, actual results could materially differ from those expressed or implied due to a number of factors including but not limited to those referenced in our public filing with the Securities and Exchange Commission.

We assume no duty to update any forward-looking statements. Materials relevant to today’s call including a copy of today’s press release as well as supplemental schedules have been posted on our website at waddell.com under the corporate tab.

Hank Herrmann

Thank you, Nicole. A good morning again. Earlier today we announced our first quarter results, the highlights of the quarter included 8% sequential growth in income per diluted share, operating margin of 23.3% despite the influence of a number of restraining factors including two fewer days of management revenues and three fewer days of sales versus the fourth quarter. A trading error of $1.3 million. The annual reset of higher payroll taxes and the reinstatement of the companies 401K match. Gross sales and net flows increased, gross sales of $6.1 billion increased 9% sequential quarterly. This level of sales has been exceeded only twice during the company’s history during the first and second quarters of 2008, just prior to the market’s decline.

Net loss of $2.8 billion represent yet again likely and industry leading organic growth rate of 16%. These achievements are all the more notable when compared to the industries weak equity flows. Long term investment performance remains solid. Now looking at the individual parts of our business, net flows in the advisory channel were positive at $146 million comparing favorably to the previous year and year ago quarters and amongst the best in the channels recent history.

Sales of $886 million was 4% below the sales volume in previous quarter and 27% above the same period last year. As you went through our release you might have noted a larger than usual decline in advisor headcounts for the fourth to the first quarter. Our annual process of terminating licenses of the advisors who did not meet the annual productivity requirement was accentuated this year by a new internal process. We now include only fully license financial advisors in our headcount figure versus the previous inclusion upon receipt of their first license.

This change has been incorporated in our calculation for productivity. Sales on the wholesale channel were $4.4 billion, a 6% sequential increase and 85% increase compared to the same period a year ago. At $2.4 billion, net flows remained robust. The Asset Strategy Fund and to a lesser extent global natural resources front remained sales leaders, taking in a combined $3.5 billion of the $4.4 billion generated in this channel.

Sales at the other fronts were up to $885 million compared to $814 million during the previous quarter and $562 million in the same period last year. Sales diversification remains a top priority. Gross sales of $819 million in the institutional channel marked a multiyear quarterly high. More than half of the volumes come from our sub-advise relationships. We continue to capitalize on our ability to act a sub-advisory for a variety of distributors who may not have the scale or record to manage internally and appreciate our approach and process.

In summary, our first quarter results were quite positive, net income and diluted earnings per share grew 8%, the operating margin expanded, sales increased 9% and net flows of $2.8 billion represent organic growth of 16% one of the best in the industry. Operator at this time, I would like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Cynthia Mayer with Bank of America.

Cynthia Mayer – Bank of America

Very good morning.

Hank Herrmann

Good morning, Cynthia.

Cynthia Mayer – Bank of America

Just to clarify on the advisor headcount, what would the headcount be on an apples-to-apples basis in terms of decline or number?

Daniel Connealy

This is Dan Connealy. I believe it would be close to 200 different.

Cynthia Mayer – Bank of America

Okay.

Hank Herrmann

But said another way to change in the licensing probably accounted for roughly half of the decline from the fourth quarter level.

Cynthia Mayer – Bank of America

Okay, and here is another question for Dan. If you adjust the G&A for the onetime expense it would be like $14.3 million which seems lower than it’s been in awhile. Is that a good run rate or was there something else going on in there. I used to think of 15 as a good run rate.

Daniel Connealy

Well, there aren’t a lot of major differences in there, in fact some legal expenses were little higher but that was the major difference.

Cynthia Mayer – Bank of America

Okay, and I guess just stepping back a little bit if I look at the trend in flows the redemption rate in the wholesale channel has picked up a little bit and let's see 21% to 24.5%. Can you talk a little bit about what’s behind that and I guess at the same time the redemption rate for the institutional channel is down but I assume that’s lumpier?

Daniel Connealy

Well I’ll let Tom to take a shot at it first and then I might add the comment.

Thomas Butch

I think there is, if you would have point it one factor we fast the redemption pressure against the Global Natural Resources Fund as a specific example. I think in a broader sense it’s just maturation of the book and with the natural run rate that evolves from that, we are still great at or little beneath the industry redemption rate and also.

