MN 10-Q Q2 2013
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q 
_____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number: 001-35355
 _____________________________________________________________
MANNING & NAPIER, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
45-2609100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
290 Woodcliff Drive
Fairport, New York
 
14450
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(585) 325-6880
_____________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 
Class
  
Outstanding at August 7, 2013
Class A common stock, $0.01 par value per share
  
13,634,246
Class B common stock, $0.01 par value per share
  
1,000
 




TABLE OF CONTENTS
 
 
 
Page
Part I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
Item 1.
Item 1A.
Item 6.
 
 
 
 
In this Quarterly Report on Form 10-Q, “we”, “our”, “us”, the “Company”, “Manning & Napier” and the “Registrant” refers to Manning & Napier, Inc. and, unless the context otherwise requires, its consolidated direct and indirect subsidiaries and predecessors.
 
 


i

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Manning & Napier, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
 

 
June 30, 2013
 
December 31, 2012
 
 
(unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
126,106

 
$
108,324

Accounts receivable
 
22,790

 
22,962

Accounts receivable—Manning & Napier Fund, Inc.
 
14,070

 
13,767

Investment securities, at fair value
 
10,949

 
13,082

Prepaid expenses and other assets
 
5,089

 
7,014

Total current assets
 
179,004

 
165,149

Property and equipment, net
 
4,304

 
4,460

Net deferred tax assets, non-current
 
48,827

 
48,571

Total non-current assets
 
53,131

 
53,031

Total assets
 
$
232,135

 
$
218,180

Liabilities
 
 
 
 
Accounts payable
 
$
675

 
$
1,231

Accrued expenses and other liabilities
 
37,926

 
38,872

Deferred revenue
 
11,312

 
10,342

Total current liabilities
 
49,913

 
50,445

Amounts payable under tax receivable agreement, non-current
 
43,989

 
43,989

Total non-current liabilities
 
43,989

 
43,989

Total liabilities
 
$
93,902

 
$
94,434

Commitments and contingencies (Note 8)
 


 


Shareholders’ equity
 
 
 
 
Class A common stock, $0.01 par value; 300,000,000 shares authorized; 13,634,246 and 13,583,873 issued and outstanding at June 30, 2013 and December 31, 2012, respectively
 
$
136

 
$
136

Class B common stock, $0.01 par value; 2,000 shares authorized, 1,000 shares issued and outstanding at June 30, 2013 and December 31, 2012
 

 

Additional paid-in capital
 
203,704

 
198,117

Retained deficit
 
(37,143
)
 
(33,392
)
Accumulated other comprehensive income
 

 

Total shareholders’ equity
 
166,697

 
164,861

Noncontrolling interest
 
(28,464
)
 
(41,115
)
Total shareholders’ equity and noncontrolling interest
 
138,233

 
123,746

Total liabilities, shareholders’ equity and noncontrolling interest
 
$
232,135

 
$
218,180

The accompanying notes are an integral part of these consolidated financial statements.


1

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
 
Investment management services revenue
 
$
92,973

 
$
81,529

 
$
183,229

 
$
166,543

Expenses
 
 
 
 
 
 
 
 
Compensation and related costs
 
47,321

 
46,570

 
95,804

 
74,302

Distribution, servicing and custody expenses
 
16,495

 
14,122

 
32,410

 
28,352

Other operating costs
 
7,750

 
7,608

 
15,529

 
14,641

Total operating expenses
 
71,566

 
68,300

 
143,743

 
117,295

Operating income
 
21,407

 
13,229

 
39,486

 
49,248

Non-operating income (loss)
 
 
 
 
 
 
 
 
Interest expense
 
(3
)
 
(8
)
 
(6
)
 
(12
)
Interest and dividend income
 
71

 
50

 
134

 
69

Net capital gains (losses) on investments
 
(298
)
 
(616
)
 
(48
)
 
(236
)
Total non-operating income (loss)
 
(230
)
 
(574
)
 
80

 
(179
)
Income before provision for income taxes
 
21,177

 
12,655

 
39,566

 
49,069

Provision for income taxes
 
2,580

 
3,199

 
4,577

 
5,189

Net income attributable to controlling and noncontrolling interests
 
18,597

 
9,456

 
34,989

 
43,880

Less: net income attributable to noncontrolling interests
 
18,337

 
11,292

 
34,385

 
42,813

Net income (loss) attributable to Manning & Napier, Inc.
 
$
260

 
$
(1,836
)
 
$
604

 
$
1,067

 
 
 
 
 
 
 
 
 
Net income (loss) per share available to Class A common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.02

 
$
(0.14
)
 
$
0.04

 
$
0.08

Diluted
 
$
0.02

 
$
(0.14
)
 
$
0.04

 
$
0.08

Weighted average shares of Class A common stock outstanding
 
 
 
 
 
 
 
 
Basic
 
13,618,193

 
13,583,873

 
13,601,128

 
13,583,873

Diluted
 
13,718,182

 
13,583,873

 
13,601,128

 
13,583,873

Cash dividends declared per share of Class A common stock
 
$
0.16

 
$
0.16

 
$
0.32

 
$
0.32

The accompanying notes are an integral part of these consolidated financial statements.


2

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Net income attributable to controlling and noncontrolling interests
 
$
18,597

 
$
9,456

 
$
34,989

 
$
43,880

Net unrealized holding loss on investment securities, net of tax
 

 
(11
)
 

 
(1
)
Comprehensive income
 
$
18,597

 
$
9,445

 
$
34,989

 
$
43,879

Less: Comprehensive income attributable to noncontrolling interest
 
18,337

 
11,281

 
$
34,385

 
$
42,812

Comprehensive income (loss) attributable to Manning & Napier, Inc.
 
$
260

 
$
(1,836
)
 
$
604

 
$
1,067

The accompanying notes are an integral part of these consolidated financial statements.


