UPDATE 3-Waddell & Reed Q2 profit tops Wall Street view

* Q2 EPS $0.27 vs $0.40 yr ago

* AUM up 17 pct sequentially

* Q2 Net flows $3.16 bln vs $0.99 bln in Q1

* Investment management fees down 27 pct at $82.6 mln

* Underwriting, distribution fees down 20 pct at $91.1 mln

* Sees $1.1 mln tax benefit in Q3 (Adds conference call details, analyst comment, stock movement)

By Anurag Kotoky and Brenton Cordeiro

BANGALORE, July 28 (Reuters) - U.S. asset manager Waddell & Reed Financial Inc (WDR.N) posted a quarterly profit above Wall Street estimates on better-than-expected fee income and said assets under management rose 17 percent sequentially.

Waddell & Reed joins the list of asset managers -- including bigger rivals Invesco Ltd (IVZ.N), T.Rowe Price Group Inc (TROW.O) and BlackRock Inc (BLK.N) -- whose latest quarterly profits topped market estimates.

In a conference call with analysts, Chief Executive Hank Hermann said July flows have remained strong and the company's operating margin goal of 20 percent by the end of the year may prove somewhat conservative.

Sandler O'Neill analyst Michael Kim said most of the quarter's flows were centered in the wholesale channel, particularly on the equity side.

Kim, who has a "sell" rating on the stock, said he was concerned over the recent underperformance at the Asset Strategy portfolio and lackluster flow prospects away from the flagship fund.

The company said it had net flows of $3.16 billion for the second quarter, compared with $0.99 billion for the first quarter.

Fund flows measure the ability of asset managers to draw in more assets, which in turn determines profitability. Coupled with steep market declines, last year's huge outflows led to massive spending cuts and layoffs at many firms.

Standard & Poor's Equity Research maintained its "sell" rating on Waddell, saying relative investment performance has slipped somewhat and redemptions remain elevated.

TAX BENEFIT

Waddell & Reed said it expects tax benefits of $1.1 million in the third quarter as it recovers capital-gains taxes paid in prior periods.

The company will record additional costs of about $540,000 in the quarter related to the sale of its unit, Austin, Calvert & Flavin Inc (ACF).

For the second quarter, the company earned $23.4 million, or 27 cents a share, compared with $35.2 million, or 40 cents a share, a year earlier.

Excluding charges tied to the ACF sale, the company earned 28 cents a share.

Analysts were looking for a profit of 25 cents a share, excluding items, according to Reuters Estimates.

Assets under management rose to $55.61 billion at the end of June, from $47.58 billion at the end of March. Asset managers generate the bulk of their revenue on fee income based on a percentage of assets under management.

Waddell, whose funds have traditionally favored energy and commodities stocks, has been hit in the recent past by falling oil and commodity prices.

Fears of heavy losses at banks and a global recession after investment bank Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt last September caused global markets to convulse and panicky investors to flee from mutual funds.

For the quarter, the company said investment management fees fell 27 percent to $82.6 million, while underwriting and distribution fees fell about 20 percent to $91.1 million.

Shares of Overland, Kansas-based Waddell & Reed were trading down 2 cents at $26.89 in afternoon trade Tuesday on the New York Stock Exchange. They had fallen more than 4 percent earlier in the day. (Editing by Ratul Ray Chaudhuri, Vinu Pilakkott)