Ladies and gentlemen, this is the operator. Today's conference call will begin shortly. Until that time, your lines will again be placed on hold. Thank you for your patience. Again, ladies and gentlemen, this is the operator. Today's conference call will begin shortly. Until that time, your lines will again be placed on hold. Thank you for your patience. Good morning. My name is Cherry, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the investor relations section of the Virtus website, www.virtus.com. This call is being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speaker's presentation and remarks, there will be a Q&A period, and instructions will follow at that time.
I will now turn the conference to your host, Sean Rourke.
Thank you, and good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the Q1 of 2022. Our speakers today are George Aylward, President and CEO, and Mike Angerthal, Chief Financial Officer. Following their prepared remarks, we'll have a Q&A period. Before we begin, please note the disclosures on page two of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements.
In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures, the applicable GAAP measures, are included in today's news release and financial supplement, which are available on our website. Now I'd like to turn the call over to George. George?
Thank you, Sean. Good morning, everyone. I'll start with an overview of the results we reported earlier today, and then Mike will provide more detail. Our Q1 financial and operating performance in the context of the challenging market environment were strong, as while we did have net outflows in open-end funds, the quarter also included strong sales in all product categories, including meaningful growth in funds and institutional, continued positive net flows in retail separate accounts and institutional, higher operating income and earnings per share as adjusted compared with the prior year period, and increased capital return to shareholders. This was also the first full quarter to include contributions from each of our three recent strategic transactions, AllianzGI, Westchester Capital, and Stone Harbor, that collectively added complementary and differentiated investment strategies, significantly increased scale, and enhanced our distribution capabilities while being financially accretive.
I would also note that of our top 20 funds with positive net flows in the quarter, nine were managed by either AGI, Westchester, or Stone Harbor. For our most recent transaction, Stone Harbor, the integration is proceeding as expected and going well. We are making particularly good progress integrating Stone Harbor's global distribution, which will augment our existing resources and enhance non-US distribution opportunities for all our affiliates, including in areas where we previously had limited presence. We are also making progress integrating Stone Harbor's end-to-end operating platform, which will also be available to our other affiliates. Turning now to a review of the results.
Total assets under management after reaching their highest level last quarter declined 2% to $183.3 billion due to market performance and net outflows, mostly offset by the addition of $14.7 billion of AUM from Stone Harbor on January first. Sales momentum continued despite the significant market volatility, with $9.4 billion of inflows up sequentially from $8.7 billion. The momentum, particularly in this type of market, reflects the effectiveness of our distribution capabilities and attractive range of investment strategies that can appeal to investors in varying market environments and as investor preferences and needs shift. The quarter open-end fund sales grew meaningfully with increases in most strategies, and institutional sales reached their second highest quarterly level. For net flows by product, we had net outflows in open-end funds, while institutional and retail separate accounts continued to generate positive net flows.
Fund net outflows were higher sequentially impacted by higher redemptions driven by investor behavior in a volatile market, particularly in the more growth-oriented equity strategies, though there were notable areas of strength, including strong positive flows in bank loans, alternatives, and midcap equity. Fund net outflows were more pronounced in January, with some subsequent improvement thereafter. Institutional net flows were positive for the sixth consecutive quarter, with continued traction at multiple affiliates and from both existing mandates and new accounts, including a significant addition to a Stone Harbor mandate. Non-U.S. mandates contributed meaningfully to institutional flows, reflecting our investments in distribution and resources over the past several years. Retail separate accounts generated positive net flows for the 16th consecutive quarter, with a 6% organic growth rate. In terms of what we're seeing in April, open-end fund flow trends remain consistent with the Q1 , as does the market volatility.
Areas of strength in open-end fund sales and flows continue to include bank loans as well as alternatives. In terms of institutional, our current pipeline of potential business is the strongest we have seen, though it is early in the quarter and markets remain challenged. Our Q1 financial results reflected the impact from the more challenging markets that began in January, as well as our normal seasonally higher employment expenses. The sequential decline in operating income and margin was primarily a result of those items. Looking at the more comparable year-over-year period, operating income has increased 16%, reflecting revenue growth from higher average assets, including the benefit of the three transactions. Earnings per share, as adjusted, increased 16% over the Q1 of 2021 to $7.87. The sequential decline in EPS reflected the market-driven revenue decline and the seasonal employment expenses.
