Virtus Investment Partners, Inc. (VRTS) CEO George Aylward on Q1 2020 Results - Earnings Call Transcript

Virtus Investment Partners, Inc. (NASDAQ:VRTS) Q1 2020 Earnings Conference Call May 1, 2020 10:00 AM ET

Company Participants

Sean Rourke - VP, IR

George Aylward - President, CEO & Director

Michael Angerthal - EVP, CFO & Treasurer

Conference Call Participants

Jeremy Campbell - Barclays Bank

Sumeet Mody - Piper Sandler & Co.

Stephanie Ma - Morgan Stanley

Operator

Good morning. My name is Crystal, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section on the Virtus website, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. [Operator Instructions].

I will now turn the conference over to your host, Sean Rourke.

Sean Rourke

Thank you, and good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the first quarter of 2020. Our speakers today are George Aylward, President and CEO of Virtus; and Mike Angerthal, Chief Financial Officer. Following the prepared remarks, we will have a Q&A period.

Before we begin, I direct your attention to the important disclosures on Page 2 of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such are subject to known and unknown risks and uncertainties including, but not limited to, those factors set forth in today's news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in these statements.

In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on our website.

Now I'd like to turn the call over to George. George?

George Aylward

Thanks, Sean. Good morning, everyone. Thank you for joining us on our first earning -- first quarter earnings conference call. As always, I appreciate your interest in Virtus and in this uncertain time, I hope that you and those you care about are all healthy and safe.

Despite the challenging markets that emerged late in the first quarter and the resulting impact on ending asset levels and net flows, we are pleased with the financial and operating performance of the business, which included our highest level of quarterly sales with increases across nearly all product categories, positive net flows in retail separate accounts and structured products as well as equity strategies in the aggregate, a higher operating margin and earnings per share compared with the prior year period and continued return of capital and meaningfully higher debt reduction.

Our managers also continue to generate outstanding investment performance, which I'll discuss in more detail in a moment. A market environment like the one we are experiencing provides a great opportunity for quality active asset managers to demonstrate their value to clients.

Turning over to the results. After reaching our highest level last quarter, long-term AUM declined by $18 billion or 17% in the first quarter, almost entirely due to the market decline in March. For the quarter, we had $1.3 billion of net outflows, which were primarily in mutual funds, particularly fixed income.

Looking at the flows, it is useful to understand the trend during the quarter. In the first 2 months, total long-term net flows continued the positive trend from the fourth quarter as we generated $1 billion of positive net flows with strong momentum across products and asset classes. However, the market shock in March led to elevated mutual fund redemptions as the retail investors fled to cash perceived safety. The elevated level of fund redemptions abated by the end of March. One thing that remained consistent throughout the quarter was sales momentum, which continued despite the challenging environment. For the full quarter, sales were $7 billion, up 47% sequentially and 28% over the prior year, with increases in all products except ETFs. So for the quarter, by product, we had net outflows in mutual funds, ETFs and institutional, while retail separate accounts and structured products generated positive net flows. Fund net outflows were $1.6 billion, primarily related to the more credit-sensitive fixed income in emerging market equity strategies.

Domestic equity fund flows were breakeven with areas of strength in domestic and SMID cap as well as international developed markets, all of which generated positive flows. We also maintained our sales and flow momentum with retail separate accounts and generated continued positive flows in both the intermediary sold and private client channels.

In terms of what we saw in April, there was continuation of the sales momentum as well as consistent positive flows. Mutual fund sales in April were at the highest level in 6 years, and net flows for the month were meaningfully positive. We also continued to see strong positive net flows in retail separate accounts. And in terms of institutional, we saw positive flows overall, including new mandates. While we do not know what the markets will bring over the next few months, this is certainly a strong start to the quarter in terms of flows.

Our financial results reflected a partial impact from the challenging markets that began late in the quarter as well as our normal seasonally higher employment expenses. The sequential decline in operating income and margin was primarily a result of those items.

Looking at the more comparable year-over-year period, operating income as adjusted increased 20% and the margin increased by 170 basis points, reflecting revenue growth and the leverageability of the business. Earnings per share as adjusted increased 22% over the first quarter of 2019 to $3.32. The sequential decline in EPS was largely driven by the seasonal employment expenses.

