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Waddell & Reed Financial (WDR)
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-[[Image:Wdrlogo.gif|left]] '''Waddell & Reed Financial''' ([[NYSE]]: WDR) is an asset manager, holding nearly $65 billion in [[Assets under management (AUM)|assets under management]]. The firm earns the majority of its revenue by providing financial planning advice for clients and earning a percentage of the assets it manages. Waddell invests over 40% of its AUM ($27 billion)<ref>{{cite 10k|ticker= WDR|link= http://www.sec.gov/Archives/edgar/data/1052100/000104746908001998/a2182870z10-k.htm#toc_dg47201_1|year= 2007|form= 10-K|pg= 5}}</ref> in Balanced/Flexible and Narrowly Diversified Investment Styles. The Balanced/Flexible investment strategy targets balancing risk and return and is often split between [[Equity|equities]] and [[Fixed income securities|bonds]].<ref>[http://www.investopedia.com/terms/b/balancedinvestmentstrategy.asp Investopedia: Balanced Investment Style]</ref> A narrowly diversified portfolio aims to reduce risk by targeting [[Securities|securities]] from companies that are in a successful sector and/or earn revenue from a variety of countries and products/services.<ref>[http://www.forbes.com/2008/07/19/graham-chile-robbins-pf-ii-in_jn_0719soapbox_inl.html Forbes: Diversify from Within]</ref> +{{hide_logo|path=[[Image:Wdrlogo.gif|left]]}}'''Waddell & Reed Financial''' ([[NYSE]]: WDR) is an asset manager and investment advisor with nearly $65 billion in [[Assets under management (AUM)|assets under management]]. The firm earns the majority of its revenue by providing financial planning advice for clients and earning a percentage of the assets it manages. About 85% of the firm's AUM is invested in equities.<ref>[http://seekingalpha.com/article/73384-waddell-amp-reed-financial-inc-q1-2008-earnings-call-transcript?page=-1 WDR Earnings Call Transcript 1Q2008]</ref> Sales from Waddell's Wholesale Channel, which distributes families of mutual funds to clients, grew by 169% from 2006 to 2007 and was a strong driver in the the firm's total 34% increase in AUM over that year.<ref name="one"/> From 2003 to 2007, Wholesale Channel assets, as a fraction of WDR total assets, have increased from 10.4% to 33.2%.<ref name="wholesale" />
-Relative to other [[Asset management|asset management]] firms, Waddell is a small company. It competes against household financial services firms, whose assets under management often overshadow that of WDR's $65 billion. Moreover, Waddell has $200 million of debt, and with current credit conditions will be hard-pressed to refinance the loan. Also, the firm has been increasingly emphasizing its Wholesale investment channel even though the rate of investor turnover is relatively high. This reaction by investors to the distribution channel that earns 65% of channel sales calls WDR's decision to prioritize Wholesale into question. WDR competes with many firms throughout the financial services industry, but its closest competitors include [[EV|Eaton Vance]], [[Jefferies Group (JEF)|Jefferies Group]], and [[LM|Legg Mason]]. +Waddell competes against household financial services firms, whose assets under management often overshadow that of WDR's $65 billion. Moreover, Waddell has $200 million of debt, and with credit conditions in mid-2008, the company will be hard-pressed to refinance the loan. Also, firm management has stated that it plans to grow its Wholesale investment channel and decrease investments in other segments. The ''Wall Street Journal'' ranked Waddell as the number one fund-family,<ref name="sixes" /> ahead of competitors such as [[EV|Eaton Vance]], [[Jefferies Group (JEF)|Jefferies Group]], and [[LM|Legg Mason]].
== Corporate Overview == == Corporate Overview ==
[[Image:Wdrrev.jpg|frame|300px|WDR Revenue Breakdown<ref name="10k1">{{cite 10k|ticker= WDR [[Image:Wdrrev.jpg|frame|300px|WDR Revenue Breakdown<ref name="10k1">{{cite 10k|ticker= WDR
