* Q2 net inflows $731 mln vs Q1's $2.8 bln
* Cites weak performance of largest funds
* Was large seller of futures contracts in May flash crash
* CEO says economic double-dip seems unlikely
* Waddell shares down 3.1 pct
(Adds CEO interview, rewrites first paragraph to mention flash
By Ross Kerber
BOSTON, July 28 Asset manager Waddell & Reed
Financial Inc (WDR.N) said its quarterly results were hurt by
subpar performance in its flagship fund, which flipped abruptly
to outflows in May and June after markets were shaken by the
Waddell moved to the center of the flash crash controversy
after news it sold a large number of equity futures contracts
on May 6, when equity markets briefly tumbled in an
There has been no suggestion that Waddell was at fault but
firm executives on a conference call on Wednesday acknowledged
the flash crash may have had an impact on its fund flows.
The Kansas City firm reported net inflows of $731 million
for the second quarter, down from $2.8 billion in the first
quarter. It cited investors' reluctance to invest in equities
amid economic uncertainty.
Waddell shares were down 3.1 percent in afternoon trading
Still, second-quarter net income rose to $34.2 million, or
40 cents per share, from $23.4 million, or 27 cents per share,
a year earlier. Revenue increased 29 percent to $257.2 million
on higher assets and investment management fees.
Analysts on average had expected 41 cents a share,
according to Thomson Reuters I/B/E/S, though several said the
company would have beaten their estimates except for a charge
of 2 cents a share to account for higher taxes tied to
Analysts had priced in lower fund inflows, and some had
feared an even deeper drop after the flash crash and
"We knew there was going to be a decline in terms of
volume," said Sandler O'Neill analyst Michael Kim, who had
expected fund inflows of just $100 million for the quarter and
earnings of 39 cents per share.
"At the end of the day, it was better than what we had
expected," he said.
The company told analysts on the conference call that the
flow picture was still mixed in July for its biggest fund, Ivy
Asset Strategy. Through Tuesday, the company's shares have
fallen 19 percent this year, almost twice the decline of a Dow
Jones index of U.S. asset managers .DJUSAG.
Having inflows at all will be helpful to the company, as
some competitors have reported outflows for the quarter,
including Legg Mason Inc (LM.N) and Janus Capital Group
(JNS.N). Other asset managers have reported inflows, including
T. Rowe Price Group (TROW.O) and Invesco Ltd (IVZ.N).
Total Waddell assets stood at $68.3 billion on June 30,
down from $74.2 billion at the end of March. Those levels are
far below first-tier asset management companies like Fidelity
Investments and Vanguard Group Inc, each with over $1 trillion
But the results were closely watched by Wall Street both
because of the flash crash and because of Waddell's rapid
growth in recent years.
Waddell did not break out second-quarter flows by fund,
though an earlier analysis by Lipper, a Thomson Reuters unit,
showed Ivy Asset Strategy had net outflows in May and June
totaling $362.9 million, after inflows in the four previous
Reviews of the May 6 flash crash identified Ivy Asset
Strategy as a large seller of future contracts that day, though
regulators have since focused on other areas.
"Certainly the publicity we received surrounding the flash
crash didn't help," said Ivy Asset Strategy fund manager
Michael Avery, who is also the company's chief investment
"I think the anxiety was misplaced," Avery added. "People
who understand the market and how we manage the fund have
dismissed it as a non-event. But it certainly didn't help,
particularly as far as people thinking of new allocations into
In an interview, Waddell Chief Executive Henry Herrmann
said it was hard to separate how much the flash crash affected
flows compared to money that was pulled away from equity funds
in general because of volatile markets.
"The market was in a down trend and that may have
aggravated it (the outflow from Ivy) to some extent, but the
magnitude of the degree is impossible to assess," he said.
Herrmann acknowledged that the performance of Ivy Asset
Strategy has fallen short of peers for the year to date. But
said he is comfortable with Avery's strategy emphasizing big
bets on Asia and some large-cap stocks.
"You have to take a stand in an environment like the one
we're in," Herrmann said.
A new downturn in the economy -- a so-called "double-dip"
-- seems unlikely, Herrmann said.
Instead he predicted a graph of the economy would resemble
the mathematical symbol for a square root -- a sharp decline,
then a sharp recovery, and a period of sluggish growth of
likely between two to three percent for a while.
(Reporting by Ross Kerber; editing by John Wallace and Tim