Waddell & Reed Financial Q3 2007 Earnings Call Transcript

| About: Waddell & (WDR)

Waddell & Reed Financial Inc (NYSE:WDR)

Q3 2007 Earnings Call

October 23, 2007 10:00 am ET

Executives

Hank Herrmann - CEO

Tom Butch - Chief MarketingOfficer

Mike Strohm - COO

Dan Connealy - CFO

Mike Avery - Chief InvestmentOfficer

Nicole McIntosh - Director of IR

Analysts

William Katz - BuckinghamResearch Group

Bob Glasspiegel - LangenMcAlenney

Craig Siegenthaler - CreditSuisse

Marc Irizarry - Goldman Sachs

Cynthia Mayer - Merrill Lynch

Robert Lee - KBW

Operator

Good morning, ladies andgentlemen. Thank you for standing by. Welcome to the Waddell & Reed ThirdQuarter Earnings Call. During today's presentation all parties will be in alisten-only mode. Following the presentation the conference will be open forquestions. (Operator Instructions).This conference is being recorded today, Tuesday, October 23, 2007.

Now at this time I would like toturn the presentation over to the Chief Executive Officer of Waddell &Reed, Hank Herrmann. Please goahead, sir.

Hank Herrmann

Thank you, Andrew. Good morning.With me today are Tom Butch, our Chief Marketing Officer, Mike Strohm, Chief OperationsOfficer; Dan Connealy, ChiefFinancial Officer; Mike Avery, Chief Investment Officer; and Nicole McIntosh,Director of Investor Relations. Nicole, would you please read theforward-looking statement.

Nicole McIntosh

During this call, some of ourresponses and commentaries will include forward-looking statements, which aresubject to risks and uncertainty. While we believe these statements to bereasonable, based on information that is currently available to us, actualresults and outcomes could materially differ from those expressed or implied.

We refer you to our filings withthe SEC for information regarding these risks and uncertainties. We assume noduty to update any forward-looking statements. We have posted schedules on ourwebsite at www.waddell.com in the corporate section under the caption "DataTables".

Hank Herrmann

Thank you, Nicole. Good morningagain everyone. Thank you for calling in. The results, we announced thismorning underscore another quarter of strong performances across the board.Solid and consistent investment performance is crucial. When I spoke toinvestors at an industry conference earlier this fall, I highlighted thestrength of our investment management performance, and tt is worth notingagain.

Year-to-date, 60% of our equityfunds and 80% of our equity assets ranked in Lipper’s top quartile, while 78%of our equity funds and 90% of our equity assets ranked in the top half. Ourlong-term record is also impressive. In the three-year period ending Septemberthis year, 56% of our equity funds and 62% of our equity assets ranked inLipper’s top quartile, while 76% of our equity funds and 89% of our equityassets ranked in the top half.

Strong performance is thefoundation for sales, and our progress is well supported by the excellentresults of our investment management team. Speaking of sales, we haveexperienced an exceptional quarter, as sales volume established yet anotherquarterly high.

Gross sales of $3.7 billionincreased 36% compared to the second quarter, and 68% compared to last year’sthird quarter. Net sales of $1.5 billion were double of those of the secondquarter and more than three times higher than those of last year’s comparableperiod.

Sales continued to experience amix shift between Waddell & Reed managed and sub-advised funds. As for thepercentage of total sales, about 80% are being invested in Waddell & Reedmanaged products, compared to 63% at this time last year. Outstanding salesresults were heavily influenced by our wholesale distribution efforts.

Gross sales in this channelreached $2.5 billion, up from $1.7 billion in the previous quarter, and $1.1billion in last year's third quarter. Net sales of $1.8 billion in the quartercompared to $1.1 billion in the second quarter and $575 million in last year'sthird quarter.

Sales performance remains robust.The Asset Strategy Fund continues to be a leader in sales volume, while salesof our Global Natural Resources Fund remains significant. A number of otherfunds are seeing meaningful traction. These include capital appreciation,large-Cap growth, and science and technology. Further, some of ourinternational funds are showing some early traction as well.

