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Manning & Napier, Inc. (NYSE:MN)

Q4 2013 Earnings Conference Call

February 13, 2014 8:00 AM ET

Executives

Paul Battaglia – Director, Finance

Patrick Cunningham – CEO

James Mikolaichik – CFO

Analysts

Chris Harris – Wells Fargo Securities

Adam Beatty – Bank of America Merrill Lynch

Michael Kim – Sandler O’Neill

Ken Worthington – JPMorgan

John Dunn – Sidoti & Company

Operator

Good morning. My name is Jasmine, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manning & Napier Fourth Quarter and Full Year 2013 Earnings Teleconference.

Our hosts 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 10:00 AM Eastern. The dial-in number is 404-537-3406 and enter PIN number 35793882. At this time all participants have been placed in a listen-only mode. And the floor will be opened for your questions following the presentation. (Operator Instructions). It is now my pleasure to turn the floor over to you Mr. Paul Battaglia.

Paul Battaglia

Thank you, Jasmine. And thank you all for joining us today to discuss Manning & Napier’s fourth quarter and year end 2013 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 relating to financial guidance, maybe deemed to 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 & Napier assumes no obligation or responsibility to update any forward-looking statements.

With that, I’ll introduce our Chief Executive Officer, Patrick Cunningham. Patrick?

Patrick Cunningham

Thank you, Paul. Good morning and thank you all for joining us. As usual, I will 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 up to Q&A.

As you all know 2013 was a strong year for the equity markets. In the U.S. slow economic growth did not hold back the market with the S&P earning more than 30% over the course of the year. Not only was this stronger than the market rebound, we saw post the financial crisis in 2009. But it was the strongest return in U.S. stocks since 1997. Similarly U.S. fixed income also made headlines but not for the same reasons. The Barclays Aggregate Index lost 2% in 2013, the worst return for that index in 20 years.

Well emerging markets also loss around in 2013, developed foreign markets as measured by ET earned more than 20%. In all, the stock market investors had a very good year, while bond market investors were disappointed. 2013 was also a very strong year for Manning & Napier across our strategies. First our equity series mutual fund which represents our domestic equity investment approach ended the year ahead of the S&P 500 with a return of 32.8%. Aside from this very strong absolute return, this out performance improved our shorter term relative returns which as you know have been challenged since late 2011.

Our lifecycle strategies also earned strong absolute and relative returns. For example, our Pro-Blend Maximum Term the most aggressive of our lifecycle strategies earned a 25.7% return versus its blended benchmark return 24%. As of yearend 10 of our 11 retirement Target Collective Trust ranked in the top 40% of their peers for the 2013 calendar year and four are ranked in the top quartile.

Our World Opportunities Fund which invested opportunistically in both developed and emerging markets earned a return of 18.8% compared to 15.3% for the All-Country World ex U.S. Index. However, the funds return trailed ET which earned a return of 22.8% in 2013. As we discussed in prior calls, EPS performed a meaningfully different than the ACWI ex U.S. Index in recent periods due to its lack of exposure to emerging markets. Our fund includes emerging markets which makes ACWI ex U.S our primary benchmark but some clients do benchmark us to EC and we continue to emphasize service for these clients.

Relative results for our fixed income products during 2013 are also worth noting. Specifically, our Core Bond Plus strategy was essentially flat for the year well the broad market was down about 2%. Like our peers, during the course of 2013 we would face with both challenges and victories. However, when we sum up all the events of the past year, we see more tailwinds than headwinds for the future distribution of our products. I point first to our strong absolute and relative returns for 2013. Also of note the underperformance we saw in the third quarter of 2011 will roll off our three-year return by the end of 2014 which should lead to improved fairly comparisons across our products said but in particular was our U.S. equity strategy.

Anecdotally, I can tell you that we’ve seen an uptake in interest in our U.S. equity strategy that impose of new business in the past few months. Beyond that, we have several newer products that will be reaching the important three-year track record in 2014. First, our emerging markets mutual fund which earns a three-year track record in November of 2014 has seen very strong relative performance thus far. In 2013, the fund was up 8.9% versus negative 2.6% for the emerging market benchmark. Since its inception it has more than doubled the return of its benchmark.

