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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-25 · 140 added, 260 removed, 389 unchanged (51% of the section changed)

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We provide investment management and related services to individuals and institutions.

We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers, each having its own distinct investment style, autonomous investment process, individual brand, as well as from select unaffiliated subadvisers.

We use a multi-manager, multi-style approach, offering investment strategies from affiliated managers, each having its own distinct investment style, autonomous investment process and individual brand, as well as from select unaffiliated subadvisers for certain of our retail funds.

By offering a broad array of products, we believe we can appeal to a greater number of investors and have offerings across market cycles and through changes in investor preferences.

Our earnings are primarily driven by asset-based fees charged for services relating to these various products, including investment management, fund administration, distribution and shareholder services.

Our earnings are primarily from asset-based fees charged for services relating to these various products, including investment management, fund administration, distribution, and shareholder services.

We offer investment strategies for individual and institutional investors in different investment products and through multiple distribution channels.

Our investment strategies are available in a diverse range of styles and disciplines, managed by differentiated investment managers.

We have offerings in various asset classes (equity, fixed income, multi-asset and alternative), geographies (domestic, global, international and emerging), market capitalizations (large, mid and small), styles (growth, core and value) and investment approaches (fundamental, quantitative and specialty).

Our retail products include open-end funds and exchange traded funds ("ETFs") as well as closed-end funds and retail separate accounts.

Our retail products include open-end funds, closed-end funds and retail separate accounts.

Our institutional products are offered through separate accounts and pooled or commingled structures to a variety of institutional clients.

We also provide subadvisory services to other investment advisers and serve as the collateral manager for structured products.

We distribute our open-end funds and ETFs principally through financial intermediaries.

We have broad distribution access in the retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and registered investment advisers, banks and insurance companies.

We distribute our open-end funds principally through financial intermediaries.

We have broad distribution access in the U.S.

retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and registered investment advisers, banks and insurance companies.

In many of these firms, we have a number of products that are on preferred "recommended" lists and on fee-based advisory programs.

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 global products and in certain international jurisdictions.

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

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

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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 capital and financial markets experience fluctuation, volatility and declines, which impact investment returns and asset flows of our investment offerings 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.

and global equity markets increased in value in 2021, as evidenced by increases in major indices as noted in the following table:

and global equity markets decreased in value in 2022, as evidenced by decreases in major indices as noted in the following table:

December 31, As of Change

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Russell 2000 Index 1,761 2,245 (21.6) %

Standard & Poor's / LSTA Leveraged Loan Index 2,420 2,338 3.5 %

Morningstar / LSTA Leveraged Loan Index 2,406 2,420 (0.6) %

Financial Highlights

▪ Net income per diluted share was $26.01 in 2021, an increase of $15.99, or 159.6%, as compared to net income per diluted share of $10.02 in 2020.

▪ Total sales were $36.5 billion in 2021, an increase of $3.1 billion, or 9.2%, from $33.4 billion in 2020.

▪ Net income per diluted share was $15.50 in 2022, a decrease of $10.51, or 40.4%, as compared to net income per diluted share of $26.01 in 2021.

▪ Total sales were $30.3 billion in 2022, a decrease of $6.2 billion, or 17.0%, from $36.5 billion in 2021.

Net flows were $(13.4) billion in 2022 compared to $3.5 billion in 2021.

▪ Assets under management were $187.2 billion at December 31, 2021, an increase of $55.0 billion, or 41.6%, from $132.2 billion at December 31, 2020.

AllianzGI Strategic Partnership

On February 1, 2021, the Company finalized a strategic partnership with Allianz Global Investors U.S.

LLC ("AllianzGI"), pursuant to which NFJ Investment Group ("NFJ") was established as a new affiliated investment manager and the Company became the investment adviser, distributor and/or administrator for $29.5 billion of AllianzGI's open-end, closed-end, institutional and retail separate account assets (the "AGI relationship").

Westchester Capital Management

On October 1, 2021, the Company completed its acquisition of Westchester Capital Management, LLC ("Westchester"), a recognized leader in global event-driven strategies with $5.1 billion of assets under management.

▪ Assets under management were $149.4 billion at December 31, 2022, a decrease of $37.8 billion, or 20.2%, from $187.2 billion at December 31, 2021.

On October 19, 2022, the Company entered into an agreement to acquire AlphaSimplex Group, LLC ("AlphaSimplex"), a leading manager of liquid alternative investment solutions.

Under the agreement, the Company would acquire 100% of AlphaSimplex for $130.0 million at closing, which includes deferred retention incentives for management.

The transaction is expected to close near the end of the first quarter of 2023, subject to customary closing conditions, necessary regulatory approvals, and client approvals, including approvals by the fund boards and fund shareholders.

Stone Harbor Investment Partners

On January 1, 2022, the Company completed its acquisition of Stone Harbor Investment Partners LLC ("Stone Harbor"), a premier manager of emerging markets debt, multi-asset credit, global corporate, and other strategies with $14.7 billion of assets under management at December 31, 2021.