-|link= http://www.sec.gov/Archives/edgar/data/1052100/000104746908001998/a2182870z10-k.htm|year= 2007|form= 10-K|pg=23}}</ref>|right]]+|link=http://www.wikinvest.com/stock/Waddell_&_Reed_Financial_%28WDR%29/Filing/10-K/2008/F3388650 | year= 2007|form= 10-K|pg=23}}</ref>|right]]
-Waddell's revenue, AUM, and net income reached all-time highs in 2007. The widespread success was spearheaded by the 34+% increase in AUM to $65 billion.<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 2}}</ref>+Waddell's revenue, AUM, and net income reached all-time highs in 2007. The widespread success was driven by the 34% increase in AUM to $65 billion.<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 2}}</ref>
In 2Q2008, earnings per share grew by 27% over Q1 and 17% from a year ago.<ref name="one">[http://seekingalpha.com/article/87755-waddell-amp-reed-financial-inc-q2-2008-earnings-call-transcript?source=feed&page=-1 WDR Earnings Call Transcript 2Q2008]</ref> Moreover, operating revenue grew by 8% while operating expenses increased by only 4%.<ref name="one"/> The firm's sales in the Wholesale Distribution Channel grew by 169% from over a year ago.<ref name="one"/> Weighted average returns in the funds and managed accounts of Waddell outperformed the S&P index by more than 525 basis points during the second quarter of 2008 and over 700 basis points as of the year-to-date.<ref name="one"/> The strong growth results can be attributed to increases in sales per advisor, net asset inflows, and strong investment positions.<ref name="one"/> In 2Q2008, earnings per share grew by 27% over Q1 and 17% from a year ago.<ref name="one">[http://seekingalpha.com/article/87755-waddell-amp-reed-financial-inc-q2-2008-earnings-call-transcript?source=feed&page=-1 WDR Earnings Call Transcript 2Q2008]</ref> Moreover, operating revenue grew by 8% while operating expenses increased by only 4%.<ref name="one"/> The firm's sales in the Wholesale Distribution Channel grew by 169% from over a year ago.<ref name="one"/> Weighted average returns in the funds and managed accounts of Waddell outperformed the S&P index by more than 525 basis points during the second quarter of 2008 and over 700 basis points as of the year-to-date.<ref name="one"/> The strong growth results can be attributed to increases in sales per advisor, net asset inflows, and strong investment positions.<ref name="one"/>
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[[Image:Wdrdist.jpg|frame|300px|WDR Distribution Channel Breakdown '''Note: $ in millions'''<ref name="10k1">{{cite 10k|ticker= WDR [[Image:Wdrdist.jpg|frame|300px|WDR Distribution Channel Breakdown '''Note: $ in millions'''<ref name="10k1">{{cite 10k|ticker= WDR
-|link= http://www.sec.gov/Archives/edgar/data/1052100/000104746908001998/a2182870z10-k.htm|year= 2007|form= 10-K|pg=27}}</ref>|right]]+|link= http://www.wikinvest.com/stock/Waddell_&_Reed_Financial_%28WDR%29/Filing/10-K/2008/F3388650
 +http://www.wikinvest.com/stock/Waddell_&_Reed_Financial_%28WDR%29/Filing/10-K/2008/F3388650|year= 2007|form= 10-K|pg=27}}</ref>|right]]
* '''Investment Management Fees (44% of Revenue)''' depend on the average value of the firm's assets under management. Such fees are calculated as a percentage of AUM. Within this segment, Waddell offers investment advice and management services to its clients. * '''Investment Management Fees (44% of Revenue)''' depend on the average value of the firm's assets under management. Such fees are calculated as a percentage of AUM. Within this segment, Waddell offers investment advice and management services to its clients.
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=== Distribution Channels === === Distribution Channels ===