In addition, our Global Quality Plus separate account strategy also reaches the three-year mark later this year. Currently, that global strategy is outpacing its benchmark by more than 400 basis points per year since inception. Alongside, the strong relative performance we’ve seen in our Core and Core Plus fixed income mutual funds, our new Global Fixed Income fund which was launched in 2012 has outpaced its benchmark by 375 basis points since inception earning positive returns well the benchmark has been negative.

Beyond these products and performance related tailwinds, it is worth noting that despite some of the challenges we faced in 2013 we continue to source more at $8 billion in new flows. Over the course of the year, we generally saw a good inflows into our lifecycle and non-U.S. equity strategies. However, as we’ve said in prior communications, our U.S. equity strategy was a source of outflows and we ended the year with a total net outflow of $2.5 billion and Jim will provide more detail about these outflows in just a few minutes.

As we move ahead into 2014, our primary objective is to remain focused on the key foundations of our business that you hear me talk about each quarter. First, is our strong team-based research engine, which focus on discipline is driving our results. Second is our solutions-oriented approach, which continues to be ideally suited to uncertain economic and market environments. And third, there is our strong governance and operating structure that aligns the incentives of our employees, with those of our clients and our shareholders.

Throughout 2014, we expect to continue making investments that position us for future growth. These investments include new products, new hires and the infrastructures to support our business, for example the Defined Contribution business is a critical growth market for us. This market has continued to evolve and retirement plan advisors are an important gatekeeper of Defined Contribution business. To ensure that we are fully addressing this marketplace we planned to shift the focus of a group of our wholesalers to the Defined Contribution Investment Only space the DCIO space. This will require additional hires in both the sales and support functions.

In addition, we will continue to invest in infrastructure to support our growth. The examples of infrastructure investments that we are currently supporting are planned to begin supporting include upgrades to our Order Management System, our client reporting system and our customer relationship management system that support our sales and service efforts. Well we may not realize the full benefit of these investments until later of 2014 or even 2015. We believe that these investments will provide future returns for the company and our shareholders.

That is all I have for the prepared comments. And now, Jim will discuss our financials. Jim?

James Mikolaichik

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 closed. As Patrick mentioned, I’ll take you through the financial highlights before opening the call to Q&A. And as in prior quarters, some of my comments will include references to non-GAAP financial measures. However, full GAAP reconciliations can be found in our earnings release and related SEC filings.

Looking at net client cash flow and assets under management, we ended the fourth quarter with $50.8 billion in assets under management, an increase of $1.7 billion or 3% on a sequentially basis and 12% increase or $5.6 billion when compared to last year. And as of December 31, 2013, the composition of our client assets by investment vehicle was consistent with what we have reported previously, with 53% in separate accounts and 47% in mutual funds and collective investment trust. By portfolio, 47% of our total client assets were invested in blended asset portfolios or lifecycle products, 51% invested in a variety of equity strategies and the remaining 2% in fixed income portfolios.

The increase in our assets under management for the period was primarily attributable to strong investment performance which was 4.8%. Gross client inflows during the quarter were $1.8 billion, offset by $2.5 billion of gross client outflows resulting in net client outflows of approximately $628 million. Despite the decline in cash outflows from our separate accounts our 2013 retention rates was 94% in line with 95% reported last year.

Transitioning to the fourth quarter financial results. We reported revenue of $98.2 million for the quarter, an increase of 13% from $87.1 million reported in the fourth quarter of 2012 and an increase of 4% over $94.6 million for the third quarter of 2013. Changes in revenue were generally consistent with changes in average assets under management, which increased by 12% from fourth quarter of 2012 and 4% since last quarter. And our revenue margins remain at 78 basis points for the fourth quarter the same as its reported last year and for the previous quarter.

Operating expenses were $58.8 million in the quarter, a $12 million increase compared to the fourth quarter of 2012, and an increase of $6.9 million compared to the previous quarter. The increase in operating expenses was a result of compensation related costs, and in particular due to an increase in the analyst bonus. The analyst bonus increased because of strong absolute and relative investment returns during the quarter for many of our products. Additionally, third quarter 2011 under performance is now over two full years behind us and less impact to the bonus compensation. And as a result, compensation as a percentage of revenue was 33% for the fourth quarter and 29% for the year.