Never in our company's historyhave we been able to gather such a large volume of assets at such a rapid pace.Since launching our effort to expand the retail distribution through thewholesale sales, efforts that were initiated in the Summer of '03, asset hasgrown to $17.4 billion, representing a compound annual growth rate in excess of40% and maybe that’s not bad [last year] Google or Apple.

The accomplishments of ouradvisors is also impressive. Gross sales of $900 million in the advisors' channelset another quarterly high accepting the unusual variable annuity exchangevolume experienced in 2001. Net flows improved greatly, nearly reaching break-evenlevels, although we had small outflows in the quarter.

We continued to believe the advisors'channel can achieve and maintain modest inflows, while providing significantprofitability. With advisors' channel sales and productivity going in the rightdirection, we continue to focus our attention on strengthening and recruiting.Adding nearly a 100 to our financial advisors headcount, this turned netpositive for the year at September 30th.

Since some of our new recruitshave little industry experience, it will take a while for them to season, andas a result we saw a slight sequential deterioration in advisors' productivity.It is important to note that our tenured advisors, those with two or more yearsof experience, continue to see steady gradual improvement and productivity.

Early in the fourth quarter salestrend show no signs of weakening. In fact, month-to-date sales in our advisors'channel are tracking ahead of the same period in ‘06, and flows are in a slightnet positive position. Sales in our Wholesale channel continue to accelerate.

Finally, I would like to expandon our operating margin. Those who track this number closely will notice asmall sequential decline. This decline is almost entirely due to increasedsales volume in our wholesale channel. All manufacturers incur costs to sellour products to third party distribution, and we are no different.

These costs include dealercompensation, wholesale commission, support, and marketing costs. These costsare offset by management fees earned on assets collected in previous periods.In periods where our sales volume exceeds the growth in management fee revenue,we will see some short-term margin pressure.

It is extremely important toremember that these sales add to assets under management, and ultimately to thebottom line. To be clear, our wholesale channel is profitable and profitabilitywill continue to expand as we gain greater scale.

Operator, at this time, I would like to open the call up toquestions.

Question-and-Answer session

Operator

Thank you, sir. (Operator Instructions). Our firstquestion will come from line of William Katz with Buckingham Research Group.Please go ahead.

William Katz - Buckingham Research Group

Hey, thank you. I just want to goback to the discussion on margin for second and just trying to understand thedynamic in that you mentioned that the sales until Waddell, Park has gone updramatically versus the comparable period. Yeah, when I look at two keymetrics, one being the revenue yield and the second one being the margin theysort of worked the other way. At what point could you start to see ticking inthose ratios?

Hank Herrmann

Well, that we might just haveback and see how the sales came in the quarter to illustrate the marginpressure. We had July sales in the Wholesale channel $615 million, August $759million and September $1.25 billion. So you will see it was backend loadedquarter much like the whole industry. So we paid for gathering all of thoseassets in this quarter and didn’t have there for even in the whole quarterthere gone are the management fees.

So that is the pressure that weare having. We are seeing traction as we calculate and you can do too with yourcalculator. The negative margin on that distribution is less negative than itwas the year ago. So we are gaining some traction and we expect to see marginexpansion in future.

William Katz - Buckingham Research Group

Okay. Just on that I’m absolutely curious, if you look atyour direct expenses relative to sales that number does continue to drive downpretty sharply thinking it down about almost 39 basis points from last year orso. Would you expect that trend to continue or at some point the things startto stabilizes, is there a natural leverage gain here?

Dan Connealy

Well, the direct expenses, I wouldn’t say, they mightdecline slightly. But I think that, where we have more variability is in theindirect expenses, which as we add wholesalers that adds indirect expenses andthen as they are successful then you have the direct expense of thecommissioned. So, this year, we’ve not added many wholesalers during this year.So, our indirect expenses kept in checked pretty well.

William Katz - Buckingham Research Group

As you and more focus on the ratio between direct versus thesales, is there, would you expect to see more leverage in that part of themargin type ratio?

