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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-27 · 219 added, 156 removed, 428 unchanged (47% of the section changed)

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Our sales efforts are supported by regional sales professionals, a national account relationship group, and separate teams for ETFs and the retirement and insurance channels.

We leverage third-party distributors for off-shore products and in certain international jurisdictions.

We leverage third-party distributors for offshore products and in certain international jurisdictions.

Our retail separate accounts are distributed through financial intermediaries and directly to private clients by teams at an affiliated manager.

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Market Developments

The financial markets have a significant impact on the value of our assets under management and on the level of our sales and flows.

The capital and financial markets could experience fluctuation, volatility and declines as they have in the past, which could impact investment returns and asset flows among investment products as well as investor choices and preferences among investment products.

The financial markets have a significant impact on the value of our assets under management and on the level of our sales and net flows.

The capital and financial markets could experience fluctuation, volatility and declines as they have in the past, which could impact investment returns and asset flows of our investment products as well as in investor choices and preferences among investment products.

The changes in our assets under management may also be affected by the factors discussed in Item 1A.

"Risk Factors" of this Annual Report on Form 10-K.

During 2020, the novel coronavirus global pandemic ("COVID-19") significantly impacted the global economy and financial markets, creating uncertainty, market volatility and dislocation.

In an effort to contain COVID-19 in the U.S., or slow its spread, the federal government and nearly every state enacted varying degrees of social containment measures, restricting business and related activities, closing borders, and restricting travel.

Governments around the world responded to the impact of COVID-19 with economic stimulus measures.

These measures are intended to support businesses, employees and consumers until economic activities recover.

Financial markets experienced significant declines during the first quarter of 2020 and volatility in subsequent quarters, although certain markets, including domestic equity securities, experienced recoveries that more than offset the first quarter decline.

Despite the general recovery of the financial markets, particularly domestic equity securities, since the first quarter of 2020, the economy has been slower to recover.

The timing and magnitude of the economic recovery, as well as the sustainability of the financial markets recovery, continues to be uncertain.

and global equity markets increased in value in 2020, as evidenced by increases in major indices as noted in the following table:

December 31, As of Change

Index 2020 2019 %

MSCI World Index 2,690 2,358 14.1 %

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Standard & Poor's / LSTA Leveraged Loan Index 2,338 2,273 2.9 %

A discussion of our results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2018 , which specific discussion is incorporated herein by reference.

Impact of COVID-19 to our Business

As a result of the challenging and volatile capital, equity and credit markets, our assets under management experienced a decrease during the first quarter of 2020, driven by market depreciation of $16.6 billion and net outflows of $1.3 billion.

For the remainder of 2020, as financial markets recovered, our assets under management increased primarily driven by $35.8 billion in market appreciation and $6.4 billion in positive net flows.

Financial Highlights

Earnings per diluted share was $11.74 in 2019 , an increase of $2.88 , or 32.5% , from $8.86 per diluted share in 2018 .

Total sales were $20.1 billion in 2019 compared with $ 22.8 billion in 2018 .

▪ Earnings per diluted share was $10.02 in 2020 compared with $11.74 per diluted share in 2019.

▪ Total sales were $32.3 billion in 2020, an increase of $12.2 billion, or 60.5%, from $20.1 billion in 2019.

Net flows were $5.1 billion in 2020 compared with $(0.8) billion in 2019.

Assets under management were $108.9 billion at December 31, 2019 compared to $92.0 billion at December 31, 2018 .

Sustainable Growth Advisers, LP

On July 1, 2018, we completed our majority investment in Sustainable Growth Advisers, LP (the "SGA Acquisition"), an investment manager with $11.3 billion in assets under management at June 30, 2018.

▪ Assets under management were $132.2 billion at December 31, 2020, an increase of $23.3 billion, or 21.4%, from $108.9 billion at December 31, 2019.

AllianzGI Strategic Partnership

On February 1, 2021, we completed actions necessary to finalize our agreement from July 2020 with Allianz Global Investors U.S.

LLC and Allianz Global Investors Distributors LLC (collectively, "AllianzGI") pursuant to which we became the investment adviser, distributor and/or administrator of certain AllianzGI's open-end, closed-end and retail separate account assets.

Agreement with Westchester Capital Management

On February 1, 2021, we entered into an agreement to acquire all of the equity of Westchester Capital Management ("Westchester").

The transaction is expected to close in the second half of the 2021, subject to customary closing conditions and approvals by Westchester's Funds' Board and shareholders.

Assets Under Management

At December 31, 2020, total assets under management were $132.2 billion, representing an increase of $23.3 billion, or 21.4%, from December 31, 2019.

The increase was primarily due to positive market performance of $19.3 billion , partially offset by net outflows, dividend distributions on open- and closed-end funds and interest payments on structured products.

Long-term assets under management, which exclude liquidity strategies, were $107.7 billion at December 31, 2019 , up 19.1% from $90.4 billion at the end of the prior year.

Average long-term assets under management, which exclude assets in liquidity strategies, were $100.5 billion for the twelve months ended December 31, 2019 , an increase of $5.9 billion , or 6.2% , from $94.6 billion for the twelve months ended December 31, 2018 .

The year-over-year increase in long-term average assets under management was primarily due to the full year impact of the SGA Acquisition and positive market performance, partially offset by net outflows, dividend distributions on open- and closed-end funds and interest payments on structured products.

The increase in total assets under management from December 31, 2019 included $19.2 billion of positive market performance and $5.1 billion of positive net flows.

Average long-term assets under management, which represent the majority of our fee-earning asset levels, were $108.2 billion for the twelve months ended December 31, 2020, an increase of $7.7 billion, or 7.7%, from $100.5 billion for the twelve months ended December 31, 2019.

The year-over-year increase in long-term average assets under management was primarily due to market performance and positive net flows.

Investment Performance - Open End Funds

The following table presents our open-end funds' three-year average annual return and the corresponding three-year benchmark index average annual return as of December 31, 2019 .

The following table presents our open-end funds' three-year average annual return and corresponding benchmark index average annual return as of December 31, 2020.