Turning now to capital, we increased the level of stock buybacks from $25 million in the prior quarter to $30 million, and that settled an additional 13 for a total of $43 million repurchased or net settled during the period. Including our dividend, which we raised in the second half of last year, we returned $57 million to shareholders in the Q1 , which is more than double the $26 million we returned in the Q1 of last year. This increased return of capital is reflective of our balanced approach to capital management that provides flexibility to prioritize different elements as circumstances warrant. Our balance sheet remains strong. We ended the quarter with modest net debt position of $48 million, as the Q1 represents our highest quarter of cash utilization, given the timing of annual incentives, and the quarter also included transaction and revenue participation payment.
With that, I'll turn the call over to Mike. Mike?
Thank you, George. Good morning, everyone. Starting with our results on Slide seven, Assets Under Management. At March 31, assets under management were $183.3 billion, down 2% from $187.2 billion at December 31. The sequential change reflected $6.5 billion of market decline and $2 billion of net outflows, which were largely offset by the addition of the assets from Stone Harbor. Assets continued to be diversified by product type, with U.S. retail funds representing 36% of assets, institutional 31% and retail separate accounts 22%. The recent strategic transactions have furthered our diversification by asset class. Equity assets represented 56% of AUM, down from 63% in the prior year period. Fixed income and alternative assets grew to 25% and 6% respectively, up from 21% and 3% a year ago.
We continued to generate strong relative investment performance across strategies. At March 31, approximately 62% of rated fund assets had four or five stars, and 90% were in three, four, or five-star funds. We had 12 funds with AUM of $1 billion or more that were rated four or five stars, the same level as a year ago, representing a diverse set of strategies from five different managers. In addition to strong fund performance, as of March 31, 81% of retail separate account assets and 58% of institutional assets were beating their benchmarks on a three-year basis, and 82% of retail separate account assets and 64% of institutional assets were outperforming their benchmarks over five years. Also, 80% of institutional assets were exceeding the median performance of their peer groups on the same five-year basis. Turning to Slide eight, Asset Flows.
Total sales were $9.4 billion, up 8% sequentially from $8.7 billion. By product, fund sales of $5 billion increased 14% due to higher sales across most strategies. Bank loan fund sales were particularly strong, up 160%, and alternatives were up by 44%. Institutional sales increased 16% to $2.4 billion, benefiting from both new mandates as well as inflows into existing ones. Retail separate account sales were $2 billion, down from $2.2 billion in the Q4 . Overall net outflows were $2 billion as positive flows in institutional and retail separate accounts were more than offset by net outflows in open-end funds.
Reviewing by product, institutional net flows of $0.8 billion were positive for the sixth consecutive quarter, again benefiting from mandates at multiple affiliates and across asset classes, including a positive emerging markets debt contribution. In retail separate accounts, net inflows were $0.6 billion, driven by domestic SMID-Cap core with an annualized organic growth rate of 6%. For open-end funds, net outflows were $3.4 billion, with net outflows in equity, particularly growth equity, consistent with industry trends as well as in convertibles, while bank loans and alternative funds generated positive net inflows. Turning to slide nine. Investment management fees as adjusted of $196.3 million declined $7.1 million or 4% sequentially, reflecting a lower average fee rate and two fewer days, partially offset by higher average AUM due to the addition of Stone Harbor's institutional assets.
The average fee rate for the quarter was 41.9 basis points, down 1.8 basis points sequentially. The lower fee rate largely reflected a higher proportion of institutional assets due to the Stone Harbor AUM, as well as lower equity assets due to market performance. Average assets increased $5.5 billion - $190.1 billion due to the addition of the Stone Harbor assets in January. However, excluding these assets, average AUM decreased by approximately $8 billion due to market depreciation and net outflows. Performance fees in the quarter of $0.6 million were relatively unchanged from the prior quarter level of $0.7 million. Looking ahead, for all products, we continue to believe the range of 41-43 basis points is reasonable, with the second quarter at the low end of the range.
Slide 10 shows the five-quarter trend in employment expenses. Total employment expenses as adjusted of $101.6 million increased 10% sequentially, primarily reflecting $9.7 million of seasonal items related to the timing of annual incentives, including incremental payroll taxes, benefits, and accelerated stock-based compensation expense as a result of equity grants made to retirement-eligible employees. Excluding the seasonal items, employment expenses were essentially flat sequentially. As a percentage of revenues, employment expenses were 45.8%, but excluding the seasonal items, they were 41.4%. The sequential increase, excluding the seasonal items, reflected market-driven revenue declines. Looking forward, we believe a reasonable range for employment expenses as adjusted would be 42%-44% of revenues, subject to variability based on markets and sales.