Hank Herrmann

In the Wholesale channel, I don’t know that, we’re expectinga whole lot of change because the cost of operating in that channel is going toremain the same. And, we are very successful on the warehouse platforms. Andso, we would expect that to continue.

William Katz - Buckingham Research Group

A bigger picture question [inaudible] so why don’t you giveus a little bit of an update on the pipeline and maybe how the relationshipwith [inaudible] is developing?

Dan Connealy

The pipeline is better, as you know, that’s a comment, butit’s getting better. Relationship with [pick tier] is accelerating. I’m notsure what the numbers of the top line that is in excess of $500 million andwe’re seeing pretty steady flows on a daily basis now. And that basicallyreflects the improvement in excitement about large cap growth products broadlyspeaking.

And the reason, I said the institutional business pipelineis improving a little bit as the same thing and there is more interest in largecap growth. But it’s still partly robust. There is most of the activitycontinues to be a defined benefit business allocations out of those areastoward alternatives.

Hank Herrmann

Whether that answered your question?

William Katz - Buckingham Research Group

Yes. Thank you very much.

Operator

Thank you. We’ll move to the next question from BobGlasspiegel with Langen McAlenney. Please go ahead.

Bob Glasspiegel -Langen McAlenney

Good morning. Actually last I look you are up morepercentage wise than Google, but still trailing Apple. So.

Hank Herrmann

Well, thank you. I feel good about that Bob.

Bob Glasspiegel -Langen McAlenney

Even the, I want to go through your market actioncontributors [your words] which look like it was up 7% beginning assets in the quartermuch more than a market. Hank before you had said earlier in the year that youwere over weighted energy with early, I assume that might have been part ofwhat contributed to the strong market performance in the other sectors thatshould we’ve been able to analyze across the firm that we are?

Hank Herrmann

In the third quarter?

Bob Glasspiegel -Langen McAlenney

In the third quarter.

Hank Herrmann

Performance in most of the equity funds were justoutstanding. And there are different reasons some because of the energyexposure; some because of incredibly good stock selection; and some of ourgrowth products. Some because we’ve been pretty quick on our fee particularlythe Asset Strategy Fund and moving around in a volatile quarter, and then the continuationof the performance of the things that China buys be that metals, be thatindustrial, be that energy and so forth.

So it’s kind of little bit depends on which fund you aretalking about it’s not that one particular emphasis resulted in it was justlittle bit of perfect storm for us in terms of all things finding on Arizona.

Bob Glasspiegel -Langen McAlenney

The numbers were still outstanding and I just want to knowwhether there was any sort of sectors that affect your, particularly leverageat this point.

Dan Connealy

No, I think is the answer.

Bob Glasspiegel -Langen McAlenney

Okay.

Dan Connealy

We had outstanding performance in large cap growth and noneof that or very little of that was about energy.

Bob Glasspiegel -Langen McAlenney

Okay.

Dan Connealy

It was a lot of it had to do with really good stockselection. Asset Strategy Fund there was a lot of energy in there, but I don’tthink that was dominant thing. I think metals, materials being quick on thefeet was important. Our large cap core product also had an outstanding quarter.You are talking about a lot of assets when you’re talking about those areas,different reason.

Bob Glasspiegel -Langen McAlenney

In the other line, you mentioned two items that helped thegain on sale and the counting in the higher earnings and trading it sounds likethe second piece might be more recurring than the first but can you quantifythose?

Dan Connealy

Yes, this is DanConnealy. The gain on sale of the mutual funds was abouta $1.8 and the rest of that gain over second quarter was higher earnings on theinvested balances. We’ve investments in our fund and also the portfoliomanagers have investments in the funds that are in our trading portfolio.

Bob Glasspiegel -Langen McAlenney

But the second piece should be relativelyrecurring right, I mean?

Dan Connealy

We’d hope so.

Bob Glasspiegel -Langen McAlenney

Okay. And if the sales stay strong, the margins not go up, Imean, are we swimming upstream or there is a cross over point, where the salesexpense sort of levels off or even with sales going up.

Bob Glasspiegel -Langen McAlenney

I guess the question, can margins expand in the rising salesenvironment and at what point does that happen?

