Morningstar | Outflows Overshadow Somewhat Stronger Results From Waddell & Reed in 2Q; No Change to FVE
There was little in narrow-moat Waddell & Reed's second-quarter results that would alter our long-term view of the firm. We are leaving our $22 fair value estimate in place. The company closed the June quarter with $78.7 billion in assets under management, down 1.9% sequentially and 2.2% year over year. Net outflows of $3.1 billion reversed a trend of improving organic growth, as the firm was affected by a slowdown in gross sales and institutional redemptions. While overall investment performance has improved, with 55%, 36%, and 51% of the firm's funds outperforming peers on a one-, three-, and five-year basis, respectively, at the end of June, Waddell & Reed faces meaningful headwinds in generating consistently positive organic growth in the near to medium term with retail-advised gatekeepers continuing to cull underperforming and higher-fee funds from their platforms (one of the main reasons the firm lowered fees on 10 key Ivy funds this past month).Despite average AUM being down 0.8% year over year, an uptick in Waddell & Reed's overall realization rate (from 0.651% to 0.654%) and higher underwriting and distribution fees allowed the firm to produce a 3.0% increase in second-quarter revenue. First-half top-line growth of 3.4% was above our forecast for flat to slightly negative revenue growth this year, but given some of the hurdles in the back half of the year (as well as the Ivy fund fee cuts), we're sticking with our forecast. Adjusted operating margins of 20.1% represented a 170-basis-point improvement over the first half of 2017, which was in line with our forecast for operating margins to remain closer to 20% over the entire course of our five-year forecast. Waddell & Reed repurchased 3.1 million shares during the first two quarters for $60.6 million, in line with the quarterly run rate we've been expecting, given management's commitment to buy back $250 million of common stock over the next two years.
Waddell & Reed Financial is a holding company. Through its subsidiaries, the company provides investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the Ivy Funds,Ivy Variable Insurance Portfolios, InvestEd Portfolios, Ivy High Income Opportunities Fund, and institutional accounts. The company also provides wealth management services, primarily to retail clients through Waddell & Reed, Inc. (W&R), and independent financial advisors associated with W&R, who provide financial planning and advice to their clients.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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