Virtus defies expectations

One of the good things about starting a new venture in a tough economic environment is that expectations are low. That was the case in 2008, when The Phoenix Cos. Inc. decided to spin off its asset management division. The business, renamed Virtus Investment Partners Inc., made its debut as a public company Jan. 1, 2009, with shares priced at $9. With the financial crisis in full bore, the stock slid to $4 in the first two months of trading. Last week, however, it was trading around $190. Though down about 25% from a peak of $248 in mid-May, Virtus is still up by a factor of 20+ since the spinoff. “We held up our end of the bargain for those who held on to our shares,” chief executive George Aylward said. A former certified public accountant at PricewaterhouseCoopers LLP who joined Phoenix in 1996, Mr. Aylward took over leadership of the business in 2006 and persuaded his bosses to spin off Virtus to Phoenix shareholders rather than look for a buyer. “There was a negative connotation to being associated with an insurance company,” Mr. Aylward said. Nevertheless, the challenge for Virtus as an independent company still is the same as it was under Phoenix, he said. “It's about differentiating ourselves in a crowded market. That was hard to do as an insurance subsidiary.” ASSET GROWTH In an industry growing at a clip of 3% to 5% a year, Virtus is more than differentiating itself. At the end of the first quarter, its assets under management were $51 billion, up 35% from the comparable time last year. Revenue rose 38% to $86.2 million and profits were up 160% to $14.2 million. (Virtus will report second quarter financials at the end of July). The firm's sales of open-ended mutual funds — it now has 45 — were up 56% from the first quarter of 2012. At the end of last year, equity funds accounted for 68% of its gross mutual fund sales, while fixed income accounted for 32%. Virtus also has a separately managed account platform. “They've had an incredible run, keyed by a turnaround in investment performance,” said Steven Schwartz, senior vice president of equity research at Raymond James & Associates Inc., who has an “outperform” rating on the stock despite its recent pullback. ADVISER FAVORITE The key to Virtus' success has been its popularity with financial advisers — particularly in the wirehouse channel. Along with in-house investment products, it offers funds run by outside managers such as Vontobel Asset Management Inc. and F-Squared Investments Inc. The strategies run the gamut from fundamental stock picking to quantitative investing to total-return fixed-income strategies. “We don't all drink from the same coffee pot here,” said Jeff Cerutti, head of retail distribution for Virtus. “Financial advisers are increasingly taking on the role of discretionary portfolio managers and they don't want a lot of relationships to deal with. Our value proposition is to offer access to a range of boutique asset managers who can dial up the alpha.” The firm's alpha dog of late has been Rajiv Jain, manager of the $8.5 billion Virtus Emerging Markets Opportunities A Fund (HEMZX). While the fund is down nearly 6% this year, it has an average annual return of 15% over the last 10 years. It has a five-star rating from Morningstar Inc., which named Mr. Jain international stock fund manager of the year in 2012. The closing of the fund to new investors on Feb. 1 (except in designated broker-dealer platforms) and the recent general investor exodus from emerging markets are twolikely reasons Virtus' stock has taken a beating this year. Mr. Schwartz, however, sees enough innovative new offerings from the firm, such as the Virtus Herzfeld Fund (VHFAX), a fund of closed-end funds subadvised by Thomas J. Herzfeld Advisors Inc., which was launched in September, to pick up the slack. “The company has so many different strategies now, if something cools off, something else will pick up,” Mr. Schwarz said. MULTIPLE OFFERINGS The Virtus Foreign Opportunities A Fund (JVIAX), another international equity offering managed by Mr. Jain, is a case in point. It has a hefty 1.45% annual management fee but has outperformed other funds in its category by an annualized 2.5% over the last three years, according to data from Morningstar, which gives it a four-star rating. Two other notable successes for the firm have been the Multi-Sector Short-Term Bond Fund (NARAX), a five-star-rated fund managed by Newfleet Asset Management LLC that now has over $8 billion in assets, and the Premium Alpha Sector A Fund (VAPAX), a fund managed by F-Squared Investments that invests in the nine SPDR Sector ETFs and/or short-term Treasuries. The alpha sector fund has underperformed peers in its category by 1.2% year-to-date, according to Morningstar, but it has continued to attract assets, with $5 billion under management as of this month. Virtus' growth has been driven by its success at the wirehouses, where it has multiple funds on the platforms of all four major Wall Street firms. Despite the fact that many Virtus funds have “above average” expenses, according to Morningstar, the performance and increasingly wide range of offerings have been a hit with advisers. “I like how they tie their products into our investment themes,” said Susan Bordash, a financial adviser with UBS Wealth Management Americas, who uses Virtus funds. “They do a great job with due diligence on outside managers and bring best-of-breed products to the market.” To keep up Virtus' impressive growth, Mr. Aylward plans to ex¬pand the company's offerings in nontraditional- and noncorrelated-asset markets, and get his wholesalers connected to regional and independent broker-dealers, as well as the fast-growing registered investment adviser market. “Financial advisers have limited time in their day and they want someone to help solve their problems,” Mr. Aylward said. “With the flexibility of our model and the diversity of our offerings, I think we can continue to have above-average growth.”