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Executives

Nicole McIntosh - VP, IR

Hank Herrmann - Chairman and CEO

Mike Avery - President, Portfolio Manager

Tom Butch - EVP and CMO

Dan Connealy - SVP and CFO

Mike Strohm - SVP and COO

Phil Sanders - CIO

Analysts

Cynthia Mayer - Banc of America Securities/Merrill Lynch

Jeff Hopson - Stifel Nicolaus

Bill Katz - Citigroup

Michael Kim - Sandler O’Neill

Steven Truong - Barclays Capital

Daniel Fannon - Jefferies

Marc Irizarry - Goldman Sachs

Mac Sykes - Gabelli & Company

Waddell & Reed Financial, Inc. (WDR) Q4 2011 Earnings Conference Call January 31, 2012 10:00 AM ET

Operator

Good morning. My name is Jodi, and I will be your conference operator today. At this time I’d like to welcome everyone to the Waddell & Reed Financial Fourth Quarter Earnings 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) Thank you.

I’d now like to introduce Mr. Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed. Please go ahead sir.

Hank Herrmann

Thank you, Jodi, good morning everyone. With me today are Mike Avery, President; Tom Butch, our Chief Marketing Officer; Dan Connealy, our Chief Financial Officer; Mike Strohm, our Chief Operations Officer; and Phil Sanders, our Chief Investment Officer; and Nicole McIntosh, our VP of Investor Relations. Nicole would you read the forward-looking statements, please?

Nicole McIntosh

During this call, some of our comments and responses will include 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 todays call including a copy of today’s press release as well as supplemental schedule has been posted on our website at Waddell.com under the Corporate tab.

Hank Herrmann

Thank you, Nicole. Good morning again everybody. Reflecting on our results for the most recent quarter, I’m reminded what a challenge the whole year was. Hike in volatility in our financial markets led to broad risk aversion resulting in equity mutual fund outflows of 67 billion industry-wide. Despite the backdrop Waddell & Reed achieved many significant successes.

Sales improved 10% over the 2010 levels in recent all time high of 24 billion. We experienced positive flows of 5 billion including record flows of 3.1 billion from fixed income products as well as equity inflows of 2.8 billion.

Assets under management peaked at 92 billion in June before falling back to 77 during a summer’s big decline, then rebound into 83 billion as the year close. As of Friday, the assets under management were 88.6 billion.

Net income of 175 million and earnings per diluted share of 205 rose 12% compared to the last year also a record high. Operating margin rose to 24.4 compared to 24.0 during 2010.

We returned 134 million to our shareholders through a combination of dividends and share repurchases. Our dividend was increased in December reflecting strong cash flow and solid balance sheet.

Focusing on the fourth quarter net income was 40 million or $0.47 per diluted share essentially flat compared to the third quarter. Compared to the same quarter in 2010, net income declined 14% while earnings per diluted share fell to 13. Assets under management rose 7% during the quarter. Sales of 5 billion fell 1.4 billion sequentially recall that the third quarter included 800 million of an institutional mandate.

Fixed income products were 1.4 billion in the fourth quarter, 70% improved compared to the previous quarter and an all time high for the company. Current market conditions combined with a public negative perception of equities have provided an excellent opportunity to showcase our strengths in the fixed income space.

The breadth of our product line continues to enable us to create positive flows across various market environments and changes in investor sentiment. So far in January, sales were approximately 1.6 billion inflows are positive.

Our advisors channel had sales of 858 million in the quarter, 9 million below the 867 million captured during the previous quarter. Redemptions declined slightly but not enough to produce positive flows. As stated in our release, an important focus for our advisors channel has been improving the productivity of our FAs and closing the gap on industry averages. In 2010, our advisors average productivities approximately 30% below the industry. Given the meaningful improvement in productivity experienced by our sales force this year, we have closed that gap materially.

Gross sales of 3.7 billion in our wholesale channel declined 6%, compared with the third quarter, while flows were a positive 153 million. As I noted earlier, the strength of our fixed income products has helped broaden sales through a wide range of funds. Sales of Asset Strategy Fund continued to become a lesser percentage of total sales.

Our institutional channel had 456 million during the quarter, modest positive flows, more than 90% of sales were made in sub-advisory accounts. Recent changes to repackage certain strategies in different product structures has been well-received by plan consultants and plan benefit participants and should lead to additional opportunities.