Turning now to capital. We continued our balanced and prudent approach to capital management. Our ability to maintain appropriate levels of working capital, reasonable levels of leverage and access to sources of liquidity in this environment demonstrates the benefit of our consistent discipline in managing the balance sheet. This quarter, we continued our consistent paydown of the term loan by repaying $17.5 million and taking advantage of market dislocations to retire an additional $10 million at a discount [Technical Difficulty]. In the quarter. We also repurchased 1.6% of our common shares outstanding, the highest level in the past 4 quarters. As a reminder, the conversion of our preferred stock during the quarter resulted in an increase in the market float of our common stock and the elimination of the preferred dividend.

Lastly, before I turn over to Mike, let me comment on our investment performance. The challenging markets we have been experiencing over the past few months are the type of environment when asset managers, particularly those with distinctive investment strategies, can demonstrate their value. I am pleased that our managers have done that. In our equity strategies, several of our managers employ high quality or high conviction orientations that seek to deliver strong relative performance and provide a level of downside protection in difficult markets. In aggregate, our equity products meaningfully outperformed the market in the first quarter as they've done over longer periods of time.

On the fixed income side, our managers employ multiple strategies across the spectrum of credit quality. Performance in our fixed income products was consistent with expectations with higher credit quality strategies outperforming during the most stressed period and others outperforming through the upturn since the recent low in the market. We are pleased with the investment results and believe that the performance in this difficult market demonstrates the value of quality asset management.

With that, let me turn the call over to Mike to provide more detail on the results. Mike?

Michael Angerthal

Thank you, George. Good morning, everyone. Starting with our results on Slide 7, assets under management. At March 31, long-term assets were $89.5 billion, down from $107.7 billion at December 31. The sequential decrease reflected $16.6 billion of market depreciation and $1.3 billion of net outflows. Assets continue to be diversified by product type with open-end funds, institutional and retail separate accounts representing approximately 37%, 32% and 20%, respectively. In terms of asset classes, equity assets represented 64% of long-term AUM with 75% in domestic equity and 25% in international. I would point out that fixed income assets represented about 32% of long-term AUM, which is up 250 basis points sequentially, largely due to the impact of the equity market decline.

We continue to generate strong relative investment performance across our strategies. As of March 31, approximately 82% of rated fund assets had 4 or 5 stars and 97% were in 3, 4 or 5-star funds. We currently have 7 funds with AUM of $1 billion or more, and all are rated 4 or 5 stars, representing a diverse set of strategies from 5 different managers. In addition to this very strong fund performance, 92% of institutional assets were beating their benchmark on a 5-year basis as of March 31 and 79% of assets were exceeding the median performance of their peer group on the same 5-year basis.

Turning to Slide 8, asset flows. Net outflows of $1.3 billion in the first quarter were largely related to the exceptionally challenging markets in March. As George indicated, net flows were broadly positive through the end of February, continuing the trend of positive flows from the fourth quarter up until the market decline in March, which then led to elevated redemptions, primarily in the more credit-sensitive fixed income strategies. By product, we had net outflows in open-end funds, institutional and ETFs and generated positive net flows in retail separate accounts and structured products for the quarter. By asset class, fixed income drove the net outflows consistent with industry trends, as our equity strategies in aggregate had positive net flows for the fifth consecutive quarter.

Net outflows for open-end funds were $1.6 billion for the quarter compared with $0.4 billion in the prior quarter. Looking at open-end fund flows by asset class, fixed income net outflows were $1.4 billion, primarily due to more credit-sensitive strategies, including leveraged finance and multisector. Domestic equity net flows were essentially breakeven. Strong positive net flows from mid and SMID cap strategies were offset by net outflows in both large and small cap. Midcap generated $0.3 billion of positive net flows in the quarter, up 33% sequentially. International equity funds had net outflows of $0.2 billion as positive net flows in developed market strategies were more than offset by emerging markets.

Total sales for the quarter were strong, up 47% sequentially and 28% year-over-year to $7 billion, their highest level since becoming public, with sequentially higher sales of open-end funds, retail separate accounts, institutional and structured products. Fund sales of $3.9 billion increased $1.5 billion or 65% sequentially with increases across asset classes. Domestic equity sales increased 76%, international increased 69% and fixed income increased 48%. Institutional sales increased by $0.3 billion or 21% from the fourth quarter due to flows into both new and existing mandates across multiple affiliates. Retail separate account sales of $1.1 billion were up 5% sequentially due to growth in the intermediary sold channel.