3

Table of Contents

Manning & Napier, Inc.
Consolidated Statement of Shareholders’ Equity
(In thousands, except share data)
(Unaudited) 
 
 
 
Common Stock –  class A
 
Common Stock – class B
 
Additional
Paid in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non
Controlling
Interest
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance—December 31, 2012
 
13,583,873

 
$
136

 
1,000

 
$

 
$
198,117

 
$
(33,392
)
 
$

 
$
(41,115
)
 
$
123,746

Net income
 

 

 

 

 

 
604

 

 
34,385

 
34,989

Distributions
 

 

 

 

 

 

 

 
(53,986
)
 
(53,986
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 

 

 

Issuance of stock for restricted stock grants
 
50,373

 

 

 

 
256

 

 

 

 
256

Equity-based compensation
 

 

 

 

 
6,251

 

 

 
38,745

 
44,996

Dividends declared on Class A common stock
 

 

 

 

 

 
(4,355
)
 

 

 
(4,355
)
Purchase of Class A units of Manning & Napier Group, LLC held by noncontrolling interests (Note 3)
 

 

 

 

 
(920
)
 

 

 
(6,493
)
 
(7,413
)
Balance—June 30, 2013
 
13,634,246

 
$
136

 
1,000

 
$

 
$
203,704

 
$
(37,143
)
 
$

 
$
(28,464
)
 
$
138,233

The accompanying notes are an integral part of these consolidated financial statements.


4

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Six months ended June 30,

 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net income
 
$
34,989

 
$
43,880

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
 
Equity-based compensation
 
44,996

 
27,746

Depreciation
 
949

 
839

Change in amounts payable under tax receivable agreement
 

 
39

Net loss on investment securities
 
48

 
236

Deferred income taxes
 
1,403

 
1,701

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
 
 
 
 
Accounts receivable
 
172

 
(1,708
)
Accounts receivable—Manning & Napier Fund, Inc.
 
(303
)
 
555

Prepaid expenses and other assets
 
522

 
324

Accounts payable
 
(556
)
 
14

Accrued expenses and other liabilities
 
(1,105
)
 
1,914

Deferred revenue
 
970

 
527

Net cash provided by operating activities
 
82,085

 
76,067

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(556
)
 
(1,774
)
Sale of investments
 
5,843

 
1,792

Purchase of investments
 
(3,759
)
 
(5,317
)
Net cash provided by (used in) investing activities
 
1,528

 
(5,299
)
Cash flows from financing activities:
 
 
 
 
Distributions
 
(53,986
)
 
(54,030
)
Dividends paid
 
(4,347
)
 
(2,173
)
Payment of capital lease obligations
 
(85
)
 
(48
)
Payment of costs directly associated with issuance of Class A common stock
 

 
(598
)
Purchase of Class A units of Manning & Napier Group, LLC
 
(7,413
)
 

Net cash used in financing activities
 
(65,831
)
 
(56,849
)
Net increase in cash and cash equivalents
 
17,782

 
13,919

Cash and cash equivalents:
 
 
 
 
Beginning of period
 
108,324

 
81,208

End of period
 
$
126,106

 
$
95,127

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

Manning & Napier, Inc.
Notes to Consolidated Financial Statements

Note 1—Organization and Nature of the Business
Manning & Napier, Inc. ("Manning & Napier", the "Company") provides a broad range of investment solutions through separately managed accounts, mutual funds, and collective investment trust funds, as well as a variety of consultative services that complement its investment process. Founded in 1970, the Company offers equity and fixed income portfolios as well as a range of blended asset portfolios, such as life cycle funds, that use a mix of stocks and bonds. Headquartered in Fairport, New York, the Company serves a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations.
The Company was incorporated on June 22, 2011 for the purpose of facilitating an initial public offering ("IPO") of 13,583,873 shares of its Class A common stock and to become the sole managing member of Manning & Napier Group, LLC and its subsidiaries ("Manning & Napier Group"), a holding company for the investment management businesses conducted by its operating subsidiaries. Prior to the series of transactions to reorganize the capital structure in advance of the IPO, the Company was a group of privately-held, affiliated companies. The diagram below depicts the Company's organization structure as of June 30, 2013.
  
(1)
Manning & Napier is the managing member of Manning & Napier Group. The operating subsidiaries of Manning & Napier Group include Manning & Napier Advisors, LLC ("MNA"), Manning & Napier Advisory Advantage Company, LLC, Exeter Advisors I, LLC, Manning & Napier Alternative Opportunities, LLC, Perspective Partners LLC, Manning & Napier Information Services, LLC, Manning & Napier Benefits, LLC, Manning & Napier Investor Services, Inc. and Exeter Trust Company.
Note 2—Summary of Significant Accounting Policies
Critical Accounting Policies
There have been no significant changes in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.
The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2012. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year.
Basis of Presentation

6

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting and include all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from these estimates or assumptions.
In the quarter ended March 31, 2013, the Company changed the presentation of certain items within its consolidated statements of operations. The Company incurs 12b-1 distribution and servicing fees ("12b-1 fees") that are due to third party distributors of the Manning & Napier Fund, Inc. series of mutual funds (the "Fund") based on the assets under management of designated share classes of the Fund. The Company incurs sub-custodian fees due to a third party that provides custodial services for those assets where Exeter Trust Company is the named custodian. The Company changed its presentation of 12b-1 fees and sub-custodian fees from "Other operating costs" to "Sub-transfer agent and shareholder service costs" to more appropriately reflect the nature of these costs as distribution and asset-based. The line was renamed "Distribution, servicing and custody expenses" to reflect the broader nature of the underlying expenses.
Amounts for the comparative prior fiscal year periods have been reclassified to conform to the current year presentation. This reclassification had no impact on previously reported total operating expenses, net income or financial position and do not represent a restatement of any previously published financial results. The impact is illustrated below:
 
 
Three months ended June 30, 2012
 
Six months ended June 30, 2012
 
 
(in thousands)
Sub-transfer agent and shareholder service costs, as previously reported
 
$
12,471

 
$
25,145

Reclassification
 
1,651

 
3,207

Distribution, servicing and custody expenses, as reclassified
 
$
14,122

 
$
28,352

 
 
 
 
 
Other operating costs, as previously reported
 
$
9,259

 
$
17,848

Reclassification
 
(1,651
)
 
