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spk10: Thank you. Before I turn the call over to David Brown, I would like to remind you that during today's conference call we may make a number of forward-looking statements. Please note that Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release that was issued after the market closed yesterday disclosed both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call, both of which are available on the investor relations portions of our website at ir.vcm.com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO. David?
spk07: Thanks, Matt. Good morning and welcome to Victory Capital's fourth quarter 2020 earnings call. I'm joined today by Michael Pellicarpo, our President, Chief Financial and Administrative Officer, as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll start by providing the business overview for the quarter, as well as an overview of the full year 2020 and an update of our pending THB acquisition. Then I will turn it over to Mike, who will review our financial results in greater detail. Following our prepared remarks, Mike, Matt, and I will be available to take questions. The business overview begins on slide five. Victory Capital ended 2020 with record-breaking financial performance across a number of metrics. Our business performed well in a very challenging operating environment. We entered the new year with strong momentum. Adjusted EBITDA margin increased to a record 52% during the fourth quarter, resulting in record adjusted quarterly earnings of $1.07 per share. That's up 7% from the third quarter of 2020. Investment performance also remained strong, with 67% of AUM outperforming respective benchmarks over the one, three, and five-year periods ended December 31. Firm-wide assets under management rose to $147.2 billion at December 31, 2020, an increase of 11% relative to September 30. We ended the year with long-term AUM of $143.7 billion. Long-term growth flows increased 12% quarter over quarter to $5.7 billion. We also saw substantial improvement in our net flow picture in the fourth quarter relative to the first three quarters of the year. While we continue to see some of the same headwinds in our net flow profile in Q4 that we saw in previous quarters, it did slow, and activity on the intermediary and institutional sides of our business was strong and included the funding of some previously awarded institutional mandates and a number of intermediary platform wins and placements. For example, on the retirement side of our business, we executed a selling agreement with ADP for the USAA mutual funds. Additionally, our recently launched NASDAQ Next 50 ETF, ticker QQQN, has been approved for sale on the LPL, Raymond James, and more recently, the Morgan Stanley Wealth Management Platforms. And Sterling Trust Capital added SOPHUS Emerging Markets Strategy to its discretionary models. We've also increased our focus on registered investment advisors with the addition of a team of distribution professionals with deep experience specializing in this channel and expect to see increased activity as we progress through the year. Lastly, we established a new institutional level relationship with Citi Private Bank earlier in the year. Moving to capital management, we generated strong cash flow for the quarter. Consistent with prior guidance, most of the excess cash we generated in 2020 was allocated to reducing debt. This reduced our leverage ratio to 1.8 times at year end. We also have made additional debt payments post-year end, which Mike will cover. Finally, we increased our quarterly cash dividend from $0.07 to $0.09, a 29% increase. We remain committed to enhancing our financial flexibility and balance sheet capacity through reduction of debt so that we can pursue strategic acquisitions while also balancing returning capital to shareholders through dividends and share buybacks. We will continue to evaluate the balancing of the two especially as we continue to create capacity on our balance sheet through debt and interest expense reduction. Turning to slide seven, we'll step back and review the full picture for 2020. In addition to ending the year with record long-term AUM and record gross flows, we saw marked improvement in long-term net flows as the year progressed. Adjusted net income with tax benefit per diluted share was a record $3.87, up 47% from $2.63 in 2019. We had record-adjusted EBITDA margin of 49% in 2020, reflecting the strength, efficiency, and flexibility of our business model, even as we navigated a very uncertain business and market environment. We reduced our debt by $164 million over the course of the year, while at the same time returning $42.6 million to shareholders. And with the latest dividend declared yesterday, we've increased the quarterly cash dividend by 80%. We continue to invest in our business in 2020 through meaningful investments in product development, digital transformation, data, and technology. This included the launch in November of a new digital platform to support clients across all our business channels. The pursuit of attractive inorganic growth opportunities also remained a focus last year and will continue into this year. In September, we announced that we had acquired a 15% interest in Alderwood Partners, which provides us with an attractive return opportunity and broadens our international scope for future acquisitions. We are on track to close the previously announced THB asset management acquisition later this quarter. We look forward to welcoming THB as our 10th investment franchise and integrating their ESG-focused investment strategies onto our platform. Both our investment in Alderwood and our acquisition of THB will broaden our distribution opportunities outside the U.S., particularly in the U.K., Europe, and Australia. We are continuing to actively evaluate M&A opportunities with a focus only on those that will make our company better by providing access to specialized asset classes, new distribution channels, and or the potential to expand our client base beyond those what we serve today. Simply put, we are in search of acquisitions that are strategic to our business. Looking back even further, slide eight lists several of the objectives we laid out at the time of our IPO in February of 2018. As you can see from the table, we've generated substantial profitable growth through 2020. Through year-end, we've achieved an 88% increase in revenues, expanded margins by 1,000 basis points, more than tripled our gap earnings per diluted share, and more than doubled adjusted net income with tax benefit. This illustrates the tangible results we've achieved since becoming a public company, and we believe serves as a report card for our business. It's important to note that we've achieved these results while continuing to reinvest significantly in our business, retain and improve our talent base, and deliver strong investment performance results for our clients. Looking ahead, we'll continue to focus on strong execution while maintaining a long-term view and creating lasting value for our shareholders. Turning to slide nine, I'd like to provide a brief update on our direct investor business. We continue to enhance the service and products that we offer to direct