Turning to Slide 9. Investment management fees as adjusted of $112.3 million, decreased $0.7 million or 1% sequentially and were up 15% over the prior year period. The sequential decrease was due to lower performance-related fees, as average AUM increased modestly in the first quarter. Performance-related fees were $0.6 million, down from $1.1 million in the prior quarter. It's important to remember for modeling second quarter revenue that certain product fees, including retail separate accounts, are based on beginning of quarter asset balances. The average fee rate on long-term assets for the quarter was 46.8 basis points, a 0.2 basis point decline from 47 in the prior quarter due to lower performance-related fees and up 0.9 basis points from the prior year period. Excluding performance-related fees from both periods, the average fee rate was flat on a sequential basis.

With respect to open-end funds, the fee rate increased to 57.8 basis points from 57.4 in the fourth quarter, reflecting the ongoing positive fee rate differential between sales and redemptions. This quarter, the blended fee rate on fund sales was 62 basis points with the rate on redemptions at 54 basis points.

Slide 10 shows the 5-quarter trend in employment expenses. Total employment expenses, as adjusted, of $66.9 million, increased 14% sequentially from the fourth quarter. The increase primarily reflected $7.7 million of seasonal items, which included $4.2 million of incremental payroll taxes, $2.2 million of increased benefit costs, primarily due to the 401(k) match; and $1.3 million of accelerated compensation expense as a result of annual equity grants made to retirement-eligible employees. Excluding the seasonal items, employment expenses of $59.2 million, increased by $0.4 million sequentially as higher sales based compensation was mostly offset by lower profit based compensation. As a percentage of revenues, employment expenses were 52.6% or 46.5% excluding the seasonal items.

Turning to Slide 11. Other operating expenses as adjusted were $18.9 million or 14.9% of revenues, up from $18.2 million or 14.2% of revenues in the prior quarter and included higher product-related costs.

Looking forward, we believe other operating expenses in the short term may trend to the lower end of the $18 million to $20 million quarterly range, as we anticipate that certain categories, in particular, travel and entertainment costs, will be meaningfully lower while we continue to invest in the future growth of the business. As a reminder, second quarter results are impacted by our annual equity grants to the Board of Directors.

Slide 12 illustrates the trend in earnings. Operating income as adjusted of $40.1 million, decreased $10 million or 20% sequentially due to the seasonally higher employment expenses and increased $6.6 million or 20% from the prior year. The operating margin as adjusted of 31.5% compared to 39% in the prior quarter. Compared with the prior year period, the operating margin increased 170 basis points from 29.8%. Excluding the $7.7 million of seasonal items, the operating margin as adjusted for the first quarter was 37.6%.

Interest and dividend income of $3.4 million declined from $4.1 million in the prior quarter. As a consequence of the market environment, we expect interest and dividend income to be lower in the second quarter, in a range of $1 million to $1.5 million. The effective tax rate as adjusted for the quarter was 29%, up from 27% in the prior quarter. We believe 29% is reasonable for modeling purposes.

Net income as adjusted of $3.32 per diluted share decreased $1 or 23% sequentially, due largely to the seasonal employment expenses which were $0.69 per share. Compared with the prior year, net income per diluted share as adjusted increased $0.59 or 22%.

Regarding GAAP results, the first quarter net loss per share of $0.58 compared with $2.83 of net income in the fourth quarter of 2019 and included the following items: $2.10 of net realized and unrealized losses on investments, $1 of CLO launch expenses, $0.86 due to the increase in the liability for the fair value adjustments to the affiliate minority interests in excess of carrying value and a $0.07 gain on the extinguishment of debt.

Slide 13 shows the trend of our capital position and related liquidity metrics. Working capital at March 31 of $155 million, decreased $5 million or 3% sequentially, primarily reflecting debt repayments and return of capital to shareholders, mostly offset by operating earnings. Gross debt outstanding at March 31 was $258 million as we repaid $27.5 million during the quarter. Over the past year, we have reduced gross debt by $70 million or 21%. The first quarter debt repayment included $17.5 million as part of our consistent quarterly paydown of the term loan as well as an opportunistic retirement of an additional $10 million at a discount to par.