Operator

Your next question comes from the line of Jeff Hopson with Stifel Nicolaus.

Jeff Hopson – Stifel Nicolaus

Okay, thanks a lot. So in the institutional channel can you breakdown a little bit I guess, between picked between this traditional fine benefit and then your other distributors and Tom, maybe could you look at the non-prop sales by product and talk about emerging products that you see or anything kind of at the margin that we may not necessarily see that would be important?

Hank Herrmann

I’ll try the first half of it. Roughly speaking the traditional defined benefit business was modestly positive in flows, and then the sub-advised business, (in Pictet) are the rest and the flows business was much larger than Pictet, that’s the clear way I would run it down.

Thomas Butch

Then on the question relative to specific funds Jeff, on the wholesale side. As you know Asset Strategy of course is the largest contributor in global natural resources second on a gross basis. High Income Fund, continues to experience good flows, science and technology picked up a great deal unless based on some research we see in the top selling fund in that category in Q1. The limited term bond fund continues to take good flow as particularly as short term, high quality bond funds remain somewhat in favor given what’s happening to return less money market funds.

International core equity is another one that continues to do very well and we’ve seen some promise in madcap growth as one of the -- and the municipal high income is two of the emerging products which are getting focused. The other thing to put your question it might be just a touch of your radar screen at the moment is that we’ll be launching a new fund here in the next week or so on May 3, which is a, it’s called Asset Strategy New Opportunities Fund and it’s a derivative of the existing Asset Strategy Fund which will essentially mirror that investment philosophy and style but focus on the equity side and small and madcap holdings.

So that’s I think a pretty good run down of what’s working and what’s on the horizon. And any thoughts on the new fund as far as initial interest and on the Asset Strategy Fund, performance depending on the day has been maybe trailing a little bit (peers) has come back in the last weeks. How has the field responded to solid performance that may be a little more volatile.

Well I guess Mike is here and may want to make a comment as well. My overall comment would be that which I have offered in the past which is this is a fund which people buy for a very specific reason which is making sure they’re protected on the downside, have broad asset exposure with fund with very confident management and a long standing track record and we’ll capture upside when it is available, it really historically has not been hostaged to day-to-day, week-to-week, month-to-month movements and certainly has been very popular this year and there is no indication that there is anything but the same kind of attention to an interest in the product, relative to the new Asset Strategy Fund, we don’t have a specific expectation. We’re not doing an introduction period, a subscription offering of limited offering. We will hope to get it up on our distribution partner platforms pretty rapidly.

There is very little you can do to market a fund as you know, when it still in registration. So we’ve been limited to that which is in the red herring but to the extent that it has been talked about, there is obviously interest in it because of the terrific tract record of the larger fund. Mike, I don’t know if you want to add anything about the new fund?

Michael Strohm

Well Jeff, this is Mike. Our shareholders generally are (inaudible) tuned to weekly performance or even monthly performance as you might think. They tend to be long term oriented for one, second, I think that the shareholders that we have appealed to them for a couple of reasons, one is that they like the idea that this fund, the asset strategy fund represents a process that is in essence a reflection of our entire investment management style which is top down look at global markets, digging out from the bottom on individual securities and this product we use the full weight of the entire investment management division of 65 people. So people like that, secondly they like the idea that we have a worldview that’s similar to theirs and then finally they appreciate a philosophy over the long term of, as Tom said allowing them to participate in rising markets but finding a Safe Harbor for them in volatile markets and over the past well since, September of ’08 the fact that we have been cautious in how we manage other people’s money has been appreciated by our shareholders and the continued positive flows I think reflect that.

Jeff Hopson – Stifel Nicolaus

Okay, great. Thanks a lot.

Daniel Connealy

And to respond, I just was looking at the daily sales rate, and thinking about it from January, February, March and so forth on April. I would tell you the daily gross sales rate is essentially unchanged to that four flat points. So I think the answers that were provided are right on, but just to give you a little comfort reality as well, the philosophy seems to be accepted, people buying into it and it hasn’t changed.

Operator

Your next question comes from line of William Katz with Citigroup.

William Katz – Citigroup

Yes, thank you and good morning everyone. I just wanted if you could talk a little more about the pipeline in the institutional channel that seems to have a little bit of a positive inflection around it, I mean walk through the different categories whether it be the client benefit the flow as you call it and maybe even Pictet, little more detail.