investors and expanded our executive leadership team to include Nikhil Sudan, who has been appointed to the newly created position of President, Direct Investor Business. Nikhil brings a wealth of experience to this role, most recently serving as a leader in McKinsey's wealth and asset management practice. We are very pleased to welcome him to Victory. Looking at the direct business, we continue to benefit from our referral agreement with USAA and our ability to deliver a diversified set of competitive products to USAA members and other direct investors. Since we launched the business in July 2019, we have approximately 115,000 new funded account registrations. A good highlight is the USAA 529 College Savings Plan, which remained net positive in terms of both account growth and flows during 2020, and since we acquired the business in July 2019. In November, we completed the final transition from USAA's technology platform and introduced a new proprietary digital experience to serve direct investors as well as clients in other business channels. The new digital marketplace advances our sales and marketing efforts and enable us to more effectively promote our products to direct investors who are not USAA members. An example of a new feature is a software-based investment planning solution that enables investors to create a personalized portfolio for retirement and non-retirement accounts based on their specific goals and risk tolerance. Earlier in 2020, we launched a new IVR contact center technology, which is fully integrated with our CRM data and better supports our marketing initiatives to gain wallet share with existing direct investors and attract new investors to our platform. In addition to our marketing and digital efforts, we are focused on continuing to expand investment options. In conjunction with the launch of our digital platform, we added a new no-load member share class to 11 of our existing victory funds specifically for the direct business. This means that direct investors are now able to invest in mutual funds not previously available through the legacy platform. We also introduced taxable and tax-exempt fixed income separately managed accounts, SMAs, managed by our USAA investments franchise on the direct platform in the fourth quarter. As a side note, we will be offering this to the intermediary channel in the coming weeks as well. During the year, we've broadened our firm-wide commitment to responsible investments by becoming a signatory to the United Nations supported principles for responsible investment. In conjunction with this commitment, we revised the strategy for the USAA World Growth Fund to focus on sustainable and responsible investing and ESG considerations and changed the fund's name to USAA Sustainable World Fund. We've been steadily securing more product placements in shelf space for fixed income strategies managed by our USAA investment franchise. The exceptional performance being generated by this group, which I'll cover in a moment, is greatly enhancing our efforts to build these pipes for future asset flows. This has picked up recently, and we anticipate this continuing throughout the year. As I mentioned, in the fourth quarter, we established a selling agreement with ADP for USAA mutual funds, and Voya added the USAA Intermediate Term Bond Fund to one of its fiduciary products. Charles Schwab also made allocations through its UMP product to the USAA High Income Fund and the USAA Income Fund. We are confident that we will continue to achieve more wins in 2021 as we further expand the commercial distribution of these strategies. Turning to slide 10, I'll review the acquisition of THB Asset Management, which, as I said earlier, is on track to close later this quarter. THB has a 38-year history with an impressive investment performance track record. As of January 31, the firm managed approximately $555 million in the micro-cap, small-cap, and mid-cap asset classes, including U.S., global, and international strategies. That number is up about 28% since the time of announcement. These are capacity-constrained asset classes that we know well and that are in demand. These are also asset classes in which active management is an important part of a well-diversified portfolio. From a business perspective, THB has significant room for AUM growth across its product set, which we think will significantly accelerate with our distribution support. All of THB's strategies have ESG considerations fully integrated into their investment processes. In fact, THB was an earlier adopter and has been managing socially responsible investment portfolios for decades. The table on this page highlights THB's stellar investment performance track record. All four of THB's primary institutional strategies have outperformed their respective benchmarks for the one, three, and five-year periods ended December 31. Additionally, all the strategies are ranked in the top quintile or top decile for the one-year period and top quartile for the five-year period, according to eVestment. This is a testament to the strength and consistency of THB's processes and long-tenure managing strategies in these specialized asset classes. THB is a great fit for us on many levels and highlights our ability to strike financially attractive, creative deal structures with talented investment organizations. THB's entrepreneurial client-first culture aligns well with ours, and we are very pleased to welcome them to our team. On slide 12, I'll review our investment results for the quarter. As of December 31, 64% of company-wide AUM in mutual funds in ETFs was ranked four or five stars overall by Morningstar. Sixteen mutual funds were ranked in the top quartile by Morningstar for the trailing one-year period, including 11 funds in the top quintile. Looking at the investment performance of our Victory Shares ETFs, four were ranked in the top quintile by Morningstar, including two ranked in the top decile for the trailing one-year period. Performance of the fixed income mutual fund and ETFs managed by our USAA investment franchise remained very strong in the fourth quarter. The percentage of AUM in those products outperforming respective benchmarks over the trailing one-year period was 90% as of December 31. Additionally, 14 out of 16 mutual funds in ETFs will rank four or five stars overall by Morningstar. This includes the two active fixed income ETFs managed by USAA Investments, which achieved their three-year track records in October, and are ranked four stars overall by Morningstar as of December 31. Reflecting on 2020 as a whole, there's no doubt that it will be characterized as a year of unprecedented challenges both personally and professionally. As we emerge from the global pandemic crisis, there will be undoubtedly substantial change ahead. We believe our business model, which combines boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform, is uniquely situated to navigate and thrive as we look forward. In fact, history shows that this type of market environment presents real opportunities for talented active managers, like our franchises and solutions platform. to outperform and deliver meaningful results to our clients. Now I'll turn it over to Mike to review our financial results in more detail.
spk09: Thanks, Dave, and good morning, everyone. The financial results review begins on slide 14. Revenue for the fourth quarter increased 6% from the third quarter, reaching $200 million in the period. For the full year, revenues were a record $775 million, up 27% from the $612 million reported for 2019. Gap operating margin was 39% in the fourth quarter and 41% for the full year. Our fourth quarter margin was down on a gap basis from the third quarter, primarily due to a non-cash adjustment to the book value of the earn-out liability related to the acquisition of USAA's asset management business. In the fourth quarter, this adjustment increased operating expense by $7.5 million compared to the third quarter. This adjustment was net of the first maximum earn-out payment of $37.5 million that we made to USA during the quarter. As you may recall, these earn-out payments are based on revenue retention, which was in excess of the maximum hurdle rate in our first year of ownership. Gap net income was $54.9 million in the fourth quarter, compared with $55.7 million in the third quarter. Versus the fourth quarter of 2019, gap net income rose by 46%. Gap earnings per diluted share for $0.75 in the fourth quarter. That was down a penny from the third quarter and up $0.24 or 47% with the fourth quarter of 2019. For full year 2020, GAAP net income jumped 130% to $213 million, while GAAP EPS rose 129% to $2.88 per diluted share, compared with $1.26 per diluted share last year. Adjusted EBITDA margin widened to a record 52% in the fourth quarter. Compounding the higher quarter-over-quarter revenue, the margin expansion drove adjusted net income with tax benefit to a record high $78.6 million, which was up 7% from the previous record set in the third quarter. Adjusted earnings per diluted share reached $1.07, which was up from $1 per diluted share in the third quarter and up from $0.99 in the same quarter last year. For the full year period, adjusted EBITDA margin expanded 480 basis points to 49%, up from 44% in 2019 due to better operating leverage and resulted in full-year ANI with tax benefit reaching a record $286 million. This was up 48% from ANI with tax benefit of $193 million in 2019. On a per share basis, ANI with tax benefit improved to $3.87 per diluted share, a 47% increase from 2019. As Dave highlighted, we increased our quarterly cash dividend for the third time in the past year. We also continued our share repurchase program while directing most of our free cash flow to reducing debt. We paid down $49 million during the quarter, which increased full-year debt prepayments to $164 million. This reduced our leverage ratio to 1.8 times at the end of the year. Since the beginning of 2021, we have repaid an additional $32.5 million of debt. Turning to slide 15, total AUM rose 11% during the quarter. The $147.2 billion of AUM at year end reflects positive market action that was partially offset by net outflows, which improved in the fourth quarter. Since the first quarter low point at the end of March, our total AUM rose steadily during the final three quarters of the year, increasing 19%. The diversity of AUM in our distribution channels remained strong throughout the year. Long-term asset flows are covered on slide 16. Consistent with guidance on our third quarter call in November, the improving flow trend that began in the second quarter continued in the fourth quarter. From the chart, you can clearly see the steady decline in redemptions throughout the year. Also, gross flows turned higher in the fourth quarter, increasing by 12% from the third quarter level. A couple of our one but not yet funded mandates came in during the fourth quarter, and we have a significant number of remaining mandates that have yet to fund. We expect most of these to fund in the first half of this year. Turning to slide 17, quarter-over-quarter revenues increased by 6%, which is slightly ahead of the 5% increase in average AUM. The average fee rate in the quarter rose 7 tenths of a basis point to 57.1 from 56.4 basis points in the prior quarter. The higher average fee rate in the fourth quarter was the result of improving asset and channel mix shift, better fulcrum fees on certain USA mutual funds, as well as additional performance fees recorded in the fourth quarter. This was partially offset by higher yield support on money market funds during the period and a slight decline in administration and servicing fees. For the full year, our average fee rate was 56.8 basis points. Looking ahead, we continue to be encouraged by the improving investment performance in the largest USAA mutual funds with welcome fees. As Dave highlighted, investment performance has continued to outpace respective benchmarks on many of the fixed income products managed by our USAA investments franchise. Moving to slide 18, the higher fourth quarter expenses compared with the third quarter were attributable primarily to the increase in the contingent liability valuation for the remaining USAA earn-out I mentioned previously. Fourth quarter adjustment of $9.5 million reflects a lower discount rate used to calculate the liability's present value plus a shorter time period for the three remaining payments and is net of the cash payment made during the quarter. This expense is included in acquisition-related restructuring and integration and represents nearly the entire increase in this category from Q3 when this adjustment was $2 million. The maximum liability of the three remaining payments is $112.5 million. At year end, the estimated present value was $92 million. Collectively, personnel and operating expenses were 6% higher than in the third quarter, which was in line with revenue growth in the period. Personnel expenses grew 12%, which included a sizable non-cash mark-to-market for a deferred compensation plan in Q4 as a result of market appreciation. This