Also presented with each fund is its three-year ranking within its Morningstar Peer Group.

Fund Type/Name

Fund Type/Name Assets

(in millions)

Benchmark Index

Peer Group Percentile

Return (1) Benchmark Index

Return (2) Peer Group Percentile

Virtus KAR Small-Cap Growth Fund $ 7,430 29.91 16.20 11

Virtus KAR Mid-Cap Growth Fund 3,354 36.53 20.50 4

Virtus Ceredex Mid-Cap Value Equity Fund 3,226 6.62 5.37 17

Virtus KAR Small-Cap Core Fund 1,813 18.61 10.25 54

Virtus Zevenbergen Innovative Growth Stock Fund 1,371 49.53 22.50 1

Virtus Ceredex Large-Cap Value Equity Fund 1,297 6.78 6.07 35

Virtus KAR Mid-Cap Growth Fund

Virtus KAR Small-Cap Value Fund 1,144 10.40 3.72 86

Virtus KAR Mid-Cap Core Fund 964 16.53 11.61 68

Virtus KAR Capital Growth Fund 780 24.41 22.99 19

Virtus KAR Small-Mid Cap Core Fund 710 N/A N/A N/A

Virtus Ceredex Small-Cap Value Equity Fund 481 1.29 3.72 91

Virtus KAR Mid-Cap Core Fund

Virtus Rampart Equity Trend Fund

Virtus Rampart Sector Trend Fund

Virtus Rampart Enhanced Core Equity Fund

Virtus Zevenbergen Innovative Growth Stock Fund

Virtus KAR Equity Income Fund 136 8.59 5.69 89

Virtus Silvant Large-Cap Growth Stock Fund 126 21.76 22.99 39

Virtus KAR Small-Mid Cap Core Fund

Virtus Horizon Wealth Masters Fund

Virtus Silvant Small-Cap Growth Stock Fund 38 20.86 16.20 36

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Virtus Newfleet Low Duration Core Plus Bond Fund 553 3.40 3.69 34

Virtus Newfleet Senior Floating Rate Fund

Virtus Newfleet Multi-Sector Intermediate Bond Fund

Virtus Seix Total Return Bond Fund 427 5.86 5.34 31

Virtus Seix Investment Grade Tax-Exempt Bond Fund

Virtus Newfleet Multi-Sector Intermediate Bond Fund 416 4.59 5.34 52

Virtus Seix High Yield Fund 384 6.85 6.22 7

Virtus Seix Investment Grade Tax-Exempt Bond Fund 295 4.39 4.23 24

Virtus Seix High Income Fund 232 5.30 6.24 42

Virtus Newfleet Tax-Exempt Bond Fund

Virtus Newfleet Senior Floating Rate Fund 200 2.67 3.99 63

Virtus Seix Core Bond Fund 197 5.47 5.34 28

Virtus Newfleet Tax-Exempt Bond Fund 112 4.00 4.32 52

Virtus Newfleet Core Plus Bond Fund 111 5.51 5.34 45

Virtus Newfleet High Yield Fund

Virtus Seix High Grade Municipal Bond Fund

Virtus Seix Corporate Bond Fund 111 8.49 7.06 1

Virtus Seix U.S.

Mortgage Fund

Fund Type/Name

Virtus Seix High Grade Municipal Bond Fund 81 5.12 4.64 27

Virtus Newfleet High Yield Fund 61 5.90 6.21 18

Fund Type/Name Assets

(in millions)

Benchmark Index Return (2)

Peer Group Percentile

Return (1) Benchmark Index Return (2) Peer Group Percentile

International/Global

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Virtus SGA Global Growth Fund 150 19.23 10.06 9

Virtus KAR Global Quality Dividend Fund

Virtus SGA International Growth Fund 48 13.50 4.88 17

Virtus KAR Global Quality Dividend Fund 38 2.59 3.89 89

Virtus KAR International Small-Mid Cap Fund 34 N/A N/A N/A

Virtus Duff & Phelps Real Estate Securities Fund 473 5.37 3.40 32

Virtus Duff & Phelps International Real Estate Securities Fund 273 5.95 1.69 18

Virtus KAR Long/Short Equity Fund 129 N/A N/A N/A

Virtus Duff & Phelps Global Infrastructure Fund 86 6.20 4.71 22

Virtus Duff & Phelps Global Real Estate Securities Fund

Virtus Aviva Multi-Strategy Target Return Fund 38 2.90 1.49 50

Virtus KAR Long/Short Equity Fund

Asset Allocation

Virtus Duff & Phelps Global Real Estate Securities Fund 29 7.00 1.52 10

Virtus Tactical Allocation Fund 966 16.19 13.66 1

Virtus Rampart Multi-Asset Trend Fund

Virtus Herzfeld Fund

Virtus GF SGA Global Growth Fund 796 18.18 10.06 13

Virtus GF Multi-Sector Short Duration Bond Fund

Virtus GF U.S.

Small Cap Focus Fund 259 19.08 10.25 17

Virtus GF Multi-Sector Short Duration Bond Fund 57 3.31 4.37 7

Virtus GF Multi-Sector Income Fund 29 4.52 5.34 19

Virtus GF Select High Yield Fund 27 N/A N/A N/A

Variable Insurance Funds

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Virtus SGA International Growth Series 165 6.89 4.88 12

Virtus Newfleet Multi-Sector Intermediate Bond Series

Virtus KAR Small-Cap Growth Series 137 30.41 16.20 9

Virtus Rampart Enhanced Core Equity Series

Virtus Duff & Phelps Real Estate Securities Series

Virtus Newfleet Multi-Sector Intermediate Bond Series 119 4.63 5.34 50

Virtus KAR Equity Income Series 99 8.81 5.69 88

Virtus KAR Small-Cap Value Series 89 10.77 3.72 93

Virtus Strategic Allocation Series 89 16.69 13.66 1

Virtus Duff & Phelps Real Estate Securities Series 76 5.45 3.40 30

Other Funds 293

(1) Represents the average annual total return performance of the largest share class as measured by net assets for which performance data is available.