2012 marks our 75th anniversary. 75 years of steady growth has been the product of studying, understanding, and monitoring the various factors that impact the financial markets around the globe. Competitive investment management expertise, combined with breadth of our product lines and distribution channels, underpin our optimism for the future.

Operator, at this time we would like to open the call for questions.

Question-and-Answer Session

Operator

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

Cynthia Mayer - Banc of America Securities/Merrill Lynch

Wondering if you could talk a little bit of the institutional pipeline, I think last quarter you mentioned that you had won an important mandate that haven’t funded and I’m wondering did that fund in the fourth quarter or is that still not funded. And just in general are you still seeing institutions moving from passive back to active?

Hank Herrmann

Let me see. As I remember, the second quarter was the quarter we said it would fund in the third, which it did. I don’t remember talking too much about what would happen in the fourth quarter. However, having said that, the pipeline’s pretty good or good depending on who you ask. We have won two mandates that are unfunded as of yet, but I expect will be material, we’ll just have to see. Until it actually comes in the door, you’re always uncertain. And I’m told that the pipeline is very strong at the present time and the relationships we have with the four major consultant firms about as good as it can get.

So, I’m hopeful that we’re going to see a better environment. Business is lumpy, but a lot of the flows in the institutional channel as we noted come in one form or another from sub-advisory relationships and I expect that will continue. However, there are the two mandates I mentioned are a straight defined benefit business. I’m optimistic that we’re going to have a pretty good environment, and we’ll just see. We have a few accounts, a few mandates rather that for particularly good records at this point in time and seem to be where there is interest, whether that’s midcap, large cap, core, and international core. So, I hope that’s helpful.

Cynthia Mayer - Banc of America Securities/Merrill Lynch

Okay. And then maybe a question on distribution. It looked like some of the indirect expenses went up and it looked like overall the distribution margin was a little bit worse in fourth quarter versus 3Q and I normally think of it as being a little bit better in the fourth quarter. Was there anything going on maybe additional IT expense or circle, or something like that?

Dan Connealy

Cynthia, this is Dan. There was additional IT expenses in the fourth quarter, there was also higher marketing and advertising costs that hit both channels. So, those were the main drivers of that increase and it’s mainly in indirect. The direct revenues and direct expenses were very well correlated as is normally the case with the anchor of the 12b-1s being in both.

Cynthia Mayer - Banc of America Securities/Merrill Lynch

Okay. Are you expecting the indirect to continue at that level?

Dan Connealy

No. There were some unusual items, but in the budget it looks like it should improve some, but that’s just the budget.

Hank Herrmann

This is Hank. I want to inject it and I know you’re aware of it, for a long period of time we’ve talked about carefully managing the growth rate indirect versus revenue growth and we’ve talked about direct expenses being correlated tightly with production and so the control over that’s a little different. And I’d say in this fourth quarter is one of the first times that we’ve been in a position where the indirect expense in distribution grew more rapidly. It’s a combination of two things; one, market action; but more importantly a number of things that are one-offs. And then one or two things that we’ve talked about in the past that are a little bit more than one-off, and that has to do with the books and records and things like that, which we talked about starting in the second quarter last year and said those expense increases were mandated by the government, and were likely to occur and we back-end load on them. And you saw a little of that in the fourth quarter and a little bit of that will carry over for a while.

Operator

You next question comes from the line of Jeff Hopson from Stifel.

Jeff Hopson - Stifel Nicolaus

You mentioned that the January flows were positive; any breakdown between equity in fixed income, and I guess maybe for Tom, asset strategy has rebounded here, your sense of the financial advisor opinions of what’s happening there, and how do you think they will react to, one, better performance, but maybe a little more volatility than perhaps they wanted?

Dan Connealy

Thanks for the question, Jeff, and taking the two questions in order, I think flows are mirroring substantially, we saw in the fourth quarter, which was effectively asset strategy 35%, bonds 35%, all else 30% on a gross basis, and that to us is enviable balance of distribution and substantially a good thing. Relative to asset strategy specifically, growth sales have picked up a bit in January versus December and redemptions are likely to be at their lowest level in a number of months. That said, flows have not yet turned positive. As to advisor perception, certainly the fund has a really good five-year number and a really good one-year number. As we all know, advisors and their investor clients are extremely risk averse and the fund has been focused in equities, and as Hank mentioned at the beginning, anything that’s exposed to equities has been substantially repudiated by investors. That does not carry forward to this fund in its full extend because of course, it has the flexibility to move elsewhere and it’s been on equities, has served shareholders extremely well right now.