Hank Herrmann

OK, in the DB business there is lots of activity, but it continues to be very slow in terms of trick translating into business. We have good products there, people are interested, but it just seems like the DB business is still slow to pull a trigger and so we make presentations and they just stay on hold that we don’t get decisions. In the flow business we want a couple of important accounts and the flow business continues to accelerate, I don’t remember the numbers of the top of my head. Like sequential quarterly maybe the flow business is 15 to 20% stronger than it was in the previous quarter or something like that.

And then finally Pictet, in the quarter improved a lot from what was going on the fourth quarter, I think mostly because of the change of opinion about two things a condition in Europe and also the currency in the Europe. So the net effect is that people appreciating that GDP growth here in the US in our market should be stronger than what’s going on Europe and that result has been instead of outflows, there has been inflows. So far in the month of April, I would say that it’s still little bit mixed. There is one outflow from platforms and then it’s been good inflows in Pictet for other reasons.

So I think the trend of money from Pictet, coming our way continues good and remember it’s in large cap growth category and large cap growth portfolio performance has been improving over the last four or five months, maybe even six months.

William Katz – Citigroup

It’s helpful. Second question, you ticked off four or five factors associated with impact of the margins as square. Just so curious if you would to normalize those factors sequentially, how much incremental margin lift would there be, or maybe several differently – you maybe could update us on your thoughts on margin opportunity for the company.

Hank Herrmann

I’ll let Dan speak to that first and then I’ll go into more depth.

Daniel Connealy

Well as we said before, we think we can gradually expand the margins. It’s not going to go in the straight line necessarily, it’s going to depend on lot of things like market action. In the fourth quarter, we had some unusual adjustments that were favorable. In the first quarter of this year, we’ve listed those items. The shorter number of days was certainly a factor, the way that we have changed the compensation for our wholesalers making it more straight line through (inaudible) rather than a tiered fashion that we used last year as we started the year we wanted to revise the system that was fair to them, but then protected us from the upside and that meant that their basis points fell, the more successful they got later in year.

That’s not necessarily the most satisfying to the wholesalers. We’ve now changed it to a more steady state. So that was about a penny’s difference right there between the fourth quarter and the first quarter. So I think the other factor is we’ve talked about – we’re not going to give you a projection of the margin in the second quarter.

Hank Herrmann

And Mr. Connealy insists on that so I can't do it, let me give you some more guidance though, in fact we had too fewer days for assets in the calculation doing on a daily basis and three fewer sales days did drag February pretty good and we had a pretty good snap back in March and I’m encouraged by that and so I would assume that a little bit more improvement is also likely in April just given market action and I haven’t seen that necessarily at this point in time.

Thomas Butch

One thing I will say Bill, that it’s probably going to be hard for the community to figure out what our comp level is likely to be in the second quarter. So our comp was about $33 million in the first quarter. We would estimate that that comp line would range next to order between 36 and $37 million. And the biggest component of that is that the share grants that were made on the second of April are at a higher rate than those that were falling off in the vesting period. So that’s going to be an ongoing higher level of expense.

William Katz – Citigroup

Okay, Hank if you could correct maybe I’m remembering my mind different than what you said it but I thought coming of last call, you were sort of your broad guidance for this year was to have margins that exceeded the fourth quarter adjusting for the year-end accrual catch up. Are you not reiterating that today or you changing that guidance, or we no longer comfortable on that guidance, so curious.

Hank Herrmann

I don’t remember I said it exactly that way Bill. But I’ll go back and review what I said on the quarter with Nicole. I expect that the as we go through the quarter-by-quarter there will be an improvement in operating margin. My recollection of the fourth quarter was a commentary about the level in the fourth quarter, not the adjusted rate that people have come up with. And so I’ll answer little bit of a different story but I continue to think we’re going to be making pretty good progress on operating margin.

William Katz – Citigroup

Okay, thank you very much.

Operator

Your next question comes from the line of Michael Kim with Sandler O'Neill.

Michael Kim – Sandler O'Neill

Hi good morning just a few questions. First can you just give us an update on your distribution efforts in the wholesale channel. Are there specific segments or firms in which you’re maybe starting to gain some penetration and then how are you sort of approaching those relationships, is it really leading with asset strategy or is there a kind of a more broader marketing pitch involved?

