Things would be looking good at Waddell & Reed Financial's [profile] mutual fund business, at least if you left out its giant Ivy Asset Strategy [profile] and High Income funds.

Yesterday the Overland Park, Kansas-based mutual fund firm and brokerage revealed third quarter 2014 earnings (excluding a charge and tax benefit related to a subadvisory agreement) per diluted share of $0.94, beating analysts' estimates by $0.02 according to Seeking Alpha. On a conference call with analysts, Waddell chairman and CEO Hank Hermann and other top Waddell execs put the results into context. Asset Strategy and High Income, and their recent PM turnover, were big topics throughout the call [see Seeking Alpha's transcript of the call].

Waddell president Michael Avery even spent part of the call explaining (and defending) Asset Strategy's current portfolio allocation.

Where is Waddell's mutual fund business shining? Tom Butch -- president and CEO of Ivy Funds Distributor, as well as executive vice president of all of Waddell and chairman and CEO of the Waddell & Reed, Inc. brokerage -- told BofA Merrill Lynch analyst Michael Carrier that in Q3 2014 the shop's balance, energy, international core equity, "muni high", and science and technology funds all did well in terms of net flows.

"By most measures this was a strong quarter," Hermann said earlier on the call, addressing the concentrated outflows and the factors that contributed to those outflows:

However, elevated flows were disappointing. The quarter saw a $3 billion in net outflows, making this the first negative quarter since December of 2012. In terms of sheer size, it was the largest quarter in our history as a publicly traded company.

Let me offer some context to better understand the situation. Mutual fund outflows during the quarter centered on our asset strategy and high income portfolios, which together have, for the past several years, been the largest contributor to our organic growth.

Outflows from Asset Strategy totaled $1.3 billion. Current performance ... continues to trail its peer group in near-term periods, while remaining competitive over the long term. Outflows from high-income fund were $1.8 billion. We believe this was principally a function of shifts in investor sentiment as the entire asset class saw similar spikes in redemption during the quarter. The fund's relative performance remained strong across all periods …

Though its influence on flows is hard to quantify, the recent PM turnover we experienced, something very unusual for us, was clearly not helpful. We replaced the departed personnel with experienced successful managers from within our organization and believe the confusion over these departures will fade in time.

And the pain has continued in October, with Waddell suffering $1.2 billion in outflows as of Friday (10/24).

Yet there is good news, too. Chip Oat of Tradition Capital asked, if other than Asset Strategy and High Income, "the rest of the firm is at worst having a pretty decent year?" Butch noted that, without those two funds and the institutional separate accounts, mutual funds had net Q3 2014 inflows of about $600 million.

"Underneath those 2 products, which of course, have been the lead horses of the growth of the fund family over quite some period of time, underneath that there's been a lot of good momentum, though not at the same magnitude in a pretty broad span of funds," Butch said on the call. "And we've worked very hard to create that kind of diversification."

"Because of the sizable influence on total flows, the outflows of Asset Strategy and High Income obscured the sales results among other other funds, which in aggregate, remained meaningfully positive during the quarter," Hermann said earlier on the call.

And the top brass at Waddell note see positive notes long run for the big outflow spots right now. They noted that high yield fixed income as an asset class is out of favor right now, but that Waddell's high income fund has strong relative performance which will help when the asset class comes back into favor. And they point to Asset Strategy as a long-term play, with the long-term performance to back it up. In responding to a question from Morningstar analyst Greggory Warren, Avery even gave a long discussion about the recent PM turnover and about Waddell's long-term PM training strategy.

To dig deeper into Waddell's results, read the full earnings release and Seeking Alpha's transcript of the earnings call. 

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