For the second quarter, absent a notable improvement in the markets, we would be at or above the high end of the range. Turning to slide 11, other operating expenses as adjusted were $29.3 million, up 28% on a sequential basis from $22.9 million. The sequential increase of $6.5 million reflected the addition of operating costs for Stone Harbor and $1.3 million of business initiative discrete expenses. The incremental expenses from Stone Harbor include valuable enhancements to our global distribution resources and a comprehensive investment in risk operating and technology platform that will eliminate previously planned multiyear initiatives and enhancements, each of which can be leveraged across our affiliates. Looking forward, we would expect other operating expenses in a range of $27 million-$31 million per quarter, with this range reflecting a more normalized level of travel and entertainment activities.
For modeling purposes, keep in mind that our annual board of directors equity grants occur in the second quarter. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $90.1 million declined $26.7 million or 23% sequentially due to lower revenues and higher employment and other operating expenses. Compared with the prior year quarter, operating income as adjusted increased 16% due to growth in the business, including accretive strategic transactions. The operating margin as adjusted of 40.6% compared with 50.2% in the Q4 . Excluding seasonal employment items, the operating margin was 45% down sequentially due to lower revenue.
Net income of $7.87 per diluted share, which included $0.91 of net special expenses compared with $10.36 in the Q4 , and $6.78 in the Q1 of last year. Regarding GAAP results, net income per share of $4.22 decreased from $6.29 per share in the Q4 , and included the following items, $1.97 of realized and unrealized losses on investments, $0.61 of acquisition and integration costs, and a $0.57 reduction reflecting the increase in the fair value of the minority interest liability. Slide 13 shows the trend of our capital, liquidity, and select balance sheet items.
Working capital was $196 million at March 31, down sequentially from $220 million, as cash generated by the business was more than offset by $56 million in return of capital to shareholders, as well as the closing payment for Stone Harbor. Cash and equivalents declined sequentially to $225 million, from $379 million at December 31. Cash utilization in the quarter included the payment of annual incentives and the AllianzGI revenue participation, as well as the return of capital and Stone Harbor closing payments. As a reminder, the Q1 typically represents the low point of our cash during the year. At March 31, gross debt to EBITDA was 0.6x, the same level as December 31, and down from 0.8x at March 31, 2021.
Net debt at March 31st was $48 million or 0.1x EBITDA. We generated $101 million of EBITDA in the Q1 , down sequentially due to seasonal employment items and lower AUM, but up 16% from the prior year level. During the Q1 , we repurchased 125,452 shares of common stock for $30 million above the prior quarter level of $25 million, and net settled an additional 61,859 shares for $13.4 million to satisfy employee tax obligations. Over the past year, total outstanding shares have been reduced by 2.3%. Looking ahead with respect to capital management, as they were in the Q1 , share repurchases will continue to be a priority given the stock's recent trading levels.
With that, let me turn the call back over to George. George?
Thank you, Mike. We'll now take everyone's questions. Cherry, would you open up the lines, please?
As a reminder, to ask a question, you will need to press star one on your telephone. Again, that's star, then the number one on your telephone keypad. To withdraw your question, you may press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Sumeet Mody from Piper Sandler. Your line is now open.
Hey, thanks. Good morning, guys. Just wanted to start on the SMA and institutional businesses. You know, it's good to see another quarter of inflows for both. Just wondering, you know, if you could help us frame how to think about client demand for those products today, maybe contrast that with what you're seeing against the kinda retail, and then what dynamics we should be thinking about from the outside that allow for such kinda consistent inflows. Is it, you know, mostly performance-based as a major driver there or any kinda particular market environment you think that, you know, demand could, you know, maybe reverse out?
Sure. No. It's a great question because there is different behavior within those three categories of open-end funds, retail separates and institutionals, even for the very same strategies, right? It's not unusual for us to actually have a strategy that could be net negative on an open-end side, but actually be positive on either institutional or retail separates. They can have different behavioral patterns, the more extreme being the institutional versus the open-end fund whereas you know the drivers of a lot of the institutional activity because they're usually based upon you know asset allocation and longer term component building of a portfolio can sometimes behave differently and including what's in favor and what's out of favor.
On the institutional side, a lot of times we'll see much more of a appetite to use markets where a strategy is out of favor as an entry point, whereas on the retail side you sometimes see people behave as an exit point for the very same strategy. Going through the three pieces, the institutional we highlighted a bit because I think as you know over the years we've talked about a lot, that it was an area of focus for us. We've invested resources, we've hired people, we've tried to introduce as many of our affiliates. On the institutional side, particularly the non-U.S., over the last few years, and then one of the benefits we highlighted from the Stone Harbor transaction was to have even more expanded resources.