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Benchmark indices are unmanaged, their returns do not reflect any fees, expenses or sales charges, and they are not available for direct investment.

The Benchmark Index for each fund can be found in the respective fund's fact sheet on our website at https://www.virtus.com/investor-center/mutual-fund-documents.

The Benchmark Index for each fund can be found in the respective fund's fact sheet on our website at https://www.virtus.com/our-products/individual-investors/mutual-funds.

(3) Represents the peer ranking of the fund's average annual total return according to Morningstar.

The Morningstar Peer Group for each fund can be found in the respective fund's fact sheet on our website at https://www.virtus.com/investor-

center/mutual-fund-documents.

The Morningstar Peer Group for each fund can be found in the respective fund's fact sheet on our website at https://www.virtus.com/our-products/individual-investors/mutual-funds.

Fund returns are reported net of fees.

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Operating Results

In 2019 , total revenues increased 2.0% , or $11.0 million , to $563.2 million from $552.2 million in 2018 primarily due to higher revenues from an increase in average assets primarily as a result of the SGA Acquisition and positive market performance.

Operating income increased by 10.3% , or $11.6 million , to $124.7 million in 2019 from $113.1 million in 2018 , due to the same factors causing the increase in total revenues in addition to a decrease in expenses.

In 2020, total revenues increased 7.2%, or $40.7 million, to $603.9 million from $563.2 million in 2019 primarily due to higher revenues from an increase in average assets under management in our open-end funds, retail separate and institutional accounts.

Operating income increased by 14.8%, or $18.5 million, to $143.2 million in 2020 from $124.7 million in 2019, due to increased revenues.

Assets Under Management by Product

The following table summarizes our assets under management by product:

As of December 31,

(in millions)

As of December 31, As of Change

(in millions) 2020 2019 2020 vs.

Open-End Funds (1) $ 49,521 $ 42,870 $ 6,651 15.5 %

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– Funds - average daily or weekly balances

- Retail Separate Accounts - average of prior-quarter ending balances or average of month-end balances

– Retail Separate Accounts - prior-quarter ending balances

– Institutional Accounts and Structured Products - average of month-end balances

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Asset Flows by Product

(in millions)

Years Ended December 31,

(in millions) 2020 2019

Open-End Funds (1)

Beginning balance $ 42,870 $ 37,710

Inflows 15,954 10,835

Outflows (16,067) (13,029)

Net flows (113) (2,194)

Market performance 7,210 7,536

Other (2) (446) (182)

Ending balance $ 49,521 $ 42,870

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Beginning balance $ 6,748 $ 5,956

Inflows 25 44

Net flows 25 44

Market performance (387) 1,116

Other (2) (472) (368)

Ending balance $ 5,914 $ 6,748

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Beginning balance $ 1,156 $ 668

Inflows 438 784

Outflows (448) (279)

Net flows (10) 505

Market performance (254) 90

Other (2) (55) (107)

Ending balance $ 837 $ 1,156

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Beginning balance $ 20,414 $ 14,998

Inflows 6,452 3,315

Outflows (2,960) (1,790)

Net flows 3,492 1,525

Market performance 5,868 4,045

Other (2) (23) (154)

Ending balance $ 29,751 $ 20,414

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Beginning balance $ 32,635 $ 27,445

Inflows 8,967 4,777

Outflows (7,513) (5,720)

Net flows 1,454 (943)

Market performance 6,681 6,377

Other (2) (147) (244)

Ending balance $ 40,623 $ 32,635

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Beginning balance $ 3,903 $ 3,640

Inflows 491 389

Outflows (265) (98)

Net flows 226 291

Market performance 91 173

Other (2) (160) (201)

Ending balance $ 4,060 $ 3,903

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Beginning balance $ 107,726 $ 90,417

Inflows 32,327 20,144

Outflows (27,253) (20,916)

Net flows 5,074 (772)

Market performance 19,209 19,337

Other (2) (1,303) (1,256)

Ending balance $ 130,706 $ 107,726

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Beginning balance $ 1,178 $ 1,613

Other (2) 310 (435)

Ending balance $ 1,488 $ 1,178

Beginning balance $ 108,904 $ 92,030

Inflows 32,327 20,144

Outflows (27,253) (20,916)

Net flows 5,074 (772)

Market performance 19,209 19,337

Other (2) (993) (1,691)

Ending balance $ 132,194 $ 108,904

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The following table summarizes our assets under management by asset class:

(in millions)

December 31, Change

(in millions) 2020 2019 2020 vs.

Equity $ 95,590 $ 70,720 $ 24,870 35.2 %

Fixed income 30,310 31,186 (876) (2.8) %

Alternatives (1) 4,806 5,820 (1,014) (17.4) %

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Liquidity (2) 1,488 1,178 310 26.3 %

Total $ 132,194 $ 108,904 $ 23,290 21.4 %

(1) Consists of real estate securities, mid-stream energy securities and master limited partnerships, options strategies and other.

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Average Fee Earned

(expressed in basis points)

Average Assets Under Management

(expressed in basis points) Average Assets Under Management

(in millions) (2)

2020 2019 2020 2019

Open-End Funds (1) 59.2 56.1 $ 41,819 $ 40,917

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Liquidity (3) 11.2 10.1 1,340 1,600

All Products 47.0 46.0 $ 109,512 $ 102,072

(1) Represents assets under management of U.S.

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– Funds - average daily or weekly balances

- Retail Separate Accounts - average of prior-quarter ending balances or average of month-end balances

– Retail Separate Accounts - prior-quarter ending balances

– Institutional Accounts and Structured Products - average of month-end balances

(3) Represents assets under management in liquidity strategies, including certain open-end funds and institutional accounts.

(3) Represents assets under management in liquidity strategies, including in certain open-end funds and institutional accounts.

Average fees earned represent investment management fees before the impact of consolidation of investment products ("CIP"), divided by average net assets.

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Average fees earned will vary based on several factors, including the asset mix and expense reimbursements to funds.