Dan Connealy

Yeah. I think margins can expand. We have done someprojections. But the rate of growth that we’re seeing this year just doesn’tallow that to happen. It would probably be not realistic to think the currentyear rate of growth is going to continue.

Hank Herrmann

And Bob, Hank. There are two parts in that question and itsappropriate question I’ve heard number of times and I struggled because I knowthat it would be helpful if I give précising answer. But I just can’t get therefrom here because I need to understand the rate gain in sales and I also needto understand market actions to figure out whether or not our operating marginswill do what.

It is fair to say that underwriting distribution margin,which is portion of the total will be under pressure as sales accelerate in Wholesalechannel. But market action can more than offset that and that of course is thepoint why we’ve made the strategic decision few years back to get the Wholesalechannel.

At some point you’re going to get an enough assets in place.So that market action is going to overwhelm the sale effort. And we are makingprogress still at the tipping point, the word I think we use, but exactly whereit is I love to be able to tell you specific answer just can’t.

Bob Glasspiegel -Langen McAlenney

Okay. Thank you very much.

Operator

Thank you. And our next question comes from the line of CraigSiegenthaler with Credit Suisse. Please go ahead.

Hank Herrmann

Good morning, Craig.

Craig Siegenthaler -Credit Suisse

Good morning. Just, I’ve two on the expense side. First doyou expect the operating margin to continue decline in the fourth quarter dueto salary and third-party sales trends or other expense offsides like G&Areduction. It looks like there could have been some onetime or is there due tounusually highly legal expenses.

Dan Connealy

Well, there were some higher legal expenses and fund relatedcosts that just come up now and again. So, I would expect our margin to declinein the fourth quarter.

Craig Siegenthaler -Credit Suisse

Okay. And then second question, it looks like directexpenses as the percentage of sales actually declined by about 20 basis pointsin the third quarter or from the second quarter and the third-party channel.Could you talk about what maybe causes this?

Hank Herrmann

I think that in the Wholesale channel, the strong saleswould not have led to a reduction.

Craig Siegenthaler -Credit Suisse

Well, as the margin. So, as the percentage of sales?

Hank Herrmann

That is respective to the fact that sales grew so rapidlyway above, what we had internally budgeted, while, we are able to keep ourdirect expenses in line with budgets.

Dan Connealy

Yeah. And as I said, we didn’t add significantly to thewholesalers in their last, well last three or quarters of the year.

Craig Siegenthaler -Credit Suisse

Got it. Thanks.

Operator

Thank you. Our next question will come from the line of MarcIrizarry with Goldman Sachs. Please go ahead.

Marc Irizarry -Goldman Sachs

Great. Thanks. Hank, I guess, this is a bit of aphilosophical question for you. But the wholesale business at $17 billion issort of I guess in the early stages of a dramatic wrap up here. But how big, doyou think that business ought to be relative to the size of the advisorbusiness.

And then maybe, can you talk about the mix of channelswithin wholesale in terms of profitability, and is there anyway to see any sortof shift in terms of your Wholesale channel mix within wholesale, be itwarehouses et cetera that could maybe help influence the margin positively? Thanks.

Hank Herrmann

I’ll let Tom handle the second part of your question. Thefirst part of your question is, I don’t have a target in terms of the Advisorschannel, I said relative to Wholesale channel. I’ve said all along that if wedo what we think we can do it won't be very long before assets in Wholesalechannel exceed assets in the Advisors channel.

The Advisors channel growth rate is problematic, it’s anassumption of headcount growth and productivity, and you just can't grow theheadcount by rapidly. On the other hand, if you are effective than Wholesalechannel you can dramatically impact the number of people, who were representingthe products to the consumer.

And we are in theearly stages of that in my opinion $17 billion in assets, but lots ofopportunity and some very, very big pockets like the large cap growth, where weat this point are still a very small player with a very good product, and we’lljust have to see how that goes.

Well I’m optimistic about we maintaining high success rateand high sales growth rate in Wholesale channel mostly on the strength of thecouple of things, one how good the performance has been, and the fact that wehad an opportunity that demonstrate that in the Wholesale channel and two, avery good infrastructure of the wholesalers et cetera that I think, they arehaving a big impact out there, and the real world. I’ll let Dan go on with the.

Dan Connealy

Moving into the mix of business in the channel, as hesuggested Mike Avery, a very warehouse focus that present with our top fourfirms being warehouses and our penetration at independent firms beingconsiderably less, and the next leg of our growth in the wholesale business andour investment in the wholesale business would be to face up against theopportunity.

On the independent side, it's probably a little bit of alonger build. And so it’s the first part of your question was did that changedthe profitably mix by distributor. I wouldn’t stated that something that iseminent.

Marc Irizarry -Goldman Sachs

Hey, great thanks.

Operator

Thank you. And our question will come from line of CynthiaMayer with Merrill Lynch. Please go ahead.

Cynthia Mayer -Merrill Lynch

Hi, good morning.

Hank Herrmann

Good morning.

Cynthia Mayer -Merrill Lynch

Just a follow on that last question, I wondering if youcould characterize the increase in sales a little bit, is it being driven bynew platforms or is it just greater sales on existing platforms.

Dan Connealy

It’s a little bit of both, I would say its really a functionof having windup from one product to two products to multiple products it wassuggested in Hank’s opening remarks, more rotation, more time on the ground,more familiarity with the span of products that we offer. We have had somelumps in a couple of discretionary programs, but those by no means have driventhe fundamental activity.

So I think it’s just, the fundamentals of good executionback pipe, terrific performance. To put some dimension on that, I said useful,the asset strategy fund was by far the largest seller in the quarter. And oneof the things that happen is to create the step between the second and thirdquarters is, that the fund performed extremely well and attracted additionalassets during the period of market disruption.

And that's the way the product has been sold and itvalidated that investment premise and so the flows to that grew substantiallyin the quarter and have grown substantially sense. The resources fund wasactually half a little bit sequentially, but still contributing substantiallyin on a pure percentage basis. The best growth that we saw was in our two largecap products are capital appreciation and large cap growth funds respectively.

And those together grew quite well and we are veryoptimistic for prior comments that with asset class coming back as it has andexpected to continue that we will continue to grow there. And the platform goeswell beyond there. So again its greater exposure in terms of the number oftimes people have seen as great work at the home offices and ongoing acceptanceof a broader span of what we do.

Cynthia Mayer -Merrill Lynch

Are you trying to add the wholesalers or reduce are yousufficiently staffing ever?

Mike Strohm

We are going to be adding to wholesalers. We, as I indicatedpreviously have done well in the wirehouse channel and we have done that to acertain extent to the exception of being able to fully attack other of thedistribution opportunities on the wholesale side.

So over the next 14 months, we would anticipate hiring 10new people and they will face us clearly against be independent. And the peoplewho we have on the ground now, some of them will work with multiple channels,but the majority of them will spend most of their time and continuing to growthe wirehouse side.

Cynthia Mayer -Merrill Lynch

And how many you have now?

Mike Strohm

Well, we have 25 in the broker dealer channel. We haveanother six, who work in the registered investment advisor and retirementchannel for a total of 31. So we do expect to be in the low 40s at the end ofnext year.

Cynthia Mayer -Merrill Lynch

Okay. Alright just a couple of more questions the, youmentioned Dan, that the there were some extra legal expenses in G&A. And Iwasn’t totally clear on whether those are going to continue into the fourthquarter legal and fund expenses?

Dan Connealy

Well, we don’t foresee elevated legal cost in the fourthquarter. Sometimes we always have little cases that [perculate] long and thesettlements probably just hit in the third quarter will higher than it had beenrunning. And we had some fund related expenses of the same nature.

Cynthia Mayer -Merrill Lynch

So you don’t think those will recur in the fourth quarter.

Dan Connealy

We don’t foresee at this time.

Cynthia Mayer -Merrill Lynch

Okay.

Dan Connealy

Not said something is going to come up.

Cynthia Mayer -Merrill Lynch

Okay. And on comp given the performance is so strong Hank,is that high enough or do you expect some what you are truing up?