-* '''Advisors Channel (53% of AUM; 24% of Channel Sales)''' WDR's Advisors Channel involves nearly 2,300 consultants<ref name="fives">{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 3}}</ref> focused on providing financial advice to clients. Often, Waddell markets its own funds to these clients in the advising process. The Advisors segment gross sales revenue grew by 10% to an all-time high of $3.5 billion and sales per advisor hit a new high of $1.2 million.<ref name="fives">{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 2}}</ref>+* '''Advisors Channel (53% of AUM; 24% of Channel Sales):''' WDR provides financial advice to clients, often marketing its own funds in the process.<ref name="fives">{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 3}}</ref> The Advisors segment gross sales revenue grew by 10% to an all-time high of $3.5 billion and sales per advisor hit a new high of $1.2 million.<ref name="fives">{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 2}}</ref>
-* '''Wholesale Channel (33% of AUM; 64% of Channel Sales)''' The company's Wholesale Channel accounts for the distribution of assets through brokers and dealers, investment advisors, and retirement platforms.<ref name="fives"/> Waddell offers families of mutual funds to its clients, including the Ivy Funds and the Advisors Funds. Within this channel, Waddell distributes these families to customers' portfolios including [[401k|401ks]] and retirement accounts. Wholesale assets doubled over 2007 to nearly $22 billion, thanks to weighting investments toward internally managed, profitable funds<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 5}}</ref> and Waddell efforts to expand AUM distributed in this channel.<ref>{{cite 10k|ticker= WDR+* '''Wholesale Channel (33% of AUM; 64% of Channel Sales):''' The company's Wholesale Channel accounts for the distribution of assets through brokers and dealers, investment advisors, and retirement platforms.<ref name="fives"/> Waddell offers families of mutual funds to its clients, including the Ivy Funds and the Advisors Funds. Within this channel, Waddell distributes these families to customers' portfolios including [[401k|401ks]] and retirement accounts. Wholesale assets doubled over 2007 to nearly $22 billion, thanks to weighting investments toward internally managed, profitable funds<ref name=corporateir>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 5}}</ref> and Waddell efforts to expand AUM distributed in this channel.<ref>{{cite 10k|ticker= WDR
-|link= http://www.sec.gov/Archives/edgar/data/1052100/000104746908001998/a2182870z10-k.htm|year= 2007|form= 10-K|pg=14}}</ref> Moreover, market appreciation of nearly $4 billion and net sales of nearly $7 billion over 2007<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 9}}</ref> both bolstered Wholesale growth.+|link= http://www.wikinvest.com/stock/Waddell_&_Reed_Financial_%28WDR%29/Filing/10-K/2008/F3388650 | year= 2007|form= 10-K|pg=14}}</ref> Moreover, market appreciation of nearly $4 billion and net sales of nearly $7 billion over 2007<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 9}}</ref> both bolstered Wholesale growth.
-* '''Institutional Channel (14% of AUM; 13% of Channel Sales)''' Waddell manages assets for a variety of clients within the Institutional Channel. Institutions in this sense include any organizations that would have pension plans or endowments. Within this sector, WDR distributes its funds to such benefit pension plans, other investment firms (as a subadvisor), endowments, and other high net worth customers.<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 7}}</ref>+* '''Institutional Channel (14% of AUM; 13% of Channel Sales)''' includes any organizations that would have pension plans or endowments. Within this sector, WDR distributes its funds to such benefit pension plans, other investment firms (as a subadvisor), endowments, and other high net worth customers.<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg= 7}}</ref>
- +In the longer run, WDR's revenue has grown every year since 2003, hitting an all-time high of over $837 million in 2007. Waddell's net income decreased consecutively in 2005 and 2006. The consecutive slips in net income can be attributed to one-time regulatory and legal settlements. Waddell, as a holding company, is composed of several subsidiaries, through which they offer their services and earn revenue. The 2006 drop in net income occurred as a result of restructuring charges for Austin, Calvert & Flavin, Inc. (ACF), an investment management firm<ref>[http://www.auscal.com/ Austin, Calvert & Flavin, Inc. Website]</ref> and one of its subsidiaries.<ref name="tens">{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/234483/WDR_10K.pdf|year= 2006|form= Annual Report|pg= 30}}</ref> The 2005 net income fall was also due to restructuring and severance charges, this time with the Advisors Channel as well as a separation of employment deal with its former CEO.<ref name="tens"/>