The average fee rate earned on long-term products for 2019 decreased by 0.1 basis points compared to the prior year, primarily due to the impact of the lower blended fee rates of the assets from the SGA Acquisition, which impacted institutional accounts, and lower performance-related fees earned on our structured products, partially offset by changes in the underlying asset mix to higher fee earnings strategies in open-end funds.

The average fee rate earned on long-term products for 2020 increased by 0.8 basis points compared to the prior year, primarily due to changes in the underlying asset mix to higher fee earnings strategies in open-end funds and retail separate accounts during the current year, as well as higher performance-related fees.

Results of Operations

Summary Financial Data

Years Ended December 31,

(in thousands)

Years Ended December 31, Change

(in thousands) 2020 2019 2020 vs.

Investment management fees $ 505,338 $ 461,477 $ 43,861 9.5 %

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Revenues by source were as follows:

Years Ended December 31,

(in thousands)

Years Ended December 31, Change

(in thousands) 2020 2019 2020 vs.

Investment management fees

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Total revenues $ 603,896 $ 563,246 $ 40,650 7.2 %

A discussion of our results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2019 , which specific discussion is incorporated herein by reference.

Investment Management Fees

Investment management fees are earned based on a percentage of assets under management and are paid pursuant to the terms of the respective investment management contracts, which generally require monthly or quarterly payments.

Investment management fees increased by $24.5 million , or 5.6% , for the year ended December 31, 2019 due to a 6.0% , or $5.8 billion , increase in average assets under management, primarily as a result of market performance and the SGA Acquisition.

Investment management fees increased by $43.9 million, or 9.5%, for the year ended December 31, 2020 due to a 7.3%, or $7.4 billion, increase in average assets under management and an increase in the total average fee rate of 1.0 basis points.

Distribution and Service Fees

Distribution and service fees are sales- and asset-based fees earned from open-end funds for marketing and distribution services.

Distribution and service fees decreased by $9.8 million , or 19.4% , for the year ended December 31, 2019 , primarily due to lower sales and average assets for open-end funds in share classes that have distribution and service fees.

Distribution and service fees decreased by $2.5 million, or 6.0%, for the year ended December 31, 2020, primarily due to lower average assets for open-end funds in share classes that have distribution and service fees.

Administration and Shareholder Service Fees

Administration and shareholder service fees represent fees earned for fund administration and shareholder services from our open-end mutual funds and certain of our closed-end funds.

Fund administration and shareholder service fees decreased $3.7 million , or 5.9% , for the year ended December 31, 2019 , primarily due to the decrease in average assets under management for our open-end funds.

Administration and shareholder service fees represent fees earned for fund administration and shareholder services from our open-end mutual funds, ETFs and certain of our closed-end funds.

Fund administration and shareholder service fees decreased $0.4 million, or 0.7%, for the year ended December 31, 2020, primarily due to the decrease in average assets under management for our closed-end funds.

Other Income and Fees

Other income and fees primarily represent contingent sales charges earned from investor redemptions of certain shares sold without a front-end sales charge.

Other income and fees increased by an immaterial amount for the year ended December 31, 2019 compared to December 31, 2018.

Other income and fees decreased for the year ended December 31, 2020 compared to December 31, 2019 due to lower redemption and referral fees.

Operating Expenses

Operating expenses by category were as follows:

Years Ended December 31,

(in thousands)

Years Ended December 31, Change

(in thousands) 2020 2019 2020 vs.

Operating expenses

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Employment expenses of $267.3 million increased $26.8 million, or 11.1%, from the prior year ended December 31, 2019.

The increase from the prior year reflected the full-year impact in 2019 from the addition of employees from the SGA Acquisition, partially offset by lower sales-based compensation.

The increase from the prior year was primarily due to increased profit- and sales-based compensation.

Distribution and Other Asset-Based Expenses

Distribution and other asset-based expenses consist primarily of payments to third-party client intermediaries for providing services to investors in sponsored investment products.

These payments are primarily based on percentages of sales, assets under management or revenues.

These payments are primarily based on assets under management or on a percentage of sales.

These expenses also include the amortization of deferred sales commissions related to up-front commissions on shares sold without a front-end sales charge to shareholders.

The deferred sales commissions are amortized on a straight-line basis over the periods in which commissions are generally recovered from distribution fee revenues

and contingent sales charges received from shareholders of the funds upon redemption of their shares.

Distribution and other asset-based expenses decreased $10.3 million , or 11.2% , from the prior year due primarily to lower average open-end fund assets under management and a lower percentage of sales in share classes where we pay distribution and other asset-based expenses.

The deferred sales commissions are amortized on a straight-line basis over the periods in which commissions are generally recovered from distribution fee revenues and contingent sales charges received from shareholders of the funds upon redemption of their shares.

Distribution and other asset-based expenses decreased $5.1 million, or 6.2%, from the prior year due primarily to a lower percentage of sales and assets under management in share classes that have distribution and other asset-based expenses.

Other Operating Expenses

Other operating expenses primarily consist of investment research and technology costs, professional fees, travel and distribution related costs, rent and occupancy expenses, and other business costs.

Other operating expenses decreased $0.5 million , or 0.7% , to $74.4 million for the year ended December 31, 2019 from the prior year primarily due to costs incurred in the prior year related to the SGA Acquisition that did not recur in the current year, partially offset by the inclusion of SGA's other operating expenses for the full year in 2019.

Other operating expenses decreased $4.5

million, or 6.0%, to $69.9 million for the year ended December 31, 2020 from the prior year primarily due to decreased travel and related expenses primarily as a result of the impact of COVID-19 on the current operating environment.

Other Operating Expenses of CIP

Other operating expenses of CIP increased $0.5 million , or 14.2% , to $4.0 million for the year ended December 31, 2019 from the prior year primarily due to costs associated with the issuance of two new CLOs, partially offset by fewer consolidated mutual funds in the current year period versus the prior year period.

Other operating expenses of CIP increased $6.6 million, or 163.6%, to $10.6 million for the year ended December 31, 2020 from the prior year primarily due to costs associated with the issuance of a new CLO as well as the refinancing of debt for two CLOs in the current year.