On January 1, 2022, the Company acquired Stone Harbor Investment Partners LLC ("Stone Harbor"), a premier manager of emerging markets debt, multi-asset credit, global corporate, and other strategies with $14.7 billion of assets under management at December 31, 2021.

Westchester Capital Management

On October 1, 2021, the Company acquired Westchester Capital Management, LLC ("Westchester"), a recognized leader in global event-driven strategies with $5.1 billion of assets under management at September 30, 2021.

Fund Adoption and NFJ Investment Group

On February 1, 2021, the Company executed an agreement with Allianz Global Investors U.S.

LLC ("AGI"), pursuant to which NFJ Investment Group ("NFJ") was established as a new affiliated investment manager, and the Company became the investment adviser, distributor and/or administrator for $29.5 billion of AGI's open-end, closed-end, institutional and retail separate account assets.

Assets Under Management

At December 31, 2021, total assets under management were $187.2 billion, representing an increase of $55.0 billion, or 41.6%, from December 31, 2020.

The change in total assets under management from December 31, 2020 included $19.4 billion of positive market performance, $29.5 billion from the AGI relationship, $5.1 billion from the Westchester acquisition and $3.1 billion of positive net flows.

Investment Performance - Open-End Funds

The following table presents our open-end funds' and their assets, as well as the three-year average annual return, corresponding benchmark index average annual return and ranking within its Morningstar Peer Group for each fund as of December 31, 2021.

Fund Type/Name Assets

(in millions)

Return % (1) Benchmark Index

Return % (2) Peer Group Percentile

Ranking % (3)

Retail Funds:

Domestic Equity

Virtus KAR Small-Cap Growth Fund $ 6,362 27.99 21.17 32

Virtus Ceredex Mid-Cap Value Equity Fund 3,701 19.26 19.62 49

Virtus KAR Mid-Cap Growth Fund 3,261 33.81 27.46 8

Virtus KAR Small-Cap Core Fund 1,976 26.48 20.02 57

Virtus KAR Mid-Cap Core Fund 1,578 27.41 23.29 45

Virtus KAR Small-Cap Value Fund 1,507 24.11 17.99 57

Virtus KAR Small-Mid Cap Core Fund 1,459 30.33 21.91 26

Virtus NFJ Mid-Cap Value Fund 1,449 17.92 19.62 64

Virtus AllianzGI Focused Growth Fund 1,446 34.26 34.08 13

Virtus Ceredex Large-Cap Value Equity Fund 1,259 19.46 17.64 28

Virtus NFJ Dividend Value Fund 910 16.04 17.64 75

Virtus KAR Capital Growth Fund 813 32.59 34.08 23

Virtus NFJ Small-Cap Value Fund 536 13.78 17.99 91

Virtus AllianzGI Mid-Cap Growth Fund 483 36.09 27.46 5

Virtus Ceredex Small-Cap Value Equity Fund 467 14.71 17.99 93

Virtus NFJ Large-Cap Value Fund 344 17.03 17.64 62

Virtus AllianzGI Small-Cap Fund 185 19.75 20.02 55

Virtus KAR Equity Income Fund 145 19.73 13.82 90

Virtus Silvant Large-Cap Growth Stock Fund 139 31.09 34.08 36

Fund Type/Name Assets

(in millions)

Return % (1) Benchmark Index

Return % (2) Peer Group Percentile

Ranking % (3)

Virtus Newfleet Multi-Sector Short Term Bond Fund 6,485 3.81 3.24 12

Virtus AllianzGI Convertible Fund 2,943 27.52 24.18 3

Virtus Seix Floating Rate High Income Fund 2,408 4.12 5.43 67

Virtus Seix U.S.

Government Securities Ultra-Short Bond Fund 881 1.15 1.11 74

Virtus AllianzGI Short Duration High Income Fund 855 6.24 5.77 80

Virtus Newfleet Low Duration Core Plus Bond Fund 804 3.19 2.92 37

Virtus Seix High Yield Fund 467 8.84 8.56 19

Virtus Seix Total Return Bond Fund 378 5.54 4.79 46

Virtus Newfleet Multi-Sector Intermediate Bond Fund 311 6.42 4.79 37

Virtus Seix Investment Grade Tax-Exempt Bond Fund 257 4.22 3.98 50

Virtus Seix High Income Fund 208 8.12 8.83 41

Virtus Newfleet Senior Floating Rate Fund 200 4.71 5.43 40

Virtus Seix Core Bond Fund 107 5.03 4.79 38

Virtus Newfleet Core Plus Bond Fund 103 6.08 4.79 25

Virtus Newfleet Tax-Exempt Bond Fund 100 4.16 4.27 53

Virtus AllianzGI High Yield Bond Fund 69 7.69 8.57 52

Virtus AllianzGI Core Plus Bond Fund 65 7.01 4.79 6

Virtus Seix Corporate Bond Fund 62 9.28 7.59 6

Virtus Seix High Grade Municipal Bond Fund 58 5.06 4.73 54

Virtus Newfleet High Yield Fund 57 8.79 8.81 20

International Equity

Virtus Vontobel Emerging Markets Opportunities Fund 3,740 8.61 10.94 85

Virtus KAR International Small-Mid Cap Fund 3,101 18.82 14.72 64

Virtus Vontobel Foreign Opportunities Fund 1,075 18.31 13.18 66

Virtus KAR Emerging Markets Small-Cap Fund 390 17.34 16.46 12

Virtus AllianzGI Emerging Markets Opportunities Fund 287 12.33 10.94 39

Virtus NFJ Emerging Markets Value Fund 148 15.29 10.94 22

Virtus NFJ International Value Fund 146 13.46 13.18 9

Virtus AllianzGI International Small-Cap Fund 74 15.33 16.27 90

Virtus AllianzGI Income & Growth Fund 7,496 18.00 26.07 2

Virtus Tactical Allocation Fund 941 21.66 19.32 1

Virtus AllianzGI Global Dynamic Allocation Fund 59 15.80 14.31 21

The Merger Fund® 4,269 3.82 0.99 68

Virtus Duff & Phelps Real Estate Securities Fund 617 22.56 18.41 13

Virtus Duff & Phelps International Real Estate Securities Fund 538 10.88 6.71 72

Virtus Westchester Event-Driven Fund 334 6.41 0.99 35

Virtus KAR Long/Short Equity Fund 168 27.31 25.79 2

Virtus FORT Trend Fund 153 2.98 0.99 N/A

Virtus Duff & Phelps Global Infrastructure Fund 93 13.34 11.46 34

Fund Type/Name Assets

(in millions)

Return % (1) Benchmark Index

Return % (2) Peer Group Percentile

Ranking % (3)

Specialty Equity

Virtus AllianzGI Technology Fund 2,364 35.42 37.82 45

Virtus AllianzGI Water Fund 1,130 25.14 20.38 14

Virtus Zevenbergen Innovative Growth Stock Fund 1,120 39.44 33.21 3

Virtus AllianzGI Health Sciences Fund 205 21.75 18.79 18

Virtus AllianzGI Global Allocation Fund 195 14.56 14.31 14

Virtus AllianzGI Global Sustainability Fund 136 24.49 20.38 3

Global Equity

Virtus Vontobel Global Opportunities Fund 400 19.96 20.38 89

Virtus SGA Global Growth Fund 172 23.56 20.38 63

Virtus AllianzGI Global Small-Cap Fund 90 20.84 19.20 54

Global Funds:

Virtus GF SGA Global Growth Fund 921 21.99 20.38 58

Virtus GF U.S.

Small Cap Focus Fund 351 20.03 20.02 60

Virtus GF Multi-Sector Short Duration Bond Fund 81 3.83 3.60 7

Variable Insurance Funds:

Virtus KAR Capital Growth Series 317 33.07 34.08 20

Virtus SGA International Growth Series 163 16.65 13.18 83

Virtus KAR Small-Cap Growth Series 128 27.75 21.17 34

Virtus Duff & Phelps Real Estate Securities Series 120 22.47 18.41 19

Virtus Newfleet Multi-Sector Intermediate Bond Series 113 5.96 4.79 3

Virtus KAR Equity Income Series 103 20.18 13.82 89

Virtus KAR Small-Cap Value Series 92 24.60 17.99 87

Virtus Strategic Allocation Series 87 22.01 19.32 5

The Merger Fund® VL 54 4.84 0.99 53

Other Funds 418

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

Performance shown does not include the effect of applicable sales charges, if any.

Had any applicable sales charges been reflected, performance would be lower than shown above.

(2) Represents the average annual total return of the benchmark index.

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/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/our-products/individual-investors/mutual-funds.

Fund returns are reported net of fees.

Past performance does not guarantee future results.

Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.

Operating Results

In 2021, total revenues increased $375.3 million, or 62.2%, to $979.2 million from $603.9 million in 2020 primarily as a result of higher average assets under management in open-end funds due to the AGI relationship, positive market performance and positive net flows.

Operating income increased by $182.3 million, or 127.4%, to $325.5 million in 2021 from $143.2 million in 2020 due to increased revenues.

At December 31, 2022, total assets under management were $149.4 billion, representing a decrease of $37.8 billion, or 20.2%, from December 31, 2021.

The change in total assets under management from December 31, 2021 included $37.1 billion of negative market performance and $13.4 billion of net outflows partially offset by $14.7 billion in assets under management from the addition of Stone Harbor.

Assets Under Management by Product

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Closed-End Funds 10,361 12,068 (1,707) (14.1) %

Exchange Traded Funds 1,479 837 642 76.7 %

Retail Separate Accounts 35,352 44,538 (9,186) (20.6) %

Institutional Accounts (2) 50,663 51,874 (1,211) (2.3) %

Structured Products 3,734 4,060 (326) (8.0) %

Total Assets Under Management $ 149,376 $ 187,186 $ (37,810) (20.2) %

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

retail funds, global funds and variable insurance funds.