The net debt to bank EBITDA ratio of 0.5x at March 31 was up from 0.3x at December 31 due to the payment of annual incentives and related seasonal expenses, but declined from 0.9x a year ago due to EBITDA growth and a higher cash balance. Gross debt-to-EBITDA was 1.2x at quarter end, down from 1.6x in the prior year. EBITDA in the first quarter was $49 million.

Regarding return of capital to shareholders, we repurchased approximately 111,000 shares of common stock for $10 million, representing 1.6% of beginning of quarter total outstanding shares and net settled an additional 41,000 shares for $3.5 million. And as discussed in our last call, our mandatorily convertible preferred shares converted during the quarter, simplifying the capital structure, increasing the market float of our common stock and eliminating the preferred dividend. One additional item of economic value to note is our intangible assets that will contribute and continue to provide a cash tax benefit of approximately $10 million per year at current tax rates over the next 14 years.

With that, let me turn the call back over to George. George?

George Aylward

Thank you, Mike. Few thoughts before taking questions. Clearly, these are unprecedented markets with an elevated level of uncertainty and volatility that makes it difficult for an asset manager to have clear visibility into the next few quarters. However, I can say that we are confident in our positioning from both competitive and balance sheet perspective. Our managers have clearly demonstrated their ability to generate attractive investment performance. Our distribution is highly effective, as evidenced by the sales growth during this environment. Our cost structure is highly variable. And as we've demonstrated, we've always managed our expenses thoughtfully and will continue to do so as we focus on those areas that enhance our value proposition. Balance sheet is strong, and we maintain an ability and flexibility to operate optimally. We will continue to be balanced in our management of capital, which has been core to our philosophy and allows us to navigate this environment without having to make fundamental changes to capital allocation.

In addition, as I said earlier, this market is an opportunity for asset managers to demonstrate their value proposition. As we anticipate, all investors will be thoughtful about how to invest for the next 10 years as opposed to the last 10. We see this as an opportunity and one for which we are particularly well positioned.

We'll now take your questions. Crystal, could you open up the lines, please.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from Jeremy Campbell from Barclays.

Jeremy Campbell

Thanks for the color around April flows. First, George, I'm just wondering if you can go into a little bit more detail around what strategies are driving such accelerated sales growth across the spectrum, but maybe particularly, especially in the retail separate account channel.

George Aylward

Sure. And I think throughout the period, what we're trying to sort of highlight was really unusual about this period is not only the continued sales momentum, but actually, if I were to have gone into like on a month-by-month basis, there was actually sort of step increases over that period. Remember, when we did the call late January for the fourth quarter, we sort of indicated that daily sales in January were very strong and robust and pretty broad-based, particularly on the equity side is what I would say. And then as we went into February, they actually upticked even more in terms of the sales, again broad-based other than maybe a few fixed income strategies.

So that was sort of interesting to watch. And then even during that incredibly severe dislocation in March, where you sort of had a capitulation on the redemption side, you actually didn't see any decline in sale, which is really unusual. I've been looking at daily sales since 1996, and it's really odd to not have some kind of correlation between sales levels and capitulation on the redemption side. But they sort of held up. And I think a lot of that was, while there were clearly many people thoughtfully moving to the perceived safety of either cash or very credit -- high credit quality strategies, other people were rebalancing their portfolios and seeing that as an entry point into maybe some equity strategies that they had previously thought might have been overbought.

So I think the diversity, because I think as we sort of walk through the different strategies, and domestic and aggregate maintained is its positive momentum. On the international side, that was positive. So what I would really do is do the reverse, is where was there a little bit of weakness, it was absolutely during the downturn in the very credit sensitive end of the lower credit quality fixed income and emerging market equities, which all make sense. Other than that, it was pretty consistent. And it was in funds and it was in retail separate accounts and as they've been alluded to for April, it's in the institutional side. So really, it's almost like if you plucked out those three weeks in March, the numbers across the board would have been incredibly strong and positive across all the product categories. Mike, is there anything you would add in terms of the breadth?

Michael Angerthal

No, I think you covered it comprehensively.

