Waddell & Reed [profile] wants to get up close and personal with investors and their intermediaries. The sale of Legend Group is just one of many pieces in this process.

During a conference call Thursday with analysts Waddell chairman, president, chief executive officer, and director Henry John Herrmann outlined some of the company’s plans, and challenges, to kick investor courting up a notch. Helping him was Thomas William Butch,who also holds several positions with the company, including chief marketing officer, executive vice president, chairman of Waddell & Reed Inc.; chief executive officer of Ivy Funds Distributor Inc.; president of Waddell & Reed Inc., and president of Ivy Funds Distributor Inc.

The three major points to take away from the call are as follows:

Point 1: W&R Wants to Recharge Distribution in All Three Channels
Point 2: W&R Is Still Betting on Equity
Point 3: W&R Is Looking for The Right Song That Will Resonate With Investors


Before we get into these points, here are some important numbers from Herrmann regarding earnings and distribution.

For example, Waddell’s third quarter income from diluted share of 61-cents rose 27 percent sequentially, and 33 percent year-over-year. Its operating margin finished the quarter at 27.2 percent, a multi-year high.

Gross sales for the quarter were $5.2 billion, down 19.5 percent compared to the same period last year. Total inflows were $826 million, down from $1.3 billion a year ago.

Here’s what Herrmann had to say about performance across all three channels:

October saw a very modest [outflow] in all 3 channels.

Looking at the contribution of each channel during the quarter, Advisors had sales of $906 million, $140 million less than the second quarter, but a $39 million increase compared with the same period last year.

The quarter's redemption rate was 9.7%, far below the industry's approximate 25% rate. The percentage of sales and assets in fee-based products continue to increase, adding growing predictability to revenues.

Our Wholesale channel had gross sales of $3.6 billion during the quarter and inflows of $670 million.

Fixed income sales continue to expand to account for nearly 50% of total sales during the quarter.

On a gross sales basis, asset strategy remained one of our top-selling products in the Wholesale channel, with new sales of nearly $1 billion during the quarter. However, redemptions have kept this product in outflows over the past 4 quarters, despite good relative performance.

Sales of our Institutional channel of $721 million, and net inflows of $231 million, opportunities for new mandates remained favorable, especially for large cap core equity.

Bearing these numbers in mind, we now go to the three takeaways.

Point 1: W&R Wants to Recharge Distribution in All Three Channels

Of course, the sale of Legend, which led to a noncash charge of $42.4 million for the quarter, was one piece of this effort. Herrmann had this to say on the subject:

The purchase of Legend in 2000 marked our first foray into selling our products beyond Wadell & Reed's proprietary distribution. Legend has proved to be a steady source of flows for a broker-dealer of its size, and today has assets of approximately $560 million in our products. At the same time, managing a separate broker-dealer whose principal business, the 403(b) Market is changing rapidly has provide -- proven to be, excuse me, a challenge. Therefore, this transition allows us to continue and blast our efforts to sell our product through Legend, in its new partner, First Allied, with that responsibility in diversion of managing this broker-dealer business, which for us is no longer a core asset.

In response to an analyst question, Butch had this to say about Waddell’s distribution efforts:

[We] made a small equity investment about a year ago in a start-up distributor. And that distributes exclusively offshore. We have our asset strategy and high income products now in that offshore structure. That is still a nascent business, but that has -- we believe is a good way to get started. We have had good response with our domestic distribution partners on their offshore platform just relative to those 2 products. I think, Hank also mentioned that institutionally, we're seeing potentially good opportunities through certain of our consultants outside the United States. Second, relative to your broader question, and I'll defer back to Hank on it, I would say that we see very good but obviously, differing opportunities in each of our businesses. There's a lot of growth trajectory on the Wholesale side, obviously and Institutionally as well. And you are aware of our efforts to grow the Advisors business, which is important and foundational to the organization. But from a distribution perspective, there's -- we believe enormous opportunity to continue to grow the Wholesale business, and the Institutional business in parallel with that.

Herrmann added to the discussion these comments:

So what I'd say is, that the strategy has continued to execute on tactics. We discussed the strategy part of it in different ways over time. The last really significant strategy move was to get into the Wholesale channel that continues to be very effective for us. And we're going to continue to try to bring products in the marketplace with a solid performance, a proven track record, stable -- the usual kind of response you're going to get. But we don't have any magic bullet at the moment that's going to completely change the profile of anything we're doing.

Point 2: W&R Is Still Betting on Equity

Two big products of Waddell’s are the Core and Asset strategies, both of which have heavy concentrations in equity.

Herrmann had this to say about the Core Fund:

The pipeline looks as good as it ever has for that product, and pretty much true for the Institutional business. Core could be pretty big, relative to where it stands right now. Obviously, we're talking about very large capitalization opportunity. And as -- unlike a lot of other, I guess, issues about what's transpiring, actively managed Core, that's outperforming, it's been attractive alternative in a number of different places. And we'll just see how that unfolds. At present time, there's interest in sovereign wealth funds and also on our Institutional area where there's somewhat of a backlash against some of the other alternatives, including index.

An analyst, asking Butch about the Asset strategy, which has outperformed but still seen outflows, pondered whether the drivers for the outflows were a function of investors still favoring fixed income, or three-year numbers being weak, or concerns over market volatility.

Butch had this response:

It is some combination of the three of those. And it is frustrating that given the funds' very good performance this year and on a 5-year basis that we continue to experience redemptions. Each of the factors that you identified are biased towards fixed income when the weight of this fund has been in equities and that thesis has been proven out. But I think, the overwhelming bias towards fixed income and towards the perception of lack of volatility is sort of the headwind, relative to the product. We're out telling the story aggressively.

Point 3: W&R Is Looking for The Right Song That Will Resonate With Investors

Herrmann, at one point, had said that “that there's a bunch of things that are going on right now, that kind of confusing flows altogether.”

“Most probably, the most important one is the election and what's the outcome of that, and what will people's presumptions be as a result in terms of what they should do about capital gains and dividends and that sort of stuff,” he added.

Butch had this to say about reaching out to investors:

I guess, what I would say is that there's no singular way to get the message out. And it's a combination, obviously. And I think in this order of very effective wholesaling, very effective and persuasive sales and value added pieces that support that, and advertising is sort of the bulwark underneath that. I don't think I would look to us to dramatically ramp up advertising as a means of getting out that message. We believe our wholesalers are very well armed with compelling sales materials, compelling product pieces, compelling product and market knowledge to take to market. And that is the first line of getting that or any message out. Obviously, support of context and a consistent brand that is a function of advertising, web presence and all the sales support materials is critical to that as well. The research that we see, and we saw it as recently as yesterday, really suggest that our brand message of being a global, highly-capable and well-diversified manager has continued to grow. And it's continued to resonate in the Advisor community. So that combination of everything that we have been doing has been validated and quantified in the research that we have seen. And so, I think, I would look for us to continue that sort of mix going forward.

To read more about this discussion, go to the conference call transcript at SeekingAlpha.  

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