(2) Includes ultra-short strategies previously included in a separate liquidity strategy.

Prior period amounts have been recast to conform to the current year presentation.

retail funds, global funds, ETFs and variable insurance funds.

(2) Represents assets under management of institutional separate and commingled accounts including structured products.

(3) Averages are calculated as follows:

– Funds - average daily or weekly balances

– Retail Separate Accounts - average of quarterly beginning balances

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

– Retail Separate Accounts - average of prior-quarter ending balances

– Institutional Accounts - average of month-end balances

The following table summarizes asset flows by product:

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Ending balance $ 10,361 $ 12,068

Exchange Traded Funds

Beginning balance $ 837 $ 1,156

Inflows 792 438

Outflows (307) (448)

Net flows 485 (10)

Market performance 213 (254)

Other (3) (56) (55)

Ending balance $ 1,479 $ 837

Asset Flows by Product

Years Ended December 31,

(in millions) 2021 2020

Retail Separate Accounts

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Ending balance $ 50,663 $ 51,874

Structured Products

Beginning balance $ 187,186 $ 132,194

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Ending balance $ 149,376 $ 187,186

Beginning balance $ 132,194 $ 108,904

Inflows 36,496 33,428

Outflows (33,364) (28,075)

Net flows 3,132 5,353

Market performance 19,352 19,224

Other (3) 32,508 (1,287)

Ending balance $ 187,186 $ 132,194

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

retail funds, global funds and variable insurance funds.

(2) Includes ultra-short strategies previously included in a separate liquidity strategy.

(3) Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from cash management strategies, and the effect on net flows from non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), structured products reset transactions, and the use of leverage.

retail funds, global funds, ETFs and variable insurance funds.

(2) Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from cash management strategies, and the impact of non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), current income or capital returned by structured products and the use of leverage.

(3) Represents assets under management of institutional separate and commingled accounts including structured products.

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

December 31, Change

December 31, Change % of Total

(in millions) 2022 2021 2022 vs.

2021 % 2022 2021

Equity $ 81,894 $ 116,546 $ (34,652) (29.7) % 54.9 % 62.3 %

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Total $ 149,376 $ 187,186 $ (37,810) (20.2) % 100.0 % 100.0 %

(1) Includes ultra-short strategies previously included in a separate liquidity strategy.

(1) Includes strategies with substantial holdings in at least two of the following asset classes:

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Closed-End Funds 57.4 55.8 11,132 11,352

Exchange Traded Funds 9.4 6.5 1,183 687

Retail Separate Accounts 42.8 44.6 38,498 37,867

Institutional Accounts (2) 31.4 32.2 53,120 48,849

Structured Products 37.3 31.5 3,849 4,173

All Products 41.6 42.9 $ 166,795 $ 172,841

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

retail funds, global funds and variable insurance funds.

retail funds, global funds, ETFs and variable insurance funds.

(2) Represents assets under management of institutional separate and commingled accounts including structured products.

(3) Averages are calculated as follows:

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– Retail Separate Accounts - prior-quarter ending balances

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

Average fees earned represent investment management fees, net of revenue-related adjustments, divided by average net assets, excluding the impact of consolidation of investment products ("CIP").

– Institutional Accounts - average of month-end balances

Average fees earned represent investment management fees, net of revenue-related adjustments, divided by average net assets, excluding the impact of consolidated investment products ("CIP").

Revenue-related adjustments are based on specific agreements and reflect the portion of investment management fees passed-through to third-party client intermediaries for services to investors in sponsored investment products.

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

Structured product fees are calculated based on a combination of the underlying cash flows and the principal value of the product.

Institutional account fees are calculated based on an average of month-end balances, an average of current quarter’s asset values or on a combination of the underlying cash flows and the principal value of the product.

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

The average fee rate earned on all products for 2021 decreased by 0.6 basis points compared to the prior year, primarily due to lower fee rates earned on the assets under management acquired from the AGI relationship.

Results of Operations

The average fee rate earned for 2022 on all products decreased by 1.3 basis points compared to the prior year primarily due to a lower proportion of assets under management in equity products as a result of negative equity markets in the year partially offset by a higher proportion of alternative assets.

Investment Performance

The following table presents a summary of investment performance by asset class measured by the percentage of assets under management exceeding their relevant benchmarks as of December 31, 2022:

Percentage of Assets Under Management

Beating Benchmark (2)

Asset Class (1) 3-Year 5-Year 10-Year

Equity 50% 67% 65%

Fixed Income 65% 49% 54%

Alternatives 94% 95% 92%

(1) Excludes non-rated funds, closed-end funds, private client accounts, structured products and certain other multi-asset strategies.

(2) Percentage beating benchmark is reported as the percentage of assets under management that have outperformed benchmarks across the indicated periods.

Performance is presented on an average annual total return basis for products with a three-, five-, and/or ten-year track record, is net of fees and is measured on a consistent basis relative to the most appropriate benchmarks.

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

Past performance is not indicative of future results.

As of December 31, 2022, 34 of 77, or 44%, of our rated U.S.

retail funds received an overall rating of 4 or 5 stars representing 57% of our total U.S.

retail fund assets under management (1) .

By comparison, 32.5% of Morningstar's fund population is given a 4 or 5 star rating (2) .

(1) Assets under management excludes non-rated funds.

Based on institutional-class shares, except for funds without I shares, for which shares were used, or if A share rating is higher than I shares.

Past performance is not indicative of future results.

(2) Morningstar ratings are based on risk-adjusted returns.

Strong ratings are not indicative of positive fund performance.

Results of Operations - December 31, 2022 compared to December 31, 2021

A discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 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, 2021 , which specific discussion is incorporated herein by reference.

Summary Financial Data

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Earnings (loss) per share-diluted $ 15.50 $ 26.01 $ (10.51) (40.4) %

In 2022, total revenues decreased $92.9 million, or 9.5%, to $886.4 million from $979.2 million in 2021 primarily as a result of lower average assets under management due to negative market performance and net outflows partially offset by the addition of assets under management from Stone Harbor and Westchester.

Operating income decreased by $128.0 million, or 39.3%, to $197.5 million in 2022 from $325.5 million in 2021 due to the previously mentioned factors.

Revenues by source were as follows:

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Institutional accounts 157,404 148,213 9,191 6.2 %

Structured products 4,726 4,012 714 17.8 %

Other products 1,479 2,511 (1,032) (41.1) %

Total investment management fees 728,339 781,585 (53,246) (6.8) %

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Total revenues $ 886,379 $ 979,234 $ (92,855) (9.5) %

A discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 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, 2020 , 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 $276.2 million, or 54.7%, for the year ended December 31, 2021, due to an increase in average assets under management of $63.3 billion, or 57.8%, primarily as a result of the AGI relationship and market performance.

Investment management fees decreased by $53.2 million, or 6.8%, for the year ended December 31, 2022, due to lower average assets under management and a lower average fee rate.

Distribution and Service Fees

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

Distribution and service fees increased by $52.1 million, or 135.7%, for the year ended December 31, 2021, primarily due to higher average assets for open-end funds primarily as a result of market performance and the AGI relationship.

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 $23.0 million, or 25.4%, for the year ended December 31, 2022, primarily due to lower sales for open-end funds in share classes that have sales-based 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, ETFs and certain of our closed-end funds.

Fund administration and shareholder service fees increased by $43.1 million, or 72.4%, for the year ended December 31, 2021, primarily due to the increase in average assets under management for our open-end and closed-end funds during the period, predominantly as a result of market performance and the AGI relationship.

Administration and shareholder service fees represent fees earned for fund administration and shareholder services from our U.S.

retail funds, ETFs and certain closed-end funds.

Fund administration and shareholder service fees decreased by $16.7 million, or 16.3%, for the year ended December 31, 2022 compared to the prior year, primarily due to the decrease in average assets under management for our open- and closed-end funds during the period as a result of market performance and net outflows in our open-end funds.

Other Income and Fees

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

Other income and fees increased by $3.9 million, or 581.0%, during the year ended December 31, 2021 compared to December 31, 2020, due to revenue from other fee earning assets primarily as a result of the AGI relationship.

Other income and fees increased modestly during the year ended December 31, 2022 compared to the prior year.

Operating Expenses

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Other operating expenses of CIP 4,408 3,562 846 23.8 %

Change in fair value of contingent consideration 12,400 — 12,400 N/M

Restructuring and severance — 1,155 (1,155) (100.0) %

Change in fair value of contingent consideration 8,020 12,400 (4,380) (35.3) %

Restructuring expense 4,015 — 4,015 100.0 %

Depreciation expense 3,923 3,900 23 0.6 %

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Employment expenses consist of fixed and variable compensation and related employee benefit costs.

Employment expenses of $358.2 million increased $90.9 million, or 34.0%, from the prior year primarily due to increased profit-based compensation in the current year.

Employment expenses of $371.3 million increased $13.0 million, or 3.6%, from the prior year primarily due to the addition of Stone Harbor and Westchester and increased salary expense partially offset by a decrease in profit-based compensation in the current year.

Distribution and Other Asset-Based Expenses

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The deferred sales commissions are amortized on a straight-line basis over the period commissions are recovered from distribution fee revenues and contingent sales charges received upon redemption of shares.

Distribution and other asset-based expenses increased $64.0 million, or 83.1%, from the prior year primarily due to increased sales and assets under management in share classes that have distribution and other asset-based expenses predominantly as a result of the AGI relationship.

Distribution and other asset-based expenses decreased $28.4 million, or 20.2%, compared to the prior year primarily due to lower sales and a decrease in assets under management in share classes that have sales- and asset-based 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 increased $20.2 million, or 29.0%, for the year ended December 31, 2021 as compared to the prior year primarily due to acquisition related professional fees and the addition of new affiliates.

Other operating expenses increased $36.0 million, or 40.0%, for the year ended December 31, 2022 as compared to the prior year primarily due to the addition of Stone Harbor and Westchester, as well as higher travel and related expenses.

