Virtus Investment Partners, Inc. Q2 FY2026 earnings call

Overall Market Context

• Results continue to reflect a challenging operating environment for the firm's overweight quality-oriented equity strategies, which have underperformed for the past two years as market conditions favored momentum-focused strategies over fundamentally driven quality selection.
• Underlying positive trends in Q2 include improved overall net flows, strong institutional sales, and positive flows across non-quality strategy classes.

Product Development and Growth

• Introduced new actively managed ETFs from Duff & Phelps & Sullivan during the quarter, expanding the firm's ETF platform. The ETF business has grown from $1 billion AUM five years ago to $5.8 billion AUM, generating $2 billion in net flows over the past 12 months. Management remains focused on expanding ETF capabilities to meet growing client demand.
• A new collateralized loan obligation (CLO) issuance is expected later in 2026.
• The firm's product and client portfolio is well-diversified across asset classes, management styles, and distribution channels.

Investment Performance

• Outside of quality-oriented equity strategies, investment performance remains strong across time horizons: 80% of fixed income and 67% of alternative strategies outperformed their 3-year benchmarks, while 73% of fixed income and 67% of alternative strategies outperformed 10-year benchmarks.
• Since late June 2026 (early in Q3 2026), nearly all quality-oriented strategies have outperformed their benchmarks quarter-to-date, coinciding with a market shift more supportive of fundamentally driven active selection, the market environment where these strategies have historically performed well. Management notes this is a very short period to confirm a sustained cycle shift, but it demonstrates the upside potential for the segment if market conditions change.

Financial Performance

• Adjusted investment management fees increased 1% to $164.8 million, as a higher average fee rate (43.1 basis points, including 1.2 basis points of incentive fees, up from 41.9 basis points Q1) offset lower average AUM.
• Adjusted operating income increased to $47.9 million from $43.8 million Q1. Adjusted operating margin was 26.1% (28.2% excluding a discrete non-cash expense), up from 24% Q1.
• Adjusted diluted earnings per share was $5.54, up from $5.38 Q1 ($5.97 excluding the discrete expense item).
• The discrete non-cash expense was a $3.8 million item related to accelerated expensing of multi-year performance-based stock awards for investment professionals who reached retirement eligibility in the quarter.

Balance Sheet and Capital Management

• End-of-quarter cash and equivalents totaled $176 million, other investments (including seed capital for growth opportunities) totaled $273 million, and undrawn revolving credit capacity was $220 million.
• During Q2, the firm repurchased 70,097 common shares for $10 million, paid its regular quarterly dividend, and repaid $20 million of outstanding revolving credit. Gross debt ended the quarter at $427 million, net debt was $251 million (0.9x EBITDA).
• Management maintains financial flexibility to balance three capital priorities: organic business investment, returning capital to shareholders, and maintaining appropriate leverage.

Total assets under management (AUM) was $152.2 billion at the end of Q2 2026, up 2% sequentially driven by positive market performance. Average AUM was $153.3 billion, down 3% quarter-over-quarter. By product segment:

• Institutional accounts: 33% of total AUM; total sales increased to $2.2 billion from $1.2 billion Q1 (highest institutional sales in 3 years); net outflows improved to $0.7 billion from $3.2 billion Q1 (best institutional net flow result in nearly 3 years), with most outflows concentrated in quality-oriented equity strategies.
• U.S. retail funds: 27% of total AUM; total open-end fund sales declined 14% to $2.6 billion; open-end net outflows were $1.8 billion, up from $1.3 billion Q1, though fixed income strategies generated positive net flows within this segment.
• Retail separate accounts (including wealth management): 24% of total AUM; total sales were $1.2 billion, down from $1.4 billion Q1, as higher wealth management sales (highest since Q4 2023) were offset by lower intermediary sold sales; net outflows improved to $3.1 billion from $3.9 billion Q1, with outflows driven by intermediary sold quality-oriented equities; wealth management net flows were positive overall.
• Other (closed-end funds, tender offer funds, ETFs, global funds): 16% of total AUM. ETF AUM reached $5.8 billion, up $0.4 billion sequentially and 58% year-over-year, generating $0.3 billion in positive net flows and sustaining double-digit organic growth. Closed-end and tender offer funds had essentially break-even net flows. By asset class:
• Fixed income: 27% of total AUM; 80% of fixed income strategies beat 3-year benchmarks, and 73% beat 10-year benchmarks; generated positive net flows.
• Alternatives + Multi-Asset: over 28% of total AUM (up from 21% year-over-year, reflecting the first-quarter addition of Keystone); 67% of alternative strategies beat 3-year and 10-year benchmarks; alternatives generated positive net flows.