(3,207
)
Other operating costs, as reclassified
 
$
7,608

 
$
14,641

Principles of Consolidation
Manning & Napier holds an approximately 14% economic interest in Manning & Napier Group, but as managing member controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statements of financial condition with respect to the remaining economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”) and Manning & Napier Capital Company, LLC (“MNCC”).
All material intercompany transactions have have been eliminated in consolidation.
Operating Segments
The Company operates in one segment, the investment management industry. The Company primarily provides investment management services to separately managed accounts, mutual funds and collective investment trust funds. Management assesses the financial performance of these vehicles on a combined basis.
Advisory Agreements
The Company derives significant revenue from its role as advisor to the Fund and the Exeter Trust Company Collective Investment Trust (“CIT”) investment vehicles.
The Company's investments in the Fund amounted to approximately $0.2 million as of June 30, 2013 and December 31, 2012.
Fees earned for advisory related services provided to the Fund and CIT investment vehicles were approximately $48.2 million and $94.7 million for the three and six months ended June 30, 2013, respectively. Fees earned for advisory related services provided to the Fund and CIT investment vehicles were approximately $42.0 million and $84.9 million for the three and six months ended June 30, 2012, respectively. These amounts represent greater than 10% of revenue in each period.
Recent Accounting Pronouncements

7

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of Accumulated Other Comprehensive Income. The adoption of this amendment on January 1, 2013 did not have a material impact on the consolidated financial statements and related disclosures.
Note 3—Noncontrolling Interests
Manning & Napier holds an approximately 14% economic interest in Manning & Napier Group, but as managing member controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statement of financial condition with respect to the remaining approximately 86% economic interest in Manning & Napier Group held by M&N Group Holdings and MNCC. Net income attributable to noncontrolling interest on the statements of operations represents the portion of earnings or loss attributable to the economic interest in Manning & Napier Group held by the noncontrolling members. A reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.” is detailed as follows:
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
Income before provision for income taxes
 
$
21,177

 
$
12,655

 
$
39,566

 
$
49,069

Less: loss before provision for income taxes of Manning & Napier, Inc. (a)
 
(255
)
 
(397
)
 
(564
)
 
(763
)
Income before provision for income taxes, as adjusted
 
21,432

 
13,052

 
40,130

 
49,832

Controlling interest percentage (b)
 
13.9
%
 
13.8
%
 
13.9
%
 
13.8
%
Net income attributable to controlling interest
 
2,977

 
1,803

 
5,576

 
6,884

Plus: loss before provision for income taxes of Manning & Napier, Inc. (a)
 
(255
)
 
(397
)
 
(564
)
 
(763
)
Income before income taxes attributable to Manning & Napier, Inc.
 
2,722

 
1,406

 
5,012

 
6,121

Less: provision for income taxes of Manning & Napier, Inc. (c)
 
2,462

 
3,242

 
4,408

 
5,054

Net income (loss) attributable to Manning & Napier, Inc.
 
$
260

 
$
(1,836
)
 
$
604

 
$
1,067

________________________
a)
Manning & Napier, Inc. incurs certain expenses that are only attributable to it and are therefore excluded from the net income attributable to noncontrolling interests.
b)
Income before provision for income taxes is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc. The amount represents the Company's weighted ownership of Manning & Napier Group for the respective periods.
c)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Manning & Napier, Inc. and (ii) the provision for income taxes of Manning & Napier, Inc. which includes all U.S. federal and state income taxes. The consolidated provision for income taxes totaled approximately $2.6 million and $4.6 million for the three and six months ended June 30, 2013, respectively. The consolidated provision for income taxes totaled approximately $3.2 million and $5.2 million for the three and six months ended June 30, 2012, respectively.
On March 29, 2013, M&N Group Holdings exchanged 498,497 Class A units of Manning & Napier Group for approximately $7.4 million in cash, $6.5 million of which was attributable to the noncontrolling interest. Subsequent to the exchange, the Class A units were retired. In addition, as further described in Note 10, on April 30, 2013 40,480 units of Manning & Napier Group were redeemed and re-issued as Class A common stock and 9,893 shares of of Class A common stock were granted resulting in Manning & Napier, Inc. acquiring an additional 50,373 units of Manning & Napier Group. As a result of the aforementioned transactions, the Company's economic ownership interest in Manning & Napier Group increased to 14%. As of June 30, 2013, M&N Group Holdings and MNCC may exchange 75,861,023 units of Manning & Napier Group for shares of the Company's Class A common stock pursuant to the terms of the exchange agreement entered into at the time of the IPO.

8

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

During both the six months ended June 30, 2013 and 2012, the Company distributed approximately $54.0 million to noncontrolling members. None of these distributions were payments pursuant to the tax receivable agreement (“TRA”).
At June 30, 2013 and December 31, 2012, the Company had recorded a liability of $45.9 million, representing the estimated payments due to the selling unit holders under the TRA. The Company made no payments pursuant to the TRA during either of the six months ended June 30, 2013 and 2012. During the next twelve months, the Company expects to pay approximately $1.9 million of the total amount recorded at June 30, 2013. The basis for determining the current portion of the payments under the TRA is the expected amount of payments to be made within the next 12 months. The long-term portion of the payments under the TRA is the remainder. The Company recorded an adjustment of less than $0.1 million to the liability during the six months ended June 30, 2012 to account for changes in enacted tax rates in various states.
Obligations pursuant to the TRA are obligations of Manning & Napier. They do not impact the noncontrolling interest. These obligations are not income tax obligations. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.
Note 4—Investment Securities
The following table represents the Company’s investment securities holdings as of June 30, 2013 and December 31, 2012:
 
 
June 30, 2013
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury note (0.25%, 8/31/2014)
 
$
505

 
$
1

 
$

 
$
506

U.S. Treasury note (1.75%, 1/31/2014)
 
102

 

 

 
102

 
 
607

 
1

 

 
608

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
5,413

Fixed income securities
 
 
 
 
 
 
 
4,710

Managed mutual funds
 
 
 
 
 
 
 
218

 
 
 
 
 
 
 
 
10,341

Total investment securities
 
 
 
 
 
 
 
$
10,949

 
 
December 31, 2012
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury note (0.25%, 8/31/2014)
 
$
505

 
$
1

 
$

 
$
506

U.S. Treasury note (1.75%, 1/31/2014)
 
102

 

 

 
102

 
 
607

 
1

 

 
608

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
7,293

Fixed income securities
 
4,970

Managed mutual funds
 
211

 
 
 
 
 
 
 
 
12,474

Total investment securities
 
 
 
 
 
 
 
$
13,082

Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities and investments in mutual funds for which the Company provides advisory services. At June 30, 2013 and December 31, 2012, trading securities consist solely of investments held by the Company for the purpose of providing initial cash seeding for product development purposes. The Company recognized approximately $0.4 million and $0.5 million of net unrealized losses related to investments classified