Other Operating Expenses of CIP

Other operating expenses of CIP decreased $7.0 million, or 66.3%, for the year ended December 31, 2021 compared to the prior year primarily due to the costs associated with the issuance of a new CLO in the prior year that did not recur.

Other operating expenses of CIP increased $0.8 million, or 23.8%, for the year ended December 31, 2022 compared to the prior year primarily due to the costs associated with the issuance of a new CLO in the current year that did not occur in the prior year.

Restructuring Expense

Restructuring expense consists primarily of costs incurred during the year ended December 31, 2022 related to the write-down of right-of-use assets for a lease in conjunction with the consolidation of certain office space.

Change in Fair Value of Contingent Consideration

The Company's contingent consideration related to its NFJ and Westchester transactions are recorded at fair value each reporting date taking into consideration changes in various estimates, including probability of success, discount rates and amount of time until the conditions of the contingent payments are achieved.

Contingent consideration related to the NFJ, Westchester and Stone Harbor transactions are remeasured at fair value each reporting date taking into consideration changes in various estimates, including underlying performance estimates, discount rates and amount of time until the conditions of the contingent payments are achieved.

The change in fair value is recorded in the current period as a gain or loss.

The change in value of contingent consideration of $12.4 million in 2021 was primarily attributable to higher future revenue projections and the time value of money.

The decrease in the change in fair value of contingent consideration of $4.4 million in 2022 compared to the prior year was primarily attributable to future revenue projections and the time value of money.

Depreciation Expense

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

Depreciation expense decreased $0.8 million, or 16.3%, during the year ended December 31, 2021, compared to the prior year, primarily due to certain assets becoming fully depreciated.

Depreciation expense remained consistent in 2022 compared to the prior year.

Amortization Expense

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

Amortization expense increased $14.4 million, or 47.6%, for the year ended December 31, 2021 compared to the prior year due to the additional amortization associated with the Westchester and AGI transactions.

Amortization expense increased $14.0 million, or 31.5%, for the year ended December 31, 2022 compared to the prior year due to the additional amortization associated with the acquisitions of Stone Harbor and Westchester.

Other Income (Expense), net

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Realized and unrealized gain (loss) of CIP, net changed $37.5 million compared to the prior year.

The change for the current year consisted primarily of net realized and unrealized gains of $73.4 million due to changes in market values of leveraged loans, partially offset by unrealized losses of $73.2 million related to the value of the notes payable.

The change for the current year consisted primarily of net realized and unrealized losses of $140.5 million due to changes in market values of leveraged loans, partially offset by unrealized gains of $103.0 million related to the value of the notes payable.

Other Income (Expense), net

Other income (expense), net increased by $2.4 million during the year ended December 31, 2021 compared to the prior year primarily due to increased earnings from equity method investments during the current year.

Other income (expense), net decreased by $4.4 million during the year ended December 31, 2022 compared to the prior year primarily due to lower equity method investment income during the current year.

Interest Income (Expense), net

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Interest Expense

Interest expense decreased $2.7 million, or 22.3%, for the year ended December 31, 2021 compared to the prior year primarily due to a lower effective interest rate as well as lower average debt outstanding compared to the prior year.

Interest expense increased $3.9 million, or 42.6%, for the year ended December 31, 2022 compared to the prior year primarily due to higher interest rates on our debt.

Interest and Dividend Income

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

Interest and dividend income remained consistent in 2021 compared to the prior year.

Interest and dividend income increased $3.1 million, or 226.1%, compared to the prior year due to higher average investment balances and higher interest rates during the current year compared to the prior year.

Interest and Dividend Income of Investments of CIP

Interest and dividend income of investments of CIP decreased $19.6 million, or 17.8%, compared to the prior year primarily due to a decrease in interest rates.

Interest and dividend income of investments of CIP increased $17.2 million, or 19.1%, compared to the prior year primarily due to higher average interest rates in the current year and the addition of a new CLO in the current year.

Interest Expense of CIP

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

Interest expense of CIP decreased by $25.0 million, or 29.3%, compared to the prior year primarily due to both lower variable interest rates and average debt balances of CIP during the current year.

Income Tax Expense

Interest expense of CIP increased by $19.8 million, or 32.8%, compared to the prior year primarily due to higher average interest rates during the current year and the addition of a new CLO in the current year.

Income Tax Expense (Benefit)

The provision for income taxes reflected U.S.

federal, state and local taxes at an estimated effective tax rate of 34.9% and 25.7% for 2022 and 2021, respectively.

The decrease in the estimated effective tax rate for the current year compared to the prior year was primarily due to excess tax benefits related to share-based compensation.

The higher estimated effective tax rate for 2022 was primarily due to valuation allowances recorded in the current year for the tax effects of unrealized losses on certain Company investments.

Effects of Inflation

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In addition, the value of the assets that we manage may be negatively impacted if inflationary expectations result in a rising interest rate environment.

Declines in the values of these assets under management could lead to reduced revenues as management fees are generally earned as a percent of assets under management.