-In the longer run, WDR's revenue has grown every year since 2003, hitting an all-time high of over $837 million in 2007. But, Waddell's net income decreased consecutively in 2005 and 2006. However, 2007 saw WDR's net income re-establish the growing trend with an all-time high of $125.5 million. The consecutive slips in net income can be attributed to one-time regulatory and legal settlements. Waddell, as a holding company, is composed of several subsidiaries, through which they offer their services and earn revenue. The 2006 drop in net income occurred as a result of restructuring charges for Austin, Calvert & Flavin, Inc. (ACF), an investment management firm<ref>[http://www.auscal.com/ Austin, Calvert & Flavin, Inc. Website]</ref> and one of its subsidiaries.<ref name="tens">{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/234483/WDR_10K.pdf|year= 2006|form= Annual Report|pg= 30}}</ref> The 2005 net income fall was also due to restructuring and severance charges, this time with the Advisors Channel as well as a separation of employment deal with its former CEO.<ref name="tens"/>+
[[Image:Wdrrevni.jpg|frame|center|WDR Historical Revenue and Net Income<ref name="10k1"/>]] [[Image:Wdrrevni.jpg|frame|center|WDR Historical Revenue and Net Income<ref name="10k1"/>]]
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=== Waddell's relatively small size inhibits competitive stance=== === Waddell's relatively small size inhibits competitive stance===
-Waddell & Reed is a relatively small asset management firm. To start, its [[Assets under management (AUM)|assets under management]] total just $65 billion, which is dwarfed by household names like [[TROW|T. Rowe Price]] ($350 billion), [[Fidelity National Financial (FNF)|Fidelity]] ($1.2 trillion), and Vanguard Group ($800 billion).<ref>[http://www.wikinvest.com/image/JNS_CAUM.JPG Wikinvest Janus Capital Competitors AUM]</ref> Note that the AUM values are of 2006. Smaller/less well known companies that take part in the [[Asset management|asset management]] industry face a roadblock when it comes to competing and raising capital to manage. Even so, Waddell's AUM and net income hit all-time highs in 2007, thanks to net inflows and market appreciation. The company's ability to compete with the big name asset managers will depend on strong investment performance, especially through this [[Subprime lending|subprime lending]] credit crisis. Waddell's funds have demonstrated strong performances in the past, including its Advisors Funds top ranking by ''Barron's'' in 2007 and Ivy Funds coming in eighth.<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg=2}}</ref> Finally, of the $16 billion dollar surge in assets under management, $10.0 billion came from market appreciation<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg=27}}</ref>, reflecting strong investments.+Waddell & Reed is a relatively small asset management firm. Its [[Assets under management (AUM)|assets under management]] total just $65 billion, which is dwarfed by household names like [[TROW|T. Rowe Price]] ($350 billion), [[Fidelity National Financial (FNF)|Fidelity]] ($1.2 trillion), and Vanguard Group ($800 billion).<ref>[http://www.wikinvest.com/image/JNS_CAUM.JPG Wikinvest Janus Capital Competitors AUM]</ref> (Note that the AUM values are of 2006.) Smaller [[Asset management|asset managers]] face a roadblock when it comes to competing and raising capital to manage. Even so, Waddell's AUM and net income hit all-time highs in 2007, thanks to net inflows and market appreciation. The company's ability to compete with the big name asset managers will depend on strong investment performance, especially through this [[Subprime lending|subprime lending]] credit crisis. Waddell's funds have demonstrated strong performances in the past, including its Advisors Funds top ranking by ''Barron's'' in 2007 and Ivy Funds coming in eighth.