We truly looked at the institutional channel, and particularly the non-U.S., as a great opportunity for us because many of our affiliates haven't previously had opportunities there. Over the last year or two, you've heard us speak to several mandates at multiple affiliates, commented about a non-U.S. portion of our business, and again, I think Mike may have made some reference to it, which within our institutional, where we hit our second-highest level of sales, included in that is continued strength in that non-U.S. piece, which we're really excited about. As I commented in the outlook for April, the pipeline is the strongest we have seen. Still early in the quarter, but we see a lot of strength in terms of the diversity as well as the size of some of the potential mandates.
Still don't know what will fall or what might redeem, but it's really. That's a positive sign for us. The retail separate accounts, again, will sort of behave sometimes in the same vein as the retail open-end funds. But generally, those are gonna be used as parts of, you know, longer-term portfolios with less trading activity, right? The average holding period for an open-end fund is significantly different than the average holding period for an SMA. You can see, again, strength on the retail separate. We continue to grow those as we noted for 16 quarters. A lot of that will really be driven by, you know, investor demand and what they're looking for in their opportunities.
Our hope there would be, you know, certain people are looking to take money off the table in some of those strategies. Others will see that as an attractive entry point. Lastly, just as a reminder, included in our retail separate accounts are two channels, intermediary sold, but also, the private client high net worth business, at one of our affiliate, at Kayne Anderson Rudnick.
Mm-hmm.
who has a wonderful business on the private client side.
Great. Thanks. That was really helpful, George. Just turning to the capital allocation strategy. I mean, I know you guys are always talk about the kind of primary balanced strategy going forward. You know, given the drawdown we've seen you know, over the course of the Q1 and into April, you know, all the you know, cash flow generation capabilities that have improved, you know, despite the market environment and kind of the balance sheet capital today, you know, is this elevated level of buybacks a decent assumption for the appetite going forward, you know, as you trade at such a deep discount to the peer group? You know, how should we think about the quarterly capacity? You guys are comfortable buying back in an environment like this.
Yeah, I mean, as I commented, again, we do have a balanced approach. The good news is we have strong balance sheet right now, and we still have good cash flow and a high margin. So we have the flexibility to do multiple things. As we sort of indicated and highlighted the fact that our approach is flexible, and given what we saw in the Q1 , even though it was our highest quarter of cash utilization, we increased our stock buybacks, and particularly with the net settlements, you know, had quite a robust amount. So I kinda highlighted it's flexible as well, and I think as Mike also indicated, that you know, as we sort of look at what the highest and best use of our capital is, again, feel very comfortable.
We have a very strong balance sheet, good cash flow. Our views around what to do with that cash, particularly given where our stock is trading, absolutely will factor in.
Thanks. Just one more from me here on just, you know, the structure of the distribution effort. Can you just remind us, you know, how much is centralized? How much do you have kind of on the specialist sales side? And as you kinda, you know, continue to scale the franchise, does kind of full centralization of that sales make any sense for you guys? Or is that kinda not how you guys think about the long-term strategy around the structure of the distribution effort?
I'll break it into two pieces, right? On the retail side, particularly the intermediary distributor retail, that is effectively a shared or centralized service, right? Virtus does face off in the retail space as one point access to a collection of very different managers who specialize in different asset classes. Whether you talk about our sales force, our national accounts, on the ETF side as well as on the retirement side, that is generally done through one coordinated team that works hand in hand with each one of our individual affiliates. That really is the model that we use there. We've been very successful with that. I think our value proposition as one point access to very different managers is an effective one.
On the institutional side, that business is different, where it really is affiliate driven in the sense that a lot of those clients want to have that direct contact with the individual affiliates. Because we've commented before, we do make available to our affiliates an array of resources to support them in their efforts. In areas where we can do the most are areas where an individual affiliate may not personally invest in something. Non-U.S. distribution is a perfect example of that, where we can make talented sales professionals in the non-U.S. market available to sell multiple of our strategies.
The institutional is much more of a hybrid and much more of an affiliate-driven kind of a sales, whereas the retail is highly coordinated and entirely done through that shared service, leveraging specialists from each of our affiliates.
Got it. Thanks so much, George. Thanks for taking my questions.
No, thank you.
Your next question comes from the line of Michael Cyprys from Morgan Stanley. Your line is now open.
Great. Thank you. Good morning. Just on the SMA part of the business, can you just remind us which are some of the largest strategies and affiliates that you currently have available on the SMA platform? And then could you also maybe talk about some of the initiatives that you have in place around getting more strategies or affiliates onto the SMA platform and some of the initiatives for getting those onto broader distribution and intermediary platforms?