Hank Herrmann

There is going to be some truing up based on what’s based ongoing on right now in terms of the performance, and with the volatility, Ihope, it continues, we expected it will, but you never know. I would say, theywill be truing up that has to recur between now and when we pay bonuses, whichis at the end of March. So, I would suspect there will be some higher costsassociated with comps in both the fourth quarter and the first quarter.

Cynthia Mayer -Merrill Lynch

Okay. And also, last year, you had higher than usual gainsin the fourth quarter, I guess from mutual fund distribution. So, should weexpect that as well?

Dan Connealy

There is a lot of dividends paid in December last year.

Cynthia Mayer -Merrill Lynch

Yeah.

Dan Connealy

And I don’t know that we’ve taken a look at that yet. Butthere probably be some high dividend this year as well.

Cynthia Mayer -Merrill Lynch

Okay. And last question, the institutional redemptions, Ithink, you mentioned like $130 million of them were from that one client thatyou mentioned last earnings call. How would you characterize the others, doesthat again just the shift or alternatives?

Hank Herrmann

Yeah. We had two fairly significant clients in our smallcap. And in both cases, it wasn’t performance related. It was a rebalancing oftheir portfolios toward more of the alternative strategies.

Cynthia Mayer -Merrill Lynch

Okay, great. Thanks a lot.

Operator

Thank you. (Operator Instructions) Our next question is coming from the line of Robert Lee with KBW.Please go ahead.

Robert Lee - KBW

Thanks. Good morning everyone.

Hank Herrmann

Hi Rob.

Robert Lee - KBW

Most of my questions were asked that is curious. It’s been awhile since the company changes its distribution, it’s [against] alternativedividend. Is there any thought of revisiting that given earnings both of themwere pretty good and you are sort of below the kind of the payout ratio, Ithink you have generally targeted?

Dan Connealy

Well, certainly we will discuss that I guess with the nextboard meeting. And I don’t want to signal any decision on their part. But itwill be part of the agenda.

Robert Lee - KBW

Okay. And maybe talk a little bit about the fixed incomeside of the business. I mean clearly predominately in equity shop, well Hank,in think in the past you’ve sort of suggested there may be given a small sizeof your fixed income business, it’s sort of under scaled, and that maybesomewhere down of what you think about whether it was change in fees structuresor taking some action there to make some of the products more competitive. Isthere any update on that or is that’s what you are thinking?

Hank Herrmann

Well, I think the products have gotten more competitive onthe basis of improved hell lot of performance that’s the sure. It’s really hardas soon as, I was no longer CIO, the performance started to get better, so Ihave to credit Avery for that. And clearly, it was nice improvement.

The other thing I would say is that we didn’t have any CDOs,COOs are all that other stuff in any of our portfolios, which are asset-backedcommercial paper, and again I would credit the fixed income department and Mr.Avery. I would just say that fixed income department is very important to us.And I think, the events over the last few months explained in more than anyother way, I could explain, why I think that’s true.

If you don’t understand what's going on in the fixed incomeyou can’t understand what's going on in equities and vice versa, I think. Buthere lightly, it’s been very important to understand the fixed income markets,and our people have done a very good job of keeping the prices to fallback. Atthe moment to be specific, I am not anticipating any changes in fees tostimulate sales. I just can’t think in the retail channels for straight plainin all the products that we offer there is a lot of demand in the Wholesalechannel.

In our Advisors channel there is demand, but what theyreally want is just straight plain to know, no surprises. It just a preferencefor equities over fixed income at the present time has been in placed for 15 orso years, given aging demographics we’ve got one-to-one of these states that’sgoing to change. At exactly what I don’t know, but we want to be there withproducts when the time comes.

Robert Lee - KBW

And then one last question on the Advisors channel that itlooks like a bad half of the new sales were actually into your money funds,which is someone out of the ordinary if you guys. Is that so we think thatmainly money that was sort of brought in and parked and is going to bereallocated to equity and fixed income?