Jeremy Campbell

Great. And then just a quick follow-up. Mike, I was hoping -- obviously, there's a lot of moving pieces to fee rate because you have inflows in the higher fee products and outflows in lower fee products, but you also have the strange averaging thing that happened probably during the first quarter where because the sell-off was in March, it kind of was a late quarter weighting, if you will. So I was just hoping you can give some color around, one, maybe where the fee rate was ending the quarter versus the quarter average? And then two, where we might be sitting right now given the pretty big rally back here we've had in April?

Michael Angerthal

Yes. Obviously, this is a difficult question to answer given the significant volatility in the markets. We did point out -- I think it's important to recall that certain of the asset categories and the product types do lock in their fee rates at the beginning of the period, and most notably, retail separate accounts. And I think just looking at that product category, I think from a modeling purpose, you'd probably want to look towards the fourth quarter rate and -- in that 46% to 47% level as a more appropriate level for modeling purposes. And then as we look at the open-end funds, we did have the positive fee rate differential which was offset by some of the equity market declines. So again, I think looking back at the fourth quarter level is probably as good as any from a modeling perspective. But clearly, these fee rates are going to be impacted by the continued volatility of the market. So I think indicative.

Operator

Our next question comes from Sumeet Mody from Piper Sandler.

Sumeet Mody

Just wanted to get an update on the capital priorities in this environment. I saw the increased debt paydown in the quarter, $27.5 million, with the purchases in line with last quarter on a dollar basis. Just wanted to get an idea of how you guys thought about that balance in the quarter. And then with the stock kind of rebounding off these lows, your leverage ratio still being in a pretty comfortable position, how are you thinking about that in the second quarter and potentially moving forward from there?

George Aylward

Sure. And a lot of it is sort of fundamental, sort of how we always think about, right? We always sort of strive to make sure that we have the flexibility and the optionality to sort of maximize our use of capital in an environment. So having gone through this environment, the thoughtfulness behind getting into this environment, making sure we weren't too overlevered and that we could sufficiently have capital to fund the ongoing investments in our business as well as sustained repurchases and returns of stock, sort of -- it was helpful to have that kind of a situation as we entered this. So as we always do, we sort of evaluate at any point in time what the different opportunities are. So we highlighted a couple. So we do believe in consistently paying down debt, and we've demonstrated that consistently since the issuance of that debt. But there's also an opportunity to retire some of the discounts.

So that we viewed as a compelling use of capital and did it at that time. And in terms of the stock repurchases, we consistently do stock repurchases generally other than those periods where we have other -- some other large capital type of a commitment. And we also, in an environment like this, want to be thoughtful that we maintain sufficient liquidity, had things continue to go south, right? At March 23, the feel in the market was much different than it was, what, 2 days ago. So we do think -- our main obligation is to make sure we have a strong balance sheet to manage the company if things were to get as dire in the financial markets as they were previously, but then not to have that preclude us from having opportunities to take advantage of that. Mike, do you want to talk about the debt repurchase?

Michael Angerthal

Yes. And Sumeet, the debt repurchase, I think it's good to just elaborate on how we thought about it, of the $28 million -- or the $27.5 million paydown in the first quarter. We've generally been consistently paying down the term loan on a quarterly basis and $17.5 million of that was clearly part of the consistent approach of paying down the loan. And then as the markets dislocated in that mid-March time frame, we saw just an opportunity to provide liquidity to certain of the holders of the loan at a meaningful discount when it just traded down into the 80s. So we were able to deliver a gain while continuing to delever. And since that time, we've seen the loan creep back up close to the 97, and it's historically traded at par. So it's something we monitor, and we were able to opportunistically execute in that dislocation.

Operator

Our next question comes from Gayathri Ramakrishnan [ph] from Bank of America.

Unidentified Analyst

This is Gayathri [ph] on behalf of Michael Carrier. Just following up on the question -- hello, can you hear me?

George Aylward

Yes, yes.

Unidentified Analyst

Yes. Just following up on the earlier question on capital management. I was wondering what your appetite for M&A is? And sort of what would be the nature of new affiliates you are likely to look at in the near future?