9

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

as trading during the three months ended June 30, 2013 and 2012, respectively. The Company recognized less than $0.1 million of net unrealized gains and approximately $0.1 million of net unrealized losses related to investments classified as trading during the six months ended June 30, 2013 and 2012, respectively.
Investment securities classified as available-for-sale consist of U.S. Treasury notes, which are held by Exeter Trust Company for compliance with certain state regulations. As of June 30, 2013 and December 31, 2012, $0.6 million of investment securities is considered restricted. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. No other-than-temporary impairment charges have been recognized by the Company during the six months ended June 30, 2013 and 2012.
Note 5—Fair Value Measurements
Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. A fair value hierarchy is provided that gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1—observable inputs such as quoted prices in active markets for identical securities;
Level 2—other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and
Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The following provides the hierarchy of inputs used to derive the fair value of the Company’s assets as of June 30, 2013 and December 31, 2012: 
 
 
June 30, 2013
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
5,413

 
$

 
$

 
$
5,413

Fixed income securities
 

 
4,710

 

 
4,710

Managed mutual funds
 
218

 

 

 
218

U.S. Treasury notes
 

 
608

 

 
608

 
 
$
5,631

 
$
5,318

 
$

 
$
10,949

 
 
December 31, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
7,293

 
$

 
$

 
$
7,293

Fixed income securities
 

 
4,970

 

 
4,970

Managed mutual funds
 
211

 

 

 
211

U.S. Treasury notes
 

 
608

 

 
608

 
 
$
7,504

 
$
5,578

 
$

 
$
13,082


Valuations of investments in fixed income securities and U.S. Treasury notes can generally be obtained through independent pricing services. For most bond types, the pricing service utilizes matrix pricing, which considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type and current day trade information, as well as dealer supplied prices. These valuations are categorized as Level 2 in the hierarchy.
There were no Level 3 securities held by the Company at June 30, 2013 or December 31, 2012.
The Company’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 securities during the six months ended June 30, 2013.

10

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 6—Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of June 30, 2013 and December 31, 2012 consisted of the following:
 
 
June 30, 2013
 
December 31, 2012
 
 
(in thousands)
Accrued bonus and sales commissions
 
$
20,385

 
$
20,070

Accrued payroll and benefits
 
2,338

 
2,960

Accrued sub-transfer agent fees
 
7,439

 
7,455

Dividends payable
 
2,181

 
2,173

Amounts payable under tax receivable agreement
 
1,928

 
1,928

Other accruals and liabilities
 
3,655

 
4,286

 
 
$
37,926

 
$
38,872

Note 7—Line of Credit
On February 13, 2013, the Company and Manning & Napier Group executed a Daily Adjusting LIBOR Revolving Line Note (the "Note") with M&T Bank. The Note has an original principal amount of $10.0 million and bears an interest rate of 1.50 percentage points above the greater of (a) one-month LIBOR, adjusting daily, or (b) one-day (i.e. overnight) LIBOR. The Note is unsecured and is payable on demand. If the Company fails to make payment when due under the Note, the default rate on the outstanding balance shall be 5 percentage points per year above the otherwise applicable rate per year. The Company has not drawn any loans under the Note.
Note 8—Commitments and Contingencies
Regulation
The Company may from time to time enter into agreements that contain certain representations and warranties and which provide general indemnifications. The Company may also serve as a guarantor of such obligations of one or more of the Manning & Napier Group entities. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects any risk of liability associated with such guarantees to be remote.
As an investment adviser to a variety of investment products, the Company is subject to routine reviews and inspections by the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”). From time to time, the Company may also be subject to claims, be involved in various legal proceedings arising in the ordinary course of its business and other contingencies. The Company does not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on its consolidated financial statements; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is difficult to predict. The Company will establish accruals for matters that are probable, can be reasonably estimated, and may take into account any related insurance recoveries to the extent of such recoveries. Currently, there are no legal proceedings pending, or to the Company’s knowledge, threatened against it. As of June 30, 2013 and December 31, 2012, the Company has not accrued for any such claims, legal proceedings, or other contingencies.
Note 9—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed by dividing net income by the weighted average number of shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect during the reporting period to all dilutive potential shares outstanding resulting from employee share-based awards. 

11

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and six months ended June 30, 2013 and 2012:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands, except share data)
Net income attributable to controlling and noncontrolling interests
 
$
18,597

 
$
9,456

 
$
34,989

 
$
43,880

Less: net income attributable to noncontrolling interests
 
18,337

 
11,292

 
34,385

 
42,813

Net income (loss) attributable to Manning & Napier, Inc.
 
$
260

 
$
(1,836
)
 
$
604

 
$
1,067

 
 
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding - basic
 
13,618,193

 
13,583,873

 
13,601,128

 
13,583,873

Dilutive potential shares from restricted stock units
 
99,989

 

 

 

Weighted average shares of Class A common stock outstanding - diluted
 
13,718,182

 
13,583,873

 
13,601,128

 
13,583,873

Net income (loss) available to Class A common stock per share - basic
 
$
0.02

 
$
(0.14
)
 
$
0.04

 
$
0.08

Net income (loss) available to Class A common stock per share - diluted
 
$
0.02

 
$
(0.14
)
 
$
0.04

 
$
0.08

At June 30, 2013 there were 75,861,023 Class A Units of Manning & Napier Group outstanding which, subject to certain restrictions, may be exchangeable for up to 75,861,023 shares of the Company’s Class A common stock. The restrictions set forth in the exchange agreement were in place at the end of the current reporting period. As such, these units were not included in the calculation of diluted earnings per common share for the three and six months ended June 30, 2013.
The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no basic or diluted EPS related to the Company’s Class B common stock.
On April 30, 2013 the Company granted awards under the 2011 Equity Compensation Plan (the “2011 Plan”) (Note 10). The following total number of Class A common stock issuable under 2011 Plan based on the treasury stock method were excluded from the calculation of diluted earnings per common share, as the effect of including these shares would have been anti-dilutive:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Restricted stock units
 

 

 
416,917

 