Restructuring and Severance

During the year ended December 31, 2019, we incurred $2.3 million in restructuring and severance costs primarily related to severance costs.

During the year ended December 31, 2020, we incurred $1.2 million in restructuring and severance costs, a decrease of $1.1 million, or 49.8%, from the prior year primarily due to lower staff reductions in the current year.

Depreciation Expense

Depreciation expense consists primarily of the straight-line depreciation of furniture, equipment and leasehold improvements.

Depreciation expense increased $0.4 million , or 8.6% , to $5.0 million for the year ended December 31, 2019 primarily due to depreciation expense on new office space.

Depreciation expense decreased $0.3 million, or 6.7%, to $4.7 million for the year ended December 31, 2020 primarily due to a higher level of equipment being fully depreciated in the current year period.

Amortization Expense

Amortization expense consists of the amortization of definite-lived intangible assets over their estimated useful lives.

Amortization expense increased $5.1 million , or 20.3% , to $30.2 million for the year ended December 31, 2019 primarily due to an increase in definite lived intangible assets as a result of the SGA Acquisition.

Amortization expense remained consistent for the year ended December 31, 2020 compared to the prior year.

Other Income (Expense), net

Other Income (Expense), net by category were as follows:

Years Ended December 31,

(in thousands)

Years Ended December 31, Change

(in thousands) 2020 2019 2020 vs.

Other Income (Expense)

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Realized and Unrealized Gain (Loss) on Investments, net

Realized and unrealized gain (loss) on investments, net increased for the year ended December 31, 2019 by $12.3 million from the prior year.

The change related to realized and unrealized gains on investments in the current year compared to realized and unrealized losses in the prior year, is consistent with global market performance in the current year compared to the prior year as evidenced by changes in the S&P 500 Index and MSCI World Index noted earlier.

Realized and unrealized gain (loss) on investments, net remained consistent for the year ended December 31, 2020 compared to the prior year.

Realized and Unrealized Gain (Loss) of CIP, net

Realized and unrealized gain (loss) of CIP, net decreased $20.1 million from the prior year.

The change for the current year primarily consisted of a decrease in realized and unrealized losses on the investments of CIP of $36.0 million, primarily due to changes in market values of leveraged loans, offset by a $15.9 million decrease in unrealized gains on notes payable of CIP.

Realized and unrealized gain (loss) of CIP, net increased $0.8 million from the prior year.

The increase for the current year consisted primarily of net realized and unrealized losses of $32.4 million due to declines in market values of leveraged loans, partially offset by unrealized gains of $31.6 million related to the changes in value of the notes payable.

Other Income (Expense), net

Other income (expense), net decreased during the year ended December 31, 2019 by $ 0.9 million , or 26.7% , as compared to the prior year due to lower earnings on equity method investments.

Other income (expense), net decreased during the year ended December 31, 2020 by $0.5 million, or 22.2%, as compared to the prior year primarily due to lower profits from equity method investments during the current year.

Interest Income (Expense), net

Interest Income (Expense), net by category were as follows:

Years Ended December 31,

(in thousands)

Years Ended December 31, Change

(in thousands) 2020 2019 2020 vs.

Interest Income (Expense)

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Interest Expense

Interest expense remained relatively unchanged for the year ended December 31, 2019 compared to the prior year.

Interest expense decreased $7.6 million, or 38.9%, for the year ended December 31, 2020 compared to the prior year primarily due to a decrease in the average debt outstanding and a lower average interest rate compared to the prior year.

Also contributing to the decrease was a $0.7 million gain recognized on the early extinguishment of debt.

Interest and Dividend Income

Interest and dividend income is earned on cash equivalents and our marketable securities.

Interest and dividend income decreased $1.2 million , or 23.1% , in 2019 compared to the prior year primarily due to lower average investment balances in the current year.

Interest and dividend income is earned on cash and cash equivalents and our marketable securities.

Interest and dividend income decreased $2.5 million, or 64.4%, in 2020 compared to the prior year primarily due to lower interest rates earned on cash and cash equivalents and lower dividends received from our investments as compared to the prior year.

Interest and Dividend Income of Investments of CIP

Interest and dividend income of investments of CIP increased $17.0 million , or 17.3% , compared to the prior year primarily due to a higher balance of investments of our CIP compared to the prior year.

Interest and dividend income of investments of CIP decreased $5.7 million, or 4.9%, compared to the prior year primarily due to a decrease in interest rates partially offset by increased investments of CIP.

Interest Expense of CIP

Interest expense of CIP increased by $27.2 million , or 42.0% , compared to the prior year primarily due to higher average debt balances of CIP as well as $4.5 million of amortization of discounts on notes payable in the current year.

Interest expense of CIP represents interest expense on the notes payable of CIP.

Interest expense of CIP decreased by $6.6 million, or 7.1%, compared to the prior year primarily due to lower variable interest rates partially offset by higher average debt balances of CIP during the current year.

Income Tax Expense

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federal, state and local taxes at an estimated effective tax rate of 26.8% and 25.0% for 2020 and 2019, respectively.

The decrease in the estimated effective tax rate for the current year was primarily due to t he change in the valuation allowance associated with various investments held.

The increase in the estimated effective tax rate for the current year was primarily due to a decrease in excess tax benefits associated with the Company's stock compensation deduction.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which contains several income tax provisions.

Certain of those tax provisions are expected to be effective retroactively for years ending before the date of enactment.

The Company has evaluated the legislation and, at this time, does not anticipate the CARES Act to have a material impact on its consolidated financial statements.

Effects of Inflation

Inflationary pressures can result in increases to our cost structure, especially to the extent that large expense components such as compensation are impacted.

Inflationary pressures can result in increases to our costs, especially to the extent that large expense components such as compensation are impacted.

To the degree that these expense increases are not recoverable or cannot be counterbalanced through pricing increases due to the competitive environment, our profitability could be negatively impacted.

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The following tables summarize certain financial data relating to our liquidity and capital resources:

(in thousands)

December 31, Change

(in thousands) 2020 2019 2020 vs.