Daniel Connealy

Michael, we continue to be pretty diversified in our top ten firms, there is no real new firm in that mix, I would tell you that our three largest partners remain wire house firms but if you look to the top ten the next one you’d find is the large independent than the seventh or eighth one also it’s a large independent and we also have good penetration of the funds, supermarket series but register investment advisors. So what I would tell you is that that we have pretty diverse distribution on the wholesale side, now the top three firms are wire houses, we don’t have an undo imbalance in terms of sales and assets there.

I don’t – it’s hard for me to point to one firm that is emerging, I think we’re just trying to make sure that we’re where we need to be and that the mix of sales and assets is healthy by type of distributor. The one thing we are doing this year, we’ve put a small group of hybrid wholesales against one large broker dealer with lift which we have very little current presence and they’re making good in roads though as a percentage of that for dealer sales not material but that will continue to grow I think over the time and will be an important partner for us as far as the marketing approach, I’d like to tell you that’s entirely up to us that’d be a little bit this in January its very often the first opportunity we have is will the most known quantity which usually is asset strategy, but that is the leverage that we often use to open the door and it’s there after that we have the opportunity to tell her other stories so what happens if you look at those top ten firms is the longer that they have been with us, the more familiar they are with the full breads of what we have in the more diverse, are there sales.

So there is great openness to the totality of the story and not unlike any other firm you have one or two asset management firm that is, your one or two lead horses and those are the ones that knock down the door and give the opportunity to show the rest of your wares. I hope that’s responsive to your question.

Michael Kim – Sandler O'Neill

No, it’s helpful and then maybe just in terms of the outlook for indirect costs in both the advisors and the wholesale channels, do you feel like the levels that we saw in the first quarter are good run rate, I guess your recent kind of incentive profile goals going forward. It should be a fairly good run rate, I don’t – I’m not aware of anything that’s going to change to that. Any headcount increases should be minor but they will tend to put a little pressure on any part of our business where we have to add this account.

Hank Herrmann

Keep in mind though that we’re being pretty cautious about headcount add and we’re trying to spread out per evenly through the year. Sorry, I hope you heard that, I was away from the microphone a little bit, but there will be headcount increased but they’ll be stretched out through the year.

Michael Kim – Sandler O'Neill

Got it and then just finally maybe how are you thinking about the data comes to you next year. It looks like it’s historically you’ve been running that kind of modest net cash balances for the past couple of years. Do that suggest that you’ll be looking to maybe refinance that at some point.

Daniel Connealy

That’s what we’re looking at right now, refinancing of it. There is no advantage to doing it early because of the features in our current debt. So we’ll just be monitoring that as the time gets closer and the amount we would refinance is really dependent on what the market accepts so sometimes you have to borrow the 200 or 250 even if you think you don’t need it just for liquidity purposes.

Michael Kim – Sandler O'Neill

Okay, thanks for taking my questions.

Operator

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler – Credit Suisse

Thanks and good morning everyone.

Hank Herrmann

Good morning Craig.

Daniel Connealy

Good morning.

Craig Siegenthaler – Credit Suisse

Dan, just hit on your comp guidance for 2Q of 36 to $37 million. The pickup in comps added a little high especially given that 1Q contains some payroll taxes and other seasonal items. Would you mind walking through some the drivers there.

Daniel Connealy

Well I think the one of the bigger drivers is the additional shares that we issued at the price they were issued is going to have to be amortized over four years at that’s higher than what is rolling off. The second thing is that during this quarter we issued a few more shares then, we probably would have planned to and cash bonuses were slightly less and so that was a benefit to the first quarter.

So those are two main factors.

Craig Siegenthaler – Credit Suisse

Okay, got it. And then maybe then just a follow-up question on the advisor headcount there. Was the 200 adviser decline something we think should continue here so we see additional downward pressure and net advisory levels and if you expect higher productivity as we saw in the first quarter to help offset this decline.

Daniel Connealy

Yes, there is couple of things that work there. As you know first quarter is usually outsize relative to other quarter because they year-end qualification kicks in and those who have not hitted it don’t come into the following year. The first quarter this year I think was as has been pointed out principally a function of the change in the way we count. I would not expect downward pressure of that magnitude to continue quarter-to-quarter now with the new metric is in. I would say though that as we talked about on the last call, we do now at the end of last year, we put in new higher qualification level s and were looking at people on a quarterly basis, they have heard also they have to hit.

