Three Things to Know From Manning and Napier's Earnings
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Thursday, February 14, 2013

Three Things to Know From Manning and Napier's Earnings

The senior management team at Manning & Napier perceives a change in the market’s headwinds, and they have a plan for seizing upon this weather change.

If you look at SeekingAlpha’stranscript of the fourth quarter earnings conference call as well as the company’s earnings info, you’ll find at least three good takeaways on how the company is enjoying the change in investment climate.

But first, the basics. Manning reported a whole lot of different varieties of income for the quarter.

Firstly, it reported fourth quarter 2012 economic income of $40.5 million, compared with $40.0 million in the fourth quarter of 2011, and $39.6 million in the third quarter of 2012.

Also for the fourth quarter of 2012, economic net income was $25.0 million, or 28-cents per adjusted share, compared with $24.7 million, or 27-cents per adjusted share in the fourth quarter of 2011, and $24.4 million, or 27-cents per adjusted share in the third quarter of 2012.

Meanwhile, on a GAAP basis, net income attributable to the controlling and non-controlling interests for the fourth quarter was $11.5 million, compared with net loss of $179.7 million in the fourth quarter of 2011 and net income of $21.1 million in the third quarter of 2012. The increase in net income compared to the fourth quarter of 2011 is attributable to the decrease in non-cash reorganization-related share-based compensation expense of $188.1 million, while the sequential decrease in net income is attributed to an increase in the non-cash reorganization-related share-based compensation expense of $9.9 million.

Finally, GAAP net loss attributable to the common shareholders for the fourth quarter of $0.3 million, or $0.02 per basic and diluted share, reflects the public ownership of the Company's subsidiary, Manning & Napier Group, LLC. The remaining ownership interest is attributed to the other members of Manning & Napier Group, LLC.

Now, we go to the takeaways.

POINT #1: A Change In Market Headwinds Plays to Manning’s Favor
POINT #2: Manning Is Investing A Lot in Distribution
POINT #3: Manning See Plenty of Relationship Opportunities to Leverage for Further Growth
Now, to elaborate on these points.

POINT #1: A Change In Market Headwinds Plays to Manning’s Favor
Chief executive Patrick Cunningham had this to say on the subject of headwinds:
So let’s start with the market. As you know, global equity markets ended the year with strong returns despite continued economic and political challenges. Both the S&P 500 and the All Country World Index SUX were up more than 15%. In a reversal from 2011, bonds were in line with historic returns and stocks outperformed bonds.

For the past several quarters we’ve talked about some of the market trends that have worked against our active fundamental approach to investing five portfolios. For example, time-market correlations and a preference for lower beta and dividends have been headwinds for us.

In 2012 we saw several of these headwinds dissipate, particularly towards the end of the year. For example, high equity correlations were significantly reduced by the end of 2012. Equity dividend yields, as driving as returns, reversed during the third and fourth quarters. Yields on U.S. Treasuries were range bound for most of the year and a higher percentage of active managers were able to outperform market benchmarks this past year.

We discussed in past calls that we would expect a reduction in these headwinds to lead to improved results for our various track record. In 2012, we saw just that as many of the peer’s investment strategies delivered strong, absolute and relative returns by year end.

POINT #2: Manning Is Investing A Lot in Distribution
Cunningham described Manning’s investments in distribution as follows:
As we enter 2013, we are continuing to focus on the depth of our multi-channel distribution structure and new products and solutions. We added six new U.S. based hires to our direct sales channel over the course of 2012. We continue to integrate those new hires into the organization and we see early signs of adoption in some of the new territories already.

In 2013, we plan to continue this expansion with the focus on the West Coast. In addition, we added two dedicated service representatives this January to enhance service levels with high net worth individuals and thereby free up time for sales representatives to do more prospecting.

Within our intermediary channel we added two key accounts position, which we expect to strengthen our relationships with targeted brokers and retirement platforms. We also added a dedicated platform sales position which we expect to drive new sub-advisory and platform relationships. These hires were largely made at the end of 2012, so we expect the impact of these roles to be felt mid-to-late 2013.

Beyond deepening these current channels, we continue to look at ways to expand our global distribution including leveraging our current relationships in Europe and expanding into new markets.

We continue to incubate several alternative strategies with competitive initial results. In addition these proprietary strategies, we’re actively reviewing potential acquisition targets that would help us get up and running in the alternative space more quickly.

Cunningham also had this to say about the sales hires:
Clearly we have an existing sales force that’s much larger than the new hires we made last year. So, I would say the fact that we have had, you know, for the majority of our investment strategies, and the good absolute and positive returns that we closed the year with, that there’s no question that our existing sales force has had – you know, the intense service environment has abated. So, I think that will have the, you know, the biggest impacts on new production going forward.

However, the new hires that we made, and we’ve made – you know, some of them were made early in the mid, and some in the latter part of the year. We’ve already seen production out of most of the hires that we have made through the recent past. So, they are – you know, the hires that we’ve made that are more regional in nature, meaning that they dig into a geography and will sell to individuals, endowments, small businesses, not for profits, they tend to get closing faster. They tend to close relatively smaller, you know, pieces of business, but they tend to close faster versus the institutional representative who are, you know, looking at much larger potential closes that typically have a longer sale cycle.

So, all in all we’re pleased with the progress that the new hires have made. And we’re certainly pleased with the performance allowing our existing long-term reps to once again drive new assets.
POINT #3: Manning See Plenty of Relationship Opportunities to Leverage for Further Growth
Both Cunningham and chief financial officer James Mikolaichik had interesting things to say regarding client relationships.

First, Cunningham had these words:
First of all let me point out that we have, you know, we have hundreds of relationships. So we have, you know, - as we look at these platforms, you know, - when you go to a single institution it can have five, six, seven different platforms on them. So, we continue to believe that there’s tremendous growth potential on the platform side of things. Both with companies that we already have a couple of relationships we think we can expand those, and there are some companies that we don’t have any relationships currently that we’re hopefully going to penetrate over time.

That said, you know, when you get on a managed mutual fund platform where they allocated a certain amount to you, you reached the point where you have saturated that particular platform. And that’s what I mean by mature relationships. And we don’t have any – we’ve had no single relationship or mature relationship that represents a significant portion of our [inaudible]

But with those, there’s a combination with our U.S. equity of some redemptions based upon performance. There’s in the case of our non-U.S. equity, it’s more of a rebalancing. So, it’s a combination of factors that I believe have impacted some of the flows on those mature relationships.

Later in the discussion Mikolaichik elaborated on these relationships in this way:
…, in total, I think what we saw through all the channels is what Patrick said. Is the direct channel brought assets in, and that’s where we have the real direct client relationships, and we saw that in, you know, non-U.S. and in multi-asset class products. And we saw it in the intermediary space we continued to see reasonable traction, and we heard good things from the sales force in that space as well.

Where the challenges came, I think we’re more on a few platforms that were larger relationships, and they were U.S. equity relationships. So, U.S. equity across the board a bit from a performance standpoint, and a bit from the markets and the environment as a whole, not really looking to put a lot of money to work in U.S. equity and active U.S. equity. That seems to be the softer spot.

The rest, I think, we’re relatively happy with how we moved through the year, as we continue to see a lot of positive traction.

For more information, turn to SeekingAlpha’stranscript of the fourth quarter earnings conference call as well as the company’s earnings info.

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