Waddell & Reed Financial Inc.'s incoming CEO will face big challenges when he takes the top spot, namely reversing a slide in assets under management, net profits and operating margins.
The Overland, Kan.-based money manager, which specializes in equity and fixed-income strategies, announced May 23 that Philip J. Sanders will succeed longtime CEO Henry J. Herrmann, who plans to retire Aug. 1.
Mr. Sanders, now senior vice president, will retain his title as chief investment officer.
Waddell & Reed spokesman Roger Hoadley said it would be too soon for Mr. Sanders to comment.
“Like all investment organizations, we are continually assessing the resources available to support our investment management capabilities and products,” Mr. Hoadley wrote in an e-mail. “We expect that Mr. Sanders will be taking a fresh look at whether there are additional efficiencies that can be achieved, or resources to be redeployed more efficiently within the organization.”
Mr. Sanders will inherit a company whose assets under management declined to $95.2 billion as of March 31, down 8.8% from three months earlier and down 22.5% from a year earlier, company financial statements show.
Poor investment performance in the firm's biggest funds, particularly the Ivy Asset Strategy Fund, combined with turnover of key portfolio managers and a general trend away from active management, has hurt Waddell & Reed, said Todd Rosenbluth, New York-based director of ETF and mutual fund research at S&P Global Market Intelligence.
Investors flocked into the Ivy Asset Strategy Fund after the financial crisis, attracted to its diversified investment philosophy across asset classes as they looked for a hedge against falling equity markets, Mr. Rosenbluth said.
Investment performance in the fund, the firm's largest mutual fund, was strong initially, but turned negative in 2014, he said.
“It has done what an alternatives fund should not do, lose money,” Mr. Rosenbluth said.
Outflows seem to be worsening. The Ivy Asset Strategy Fund had $5.3 billion in net outflows in the first four months of 2016, Morningstar Inc. data show, compared with $10 billion in net outflows for all of 2015.
The fund had $9.3 billion under management as of April 30, the Morningstar data show, down 73% from $34.6 billion at the end of 2013.
Waddell & Reed's overall institutional assets stood at $14.4 billion as of March 31, but that was before two institutional asset owners withdrew almost $3 billion in April. Waddell & Reed executives disclosed those withdrawals in a conference call with analysts on April 26.
One of the withdrawals was a $2 billion separate account by the Jackson National Life Insurance Co. that was managed by the team that oversees the Ivy Asset Strategy Fund, Mr. Hoadley said in an e-mail on May 24. The other redemption of $800 million was from an undisclosed subadvisory relationship, said Thomas W. Butch, Waddell & Reed's executive vice president and chief marketing officer, during the April conference call.
Those outflows are on top of the $601 million in net institutional outflows in the first quarter of 2016 and $2.3 billion in net institutional outflows for all of 2015.
The company reported net income of $37.5 million in the first quarter, down 40.4% from the previous quarter and down 44.1% from the year-earlier quarter, as fee revenue from clients declined.
Meanwhile, its operating margin of 22.1% for the quarter ended March 31 declined 3.2 percentage points from the previous quarter, and 5 percentage points from the quarter ended March 31, 2015.
The firm's overall operating margin is lower than that of public peers, which currently are in the mid-30s, said Craig Siegenthaler, managing director and equity research analyst at Credit Suisse Group, New York.
Waddell & Reed's adjusted stock price closed at $20.17 on June 9, down more than 70% since it closed at an adjusted high of $69.11 on April 2, 2014.