The results of hat today are candidly pretty encouraging relative o the number of people who seems to rising to that and I think that will have the effect of likely smoothing that outsized year-end number to which I alluded previously. So I guess I would say we wouldn’t expect downward pressure of that magnitude on a quarter-to-quarter basis but you may seen in other than the first quarter, higher numbers than traditionally had been reported as a result of the new quarterly that had been put in place.

Craig Siegenthaler – Credit Suisse

Got it and Tom, I may have missed it but what was the year-end number you referenced?

Thomas Butch

2057.

Craig Siegenthaler – Credit Suisse

Great. Thanks for taking my questions.

Operator

Your next question comes from the line of Robert Lee with KBW.

Robert Lee – KBW

Hi good morning everyone.

Hank Herrmann

Good morning Rob.

Robert Lee – KBW

Most of my questions were asked bur just two quick ones first and sticking with a margins and expenses, if memory shows me the firs t quarter distribution expenses often may include some, is there some seasonality there if its related to sales meetings and things like that that we to maybe expect that to improve some, everything being equal in coming quarters?

Hank Herrmann

No, I think it’s more likely that the second and third quarter will have that kind of an effect to some degree just normal stuff. Tom seems like he wants to add something to it but the answer is no seasonality, OK.

Thomas Butch

But we accrue for these sales meetings because they’re predictable, large sales meetings are spread throughout the year. The only variation would be if we done a missed our accrual and we have to tune it up later in the year, that actually happened in the fourth quarter when the sales convention costs were lower than we expected.

Hank Herrmann

The only variable that’s important is the one we’ve discussed and you have a short month in February which was going to tempered margin and that’s a fact of life over year.

Robert Lee – KBW

OK, and maybe just sticking with I guess on the expense name, no Hank bearing in mind your comments about cautious in adding headcount and spring it up through the year, but as you look ahead, I guess hopeful that we contained to get some positive, market action in growth, I mean do you see other areas in the they considering having to step up the rave investment maybe it’s reinstating some technology projects that may be had been put on fold, past year. Or is there any other place where we could see some increase in the investment.

Hank Herrmann

Robert answer the question this way, if we continue to have favorable market action. The impact of the fee generated from that will overcome anything we’ve got in the harper in terms of plan spending increases. And there is nothing that jumps right out and at the moment in terms of a big ramp up on any particular thing. We’re going to have to be hiring more wholesalers that they’re also going to be producing.

We’re going to be adding people to the investment division, we’re adding peoples operations and so forth but broadly speaking we’ve budgeted increases below the revenue increases as we expected to increase and our experiencing.

Robert Lee – KBW

Okay, great and one last question, I guess this is really for Mike, it relates to Asset Strategy Fund and understanding that it’s kind of a go anywhere do anything fund so obviously size doesn’t necessarily constraint in terms of to some extent but as it gets larger maybe relative to earlier years where you could do more, add more alpha or value through small and madcap holdings, is that kind of one of the drivers behind kind of spinning off this kind of fund of asset strategy because it allows you to kind of play in that field with a main fund, it’s too big to small midcaps don’t have as much of an impact?

Michael Strohm

Well you had a couple of embedded questions there Robert, I thought you were headed in the direction of is the fund getting too large for me to manage, I hope that wasn’t what you were trying to suggest. No but that maybe had, there is no falter what you had to do.

Just checking well I think it’s helpful to know a couple of things, one that the asset strategy product represents the process of the entire investment management division. So we have more than ample resources from a personal perspective to help us in all over the global markets that we want to participate that’s number one, number two, this product started out fairly small, I think it’s also helpful to realize which most people seem to forget that Mr. Herrmann was the progenitor as it were of the Asset Strategy Fund that would be back winter back in 1999 time period. And as way to reflect our entire process into one product that as you say has a go anywhere style to it. That’s one thing, I would say also that because at this particular fun allows us the capability to go into all of the major asset classes and the and just a fact that we’ve managed this from a very small but to where it is today, I think helps us with the process of handling the flows on a daily basis because we’ve seen income in from nothing to what they are today and that the management of that seems to be very well managed.