Balance Sheet Data

Cash and cash equivalents $ 246,511 $ 221,781 $ 24,730 11.2 %

Investments 64,944 83,206 (18,262) (21.9) %

Debt 201,212 277,839 (76,627) (27.6) %

Redeemable noncontrolling interests 115,513 63,845 51,668 80.9 %

Years Ended December 31,

(in thousands)

Total equity 720,940 686,257 34,683 5.1 %

Years Ended December 31, Change

(in thousands) 2020 2019 2020 vs.

Cash Flow Data

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At December 31, 2020, we had $246.5 million of cash and cash equivalents and $64.9 million of investments, which included $40.0 million of investment securities, compared to $221.8 million of cash and cash equivalents and $83.2 million of investments, which included $61.0 million of investment securities, at December 31, 2019.

At December 31, 2019 , we had $285.7 million outstanding under our term loan maturing June 1, 2024 and no outstanding borrowings under our $100.0 million revolving credit facility.

At December 31, 2020, we had $205.7 million outstanding under our term loan maturing June 1, 2024 and no outstanding borrowings under our $100.0 million credit facility.

Uses of Capital

Our main uses of capital related to operating activities include payments of annual incentive compensation, interest on our indebtedness, income taxes and other operating expenses, which primarily consist of investment research, technology costs, professional fees, distribution and occupancy costs.

Our main uses of capital related to operating activities comprise employee compensation and related benefit costs including payment of annual incentive compensation, interest on our indebtedness, income taxes and other operating expenses, which primarily consist of investment research, technology costs, professional fees, distribution and occupancy costs.

Annual incentive compensation, which is one of the largest annual operating cash expenditures, is typically paid in the first quarter of the year.

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In addition to operating activities, other uses of cash could include:

(a) investments in organic growth, including expanding our distribution efforts;

(b) seeding or launching new products, including seeding funds or sponsoring CLO issuances;

(c) principal payments on debt outstanding through scheduled amortization, excess cash flow payment requirements or additional paydowns;

(d) dividend payments to preferred and common stockholders;

(e) repurchases of our common stock;

(f) investments in our infrastructure;

(g) investments in inorganic growth opportunities as they arise;

(h) integration costs, including restructuring and severance, related to potential acquisitions, if any;

and (i) potential purchases of affiliate noncontrolling interests.

(i) investments in organic growth, including expanding our distribution efforts;

(ii) seeding or launching new products, including funds or sponsoring CLO issuances;

(iii) principal payments on debt outstanding through scheduled amortization, excess cash flow payment requirements or additional paydowns;

(iv) dividend payments to common stockholders;

(v) repurchases of our common stock;

(vi) investments in our infrastructure;

(vii) investments in inorganic growth opportunities which may require upfront payments and/or contingent consideration;

(viii) integration costs, including restructuring and severance, related to acquisitions, if any;

and (ix) purchases of affiliate noncontrolling interests.

Capital and Reserve Requirements

We operate a broker-dealer subsidiary registered with the SEC that is subject to certain rules regarding minimum net

We operate a broker-dealer subsidiary registered with the SEC that is subject to certain rules regarding minimum net capital.

The broker-dealer is required to maintain a ratio of "aggregate indebtedness" to "net capital," as defined, which may not exceed 15 to 1 and must also maintain a minimum amount of net capital.

Failure to meet these requirements could result in adverse consequences to us, including additional reporting requirements, a lower required ratio of aggregate indebtedness to net capital or interruption of our business.

Failure to meet these requirements could result in adverse consequences to us, including additional reporting requirements, a lower required ratio of aggregate indebtedness to net

capital or interruption of our business.

At December 31, 2020, the ratio of aggregate indebtedness to net capital of our broker-dealer was below the maximum allowed, and net capital was significantly greater than the required minimum.

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Operating Cash Flow

Net cash used in operating activities of $36.7 million for 2019 decreased by $25.8 million from net cash used in operating activities of $62.6 million in 2018.

The decrease was due primarily to a decrease in the net purchases of investments of CIP and by changes in our operating assets and liabilities and the operating assets and liabilities of CIP.

Net cash used in operating activities of $226.1 million for 2020 increased by $189.4 million from net cash used in operating activities of $36.7 million in 2019 primarily due to increased net purchases of investments by CIP of $201.8 million in the current year compared to the prior year.

Investing Cash Flow

Cash flows from investing activities consist primarily of capital expenditures and other investing activities related to our business operations.

Net cash provided by investing activities of $4.4 million for 2019 changed by $125.7 million from net cash used in investing activities of $121.2 million in 2018 .

Net cash provided by investing activities of $8.7 million for 2020 increased by $4.2 million from net cash provided by investing activities of $4.4 million in 2019.

The primary investing activities during 2020 were related to the increase in cash of $9.7 million from the consolidation of investment products partially offset by capital expenditures and other asset purchases of $1.0 million.

The primary investing activity during 2018 was the $127.0 million SGA Acquisition.

The primary investing activities during 2019 were related to the increase in cash of $10.0 million from the consolidation of investment products partially offset by capital expenditures and other asset purchases of $7.6 million.

Financing Cash Flow

Cash flows from financing activities consist primarily of the issuance of common and preferred stock, return of capital (through repurchases of common shares, dividends, withholding obligations for the net share settlement of employee share transactions), issuance and repayment of debt by us, and CIP and contributions to noncontrolling interests related to CIP.

Net cash provided by financing activities decreased $104.6 million to $99.6 million in 2019 compared to net cash provided by financing activities of $204.2 million in the prior year, primarily due to the issuance of debt for the SGA Acquisition in 2018.

Cash flows from financing activities consist primarily of the issuance of common stock, return of capital through repurchases of common shares, dividends, withholding obligations for the net share settlement of employee share transactions, issuance and repayment of debt and changes to noncontrolling interests.

Net cash provided by financing activities increased $135.8 million to $235.3 million in 2020 compared to net cash provided by financing activities of $99.6 million in the prior year, primarily due to an increase of $166.6 million in net borrowings of CIP during 2020 compared to the prior year, partially offset by an increase of $24.2 million on the repayment of debt during 2020 compared to the prior year.