What I’d say where our allocation category as a whole in December was in outflow. The fund has been a little bit more volatile than its peer set, so it’s incumbent on us to market it effectively and to assert the degree to which the managers over a long period of time have been very adroit at moving in and out of opportunity and creating good opportunity. So, yes, there is a bias generally among advisors and their clients as is reflected in industry flows and all that’s being written about it against volatility. Volatility and risk may be different things at this point in time and so, it’s incumbent on us to tell the story well. Flows into the fund remain the largest source of growth flows into our business and so a substantial portion of the advisor base is still highly supportive of the product.

Jeff Hopson - Stifel Nicolaus

Okay. And whatever negative side effect, it doesn’t seem to have affected your ability to sell other product; is that fair?

Dan Connealy

That’s more than fair. It wasn’t that long ago during calls like this we were talking about hoping to reduce asset strategy as a percentage of total sales from something on the order of 75% to a more manageable number. And the very fact that net outflows relative to the size of the fund have been manageable is we think a good thing. It’s especially noteworthy that flows have remained positive even with it, the largest of our funds and the second-largest fund in global natural sources being in outflow. And that I think this speaks of the very concerted effort we’ve made over time to diversify the base of flows, and we’re fortunate in that regard to have great product diversity and good performance across a span of products. All of that we think is a strength, and it really positions us effectively versus a lot of other competitors.

Operator

Your next question comes from the line of Bill Katz from Citigroup.

Bill Katz - Citigroup

Just trying to pencil out, it looks like you’ve got a $100 million of flows so far to January, which tends to be seasonally pretty strong for the industry, just from a big picture perspective. Just sort of curious, from a marketing perspective, are you going to need to sort of keep up these expenditures, just give it a little more lumpiness on performance and the diversification argument to try and boost flows, sort of curious of your outlook into 2012?

Hank Herrmann

Well, it’s most basic, Bill, I’d say that marketing expenditures will be flattish with last year. You know that last year we did a branding campaign, which was the first such effort we’d undertaken on the IV side and did it in what we thought was a very cost effective manner and to the extent that we continue that this year, it will be a similar expenditure. Much of what we do has less to do with that kind of expenditure and more to do with the quality of the sales force that we have and the national accounts relationships that we maintain and that’s been the principal investment we’ve made over the last 10 years, and that’s likely to be our focus, which doesn’t result in huge increases and expenditure over time.

Bill Katz - Citigroup

Okay. And then just another big picture question; it looks like comp was a little bit higher than maybe most investors were looking for this quarter. And I just wasn’t sure reading through the press release whether or not you’re yet at a normalized ratio. It just didn’t seem clear to me. So, as you think about comp on a go-forward basis, what is sort of the way to be thinking about that? And then the bigger question embedded in that is you had somewhat of a low margin in the fourth quarter; I get the market volatility, I get the seasonal boost in marketing, but is 25% still a feasible long-term growth target?

Dan Connealy

This is Dan. Yes, the fourth quarter had a little higher than many of the analysts predicted in comp expense. I don’t know if the $3 million reduction we took in the third quarter, which was a reduction of the whole year-to-date was understood. So, that $3 million reduction really was a $1 million a month taken out of the bonus accrual, $1 million a quarter and the same thing happened in the fourth quarter. So, I think that led to a big part of the difference. We also had some severance in that number, too. That’s the primary changes.

Hank Herrmann

I’m not quite sure the way Dan said that whether or not we have, how do I explain this, other than we bump down the number, it seem to me anyway that people presumed that the lower number would also apply to the fourth quarter, and that’s not true in every case, but a number of models that I’ve looked at seem to have that in it, and that was not our intent. In addition to that, given the fourth quarter rally, it just seemed like we were accrued at more or less the right level by the time we got to the end of the fourth quarter.

Dan Connealy

Also included in comp is the we turn positive or negative when the theoretical investment of portfolio manager’s deferred comp. So, that’s a hard thing to predict, and it was higher because of the strong October than in the previous quarter, which had been negative. We estimate that compensation in the first quarter will be somewhere in the order of 44 to 45 million.