Also there are other products that are global in nature and I’m not going to list those, but there are other products that manage multiples of what we manage in the Asset Strategy Fund so that gives me some I guess, solicit that to the fund (Kennedy) get larger because similar products are managed very effectively in a similar style. As it pertains to your final question about the New Opportunities Fund, the way I think about it in terms of – or the way we think about it in terms of why we wanted that particular product, those of you who have followed the worldview that our organization has we have a worldview that we are investing in people that’s what we invest in and as our worldview which has been laid out looks at people over several different phases of economic development from agrarian to export to urbanization to domestic consumption to prosperity, what the Asset Strategy Fund up until this point has primarily focused on or individuals in, are people groups in the category known as urbanization domestic consumptions that’s been the primary focus of that particular product.

With the introduction of the New Opportunities Fund what we’re going to do with that fund is spend more time focusing on the beginning of the human economic development chain and focus more time on those individuals that are perhaps entering the agrarian phase of economic growth for the very first time. Think areas of Africa for example, or those who are emerging from an agrarian based economy into export driven for the very first time. The point is that within those two particular phases of economic growth you are entering into countries that by definition of fairly small and you have the opportunity to buy stocks in local markets that are small to madcap in nature. So I think that having a product that compliments what we’re doing in asset strategy, the larger fund by getting at other segments of the human economic development chain will be very beneficial not only to our entire process but also to our shareholders as well.

Robert Lee – KBW

Alright, great. I appreciate the detailed response.

Operator

Your next question comes from the line of Roger Freeman with Barclays Capital.

Roger Freeman – Barclays Capital

Hi good morning actually Mike, didn’t pick up so on the call here. If you look at the Asset Strategy Fund and its integrity and kind of listening to the comments around Pictet, where it looks like we’re seeing preference back to US assets, is that a view from, do you think from an institutional standpoint that investors are migrating back to US assets.

Michael Strohm

Well I think that’s certainly been true since, my perception is that certainly been true since October, November up until now and the gravitation back to US securities is a function of several developments that have occurred in the world during that period of time such as the introduction in investors mind of sovereign risk with the events that occurred in Dubai World in October, November of last year and then at the beginning in this world – beginning at this year, the emphasis on the outcome for the Southern European countries that are dealing with massive debt issues namely Greece, Spain, Portugal to name a few.

So I think that focus by investors on debt issues on the part of Southern European countries causes investors to look for a safe haven and in the investment world, the dollar tends to be the quote “safe haven” currency that people go to when they are uncertain, confused about developments in other part of the globe. Not that that's the best choice but it’s the choice that people tend to move to and that’s – so that has implications not only for the U.S. dollar but also U.S. denominated securities whether they are fixed income or equity. That’s one.

Number two, since the end of last year, investors who have had their eye on the prospects for growth outside the U.S., notably in Asia in general, China in particular have been I think caught up in the debate as to whether or not there is a Chinese property bubble occurring and what the implications are for GDP growth in China as they look out across the remainder of 2010. And by admission and the policy makers in China would say that the GDP growth is wrap it at 12% in the first quarter and they have implemented policies that is designed to slow growth to a more sustainable 8% to 9% which we believe that they will achieve.

However, in an environment that is – tends to be short-term in nature that makes U.S. Securities more desirable. Then thirdly the stability of the U.S. market as evidence by the ability of companies to generate above average profits in the first quarter and perhaps throughout the remainder of 2010 is a little clear in some people’s mind, which has caused as you all know revision upwards in earnings estimates across the boards as a result of better margins, the financial service sector in general has taken fewer reserves for non-performing loans and that's helped earnings go up.

So I think in the aggregate, at least in the first half of ’10, you had coming into the picture where the U.S. was the more desirable place to go. Now as we get on to the second half of ’10 and then to 2011, I am not quite so sure because I think at – as people start looking at the second half and then beyond what they have got into, I think refocus on is the likelihood that Asia, China in particular is going to be able to sustain 8% to 9% GDP growth and that's going to look a lot better than most places around the world and as people become less concerned about that, there may be reallocations accordingly.