Credit Agreement

The Company's credit agreement, as amended (the "Credit Agreement") comprises (a) $365.0 million of seven-year term debt (the "Term Loan") expiring in June 2024 and (b) a $100.0 million five-year revolving credit facility (the "Credit Facility") expiring in June 2022.

The Company's credit agreement, as amended (the "Credit Agreement"), is comprised of (i) $365.0 million of seven-year term debt (the "Term Loan") expiring in June 2024 and (ii) a $100.0 million five-year revolving credit facility (the "Credit Facility") expiring in June 2022.

At December 31, 2020, $205.7 million was outstanding under the Term Loan, and there were no outstanding borrowings under the Credit Facility.

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The following table summarizes our contractual obligations as of December 31, 2020:

(in millions)

(in millions) Total Less Than

1 Year 1-3 Years 3-5 Years More Than

Lease obligations $ 29.1 $ 5.8 $ 12.9 $ 4.8 $ 5.6

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Minimum payments on service contracts (2) 12.6 7.2 5.4 — —

Total $ 270.2 $ 23.7 $ 236.1 $ 4.8 $ 5.6

(1) At December 31, 2020, we had $205.7 million outstanding under our Term Loan, which has a variable interest rate, and no amounts outstanding under our Credit Facility.

Payments due are estimated based on the variable interest rate and commitment fee rate in effect

on December 31, 2019 .

Debt of CIP is excluded from the above table as we are not obligated for these amounts.

Payments due are estimated based on the variable interest rate and commitment fee rate in

effect on December 31, 2020.

Debt of CIP is excluded as we are not obligated for these amounts.

See Part II, Item 8, "Financial Statements and Supplementary Data," Note 19 "Consolidation" for additional information.

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Consolidation

The consolidated financial statements include the Company's accounts, including our subsidiaries and investment products that are consolidated.

Voting interest entities ("VOEs") are consolidated when we have a controlling financial interest, which is typically present when we own a majority of the voting interest in an entity or otherwise have the power to govern the financial and operating policies of the entity.

The consolidated financial statements include the accounts of the Company, its subsidiaries and investment products that are consolidated.

Voting interest entities ("VOEs") are consolidated when we are considered to have a controlling financial interest, which is typically present when we own a majority of the voting interest in an entity or otherwise have the power to govern the financial and operating policies of the entity.

We evaluate any variable interest entities ("VIEs") in which we have a variable interest for consolidation.

A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) where, as a group, the holders of the equity investment at risk do not possess:

(i) the power, through voting or similar rights, to direct the activities that most significantly impact the entity’s economic performance;

(ii) the obligation to absorb expected losses or the right to receive expected residual returns of the entity;

or (iii) proportionate voting and economic interests and where substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor with disproportionately fewer voting rights.

A VIE is an entity in which either (i) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (ii) where as a group, the holders of the equity investment at risk do not possess (x) the power through voting or similar rights to direct the activities that most significantly impact the entity's economic performance;

(y) the obligation to absorb expected losses or the right to receive expected residual returns of the entity;

or (z) proportionate voting and economic interests and where substantially all of the entity's activities either involve or are conducted on behalf of an investor with disproportionately fewer voting rights.

If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary.

The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

CIP includes both VOEs, primarily consisting of open-end funds in which we hold a controlling financial interest, and VIEs, which primarily consist of CLOs of which we are considered the primary beneficiary.

CIP includes both VOEs, made up primarily of open-end funds in which we hold a controlling financial interest, and VIEs, which primarily consist of CLOs of which we are considered the primary beneficiary.

The consolidation and deconsolidation of these investment products have no impact on net income (loss) attributable to stockholders.

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Noncontrolling Interests

Noncontrolling interests include third-party investments in CIP and minority interests held in an affiliate.

Noncontrolling interests - CIP

Represent third-party investments in our CIP and are classified as redeemable noncontrolling interests if investors in those products may request withdrawal at any time.

Noncontrolling interests - CIP represent third-party investments in our CIP and are classified as redeemable noncontrolling interests in our Consolidated Balance Sheets because investors in those products are able to request withdrawal at any time.

Noncontrolling interests - affiliate

Represent minority interests held in a consolidated affiliate.

Noncontrolling interests - affiliate represent minority interests held in a consolidated affiliate.

Minority interests held in an affiliate are subject to holder put rights and our call rights at established multiples of earnings before interest, taxes, depreciation and amortization and, as such, are considered redeemable at other than fair value.

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The following is a discussion of the valuation methodologies used for our assets measured at fair value:

Sponsored funds represent investments in open-end, closed-end funds and ETFs for which we act as the investment manager.

Cash equivalents represent investments in money market funds.

Cash investments in money market funds are valued using published net asset values are classified as Level 1.

Sponsored funds represent investments in open-end funds, closed-end funds and ETFs for which we act as the investment manager.

The fair value of open-end funds is determined based on their published net asset values and are categorized as Level 1.

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Equity securities include securities traded on active markets and are valued at the official closing price (typically last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.

Debt securities and Investments - available for sale represent investments in CLOs for which we provide investment management services.

The investments in collateralized loan obligations are measured at fair value based on independent third party valuations and are categorized as Level 2 or Level 3.

The independent third party valuations are based on discounted cash flow analyses and comparable trade data.

Debt securities represent investments in senior secured bank loans and are based on evaluated quotations received from independent pricing services and are categorized as Level 2.

Nonqualified retirement plan assets represent mutual funds within a nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.

Investments of CIP represent the underlying debt and equity securities held in sponsored products that we consolidate.

Equity securities are valued at the official closing price on the exchange on which the securities are traded and are categorized within Level 1.

Level 2 investments include certain equity securities for which closing prices are not readily available or are deemed to not reflect readily available market prices and are valued using an independent pricing service, as well as most debt securities that are valued based on quotations received from independent pricing services or from dealers who make markets in such securities.

Pricing services do not provide pricing for all securities, and therefore indicative bids from dealers, which are based on pricing models used by market makers in the security, are utilized, and are also included within Level 2.