Note 10—Equity Based Compensation
2011 Equity Compensation Plan
On April 30, 2013, 467,290 interests were awarded under the 2011 Plan. Of these awards, 40,480 related to the redemption of previously issued and outstanding profit participation units in Manning & Napier Group that were granted prior to the initial public offering, which were subsequently re-issued as Class A common stock. The remaining 426,810 awards represent newly issued awards, consisting of 9,893 shares of Class A common stock and 416,917 of restricted stock units. The Class A common stock awards vested immediately and the restricted stock units will generally vest on the third anniversary of the grant date.
The following table summarizes stock award activity for the six months ended June 30, 2013 under the 2011 Plan:
 
 
Restricted
Stock Awards
 
Weighted Average Grant Date Fair Value
Stock awards outstanding at January 1, 2013
 

 
$

Granted
 
467,290

 
$
15.83

Vested
 
(50,373
)
 
$
17.51

Forfeited
 

 

Stock awards outstanding at June 30, 2013
 
416,917

 
$
15.63


12

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The weighted average fair value of 2011 Plan awards granted during the six months ended June 30, 2013 was $15.83, based on the closing sale price of Manning & Napier Inc.'s Class A common stock as reported on the New York Stock Exchange on the date of grant, and reduced by the present value of the dividends expected to be paid on the underlying shares during the requisite service period. For such awards that vest over time, recipients are not entitled to dividends declared on the underlying Class A common shares during the vesting period.
For the three and six months ended June 30, 2013, the Company recorded approximately $0.6 million of compensation expense related to awards under the 2011 Plan. The aggregate intrinsic value of 2011 Plan awards that vested during the six months ended June 30, 2013 was approximately $0.9 million. As of June 30, 2013, there was unrecognized compensation expense related to 2011 Plan awards of approximately $6.1 million, which the Company expects to recognize over a weighted average period of approximately 2.8 years.
Reorganization-Related Equity Based Compensation
During the six months ended June 30, 2013, the Company commenced recognition of compensation expense for the approximately 3.8 million performance-based awards eligible to vest on December 31, 2013 under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. Vesting of these performance-based awards is contingent upon the satisfaction of annual performance criteria specific to each award recipient. The determination of whether an award recipient has met such performance criteria will be made by a vesting committee at the end of the annual service period. In accordance with Accounting Standards Codification Topic 718, Stock Compensation, the grant date for these performance-based awards will occur at the end of the service period. Until the grant date, compensation expense will be re-measured at the end of each reporting period, to the extent that service has been rendered in proportion to the total requisite service period. No expense is being recognized for the performance-based awards eligible to vest on December 31, 2014 in connection with the 2011 reorganization transactions, as the performance conditions have not yet been defined.
The following table summarizes performance-based stock unit activity for the six months ended June 30, 2013 specific to the 2011 reorganization transactions:
 
 
Performance-Based
Stock Units
 
Weighted Average Grant Date Fair Value
Stock unit awards outstanding at January 1, 2013
 
28,914

 
$
12.00

Granted
 

 

Vested
 
(28,914
)
 
12.00

Forfeited
 

 

Stock unit awards outstanding at June 30, 2013
 

 
$

The following table summarizes service-based stock unit activity for the six months ended June 30, 2013 specific to the 2011 reorganization transactions:
 
 
Service-Based
Stock Units
 
Weighted Average Grant Date Fair Value
Stock unit awards outstanding at January 1, 2013
 
2,924,962

 
$
12.00

Granted
 
102,390

 
$
16.54

Vested
 
(102,390
)
 
$
16.54

Forfeited
 
(8,853
)
 
$
12.00

Stock unit awards outstanding at June 30, 2013
 
2,916,109

 
$
12.00

For service-based awards granted during the six months ended June 30, 2013, the weighted average fair value of the awards granted was $16.54, as determined by the closing sale price of Manning & Napier, Inc.’s Class A common stock as reported on the New York Stock Exchange on the date of grant.
For the three and six months ended June 30, 2013, the Company recorded approximately $22.7 million and $44.4 million, respectively, of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions. For the three and six months ended June 30, 2013, approximately $4.5 million and $10.6 million respectively, is attributable to the service-based awards. For the same periods, the remaining expense of approximately $18.2 million and $33.8 million, respectively, is attributable to performance-based awards. For the three and six months ended June 30, 2013, $18.0 million and $33.6 million, respectively, of the expense attributable to performance-based awards is related to awards eligible to vest on December 31, 2013 under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. As discussed above, this expense is based upon the closing sale price of Manning & Napier Inc.’s Class A common stock as reported on the New York Stock Exchange on June 28, 2013.

13

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

For the three and six months ended June 30, 2012, the Company recognized a total of approximately $24.0 million and $27.7 million, respectively, of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions. For the three and six months ended June 30, 2012, approximately $2.7 million and $6.4 million, respectively, was attributable to the service-based awards. For the same periods, the remaining expense of approximately $21.3 million and $21.4 million, respectively, is attributable to performance-based awards. For both the three and six months ended June 30, 2012, $21.2 million of the expense attributable to performance-based awards was related to awards that were eligible to vest on December 31, 2012 under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. As discussed above, this expense is based upon the closing sale price of Manning & Napier Inc.’s Class A common stock as reported on the New York Stock Exchange on June 29, 2012.
As of June 30, 2013, there was unrecognized compensation expense related to unvested service-based awards of approximately $24.6 million. The Company expects to recognize this expense over a weighted average period of 1.1 years.
As of June 30, 2013, there was unrecognized compensation expense related to unvested performance-based awards of approximately $102.1 million, which the Company expects to recognize over a weighted average period of 1.2 years. Included in this total is an estimate of $100.7 million of unrecognized compensation expense related to the approximately 7.6 million unvested performance-based awards under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. This estimate is based upon the closing sale price of Manning & Napier, Inc.’s Class A common stock as reported on June 28, 2013, and includes performance awards eligible to vest through 2014.
Stock unit awards forfeited during the six months ended June 30, 2013 and during the fourth quarter of 2012 were redistributed amongst the legacy owners, including William Manning, during the six months ended June 30, 2013. Of the stock units forfeited, 102,390 were granted to William Manning which vested immediately. The remaining units were awarded to the other legacy owners and are subject to performance criteria. This award does not result in dilution to the number of outstanding shares of Class A common stock. The aggregate intrinsic value of stock units that vested during the six months ended June 30, 2013 was approximately $1.7 million.
Note 11—Income Taxes
The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC") or a “C" corporation. As such, the entities functioning as LLC’s are not liable for or able to benefit from U.S. federal and most state income taxes on their earnings, and earnings will be included in the personal income tax returns of each entity’s unit holders. The entities functioning as "C" corporations are liable for or able to benefit from U.S. federal and state and local income taxes on their earnings and losses, respectively.
The Company’s income tax provision and effective tax rate were as follows: 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
Earnings from continuing operations before income taxes
 