Distribution, servicing and custody expenses have increased in line with average assets under management, with the increase primarily due to sub-transfer agent and 12b-1 fee expenses. Other operating costs when considered as a percentage of revenue had remained consistent with prior quarters at approximately 9%, it’s down from 10% in the fourth quarter of 2012.

And as a result, we reported economic income for the quarter of $40.1 million, a 1% decrease from the fourth quarter of 2012 and 7% decrease from $43.3 million reported last quarter. And our economic income margin was 40.9% compared to 45.7% last quarter and 46.4% at this time last year. Economic net income was $24.8 million or $0.28 per adjusted share compared with $0.30 per adjusted share last quarter and $0.28 per adjusted share in the fourth quarter of 2012.

With that, I’ll turn to the full year results. For the year, we accumulated approximately $8.4 billion in gross client inflows including $2.5 billion in our separate accounts and $5.8 billion into our mutual fund and collective trust products. We experienced gross client outflows of $10.8 billion for the year resulting in net client outflows of $2.5 billion. The net client outflows were more than offset by an $8.1 billion increase in our assets under management from the investment returns during the year. And in total, our assets under management increased by $5.6 billion or 12%.

The increase in our assets under management drove a 11% increase in revenue over 2012 with total revenues were $376.1 million for 2013. And our revenue margins were 78 basis points for both the current and prior year.

Operating expenses increased by 15% or $27.2 million to $209.8 million. Approximately 17% of the – $70 million of the increase resulted from compensation and related cost and was attributable to analyst bonus as well as non-cash stock-based compensation charges that’s coming from the first issuance of warrants granted under our long-term incentive plans. And we would expect to continue our long-term incentive plan with another equity grant in 2014.

Nearly $10 million of the operating expense increase was from distribution, servicing and custody costs which are entirely attributable to increase in assets under management. And the remaining expense increased was another operating expenses which increased by 2% in 2013 but decreased as a percentage of revenue from 9% in 2012, 8% this year.

Non-operating income for the year was $1.2 million. This resulted in full year of 2013 economic income of $167.5 million up 7% from $156.9 million reported in 2012. And our full year 2013 economic income margin was 44.5% compared to 46.3% in 2012. And economic net income for adjusted share for 2013 was $1.15, an improvement from $1.08 in 2012.

Before closing, I’ll point out a few other items. First, our management team continues to own approximately 18% of our business, and a large portion of that ownership is subject to individual vesting requirements through 2014. As a result, we are continuing to report non-cash compensation expenses. And those expenses are variable in nature subject to the underlying investing criteria and the market value of our public stock. Second, we are nearing an exchange period whereby both our founder and management team have the ability to exchange invested private units. The exchange timing will occur at or near at the end of the first calendar quarter. And as we approach the exchange period, we will continue to communicate information related to the process. I would also remind everyone that both the vesting and exchange process are fully accounted for us as part of our adjusted share count did not have dilutive impact to our shareholders.

With respect to the balance sheet, we continue to have a debt-free capital structure and we maintain the cash balance $125.3 million. Besides returning cash to our shareholders, we invested approximately $10 million in new products during the fourth quarter including in new emerging markets fixed income product and further expand our emerging market offerings. And at year end we have approximately $30 million invested in new product concepts.

As you all aware, Manning and Napier Group distributed $46.3 million in cash to its members for the quarter, including a special one-time distribution of $15 million. This distribution resulted in a quarterly dividend of $0.16 per share, which is consistent with the quarterly dividend that we have provided to shareholders in prior periods and a special one-time dividend of $0.08 per share. For the year, we distributed approximately $140.4 million or $0.72 per share to our shareholders.

In closing, we were able to enhance shareholder value during 2013 to economic income growth and dividend payments. Additionally, we were able to create value for our clients to positive investment returns. And as Patrick stated earlier, we see opportunities for future growth in a Defined Contribution market and plan to make the necessary investments in 2014 to add to our sales force and improve our infrastructure to be able to capitalize on these opportunities and realize the return on these investments in 2015 and beyond.

That concludes my formal remarks. I will now turn the call back over to the operator. And we look forward to your questions. Operator?

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions). Thank you. Our first question comes from the line of Chris Harris from Wells Fargo Securities.