expense is 100% offset as a reduction in non-operating expenses and has no financial impact on the company's earnings. Adjusting for this expense, personal expense growth was 6% and in line with our revenue earnings growth for the quarter. Variable operating expenses flexed higher due to the increased AUM and revenue in the quarter, and other operating expenses rose 1%. Non-operating expenses declined by 35% from the third quarter. This was driven by 6% lower interest expense quarter over quarter as outstanding debt continued to rapidly decline in the quarter, and the offset for the deferred compensation plan mark to market mentioned previously. Before we move to our non-GAAP results, we thought it might be helpful to illustrate long-term trends in our annual incentive compensation on slide 19. Another benefit of increasing scale is that incentive compensation increased in absolute dollars since our management buyout with the addition of new investment franchises, distribution, and support staff. but the percentage of pre-incentive compensation EBITDA represented by that incentive compensation has been reduced by more than half, from 40% to less than 19%. This is another demonstration of the substantial operating leverage we can achieve with our business model. Slide 20 provides a snapshot of our non-GAAP metrics for the quarter. Adjusted net income with tax benefit per diluted share was up 7% from the third quarter and up 8% from $0.99 per diluted share reported in last year's fourth quarter. While we are not surprised by our strong financial performance and record results in 2020, it is still gratifying to realize the profitable growth we envisioned. Our highly variable expense structure was deliberately designed to ensure consistently strong financial results regardless of market conditions. Our strategy was put to the test during the year. Coupled with resilient execution, we emerged as a stronger company. This certainly included strong execution by our investment franchises and solutions platform. Our investment professionals successfully navigated the unprecedented disruptions during the pandemic while continuing to deliver robust investment performance. Our investment teams were provided with uninterrupted best-in-class resources from our centralized operating platform, allowing them to remain focused on managing client assets. Our just-in-net income of $71.8 million generated in the fourth quarter was another record. There also was a small increase in the quarter's cash tax benefit due to making the first full contingency payment to USAA, which increased goodwill and acquired intangibles modestly during the quarter. The end result was an A&I with tax benefit growing by 7% in the quarter to $78.6 million. As we look ahead, the significant expansion in our adjusted earnings margin from Q1 to Q4 in 2020 of 700 basis points is a testament to our financial execution and our operating platform. Margins will vary quarter to quarter based on the timing of investments we are making to drive future growth and some seasonality of certain expenses. We look at our full year 2020 margin level of 49% as sustainable going forward, which will include our investments in the digital transformation of distribution and marketing, product development, data, technology, and analytics. Finally, moving to slide 21, I'll cover our capital management activities. We paid down an additional $49 million in debt during the quarter and another $32.5 million subsequent to year end. Since the origination of the term loan in July of 2019, we have repaid approximately $345 million of the outstanding debt. As a result of our proactive measures to manage our interest costs, our cost of debt has decreased over 240 basis points since July of 2019. you can see the impact of this steady decline and our paydowns in the chart on the top right of this slide. Also, our $100 million committed revolver remains undrawn, and we continue to generate substantial free cash flow. Gap net cash flow from operating activities in the fourth quarter was $68 million. For the full year period, cash flow from operations totaled $251 million, which does not include the $27 million we realized in cash tax savings during the year. With our strong financial position and free cash flow, we have added flexibility to return capital to shareholders. As we look ahead, we intend to maintain our capital allocation priorities with the majority of our excess cash flow being allocated to reducing debt. However, as our cash flows grow and leverage declines, we intend to strike a balance that allows us to continue to pursue strategic and value-creating acquisitions while increasing capital returns to shareholders. In the final quarter of 2020, we returned $10.3 million to shareholders in the form of share repurchases and dividends. We repurchased 272,000 shares at an average cost of $19.72 per share and announced our third consecutive dividend increase. For the full year, we returned a total of $42.6 million in capital to shareholders, nearly matching the savings in our run rate cost of financing. With our debt to equity ratio close to 1 to 1 and a very attractive interest rate below 3.5%, locked in on $450 million of the outstanding debt, we are evaluating if this fixed rate portion of our debt might represent a natural floor. Of course, it will ultimately depend on a number of factors that will be driven by the actual facts and circumstances. And given what we have all endured over the past year, we know a lot can change in a very short period of time. With that, I will conclude our prepared remarks and turn it back over to the operator for questions.
spk04: Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by the number 1 on your telephone keypad. Again, that's star 1. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Chris Shutler with William Blair.