Declines in the values of these assets under management could lead to reduced revenues as management fees are generally earned as a percentage of assets under management.

Liquidity and Capital Resources

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Investments 100,330 108,890 (8,560) (7.9) %

Contingent consideration 162,564 — 162,564 N/M

Contingent consideration 128,400 162,564 (34,164) (21.0) %

Debt 255,025 266,346 (11,321) (4.3) %

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Uses of Capital

Our main uses of capital related to operating activities comprise employee compensation and related benefit costs, which includes annual incentive compensation;

other operating expenses, which primarily consist of investment research;

technology costs;

professional fees;

distribution and occupancy costs;

interest on our indebtedness;

and income taxes.

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

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

In the first quarters of 2021 and 2020, we paid approximately $96.9 million and $84.7 million, respectively, in incentive compensation earned during the years ended December 31, 2020 and 2019, respectively.

In 2022 and 2021, we paid approximately $151.6 million and $96.9 million, respectively, in incentive compensation earned during the years ended December 31, 2021 and 2020, respectively.

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

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

(viii) purchases of affiliate noncontrolling interests and (ix) payment of contingent consideration related to completed acquisitions.

and (viii) purchases of affiliate equity interests.

Capital and Reserve Requirements

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Operating Cash Flow

Cash flows provided by operating activities of $665.7 million for 2021 changed by $891.8 million from cash flows used in operating activities of $226.1 million in 2020 primarily due to an increase in net sales of investments by CIP of $698.5 million compared to the prior year.

Cash flows provided by operating activities of $132.7 million for 2022 decreased by $533.1 million from cash flows provided by operating activities of $665.7 million in 2021 primarily due to a $396.2 million reduction in net sales of investments by CIP and a decrease in accrued compensation and other liability balances 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 used in investing activities of $175.0 million for 2021 changed by $183.7 million from net cash provided by investing activities of $8.7 million in 2020.

The primary investing activities during 2021 related to cash paid for the Westchester transaction.

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.

Net cash used in investing activities of $27.5 million for 2022 decreased by $147.6 million from net cash used in investing activities of $175.0 million in 2021.

The decrease in cash used in investing activities during 2022 compared to the prior year related to the decrease in cash paid for acquisitions.

Financing Cash Flow

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 related to financing activities changed by $479.7 million to net cash outflows of $244.4 million in 2021 compared to net cash provided by financing activities of $235.3 million in the prior year, primarily due to a decrease of $579.9 million in net borrowings of CIP during 2021 compared to the prior year, partially offset by an increase of net cash inflows of $147.7 million primarily as a result of the refinancing of our credit agreement more fully discussed below.

Credit Agreement Refinancing

On September 28, 2021, we completed a refinancing through the execution of an amended and restated credit agreement (the "Credit Agreement").

The Credit Agreement provides for (i) a $275.0 million term loan with a seven-year term (the "Term Loan") and (ii) a $175.0 million revolving credit facility with a five-year term.

A portion of the proceeds from the refinancing was used to pay off $194.0 million outstanding on a previous term loan.

Cash flows from financing activities consist primarily of transactions related to our common shares, issuance and repayment of debt by us and CIP, payments of contingent consideration and changes to noncontrolling interests.

Net cash used in financing activities decreased by $142.3 million to net cash outflows of $102.1 million in 2022 compared to net cash outflows of $244.4 million in the prior year.

The decrease in the current year was primarily due to a decrease in net borrowings of CIP of $308.8 million partially offset by an increase in contingent consideration payments of $33.0 million and an increase in repurchases of common shares of $32.5 million in the current year.

Credit Agreement

The Company's credit agreement, as amended (the "Credit Agreement"), comprises (i) a $275.0 million term loan with a seven-year term (the "Term Loan") expiring in September 2028, and (ii) a $175.0 million revolving credit facility with a five-year term expiring in September 2026.

During 2022, the Company repaid $12.8 million outstanding under its Term Loan.

At December 31, 2022, $261.6 million was outstanding under the Term Loan, and there were no outstanding borrowings under the revolving credit facility.

In accordance with Accounting Standards Codification ("ASC") 835, Interest , the amounts outstanding under the Term Loan are presented on the Consolidated Balance Sheet net of related debt issuance costs, which were $8.0 million as of December 31, 2021.

In accordance with Accounting Standards Codification ("ASC") 835, Interest , the amounts outstanding under the Company's Term Loan are presented on the Consolidated Balance Sheet net of related debt issuance costs, which were $6.6 million as of December 31, 2022.

Impact of New Accounting Standards

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Our consolidated financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which requires the use of estimates.

Actual results may vary from these estimates.

Actual results will vary from these estimates.

Management believes the following critical accounting policies are important to understanding our results of operations and financial position.

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

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;

(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;

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Noncontrolling interests - CIP

Noncontrolling interests - CIP represent third-party investments in our CIP and are classified as redeemable noncontrolling interests on our Consolidated Balance Sheets because investors in those products are able to 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

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These rights are exercisable at pre-established intervals (between four and seven years from their issuance) or upon certain conditions such as retirement.

