Capital Return Is Paramount for Virtus (VRTS) - Jefferies

Jefferies analyst, Surinder Thind, met with Virtus Investment Partners (NASDAQ: VRTS) CFO Mike Angerthal and discussed fund outflows, the seed portfolio and the company's capital return program.

Net outflows from retail funds have improved for 4 consecutive months, with Nov totaling approx. -$245M, down from roughly -$760M in July. The primary source of outflows continues to be the former AlphaSector funds (- $215M), excluding which, net flows would be close to breakeven. The Emerging Markets Opportunities fund was the largest positive contributor in Nov with inflows totaling + $120M. Looking ahead, we expect flows to continue exhibiting improvement, albeit with potentially some volatility m/m.

Management indicated that ongoing build out of the existing product set and increasing distribution capabilities are key to setting the stage for long-term growth. The size of the seed portfolio at the end of 3Q was $277M, or almost $300M if the CLO investment is included. This is up from $239M at the end of 2Q and $96M 2 years earlier. The long-term target size of the seed portfolio remains $200-250M, with the current size reflecting some of the unique needs of the seeded products.

Return of excess capital remains an important consideration for mgmt. While mgmt. did not expressly favor one mechanism over another (i.e., share repurchases vs. dividend increase), recent actions suggest share repurchases are likely to remain the primary vehicle. On Oct 21 the Board increased its share repurchase authorization by 1.50M shares to 1.75M (20% of outstanding shares), which gives mgmt. considerable flexibility to be opportunistic. Also worth noting, the quarterly dividend of $0.45 has not been increased in 6 quarters.

No change to the Buy rating or the $152 price target which assumes a forward P/E of 16x, This represents a 2x premium to the peer group.

For an analyst ratings summary and ratings history on Virtus Investment Partners click here. For more ratings news on Virtus Investment Partners click here.

Shares of Virtus Investment Partners closed at $129.56 yesterday.

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