spk08: Hi, guys. Good morning. You mentioned that you're evaluating the optimal leverage level. Can you just give us a little more insight on what you're thinking there, at least at a high level? And should we read that at all as saying anything about the size of potential acquisitions you're looking at?
spk07: Good morning, Chris. A couple things. One is, no, you shouldn't read that at all as the size of acquisitions we're looking at. As I've said many times, we're going to do small acquisitions, we're going to do large acquisitions, and really the key driver is going to be, is it strategic to our business? We're not going to do sized acquisitions just to gain size and scale. I think it has to be a lot more strategic than that. As Mike and I talked about in the prepared remarks, The optimal leverage level, it'll depend on facts and circumstances of the time, but we are evaluating where we are today. And when we think about the reduction of debt, the reduction of the cost of debt, and really the strengthening balance sheet and our free cash flow and the strength of our business, it just makes sense to look at this probably through a different lens. I think our balance sheet is prepared, and we're prepared to really balance it to where we're not going to do anything that's going to prevent us from doing an acquisition, but also probably increase our ability to return capital to shareholders through buybacks, and through dividends.
spk08: Okay, got it. And then one more specific, just regarding the rollout of separately managed accounts at USAA, are you able, as part of your relationship, to become more of a, I guess, a managed accounts provider there, building goals-based portfolios that incorporate both proprietary and third-party funds and ETFs? I'm just not sure exactly what the line is between what you're allowed to do and what Schwab can do as part of the relationship.
spk07: So, you know, if you start with our direct investor business, we have the ability to offer, you know, our current clients, which a good amount of them are USA members, some are not, we can offer them any product that we'd like. The referral agreement from USAA, they are referring directly members that inquire about USA Mutual funds over to us. They inquire through a call or through digitally, and they'll refer those to us. Once we're speaking to a USA member, we have the ability to offer them really any product that we have in our investor business. And as we talked about, we have mutual funds. We've expanded the mutual funds to add some victory funds. We can offer them a portfolio planning tool. We have the fixed income SMAs we talked about, and we'll be expanding that. So we have the ability to really offer them any product. What you're probably referring to is the referral agreement, how things are referred over, and we get the referrals in reference to the USA mutual funds.
spk08: Okay, got it.
spk07: Thanks, Dave.
spk04: Your next question is from the line of Randy Benner with B Reilly.
spk12: Oh, hey. Good morning. Good quarter. I have a couple of cleanup questions. I guess first on solutions, Dave, you highlighted in your script that 529 was good, and it was. But I think flows were maybe a little bit slower there. So I'm just asking, is there a slowdown in that business, or is that just kind of normal fluctuation we'd see there and, you know, just looking for kind of the outlook you see from a flow perspective for solutions in 2021?
spk07: The solutions business for us is really going to be a grower. It has been a grower. And when we look forward, what we have to offer there where the solutions business really is an engine, an investment engine for us. So you think about the Victory Shares ETS, you think about some of the customized portfolios that we do and some of the other products, we think that's going to be a grower, especially as investors are thinking about outcome-based portfolios and more custom-based portfolios. If there's a slowdown quarter to quarter or if one quarter is slower than another, that's really just an ebb and flow of just natural market swings.
spk12: Okay, got it. And then, Mike, can you please review some of your comments around the compensation line? I think you said maybe the stock-based comp aspect of the personal comp and benefits line gets offset in operating, but I just wanted to understand what the offset you refer to is in the income statement.
spk09: Sure, Andy. Good morning. Yeah, so it relates to we have a deferred compensation plan offered to employees, and the asset and the liability both sit on the balance sheet. So when there's a marked market and we saw a strong market appreciation in Q4, we recorded $3.4 million of a markup of that plan that goes through the compensation line item. And that same $3.4 million is offset in non-operating expenses as a reduction of non-operating expense. So it gives the inflation, if you will, of our personnel expense, you know, which is really offset 100% by the decline in non-operating expense that we show. Has no impact at all to the bottom line, but it's really a geography.
spk12: Okay, understood. And then on... Just on USAA, are there any further earnouts that are notable expected for 2021? Sure.
spk09: It's Mike again. So the structure of the earnouts with respect to the USAA acquisition was over four years. So on an annual basis, there's a maximum payment of $37.5 million annually. And as we said in our prepared remarks, we exceeded the maximum revenue threshold from a retention perspective in 2020 and made the first of those payments in the fourth quarter. So we would expect going forward we'll evaluate the ongoing levels of revenue based on the contractual obligations that we have, and we have up to three additional payments that we will make. over the next three years, really Q3, Q4 timeframe post the computations and the evaluation.
spk12: Okay, yeah, so we have it in the third quarter, but I guess this year it slipped more to the fourth quarter.
spk09: Is that right? Yeah, just the timing. I mean, the anniversary, if you will, of the close was July 1st. By the time you make the computations and the payments, it will be Q3, Q4 ongoing. It just was in Q4 this year.
spk12: All right, that's great. Thanks a lot.