Bill Katz - Citigroup

Yes, that’s helpful. And then Hank, just from a big picture, just given some of the lumpiness of flows and the mix shift that’s going on underneath that, what would be the triggers of the events that get you to the 25% operating margin target?

Hank Herrmann

Which market action forecast should I use, Bill?

Bill Katz - Citigroup

Say, 7% on average over time.

Hank Herrmann

Sometime in the future. You know how difficult it is for me to be able to be precise about that kind of a question. The direction continues to be in the area of we’re going to get to 25%, and that’s the focus. You know that the market actually plays a big role in that, as a number of other things. I’ve tried to signal in my remark little earlier that we’re going to remain very vigilant regarding direct the U&D, and that’s going to play an important role in helping us, and then the other thing that’s going to be important is what your market action assumption is. There are a lot of assets in our organization with a lot of fees on them and the relationship between that and our expenses is such that you give me a reasonable amount of market action and margins are going to improve. That’s the best I can do. I appreciate the question and I used to have hair before I had to answer it, but now I’m in a different position.

Operator

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

Michael Kim - Sandler O’Neill

First, you mentioned kind of repackaging some of your strategies into the institutional channel. Can you just maybe flesh out a bit what some of the specific strategies are that you think might be in demand? Is it asset strategy or is it more kind of the traditional equity strategies like large cap core and large cap growth? And then, just any thoughts on the timeline associated with that initiative would be helpful as well.

Hank Herrmann

Okay. Well, most of the focus is on large cap core at the present time and I’ve been talking about that for a little while. The other thing I’d say is that more of the institutional business is taking the form of being sub-advised business, even in the DB world and is a new platform. And as a result of that, a lot of the administrative expenses that would normally be associated with the institutional business are basically residing the responsibility of an intermediary, and we’re primarily getting the investment management fee on the businesses that we win. Accordingly, you have a lower fee in the aggregate, but you have a much higher margin. And so, that’s the part that I was trying to focus on.

Michael Kim - Sandler O’Neill

Okay. So, no kind of incremental focus on the asset strategy into that channel?

Hank Herrmann

Not incrementally, but it’s an important part of the flows in the institutional channels through sub-advised.

Michael Kim - Sandler O’Neill

Got it. Okay. And then just coming back to comp, just to be clear, did the step-up in comp in the fourth quarter reflect kind of higher markets and maybe better relative performance, or was it more of a function of kind of the third quarter adjustment or maybe it was a combination of a bit of both?

Hank Herrmann

Well, it was a bit of both and I’d just say a better market and better performance in the fourth quarter was part of why the step-up occurred.

Michael Kim - Sandler O’Neill

Okay.

Hank Herrmann

We’re trying to put together financial numbers at the end of September with the market down dramatically, and then by the time we get to the late part of the fourth quarter, the market’s pretty much recovered all of it, and it just has an impact on how you have to put together bonuses for portfolio managers. And clearly, there was a relevant performance improvement in an environment where the difference between being in the top quartile and a bottom quartile is 200 basis points or less almost everywhere; that can have a pretty profound impact on bonus calculations, the way we do them.

Michael Kim - Sandler O’Neill

Right. Got it, okay. And then just finally, on capital management, more specifically buybacks, any change in how you’re thinking about the buybacks looking out to this year just continuing to kind of offset the dilution related to the grants?

Hank Herrmann

I’m thinking that when it’s all said and done, grants will be some place in the area of 1.5 million, and I expect that we will offset that with the share buybacks. And then as you know, we bought 500,000 or more above our original plan, which was a function of one, our balance sheet, but also a function of the share price. And I’ve said in the past if the share price gets depressed enough, we’d adjust our goals, and so for the moment, our target is 1.5 million shares.

Operator

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

Steven Truong - Barclays Capital

It’s Steven Truong for Roger. I wanted to go back to the discussion on the advertising and marketing. Given the fourth quarter was a period of risk aversion, how much do you think fixed income sales have benefited from that advertisement, and how much do you think you’ll benefit going forward, as the appetite comes back? Thank you.

Tom Butch

Well, we don’t have final results specifically linking the marketing initiative to sales results. We have a lot of data around website use and tracking attention to the micro site we established for this, but we haven’t done a pre and post-awareness and the things you would normally do around a campaign.