<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg=2}}</ref> Finally, of the $16 billion dollar surge in assets under management, $10.0 billion came from market appreciation<ref>{{cite 10k|ticker= WDR|link= http://library.corporate-ir.net/library/72/725/72585/items/282963/WDR10K.pdf|year= 2007|form= Annual Report|pg=27}}</ref>, reflecting strong investments.
 +===Waddell's increased emphasis on its Wholesale Channel translates to greater redemption rates ===
 +Within Waddell's Advisory Channel, WDR boasted industry-low redemption rates--the frequency of an buyer executing his option to sell a certain [[Security|security]] (before maturity) back to the seller at a predetermined price<ref>[http://en.wikipedia.org/wiki/Redemption_value Wikipedia: Redemption Value]</ref>--of 9.1% and 9.2% for 2007 and 2006 respoectively.<ref name="wholesale"/> In other words, redemption rates indicate how long investors decide to stick with a company, and the lower the better.<ref>[http://www.businessweek.com/magazine/content/04_10/b3873109_mz070.htm Business Week: Redemption Rates]</ref>
-===Waddell's increased emphasis on its Wholesale Channel translates to greater redemption rates ===+However, WDR's Wholesale securities tend to be more liquid (transferable) and have a greater rate of redemption--more than double that of the Advisor Channel--at 18.5% and 21.0% for 2007 and 2006 respectively.<ref name="wholesale"/> The Wholesale Channel has also been expanding -- from 2003 to 2007, Wholesale Channel assets, as a fraction of WDR total assets, have increased from 10.4% to 33.2%.<ref name="wholesale">{{cite 10k|ticker= WDR|link= http://www.wikinvest.com/stock/Waddell_&_Reed_Financial_%28WDR%29/Filing/10-K/2008/F3388650 | year= 2007|form= 10-K|pg=14}}</ref> With a higher rate of redemption (investors staying with Waddell & Reed for shorter periods of time on average) in the Wholesale department and its growing size, the ability for WDR to obtain and maintain investors and AUM in this increasingly emphasized segment comes into question.
 + 
 +=== WDR's status as a [[Holding company|holding company]] inhibits debt payments and growth===
-From 2003 to 2007, Wholesale Channel assets, as a fraction of WDR total assets, have increased from 10.4% to 33.2%.<ref name="wholesale">{{cite 10k|ticker= WDR|link= http://www.sec.gov/Archives/edgar/data/1052100/000104746908001998/a2182870z10-k.htm|year= 2007|form= 10-K|pg=14}}</ref> Moreover, sales within the Wholesale segment grew from 16.5% to 63.5%<ref name="wholesale"/> over the same period. Within Waddell's Advisory Channel, WDR boasted industry-low redemption rates--the frequency of an buyer executing his option to sell a certain [[Security|security]] (before maturity) back to the seller at a predetermined price<ref>[http://en.wikipedia.org/wiki/Redemption_value Wikipedia: Redemption Value]</ref>--of 9.1% and 9.2% for 2007 and 2006 respoectively.<ref name="wholesale"/> In other words, redemption rates indicate how long investors decide to stick with a company.<ref>[http://www.businessweek.com/magazine/content/04_10/b3873109_mz070.htm Business Week: Redemption Rates]</ref> However, as WDR's Wholesale securities tend to be more liquid (transferable) and have a greater rate of redemption--more than double that of the Advisor Channel--at 18.5% and 21.0% for 2007 and 2006 respectively.<ref name="wholesale"/> With a higher rate of redemption (investors staying with Waddell & Reed for shorter periods of time on average) in the Wholesale department, the ability for WDR to obtain and maintain investors and AUM in this increasingly emphasized segment comes into question.+The corporate structure of Waddell is that of a holding company, or a business that owns any amount of the outstanding stock of another company.