spk09: Sure.
spk04: Your next question is from the line of Ken in Worthington with JP Morgan.
spk11: Good morning. This is Will Cuddy filling in for Ken. So, Dave, you mentioned several intermediary ones in your prepared remarks. Could you help us understand the progression from initial intermediary placement to flows? How long does it typically take to get traction on a new intermediary platform? And how does that timeline vary depending on the intermediary?
spk07: Good morning. So it really does vary based on each platform. I think a rule we kind of use internally is from the time you are approved, it's probably a year before you see significant flows. Some of the platforms are sooner. Some of them are longer. It also depends on exactly what you're being approved and where you're being approved. But I think a good rule of thumb is probably 12 months. And so, you know, we're seeing a lot of traction, you know, the strong investment performance plus, you know, our ability to just continue to work into our preexisting relationships and new relationships. So we're building the pipes today. And, you know, we know when you look over the horizon six to 12 months out, we know that, you know, it's going to follow with flows. Great.
spk11: So there's a second question. So there's been a renewed recent interest in asset manager consolidation. As you look at your M&A opportunity set, how has the uptick in asset manager M&A interest impacted your outlook to source attractive and strategic firms at good valuations?
spk07: So, you know, really, this is the busiest we've ever been from, you know, sourcing and speaking to potential acquisition candidates. You know, for us, it's not an issue of Having the volume and we have we've had plenty of volume and we have plenty of volume today It's really finding the right partner look for us. We are selective We've been doing acquisitions for a long time You know, we we are not in a rush But that being said it is pretty it is pretty fruitful out there talking to people and we are you know, we're looking at things that are going to be strategic to our business and As far as valuations go, they're in line. Some are, you know, rightfully more expensive than others based on quality. But for us, you know, we have the means, the resources, and the balance sheet to really get things done that, you know, we think would make sense. But for us, it's not a volume issue. It's really about a selection issue.
spk11: Great. Thanks, Dave. And just as a quick cleanup, Mike, and apologies if I missed this, But what was the impact of the fee waivers and bulking fees for the quarter?
spk09: So our basis points in the fourth quarter was 57.1. And the increase, if you will, quarter over quarter was a combination of enhanced bulking fees, as well as asset and client mix, just with the market appreciation and seeing a little bit more towards equities. And then we're offset a little bit with increased waivers on money markets. You know, the yield support with respect to money markets is still present. And then we had a little bit of a drag in admin and service fees to offset that. So you kind of look at that, and then that's out to a 0.7 basis point increase quarter over quarter. The annual performance fees that we book are immaterial, still overall to the business, less than 1% of revenue for the quarter. So really it was driven by slight improvement in fulcrum fees quarter over quarter. Not significant. We still have upside with that as we look out. It's still a negative impact to the business.
spk11: Okay. Thank you for taking our questions.
spk09: Sure.
spk04: Your next question is from the line of Kenneth Lee with RBC Capital Markets.
spk05: Hi, good morning. Thanks for taking my question. Just one follow-up in terms of potentially seeing some increased capital returns, realizing that you're going to still allocate the majority to delivering I wonder if you could just talk further about considerations that could buy us the additional capital returns either to share repurchases or dividends. Thanks.
spk07: Good morning. You know, we have not decided really the avenue on how we're going to deliver that, be it an increase in dividends or be it an increase in the buybacks. um we have increased our our dividend over the last few quarters um i i wouldn't uh anticipate that changing um but as far as the the real capital allocation it'll really depend on the facts and circumstances at the time what we know is is we're generating more free cash flow we know our cost of debt has come down we know our business has strengthened um our balance sheet is strong We have a really positive outlook for the growth of our business. So we'll figure out at the time, you know, working with our board, what the right, you know, avenue is to increase. And it doesn't have to be through one. It could be through increased buybacks or it could be through increased dividends and a combination thereof.
spk05: Great. Very helpful. And just one follow-up, if I may. You mentioned that prepared remarks, seeing some, contribution from previously awarded mandates being funded in the fourth quarter. Wondering if you could just give us a little more detail how much of a contribution that was in terms of net flows and then relatedly in terms of the unfunded pipeline being funded in the first half this year. Wondering if you could just help us quantify rough ballpark there. Thanks.
spk07: So it contributed to the fourth quarter. I would say it wasn't a material amount. When I think about the first half of this year, we have a sizable amount that has been awarded to us but not funded yet, and that's building. That's going to lean very heavily towards the first half of the year. A lot of that is going to be through our institutional channel and and some of our smaller amount in our kind of retail and retirement channel. As you know, we don't really give guidance on flows intra-quarter, and a lot can change quarter to quarter. But we have a book that's building, and it's really founded on – we have really strong investment performance across the board. We have some products that I think are starting to see traction through – really through a desire for investors to use these products in their portfolios. And then we've also added a few sales professionals that we talked about in our prepared remarks to focus on registered investment advisors. And that's a new focus for us, and we're starting to see some benefits there. And then we're rolling out our fixed income SMAs commercially, you know, in the next few weeks. So we're excited about that as well. So we put all that together, and I think we have a, you know, a more positive outlook around flows as we think about from a gross perspective.