Sure. On retail separate accounts, Kayne Anderson Rudnick is the largest. We also have strategies available in the fixed income space as well as on the value space. We do spend a lot of time trying to introduce, you know, one of the uses of our seed capital, which you see in our balance sheet, is to incubate track records ultimately to make available. A lot of times what we'll be doing is seeding track records to ultimately make available in the retail space. Actually a lot of the strategies that we're gathering assets for today and last year are strategies we probably seeded three or four years ago.
You know, a couple of the Kayne ones in particular, where you know, by seeding the strategies, building the track record, we've then been able to bring them to market. We continue to see the retail separate account opportunity as a good one. We continue to look to expand to as many strategies that sort of fit into that space. As indicated before, there are some differences in what works really well in a retail separate account versus a fund, because of the way that they're tailored and managed for individual clients, but continue to see that as an attractive area for us.
Great. Can you just remind us, I believe you guys mostly have a revenue share model. Can you just remind us how that sort of flexes and operates in a down market like what we're seeing year to date and month to date?
Sure. We actually have a profit based model, right? Our alignment of interest is designed to really incent everyone to generate operating income, that's so our affiliates share in the profit that they bring to the bottom line, which is what is the profit to the Virtus shareholders. We think that's a good model in terms of how we run it. It does facilitate everyone managing to a good margin and managing through difficult times. Our affiliate incentives are all profit based.
Great. Maybe just last one around capital management. I heard you mention the buyback in terms of that being a priority. I didn't hear anything on debt paydown. Is that off the table for now? How are you thinking about that, maybe bringing that back to the forefront at some point? Then also on M&A, something you guys have spoken about in the past and clearly have executed well against over the years. Just curious where that is on your priority stack today. Maybe you could kinda give us a little bit of a flavor or color for what you're seeing in the marketplace today and how the current market volatility is maybe accelerating or delaying any sort of potential things you may be thinking about.
Sure. I'll on the capital side, again, we feel very comfortable because our balance sheet is strong and because our cash flow is strong, that we have the flexibility to do multiple things. We do prioritize different things at different points in the cycle. Again, in evaluating, you know, alternatives between buying back stock or paying down debt, that will be influenced by how we believe our stock is trading relative to its actual valuation. Again, given the current environment, I don't know, Mike, if we're in a rush to pay down debt per se. I think our stock price is right now probably slightly more prominent. When I would go to the M&A environment continues to be incredibly active.
Again, as you noted, we have been very active over the years, even though we fundamentally want our growth strategy not to need M&A, we're continuing to look at multiple opportunities. I think the general level of those opportunities has increased. In terms of the impact of market volatility, it's interesting because I think market volatility will do two things. It might put something on hold, or it might make something wanna move forward faster, in advance of more prolonged down markets. I think net-net is still very active. You know, we've been very active in terms of the amount of things that we've looked at and considered, and I continue to think that will continue on.
If I could just sneak in one additional one in there, just around the types of things that you're interested in potentially on the M&A front. I think in the past you had suggested on product areas with uncorrelated returns and international distribution. Are those still at the top of the list? Any others that you would flag in terms of what you're prioritizing and looking at?
Sure. No, I think you hit it right. Again, generally across the traditional types of long-only strategies, we have very good coverage with great affiliates. The areas that we have been focusing in on have included, you know, other specialized asset classes like emerging market debt, which is one we didn't necessarily have, but in particular alternatives and less correlated strategies, right? Westchester was a perfect example of the type of thing we wanted, something that had less correlation to the market in the event that the markets became more volatile. Now, as you've seen in the Q1 , we're very pleased that we did it at that time period because those are the kinds of strategies that would be attractive.
We continue to be interested in things that are less correlated to traditional, you know, long equity or fixed income products. Things that will expand our distribution footprint, particularly on the institutional and the non-U.S. side. We're always looking for things that will have a strategic rationale. I feel, you know, we've been very disciplined in what we do. Sometimes we'll look at things and we'll ultimately conclude it is not a good fit for us, which may mean we may spend some money and then not do anything. I think we have the ability to be very strategic about what we do, but it will be things that will sort of build out the foundations for continued future growth.
Great. Thanks for taking my questions.
There are no questions at this time. This concludes our Q&A session. I would like to turn the conference back over to Mr. Aylward.
Great. All right. As always, I just wanna thank everyone for joining us today, and we certainly encourage you to reach out if you have any other further questions. Enjoy the rest of your day.