• For modeling purposes, the Q2 2026 average fee rate of 43.1 basis points is considered a reasonable baseline for future periods, with acknowledgement that fee rates will vary based on market performance and asset mix.
• Adjusted employment expenses as a percentage of revenue are expected to be approximately 54% in Q3 2026, consistent with the firm's long-term outlook, after excluding the one-time discrete expense from Q2.
• Adjusted other operating expenses are expected to fall in a range of $30 million to $32 million per quarter going forward.
• The effective corporate tax rate is expected to remain in a range of 13% to 14% for upcoming quarters.
• A modest decline in interest expense is expected in Q3 2026 following the Q2 credit facility repayment.
• The remaining $30 million of outstanding revolving credit is expected to be repaid in the near term.

• Forward-looking statements about future performance, market cycles, and growth are subject to material risks and uncertainties, and actual results may differ materially from current expectations, as detailed in the firm's SEC filings and news releases.
• Sustained unfavorable market conditions for quality-oriented equity strategies could continue to drive net outflows and pressure overall financial results, given the firm's overweight exposure to this segment.
• The firm's performance-based fee revenue and overall financial results are dependent on market levels and asset mix, which can be volatile.
• There is ongoing exposure to distressed/defaulted loans in the Keystone acquisition portfolio, though management notes current mark-to-market methodologies follow standard industry practice and does not expect material further impacts from this exposure.

Q: What is driving the strong performance and flows in fixed income and alternatives, and what is the upside potential for quality equities? / A: Strength in fixed income comes from diversified, well-performing capabilities across multi-sector, emerging market debt, leveraged loans, and investment grade, which have driven asset growth across product structures. In alternatives, the firm saw a large institutional inflow into a global listed REIT strategy in Q2, and non-quality oriented equity strategies have also seen consistent growth for several quarters. Management noted that while quality equities have outperformed so far in Q3 in a more supportive market, the period is too short to confirm a sustained cycle shift, but the early performance demonstrates the upside potential when market conditions rotate back to quality.

Q: Will there be more discrete compensation expenses like the Q2 item in upcoming quarters, and is the 54% employment expense forecast adjusted for future discrete items? / A: The Q2 discrete expense was a one-time event triggered by the retirement eligibility of multiple investment professionals with outstanding multi-year performance stock awards, which required accelerated full expensing in the quarter. Management confirmed that the 54% employment expense margin guidance for Q3 and future periods reflects the current underlying state of the business, with no expectation of similar discrete items, and that margin will only vary based on actual revenue levels driven by market and flow performance.

Q: What is the expected size, timing, and required firm capital for the planned 2026 CLO issuance? / A: Management noted that recent CLO issuances have historically fallen in the $300 million to $400 million total size range, with the firm typically investing $25 million to $30 million of its own capital. Final specifics are not yet available, but this range is a reasonable expectation for the upcoming issuance.

Q: Why are defaulted/bankruptcy-linked loans in the Keystone portfolio still marked at or near par, and is there potential for future negative impact? / A: Management stated that Keystone follows standard industry mark-to-market methodologies for all its assets, and that the current First Brands/defaulted loan exposure has not had material adverse impact to date. Management does not expect any further material impact from this exposure going forward.