spk05: Great. That's very helpful. Thanks again.
spk04: Your next question is from the line of Alex Bolsny with Goldman Sachs.
spk00: Hi, this is sharing filling in for Alex. Appreciate the color on the M&A front. If you can provide more details on the pipeline in the sense what kind of asset classes and what kind of channels you guys are targeting and how are the conversations progressing on that front?
spk07: Sure. So let me start off and say that anything we do is going to be strategic. We are not interested in just doing something for size sake or scale sake. I think we have the size and scale and the operating leverage, as you could see, with our margins for the year in this quarter. We start off with products. We're looking for products that fit within a portfolio, a well-diversified portfolio, a portfolio of the future. And when you think about that, you think about products that generate income, products that potentially are in private markets. products that offer solutions, have an ESG tilt to it, are outcome-based. I mean, we're really looking at those kinds of products when we think about acquisitions. And then from there, we're also looking at, you know, do these acquisitions bring us more distribution? Do they bring us access to new clients, new geographies, geographies in distribution and also in manufacturing? The sizing of the pipeline, acquisition pipeline, really ranges from small and very strategic to large and strategic. We've done acquisitions. The latest one we've done, THP, is small but very strategic and is going to be a grower. It's going to bring us positive flows, great investment performance, great asset classes. you know, what we've been looking for. You go back to USAA, it was very large in size and it was very strategic for us. It brought us a great fixed income offering. It brought us, you know, a new distribution channel, a new business in the direct investor business. So we built our business really now to have a platform where we can do something that's small and something that's large, and we're talking really to all ranges in size.
spk00: Thank you. And one more for Mike. On the 49% sustainable margin going forward, can you help us understand the sensitivity to that if the markets kind of just keep going higher or if at all we see like a decline in the markets in 2021?
spk09: Yeah, so we did guide to kind of our full year margins as kind of sustainable and foundational as we look ahead. You know, I think margins will ebb and flow, you know, quarterly, depending upon seasonality of expenses, the level and timing of investments that we're making, as well as kind of ongoing asset and product mix, if you will. With two-thirds of our expenses being variable, You know, we have tried to design, you know, the expense base of the business, you know, to flow with market. In Q2, we had seen, you know, some market depreciation and some recovery the early part of 2020. And, you know, we sustained margins that have since expanded since then. So we think that the business is set up pretty well to flex with margin and market appreciation. But the 49% is where we feel comfortable running the business where we are today, inclusive of the investments that we highlighted in our prepared remarks and kind of where we're thinking going forward.
spk00: Got it. Thank you so much. Sure.
spk04: And your next question is from the line of Jeremy Campbell with Barclays.
spk06: Hey, guys. So, maybe just a higher level one. Dave, you and Mike have gone through a rigmarole of the different kind of positive things, you know, from declining headwind from USAA, a strong pipeline, new products, new channels, good performance, new markets, et cetera. Dave, and I know you're going to want to say all of the above, but if we're sitting here in Feb 22 and we're looking back over the year and flows have inflected from, you know, out to in, What are the one or two aspects of the giant menu you've laid out here that you have the highest conviction that helped drive that inflection?
spk07: So I would say the fixed income traction we're making today is going to drive flows. If you look at what's happening, just generally speaking, from investors and looking for income and the quality of that franchise, and really today, when you think about today backwards, we have not been rewarded with flows yet. We're building distribution, so I think the fixed income flows will be very impactful. And then I think we have a number of franchises that have been building great track records, and you think about franchises with lots of capacity, and I can go through a number of them and add THB to it as well. that group will drive flows as well. That doesn't mean that the direct investor business, that doesn't mean some of the other things we're doing. I don't have high conviction in or I don't think we'll be big contributors, but when I stand here today and with my crystal ball that's still pretty blurry, those are the two big buckets, I would say, where we go from out to in.
spk06: Great. And then maybe just to follow up on THP, and I apologize if I missed this one, but I know these are capacity constrained, as you guys noted. What's the headroom in that business between where they're at and where your either hard or soft cap would be?
spk07: So today, at the end of January, they're at about $555 million. They're higher than that actually today. We think easily it's a $15 billion franchise. So if you think about $600 million to $15 billion today, That would be, you know, the open capacity. We'll evaluate capacity as we do with every franchise when we get to $2 billion to $5 billion to $10 billion. But from what we know today, probably $15 billion of capacity at the top end.
spk06: Great. Thanks a lot, guys.
spk04: Our next question is from the line of Robert Lee with KBW.
spk01: Hi, good morning. This is Jeff Dresner on for Rob Lee. A quick question on ESG. You mentioned that THB has a full ESG integration in the investment process, and I was just wondering, going forward on any acquisitions, how important would that kind of integration be in terms of ESG, and any plans to perhaps join to become signatories onto the SASB or some standards like that? Thanks.
