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Waddell & Reed Financial Inc (WDR)
Q4Â 2019 Earnings Call
Apr 28, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Waddell & Reed First Quarter 2020 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Mike Daley Vice President Investor Relations. Please go ahead.
Michael John Daley -- Vice President-investor Relations And Controller
Thank you. On behalf of our management team I would like to welcome you to our quarterly earnings conference call. Joining me on our call today are Phil Sanders our CEO; Ben Clouse our CFO; Brent Bloss our President; Dan Hanson our CIO; Shawn Mihal President of our Retail Wealth Management business Waddell & Reed Inc.; and Amy Scupham President of Ivy Distributors Inc. Before we begin I would like to remind you that some of our comments and responses may include forward-looking statements and non-GAAP financial measures.
While we believe these forward-looking statements to be reasonable based on information that is currently available to us actual results could materially differ from those expressed or implied due to a number of factors that we reference in our public filings with the SEC. We assume no duty to update any forward-looking statements. Materials relevant to today's call including a copy of the press release that contains a description of these non-GAAP financial measures and a reconciliation to GAAP and supplemental schedules have been posted on the Investor Relations section of our website at ir.waddell.com.
I would now like to turn the call over to Phil.
Philip J. Sanders -- Chief Executive Officer
Thanks Mike. Good morning everyone and thanks for joining us. Before we get into the more detailed financial discussion I want to take a moment to address the extraordinary environment we and the world are currently navigating. The COVID-19 pandemic has caused one of the most rapid and dramatic global economic downturns in history. We may not fully realize the totality of the tragic human consequences for several months. The U.S. stock markets dropped approximately 35% from peak in February to trough in late March.
Global economic activity had a full stop around the world, as countries and businesses implemented plans to isolate and protect their citizens and employees. Remarkably, within about 30 days, we moved from a relatively strong domestic economy, with financial market indexes heading record highs to a global recession. Amid the unprecedented uncertainty and volatility our company proactively implemented a comprehensive business continuity plan that allowed us to effectively respond to the crisis while maintaining the safety of our employees clients independent advisors and stakeholders in the communities where we live and work. We adapted quickly and by late March 98% of our workforce was working remotely with negligible downtime. I'll let Brent give highlights of our preparation and response activities in just a moment. I think it's important to note here as well that despite the circumstances and challenges we remain positioned to execute on our long-term strategic plan. Our steady and proactive response has allowed our asset management and wealth management businesses to maintain continuity of service and the access that our clients need and expect.
In short we are actively managing through this acute global disruption while remaining focused on our long-term growth and competitive position. We maintain a strong financial profile with significant liquidity. In addition to a high level of cash reserves and the significant investment portfolio the firm operates with a low level of debt. Our exceptionally strong balance sheet allows us to continue to execute our long-term growth strategies while retaining our focus on controlling expenses. Periods of volatility and dislocation may generate additional opportunities or growth accelerators that require a nimble approach and we remain prepared to respond. As such the tenants of our long-term strategy remain at the center of our executional approach as we continue to drive the transformation of our wealth management business to realize its full value and growth potential as well as continue the strong tradition of Ivy as an institutional caliber asset manager. While the COVID-19 pandemic continues to impact the world and some say it may forever change certain elements of our society we steadily look ahead as we plan for a return to more normal circumstances.
I'll let Brent take a moment to relay some of the details around our preparation planning and response to the pandemic. Brent?
Brent K. Bloss -- President
Thanks Phil and good morning everyone. As Phil noted the extraordinary environment required us to implement business continuity plans in all aspects of our company. Importantly our overall strategic approach has been proactive and focused on leading for the benefit of all our stakeholders our clients independent advisors employees shareholders and community. We believe a holistic approach like this will enable us to navigate these unique times in the best way possible and allow us to come out of this current situation in a stronger position as a company. We started transitioning to a work-from-home environment early in March and have been in lockstep with the CDC and recommendations from local authorities on safe practices throughout this process. We are operating efficiently and continue to provide all investment and wealth management support services remotely. The shift to a work-from-home environment has not altered the comprehensive capability of our investment team or the distribution and service components of our work. Early in the quarter we quickly stood up an enterprise preparedness team and a COVID-19 steering committee to assess developments and determine the best actions to address business continuity.
These teams continue to me on an ongoing basis. Consistent with the guidance of governmental and public health officials, we have adopted interim business practices, including restricting business travel, requiring all meetings to take place via remote access tools, adopting safety protocols to my potential exposure adopted social distancing practices implementing a clearly defined approval process for reentry to any worksite advising personnel on preventative measures and offering remote collaboration and productivity tools and training resources. In addition we continue to monitor enhance our system capabilities to our remote workforce to function efficiently and we have continued our educational and monitoring practices to ensure there are no compromises to confidentiality privacy and cybersecurity requirements. Given our preparedness we do not expect any significant impact to our investing trading client servicing or reporting functions. The Ivy Investment Management team transitioned seamlessly and was 100% remote working as of March 16. Our investment teams have a strong heritage of active collaboration and we've been pleased with our team's transition to a virtual environment while maintaining that collaborative spirit. They continue to conduct their daily morning meeting remotely and meet with company management teams in a virtual setting as well.