Tom Butch

Yes, Rob this is Tom. Particularly given the fact that ourMAP and MAP Plus program, which we are introduced earlier this year and oursort of turn key asset allocation programs that becomes the holding tank forthose until those money are invested and that's what you’ve seen [the price canbe up].

Hank Herrmann

We just haven’t tracked that probably as precisely as wemight have liked. I think good almost half of the money market flows are endingin those products.

Robert Lee - KBW

Right, great. Thank you very much guys.

Hank Herrmann

That was one question that was answered earlier about theratio of direct in the Wholesale channel and the UND, the direct revenues, thedirect expenses and why that might be changing. A bit part of both the expenseand the revenue is to be all one piece until we collect those and growingrevenue and we paid them all out to the advisors.

So though as our assets growing in that channel. That actiondrives that margin towards zero because you have 25 basis points in revenue and25 basis points in expenses. And we are gaining assets as they attract us.

Operator

Thank you. Our next question is afollow-up question from William Katz with Buckingham Research Group. Please goahead.

William Katz - Buckingham Research Group

Hi, thank you.

Dan Connealy

That’s 125,000 shares what else.Hi, Bill.

William Katz - Buckingham Research Group

I promise I was going to ask thecapital management. Hey my 500,000 share forecast so I think I got that onenailed. We will come back to sales for a moment in the advisor side seeing asignificant shift toward the [NAP] other type of asset allocation products.Just I’m curious how we should think about that on a go forward basis. Is thattrend going to persist?

Dan Connealy

I’d think it would.

William Katz - Buckingham Research Group

And then if you with sort of proforma for the strong backend is waiting of the sales in the Advisors channel.Where you would put the equity yield and then your overall revenue yield forthat channel?

Dan Connealy

I think we’ve said strong backendloaded for the Wholesale channel. You’re asking the Advisors channel?

William Katz - Buckingham Research Group

I’m sorry I misspoke, in theWholesale channel. For the equity yield and in the overall revenue yield?

Dan Connealy

Well, as far as the revenue yieldwe didn’t have a lot of those assets for very many days. So we didn’t cut themanagement fees on it. Then we had the entire cost to gardening those assets in the quarter or inthe month. I don’t know we calculated what you are asking precisely.

William Katz - Buckingham Research Group

I ask you in a different way. Ifyou look back to the second quarter and I think your second quarter sales werepretty strong relative to the first quarter. Your revenue yield both equitiesand the overall yield for that channel, the Wholesale channel declinedsequentially. I’m so curious, are we sort of facing that same [panjandrum] thatas this business builds the revenue yields will continue to erode or it's justa timing issue?

Dan Connealy

Well, the fee rate did come down slightly probably becauseof the mix and slightly because of great points probably more than mix thananything else. And that’s probably because that the, while that the strongperformance is still in Asset Strategy and Global Natural Resource, we’ve seena widening out than some of those other funds have a little lower managementfee.

William Katz - Buckingham Research Group

And then how much of the sequential change in G&A isonetime, I’m still not quite clear based on your comments.

Hank Herrmann

Well, I don’t know that we’ve said how exactly, how much.But a good share of the increase has to do with those two items. You alwayshave some fund related expense items that come in and one of them that we aredealing with is the higher statement costs that we shoulder and the fundscompany don’t to the extent some part of it’s recurring.

But I would say $0.5. It would be considered recurring. Nowwe see what non-recurring things will add next quarter. But

Dan Connealy

It sort of answered your question.

William Katz - Buckingham Research Group

Yes. Thank you.

Hank Herrmann

Thank you.

Operator

Management, at this time, there are no additional questionsin the queue. And I would now like to turn the conference back to you for anyclosing remarks.

Hank Herrmann

Well, again, I appreciate everybody listening in. And welook forward to having visit with you again at the end of the fourth quarter.Thanks very much.

Operator

Thank you, management. Ladies and gentlemen, at this time,we will conclude today’s teleconference. We do thank you for your anticipationon the program. If you'd like to listen to a replay of today's conference call,please dial 1-800-405-2236 or 303-590-3000 with the access code of 11097017followed by the # sign.

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