Yesterday Waddell & Reed [profile] reported fourth quarter growth in earnings and assets under management, despite slight outflows [see Waddell's Q4 earnings report].

For the quarter ended December 31, 2012, the Overland Park, Kansas-based parent of Ivy Funds [profile] earned $52.4 million from continuing operations or $0.61 per diluted share, up from $39.4 million and $0.46 in Q4 2011 and $52.1 million and $0.61 in Q3 2012. That $0.61 per diluted share surpassed analysts' estimates of $0.58, Reuters reported.

Waddell & Reed's AUM on December 31, 2012 was $96.4 billion, up two percent from September 30, 2012 and 16 percent from December 31, 2011. AUM rose despite net outflows of $165 million for the quarter.

The Kansas City Business Journal, Kansas City Star and MarketWatch all covered Waddell's earnings. And now Goldman Sachs has reportedly upgraded Waddell from Sell to Neutral.

If you look at Waddell's earnings report and the SeekingAlpha transcript of the earnings call yesterday morning, you'd notice three takeaways.

POINT #1: Q4 Net Outflows Were Probably Just a Blip

POINT #2: Sales Growth is Strong Across Asset Classes

POINT #3: Waddell's Captive Advisor Force Will Expand a Bit

Now to elaborate on those points:

POINT #1: Q4 Net Outflows Were Probably Just a Blip
During the conference call, Waddell chairman and CEO Hank Hermann commented on the slight net outflows, despite strong sales, across Waddell's three channels. He pointed to the fiscal cliff and fears over possible changing tax rates as possible drivers of those outflows.

"Redemptions increased in what appeared to be a year-end push by investors by locking capital gains prior to the much anticipated rise in tax rates," Hermann said, according to the transcript, pointing to both Waddell's captive advisor channel and its wholesale channel (which involves through retirement plans, RIAs and other broker-dealers).

Net outflows for Q4 were $165 million, compared to $5.1 billion of sales. And Hermann said that the outflows have already more than reversed.

It should be noted that January to date has seen a meaningful moderation in redemptions and a sharp improvement in sales volume. At this time, it is still too early to tell how sustainable the improvement is.

The inflow of funds maybe due in part to investors reinvesting funds withdrawn at the end of 2012, but it’s also possible that investors have found renewed confidence in the equity markets ... Based on what’s going on right now in January we’re again in very substantial positive flows.

When asked by Barclays Capital analyst Roger Freeman about the relative size of the January inflows so far compared with the Q4 outflows, Herrmann offered a hint with no numbers: "The net inflows are substantially more than the outflows in the fourth quarter."

POINT #2: Sales Growth is Strong Across Asset Classes
Citigroup analyst Bill Katz asked where those inflows are heading. Thomas Butch, chief marketing officer for Waddell, said that Waddell's seeing continued fixed income inflows even as equity inflows rebound:

We’ve seen a significant increase in the appetite for our equity products and we have not seen a concurrent diminution of the appetite for the fixed income products that had been working, which is to say, the sales are broad based and in that sense encouraging.

Butch later pointed to Waddell's broad allocation strategies (like the giant Ivy Asset Strategy Fund, as well as balanced and global income allocation offerings), mid-cap growth, small cap growth, and eventually core equity as benefiting from the equity flows turnaround. Hermann mentioned mid-cap core and large cap core, too.

POINT #3: Waddell's Captive Advisor Force Will Expand a Bit
Waddell has three distribution channels: an institutional channel targeted at defined benefit pension plans and other institutional investors; a wholesale channel targeted at outside broker-dealers (and their advisors), RIAs and retirement platforms for 401(k)s and the like; and a captive, advisor force.

On the call, Barclays' Freeman highlighted the first increase in Waddell's advisor count for a year. On December 31, 2012, Waddell boasted 1,763 advisors, up 10 from September 30, 2012. Freeman asked if Waddell expects that number to rise again. Butch responded:

We certainly hope it will. I think if you look at the several quarters, it’s moved in a very narrow range and that suggest over the fact that we’re probably near a bottom in the total number and obviously we’re aggressively in the market seeking to find the right people. So we would hope to grow at this year.

For more information, turn to Waddell's earnings report and the SeekingAlpha transcript of the earnings call. 

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