Our distribution operations are largely remote workers throughout the year and they have not missed a beat during this transition. Our investment management distribution and marketing teams have partnered to remain actively connected with our clients during these volatile times delivering ongoing investment insight updates. Within our wealth management business the majority of independent advisors are working from temporary locations. We are demonstrating our differentiated service and support model by continuing regular communications with our independent advisors as well as delivering over 160 additional advisor and client-focused resources to help navigate these unique times. For independent advisors we delivered operations assistance for temporary office closures remote work and business processing. In addition we've rolled out blogs and webinars around market and industry developments the CARES Act and practice development. We are also offering client-focused resources such as customizable email and social media messaging as well as supporting client outreach and financial planning for market volatility. With respect to our commitment to our employees and local community we have not initiated any layoffs furloughs or reduced hours.
In fact as we implemented our business continuity plans we have intentionally maintained continuity in our pay practices for all our employees based upon their regular work schedule paid spot bonuses to certain employees implemented a temporary hourly wage increase to designated client service personnel on both our asset management and wealth management operations increased certain benefit recoveries for specific COVID-19-related treatments through May and have increased our philanthropic support for local organizations to help support the COVID-19 responses in our community. In summary I'm extremely proud of the way our entire company has responded to these unprecedented circumstances. There were certainly challenges along the way but these learnings have helped improve our continuity process going forward and we are confident in our continued ability to do the right thing for our employees clients independent advisors shareholders and our local communities.
Philip J. Sanders -- Chief Executive Officer
Thanks Brent. Our teams have done a tremendous have done tremendous work to ensure our business continues to operate seamlessly. Let me now provide a few highlights of our asset management and wealth management businesses before I turn it over to Ben to discuss our financial results. With the recent while the recent environment has required a significant amount of operational change in a short amount of time over the last two years we have been evolving this business more holistically and ensuring we have a solid foundation to grow from in the future. The overall enterprise platform and business model is distinct in the industry due to the combination of a highly capable active fundamental research based asset manager and a reinvigorated wealth manager operating with a fully open architecture with both operations supported by enterprisewide shared services groups. This unique enterprise model enables deeper client relationships in both operations while financially leveraging shared services functions and platforms across the enterprise. Having a fully open architecture model for wealth management enables asset retention over time and enhanced advisor recruiting and broader acquisition opportunities. Through a lot of hard work and investment we've meaningfully increased our institutional caliber investment and distribution capabilities for Ivy Investments as well.
We are already seeing evidence of progress across the enterprise and feel strongly that our strategic positioning our robust capital position and most importantly the resilience of our people positions us well for growth in the future. Now turning to investment performance. We were pleased to see performance trends improving across the trailing one three and five-year periods as measured by the percentage of funds ranked in the top half of their respective Morningstar universes led by improvements in our small and mid-cap franchises. Performance as measured by the percentage of assets was mixed as one-year records improved while three- and five-year performance declined slightly. Broadly speaking we have seen active managers perform slightly better than benchmarks during this period of volatility and we see our franchise delivering improved relative peer group performance in many of our key strategies. As an example in the U.S. large-cap growth category 64% of actively managed funds outperformed benchmarks and our Ivy large-cap growth strategy delivered top quartile results adding to a long-term track record of value creation for clients. This fund has been featured by Barron's as a top sustainable fund for three consecutive years. And we see the current market environment as providing continued opportunities for our active fundamental investment approach.
We continue to focus on delivering long term success to our clients. Through our fundamental research and insights. As we have seen many market cycles. Flows across the industry shifted sharply during the quarter as investors move significant amounts of money to the sidelines, reversing the prior trend of strong inflows into fixed income products. For IV investments. It is notable that while redemptions increased compared to the prior year, first quarter, they actually improved compared to the fourth quarter. And overall, the magnitude of the flows impact at this point has been less significant than the broader market volatility might suggest. From a sales perspective we saw an improvement both compared to last year and compared to the fourth quarter of 2019. While there is certainly some seasonality in the first quarter we were pleased to see sales increase especially in light of the broader market disruptions and the fact that we implemented a new sales coverage model only 18 months ago. The modest increase in sales is encouraging as we look to the future with the diversification of sales coming from multiple channels and client types and an increased breadth of investment strategies including positive flows in our large-cap value franchise.
We have seen an improvement in April flows to date with continued sales momentum and a moderation of redemptions. Additionally within our wealth management business both sales and redemptions improved compared to last year. Historically this part of our business tends to be more resilient during periods of volatility and the work we've done in transitioning the business model has certainly helped these dynamics. Our advisor network continues to stabilize and we moved closer to the inflection point of advisor growth this quarter with some recruiting successes. Most notably we added 10 experienced advisors to our network this quarter. Our differentiated service and support model combined with our technology package and full product suite are clearly resonating with these newly added advisors as well as other advisors in our recruiting pipeline. We also continued to see advisor productivity trend upward versus the prior quarter. On the technology front progress continues on the remaining components of our wealth management business administration program including enhanced reporting improved data analytics and a simplified business processing model.
During the first quarter, we completed a pilot launch of the new Salesforce integrated data repository, allowing seamless access to data and reports across the business.
We will introduce the integrated data repository. What else one source to the full network of advisors beginning in the second quarter. These are certainly challenging times but I feel confident that our company is prepared to weather the short-term turbulence and we have a lot to be excited about as we start to see some of the early results from our strategic actions emerge. The power of our business model is in its combination of asset and wealth management and the synergies that it drives. And we're looking forward to generating growth across both businesses.
I'll now turn it over to Ben to go over the financials.
