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Friday, August 02, 2013

Three Things to Know About Waddell & Reed's Earnings

News summary by MFWire's editors

Waddell & Reed's [profile] profit rose 26 percent in the second quarter and net inflows increased, from $376 million in the second quarter last year to $935 in the second quarter this year, Reuters reports.

Net income went up from $0.48 per share, or $52 million, a year earlier to $0.61, or $41.2 million in this year's second quarter. Its AUM was $104 billion, an bump of 17 percent from a year ago, Reuters writes. The firm beat Wall Street expectations of $0.64 adjusted EPS income by reporting $0.67 per share and beat the annual revenue estimate of $327 million, according to Wall Street Cheat Sheet.

POINT 1: Investors have an appetite for Waddell & Reed's Science and Technology fund.
POINT 2: CEO Henry John Herrmann says it makes no sense to spin out the Advisor channel.
POINT 3: Waddell & Reed has to reestablish momentum in its Natural Resources fund.

Now we will look at each point in more detail.

POINT 1: Investors have an appetite for Waddell & Reed's Science and Technology fund.

Michael Kim of Sandler O' Neill posed a question to Waddell & Reed CMO executive vice president and chairman Thomas William Butch:
Kim: Just a couple of questions. First -- so your equity fund flow has held up well across both the Wholesale and Advisors channels last quarter. So I'm just wondering -- as you look across your funds and given your comments around ongoing inflows thus far this quarter on the equity side, just wondering where you're generating the growth, particularly given what seemed like more mixed trends across the industry?

Butch: Hey. Mike, it's Tom again. As I suggested in my prior comment, the appetite for equity products seems to be coming around and that's reflected in the appetite for, for example, our Science and Technology Fund, which is gathering material flows after having been a very good performer in a category which was ignored for a long time. Outflows in that are very strong. We continue to see good attention to our Mid-Cap Growth strategy. And the High Income product, which, as Hank mentioned, in June, our fixed income flows were rocky, but that has come back quite well here in July. And even a product like our balanced product which is a pure vanilla balanced product is gathering good flows as well. So the tilt to equity has enabled us to show things, if you will, which have not been in favor in the recent past in the appetite for the things that have worked for us over the last couple of years seems to have come back in the quarter.
POINT 2: CEO Henry John Herrmann says it makes no sense to spin out the Advisor channel.

J. Jeffrey Hopson of Stifel, Nicolaus & Co., Inc, posed a question to CEO Henry John Herrmann:
Hopson: No problem. Would it ever make sense to spin off the Advisor segment into a separate entity or some other financial engineering, or including it on the overall platform improve the distribution diversification?

Herrmann: Well, if spinning out, I guess, is the question on the Advisors channel, and I'd say it makes no sense at all. That's a very valuable asset. To simplify it, it's essentially a cash cow with a very, very attractive financial attributes that generates a lot of ability for us to invest in growth in other parts of our strategy. And the mere stability of that asset base is incredibly important.

So it's a trade-off. You get very, very attractive financial characteristics, a stable business, relatively slower growth. Although growth has been doing a little better, but still relatively stable growth. But the resources that are generated by that business transfer very attractively into Wholesale, which, at the point of distribution, you know is a fairly significant negative margin and there is a lots of investment that's required to sustain your position in that business. The benefit, of course, of Wholesale is you get very rapid growth rate relatively and you accumulate assets sufficiently larger such that if you -- in periods when you get favorable market action is very beneficial. I hope that was responsive to your question.
POINT 3: Waddell & Reed has to reestablish momentum in its Natural Resources fund.

Roger Freeman of Barclays Capital, posed a question to Herrmann:
Freeman: Got it. Okay. That's helpful. And then, just on the bringing the Natural Resources in-house, do you expect any -- or is there a risk of any redemptions despite of switching out the portfolio manager? Did they have any institutional money? How much?

Hermann: Not traditional institutional money. In a sense, I think you're talking about it. Remember the fund has been in redemptions for some time. So there was one sizable withdrawal that just sort of reflects it because some certain broker/dealer platforms, change of manager and on a preferred shelf will be a cause for immediate elimination of that. There's no such additional exposure. The fund is sort of on preferred list elsewhere. And again, it's least possible that it will be removed from those. But that wouldn't be a one-time hit. Those funds might attrit over time. At the same time, we've done our best to get the manager who runs our Ivy Energy Fund and has very good track record with it in front of the firms. And so, I think what we've seen in terms of a one-time outflow probably has transpired, and it's our job now to move forward with the new manager and try to reestablish some momentum in the product.
To read more, click here and here

Edited by: Casey Quinlan

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