$
21,177

 
$
12,655

 
$
39,566

 
$
49,069

Effective Tax Rate
 
12.2
%
 
25.3
%
 
11.6
%
 
10.6
%
Provision for income taxes
 
2,580

 
3,199

 
4,577

 
5,189

Provision for income taxes @ 35%
 
7,412

 
4,429

 
13,848

 
17,174

Difference between tax at effective vs. statutory rate
 
$
(4,832
)
 
$
(1,230
)
 
$
(9,271
)
 
$
(11,985
)
For the three and six months ended June 30, 2013 and 2012, the difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35% is primarily attributable to the benefit resulting from the fact that a significant portion of the Company’s operations include a series of flow-through entities which are generally not subject to federal and most state income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate level taxes.
Note 12—Related Party Transactions
From time to time, the Company may be asked to provide certain services, including investment management, accounting, legal and other administrative functions for the members of Manning & Napier Group. In total, the value of such services for the six months ended June 30, 2013 was immaterial.
Note 13—Subsequent Events
Distributions and dividends
On August 8, 2013, the Board of Directors approved a distribution from Manning & Napier Group to Manning & Napier and the noncontrolling members of Manning & Napier Group. The amount of the distribution to the members of Manning &

14

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Napier Group is approximately $31.3 million. Concurrently, the Board of Directors declared a $0.16 per share dividend to the holders of Class A common stock. The dividend is payable on November 1, 2013 to shareholders of record as of October 15, 2013.

15

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our views with respect to, among other things, our operations and financial performance. Words like "believes," "expects," "may," "estimates," "will," "should," "intends," "likely," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, are used to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ materially from our expectations or beliefs are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of our products; client sales and redemption activity; and changes of government policy or regulations. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview
Business
We are an independent investment management firm that provides a broad range of investment solutions through separately managed accounts, mutual funds and collective investment trust funds. Founded in 1970, we offer equity and fixed income portfolios as well as a range of blended asset portfolios, such as life cycle portfolios, that use a mix of stocks and bonds. We serve a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, and endowments and foundations. Our operations are based principally in the United States, with our headquarters located in Fairport, New York.
Our Products
We derive substantially all of our revenues from investment management fees earned from providing advisory services to separately managed accounts and mutual funds and collective investment trusts—including those offered by the Manning & Napier Fund, Inc. (the "Fund") and Exeter Trust Company.
Our separate accounts are primarily distributed through our Direct Channel, where our representatives form relationships with high net worth individuals, middle market institutions or large institutions that are working with a consultant. To a lesser extent, we also obtain a portion of our separate account distribution via third parties, either through our Intermediary Channel where national brokerage firm representatives or independent financial advisors select our separate account strategies for their clients, or through our Platform/Sub-Advisory Channel, where unaffiliated registered investment advisors approve our strategies for their product platforms. Our separate account products are a primary driver of our blended asset portfolios for high net worth and middle market institutional clients and financial intermediaries. In contrast, larger institutions and unaffiliated registered investment advisor platforms are a driver of our separate account equity portfolios.
Our mutual funds and collective investment trusts are primarily distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also obtain a portion of our mutual fund and collective investment trust distribution through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are important drivers of our blended asset class portfolios, in particular with 401(k) plan sponsors, advisors and recordkeepers that select our funds as default options for participants. In addition, financial intermediaries, mutual fund advisory programs and retail platforms are a driver of equity strategies within our mutual fund offerings.
Our assets under management (“AUM”) was $46.3 billion as of June 30, 2013. The composition of our AUM by vehicle and portfolio is illustrated in the table below.
 
 
June 30, 2013
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Separately managed accounts
 
$
11,957.0

 
$
11,678.0

 
$
1,156.5

 
$
24,791.5

Mutual funds and collective investment trusts
 
9,766.4

 
11,727.4

 
32.4

 
21,526.2

Total
 
$
21,723.4

 
$
23,405.4

 
$
1,188.9

 
$
46,317.7


16

Table of Contents

The composition of our separately managed accounts as of June 30, 2013, by channel and portfolio, is set forth in the table below. 
 
 
June 30, 2013
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(dollars in millions)
Separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
$
8,523.8

 
$
9,012.1

 
$
939.9

 
$
18,475.8

Intermediary Channel
 
3,433.2

 
920.7

 
216.6

 
4,570.5

Platform/Sub-advisor Channel
 

 
1,745.2

 

 
1,745.2

Total
 
$
11,957.0

 
$
11,678.0

 
$
1,156.5

 
$
24,791.5

Percentage of separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
34
%
 
37
%
 
4
%
 
75
%
Intermediary Channel
 
14
%
 
3
%
 
1
%
 
18
%
Platform/Sub-advisor Channel
 

 
7
%
 

 
7
%
Total
 
48
%
 
47
%
 
5
%
 
100
%
Percentage of portfolio by channel
 
 
 
 
 
 
 
 
Direct Channel
 
71
%
 
77
%
 
81
%
 
75
%
Intermediary Channel
 
29
%
 
8
%
 
19
%
 
18
%
Platform/Sub-advisor Channel
 

 
15
%
 

 
7
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Percentage of channel by portfolio
 
 
 
 
 
 
 