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Thank you Phil and good morning everyone. As you saw in our release we reported net income of $22 million or $0.32 per share this quarter. Given that the market volatility occurred later in the quarter average assets and revenues were not as significantly impacted as the outlook for the remainder of the year which I will cover shortly. While operating income for the quarter was largely inside of our expectations we did record $11 million in unrealized losses on our investment portfolio compared to unrealized gains at year-end. In addition the quarter included additional tax expense of $1.9 million which increased our reported effective tax rate. Wealth management assets under administration ended the quarter at $51.8 billion and decreased 14% compared to the prior quarter. While average assets under administration decreased only 1% over the same period. While absolute asset levels decreased from the market losses net new advisory assets grew once again this quarter and redemptions improved slightly as well. Ivy assets under management ended the quarter at $56 billion a decrease of 20% from the prior quarter while average assets under management of $66.1 billion were down 4%. Phil covered the details on flows but clearly the asset declines will impact our projected revenues for the remainder of the year. Turning now to the financial results.
Given these unprecedented times I'm going to provide some additional color around our balance sheet position before covering the income statement. We ended the quarter with cash and investment balances of $766 million with the decrease primarily attributable to declines in our investment portfolio and incremental share repurchases. Within that combined total our cash balance increased modestly from last quarter due to an increase in swap collateral and investment maturities partially offset by share repurchases and dividends. Investment balances decreased approximately $83 million due to $56 million of unrealized losses on our seed portfolio and $27 million in investment maturities that we redeployed into share repurchases during the first quarter. During the quarter we returned capital of $71 million to shareholders through dividends and share repurchases. We repurchased 5.5% of our outstanding shares during the quarter and over the trailing 12 months we've repurchased over 14% of our outstanding shares. Our investment balance is comprised of a seed capital portfolio totaling $293 million and our corporate investment portfolio totaling $312 million as of quarter end. A reminder that the seed capital is part of our strategic product incubation and development process which is of course key to our asset management business.
We have a conservative hedging program with the majority of the seed portfolio hedged which partially offset the unrealized losses I mentioned previously. As for the corporate investment portfolio it is comprised entirely of investment-grade corporate bonds commercial paper and U.S. treasuries with an average issuance size of $5 million and a duration of 1.5 years. We continue to believe our balance sheet strength without any significant leverage is a key differentiator in this industry especially in the current environment which affords us the financial flexibility to take advantage of dislocations and other opportunities these markets bring. Now turning to the income statement. Total revenue for the quarter was $263.7 million and decreased 2% compared to the prior quarter. The majority of the sequential quarter revenue decrease occurred in March as asset levels decreased sharply impacting investment management fees and shareholder service fees. There was also one less day in the quarter. The management fee rate actually improved to 64 basis points due to lower fund fee waivers and a favorable mix shift between our institutional and retail products. We did add some new fee waivers on our large-cap growth and core bond products during the period which were effective April 1.
We expect these fee reductions to have a one to two cent annualized impact on earnings per share and position these products for distribution opportunities into to large asset categories where we have competitive products, Underwriting and distribution revenues were actually slightly higher as over half of our U&D revenues are now comprised of advisory products which are billed based on beginning-of-month assets so they were not impacted by the March market downturn. Operating expenses totaled $224 million and decreased $16.9 million compared to the prior quarter. However the prior quarter included a $12.8 million asset impairment charge. The remaining decrease was due to lower compensation and lower G&A expenses. Compensation was lower due to a slight decline in headcount and lower incentives despite the resetting of tax limits and an annual merit increase. G&A decreased across a number of categories most notably due to meetings and travel shifting to virtual formats. In addition there was a shift in transfer agency transactional processing costs from the technology line. In light of the market uncertainty caused by the COVID-19 pandemic we expect our 2020 controllable expenses to be below our prior guidance. We have been modeling various management actions and the related financial scenarios for the remainder of the year.
These actions include assessing controllable expenses for savings opportunities evaluating all ongoing projects for strategic alignment and effectiveness of the project teams consultants and contractors and evaluating our open positions. We will continue to prudently manage our expenses but I want to be clear we will continue to take a long-term view. Our decisions will focus on those actions that we believe best enable long-term success and sustainability especially as it relates to those projects that we believe will drive future organic and inorganic growth. Our response will be determined by the magnitude and timing of asset levels in the balance of 2020. Should market performance decline further we're prepared to take additional actions as necessary while maintaining our long-term focus and doing the right thing for all of our stakeholders. Finally the effective income tax rate was 32% for the quarter. But as I mentioned it included additional tax expense items of $1.9 million.
Without those items the tax rate was 25.8%. We expect the tax rate to remain higher due to an unfavorable relationship between nondeductible items and pre-tax income excluding the impact of any additional nonrecurring or discrete items. In addition based on current share prices we do expect an additional tax charge in the second quarter for the shortfall from vesting of restricted shares of approximately $1.5 million. Overall as Phil and Brent mentioned we are leading this company for the benefit of all of our key stakeholders. We believe that will enable the best success over time. For shareholders specifically as you have heard we continue to utilize our strong balance sheet and ample liquidity to invest in key growth opportunities which we believe will deliver long-term shareholder value.
Operator we would now like to open the call for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Glenn Schorr with Evercore. Please go ahead. Your line is open
Glenn Schorr -- Evercore -- Analyst
Thank you. I appreciate it. So curious when you talked about growth accelerants that you're thinking about in your prepared remarks I'm curious if there are if that's talking about new products that are in the pre-pipeline new investments on distribution? I wonder if you could just unpack that a little bit? I find that interesting.
Philip J. Sanders -- Chief Executive Officer
Okay. Glenn this is Phil. I think primarily what we're seeing is we've talked in the past about our balance sheet and liquidity to be a real differentiator in this marketplace. And I see I think when we see market dislocations we want to be poised to be opportunistic whether it's on the asset management side of our company or the wealth management side. So thinking primarily in terms of acquisition opportunities or abilities to accelerate investments or it could be in new product development areas as well. So it really encompasses a little bit of all of the above. It speaks to being opportunistic at a time when maybe some others are kind of on their heels and things are a little dicey. We have a conservative balance sheet lots of liquidity and really the opportunity to take advantage of opportunities wherever we see them.
Glenn Schorr -- Evercore -- Analyst
Okay. And maybe just a follow-up on your fee waiver comments. You've done some things like that in the past as to basically get below the peer meeting or be more competitive to help drive growth. I'm assuming that this is the case again but I'm wondering if you could talk about how much of a reduction and how that feedback works. Does that come to you from the retail channels? Do you go out seek it out for the best-performing funds? Just curious on how that works.
Philip J. Sanders -- Chief Executive Officer
Sure. Amy do you want to take that one?
Amy J. Scupham -- Senior Vice President, Distribution
Sure. Glenn thanks for the question. Yes. So when we are evaluating our fees it's a piece of our continued effort to really drive the competitiveness of our products. So we're looking at it from a few different standpoints. But as it specifically relates to the fee reductions that we did in mid-2018 and then these two fee reductions as well we take a look at our competitors in the marketplace. We look at who's winning and where their fees are versus their assets under management and the strategy. And then we also really take a look at what the median of the below-average category on the Morningstar peer group is. And so we take all of those things combine them together with what we feel like the opportunity is out in the marketplace and we take that suggestion to our executive team and Board for approval.
Glenn Schorr -- Evercore -- Analyst
How much was the reduction in those products this go around?
Amy J. Scupham -- Senior Vice President, Distribution
There was a nine basis point expense ratio reduction on security and core bond in the I share classes I and N share classes. And then I believe it was only around four basis points in large-cap growth because that was also part of the original reduction in mid-July.
Glenn Schorr -- Evercore -- Analyst
Awesome.
Amy J. Scupham -- Senior Vice President, Distribution
And that's from the I and N shares. Yes.
Philip J. Sanders -- Chief Executive Officer
Glenn I think Ben wanted to add one thing to your prior question. Go ahead.
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Thank you Phil. I just wanted to add to Phil's remarks Glenn that we're really thinking about that in terms of organic and inorganic growth. Organically as we think about our wealth manager we're continuing to invest in recruiting opportunities which you heard us mention and Shawn could provide additional color on. Also we are continuing very aggressively our technology efforts in that line of business and beginning to stand up some of the pieces. As you heard in our remarks that will continue through this year. And then the other piece would be inorganically we are obviously continuing to look at the marketplace as you heard Phil say in his comments about opportunities that may arise and opportunities for us to use our capital for growth.
Glenn Schorr -- Evercore -- Analyst
Thanks for that man.
Operator
The next question is from Dan Fannon with Jefferies. Please go ahead.
Dan Fannon -- Jefferies -- Analyst
I think just wanted to follow-up on the expense commentary. You talked about coming in below your previous guidance. I was wondering if you could be a bit more specific in terms of what you think the new range is or how we think about the run rate kind of going into next quarter in terms of those controllable expenses?
Philip J. Sanders -- Chief Executive Officer
Okay. Ben do you want to take that?
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Sure. Dan we're obviously constantly assessing our expense base and looking at the ways we do business and we're going to continue to be prudent as we think about that. And you've seen that we've taken a number of actions over the last couple of years. As I mentioned in my prior answer we don't intend to interrupt the strategic progress that we have under way in particular in some of those items that I mentioned. Generally if we as I think about our expense base the magnitude and timing of asset levels in the balance of the year are going to determine ultimately the magnitude of actions we will take. As I think about the composition of our cost base compensation G&A and marketing are certainly the most variable. I don't think you'll see us make a lot of movement in technology as that's where a lot of that strategic spending is that I referred to.
As it relates to the rest of the year some items were just naturally lower in Q1 such as our equity and deferred comp plans that have a mark-to-market component. We also have been very judicious in regard to filling vacancies and thinking about that on a case-by-case basis. But again continuing to invest in talent in those areas that we think it's important to move our strategy forward.
Dan Fannon -- Jefferies -- Analyst
Okay. And then just a follow-up question around the balance sheet and the dividend. You guys have obviously highlighted the strength in the liquidity that that provides in terms of flexibility. But thinking about the dividend at these levels and your cash flow how committed I guess to the dividend are you assuming markets are worse taking a little bit down? And how willing would you be to pay that dividend out of excess cash versus ongoing cash flow from the business?
Philip J. Sanders -- Chief Executive Officer
Well maybe this is Phil and I'll start with a high level comment and I'll let Ben follow-up. I think we a few years ago when we adjusted our capital return program we thought through this quite extensively about how we wanted to proceed and we feel pretty comfortable with respect to the level of the dividend at this point. There's quite a difference between the cash flows that we generate versus reported net income. And at this point we feel very comfortable with the current level of dividend the sustainability of that. Maybe Ben I'll let you elaborate a little bit if you want to add something there.
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Sure. Thank you Phil. Yes I would. Just to remind you as Phil said it was 2017 fourth quarter we moderated our dividend level and adjusted our share buyback program at that time to provide much more flexibility in our capital allocation structure. And since that time you've seen us return a significant amount of capital to shareholders through continuing the dividend obviously as well as doing share buybacks at or actually beyond the prior dividend level when you add those components together. We're going to continue to be opportunistic with buybacks but we can obviously take advantage of that flexibility that I mentioned and move that up or down based on other needs we might have for capital whether that's M&A opportunities on the market or other strategic investments like we were talking about earlier. And then just to reiterate Phil's other point we do have cash flow beyond the pure net income level which gives us some additional room there as well.
Dan Fannon -- Jefferies -- Analyst
Thank you
Operator
.The next question is from Patrick Davitt with Autonomous Research. Please go ahead.
Patrick Davitt -- Autonomous Research -- Analyst
Good morning, guys. You hinted on this in the prepared remarks. But when you kind of think about where AUM ended 1Q the waivers that came off in 1Q plus the waivers that came on in 2Q could you give us a little bit more specificity on what you think the run rate revenue level is versus 1Q kind of at the beginning of 2Q?
Philip J. Sanders -- Chief Executive Officer
Ben do you want to take that one?
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Sure. Patrick as I mentioned the waivers coming on we think are in a range of $0.01 to $0.02 impact and we believe just adding to Amy's earlier comments on the market we believe those are both product categories where we have some distribution opportunity. Again our strategy on thinking about pricing is to continue to work on making sure our products are well positioned in the market and that pricing is not an inhibitor as Amy's team goes to work on distribution. In regard to waivers coming off that was more a timing issue related to asset composition and movement within our portfolio versus a deliberate action or expiration there Patrick.
Patrick Davitt -- Autonomous Research -- Analyst
So taking it all together I guess the question is really like what should we where should we think about kind of the baseline for where your total run rate revenue level is versus 1Q right now?
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Yes. Taking it all together I don't expect a significant change in the fee rate. Obviously assets are have moved and are moving. But our effective fee rate I don't anticipate a significant change there.
Patrick Davitt -- Autonomous Research -- Analyst
So just kind of run the AUM through. Okay.
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Yes. With the impact I mentioned on the new waivers again $0.01 to $0.02.
Patrick Davitt -- Autonomous Research -- Analyst
Right. Thank you.
Operator
The next question is from Mike Carrier with Bank of America. Please go ahead.
Mike Carrier -- Bank of America -- Analyst
Good morning. Thanks for taking the questions on First question just on the expenses and being realized it's a volatile backdrop but can you provide maybe some color on the controllable expense level ahead and either maybe like a flat market backdrop or an environment where we're up or down 10% I guess just any color to gauge the flexibility on that base which I think previously was somewhere in like the low 400s?
Philip J. Sanders -- Chief Executive Officer
Ben do you want to take that one?
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Sure. Mike you are correct. Our prior guidance was in a range of $420 million to $425 million for that controllable expense base. We came in first quarter at a level of $97 million so significantly below. As I mentioned our ultimate response here will be determined by what asset levels look like in the balance of the year in regard to our expenditure level. The additional color I could give you maybe would be as we think about our strategic project spend I do believe that will our intention is for that to continue in the balance of the year. And I believe absent other factors that would actually drive that controllable rate up slightly in the subsequent quarters. But we've not yet finalized our intentions on what we will do in regard to other controllable expenses. The extreme amount of volatility that we saw in the latter half of March and early April have made that quite a challenge as you can imagine for us and others as well to ultimately formulate our plans.
Mike Carrier -- Bank of America -- Analyst
Got it. And then just one more follow-up on the fee waivers and not the fee waivers in April going forward but more just in the quarter some of those fee waivers decreasing. Is that I guess significant amount? Meaning if I look at the fee rate and like how much these fee waivers can contribute either an increase or decrease in a given quarter? I guess I'm just trying to kind of gauge or understand what can like shift that around or move things around from quarter-to-quarter?
Philip J. Sanders -- Chief Executive Officer
Dan you want to anything to add there?
Daniel P. Hanson -- Senior Vice President And Chief Investment Officer
I would add just one thing which is the primary driver is product composition and that I think was the primary driver in the sequential quarter. So both as assets have obviously moved around in regard to where investors are going and also we experienced some shifts in the composition of our assets between institutional and retail assets which will also impact that rate a bit. Again the primary driver in particular for the quarter was not actions we had taken but is far more weighted toward composition of the AUM base within our product set.
Mike Carrier -- Bank of America -- Analyst
Okay, thanks a lot.
Operator
The next question is from Kenneth Lee with RBC. Please go ahead.
Kenneth Lee -- RBC -- Analyst
Hi, good morning, and thanks for taking my question. Just one. You mentioned the cash and liquid securities on balance sheet of 776 $766 million and as well the latest seed capital. Just wondering what's your best sense of the current excess capital or deployable cash on the balance sheet if you were to exclude working capital needs as well as the seed capital?
Philip J. Sanders -- Chief Executive Officer
Ben you want to address that?
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Sure. I would be happy to go. Kenneth as I think I've mentioned before our primary needs for working capital or is our seed portfolio in the asset management business. We do not maintain or have a need to maintain significant regulatory capital or anything of that nature. In the wealth management business it's quite minimal. So our working capital needs would simply be running the business. And then our seed portfolio I don't anticipate we will have significant changes in the seed portfolio in the near term. We do continue to assess that as products make their way into the marketplace.
And then we always have opportunities that we are evaluating to pull seed capital out once a product becomes mature and has enough of a base to begin to fully function on its own. We are certainly cognizant of not impacting products or impacting clients as we think about that seed capital. So we're cognizant of those factors. But in the near term I don't believe we'll see significant changes in that seed capital portfolio. The balance of our capital then will be utilized for growth opportunities and then of course thinking about shareholder return as I talked about in the way of dividends and continued buybacks as well as the potential for inorganic opportunities that may present themselves in the marketplace.
Kenneth Lee -- RBC -- Analyst
And just one follow-up if I may. Just in terms of the just want to focus on the continued improvement within the advisor productivity metrics within wealth management. Is this still being driven by the retention and recruitment of higher producing advisors? Or are there any other factors that's driving that continued productivity improvement?
Philip J. Sanders -- Chief Executive Officer
Okay. Shawn do you want to address that question?
Shawn M. Mihal -- Senior Vice President, Wealth Management
Yes sure. Kenneth Shawn Mihal. Yes primarily this has really been driven off of that retention of those more highly productive advisors as well as our scope and change of recruiting focus on those more experienced advisors. So as we have been gathering momentum around our recruiting efforts we have been targeting average overall productivity in that $400000 range with respect to the advisors that we've been onboarding. So I think that's primarily the combination drivers behind that.
Kenneth Lee -- RBC -- Analyst
It's very helpful. Thank you very much.
Operator
The next question is from Robert Lee with KBW. Please go ahead.
Robert Lee -- KBW -- Analyst
Hey, good morning. Thanks for taking my questions. Hope everyone is doing well. up environment. I guess my first question would be on within wealth management can you update us if you look at kind of sales across the platform? What proportion of that whether it's fee-based products or otherwise or is actually flowing into a Waddell-managed product as opposed to a third-party strategy?
Philip J. Sanders -- Chief Executive Officer
Okay. So maybe Shawn you want to address that first from your perspective and then maybe Amy might add on from kind of the Ivy perspective as well.
Shawn M. Mihal -- Senior Vice President, Wealth Management
Yes. Shawn again. Yes we are watching the overall concentration ratios of our primarily when we look at this it's on the advisory side of the programs where most flows are actively going today. So we have our non-advisory business and advisory business. We're continuing to see the positive flows move into that advisory business. In general we're still continuing to see a little bit of reduction in the overall concentration ratio of affiliated funds with inside of our totality of the wealth management business.
The overall ratio ended at about 64.3%. Most of this is being driven by those ongoing flows going into a broader scope of products. And as we look at our advisory programs and the overall assets inside those programs from our open architecture programs we're seeing about 10% overall of affiliated assets inside those programs too. Our mutual fund type programs and advisory that we're seeing overall concentration ratio is about 20% of those assets inside those programs. So that's about the ranges we're seeing on the advisory side of concentration of flows around that assets of about 10% to 20% depending on the type of program.
Robert Lee -- KBW -- Analyst
Okay. Great. And then sorry go ahead.
Philip J. Sanders -- Chief Executive Officer
I don't know Amy do you want to add something out to that?
Amy J. Scupham -- Senior Vice President, Distribution
Robert I was just going to add kind of at a higher level we have a channel of sales and service individuals that focus on our Waddell & Reed advisor team. And we have seen our net outflows for the quarter were right around $1 billion out of that channel. And that's down from an average of $1.2 billion to $1.3 billion net out last year. So we're we continue to see a nice stabilization both of sales and redemptions from Waddell.
Robert Lee -- KBW -- Analyst
Okay. Great. And maybe as a follow-up to that maybe I mean this is for you too. I'm not sure. But the as you look to the I guess your unaffiliated channel and I know you've made some strategic pivots there to in segments that you're targeting. So number one can you update us on some of those segments? And given kind of at least the asset scale there be it at $20 billion in unaffiliated I mean are there certain I mean do you feel like maybe it's the wirehouses or whatnot that may be at this point some would subscale for some channels? Or just kind of update us on kind of the third-party strategy and where you see the opportunity?
Amy J. Scupham -- Senior Vice President, Distribution
Yes. Sure. Robert I'll go ahead and add...
Philip J. Sanders -- Chief Executive Officer
Yes. Amy do you want to take that?
Amy J. Scupham -- Senior Vice President, Distribution
Yes. Yes. I will add to that. So just as a reminder and we walked through this probably about 1.5 years ago. But we divided our distribution sales force into two primary channels one which we are which we refer to as our professional buyer or institutional channel and the other is the national channel. In the national channel that's where we focus on our broker-dealer distribution partners the wirehouses the independents and Waddell & Reed. And then in the professional buyer we have insurance and retirement group. We have our RIA team and then we have our institutional teams. So when I think about how we're seeing traction one of the reasons Robert that we structured ourselves that way was because of what we saw going on in the marketplace where there's much more of an institutional type of buying process that's coming from everywhere regardless of what channel it is. And so as I look at the quarter and start to see some of the incremental improvements I'm seeing it in really kind of four different areas. There's getting placement on platforms there's being upgraded on platforms to either the select or recommended list.
There's having those institutional opportunities and that could be an institutional like the standard institutional client that we all know of be it endowment foundation public plan corporate plan or it can also be where consultants have overlaid the more retailer third-party intermediary part of the marketplace. And we are starting to see traction in all of those places. It's still early in our new sales strategy but we're really starting to see our pipeline and wins picking up across channel. I think the other thing that I would say is in May of last year you'll recall we introduced a series of model delivery portfolios. We thought it would be something around a nine to 18 months conversation and beginning to tick on replacement and we have recently signed a contract on our first large opportunity in that space. So those are nondiscretionary assets but so assets nonetheless and a big win for us in the distribution channel. So I think with that I'll pause and I'll see if Dan Hanson our CIO has anything he'd like to add.
Daniel P. Hanson -- Senior Vice President And Chief Investment Officer
Well I think just in general thanks Amy. Just to build on the comment about I think traction we're feeling. It's all about the core of what we are Ivy is a platform for quality growth Ivy is a platform for small-cap and global. These are key strengths that really is our heritage and also our strength. And we think it's playing to where the market is going to go. If you look at where the puck is going in terms of active management it's picking their spots and we're seeing it we want to be tentative and realize the market can change quickly. But in the first quarter we saw 59% of large-cap U.S. managers across the board outperformed in what was the worst quarter I think on the book.
So you've got the best quarter for active managers in a dozen years which aligns pretty well with the DNA and core North Star for our franchises which is around not trying to do everything or be everything to everyone but just that home per active managers who are doing fundamentally deep diligence bottom-up work and picking the spots. That is what that is how we define active management in our franchise at Ivy. We think our clients increasingly are getting comfortable with the mix and the role for active managers in a broader portfolio and we've got our spot in that. So that's the comment I'd make. Thanks.
Robert Lee -- KBW -- Analyst
Well, thank you for taking my questions. The next question is from Bill Katz with Citigroup. Please go ahead.
Bill Katz -- Citigroup -- Analyst
Okay. Thank you very much taking the question this morning as well, hope everyone's Well, with this, everything going on. Just coming back to some of the fee cuts that you had mentioned. It seems to be sort of an ongoing pattern as you just sort of look at the market and sort of reset your product line. Where are you today? If you look at maybe your 10 to 15 top-selling funds or largest funds where are you relative to a benchmark whether it be median below median in terms of pricing? And is there any sort of other risk here of sort of residual pricing pressure to try and jump-start flat volumes?
Philip J. Sanders -- Chief Executive Officer
This is Phil. Maybe I'll start and I'll turn it over to Amy for some specifics. But just as a high level Bill remember we did a more comprehensive view of our pricing across our product line. I don't remember exactly when it is. Maybe Amy can recall. But it was more extensive and broad-based. And we implemented that we've kind of cycled through that. And as we move forward it's going to be as you described more ongoing and tactical and product-specific where we need to be competitive. But it was it's something that I think clearly we're going to be constantly evaluating. It will probably never end. It's kind of the nature of the industry. But it will be more incremental going forward and product-specific. So Amy do you want to talk a little bit about kind of where we stand relative to the rankings and how we go about this process and how we think about it?
Amy J. Scupham -- Senior Vice President, Distribution
Sure sure. So Bill today we're sitting at about 73% of our assets under management for our funds family is a median or better as it relates to pricing. When we look at our top 10 or what we might refer to as our focus on nine out of those 10 funds right now are sitting in that range of that median of the below-average quintile from a Morningstar standpoint. So we're doing pretty well and the one that isn't sitting right around median just a little bit more than median. So as Phil said from the larger fee reduction that we did I believe it was in July of 2018 effective August of 2018. That's where we've really drilled in and said from a strategic standpoint where we feel like we have competitive products that we felt like it could get traction today. That's where we made those big moves. And these were a couple of incremental strategic moves. And like Phil said I do believe that going forward there'll probably be maybe smaller in nature or more tactical than strategic.
Bill Katz -- Citigroup -- Analyst
Okay. That's helpful. And then just my follow-up is a little bit of a two-part so I apologize for that. Just as you think about what's coming in the door versus what's going out the door how do you think that that affects the fee rate net of all these product changes? And then secondly I think you had mentioned that the trends in the wealth management section I think that's what you're speaking to had gotten a bit better quarter to date. Just wondering if you could verify that. And then maybe stepping back more broadly could you talk a little bit about what you're seeing in terms of net flows for the complex in April?
Philip J. Sanders -- Chief Executive Officer
Okay. Maybe Amy why don't you address the flow issue? And then I don't know if Ben you want to think about that fee the first part of Bill's question with respect to fees? Or if Amy you have any thoughts on the differentiation of what's going in and leaving and that type of thing? But maybe I think a flow comment would certainly be helpful.
Amy J. Scupham -- Senior Vice President, Distribution
Sure. So as we look into the first quarter and I'll address the first quarter first Bill and then I'll move a little bit into your question in April. In the first quarter we saw a very large increase in the breadth of strategies that were winning what we would consider to be a large allocations per our distribution strategy. So we definitely saw less of a concentration in what had formally been our highest selling strategy the international core strategy. And it has moved across the board. So from small- to large-cap on the growth side. Our small-cap core has seen some nice traction. Mid-cap income opportunities which is a portfolio that's held a five-star Morningstar rating for quite some time continues to flow net positive.
And then our emerging market equity continues to have strong performance and good flow patterns as well. So from what's coming in it's that what's going out tends to be our international core and high income both of which have suffered a bit of a performance disruption. And so we continue to see outflows in those two areas. As we look at April when we look at a gross sales basis we're seeing a slight reduction from March which I would attribute to seasonality more than anything. But I think the more telling point is that we're seeing a fairly substantial reduction in redemptions across the complex. And so and that's primarily in that international core and high-income space where we've seen redemptions in those two spaces start to slow as well as across our institutional business.
Philip J. Sanders -- Chief Executive Officer
Ben I don't know if there was anything to add on the fee rate or if Amy covered it there? I'm not sure.
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Phil I think Amy did well. I don't have anything to add.
Bill Katz -- Citigroup -- Analyst
Okay. Thanks for your patience. answer all the questions, guys. Thank you.
Operator
The next question is from Michael Cyprys with Morgan Stanley. Please go ahead.
Michael Cyprys -- Morgan Stanley -- Analyst
Hey, morning. Thanks for taking the question. I just wanted to circle back on the controllable expenses that came in around $97 million in the quarter or so. Just curious how we should think about some of the puts and takes as we move into the second quarter here. It sounds like some project spend accelerating through the year so that arguably drives a little bit of upward pressure. But how much seasonal expenses should we think about coming out as we move into the second quarter? Also markets have recovered about 11%. So how does that how should we think about that driving any sort of upward pressure on expenses here? Maybe you can remind us of the portion of expenses that are market-sensitive and also what portion of the comp line would you describe as variable?
Philip J. Sanders -- Chief Executive Officer
Okay. Ben you want to offer some context around that question?
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Sure. Sure. In regard to the first quarter we did have some savings versus fourth quarter or some reduction in compensation as I mentioned. And that was largely driven by lower headcount as well as a little bit of deferral on some open positions as we thought through that. Again we're not slowing or delaying any strategic hiring but we're of course being very judicious about that. We also saw some impacts already in the first quarter from lower travel expenses as well as lower meeting costs even some things beginning to move into virtual formats and some planning for some of that into the balance of the year as we think about a slow ramp-up back to work. In regard to the rest of the year I think I mentioned earlier I do expect we'll see some increase in our project spending as some of those items ramp up a bit more fully in the year and those are really centered around strategic technology projects in particular our continued investment in the wealth management platform. And you heard in our prepared remarks some of the rollout of that.
In regard to variability we certainly have a big portion of our overall cost base is fixed and flows through the distribution line and varies with asset levels as we are thinking about our business model. As you've heard us say in past quarters we have done a lot of work to move a number of fixed cost operations into more variable structures in particular in the wealth management business which we believe is more sustainable for the corporation and allows us to be a little bit more flexible. Compensation as you mentioned of course is one item that has some significant flexibility in that although we certainly will continue to pay our good people as we're again taking a long-term view and making sure we can continue to move strategically forward even through this interruption that we have had.
Michael Cyprys -- Morgan Stanley -- Analyst
And just as a follow-up if I look at the prior guidance on the controllable expenses the $425 million I think consensus is around $403 million so about 4% to 5% below your prior guidance. I guess do you think that's optimistic or that sort of reduction? Or what sort of environment do you think would be needed to see that sort of outcome?
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Yes I definitely believe we will come in below our prior guidance which you're correct is in the $420 million to $425 million range based on first quarter at $97 million. Obviously that demonstrates the start of that trend. And as I said our ultimate actions will really be determined on what asset levels look like for the balance of the year. We have seen of course some recovery of markets in April and our response will be determined by what that looks like in the rest of the year.
Michael Cyprys -- Morgan Stanley -- Analyst
Okay, thank you.
Operator
The next question is a follow-up from Patrick Davitt with Autonomous Research. Please go ahead.
Patrick Davitt -- Autonomous Research -- Analyst
Hi, thanks for the follow up. I hear the thank you for the guidance on kind of how April looks. I think probably not surprising to anyone that it's better than March but could you frame it maybe relative to January and February?
Philip J. Sanders -- Chief Executive Officer
Amy you want to take that one?
Amy J. Scupham -- Senior Vice President, Distribution
Sure. Yes. Relative to January and February I would say very similar comments. The sales are depending on which months we're talking about from a growth standpoint in line maybe slightly less and the redemptions just continue to improve. So from a net basis April is looking better.
Patrick Davitt -- Autonomous Research -- Analyst
Thank you
Amy J. Scupham -- Senior Vice President, Distribution
Yep.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Phil Sanders for any closing remarks.
Philip J. Sanders -- Chief Executive Officer
Okay. Thank you. Listen thanks everybody for your interest in dialing in today. Obviously these are really challenging times. And I just want to say I'm really proud of the organization and appreciate the hard work and everybody in terms of how we pulled together and transitioned to kind of this work-from-home environment really managing the company balancing the interest of all of our stakeholders whether it's obviously clients advisors employees shareholders communities. It's been certainly challenging times but I'm really proud of how everybody's pulled together and done their part in terms of coming together and really demonstrating our core values and focusing on the client collaboration and that type of thing. So anyway it's been challenging to say the least in a lot of respects but certainly proud of how everybody's pulled together. So with that thanks everybody for your interest and look forward to catching up with you in a few months. All right. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 90 minutes
Call participants:
Michael John Daley -- Vice President-investor Relations And Controller
Philip J. Sanders -- Chief Executive Officer
Brent K. Bloss -- President
Benjamin R. Clouse -- Senior Vice President And Chief Financial Officer
Amy J. Scupham -- Senior Vice President, Distribution
Daniel P. Hanson -- Senior Vice President And Chief Investment Officer
Shawn M. Mihal -- Senior Vice President, Wealth Management
Glenn Schorr -- Evercore -- Analyst
Dan Fannon -- Jefferies -- Analyst
Patrick Davitt -- Autonomous Research -- Analyst
Mike Carrier -- Bank of America -- Analyst
Kenneth Lee -- RBC -- Analyst
Robert Lee -- KBW -- Analyst
Bill Katz -- Citigroup -- Analyst
Michael Cyprys -- Morgan Stanley -- Analyst