George Aylward

Yes. So going back to the -- the philosophy is, we want to make sure we do have flexibility for the various things in terms of, we spoke about return of capital, we spoke about thoughtfully managing our leverage as appropriate and having flexibility in our balance sheet. We always say on M&A that our fundamental long-term growth strategy is not predicated upon M&A. However, we see it as a very effective tool in the right environments. And I think it will be interesting to see, this environment may create opportunities. We certainly will evaluate anything that comes to our attention. We think we're uniquely positioned, particularly for some of the firms that we’re looking to partner in a multi-boutique model. So we would certainly consider things like that. Again, our strategy isn't dependent upon that to be successful. But we do think that there could -- if there were opportunities, we would certainly look at those. And in terms of kinds of things we look at, it would -- it really gets down primarily to firms that are very good at what they do and are somehow differentiated in one aspect or another. So it's sort of hard to put a filter around that because you sort of never know what opportunities are going to arise. But we're conscious of anything that's sort of out there and are continuing -- we continuously have dialogues looking for opportunities. But we're very thoughtful about how we use our capital and what is the highest and best use at any given time.

Operator

[Operator Instructions]. And our next question comes from Michael Cyprys from Morgan Stanley.

Stephanie Ma

This is Stephanie filling in for Mike. I wanted to ask about expenses a bit more and how are you thinking about expense flexibility if the markets pull back further. Maybe can we get update on the comp outlook? I apologize, if I missed that earlier. And then broadly speaking, any color around what levers you could potentially look to pull further, if we have a sustained market pullback?

George Aylward

Sure. I'll give a high level, and then Mike can elaborate. So generally, as we sort of look at our expenses, we do have a meaningful percentage of our expenses that are variable, that will vary with the revenue line and the AUM line, and that includes a significant portion of our employment expense. So a lot of our employment expense, and as a reminder, a lot of our affiliate structures, are profit based. So that as profit goes down, the compensation goes down. And then there will be certain things, and Mike alluded to one of them, which is travel and entertainment, I'm pretty confident will be much lower this quarter than it was in the second quarter of last year. So I think we sort of see that happening. So we constantly monitor our expenses and we look at those things where, in the short term, we can maximize opportunity without sacrificing strategic things. Mike?

Michael Angerthal

Yes. I think as we've talked about, on the employment side, about 50% to 55% of the employment is variable. It is challenging given these volatile markets to talk about expectations. Certainly, we pointed to record levels of sales in April. Assuming that would continue, then we would have sales commissions go up. And given the market environment, we would probably exceed the range that we've talked about previously. But certainly, the market and sales levels are the key variables that are going to drive the employment ratio, the profit-based pools, they certainly take care and fluctuate according to revenue and profits. On the other operating expense side, we did point to moving to the low end of that $18 million to $20 million range, as we talked about. So there's some flexibility. And again, I think that that's appropriate thinking about the second quarter. And as you model again, just a reminder of the Board grants that come through on the expense side in Q2.

Stephanie Ma

Okay. And then maybe a follow-up, if I can. I wanted to get an update on your view on the CLOs. Given the current market environment, how are you thinking about the potential deferral of sub fees on the CLOs? Has that happened yet? And any help on sizing any potential impact there?

Michael Angerthal

Yes. I think there are a couple of impacts that I'll point to, and we did talk about the outlook for interest and dividend income in the second quarter in a range of $1 million to $1.5 million. That's down from $3.4 million in the first quarter, and that's a combination of the seed portfolio, the cash balances expecting to contribute lower given the lower cash balances and the lower expected return on those cash balances in the current environment and then the outlook on CLOs. I think as we look forward to the CLOs, our managers are actively performing and managing each of our CLOs, which represent about $4 billion or so of AUM. I think it's important to note of the 34 basis point fee on structured products, about 1/3 of that fee is the senior fee, 2/3 of it is subordinate. And we'll look to each of the structures on how they're performing will impact the subordinate fee. And as you mentioned, there are some structures that have been deferring the subordinate fee at this point. We sort of looked back to previous market cycles where those deferrals can last a quarter or two and then get fully recovered. So we feel good about that asset category. It'll be reflected on a structure by structure basis, and we'll update you as appropriate to the extent anything changes.

Operator

And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to George Aylward for any closing remarks.

George Aylward

Great. Thank you. And I want to thank everyone today for joining us. And certainly, as always, encourage you to give us a call if you have any other further questions. Take care and stay safe.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.