Roger Freeman – Barclays Capital

Thanks, that’s very helpful. If you look at your flows broadly, gross sales picked up quite a bit sequentially and it sounded like the gross sales into asset strategy were about, if I heard correctly I think flat sort of quarter-to-quarter, redemption picked up in the natural resources fund. But I think if you look at that the gross pickup, is that across all those funds that you were talking about like science and technology that it picked up? Was there anything else was sort of outside? And in fact were gross flows into natural resources high, was it just a lot of churn there or was it gross down there too?

Hank Herrmann

The gross was down a bit, but it was more that the net was under pressure. And I think the funds I identified previously – actually the gross was down more than a bit. The gross was down for the quarter. And the funds identified previously were in fact the ones that would have made up the difference if you will.

Roger Freeman – Barclays Capital

Yes, okay, great. And then on the management fee yield, that came down sequentially. Is there anything more than just a couple of declines in the quarter. I noticed institutional ticked down more than the others, I am not sure there was something there.

Hank Herrmann

Institutional what ticked down more.

Roger Freeman – Barclays Capital

The management rate. The MU (ph) yield.

Hank Herrmann

That had to do substantially with one of the accounts we talked about before which uses the asset strategy fund on a sub advised basis. And I think that would be account for it.

Roger Freeman – Barclays Capital

That would account for it. Okay.

Hank Herrmann

There is nothing unusual. The overall decline in yield was pretty minor. There is nothing to be read into that.

Roger Freeman – Barclays Capital

Okay. And then on the – just back on the advisors, I guess it looks like there was a pickup even adjusting for the change in classification sort of year-to-year, maybe a 150, 160 or so the actual declines versus I think like less than a 100 the year before. Is these new standards that were put in place, I assume, if you can recall, they are more stringent. Was that – so it was just a one-time pickup maybe –?

Hank Herrmann

What we have tried to do, what we have tried to do was – remind you is that in the first quarter historically, we have obviously had a drop from the fourth quarter, just because of relicensing. And so, that happened. And then in addition to that, we had additional follow-up as a result of the change in the way we relicense. And as I said, it’s roughly half or a little bit more of than half of the decline came from the change in the proceedings – procedures as opposed to typical falloff which accounted for the less than half.

Roger Freeman – Barclays Capital

Yes, I was just getting at that half, the half that we care about was more than the associated falloff from 4Q08 to 1Q09. So I am just wondering if there was a larger reading out this year than there was the prior year.

Henry Herrmann

Yes, I don’t. That varies from year-to-year honestly. And I think the one point we are also trying to make relative to the quarterly mileposts if you will is that we would be somewhat surprised if we saw the same phenomenon repeat next first quarter, because we have mileposts at each quarter end.

Roger Freeman – Barclays Capital

Yes and my follow-up – right and so actually does those seasonality get completely eliminated now because of the quarterly metrics?

Henry Herrmann

Substantially, I don't know if it's every completely eliminated but substantially eliminated sure.

Roger Freeman – Barclays Capital

Got it. Okay, alright, thanks.

Operator

Your next question comes from the line of Alex Blostein with Goldman Sachs.

Alex Blostein – Goldman Sachs

Hi guys, good morning. Most of my questions have been answered. Just wanted to follow-up quickly on capital management thought, it seems like the buyback picked up a little bit quarter-over-quarter, so just wanted to get your updated thoughts on that, thanks.

Henry Herrmann

Well, as we have said, we intend to buyback enough stock to counter the delusion that occurs with each year's grant of a restricted stock. So we tend to want to do that earlier than later in the year if the markets are favorable to that. So we have maybe one-third of it we have purchased so far this year. Sometimes we – in the past, we have also had further delusion from the granting of options which are now having a lessening effect in the future.

Alex Blostein – Goldman Sachs

Got it thanks.

Operator

Your next question comes from the line of Mac Sykes with Gabelli and Company

Mac Sykes – Gabelli and Company

Good morning. Mike not to beat the dead horse here, but just assuming that investors migrate back to equity assets versus fixed income, do you think that would be – would that accelerate flows to asset strategy or sort of be indifferent.

Michael Avery

Why would that be a dead horse, Mac? I don't think that's a dead horse. I think that's a good horse. Say your question again I was focused on the dead horse kind of it, so –

Mac Sykes – Gabelli and Company

Well, no dead horse being that I keep asking the questions about asset strategy. I guess just thinking about the flows last year were strongly favoring fixed income versus equity. And if you assume for a second that investors come back more to equity versus fixed income, do you think that would favor your product strategy or indifferent?