<ref>[http://en.wikipedia.org/wiki/Holding_company Wikipedia: Holding Company]</ref> As such, Waddell runs much of the firm through its subsidiaries, such as Ivy Funds. Waddell does face a few obstacles as a holding company, including the fact that each of their subsidiaries is a separate legal organization, and is not required to help WDR on any payments of debt. Though WDR made $125 million in net income in FY2007, it may run into problems paying back its $200 million in debt.<ref>{{cite 10k|ticker= WDR|link= http://www.wikinvest.com/stock/Waddell_&_Reed_Financial_%28WDR%29/Filing/10-K/2008/F3388650#toc_dg47201_1 | year= 2007|form= 10-K|pg=19}}</ref> Should WDR have to focus on repaying the debt with its own profits, it will bypass opportunities to invest and expand the firm.
== Competition == == Competition ==
-Waddell competes with a variety of companies within the [[Financial Services|financial services]] industry. However, its closest competitors include [[Eaton Vance (EV)|Eaton Vance]], the [[Jefferies Group (JEF)|Jefferies Group]], and [[Legg Mason (LM)|Legg Mason]], all of which distribute assets within mutual funds. Below is a chart of relevant operating metrics for Waddell and Reed and its industry competitors. +Waddell competes with a variety of companies within the [[Financial Services|financial services]] industry. Its closest competitors include [[Eaton Vance (EV)|Eaton Vance]], [[Janus Capital Group (JNS)|Janus Capital]] and [[Legg Mason (LM)|Legg Mason]], which all invest in mutual funds. The Wall Street Journal published a mutual fund family ranking based on factors such as U.S. equity, world equity and bond performance, which listed WDR first along with its subsidiary, Ivy Funds, in eighth.<ref name="sixes">[http://s.wsj.net/public/resources/documents/BA_FUND_FAMILY_020408.pdf WSJ Mutual Fund Family Rankings]</ref> Eaton Vance and Janus Capital ranked second and third.<ref name="sixes"/> Below is a chart of relevant operating metrics for Waddell and Reed and its industry competitors.
{| border="1" cellpadding="3" style="border-collapse:collapse" align="center" {| border="1" cellpadding="3" style="border-collapse:collapse" align="center"
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| 69.68 | 69.68
|- |-
-|Jeffries Group<ref>{{cite 10k|ticker= JEF|link= http://www.sec.gov/Archives/edgar/data/1084580/000095012408000973/v38455e10vk.htm|year= 2007|form= 10-K}}</ref> +|Janus Capital<ref>{{cite 10k|ticker= JNS|link= http://www.wikinvest.com/stock/Janus_Capital_Group_%28JNS%29/Filing/10-K/2008/F1942631 | year= 2007|form= 10-K}}</ref>
-| $ 5.8+| $ 165.0
-| N/A+| $ 2,175.8
-| (5.41)+| 32.21
-| (3.40)+| 18.32
-| (0.27)+| 6.05
-| (2.52)+| 11.40
|- |-
-|T. Rowe Price<ref>{{cite 10k|ticker= TROW|link= http://www.sec.gov/Archives/edgar/data/1113169/000095013308000389/w47962e10vk.htm|year= 2007|form= 10-K}}</ref>+|T. Rowe Price<ref>{{cite 10k|ticker= TROW|link= http://www.wikinvest.com/stock/T._Rowe_Price_Group_%28TROW%29/Filing/10-K/2008/F3444726 | year= 2007|form= 10-K}}</ref>
| $ 400.0 | $ 400.0
| $ 857.2 | $ 857.2
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| 25.68 | 25.68
|- |-
-|Legg Mason<ref>{{cite 10k|ticker= LM|link= http://www.sec.gov/Archives/edgar/data/704051/000119312508124629/d10k.htm|year= 2007|form= 10-K}}</ref>+|Legg Mason<ref>{{cite 10k|ticker= LM|link= http://www.wikinvest.com/stock/Legg_Mason_%28LM%29/Filing/10-K/2008/F3470612 | year= 2007|form= 10-K}}</ref>
| $ 950.1 | $ 950.1
| $ 3,583.9 | $ 3,583.9
Line 105: Line 109:
|} |}
-''Note: Margins and Returns Data taken from Reuters on September 30, 2008.''+''Note: Margins and Returns Data for all companies but JNS taken from Reuters on September 30, 2008. JNS taken on October 11, 2008''
{{clr}} {{clr}}
-<autowikidata/>+ 
==References== ==References==
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[[category:Financial Services]] [[category:Financial Services]]
[[category:Investment Banks*]] [[category:Investment Banks*]]
 +[[category:asset management]]
 +[[category:Mutual Funds]]
 +[[category:mature]]
 +[[Category:Brokerage*]]
[[Category:Investment_Banks*]] [[Category:Investment_Banks*]]

