According to a study by the Spinoff Report, 60% of the 500 spinoffs it studied between 2000 and 2010 were up after one year. Furthermore, Joel Greenblatt has found that spin-offs tend to outperform their industry peers in the first three years as public companies. It's no surprise then that Virtus Investment Partners (Nasdaq:VRTS) is up 660% since Jan. 2, 2009, the day it became an independent company; while its parent, Phoenix Companies (NYSE:PNX), is down 36% to $2.03. Virtus has done nothing but perform since its spin-off in early 2009 and you can expect that to continue. Here are three reasons why.
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Assets Under Management
Mutual funds carried the day in 2011 as net flows were $5.1 billion, $3.4 billion higher than in 2010. Its fourth quarter was its 11th consecutive quarter of positive flows and its fourth consecutive quarter of more than $1 billion of net flows from open-end mutual funds. It finished 2011 with $34.6 billion in assets under management, up 17% from 2010 and 5% from the third quarter ended Sept. 30, 2011. Mutual fund assets represent 72% of its total assets under administration with long-term open-end funds approximately two-thirds of that with closed-end funds and money market funds the remainder.
All of its growth in assets under management in 2011 was the result of a strong distribution team and not market appreciation, as you can well imagine, given the performance of the indexes. One year earlier in 2010, its open-end mutual funds had $1.3 billion in market appreciation to go along with $1.7 billion in net flows. While it can't control the direction of the markets, it certainly can control its sales efforts. In 2011, its sales effort was a big success and this showed up in a big increase in management fees.
Revenues and Profits
On the top line, revenues increased 42% to $204.7 million with investment management fees increasing by 38% to $135.1 million, or 66% of revenues. Ancillary revenue, which includes service and transfer agent fees, increased 51% to $67.7 million. Excluding distribution expenses on a non-GAAP basis, adjusted revenues increased 39% to $155.1 million. Farther down the income statement, it generated adjusted operating income of $43.7 million, a 90% increase from 2010. Its operating margin on an adjusted basis in 2011 was 28%, 800 basis points higher than in 2011. This has a lot to do with its stock rising 68% in 2011, the best performance by a public asset manager for the second consecutive year.
Up 5% through April 20, it's going to need some more good news if it wants to catch its asset manager peers, which are up 13.5% year-to-date.
For those of you who believe in active management, mutual funds are the only way to go. Active ETFs represent less than 1% of ETF assets at present and even with big entrants like PIMCO, it's going to take years for this to change. When it does, Virtus will be there. The important thing to remember about its business is that it doesn't bring in more assets if its investment managers are second rate. At the end of 2011, 85% of its assets and 60% of its funds were invested in five- and four-star Morningstar-rated funds.
Investors are attracted to success and its funds have had plenty. For instance, its biggest equity fund, with at least a five-year history, is the Virtus Emerging Markets Opportunities Fund (HEMZX), which has a 22.7% three-year annualized return. It won The Street.com's Best Funds 2012 award for best fund in emerging markets. Run by Rajiv Jain since 2006, it invests in companies like McDonald's (NYSE:MCD) and Coca-Cola (NYSE:KO) that are benefiting from domestic consumption in places like China, India and Brazil.
The Bottom Line
Probably the biggest reason to like Virtus is the fact it's owned 22.4% by the Bank of Montreal (NYSE:BMO), which is making a big push into the U.S. through Chicago-based Harris Bank. Long-term, you have to like the chances of BMO acquiring it. Therefore, unless it stumbles badly, which is unlikely, Virtus comes with a floor price of sorts and that's attractive indeed.