Level 3 investments include debt and equity securities that are not widely traded, are illiquid and are priced by dealers based on pricing models used by market makers in the security.

Investments of CIP represent the underlying debt, equity and other securities held in CIP.

Equity investments are valued at the official closing price on the exchange on which the securities are traded and are generally categorized within Level 1.

Level 2 investments represent most debt securities, including bank loans and certain equity securities (including non-U.S.

securities), for which closing prices are not readily available or are deemed to not reflect readily available market prices, and are valued using an independent pricing service.

Debt investments are valued based on quotations received from independent pricing services or from dealers who make markets in such securities.

Bank loan investments, which are included as debt investments, are generally priced at the average mid-point of bid and ask quotations obtained from a third-party pricing service.

Fair value may also be based upon valuations obtained from independent third-party brokers or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics.

In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes.

Depending on the nature of the inputs, these assets are classified as Level 1, 2 or 3 within the fair value measurement hierarchy.

Notes payable of CIP represent notes issued by CLOs we consolidate and that are measured using the measurement alternative in ASC 820 for collateralized financing entities.

Accordingly, the fair value of CLO liabilities was measured based on the fair value of CLO assets less the sum of (a) the fair value of our beneficial interests and (b) the carrying value of any beneficial interests that represent compensation for services.

Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.

Marketable securities are reflected in the consolidated financial statements at fair value based upon publicly quoted market prices.

Level 3 investments include debt and equity securities that are not widely traded, are illiquid or are priced by dealers based on pricing models used by market makers in the security.

Derivative assets and liabilities of CIP represent futures contracts, swaps contracts, option contracts and forward contracts held in CIP.

These assets and liabilities are recorded within other assets of CIP and other liabilities of CIP on our Consolidated Balance Sheets.

Depending on the nature of the inputs, these derivative assets and liabilities are classified as Level 1, 2 or 3 within the fair value measurement hierarchy.

Notes payable of CIP represent notes issued by CIP CLOs we consolidate and are measured using the measurement alternative in Accounting Standards Update 2014-13, Consolidation (Topic 810) .

Accordingly, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of (i) the fair value of the beneficial interests held by the Company and (ii) the carrying value of any beneficial interests that represent compensation for services.

The fair value of the beneficial interests held by the Company is based on third-party pricing information without adjustment.

Short sales of CIP are transactions in which a security is sold that is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline and are classified as Level 1 based on the underlying equity security.

These liabilities are recorded within other liabilities of CIP on our Consolidated Balance Sheets.

Cash, accounts receivable, accounts payable, securities purchase payable of CIP and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.

As of December 31, 2020, the carrying value of goodwill was $290.4 million.

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We completed our annual impairment assessment of these assets as of October 31, 2020, and no impairments were identified.

For purposes of this assessment, we considered various qualitative factors for the investment advisory contracts related to the indefinite-lived intangible assets including, but not limited to, (a) the growth in assets under management, (b) the positive operating margins, and (c) the positive cash flows generated, and we determined that it was more likely than not that the fair value of indefinite-lived intangible assets was greater than their carrying value.

For purposes of this assessment, we considered various qualitative

factors for the investment advisory contracts related to the indefinite-lived intangible assets including, but not limited to, (i) the growth in assets under management, (ii) the positive operating margins, and (iii) the positive cash flows generated, and we determined that it was more likely than not that the fair value of indefinite-lived intangible assets was greater than their carrying value.

Only a significant decline in the fair value of the indefinite-lived intangible assets would indicate that an impairment may exist.

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Impairment testing is performed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

If we determine the carrying value of the definite-lived intangible assets is less than the sum of the undiscounted cash flows expected to result from the asset, we will quantify the impairment using a discounted cash flow model.

If we were to determine that the carrying value of the definite-lived intangible assets was less than the sum of the undiscounted cash flows expected to result from the asset, we would quantify the impairment using a discounted cash flow model.

Revenue Recognition

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The net asset values from which investment management, distribution and service, and administration and shareholder service fees are calculated are variable in nature and subject to factors outside of our control such as additional investments, withdrawals and market performance.

Because of this, they are considered constrained until the end of the contractual measurement period (monthly or quarterly) which is when asset values are generally determinable.

Because of this, these fees are considered constrained until the end of the contractual measurement period (monthly or quarterly) which is when asset values are generally determinable.

Investment Management Fees

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Amounts paid to unaffiliated subadvisers for the years ended December 31, 2020, 2019 and 2018 were $38.6 million, $40.5 million and $46.7 million, respectively.

Retail separate account fees are generally based on the end of the preceding or current quarter's asset values or on an average of month-end balances.

Institutional account fees are generally based on an average of month-end balances or current quarter’s asset values.

In certain instances, institutional fees may include performance fees that are based on relative investment returns.

Retail separate account fees are generally based on the end of the preceding or current quarter's asset values.

Institutional account fees are generally based on an average of month-end balances.

In certain instances, institutional fees may include performance related fees that are based on relative investment returns.

Fees for structured finance products, for which we act as the collateral manager, consist of senior, subordinated and, in certain instances, incentive management fees.

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Depending on the fund type or share class, these fees primarily consist of an asset-based fee that is paid by the fund over a period of years to cover allowable sales and marketing expenses for the fund or front-end sales charges that are based on a percentage of the offering price.

Asset-based distribution and service fees are primarily based on percentages of the average daily net asset value and are paid monthly pursuant to the terms of the respective distribution and service fee contracts.

Asset-based distribution and service fees are primarily based on percentages of the average daily net asset value and are

paid monthly pursuant to the terms of the respective distribution and service fee contracts.

Distribution and service fees represent two performance obligations comprised of distribution and related shareholder servicing activities.

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Administration & Shareholder Service Fees

We provide administrative fund services to our open-end funds and certain of our closed-end funds and shareholder services to our open-end funds.

We provide administrative fund services to our open-end mutual funds, ETFs and certain of our closed-end funds and shareholder services to our open-end funds.

Administration and shareholder services are performed over time.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis