Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q 
_____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission file number: 001-35355
 _____________________________________________________________
MANNING & NAPIER, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
45-2609100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
290 Woodcliff Drive
Fairport, New York
 
14450
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(585) 325-6880
_____________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 
Class
  
Outstanding at August 6, 2018
Class A common stock, $0.01 par value per share
  
15,333,041
 




TABLE OF CONTENTS
 
 
 
Page
Part I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
Item 1A.
Item 6.
 
 
 
 
In this Quarterly Report on Form 10-Q, “we”, “our”, “us”, the “Company”, “Manning & Napier” and the “Registrant” refers to Manning & Napier, Inc. and, unless the context otherwise requires, its consolidated direct and indirect subsidiaries and predecessors.
 
 


i

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Manning & Napier, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
 
 
 
June 30, 2018
 
December 31, 2017
 
 
(unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
77,198

 
$
78,262

Accounts receivable
 
12,863

 
15,337

Investment securities
 
69,376

 
70,404

Prepaid expenses and other assets
 
5,104

 
4,870

Total current assets
 
164,541

 
168,873

Property and equipment, net
 
5,737

 
5,407

Net deferred tax assets, non-current
 
22,508

 
23,298

Goodwill
 
4,829

 
4,829

Other long-term assets
 
4,496

 
2,773

Total assets
 
$
202,111

 
$
205,180

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
$
2,367

 
$
1,612

Accrued expenses and other liabilities
 
25,428

 
32,347

Deferred revenue
 
9,886

 
10,213

Total current liabilities
 
37,681

 
44,172

Other long-term liabilities
 
3,185

 
3,370

Amounts payable under tax receivable agreement, non-current
 
18,987

 
19,278

Total liabilities
 
59,853

 
66,820

Commitments and contingencies (Note 8)
 


 


Shareholders’ equity
 
 
 
 
Class A common stock, $0.01 par value; 300,000,000 shares authorized; 15,333,041 and 15,039,347 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
 
153

 
150

Additional paid-in capital
 
198,488

 
198,641

Retained deficit
 
(38,626
)
 
(38,424
)
Accumulated other comprehensive income (loss)
 
(113
)
 
(86
)
Total shareholders’ equity
 
159,902

 
160,281

Noncontrolling interests
 
(17,644
)
 
(21,921
)
Total shareholders’ equity and noncontrolling interests
 
142,258

 
138,360

Total liabilities, shareholders’ equity and noncontrolling interests
 
$
202,111

 
$
205,180

The accompanying notes are an integral part of these consolidated financial statements.


1

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
 
Management Fees
 
 
 
 
 
 
 
 
Separately managed accounts
 
$
24,483

 
$
27,530

 
$
49,838

 
$
57,469

Mutual funds and collective investment trusts
 
11,030

 
17,806

 
22,010

 
37,091

Distribution and shareholder servicing
 
3,033

 
3,353

 
6,211

 
6,393

Custodial services
 
1,895

 
2,012

 
3,817

 
4,357

Other revenue
 
679

 
835

 
1,468

 
1,711

Total revenue
 
41,120

 
51,536

 
83,344

 
107,021

Expenses
 
 
 
 
 
 
 
 
Compensation and related costs
 
21,689

 
22,233

 
45,462

 
45,614

Distribution, servicing and custody expenses
 
4,502

 
7,084

 
9,283

 
14,495

Other operating costs
 
8,579

 
7,234

 
15,033

 
15,212

Total operating expenses
 
34,770

 
36,551

 
69,778

 
75,321

Operating income
 
6,350

 
14,985

 
13,566

 
31,700

Non-operating income (loss)
 
 
 
 
 
 
 
 
Interest expense
 
(21
)
 
(2
)
 
(30
)
 
(12
)
Interest and dividend income
 
374

 
238

 
876

 
418

Change in liability under tax receivable agreement
 

 

 
291

 

Net gains (losses) on investments
 
(21
)
 
610

 
(270
)
 
1,582

Total non-operating income (loss)
 
332

 
846

 
867

 
1,988

Income before provision for income taxes
 
6,682

 
15,831

 
14,433

 
33,688

Provision for income taxes
 
492

 
1,242

 
970

 
2,585

Net income attributable to controlling and noncontrolling interests
 
6,190

 
14,589

 
13,463

 
31,103

Less: net income attributable to noncontrolling interests
 
5,424

 
12,904

 
11,483

 
27,521

Net income attributable to Manning & Napier, Inc.
 
$
766

 
$
1,685

 
$
1,980

 
$
3,582

 
 
 
 
 
 
 
 
 
Net income per share available to Class A common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.05

 
$
0.12

 
$
0.13

 
$
0.25

Diluted
 
$
0.05

 
$
0.12

 
$
0.13

 
$
0.25

Weighted average shares of Class A common stock outstanding
 
 
 
 
 
 
 
 
Basic
 
14,691,928

 
14,111,368

 
14,503,784

 
14,077,313

Diluted
 
14,709,403

 
14,298,834

 
14,530,398

 
14,256,911

Cash dividends declared per share of Class A common stock
 
$
0.08

 
$
0.08

 
$
0.16

 
$
0.16

The accompanying notes are an integral part of these consolidated financial statements.


2

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income attributable to controlling and noncontrolling interests
 
$
6,190

 
$
14,589

 
$
13,463

 
$
31,103

Net unrealized holding gain (loss) on investment securities, net of tax
 

 
(9
)
 
(147
)
 
(15
)
Comprehensive income attributable to controlling and noncontrolling interests
 
$
6,190

 
$
14,580

 
$
13,316

 
$
31,088

Less: Comprehensive income attributable to noncontrolling interests
 
5,424

 
12,895

 
11,363

 
27,506

Comprehensive income attributable to Manning & Napier, Inc.
 
$
766

 
$
1,685

 
$
1,953

 
$
3,582

The accompanying notes are an integral part of these consolidated financial statements.


3

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)
(Unaudited) 
 
 
 
Common Stock –  class A
 
Common Stock – class B
 
Additional
Paid in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non
Controlling
Interests
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance—December 31, 2016
 
14,982,880

 
$
150

 
1,000

 
$

 
$
200,158

 
$
(37,383
)
 
$
(13
)
 
$
(28,434
)
 
$
134,478

Net income
 

 

 

 

 

 
3,582

 

 
27,521

 
31,103

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(17,660
)
 
(17,660
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
(15
)
 

 
(15
)
Common stock issued under equity compensation plan, net of forfeitures
 
96,467

 
1

 

 

 
(1
)
 

 

 

 

Shares withheld to satisfy tax withholding requirements related to restricted stock units granted
 

 

 

 

 
(48
)
 

 

 
(224
)
 
(272
)
Equity-based compensation
 

 

 

 

 
253

 

 

 
1,183

 
1,436

Dividends declared on Class A common stock - $0.16 per share
 

 

 

 

 

 
(2,273
)
 

 

 
(2,273
)
Impact of changes in ownership of Manning & Napier Group, LLC
 

 

 

 

 
(1,876
)
 

 

 
(7,927
)
 
(9,803
)
Balance—June 30, 2017
 
15,079,347

 
$
151

 
1,000

 
$

 
$
198,486

 
$
(36,074
)
 
$
(28
)
 
$
(25,541
)
 
$
136,994

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—December 31, 2017
 
15,039,347

 
$
150

 

 
$

 
$
198,641

 
$
(38,424
)
 
$
(86
)
 
$
(21,921
)
 
$
138,360

Net income
 

 

 

 

 

 
1,980

 

 
11,483

 
13,463

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(8,181
)
 
(8,181
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
(27
)
 
(120
)
 
(147
)
Common stock issued under equity compensation plan, net of forfeitures
 
293,694

 
3

 

 

 
(3
)
 

 

 

 

Equity-based compensation
 

 

 

 

 
297

 

 

 
1,342

 
1,639

Dividends declared on Class A common stock - $0.16 per share
 

 

 

 

 

 
(2,448
)
 

 

 
(2,448
)
Cumulative effect of change in accounting principle, net of taxes (Note 3)
 

 

 

 

 

 
266

 

 
1,224

 
1,490

Impact of changes in ownership of Manning & Napier Group, LLC (Note 4)
 

 

 

 

 
(447
)
 

 

 
(1,471
)
 
(1,918
)
Balance—June 30, 2018
 
15,333,041

 
$
153

 

 
$

 
$
198,488

 
$
(38,626
)
 
$
(113
)
 
$
(17,644
)
 
$
142,258

The accompanying notes are an integral part of these consolidated financial statements.


4

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Six months ended June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income attributable to controlling and noncontrolling interests
 
$
13,463

 
$
31,103

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
 
Equity-based compensation
 
1,639

 
1,436

Depreciation and amortization
 
957

 
875

Change in amounts payable under tax receivable agreement
 
(291
)
 

Gain on sale of intangible assets
 
(2,509
)
 

Net (gains) losses on investment securities
 
270

 
(1,582
)
Deferred income taxes
 
721

 
1,983

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
 
 
 
 
Accounts receivable
 
2,474

 
4,160

Prepaid expenses and other assets
 
197

 
1,033

Other long-term assets
 
(617
)
 

Accounts payable
 
755

 
(738
)
Accrued expenses and other liabilities
 
(6,714
)
 
(8,017
)
Deferred revenue
 
(327
)
 
273

Other long-term liabilities
 
(348
)
 
(315
)
Net cash provided by operating activities
 
9,670

 
30,211

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(1,265
)
 
(750
)
Sale of investments
 
1,615

 
4,243

Purchase of investments
 
(25,967
)
 
(25,822
)
Sale of intangible assets
 
2,509

 

Proceeds from maturity of investments
 
24,963

 
15,364

Acquisitions, net of cash received
 

 
320

Net cash provided by (used in) investing activities
 
1,855

 
(6,645
)
Cash flows from financing activities:
 
 
 
 
Distributions to noncontrolling interests
 
(8,181
)
 
(17,660
)
Dividends paid on Class A common stock
 
(2,424
)
 
(3,596
)
Payment of shares withheld to satisfy withholding requirements
 

 
(271
)
Payment of capital lease obligations
 
(66
)
 
(97
)
Purchase of Class A units of Manning & Napier Group, LLC
 
(1,918
)
 
(9,803
)
Net cash used in financing activities
 
(12,589
)
 
(31,427
)
Net increase (decrease) in cash and cash equivalents
 
(1,064
)
 
(7,861
)
Cash and cash equivalents:
 
 
 
 
Beginning of period
 
78,262

 
100,819

End of period
 
$
77,198

 
$
92,958

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

Manning & Napier, Inc.
Notes to Consolidated Financial Statements

Note 1—Organization and Nature of the Business
Manning & Napier, Inc. ("Manning & Napier", or the "Company") provides a broad range of investment solutions through separately managed accounts, mutual funds, and collective investment trusts, as well as a variety of consultative services that complement its investment process. Founded in 1970, the Company offers U.S. and non-U.S. equity, fixed income and a range of blended asset portfolios, such as life cycle funds and actively-managed exchange-traded fund ("ETF")-based portfolios. Headquartered in Fairport, New York, the Company serves a diversified client base of high-net-worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations.
The Company is the sole managing member of Manning & Napier Group, LLC ("Manning & Napier Group"), a holding company for the investment management businesses conducted by its operating subsidiaries. The diagram below depicts the Company's organization structure as of June 30, 2018.
  http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12400265&doc=16
(1)
The consolidated operating subsidiaries of Manning & Napier Group include Manning & Napier Advisors, LLC ("MNA"), Perspective Partners LLC, Manning & Napier Information Services, LLC, Manning & Napier Investor Services, Inc., Exeter Trust Company and Rainier Investment Management, LLC ("Rainier").
Note 2—Summary of Significant Accounting Policies
Critical Accounting Policies
The Company's critical accounting policies and estimates are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017. The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, these financial statements should be read in conjunction with the financial statements and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The financial data for the interim periods may not necessarily be indicative of results for future interim periods or for the full year.
Changes to the Company's accounting policies as a result of adopting ASU 2014-09, Revenue from Contracts with Customers (Topic 606) are discussed under "Revenue", "Costs to Obtain a Contract" and "Reclassifications" below.
Revenue
Investment Management: Investment management fees are computed as a percentage of assets under management ("AUM"). The Company's performance obligation is a series of services that form part of a single obligation satisfied over time.
Separately managed accounts are paid in advance, typically for a semi-annual or quarterly period, or in arrears, typically for a monthly or quarterly period. When investment management fees are paid in advance, the Company defers the revenue as a contract liability and recognizes it over the applicable period. When investment management fees are paid in arrears, the Company estimates revenue and records a contract asset (accrued accounts receivable) based on AUM as of the most recent month end date.

6

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Mutual funds and collective investment trust investment management revenue is calculated and earned daily based on AUM. Revenue is presented net of cash rebates and fees waived pursuant to contractual expense limitations of the funds. The Company also has agreements with third parties who provide recordkeeping and administrative services for employee benefit plans participating in the collective investment trusts. The Company is acting as an agent on behalf of the employee benefit plan sponsors, therefore, investment management revenue is recorded net of fees paid to third party service providers.
Distribution and shareholder servicing: The Company receives distribution and servicing fees for providing services to its affiliated mutual funds. Revenue is computed and earned daily based on a percentage of AUM. The performance obligation is a series of services that form part of a single performance obligation satisfied over time. The Company has agreements with third parties who provide distribution and administrative services for its mutual funds. The agreements are evaluated to determine whether revenue should be reported gross or net of payments to third-party service providers. The Company controls the services provided and acts as a principal in the relationship. Therefore, distribution and shareholder servicing revenue is recorded gross of fees paid to third parties.
Custodial services: Custodial service fees are calculated as a percentage of the client’s market value with additional fees charged for certain transactions. For the safeguarding and administrative services that are subject to a percentage of market value fee, the Company's performance obligation is a series of services that form part of a single obligation satisfied over time. Revenue for transactions assigned a stand-alone selling price is recognized in the period which the transaction is executed. Custodial service fees are billed monthly in arrears. The Company has agreements with third parties who provide safeguarding, recordkeeping and administrative services for their clients. The Company controls the services provided and acts as a principal in the relationship. Therefore, custodial service revenue is recorded gross of fees paid to third parties.
Costs to Obtain a Contract
Incremental first year commissions directly associated with new separate account and collective investment trust contracts are capitalized and amortized straight-line over the estimated customer contract period of 7 years for separate accounts and 3 years for collective investment trust contracts. Refer to Note 3 for further discussion.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting and include all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from these estimates or assumptions.
Reclassifications
The Company changed the presentation of revenue within its consolidated statements of operations for the three and six months ended June 30, 2018. Revenue, previously reported as a single line item, has been disaggregated to present revenue by the various services the Company provides. Amounts for the comparative prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported net income or financial position and do not represent a restatement of any previously published financial results.
For periods prior to and including December 31, 2017, the Company presented "Accounts receivable - affiliated mutual funds" on its consolidated statements of financial condition. Further disclosure regarding accounts receivable from affiliated mutual funds and the components of accounts receivable as of June 30, 2018 is included in "Accounts Receivable" in Note 3 of the notes to the consolidated financial statements. Amounts for the comparative prior fiscal year periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported net income and do not represent a restatement of any previously published financial results.
Principles of Consolidation
The Company consolidates all majority-owned subsidiaries. In addition, as of June 30, 2018, Manning & Napier holds an economic interest of approximately 18.2% in Manning & Napier Group but, as managing member, controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statements of financial condition with respect to the remaining economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”) and Manning & Napier Capital Company, LLC (“MNCC”).
All material intercompany transactions have been eliminated in consolidation.

7

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

In accordance with Accounting Standards Update ("ASU") 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis, the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design, a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance, and whether a company is obligated to absorb losses or receive benefits that could potentially be significant to the entity. The standard also requires ongoing assessments of whether a company is the primary beneficiary of a variable interest entity (“VIE”). When utilizing the voting interest entity ("VOE") model, controlling financial interest is generally defined as majority ownership of voting interests.
The Company provides seed capital to its investment teams to develop new products and services for its clients. The original seed investment may be held in a separately managed account, comprised solely of the Company's investments, or within a mutual fund, where the Company's investments may represent all or only a portion of the total equity investment in the mutual fund. Pursuant to U.S. GAAP, the Company evaluates its investments in mutual funds on a regular basis and consolidates such mutual funds for which it holds a controlling financial interest. When no longer deemed to hold a controlling financial interest, the Company would deconsolidate the fund and classify the remaining investment as either an equity method investment or as trading securities, as applicable.
The Company serves as the investment adviser for Manning & Napier Fund, Inc. series of mutual funds (the “Fund”), Exeter Trust Company Collective Investment Trusts (“CIT”) and Rainier Multiple Investment Trust. The Fund, CIT and Rainier Multiple Investment Trust are legal entities, the business and affairs of which are managed by their respective boards of directors. As a result, each of these entities is a VOE. The Company holds, in limited cases, direct investments in a mutual fund (which are made on the same terms as are available to other investors) and consolidates each of these entities where it has a controlling financial interest or a majority voting interest. The Company's investments in the Fund amounted to approximately $1.4 million as of June 30, 2018 and $2.6 million as of December 31, 2017. As of December 31, 2017, the Company maintained significant influence in one mutual fund, Manning & Napier Fund, Inc. Quality Equity Series, but did not maintain a controlling financial interest in the mutual fund, which was accounted for as an equity method investment. During the first quarter of 2018, the Manning & Napier Fund, Inc. Quality Equity Series liquidated and closed.
Cash and Cash Equivalents
The Company generally considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are primarily held in operating accounts at major financial institutions and also in money market securities. Cash equivalents are stated at cost, which approximates market value due to the short-term maturity of these investments. The fair value of cash equivalents have been classified as Level 1 in accordance with the fair value hierarchy.
Investment Securities
Investment securities are classified as either trading, equity method investments or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities, and investments in mutual funds for which the Company provides advisory services. Realized and unrealized gains and losses on trading securities are recorded in net gains (losses) on investments in the consolidated statements of operations. At June 30, 2018, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes.
Investments classified as equity method investments represent seed investments in which the Company owns between 20-50% of the outstanding voting interests in the affiliated fund or when it is determined that the Company is able to exercise significant influence but not control over the investments. If the seed investment results in significant influence, but not control, the investment will be accounted for as an equity method investment. When using the equity method, the Company recognizes its share of the investee's net income or loss for the period which is recorded in net gains (losses) on investments in the consolidated statements of operations.
Investment securities classified as available-for-sale consist of U.S. Treasury notes, corporate bonds and other short-term investments. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported, net of deferred income tax, as a separate component of accumulated other comprehensive income in stockholders’ equity until realized. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. If impairment is determined to be other-than-temporary, the carrying value of the security will be written down to fair value and the loss will be recognized in earnings. Realized gains and losses on sales of available-for-sale securities are computed on a specific identification basis and are recorded in net gains (losses) on investments in the consolidated statements of operations.

8

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Property and Equipment
Property and equipment is presented net of accumulated depreciation of approximately $11.7 million and $11.4 million as of June 30, 2018 and December 31, 2017, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess cost over the fair value of the identifiable net assets of acquired companies. Identifiable intangible assets generally represent the cost of client relationships and investment management agreements acquired as well as trademarks. Goodwill and indefinite-lived assets are tested for impairment annually or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Intangible assets subject to amortization are tested for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Goodwill and intangible assets require significant management estimate and judgment, including the valuation and expected life determination in connection with the initial purchase price allocation and the ongoing evaluation for impairment.
On January 16, 2018, the Company sold a Rainier U.S. mutual fund to a third party for approximately $2.1 million, based on total assets under management on the closing date of approximately $0.3 billion. The carrying value of the intangible assets for client relationships associated with these products was zero as a result of the impairment loss recognized in 2016. During the first quarter of 2018, the Company recognized a gain of approximately $2.1 million for the sale of this fund, as included in other operating costs in the consolidated statements of operations.
Operating Segments
The Company operates in one segment, the investment management industry.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The revenue standard contains principals to determine the measurement of revenue and timing of recognition and also impacts the accounting for incremental costs to obtain a contract. The Company adopted the new standard on its effective date of January 1, 2018. Refer to Note 3 for further discussion regarding the impact of adoption of this standard.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income. The guidance is effective on January 1, 2018. The Company's adoption of ASU 2016-01 on January 1, 2018 did not have a material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, to clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The FASB issued the ASU with the intent of reducing diversity in practice regarding eight types of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company's adoption of ASU 2016-15 on January 1, 2018 did not have a material impact on its consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The new guidance will be effective for fiscal years beginning after December 15, 2018, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. The ASU requires goodwill impairments to be measured on the basis of the fair value of the reporting unit relative to the reporting unit's carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. The ASU is effective for annual and interim impairment tests for periods beginning after December 15, 2019. Early adoption is allowed for annual and interim impairment tests occurring after January 1, 2017. The Company is evaluating the effect of adopting this new accounting standard.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate as a result of the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate. The ASU will be

9

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting standard.
Note 3—Revenue, Contract Assets and Contract Liabilities
Adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective approach with the cumulative effect of initial application recognized January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting policies under Topic 605. The Company elected the practical expedient to adjust for active contracts that existed at the date of adoption. A reduction to opening shareholders' equity and noncontrolling interests of $1.5 million, net of taxes, as of January 1, 2018 has been recorded due to the cumulative impact of adopting Topic 606 related to the capitalization of incremental contract costs.
While there were no changes in the timing of revenue recognition, upon the adoption of Topic 606, the Company changed the presentation of certain revenue related costs on a gross versus net basis. The changes did not have a significant impact to total revenue, distribution, servicing and custody expenses and other operating costs, and had no impact on net income. Changes in the presentation of revenue related costs on a gross versus net basis are summarized below:
Fees in the amount of $0.7 million and $1.3 million for the three and six months ended June 30, 2018, respectively, due to third parties who provide record-keeping and administrative services for employee benefit plans participating in the Company's collective investment trusts are presented net as a reduction of mutual fund and collective investment trust revenue. Prior to the adoption of Topic 606 third party record-keeper fees associated with the Company's collective investment trusts were reported as distribution, servicing and custody expense.
Fees in the amount of $0.5 million and $1.0 million for the three and six months ended June 30, 2018, respectively, due to a third party who provides accounting and administrative services on behalf of the Company to its affiliated mutual fund are presented as other operating costs. Prior to the adoption of Topic 606, these fees were presented as a reduction of other revenue.
Fees in the amount of $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively, due to a third party who provides safeguarding and administrative services on behalf of the Company are presented as distribution, servicing and custody expense. Prior to the adoption of Topic 606, these fees were presented as a reduction of custodial service revenue.
Disaggregated Revenue
The following table represents the Company’s separately managed account and mutual fund and collective investment trust investment management revenue by investment portfolio for the three and six months ended June 30, 2018:
 
 
Three months ended June 30, 2018
 
Six months ended June 30, 2018
 
 
Separately managed accounts
 
Mutual funds and collective investment trusts
 
Total
 
Separately managed accounts
 
Mutual funds and collective investment trusts
 
Total
 
 
(in thousands)
Blended Asset
 
$
18,010

 
$
6,699

 
$
24,709

 
$
36,319

 
$
13,151

 
$
49,470

Equity
 
5,831

 
4,222

 
10,053

 
12,187

 
8,710

 
20,897

Fixed Income
 
642

 
109

 
751

 
1,332

 
149

 
1,481

Total
 
$
24,483

 
$
11,030

 
$
35,513

 
$
49,838

 
$
22,010

 
$
71,848



10

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Accounts Receivable
Accounts receivable as of June 30, 2018 and December 31, 2017 consisted of the following:
 
 
June 30, 2018
 
December 31, 2017
 
 
(in thousands)
Accounts receivable - third parties
 
$
5,850

 
$
7,278

Accounts receivable - affiliated mutual funds and collective investment trusts
 
7,013

 
8,059

Total accounts receivable
 
$
12,863

 
$
15,337

Accounts receivable: Accounts receivable represents the Company's unconditional rights to consideration arising from its performance under separately managed account, mutual fund and collective investment trust, distribution and shareholder servicing, and custodial service contracts. Accounts receivable balances do not include an allowance for doubtful accounts nor has any significant bad debt expense attributable to accounts receivable been recorded during the three and six months ended June 30, 2018 or 2017. Accounts receivable are stated at cost, which approximates net realizable value due to the short-term collection period.
Advisory and Distribution Agreements
The Company earns investment advisory fees, distribution fees and administrative service fees under agreements with affiliated mutual funds and collective investment trusts. Fees earned for advisory and distribution services provided were approximately $14.3 million and $28.8 million for the three and six months ended June 30, 2018, respectively, and approximately $21.1 million and $45.2 million for the three and six months ended June 30, 2017, respectively, which represents greater than 10% of revenue in each period. The following provides amounts due from affiliated mutual funds and collective investment trusts reported within accounts receivable in the consolidated statement of financial condition as of June 30, 2018 and December 31, 2017:
 
 
June 30, 2018
 
December 31, 2017
 
 
(in thousands)
Affiliated mutual funds (1)
 
$
5,472

 
$
6,219

Affiliated collective investment trusts
 
1,541

 
1,840

Accounts receivable - affiliated mutual funds and collective investment trusts
 
$
7,013

 
$
8,059

________________________
(1)
December 31, 2017 balance includes $0.7 million of distribution and servicing fees receivable, which in the prior fiscal period were reflected in "Accounts Receivable". This amount was reclassified to conform to the current period presentation (Note 2).

Contract assets and liabilities
Accrued accounts receivable: Accrued accounts receivable represents the Company's contract asset for revenue that has been recognized in advance of billing separately managed account contracts. Consideration for the period billed in arrears is dependent on the client’s AUM on a future billing date and therefore conditional as of the reporting period end. During the six months ended June 30, 2018, revenue was decreased by less than $0.1 million for changes in transaction price. Accrued accounts receivable of $0.3 million is reported within prepaid expenses and other assets in the consolidated statement of financial condition as of June 30, 2018.
Deferred revenue: Deferred revenue is recorded when consideration is received or unconditionally due in advance of providing services to the Company's customer. Revenue recognized for the six months ended June 30, 2018 that was included in deferred revenue at the beginning of the period was approximately $9.7 million.
Costs to obtain a contract: Incremental first year commissions directly associated with new separate account and collective investment trust contracts are capitalized and amortized straight-line over an estimated customer contract period of 7 years for separate accounts and 3 years for collective investment trust contracts. The total net asset as of June 30, 2018 was approximately $1.5 million. Amortization expense included in compensation and related costs totaled approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively. An impairment loss of approximately $0.1 million was recognized for the six months ended June 30, 2018 related to contract acquisition costs for client contracts that canceled during the period.

11

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 4—Noncontrolling Interests
Manning & Napier holds an economic interest of approximately 18.2% in Manning & Napier Group, but as managing member controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statement of financial condition with respect to the remaining approximately 81.8% aggregate economic interest in Manning & Napier Group held by M&N Group Holdings and MNCC. Net income attributable to noncontrolling interests on the statements of operations represents the portion of earnings attributable to the economic interest in Manning & Napier Group held by the noncontrolling interests.
The following provides a reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.”:
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Income before provision for income taxes
 
$
6,682

 
$
15,831

 
$
14,433

 
$
33,688

Less: income (loss) before provision for income taxes of Manning & Napier, Inc. (1)
 
(12
)
 
4

 
259

 
7

Income before provision for income taxes, as adjusted
 
6,694

 
15,827

 
14,174

 
33,681

Controlling interest percentage (2)
 
18.2
%
 
17.8
%
 
18.2
%
 
17.6
%
Net income attributable to controlling interest
 
1,221

 
2,826

 
2,573

 
5,928

Plus: income (loss) before provision for income taxes of Manning & Napier, Inc. (1)
 
(12
)
 
4

 
259

 
7

Income before income taxes attributable to Manning & Napier, Inc.
 
1,209

 
2,830

 
2,832

 
5,935

Less: provision for income taxes of Manning & Napier, Inc. (3)
 
443

 
1,145

 
852

 
2,353

Net income attributable to Manning & Napier, Inc.
 
$
766

 
$
1,685

 
$
1,980

 
$
3,582

________________________
(1)
Manning & Napier, Inc. incurs certain income or expenses that are only attributable to it and are therefore excluded from the net income attributable to noncontrolling interests.
(2)
Income before provision for income taxes is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc. The amount represents the Company's weighted ownership of Manning & Napier Group for the respective periods.
(3)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Manning & Napier, Inc. and (ii) the provision for income taxes of Manning & Napier, Inc. which includes all U.S. federal and state income taxes. The consolidated provision for income taxes was $0.5 million and $1.0 million for the three and six months ended June 30, 2018, respectively, and $1.2 million and $2.6 million for the three and six months ended June 30, 2017, respectively.

As of June 30, 2018, a total of 63,349,721 units of Manning & Napier Group were held by the noncontrolling interests. Pursuant to the terms of the exchange agreement entered into at the time of the Company's initial public offering, such units may be exchangeable for shares of the Company's Class A common stock. For any units exchanged, the Company will (i) pay an amount of cash equal to the number of units exchanged multiplied by the 15-day value of one share of the Company's Class A common stock less a market discount and expected expenses, or, at the Company's election, (ii) issue shares of the Company's Class A common stock on a one-for-one basis, subject to customary adjustments. As the Company receives units of Manning & Napier Group that are exchanged, the Company's ownership of Manning & Napier Group will increase.
During the six months ended June 30, 2018, M&N Group Holdings and MNCC exchanged a total of 581,344 Class A units of Manning & Napier Group for approximately $1.9 million in cash. Subsequent to the exchange the Class A units were retired, resulting in an increase in Manning & Napier's ownership in Manning & Napier Group. In addition, during the six months ended June 30, 2018, Class A common stock was issued under the Company's 2011 Equity Compensation Plan (the "Equity Plan") for which Manning & Napier, Inc. acquired an equivalent number of Class A units of Manning & Napier Group.

12

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following is the impact to the Company's equity ownership interest in Manning & Napier Group for the six months ended June 30, 2018:
 
Manning & Napier Group Class A Units Held
 
 
 

Manning & Napier
 
 
Noncontrolling Interests
 
Total
 
Manning & Napier Ownership %
As of December 31, 2017
13,873,042

 
63,931,065

 
77,804,107

 
17.8%
Class A Units issued
253,694

 

 
253,694

 
0.3%
Class A Units exchanged

 
(581,344
)
 
(581,344
)
 
0.1%
As of June 30, 2018
14,126,736

 
63,349,721

 
77,476,457

 
18.2%

Since the Company continues to have a controlling interest in Manning & Napier Group, the aforementioned changes in ownership of Manning & Napier Group were accounted for as equity transactions under ASC 810, Consolidation. Additional paid-in capital and noncontrolling interests in the Consolidated Statements of Financial Position are adjusted to reallocate the Company's historical equity to reflect the change in ownership of Manning & Napier Group.
At June 30, 2018 and December 31, 2017, the Company had recorded a total liability of $21.5 million and $21.8 million, respectively, representing the estimated payments due to the selling unit holders under the tax receivable agreement ("TRA") entered into between Manning & Napier and the other holders of Class A Units of Manning & Napier Group. Of these amounts, $2.5 million was included in accrued expenses and other liabilities as of June 30, 2018 and December 31, 2017. The Company made no payments pursuant to the TRA during the six months ended June 30, 2018 and 2017.
Obligations pursuant to the TRA are obligations of Manning & Napier. They do not impact the noncontrolling interests. These obligations are not income tax obligations. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.
Note 5—Investment Securities
The following represents the Company’s investment securities holdings as of June 30, 2018 and December 31, 2017:
 
 
June 30, 2018
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
Fixed income securities
 
$
19,589

 
$

 
$
(172
)
 
$
19,417

U.S. Treasury notes
 
22,663

 

 
(45
)
 
22,618

Short-term investments
 
22,470

 

 

 
22,470

 
 
 
 
 
 
 
 
64,505

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
3,463

Mutual funds
 
 
 
 
 
 
 
1,408

 
 
 
 
 
 
 
 
4,871

Total investment securities
 
 
 
 
 
 
 
$
69,376


13

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

 
 
December 31, 2017
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
Fixed income securities
 
$
19,589

 
$

 
$
(29
)
 
$
19,560

U.S. Treasury notes
 
22,428

 

 
(42
)
 
22,386

Short-term investments
 
22,323

 

 

 
22,323

 
 
 
 
 
 
 
 
64,269

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
3,548

Mutual funds
 
 
 
 
 
 
 
1,409

 
 
 
 
 
 
 
 
4,957

Equity method investments
 
 
 
 
 
 
 
 
Mutual funds
 
 
 
 
 
 
 
1,178

Total investment securities
 
 
 
 
 
 
 
$
70,404

Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities and investments in mutual funds for which the Company provides advisory services. At June 30, 2018 and December 31, 2017, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes. The Company recognized approximately $0.3 million of net unrealized losses and $1.2 million of net unrealized gains related to investments classified as trading during the six months ended June 30, 2018 and 2017, respectively.
Investment securities classified as available-for-sale consist of U.S. Treasury notes, corporate bonds and other short-term investments for compliance with certain regulatory requirements and to optimize cash management opportunities. As of June 30, 2018 and December 31, 2017, $0.6 million of these securities was considered restricted. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. No other-than-temporary impairment charges have been recognized by the Company during the six months ended June 30, 2018 and 2017.
Note 6—Fair Value Measurements
Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. A fair value hierarchy is provided that gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1—observable inputs such as quoted prices in active markets for identical securities;
Level 2—other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and
Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

14

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following provides the hierarchy of inputs used to derive the fair value of the Company’s financial instruments measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017: 
 
 
June 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
3,463

 
$

 
$

 
$
3,463

Fixed income securities
 

 
19,417

 

 
19,417

Mutual funds
 
1,408

 

 

 
1,408

U.S. Treasury notes
 

 
22,618

 

 
22,618

Short-term investments
 
22,470

 

 

 
22,470

Total assets at fair value
 
$
27,341

 
$
42,035

 
$

 
$
69,376

 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$

 
$

Total liabilities at fair value
 
$

 
$

 
$

 
$

 
 
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
3,548

 
$

 
$

 
$
3,548

Fixed income securities
 

 
19,560

 

 
19,560

Mutual funds
 
2,587

 

 

 
2,587

U.S. Treasury notes
 

 
22,386

 

 
22,386

Short-term investments
 
22,323

 

 

 
22,323

Total assets at fair value
 
$
28,458

 
$
41,946

 
$

 
$
70,404

 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$

 
$

Total liabilities at fair value
 
$

 
$

 
$

 
$


Short-term investments consists of certificate of deposits ("CDs") that are stated at cost, which approximate fair value due to the short maturity of the investments.
Valuations of investments in fixed income securities and U.S. Treasury notes can generally be obtained through independent pricing services. For most bond types, the pricing service utilizes matrix pricing, which considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type and current day trade information, as well as dealer supplied prices. These valuations are categorized as Level 2 in the hierarchy.
Contingent consideration was a component of the Company's purchase price of Rainier in 2016 of additional cash payments of up to $32.5 million over the period ending December 31, 2019, contingent upon Rainier’s achievement of certain financial targets. The fair value of the contingent consideration is calculated on a quarterly basis by forecasting Rainier’s adjusted earnings before interest, taxes and amortization ("EBITA") over the contingency period. There were no changes in contingent consideration liability measured at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2018.
The Company’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Levels during the six months ended June 30, 2018.

15

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 7—Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of June 30, 2018 and December 31, 2017 consisted of the following:
 
 
June 30, 2018
 
December 31, 2017
 
 
(in thousands)
Accrued bonus and sales commissions
 
$
14,728

 
$
19,153

Accrued payroll and benefits
 
2,243

 
3,877

Accrued sub-transfer agent fees
 
1,738

 
2,445

Dividends payable
 
1,227

 
1,203

Amounts payable under tax receivable agreement
 
2,549

 
2,549

Other accruals and liabilities
 
2,943

 
3,120

Total accrued expenses and other liabilities
 
$
25,428

 
$
32,347

Note 8—Commitments and Contingencies
The Company may from time to time enter into agreements that contain certain representations and warranties and which provide general indemnifications. The Company may also serve as a guarantor of such obligations of one or more of the Manning & Napier Group entities. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects any risk of liability associated with such guarantees to be remote.
Regulation
As an investment adviser to a variety of investment products, the Company and its affiliated broker-dealer are subject to routine reviews and inspections by the SEC and the Financial Industry Regulatory Authority, Inc. From time to time, the Company may also be subject to claims, be involved in various legal proceedings arising in the ordinary course of its business and be subject to other contingencies. The Company does not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on its consolidated financial statements; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is difficult to predict. The Company will establish accruals for matters that are probable, can be reasonably estimated, and may take into account any related insurance recoveries to the extent of such recoveries. As of June 30, 2018 and December 31, 2017, the Company has not accrued for any such claims, legal proceedings, or other contingencies.
Note 9—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed using the two-class method to determine net income available to Class A common stock. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company's restricted Class A common shares granted under the Equity Plan have non-forfeitable dividend rights during their vesting period and are therefore considered participating securities under the two-class method. Under the two-class method, the Company's net income available to Class A common stock is reduced by the amount allocated to the unvested restricted Class A common stock. Basic EPS is calculated by dividing net income available to Class A common stock by the weighted average number of common shares outstanding during the period.
Diluted earnings per share (“diluted EPS”) is computed under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, the weighted average number of common shares outstanding during the period is increased by the assumed conversion into Class A common stock of the unvested equity awards and the exchangeable units of Manning & Napier Group, to the extent that such conversion would dilute earnings per share.

16

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and six months ended June 30, 2018 and 2017 under the two-class method:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except share data)
Net income attributable to controlling and noncontrolling interests
 
$
6,190

 
$
14,589

 
$
13,463

 
$
31,103

Less: net income attributable to noncontrolling interests
 
5,424

 
12,904

 
11,483

 
27,521

Net income attributable to Manning & Napier, Inc.
 
$
766

 
$
1,685

 
$
1,980

 
$
3,582

Less: allocation to participating securities
 
47

 
102

 
95

 
212

Net income available to Class A common stock
 
$
719

 
$
1,583

 
$
1,885

 
$
3,370

 
 
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding - basic
 
14,691,928

 
14,111,368

 
14,503,784

 
14,077,313

Dilutive effect of unvested equity awards
 
17,475

 
187,466

 
26,614

 
179,598

Dilutive effect of exchangeable Class A Units
 

 

 

 

Weighted average shares of Class A common stock outstanding - diluted
 
14,709,403

 
14,298,834

 
14,530,398

 
14,256,911

Net income available to Class A common stock per share - basic
 
$
0.05

 
$
0.12

 
$
0.13

 
$
0.25

Net income available to Class A common stock per share - diluted
 
$
0.05

 
$
0.12

 
$
0.13

 
$
0.25

For the three and six months ended June 30, 2018, 592,500 and 668,603, respectively, unvested equity awards were excluded from the calculation of diluted earnings per common share because the effect would have been anti-dilutive. For both the three and six months ended June 30, 2017, 830,000 unvested equity awards were excluded from the calculation of diluted earnings per common share because the effect would have been anti-dilutive.
At June 30, 2018 and 2017, there were 63,349,721 and 63,941,860 Class A Units of Manning & Napier Group outstanding, respectively, which, subject to certain restrictions, may be exchangeable for up to an equivalent number of the Company's Class A common stock. These units were not included in the calculation of diluted earnings per common share for the three and six months ended June 30, 2018 or for the three and six months ended June 30, 2017, because the effect would have been anti-dilutive.
Note 10—Equity Based Compensation
The Equity Plan was adopted by the Company's board of directors and approved by stockholders prior to the consummation of the Company's 2011 initial public offering. Under the Equity Plan, a total of 13,142,813 equity interests are authorized for issuance, and may be issued in the form of Class A common stock, restricted stock units, units of Manning & Napier Group, or certain classes of membership interests in the Company which may convert into units of Manning & Napier Group.
The following table summarizes the award activity for the six months ended June 30, 2018 under the Equity Plan:
 
 
Restricted
Stock Awards
 
Weighted Average Grant Date Fair Value
Stock awards outstanding at January 1, 2018
 
852,123

 
$
12.09

Granted
 
300,321

 
$
3.43

Vested
 
(491,194
)
 
$
7.91

Forfeited
 

 
$

Stock awards outstanding at June 30, 2018
 
661,250

 
$
11.27

The weighted average fair value of Equity Plan awards granted during the six months ended June 30, 2018 was $3.43, based on the closing sale price of Manning & Napier Inc.'s Class A common stock as reported on the New York Stock Exchange on the date of grant, and, when applicable, reduced by the present value of the dividends expected to be paid on the underlying shares during the requisite service period. Restricted stock unit awards are not entitled to dividends declared on the underlying shares of Class A common stock until the awards vest.

17

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

For the three and six months ended June 30, 2018, the Company recorded approximately $0.5 million and $1.6 million, respectively, of compensation expense related to awards under the Equity Plan. For the three and six months ended June 30, 2017, the Company recorded approximately $0.7 million and $1.4 million, respectively, of compensation expense related to awards under the Equity Plan. The aggregate intrinsic value of awards that vested during the six months ended June 30, 2018 and 2017 was approximately $1.7 million and $1.2 million, respectively. As of June 30, 2018, there was unrecognized compensation expense related to Equity Plan awards of approximately $4.7 million, which the Company expects to recognize over a weighted average period of approximately 2.8 years.
Note 11—Income Taxes
The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC") or a C corporation (“C-Corporation"). As such, the entities functioning as LLCs are not liable for or able to benefit from U.S. federal and most state income taxes on their earnings (losses), which will be included in the personal income tax returns of each entity’s unit holders. The entities functioning as C-Corporations are liable for or able to benefit from U.S. federal and state and local income taxes on their earnings and losses, respectively.
The Company’s income tax provision and effective tax rate were as follows: 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Earnings from continuing operations before income taxes
 
$
6,682

 
$
15,831

 
$
14,433

 
$
33,688

Effective tax rate
 
7.4
%
 
7.8
%
 
6.7
%
 
7.7
%
Provision for income taxes
 
492

 
1,242

 
970

 
2,585

Provision for income taxes @ statutory rate
 
1,403

 
5,383

 
3,031

 
11,454

Difference between tax at effective vs. statutory rate
 
$
(911
)
 
$
(4,141
)
 
$
(2,061
)
 
$
(8,869
)
The difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 21% for the three and six months ended June 30, 2018 and 34% for the three and six months ended June 30, 2017 is primarily attributable to the benefit resulting from the fact that a significant portion of the Company’s operations include a series of flow-through entities which are generally not subject to federal and most state income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate level taxes.
Note 12—Related Party Transactions
Transactions with noncontrolling members
From time to time, the Company may be asked to provide certain services, including accounting, legal and other administrative functions for the noncontrolling members of Manning & Napier Group. While immaterial, the Company has not received any reimbursement for such services.
The Company manages the personal funds and funds of affiliated entities of certain of the Company's executive officers and directors. Pursuant to the respective investment management agreements, in some instances the Company waives or reduces its regular advisory fees for these accounts. The aggregate value of the fees earned and fees waived was less than $0.1 million for the six months ended June 30, 2018 and 2017, respectively.
Affiliated fund transactions
The Company earns investment advisory fees, distribution fees and administrative service fees under agreements with affiliated mutual funds and collective investment trusts. Fees earned for advisory and distribution services provided were approximately $14.3 million and $28.8 million for the three and six months ended June 30, 2018 and approximately $21.1 million and $45.2 million for the three and six months ended June 30, 2017, respectively. Fees earned for administrative services provided were approximately $0.5 million and $1.0 million for the three and six months ended June 30, 2018, respectively. See Note 3 for disclosure of amounts due from affiliated mutual funds and collective investment trusts.
The Company incurs certain expenses on behalf of the collective investment trusts and has contractually agreed to limit its fees and reimburse expenses to limit operating expenses incurred by certain affiliated fund series. The aggregate value of fees waived and expenses reimbursed to, or incurred for, affiliated mutual funds and collective investment trusts was approximately $0.7 million and $2.4 million for the three and six months ended June 30, 2018 and $1.4 million and $2.7 million for the three and six months ended June 30, 2017, respectively. As of June 30, 2018, the Company has recorded a receivable of approximately $0.7 million for expenses paid on behalf of an affiliated mutual fund. These expenses are reimbursable to the Company under an agreement with the affiliated mutual fund, and are included within other long-term assets on the consolidated statements of financial condition.

18

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 13—Subsequent Events
Distributions and dividends
On July 24, 2018, the Board of Directors approved a distribution from Manning & Napier Group to Manning & Napier and the noncontrolling interests of Manning & Napier Group. The amount of the distribution will be based on earnings for the quarter ended June 30, 2018, with a maximum amount of $2.5 million. Concurrently, the Board of Directors declared an $0.08 per share dividend to the holders of Class A common stock. The dividend is payable on or about November 1, 2018 to shareholders of record as of October 15, 2018.
Voluntary Employee Retirement Offering
During the quarter ended June 30, 2018, the Company commenced a voluntary employee retirement offering (the "offering"), available to employees meeting certain age and length-of-service requirements as well as business function criteria. Employees electing to participate in the offering are subject to approval by the Company, and will receive enhanced separation benefits. As of June 30, 2018, the period for voluntary participation in the offering remained open. Subsequent to June 30, 2018, the offering period closed.
The Company's estimate of the costs and benefits to be recorded under the offering is approximately $2.6 million, of which approximately $2.2 million is expected to be incurred during the third and fourth quarters of 2018. Participants will depart on a staggered schedule to maintain business continuity.


19

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect the views of Manning & Napier, Inc. ("we," "our," or "us") with respect to, among other things, our operations and financial performance. Words like "believes," "expects," "may," "estimates," "will," "should," "could," "intends," "likely," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, are used to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ materially from our expectations or beliefs are disclosed in the “Risk Factors” section, as well as other sections, of our Annual Report on Form 10-K which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of our products; client sales and redemption activity; any loss of an executive officer or key personnel; changes in our business related to strategic acquisitions and other transactions; risks related to the accuracy of the estimates and assumptions we used to revalue our net deferred tax assets in accordance with U.S. Tax Reform; and changes of government policy or regulations. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Our Business
We are an independent investment management firm that provides a broad range of investment solutions, as well as a variety of consultative services that complement our investment process. Founded in 1970, we offer U.S. and non-U.S equity, fixed income, and a range of blended asset portfolios, such as life cycle funds and actively-managed exchange-traded fund ("ETF")-based portfolios. We serve a diversified client base of high-net-worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. Our operations are based principally in the United States, with our headquarters located in Fairport, New York.
Market Developments
With regard to notable developments to the investment environment, two persistent headwinds active managers have faced since the Global Financial Crisis have recently become tailwinds: equity correlations and valuation dispersion. Equity correlations collapsed at the start of 2017, suggesting investors are now pricing stocks based on corporate fundamentals and other factors that affect individual companies. We believe this provides fundamental-based active investment managers, like us, a wider opportunity set to exploit. Valuation dispersion has also shifted, moving notably higher, resulting in more opportunities for active investment managers to take advantage of security mispricing. To the extent that these dynamics continue to hold, we believe the market environment should remain more conducive to active investment managers relative to the generally challenging environment that has persisted for much of the past decade.
We have experienced net client outflows since 2013 resulting in an overall decrease in our AUM, which is likely to continue in the near term, though we believe at a slower rate. Our ability to increase AUM in the future will depend in part on our ability to execute our investment strategies to achieve competitive investment returns, and on our ability to successfully distribute our products and services, including those that have been areas of strategic focus for us.
As part of our recent business plan review and due in part to these AUM and corresponding revenue decreases, we have implemented initiatives focused on strengthening our core business and improving profitability through expense management, while prioritizing initiatives that we believe will support future AUM growth. Our sales and service teams have prioritized our most competitive product and service offerings for distribution while remaining focused on protecting our existing client relationships. With an initial focus on expense management, we have reviewed operating expenses across our firm and made adjustments where feasible, including workforce reductions. During the quarter ending June 30, 2018, we commenced a voluntary employee retirement offering ("the offering") for employees meeting certain age and length-of-service requirements, and whose business function is outside of our Research and Sales teams. As of June 30, 2018, the period for voluntary participation in the offering remained open. Subsequent to June 30, 2018, that offering period closed, and we also completed additional workforce reductions. Under these initiatives, we estimate approximately $2.7 million in severance charges will be incurred during the third and fourth quarters of 2018. Ongoing savings achieved from these expense management initiatives will be redirected toward increased investment in our information technology infrastructure.
In response to industry trends and increasing fee pressure from passive strategies offered by our competitors, management has evaluated fees across our product set and is restructuring fees across many of our mutual fund and collective trust products. Management fee reductions and corresponding distribution and shareholder servicing expense reductions for the various series of our funds began during the fourth quarter of 2017 and will continue throughout 2018. Given the overall pressure on fees that

20

Table of Contents

all active managers are facing, we believe that bringing our fund fees to a more competitive level will enhance our ability to attract additional assets in the future.
Additionally, we are actively marketing our Custom Solution offering. Custom Solution is a competitively priced consultative advisory service in which we tailor an allocation among proprietary and non-proprietary investment products and vehicles to meet a client’s unique investment objectives and cash flow needs. Direct advisory services such as Custom Solution are an essential part of our strategy to pursue direct relationships with clients built on managing risk and meeting investment objectives over market cycles. 
Our Products
We derive substantially all of our revenues from investment management fees earned from providing advisory services to separately managed accounts, mutual funds and collective investment trusts—including those offered by MNA, the Manning & Napier Fund, Inc. (the "Fund"), Exeter Trust Company, and Rainier Investment Management.
Our separate accounts are primarily distributed through our Direct Channel, where our representatives form relationships with high-net-worth individuals, middle market institutions or large institutions that are working with a consultant. To a lesser extent, we also obtain a portion of our separate account distribution via third parties, either through our Intermediary Channel where national brokerage firm representatives or independent financial advisors select our separate account strategies for their clients, or through our Platform/Sub-Advisory Channel, where unaffiliated registered investment advisors approve our strategies for their product platforms. Our separate account products are a primary driver of our blended asset portfolios for high-net-worth, middle market institutional clients and financial intermediaries. In contrast, larger institutions and unaffiliated registered investment advisor platforms are a driver of our separate account equity portfolios.
Our mutual funds and collective investment trusts are distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also distribute our mutual fund and collective investment trusts through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are an important driver of both our blended asset class and single asset class portfolios.
Our AUM was $22.8 billion as of June 30, 2018. The composition of our AUM by vehicle and portfolio is illustrated in the table below:
 
 
June 30, 2018
AUM - by investment vehicle and portfolio
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Separately managed accounts
 
$
10,084.1

 
$
4,446.6

 
$
1,075.2

 
$
15,605.9

Mutual funds and collective investment trusts
 
4,893.8

 
2,224.8

 
113.2

 
7,231.8

Total
 
$
14,977.9

 
$
6,671.4

 
$
1,188.4

 
$
22,837.7


21

Table of Contents

Separately Managed Accounts
The composition of our separately managed accounts as of June 30, 2018, by channel and portfolio, is set forth in the table below:
 
 
June 30, 2018
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(dollars in millions)
Separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
$
7,669.6

 
$
2,988.2

 
$
957.2

 
$
11,615.0

Intermediary Channel
 
2,408.6

 
631.0

 
118.0

 
3,157.6

Platform/Sub-advisor Channel
 
5.9

 
827.4

 

 
833.3

Total
 
$
10,084.1

 
$
4,446.6

 
$
1,075.2

 
$
15,605.9

Percentage of separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
49
%
 
19
%
 
6
%
 
74
%
Intermediary Channel
 
15
%
 
4
%
 
1
%
 
20
%
Platform/Sub-advisor Channel
 
0
%
 
6
%
 
%
 
6
%
Total
 
64
%
 
29
%
 
7
%
 
100
%
Percentage of portfolio by channel
 
 
 
 
 
 
 
 
Direct Channel
 
76
%
 
67
%
 
89
%
 
74
%
Intermediary Channel
 
24
%
 
14
%
 
11
%
 
20
%
Platform/Sub-advisor Channel
 
0
%
 
19
%
 
%
 
6
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Percentage of channel by portfolio
 
 
 
 
 
 
 
 
Direct Channel
 
66
%
 
26
%
 
8
%
 
100
%
Intermediary Channel
 
76
%
 
20
%
 
4
%
 
100
%
Platform/Sub-advisor Channel
 
1
%
 
99
%
 
%
 
100
%
Our separate accounts contributed 47% of our total gross client inflows for the six months ended June 30, 2018 and represented 68% of our total AUM as of June 30, 2018.
Our separate account business has historically been driven primarily by our Direct Channel, where sales representatives form a relationship with high-net-worth investors, middle market institutions, and large institutional clients working in conjunction with a consultant. The Direct Channel contributed 63% of the total gross client inflows for our separate account business for the six months ended June 30, 2018 and represented 74% of our total separate account AUM as of June 30, 2018. We anticipate the Direct Channel to continue to be the largest driver of new separate account business going forward, given the Direct Channel’s high-net-worth and middle market institutional client-type focus.
During the six months ended June 30, 2018, blended asset portfolios represented 62% of the separate account gross client inflows from the Direct Channel, while equity and fixed income portfolios represented 21% and 18%, respectively. As of June 30, 2018, blended asset and equity portfolios represented 66% and 26%, respectively, of total Direct Channel separate account AUM, while our fixed income portfolios were 8%. We expect our focus on individuals and middle market institutions to continue to drive interest in our blended asset class portfolios, where we provide a comprehensive portfolio of stocks and bonds managed to a client’s specific investment objectives. Our relationships with larger institutions may also be a driver of growth in separately managed account equity strategies, though many of these larger institutions may seek exposure to non-U.S. equity strategies through commingled vehicles rather than separately managed accounts to limit related custody expenses.
To a lesser extent, we also obtain separate account business from third parties, including financial advisors or unaffiliated registered investment advisor programs or platforms. During the six months ended June 30, 2018, 22% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 15% came from registered investment advisor platforms (Platform/Sub-advisor Channel). The Intermediary and Platform/Sub-advisor Channels represented 26% of our total separate account AUM as of June 30, 2018.
New separate account business through the Intermediary Channel flowed into both our blended asset and equity portfolios, driven by advisors’ needs to identify either a one-stop solution (blended asset portfolio) or to fill a mandate within a multi-strategy portfolio. During the six months ended June 30, 2018, blended asset and equity portfolios represented 82% and

22

Table of Contents

18%, respectively, of the separate account gross client inflows from the Intermediary Channel. As of June 30, 2018, 76% of our separate account AUM derived from financial advisors was allocated to blended asset portfolios, with 20% allocated to equity and 4% allocated to fixed income. We expect that equity and fixed income portfolios may see additional interest from financial advisors over time as more advisors structure a multi-strategy portfolio for their clients.
During the six months ended June 30, 2018, 100% of our separate account gross client inflows from the Platform/Sub-advisory Channel were into equity portfolios. Gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product.
Our annualized separate account retention rate across all channels was 83% during the six months ended June 30, 2018, consistent with 84% for the rolling 12 months ended June 30, 2018.
Mutual Funds and Collective Investment Trusts
The composition of our mutual fund and collective investment trust AUM as of June 30, 2018, by portfolio, is set forth in the table below:
 
 
June 30, 2018
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Mutual fund and collective investment trust AUM
 
$
4,893.8

 
$
2,224.8

 
$
113.2

 
$
7,231.8

Our mutual funds and collective investment trusts contributed 53% of our total gross client inflows for the six months ended June 30, 2018 and represented 32% of our total AUM as of June 30, 2018. As of June 30, 2018, our mutual fund and collective investment trust AUM consisted of 68% from blended asset portfolios, 31% from equity portfolios and 1% from fixed income portfolios compared to 62% and 37% for blended asset and equity portfolios as of June 30, 2017. During the six months ended June 30, 2018, 63%, 33%, and 3% of the gross client inflows were attributable to blended asset, equity and fixed income portfolios, respectively.
Our mutual fund and collective investment trust business is driven by financial intermediaries and direct sales representatives. Intermediary distribution of our mutual fund and collective investment trust vehicles is achieved via financial advisors, brokers and retirement plan advisors. Through our Intermediary Channel, we are focused on distributing both our blended asset life cycle fund vehicles and our single asset class fund vehicles to advisors who work with retail and retirement plan clients. Our blended asset portfolios are used by advisors seeking a multi-asset class solution for their clients while our equity and fixed income portfolios are used by intermediaries wishing to use our funds as a component of a larger portfolio or retirement plan menu design.
We also have relationships with consultants and manager research teams at platforms in order to distribute our funds within advisory programs, or through placement on platforms' approved lists of funds. To facilitate our relationships with intermediaries, we currently have approximately 290 dealer relationships. These relationships are important to our retail business as well as our 401(k) life cycle and institutional business.
Through the Direct Channel, we also form relationships with middle market and large market defined contribution plan sponsors seeking to use our life cycle mutual funds and collective investment trusts as default options on their investment menu. Our Direct Sales Representatives also distribute our equity portfolios to large institutional clients with which we have direct relationships and often, the client's consultant. We expect this channel to focus on distributing blended asset and equity portfolio funds in the future.
Results of Operations
Below is a discussion of our consolidated results of operations for the three and six months ended June 30, 2018 and 2017.
Components of Results of Operations
Overview
An important factor influencing inflows and outflows of our AUM is the investment performance of our various investment approaches. Our variety of stock selection strategies, absolute pricing discipline and active asset allocation management approach generally results in specific absolute and relative return characteristics in different market environments. For example, during a fundamental-driven bull market when prices are rising alongside improving fundamentals, we are likely to experience positive absolute returns and competitive relative returns. However, in a more momentum-driven bull market, when prices become disconnected from underlying fundamentals, or narrow market environment where a small handful of stocks outperform the average stock, we are likely to experience positive absolute returns but lagging relative returns. Similarly,

23

Table of Contents

during a valuation-driven bear market, when markets experience a period of price correction following a momentum-driven bull market, we are likely to experience negative absolute returns but strong relative returns. However, in a momentum-driven bear market, which is typically characterized by broad price declines in a highly correlated market, we are likely to experience negative absolute returns and potentially lagging relative returns. Essentially, our approach is likely to do well when markets are driven by fundamentals, but lag when markets are driven primarily by momentum.
Other components impacting our operating results include:
asset-based fee rates and changes in those rates;
the composition of our AUM among various portfolios, vehicles and client types;
changes in our variable costs, including incentive compensation and distribution, servicing and custody expenses, which are affected by our investment performance, level of our AUM and revenue; and
fixed costs, including changes to base compensation, vendor-related costs and investment spending on new products.

24

Table of Contents

Assets Under Management and Investment Performance
The following table reflects the indicated components of our AUM for our investment vehicles for the three and six months ended June 30, 2018 and 2017:
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 
(in millions)
 
 
 
 
 
 
 
 
As of March 31, 2018
$
15,960.1

 
$
7,473.4

 
$
23,433.5

 
68
%
 
32
%
 
100
%
Gross client inflows (1)
331.1

 
349.7

 
680.8

 
 
 
 
 
 
Gross client outflows (1)
(899.7
)
 
(654.5
)
 
(1,554.2
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other (2)
214.4

 
63.2

 
277.6

 
 
 
 
 
 
As of June 30, 2018
$
15,605.9

 
$
7,231.8

 
$
22,837.7

 
68
%
 
32
%
 
100
%
Average AUM for period
$
15,689.8

 
$
7,394.2

 
$
23,084.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2017
$
18,762.8

 
$
12,866.6

 
$
31,629.4

 
59
%
 
41
%
 
100
%
Gross client inflows (1)
621.2

 
450.0

 
1,071.2

 
 
 
 
 
 
Gross client outflows (1)
(2,316.8
)
 
(4,375.2
)
 
(6,692.0
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other (2)
647.7

 
419.2

 
1,066.9

 
 
 
 
 
 
As of June 30, 2017
$
17,714.9

 
$
9,360.6

 
$
27,075.5

 
65
%
 
35
%
 
100
%
Average AUM for period
$
18,424.4

 
$
10,218.0

 
$
28,642.4