spk07: So first on ESG integration into our investment processes, I think it's important. It's where the industry is going. For us, it's going to be unique to each franchise that is with us today and then unique to the businesses that will buy. I don't think there's one way to integrate ESG, but it is important. It's a factor. And I don't think it's a trend that's changing. I think it's a trend that's accelerating. We've made a lot of progress on our ESG internally. We talked about the UN PRI. I've signed a CEO action pledge. And we have a number of other initiatives. And we're evaluating a number of other signatory forums to get involved in. But it's important to our company. It's important to our employees. It's important to me personally, and it's important to our clients, most importantly. And, you know, we've really, you know, it'll be part of who we are going forward. I'd also say in our prepared remarks, we talked about launching the USAA Sustainable World Growth Fund. And, you know, I would anticipate there's more of those kinds of products that we're going to launch over the next quarters and years.
spk01: Great.
spk10: And if I could just... I was going to just follow up on that real quick, Jeff. We did just join the SASB Alliance as a user member. That's happened earlier this quarter in 2021.
spk01: Oh, great. Okay. Thank you. And if I could just – and I apologize if you mentioned this already, but maybe what your outlook is on the fee rate. I know it kind of ticked up quarter over quarter, and I was just curious how you're thinking about that going forward.
spk09: So our full-year fee rate last year is 56.8 basis points. I think that's a good rate that we're looking at going out. It will ebb and flow based on asset mix and channel mix, but as we look out, that 56.8 seems to be pretty consistent. And, again, looking back, it ebbed and flowed a little bit based on bulk from fees, asset channel, money market yield support, but we're looking at that as the rate going forward. Great. Thank you.
spk04: And your next question is from the line of Michael Cypress with Morgan Stanley.
spk03: Hi, good morning. This is Stephanie on for Mike. Can you update us on the flow dynamics in the USA channel and what in your view is leading to the continued drag on flows? What actions, if any, can you take to stem this drag and any sense on the timeframe for when this could stabilize?
spk07: Good morning. You know, I think where we're at with the drag on flows, we're seeing it subside. We've done a lot from, you know, bettering our investment performance to working with clients to working with, you know, our partners in Schwab and USA. So I think over time, you'll see that and you are seeing that slow down. I don't really have any specifics, anything more specific to add to that.
spk03: Okay, great. And then as my follow-up, curious your latest thinking on the opportunity set to expand distribution outside the U.S. What sort of initiatives are you putting in place or contemplating at this point?
spk07: So with the acquisition of THB, that will help us in Australia and it will help us in Europe. There's relationships that they bring. Our investment in Alderwood that we made in 2020 will help us with distribution in Europe. And those are probably the two things I'd point out. When we look at acquisitions, I talked about earlier about thinking about geography around distribution. So we have that. That being said, I think we have a tremendous opportunity here in the U.S. to really grow our distribution. We talked about adding a team to focus on registered investment advisors, building out our direct investor business. So we've got plenty to do here in the U.S., and I think we can be really successful with distribution with the lineup we have today here inside the states.
spk04: Your next question is from the line of Samit Modi with Piper Sandler.
spk02: Thanks. Good morning, guys. Just a high-level question for me. I just wanted to get a little bit more color around kind of how you guys are leveraging technology, both on a firm-wide basis and then across the affiliates, you know, as well through, you know, the improvements in the distribution platform. I know you guys... have the new technology and the direct channel across the firm? Is that something you guys have been able to kind of apply elsewhere? And then, you know, is there an inorganic and organic growth component there, or is it mostly just kind of inorganic for future growth?
spk09: Sure. It's Mike. I'll start. Yeah, we did mention that we did launch a new digital platform, really a new digital website. to benefit all of our channels. So the direct channel is clearly a focus as we came off of legacy technology as part of the USA transaction for the direct investor business, but that will also benefit all of our investors, institutional and intermediary. And so we continue to make investments around the digitization of distribution and marketing and how we can continue to leverage the digital footprint to access and service our clients across all channels. Additionally, we continue to look at data and analytics. We've talked a lot about that to be able to provide better data data and analytics for the sales efforts that we have and the marketing efforts, both new and existing clients, as well as for our investment franchises. We continue to offer everything that we can to our investment franchises with respect to data and analytics. to support their efforts on their investment processes, research, and execution. So those are a couple of highlights that we're looking at. So I think we're making investments that will benefit not one particular aspect of the business through technology, but the entire business.
spk02: Great. Thank you.
spk04: Our final question is from the lineup of Chris Shutler with William Blair.
spk08: Hey, guys, my questions have been asked and answered. Thanks a lot.
spk04: Thank you. I would now like to turn the conference over to Mr. David Brown for closing remarks.
spk07: Great. Thank you. Thanks for joining us this morning. We look forward to sharing our continued progress throughout 2021. We'll be attending the Credit Suisse Annual Financial Services Forum on February 25th, and next month on March 10th, we'll be at RBC's Capital Market Conference. We hope to see all of you there virtually, and everyone have a great day.
spk04: Thank you, ladies and gentlemen. We exit you now. Please disconnect your lines.
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