Current revision

Waddell & Reed Financial (NYSE: WDR) is an asset manager and investment advisor with nearly $65 billion in assets under management. The firm earns the majority of its revenue by providing financial planning advice for clients and earning a percentage of the assets it manages. About 85% of the firm's AUM is invested in equities.[1] Sales from Waddell's Wholesale Channel, which distributes families of mutual funds to clients, grew by 169% from 2006 to 2007 and was a strong driver in the the firm's total 34% increase in AUM over that year.[2] From 2003 to 2007, Wholesale Channel assets, as a fraction of WDR total assets, have increased from 10.4% to 33.2%.[3]

Waddell competes against household financial services firms, whose assets under management often overshadow that of WDR's $65 billion. Moreover, Waddell has $200 million of debt, and with credit conditions in mid-2008, the company will be hard-pressed to refinance the loan. Also, firm management has stated that it plans to grow its Wholesale investment channel and decrease investments in other segments. The Wall Street Journal ranked Waddell as the number one fund-family,[4] ahead of competitors such as Eaton Vance, Jefferies Group, and Legg Mason.

Contents

Corporate Overview

WDR Revenue Breakdown
WDR Revenue Breakdown[5]

Waddell's revenue, AUM, and net income reached all-time highs in 2007. The widespread success was driven by the 34% increase in AUM to $65 billion.[6]

In 2Q2008, earnings per share grew by 27% over Q1 and 17% from a year ago.[2] Moreover, operating revenue grew by 8% while operating expenses increased by only 4%.[2] The firm's sales in the Wholesale Distribution Channel grew by 169% from over a year ago.[2] Weighted average returns in the funds and managed accounts of Waddell outperformed the S&P index by more than 525 basis points during the second quarter of 2008 and over 700 basis points as of the year-to-date.[2] The strong growth results can be attributed to increases in sales per advisor, net asset inflows, and strong investment positions.[2]

Business Segments

WDR Distribution Channel Breakdown Note: $ in millions
WDR Distribution Channel Breakdown Note: $ in millions[5]
  • Investment Management Fees (44% of Revenue) depend on the average value of the firm's assets under management. Such fees are calculated as a percentage of AUM. Within this segment, Waddell offers investment advice and management services to its clients.
  • Underwriting and Distribution Fees (44% of Revenue) are based on commissions received on investment transactions and advisory services. WDR earns revenue in this segment by distributing mutual funds (their own and sometimes the funds of other companies) and buying/selling the shares of the funds continuously.
  • Shareholder Service Fees (11% of Revenue) refer to portfolio accounting charges, custodian fees for retirement accounts, and other maintenance costs.

Distribution Channels

  • Advisors Channel (53% of AUM; 24% of Channel Sales): WDR provides financial advice to clients, often marketing its own funds in the process.[7] The Advisors segment gross sales revenue grew by 10% to an all-time high of $3.5 billion and sales per advisor hit a new high of $1.2 million.[7]
  • Wholesale Channel (33% of AUM; 64% of Channel Sales): The company's Wholesale Channel accounts for the distribution of assets through brokers and dealers, investment advisors, and retirement platforms.[7] Waddell offers families of mutual funds to its clients, including the Ivy Funds and the Advisors Funds. Within this channel, Waddell distributes these families to customers' portfolios including 401ks and retirement accounts. Wholesale assets doubled over 2007 to nearly $22 billion, thanks to weighting investments toward internally managed, profitable funds[8] and Waddell efforts to expand AUM distributed in this channel.[9] Moreover, market appreciation of nearly $4 billion and net sales of nearly $7 billion over 2007[10] both bolstered Wholesale growth.
  • Institutional Channel (14% of AUM; 13% of Channel Sales) includes any organizations that would have pension plans or endowments. Within this sector, WDR distributes its funds to such benefit pension plans, other investment firms (as a subadvisor), endowments, and other high net worth customers.[11]

In the longer run, WDR's revenue has grown every year since 2003, hitting an all-time high of over $837 million in 2007. Waddell's net income decreased consecutively in 2005 and 2006. The consecutive slips in net income can be attributed to one-time regulatory and legal settlements. Waddell, as a holding company, is composed of several subsidiaries, through which they offer their services and earn revenue. The 2006 drop in net income occurred as a result of restructuring charges for Austin, Calvert & Flavin, Inc. (ACF), an investment management firm[12] and one of its subsidiaries.[13] The 2005 net income fall was also due to restructuring and severance charges, this time with the Advisors Channel as well as a separation of employment deal with its former CEO.[13]

WDR Historical Revenue and Net Income
WDR Historical Revenue and Net Income[5]

Key Trends and Forces

Waddell's relatively small size inhibits competitive stance

Waddell & Reed is a relatively small asset management firm. Its assets under management total just $65 billion, which is dwarfed by household names like T. Rowe Price ($350 billion), Fidelity ($1.2 trillion), and Vanguard Group ($800 billion).[14] (Note that the AUM values are of 2006.) Smaller asset managers face a roadblock when it comes to competing and raising capital to manage. Even so, Waddell's AUM and net income hit all-time highs in 2007, thanks to net inflows and market appreciation. The company's ability to compete with the big name asset managers will depend on strong investment performance, especially through this subprime lending credit crisis. Waddell's funds have demonstrated strong performances in the past, including its Advisors Funds top ranking by Barron's in 2007 and Ivy Funds coming in eighth.[15] Finally, of the $16 billion dollar surge in assets under management, $10.0 billion came from market appreciation[16], reflecting strong investments.