 
Direct Channel
 
46
%
 
49
%
 
5
%
 
100
%
Intermediary Channel
 
75
%
 
20
%
 
5
%
 
100
%
Platform/Sub-advisor Channel
 

 
100
%
 

 
100
%
Our separate accounts contributed 32% of our total gross client inflows for the six months ended June 30, 2013 and represented 54% of our total AUM as of June 30, 2013.
Our separate account business has historically been driven primarily by our Direct Channel, where sales representatives form a relationship with high net worth investors, middle market institutions, and large institutional clients working in conjunction with a consultant. The Direct Channel contributed 71% of the total gross client inflows for our separate account business for the six months ended June 30, 2013 and represented 75% of our total separate account AUM as of June 30, 2013. We anticipate the Direct Channel to continue to be the largest driver of new separate account business going forward, given the Channel’s high net worth and middle market institutional client-type focus.
During the six months ended June 30, 2013, blended asset and equity portfolios represented 50% and 43% of the separate account gross client inflows from the Direct Channel, respectively, while fixed income portfolios accounted for 7%. As of June 30, 2013, blended asset and equity portfolios represented 46% and 49%, respectively, of total Direct Channel separate account AUM, while our fixed income portfolios were 5%. We expect our focus on individuals and middle market institutions to continue to drive interest in our blended asset class portfolios, where we provide a comprehensive portfolio of stocks and bonds managed to a client’s specific investment objectives. However, relationships with larger institutions have resulted in strong growth in equity portfolios as a percentage of total AUM, which will likely continue given the breadth of our offerings, including domestic, international and global equity portfolios.
To a lesser extent, we also obtain separate account business from third parties, including financial advisors or unaffiliated registered investment advisor programs or platforms. During the six months ended June 30, 2013, 19% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 10% came from unaffiliated registered investment advisor platforms (Platform/Sub-advisor Channel). The Intermediary and Platform/Sub-advisor Channels represented 25% of our total separate account AUM as of June 30, 2013.
New separate account business through the Intermediary Channel flowed into both our blended asset and equity portfolios, driven by advisors’ needs to identify either a one-stop solution (blended asset portfolio) or to fill a mandate within a multi-strategy portfolio. During the six months ended June 30, 2013, blended asset and equity portfolios represented 77% and 22%, respectively, of the separate account gross client inflows from the Intermediary Channel, while fixed income portfolios represented 1%. As of June 30, 2013, 75% of our separate account AUM derived from financial advisors was allocated to

17

Table of Contents

blended asset portfolios, with 20% allocated to equity and 5% allocated to fixed income. We expect that equity and fixed income portfolios may see additional interest from financial advisors over time as more and more advisors structure a multi-strategy portfolio for their clients.
In contrast, gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product. During the six months ended June 30, 2013, 100% of our separate account gross client inflows from the Platform/Sub-advisory Channel were into equity portfolios, and we expect this will continue over the near term. As of June 30, 2013, equity portfolios represented 100% of total Platform/Sub-Advisory Channel separate account AUM.
Our annualized separate account retention rate across all channels was approximately 92% during the six months ended June 30, 2013, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.
During the six months ended June 30, 2013, market appreciation for our separate account AUM was 6.5%, including 5.2% in our blended assets and 8.6% in equity portfolios.
The composition of our mutual fund and collective investment trust AUM as of June 30, 2013, by portfolio, is set forth in the table below. 
 
 
June 30, 2013
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Mutual fund and collective investment trust AUM
 
$
9,766.4

 
$
11,727.4

 
$
32.4

 
$
21,526.2

Our mutual funds and collective investment trusts contributed 68% of our total gross client inflows for the six months ended June 30, 2013 and represented 46% of our total AUM as of June 30, 2013. As of June 30, 2013, our mutual fund and collective investment trust AUM consisted of 45% from blended asset portfolios and 55% from equity portfolios. During the six months ended June 30, 2013, 50% and 49% of the gross client inflows were attributable to blended assets and equity portfolios, respectively. For the six months ended June 30, 2013, market appreciation for our mutual fund and collective investment trust AUM was 4.6%, including 4.7% in our blended assets and 4.6% in our equity portfolios.
Our mutual fund and collective investment trust business is driven by financial intermediaries and to a lesser extent, our direct sales representatives. Intermediary distribution of our mutual fund and collective investment trust vehicles is achieved via financial advisors, brokers, retirement plan advisors and approval of our funds within mutual fund platforms. Through our Intermediary Channel, we are increasingly focused on our blended asset life cycle fund vehicles given our emphasis on advisors that work with retirement plans. Our blended asset portfolios are also used by advisors seeking a multi-asset class solution for their retail clients. In addition, our allocation to equity portfolios within the Intermediary Channel is anticipated to increase due to national brokerage firm representatives who wish to use our mutual funds as a sleeve within a larger portfolio.
Through our Platform/Sub-advisor Channel, we have relationships with consultants and advisors at platforms. We derive equity portfolio assets in this channel through the selection of our funds within advisory programs where our mutual funds are used within a multi-strategy portfolio, or through placement on platforms’ approved lists of funds. To facilitate our relationships with intermediaries, we currently have more than 280 dealer relationships. These relationships are important to the expansion of our retail business as well as our 401(k) life cycle and institutional business.
Our Direct Sales Representatives distribute our equity portfolios, in particular our non-U.S. portfolios, to large institutional clients for which we have direct relationships with the client, and often the client’s consultant. Through the Direct Channel, we also form relationships with middle market and large market defined contribution plan sponsors seeking to use our life cycle mutual funds and collective investment trusts as default options on their investment menu. We expect this channel to be focused on distributing blended asset and equity portfolio funds, particularly as the breadth of our mutual fund and collective investment trust offerings expands.
Results of Operations
Below is a discussion of our consolidated results of operations for the three and six months ended June 30, 2013 and 2012.


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Table of Contents

Key Components of Results of Operations
Overview
Changes to our operating results over time are largely driven by net client asset flows and changes to the market value of our AUM.
An important factor influencing inflows and outflows of our AUM is the investment performance of our various investment approaches. Our variety of stock selection strategies, absolute pricing discipline and active asset allocation management approach generally results in specific absolute and relative return characteristics in different market environments. For example, during a fundamental-driven bull market when prices are rising alongside improving fundamentals, we are likely to experience positive absolute returns and competitive relative returns. However, in a more momentum-driven bull market, when prices become disconnected from underlying fundamentals, we are likely to experience positive absolute returns but lagging relative returns. Similarly, during a valuation-driven bear market, when markets experience a period of price correction following a momentum-driven bull market, we are likely to experience negative absolute returns but strong relative returns. However, in a momentum-driven bear market, which is typically characterized by broad price declines in a highly correlated market, we are likely to experience negative absolute returns and lagging relative returns. Essentially, our approach is likely to do well when markets are driven by fundamentals, but lag when markets are driven primarily by momentum.
Other components of our operating results include:
asset-based fee rates and changes in those rates;
the composition of our AUM among various portfolios, vehicles and client types; and
the rate of increase in our variable and fixed costs, which is affected by the rate of revenue increases, compensation and year-to-year changes in incentive bonuses, changes to base compensation, vendor-related costs and investment spending on new products, consultative staffing and proprietary and third-party technology development.