Chris Harris – Wells Fargo Securities

Thanks. Good morning guys.

James Mikolaichik

Good morning, Chris.

Patrick Cunningham

Good morning.

Chris Harris – Wells Fargo Securities

Few questions on the comp. So, I know that obviously absolute performance play a role this quarter. But when you look at market returns, they were just as strong as they were this quarter in Q1. Your comp ratio was a lot higher. So, I’m just trying to get an understanding, was it because of the relative performance was also so much better this quarter and then you had the impact of the weaker performance rolling off. So, those two kind of really contribute to the pump up. And then the other thing I’m wondering about is as we think about comps for 2014 as you get the weaker performance kind of rolling off assuming everything else is equal, should we assume the comp ratio will likely be a little bit higher again you have to assume the same level of market returns and so forth. So, just trying to get the – kind of quantify the impact from that dynamic as well.

James Mikolaichik

Sure. Yes, the – I’d say one you saw few things happening this year that were different than other years but it wasn’t have to be ordinary or I’d say unexpected that we see shifts in comp from quarter-to-quarter that we’ll move by 3%, 4%, 5 percentage points. And we saw that at the end of 2011 with under performance in the third quarter resulting in margins that went from 45% up to 50% because this moved the other direction. And what you had in this year, 32%, 33% returns in equity markets significant returns overseas as well as the U.S. you’ll – it is probably somewhat unexpected and when we have those types of returns and we outperformed benchmarks, you’re going to see our comp move up accordingly given the way that the comps tied to the individual stock selection, as we’ve talked about quite a few times.

The fact is that well the returns in the first half of the year were probably similar in terms of the performance against benchmarks. The returns in the second half of the year I think were higher from an absolute standpoint for both the third and the fourth quarter which I think contributed to the higher comp in the second half of the year. And then specifically in the fourth quarter, because we calculate the compensation expense as a combination of one, two and three year, you had third quarter 2011 was the large under performance period in our portfolios, that now is out of the one year out of the two year and always impacting this three year component of the computation which is the least impactful to the overall computation.

So, when you put all those things together, you saw that variability in the fourth quarter. But when you look at it as a full year, our margins remains relatively in line with what we have seen historically which is hovering around that 45% range with comp as a percentage of revenues in total was under 30% and then 29% range. And as we go forward, I think our annual basis it tends to normalize in that space where as we perform better and bring on more assets, it contracted a little bit but seems to move back pretty well today in the mid-40s. The one other item that will impact our comp is the stock-based compensation that’s started last year.

We issued about 400,000 shares last year at about $6.5 million which is amortized over our vesting period and we would expect that to continue to impact our compensation expense this year for the second annual amortization but we’d also have a new grant coming on this year for an additional amount, it will be impacted by the stock price. So, you put all those things together, that’s how we ended up where we are at present.

Chris Harris – Wells Fargo Securities

Okay, Jim. That’s helpful. My one follow-up would be again another financials question. You guys called out a number of initiatives you’re working on, system upgrades, some new hiring. How should be we thinking about the financial impact of all those items in 2014 and beyond?

James Mikolaichik

We generally stayed at about 8% to 10% with other operating expenses as a percentage of revenue and we’ve been able to keep it in that range historically. So, we measured our investment in the business to grow organically has been the history of the company. And I think we – well it moves sort of into the 9% and 10% range at times when we’re doing little bit investing. I think we’ll measure and monitor it but would expected to stay within somewhat normal ranges.

Chris Harris – Wells Fargo Securities

Great. Thank you.

Operator

Our next question comes from the line of Adam Beatty from Bank of America Merrill Lynch.

Adam Beatty – Bank of America Merrill Lynch

Thank you. And good morning. Just a question about the trend in gross sales and some of your expansion into regional markets. It seem to like through the last year or two you’ve been expanding into some additional localities and what have you – and yes – when I’m looking to grow sales it seems like maybe that haven’t had much of an impact yet. It was that a question of new markets contributing as you expected but maybe some of the older markets diminishing in terms of their sales contribution or just any color you could give on how the expansion is going and our gross sales where you would expect?

Patrick Cunningham

Sure, Adam. Good morning. The expansion is going as, as we’ve planned. I mean, we’ve hired new people particularly our expansion into the Southeast and into the – excuse me the Southwest and into the West as continued. The – as you know with some of the performance issues we had in 2011, that affects the short-term marketability of some of our track records. So, I would say that the sales cycle is a little bit longer and a little bit harder. But, nonetheless, we are seeing a lot of activity and a lot of positive interest. I mentioned earlier, with our U.S. equity strategy that we saw anecdotally an uptick in interest and that’s not to be and then all of a sudden we see a large inflows.

But, clearly in the sophisticated investor market to the large institutional investors, they are taking interest in it because they – if they believe that your process and your disciplines are sound and have legs and have performed well in prior markets, they frankly take advantage of it when it’s not performing well immediately. So, we know – we always – I’m satisfied with the type of progress that our reps have been making, I don’t think they’re at full stride quite yet, I think they will hopefully be coming in full stride, there is a lot of activity and a lot of interest that hopefully will turn into new business in 2014.

Adam Beatty – Bank of America Merrill Lynch

Thanks. That’s helpful. Have you had – sorry. Have you had underperformers about having that you had to kind of call from their heard and is that any more than you would normally expect?

Patrick Cunningham

See, we always have underperformers that we have to call from the heard. And so we continue to do that and I would say it’s about normal, it’s not nothing – it takes usually years to determine, I won’t say years, a couple of years to determine whether someone is really doing the type of activity that’s required to be successful is talking to the right decision makers. So, it’s been a continual process that our sales management goes through. And but nothing unusual, Adam.

Adam Beatty – Bank of America Merrill Lynch

Great. Just one more. Thanks for taking on my questions, again I guess on distribution. You mentioned refocusing and repurposing some of the sales force around Defined Contribution retirement. What areas where those folks working upon before and how does you think about making that sort of tactical decision?

Patrick Cunningham

Sure. Our wholesaling force has been and a generalist force. So, they would deal both with the retail space, with the high-net-worth space and advisors who service those type of clients as well as the Defined Contribution space and retirement plan advisors who either dowel in or specialize in the following key markets. So, as we have hired wholesalers over the past several years having seen the trend for sometime that the retirement plan space is intermediated with retirement plan advisors primarily as a result of some of the regulatory issues that we’ve seen with the Pension Protection Act and clarifications on that Act over the years.

We were hiring people who had come from a DCIO background. We were hiring people who had specialized in that area. So, as we – if you will split our wholesaling force into a force of specialist in DCIO, we are pretty much stepped on that already, that’s not – we’re not going to have to backfill that. We will – we’ll have to backfill our – the wholesalers who deal in the retail space. So, it’s not a – this is something we have been picking of that and contemplating and it was at the end of the year as we did our action plans and our strategic plans for the next year to three years, we determine that now is the right time to make that happen. So, it is – it’s in process.

Adam Beatty – Bank of America Merrill Lynch

That’s good. It sounds like you had in the pipeline definitely. Really appreciate. That’s all I had today. Thanks.

Patrick Cunningham

Thank you.

Operator

Our next question comes from the line of Michael Kim from Sandler O’Neill.

Michael Kim – Sandler O’Neill

Hey, guys, good morning. First, I know it’s still early days but it does seem like retail investors have started to move up the risk curve at least up until more recently. So, just assuming that trend continues to play out. Be curious to get your thoughts on maybe which of your funds are best positioned for a step up inflows versus maybe some strategies that might not necessarily fully participate just given performance and or positioning headwinds?

Patrick Cunningham

Sure. Well, I’d have to segment it a little bit, the lifecycle space clearly we are – we have a long enriched history in lifecycle space going back decades. Our lifecycle funds are highly differentiated. Most lifecycle the most popular lifecycle finds are fund to funds having 15 to 25 underlying funds. Most lifecycle funds have a glide path which is a relatively fixed line a slope that goes down to more conservative over time. Most – we are different, we have a glide range meaning that we can be – we can move 15% above and below a mid-point depending upon what’s happening in the market which is quite different and we did not use having 20 different portfolio managers hovel together to make a target date funds.

So, we – so I think that differentiation is continues to play well in the marketplace and the fact that the regulators are making sure that people put a high degree of scrutiny on lifecycle funds meaning that you can’t just buy the lifecycle fund of the record keeper, you have to go through a fairly rigorous scrutiny, it’s just like you would any other fund. In fact, I would argue that it’s more difficult to compare and analyze lifecycle funds. In fact, we put together a white paper called Raising The Bar, due-diligence for target date funds in conjunction with strategic insight which is we’ve seen it but it’s – it talks about some of the issues associated with that. So, on a lifecycle space we’ve seen positive flows, we expect to continue to see positive flows.

The other is that the – while investors at least up until through the fourth quarter of last year were clearly being more open-minded about equities in general and effective management. We still believe that the marketplace it will – as the last month indicates is it still can be relatively skittish and having a strategy that is designed to protect people in down markets. When I say protecting to avoid sustained capital losses, that’s who we are, that’s our – that’s who we’ve been and who we are. And we think that, that will continue to resonates with investors and continue to add value and there will be demand for us. So, the other area I think the – our global products are – we see demand from the global strategies which – with a lot of flexibility. The investors who want managers who aren’t filed constraints, they want managers who have the conviction to move and move in – and sometimes dramatic fashion from over value sectors to under value sectors. I’m optimistic that our overall strategy will continue to have demand in the marketplace. And then as our U.S. track record washes out 2011, we should see more retail demand for that as well.

Michael Kim – Sandler O’Neill

Okay. That’s helpful. And then just given the improving investment performance track records more broadly, just curious to what extent the sales team has started to sort of shift back in incentive whereas focusing more on sales cost as oppose to spending a fair amount of time servicing existing clients. And then assuming that’s the case, have those efforts translated into a step up in sales activity more recently?

Patrick Cunningham

The short answer is yes, Michael. We – as you – a lot of the clients who had concerns about the U.S. [record] track record with a strong year in 2013 and some of the – some of the positioning that we have started to show real value to clients, for example we had – one of the reasons why we haven’t perform in 2011 and because we didn’t see that high dividend paying stocks which were safe investments where the right place to be. The marketplace is now basically agree that that’s not the right place to be and having good top-line growth, good revenue growth despite of slow economy is going to be key to success. And so, there is no question that the intensive service environment has made it significantly allowing our reps to sell more.

Michael Kim – Sandler O’Neill

Great. Thanks for taking my questions.

Patrick Cunningham

Thank you.

Operator

(Operator Instructions). Our last question comes from the line of Ken Worthington from JPMorgan.

Ken Worthington – JPMorgan

Hi. Good morning. First, just to maybe expand on the last question in terms of differentiations. So, you’re entering the DCIO market, it’s a very competitive landscape, participants, big budgets, big breadth of product. You’ve competed effectively in retirement, but there has been a focus on kind of benefits as a point of differentiation to distinguish you from peers. As you kind of build out DCIO, do you have a like a nature or something different on the distribution side which may distinguish you from that competitive – or distinguish you in that competitive landscape?

Patrick Cunningham

Yes. Good morning Ken. I just want to clarify, we’re not entering the DCIO space. We’ve been in the DCIO space for a very long time, in fact they were not our record keeper. So, we’ve only been in the DCIO space for our history. We have – I’m speaking at a conference in March, we have – we are very active in DCIO conferences, we are – we’re students of this industry and have been for a long period of time. So, we’re – this is not something new to the extent that we’re – we are actively and aggressively working in the space. We – it was – either it’s a modifications to our wholesaling force so that those people who naturally have an affinity for the retirement plan advisor, now we’re working exclusively with those type of advisors as oppose to working with retirement plan advisors and with high-net-worth advisors as well.

So, it’s a – I think it’s a logical extension of a strategy that we’ve had in place for a very long period of time. So, that’s the first point. Second point of that differentiation, if you look at behavioral dynamics, behavioral finance, you know that people feel 2.5 times worse losing 10% than they do feeling good gaining 10%. And the reason I mention that is because draw down – we talk about participant outcomes, participant outcomes are a result of them making bad decisions at the wrong time. And so, we have been able to differentiate ourselves, as I said before because we use a glide range. We don’t assume what inflation is going to be 10 years from now is both unknown and unknowable.

And – so we don’t presume to know that, we have to have the flexibility in order to react to what’s the current environment is all about. So, we believe that the flexibility we have is very different than others in the marketplace and as a – it is a real plus. So, I think our bonus structure resonates with people who are looking at hiring to – in essence what I’m saying is that protecting on a downside, managing that type of sustained capital risk, we believe is not only in demand now, we’ll continue to growing demand as we go forward. So, I’m very positive about our positioning in that space and I don’t think anybody else does it the same way that we do. I hope that answer your question.

Ken Worthington – JPMorgan

Yes, very helpful. Yes. Thank you. And then on the topic of performance, so I think you painted a picture of improving performance and even good performance in a number of areas. And we use kind of [Blippar] and even Bloomberg has some proprietary performance metrics. And it looks like as we look at performance on a one-year and three-year basis and acknowledging that 2014 seems to be off to the – that the race is for you guys. That it is still weaker in some of your bigger funds or maybe even many are bigger funds. So, like Pro-Blend Extended looks great, Pro-Blend Conservative is great but like World Opp Overseas Equity Series small cap. It seems solely third quartile for the one and the three-year period.

And as I look at sales, sales also kind of feel like it’s reflecting at least the perception of weaker performance. So, I guess, am I off the reservation here, am I – I feel like I’m looking at things differently than you’re presenting them and I’m trying to reconcile the two. But, based on sales which are sales in redemption, it would also seem like – if I’m looking at information correctly maybe some of your clients are doing the same thing. So, any thoughts on how you’re looking at performance versus how maybe your clients are looking at performance?

Patrick Cunningham

Well, I mean the numbers are within our [tens]. So, you – they have – I think in the retail space the shorter term numbers in the relative rankings have a bigger impact than they do in the institutional space. For the sophisticated buyers that we deal with which include well some of the larger platforms as well as the largest to short clients, I think they get it. The – we’re – what I’m – was walking about in terms of performance was improving performance. You’re – the – and it’s – and you’re right we had it, we have a downgrade in our World Opportunity Funds from 4 stars to 3 stars through the course of last year. That has not dramatically impacted the flows that we’ve seen in that fund.

But, we – you go through periods like this, if you’re in this business and you’re active like we are, you go through periods like we did, I mentioned it before back in 2000, we were less than 5% in technology in our client accounts when the S&P had over 30% and now it’s like over 70% of technology. And we would not instinct with the market and that had an impact now, that set the stage for 10 years of very, very good performance but you have to go through those periods and we’re going through a period now where we had under performance and would – hopefully that’s working its way through the system. And so I guess I’m not – my comments were more – I’m optimistic about where we’re going and the direction we’re going. But the numbers still are not great when you look at certain of our products in one and three-year basis.

Ken Worthington – JPMorgan

Okay, good. I want to make sure I was thinking about things correctly. Thank you very much.

Patrick Cunningham

Thank you.

Operator

We do have a question from the line of John Dunn from Sidoti & Company.

John Dunn – Sidoti & Company

Good morning, guys. Real quick one from me. Do you guys have a sense of what percentage of your high-net-worth clients utilize the ancillary consultative services?

Patrick Cunningham

It’s a fair number, I don’t have that look at exact number but fairly it’s something that we promote.

John Dunn – Sidoti & Company

Right.

Patrick Cunningham

With our high-net-worth clients particularly those where we have a direct relationship, what we call our Client Analytics Group which is a team over 10 people who – they’re analyst but they’re not analyst in the sense that they’re doing stock research. They do manager analytics for people, we have a state planning attorneys of staff, we have – as we’ve talked about before we have health plan consultants and staff. So, we are continually promoting the ancillary services to our clients.

Many of them take advantage of that, sometimes it’s a one-time event, sometimes it’s an ongoing sort of service that we provide for example our high-net-worth that a specialist will meet with our clients on an annual basis thus making sure that they’re reaching their life goals, it’s not that they beat the S&P or trail the S&P, what are they, is that our safe plan in state, is the retirement plan is safe, is their guessing plan on target. So, it is something that – I don’t have the numbers on top of my head but it’s something that we promote and very much believe is one of the reasons why we have – as Jim mentioned our retention rate is 94% for our separate accounts and we believe which is additional – we’re proud of that. And I think part of the reason is because of these services that we provide.

John Dunn – Sidoti & Company

Thank you.

Operator

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time. And have a wonderful day.

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