Waddell's increased emphasis on its Wholesale Channel translates to greater redemption rates

Within Waddell's Advisory Channel, WDR boasted industry-low redemption rates--the frequency of an buyer executing his option to sell a certain security (before maturity) back to the seller at a predetermined price[17]--of 9.1% and 9.2% for 2007 and 2006 respoectively.[3] In other words, redemption rates indicate how long investors decide to stick with a company, and the lower the better.[18]

However, WDR's Wholesale securities tend to be more liquid (transferable) and have a greater rate of redemption--more than double that of the Advisor Channel--at 18.5% and 21.0% for 2007 and 2006 respectively.[3] The Wholesale Channel has also been expanding -- from 2003 to 2007, Wholesale Channel assets, as a fraction of WDR total assets, have increased from 10.4% to 33.2%.[3] With a higher rate of redemption (investors staying with Waddell & Reed for shorter periods of time on average) in the Wholesale department and its growing size, the ability for WDR to obtain and maintain investors and AUM in this increasingly emphasized segment comes into question.

WDR's status as a holding company inhibits debt payments and growth

The corporate structure of Waddell is that of a holding company, or a business that owns any amount of the outstanding stock of another company.[19] As such, Waddell runs much of the firm through its subsidiaries, such as Ivy Funds. Waddell does face a few obstacles as a holding company, including the fact that each of their subsidiaries is a separate legal organization, and is not required to help WDR on any payments of debt. Though WDR made $125 million in net income in FY2007, it may run into problems paying back its $200 million in debt.[20] Should WDR have to focus on repaying the debt with its own profits, it will bypass opportunities to invest and expand the firm.

Competition

Waddell competes with a variety of companies within the financial services industry. Its closest competitors include Eaton Vance, Janus Capital and Legg Mason, which all invest in mutual funds. The Wall Street Journal published a mutual fund family ranking based on factors such as U.S. equity, world equity and bond performance, which listed WDR first along with its subsidiary, Ivy Funds, in eighth.[4] Eaton Vance and Janus Capital ranked second and third.[4] Below is a chart of relevant operating metrics for Waddell and Reed and its industry competitors.

2007 Operating Metrics
Company AUM ($ in billions) Operating Expenses ($ in millions) Operating Margin (TTM) Net Profit Margin (TTM) Return on Assets (TTM) Return on Equity (TTM)
Waddell & Reed $ 64.9 $ 642.9 21.82 13.99 16.96 41.90
Eaton Vance[21] $ 161.7 $ 851.0 34.49 19.89 29.54 69.68
Janus Capital[22] $ 165.0 $ 2,175.8 32.21 18.32 6.05 11.40
T. Rowe Price[23] $ 400.0 $ 857.2 43.77 29.28 22.17 25.68
Legg Mason[24] $ 950.1 $ 3,583.9 22.02 1.02 0.40 0.68

Note: Margins and Returns Data for all companies but JNS taken from Reuters on September 30, 2008. JNS taken on October 11, 2008




References

  1. ↑ WDR Earnings Call Transcript 1Q2008
  2. ↑ 2.0 2.1 2.2 2.3 2.4 2.5 WDR Earnings Call Transcript 2Q2008
  3. ↑ 3.0 3.1 3.2 3.3 WDR 2007 10-K pg. 14  
  4. ↑ 4.0 4.1 4.2 WSJ Mutual Fund Family Rankings
  5. ↑ 5.0 5.1 5.2 WDR 2007 10-K pg. 23  
  6. ↑ WDR 2007 Annual Report pg. 2  
  7. ↑ 7.0 7.1 7.2 WDR 2007 Annual Report pg. 3  
  8. ↑ WDR 2007 Annual Report pg. 5  
  9. ↑ WDR 2007 10-K pg. 14  
  10. ↑ WDR 2007 Annual Report pg. 9  
  11. ↑ WDR 2007 Annual Report pg. 7  
  12. ↑ Austin, Calvert & Flavin, Inc. Website
  13. ↑ 13.0 13.1 WDR 2006 Annual Report pg. 30  
  14. ↑ Wikinvest Janus Capital Competitors AUM
  15. ↑ WDR 2007 Annual Report pg. 2  
  16. ↑ WDR 2007 Annual Report pg. 27  
  17. ↑ Wikipedia: Redemption Value
  18. ↑ Business Week: Redemption Rates
  19. ↑ Wikipedia: Holding Company
  20. ↑ WDR 2007 10-K pg. 19  
  21. ↑ EV 2007 10-K  
  22. ↑ JNS 2007 10-K  
  23. ↑ TROW 2007 10-K  
  24. ↑ LM 2007 10-K  
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