19

Table of Contents

Assets Under Management
The following tables reflect the indicated components of our AUM for our investment vehicles for the three and six months ended June 30, 2013 and 2012.
 
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
As of March 31, 2013
 
$
26,231.2

 
$
21,849.2

 
$
48,080.4

 
55
%
 
45
%
 
100
%
Gross client inflows
 
474.8

 
1,401.5

 
1,876.3

 
 
 
 
 
 
Gross client outflows
 
(1,808.1
)
 
(1,505.0
)
 
(3,313.1
)
 
 
 
 
 
 
Market appreciation (depreciation)
 
(106.4
)
 
(219.5
)
 
(325.9
)
 
 
 
 
 
 
As of June 30, 2013
 
$
24,791.5

 
$
21,526.2

 
$
46,317.7

 
54
%
 
46
%
 
100
%
Average AUM for period
 
$
25,833.2

 
$
21,991.0

 
$
47,824.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2012
 
$
24,827.7

 
$
19,904.3

 
$
44,732.0

 
56
%
 
44
%
 
100
%
Gross client inflows
 
979.2

 
1,443.5

 
2,422.7

 
 
 
 
 
 
Gross client outflows
 
(1,193.8
)
 
(1,422.4
)
 
(2,616.2
)
 
 
 
 
 
 
Market appreciation (depreciation)
 
(1,062.6
)
 
(1,104.4
)
 
(2,167.0
)
 
 
 
 
 
 
As of June 30, 2012
 
$
23,550.5

 
$
18,821.0

 
$
42,371.5

 
56
%
 
44
%
 
100
%
Average AUM for period
 
$
23,969.5

 
$
18,827.0

 
$
42,796.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 

 
(in millions)
 
 

 
 
 
 
 
 
As of December 31, 2012
 
$
24,683.6

 
$
20,525.3

 
$
45,208.9

 
55
%
 
45
%
 
100
%
Gross client inflows
 
1,454.9

 
3,149.2

 
4,604.1

 
 
 
 
 
 
Gross client outflows
 
(2,963.0
)
 
(3,097.7
)
 
(6,060.7
)
 
 
 
 
 
 
Market appreciation (depreciation)
 
1,616.0

 
949.4

 
2,565.4

 
 
 
 
 
 
As of June 30, 2013
 
$
24,791.5

 
$
21,526.2

 
$
46,317.7

 
54
%
 
46
%
 
100
%
Average AUM for period
 
$
25,740.7

 
$
21,704.2

 
$
47,444.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011
 
$
22,658.1

 
$
17,542.0

 
$
40,200.1

 
56
%
 
44
%
 
100
%
Gross client inflows
 
1,858.4

 
3,296.6

 
5,155.0

 
 
 
 
 
 
Gross client outflows
 
(2,133.1
)
 
(2,894.6
)
 
(5,027.7
)
 
 
 
 
 
 
Market appreciation (depreciation)
 
1,167.1

 
877.0

 
2,044.1

 
 
 
 
 
 
As of June 30, 2012
 
$
23,550.5

 
$
18,821.0

 
$
42,371.5

 
56
%
 
44
%
 
100
%
Average AUM for period
 
$
23,848.8

 
$
18,965.4

 
$
42,814.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

20

Table of Contents

The following tables reflect the indicated components of our AUM for our portfolios for the three and six months ended June 30, 2013 and 2012.
 
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
As of March 31, 2013
 
$
21,908.6

 
$
24,933.6

 
$
1,238.2

 
$
48,080.4

 
45
%
 
52
%
 
3
%
 
100
%
Gross client inflows
 
989.5

 
840.4

 
46.4

 
1,876.3

 
 
 
 
 
 
 
 
Gross client outflows
 
(960.3
)
 
(2,282.0
)
 
(70.8
)
 
(3,313.1
)
 
 
 
 
 
 
 
 
Market appreciation (depreciation)
 
(214.4
)
 
(86.6
)
 
(24.9
)
 
(325.9
)
 
 
 
 
 
 
 
 
As of June 30, 2013
 
$
21,723.4

 
$
23,405.4

 
$
1,188.9

 
$
46,317.7

 
47
%
 
50
%
 
3
%
 
100
%
Average AUM for period
 
$
22,004.7

 
$
24,575.3

 
$
1,244.2

 
$
47,824.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2012
 
$
19,658.1

 
$
23,819.0

 
$
1,254.9

 
$
44,732.0

 
44
%
 
53
%
 
3
%
 
100
%
Gross client inflows
 
1,015.6

 
1,365.7

 
41.4

 
2,422.7

 
 
 
 
 
 
 
 
Gross client outflows
 
(894.0
)
 
(1,626.5
)
 
(95.7
)
 
(2,616.2
)
 
 
 
 
 
 
 
 
Market appreciation (depreciation)
 
(329.0
)
 
(1,862.3
)
 
24.3

 
(2,167.0
)
 
 
 
 
 
 
 
 
As of June 30, 2012
 
$
19,450.7

 
$
21,695.9

 
$
1,224.9

 
$
42,371.5

 
46
%
 
51
%
 
3
%
 
100
%
Average AUM for period
 
$
19,348.3

 
$
22,209.2

 
$
1,239.0

 
$
42,796.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
$
20,470.7

 
$
23,472.5

 
$
1,265.7

 
$
45,208.9

 
45
%
 
52
%
 
3
%
 
100
%
Gross client inflows
 
2,289.4

 
2,226.3

 
88.4

 
4,604.1

 
 
 
 
 
 
 
 
Gross client outflows
 
(2,057.7
)
 
(3,862.6
)
 
(140.4
)
 
(6,060.7
)
 
 
 
 
 
 
 
 
Market appreciation (depreciation)
 
1,021.0

 
1,569.2

 
(24.8
)
 
2,565.4

 
 
 
 
 
 
 
 
As of June 30, 2013
 
$
21,723.4

 
$
23,405.4

 
$
1,188.9

 
$
46,317.7

 
47
%
 
50
%
 
3
%
 
100
%
Average AUM for period
 
$
21,670.1

 
$
24,535.4

 
$
1,239.4

 
$
47,444.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011
 
$
18,122.5

 
$
20,812.0

 
$
1,265.6

 
$
40,200.1

 
45
%
 
52
%
 
3
%
 
100
%
Gross client inflows
 
2,046.9