Hank Herrmann

We understand the question. This is Hank. If there is a swing back toward equities, it's going to help all of our products, and it will certainly help asset strategy fund.

Mac Sykes – Gabelli and Company

And then just the last thing, are you seeing any opportunities to increase your scale on fixed income? Has that changed in the last quarter or so?

Hank Herrmann

I am not sure how you mean increase to scale?

Mac Sykes – Gabelli and Company

On potentially lift outs or opportunities.

Hank Herrmann

We are looking at a lot of things like we always do, because there's nothing in the hopper at the present time.

Mac Sykes – Gabelli and Company

Great thanks.

Hank Herrmann

If I may, a couple of questions have sort of nibbled around the question of what's happening to equity flows outside asset strategy and they were sharply sequentially that is domestic equity funds as a group showed good sequential growth. So a couple of the questions nibbled around the edge of that, but I wanted to make that point.

Operator

Your next question comes from the line of Cynthia Mayer with Bank of America.

Cynthia Mayer – Bank of America

Hi thanks. Just a quick follow-up, could you talk a little about the tax rate and what a normalized tax rate is for the rest of the year?

Hank Herrmann

Yes Cynthia. Our normalized tax rate is about 37.5% and the variation that you see from quarter-to-quarter really has to do with capital gains a positive and negative. So to the extent, we have capital gains that are positive gains will have a lower tax rate, because of the carry forward we have. And if we are going to look capital losses, then we will have a higher tax rate. So almost all that variation that you see between 37.5% and our recorded tax rate has to do with investment gains.

Cynthia Mayer – Bank of America

Okay, but you didn't seem to have very large gains this quarter.

Hank Herrmann

Well, it also affects the held for sale categories, which don't go through the income statement, but the tax effect is treated the same way. So you have to look at our held for sale portfolio and be aware of what's happening to not only our training portfolio but our held for sale.

Cynthia Mayer – Bank of America

Got it. Thanks very much.

Operator

Our final question is a follow-up from William Katz with Citigroup.

William Katz – Citigroup

Okay, a couple of follow-ups. In your – so your thoughts about accrual accounting for compensation for the rest of this year, are you accruing for bonuses at a normal level, that's my first question. Second question, I was wondering if you could just talk a little bit about the outlook for sub advisory (inaudible), is there any way to internalize anymore of that flow if you will? And I have one follow-up on the other side of that too.

Hank Herrmann

The answer to the first question is yes we are accruing at normal level. I didn't quite understand your second question. Ask me again.

William Katz – Citigroup

I apologize. Just in terms of – is there opportunity to internalize anymore of the subadvisory mandates that would reduce the subadvisory fee expense other than just assets rising against those?

Hank Herrmann

No – Will, I don't think so, not at the moment. We have taken care of the things that needed to be taken care of and we had strategic alliance relationships with the number of the other providers in a global natural resources fund, fees are partner forever based on what he's delivered to us and we have delivered to him. But I don't see anything going on there. What was your final question?

William Katz – Citigroup

And just last one is just maybe Tom; you mentioned that you saw a nice increase in the domestic equity sequentially. Wondering if you give an update into April of some of the trends you are seeing just on a broad base and flows?

Tom Butch

The flows so far in the advisory channel are up nicely on a daily sales basis for the quarter and on the wholesale side they are flattish for March levels.

Hank Herrmann

Were you asking about equities as a percentage of total, different names, need a little more help there?

William Katz – Citigroup

Sure, well it was actually a combination of the two, so I apologize for not being clear. One was just the absolute level of flows in April and secondly any kind of mix shift within the flows?

Hank Herrmann

Okay. There's a little bit of a mix shift toward equities relatively, because the fixed income thing is not quite as hot as it was earlier. And then broadly speaking, I would say that flows in April are a scoot slower than they were before but it is just a scoot.

William Katz – Citigroup

Okay, thank you.

Operator

And now I will hand the program back over to management for any closing remarks.

Hank Herrmann

We thank you all very much for the time you spent with us this morning. We appreciate and look forward to talking to you next quarter, please take care, bye.

Operator

This concludes today's conference call, you may now disconnect.

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