The put and call rights are not legally detachable or separately exercisable and are deemed to be embedded in the related noncontrolling interests.

The put and call rights are not legally detachable or separately exercisable and are deemed to be embedded in the related

noncontrolling interests.

We, in purchasing affiliate equity, have the option to settle in cash or shares of common stock and are entitled to the cash flow associated with any purchased equity.

Minority interests held in an affiliate are generally recorded on our Consolidated Balance Sheets at estimated redemption value within redeemable noncontrolling interests, and changes in estimated redemption value of these interests are recorded on our Consolidated Statements of Operations within noncontrolling interests.

Minority interests held in an affiliate are generally recorded in our Consolidated Balance Sheets at estimated redemption value within redeemable noncontrolling interests, and changes in estimated redemption value of these interests are recorded in our Consolidated Statements of Operations within noncontrolling interests.

Fair Value Measurements and Fair Value of Financial Instruments

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Cash investments in money market funds are valued using published net asset values and 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.

The fair value of closed-end funds and ETFs are determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.

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

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

The fair value of U.S.

retail funds, global funds and variable insurance funds is determined based on their published net asset values and are categorized as Level 1.

The fair value of closed-end funds and ETFs is determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.

Equity securities represent securities traded on active markets, 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.

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.

Contingent consideration represents liabilities associated with our business combinations.

The estimated fair values are measured using a simulation model using unobservable market data inputs prepared with the assistance of an independent valuation firm.

These liabilities are categorized as Level 3.

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

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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.

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.

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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) .

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.

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.

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.

Short sales are recorded on the Consolidated Balance Sheets within other liabilities of CIP and are classified as Level 1 based on the underlying equity security.

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

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If we determine that the carrying value of the reporting unit is less than the fair value, a second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.

We completed our annual goodwill impairment assessment as of October 31, 2021, and no

impairment was identified.

For purposes of this assessment, we considered various qualitative factors including, but not limited to, certain indicators of fair value (i.e., market capitalization and market multiplies for asset managers), and determined that it was more likely than not that the fair value of our reporting unit was greater than its carrying value.

We completed our annual goodwill impairment assessment as of October 31, 2022, and no impairment was identified.

For purposes of this assessment, we considered various qualitative factors including, but not limited to, certain indicators of fair value (e.g., market capitalization and market multiplies for asset managers) and determined that it was more likely than not that the fair value of our reporting unit was greater than its carrying value.

Only a significant decline in the fair value of our reporting unit would indicate that an impairment may exist.

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Investment management fees, distribution and service fees, and administration and shareholder service fees are calculated as a percentage of average net assets of the investment portfolios managed.

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

The net asset values from which

these 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, 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

We provide investment management services pursuant to investment management agreements through our affiliated investment advisers (each an "Adviser").

We provide investment management services pursuant to investment management agreements through our investment advisers (each an "Adviser").

Investment management services represent a series of distinct daily services that are performed over time.

Fees earned on funds are based on each fund's average daily or weekly net assets and are generally calculated and received on a monthly basis.

We record investment management fees net of the fees paid to unaffiliated subadvisers since we are deemed to be an agent of the fund as it relates to the day-to-day investment management services performed by unaffiliated subadvisers, with our performance obligation being to arrange for the provision of that service and not control the specified service before it is performed.

We record investment management fees net of the fees paid to unaffiliated subadvisers since we are deemed to be an agent of the fund as it relates to the day-to-day investment management services they perform, with our performance obligation being to arrange for the provision of that service and not control the specified service before it is performed.

Amounts paid to unaffiliated subadvisers for the years ended December 31, 2022, 2021 and 2020 were $77.0 million, $115.5 million and $38.6 million, respectively.

The increase in 2021 compared to prior years was due to the new subadvisory relationship with AllianzGI.

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

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We rely on data provided to us by service providers for the pricing of the underlying investment securities for the asset values that drive our investment management fees and our assets under management.

Our service providers have formal

valuation policies and procedures over the valuation of investments.

Our service providers have formal valuation policies and procedures over the valuation of investments.

As of December 31, 2022, our total assets under management by fair value hierarchy level, as defined by ASC 820, were approximately 72.2% Level 1, 27.6% Level 2 and 0.2% Level 3.

Distribution and Service Fees

Distribution and service fees are asset-based fees earned from certain share classes within our open-end funds and on a portion of other fee earning assets for distribution services.

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

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.

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Administration & Shareholder Service Fees

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

We provide administrative fund services to our U.S.

retail funds, ETFs and the majority of our closed-end funds and shareholder services to our open-end funds.

Administration and shareholder services are performed over time.

We earn fees for these services, that are calculated and paid monthly, based on each fund's average daily or weekly net assets.

We earn fees for these services, which are calculated and paid monthly, based on each fund's average daily or weekly net assets.

Administrative fund services include:

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Shareholder services include maintaining shareholder accounts, processing shareholder transactions, preparing filings and performing necessary reporting.

Other Income and Fees

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

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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