Separate from the marketing though, as Hank indicated, the market conditions have had the silver lining of enabling us to put forth the quality of our fixed income and certainly, that has provided a very material offset to the pressure we have in a couple of our larger funds that have historically been responsible for a disproportionate part of the growth in net sales of the organization. So, there’s nothing that suggests any pause in the momentum of the sales in the fixed income products. If anything, that momentum seems to be sustaining, if not increasing. And so to your point, to the extent that we get a turn in equity sentiment, and are able at the same time, to maintain the momentum that we have on the fixed income side, there ought to be an acceleration resulting from that.

Operator

Your next question comes from the line of Daniel Fannon from Jefferies.

Daniel Fannon - Jefferies

I guess first, what was the severance cost in the quarter?

Hank Herrmann

It was somewhere a little less than $1 million.

Daniel Fannon - Jefferies

Okay. And then I’m not sure if I heard you correctly, but I think you said the starting point into the first quarter was around 44 to 45 million for comp?

Hank Herrmann

Yes.

Daniel Fannon - Jefferies

And if I think about the ending assets kind of today versus where you were a year ago, you’re below that, and that would be above on a comp basis and the mix is probably a little less favorable now. I guess, can you just walk us through kind of the step-up in the comp going into 2012?

Mike Avery

Well, we will have some raises as you might expect, and also the full effect of adds to staff throughout the year are all in that quarter. The equity comp component is a little bit higher because grants that are rolling off will be replaced by the grants that were, on the net a little higher, those are mainly the components. Also in the first quarter, payroll check starts again and so pension costs should be a little higher this year as well. So, those would be the changes.

Daniel Fannon - Jefferies

Okay, that’s helpful. And I guess, just thinking about the advisors and the ones that you’ve been hiring over the last kind of two to three years, wondering as their usage of just the Waddell sponsored-only products, are they more prone to use products outside of the Waddell family that kind of change maybe the advisor redemption rates and sales over time, or is it kind of a similar theme to what’s been the case over time?

Tom Butch

No, I want to make sure I’m responsive to your question. And I think it is, do the advisors whom we are hiring for the first time from outside the organization have the same kind of allegiance to Waddell & Reed product as those who we hire as new advisors and train them in our organization, is that your question?

Daniel Fannon - Jefferies

Yes.

Tom Butch

Okay. As you would expect, the answer to that is, in certainly the first instance, no. And neither did we project that they would have that kind of utilization rate of our products. So, a couple of things are worth noting. Our goal was that over time, we would get to about 30% of new sales from those advisors whom we hire from the outside going into the Waddell & Reed and IB products. That number is currently 20% of mutual funds and about 10% of total assets so we’re not at that target yet, but that was really effectively a three-year target.

Second thing I think is worth so you’re not going to get with someone who brings in existing book of business to the level of penetration with our funds that you will with an advisor who has spent their whole career here and maybe as much as 90% of their book would be in our funds. The other thing worth considering though is that the revenue characteristics of that business that is the people we bring from the outside and put on the brokerage platform is different and about 50% of the revenues that come from that business so far are wrapped, meaning there’s an asset-based fee attaching to the underlying investment selections. And so we’re making revenue from that fee, whether or not our funds are the underlying investments. And so, it’s little bit of a different model and the intent was to have the opportunity to capture people who were already successful in the business and bring them in and augment what we do with hiring new people new to the business.

Operator

Your next question comes from the line of Marc Irizarry from Goldman Sachs.

Marc Irizarry - Goldman Sachs

Just on the institutional redemption rate this quarter came in at 19% that seem low. Hank, does that have to do a little bit with the nature of the types of institutional business you have or do we see maybe lack of sort of money moving around the institutional world?

Hank Herrmann

I wasn’t quite sure if you were asking about the redemption rate in institutional at 19; I thought I heard you say that seems low.

Marc Irizarry - Goldman Sachs

Right. And is that a function of the mix of business you have there or was there something happening during the quarter that was abnormal?

Hank Herrmann

I don’t think anything was abnormal. I think of 19 as too high, but I recognize relative to recent history it’s a little bit lower. I’d tell you that the important outflows have been related to Pictay, and that’s been true for six quarters I think and Pictay was also probably the largest outflow in the quarter. There were other little bits here and there, but nothing to point to. And Pictay has been about two things; one, risk aversion in the U.S., which was in the process of collapsing as you all know, while the Europe was in great shape. You heard the sarcasm I hope; and then secondly, the performance of large-cap growth was struggling a little bit because it is pretty dedicated to high quality large-cap growth, which has underperformed for a long time. Hence, it’s a little bit difficult to get people over the hump. I’d just say the large-cap growth had a very good year in year just ended, and I’m hopeful that that’s going to continue based on where things are going. I expect Pictay outflows could be reversed and I know that there is some talk about more of an emphasis on that product over there. Looking at gross sales of that product in the fourth quarter, there are some signs that things are getting better. I hope that was responsive.

Marc Irizarry - Goldman Sachs

That’s great. And then on the wholesale business, if you look at, you guys have done a nice job of diversifying away from asset strategy. To what extent has sort of comp plans played into that when you think from a wholesaler perspective? Are you thinking about a comp model that is somewhat influencing that decision or is it just purely the environment that we are in and maybe some marketing?

Dan Connealy

It’s a great question, and we look at our comp model on an annual basis, and we do use it as an incentive to shape behavior. So, in the first instance, what I would tell you is back I referred to the fact that there was a time when asset strategy was as much as almost 80% of sales. I think it was the diversification, that first wave of diversification was driven I think meaningfully by the comp model that incented other products. I think at this point we’re in a market environment where that incentive is secondary to what’s going on in the market relative to the percentage going to that strategy.

Marc Irizarry - Goldman Sachs

Okay. And then just, Dan, on the tax rate, maybe more clarity on how we should think about that for 2012?

Dan Connealy

Well, the normal rate should be around 37.8%, and so the variations from that are primarily due to the gains or losses on our trading securities. We also from time-to-time have some differences with or some changes to outstanding tax years, and so as those roll off that can help the tax rate. There has in the past been help from State of Kansas credits for expansion. So, those are the variables, but it’s kind of hard to predict what that’s going to do from quarter-to-quarter. So, we say 37.8% is a good run rate.

Operator

Your next question comes from the line of Mac Sykes from Gabelli & Company.

Mac Sykes - Gabelli & Company

Hi. Good morning, gentlemen. Just to go back to IV, given that’s it’s off to a good start in terms of absolute performance, has that affected your thoughts on the portfolio’s positioning for the rest of the year? And then what impacts have you seen from the star increase from Morningstar in terms of sales?

Hank Herrmann

This is Hank, I’m not quite sure I understand the question. Could you try again?

Mac Sykes - Gabelli & Company

Sure. Is the portfolio becoming, you think about it being more defensive at this point, given the absolute performance returns we’ve seen year-to-date?

Hank Herrmann

Talking about the asset strategy front?

Mac Sykes - Gabelli & Company

Yes.

Hank Herrmann

I’m sorry. Okay, Mike?

Mike Avery

Well, I guess I’m not absolutely clear on what your question is. I’ll answer it this way. If you look at the structure or the fund, it would be very similar to the structure of the fund throughout most of last year actually in that we have 80% of the fund in equities, we have 10% of the fund in gold bullion and the remainder is in cash or other fixed income-related securities. So, that overall mix hasn’t changed that much.

Now, what we’re seeing with the rise of the market, particularly since the beginning of October of last year, what you’re seeing is correlations among market indices globally beginning to revert back to a median. And what that means for us is that, that results in premiums on structured products, derivatives that we have historically used to hedge the portfolio, becoming much less expensive. So, what investors may see us doing in this fund is using the opportunity that has presented itself by this risk on-trade, if you’ll, in the markets to use it as an opportunity to put on more protection as the premiums come down.

Mac Sykes - Gabelli & Company

Terrific. And then, have you seen any impact from the star increase from Morningstar in terms of sales?

Mike Avery

Well, to tell you the truth, Mac, I rarely, to tell you the truth, the only time I ever get questions about Morningstar is on this call. Outside of this call it never comes up; why? Because funds that fall into a world allocation or a global or flexible category, shareholders or investors who are attracted to that category are looking for the antithesis of the rated funds. In other words, people are looking for something that is not adhering to a Lipper rating or Morningstar rating. They like the flexibility of a fund that is not confined by a style box. So, it rarely ever comes up except on this call.

Operator

(Operator Instructions) There are no further questions at this time. I’d now like to turn the conference back over to the presenters for any closing remarks.

Hank Herrmann

Thank you all for sitting in. I appreciate very much your attention. Anything else we can do, give us a call. Take care.

Operator

Thank you. That concludes today’s conference call. You may now disconnect.

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