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Tuesday, August 5, 2014

W & R Waters Ivy's Sales

Reported by Tommy Fernandez

Like any serious gardeners, the executives at Waddell & Reed know that you need a number of factors to keep the Ivy healthy.

Waddell reported a solid second quarter, garnering a net income of $83 million or 98 cents per share, compared to $52 million and 61 cents per share a year ago.

During a conference call on the earnings, W & R chief executive Henry Herrmann noted that assets under management ended the quarter at $135.6 billion, up 30 percent compared to the same period last year and 3 percent sequentially. Sales of $7.5 billion rose 10 percent compared with last year's second quarter but fell 25 percent from the previous quarter's record-setting levels, he said.

However, the three recent departures of PMs from Waddell's Ivy Funds led to some speculation on what was happening at the firm, and what impact this could have on flows.

Indeed, future sales were a major topic of discussion during Waddell's conference call on these second quarter results, SeekingAlpha has provided a transcript of the call.

During the call, Ivy Funds Distributors chief executive Thomas Butch said that gross sales for the Asset Strategy fund in July were down roughly 12-percent compared to June, while sales for the High Income fund dipped 20-percent in July compared to June.

To be fair, W & R's flows during the second quarter were up handily though, up 29 percent from a year ago to $1.2 billion, although they below the record levels achieved in the first quarter.

Herrmann, Butch and their colleagues are preparing a number of tools to bolster Ivy's sales in the future.

Of course, the first notable move has been the promotion of two Ivy veterans to the PM team for Ivy's flagship Asset Strategy team.

They are:
  • Cynthia Prince-Fox, senior vice president and portfolio manager. Prince-Fox joined the firm in 1983 and has 31 years of industry experience. At June 30, 2014, she managed approximately $5.3 billion across the Ivy Balanced Fund, Ivy Funds VIP Balanced, Ivy Dividend Opportunities Fund, Ivy Funds VIP Dividend Opportunities, Waddell & Reed Advisors Continental Income Fund and Waddell & Reed Advisors Dividend Opportunities Fund.
  • Chace Brundige, senior vice president and portfolio manager. Brundige joined the firm in 1996 and has 21 years of industry experience. At June 30, 2014, he managed approximately $1.6 billion in assets across Ivy International Growth Fund, Ivy Funds VIP International Growth and Waddell & Reed Advisors International Growth Fund.

    Other strategies outlined in the SeekingAlpha transcript of the conference call, include a broad-based outreach to clients by Ivy PMs, including a recent call by a high income manager with roughly 300 advisors.

    There is also the ongoing effort by Waddell to bolster productivity out of its advisor channel team.

    In response to a question from BofA Merrill Lynch analyst Cynthia Mayer: Butch had this to say on the subject:

    That's a question we talk about a lot. The short answer is yes, but at some point, as your question infers, you can't continue to rely wholly on squeezing more out of the same and headcount has to start growing productively. Certainly, we're not in any sense capped out on productivity potential. It's been a long climb to get from, effectively 6, 7 years ago, being half of the industry productivity, to being about industry productivity for independence today. And so, just being in the same range, certainly doesn't suggest we're capped out. We've done a lot of work to ensure the professionalization, if you will, of our Advisor force, and we've put a lot of things in place that, I can go on and on about, that have helped increase their productivity, and I think there's more to wring out of that. What the number is, I can't really tell you. But there's certainly more because, again, we are just at the industry productivity level. Certainly, we get to a place where growing the Advisor count is important. And again I think that will be steady incremental progress rather than any massive way of the people coming in, because our belief is that that's the right way to build and that finding the right people and bringing them in, and making them successful, rather than hiring masses of people on a less differentiated way is the way to go. So short answer, yes, there's more productivity to wring out, but we have to get moving in the right direction with productive Advisors whom we hire.

    Another notable element of their sales strategy is their approach to wholesaling compensation.

    During the conference call, Butch had this to say on the subject:

    There's a lot of different ways obviously to compensate wholesalers. The dominant way today still is gross sales. I would say, and I hope it doesn't sound cynical and that there's sort of a cyclical dalliance with this notion that net sales is a workable metric for wholesalers, but for lots of reasons, the industry's still sticks to gross sales, because that's the piece that is most controllable by the wholesaler. I think what we've done, over time, is to have a 3-legged stool, if you will, a base compensation, commission that is based substantially on gross sales. And then bonus, in the form of equity, which is based on different metrics, each year, sometimes including net sales. Often including particular emphasis aligned with our strategic priorities. And so it's through that mixture of those 3 things that we think we strike a pretty good balance, which fairly awards the wholesalers and does its best to align their and our corporate interest. Whether this change to a net sales focus finds traction this time, we'll see. Certainly, we've tried to incorporate it and other metrics of import, but not as the sole or dominant metric, by which we pay our people.

    Read more in the SeekingAlpha transcript

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