* Q3 profit up 21 percent, beats estimates
* Inflows down vs Q2 and year-ago
* Investors sticking with Asset Strategy fund, exec says
* Concern about possible "political gridlock"
* Shares up 4 percent
(Recasts with conference call, share move, byline)
By Ross Kerber
BOSTON, Oct 26 Asset manager Waddell & Reed
Financial Inc (WDR.N) said net inflows fell further in the
third quarter, but profit topped expectations and investors
have stayed with its much-scrutinized Asset Strategy fund.
"Redemption activity has normalized" for the fund, Chief
Marketing Officer Thomas Butch said on a conference call with
analysts who pressed for details.
"What we have heard from holders of the product has been
broad-based support," Butch added.
Waddell & Reed shares were up 4 percent in midday trading.
The company came under scrutiny after trades by Asset
Strategy and other funds were identified as precipitating the
stock market's May 6 "flash crash." The Overland Park, Kansas,
company previously said the event may have discouraged inflows,
which tumbled to $731 million in the second quarter from $2.8
billion in the first quarter.
The decline continued in the third quarter, the company
reported on Tuesday. Inflows totaled $658 million, down 10
percent from the second quarter and down from $2.4 billion a
In comparison, Janus Capital Group (JNS.N) last week
reported net outflows for the quarter, but Affiliated Managers
Group (AMG.N) on Tuesday reported net inflows of $5.5 billion.
Regulators did not fault Waddell & Reed for the flash
crash, in which the Dow Jones industrial average plunged 700
points in just minutes, exposing flaws in the electronic
marketplace dominated by high-speed trading.
Waddell & Reed said third-quarter net income increased to
$40.5 million, or 47 cents a share, from $33.4 million, or 39
cents a share, a year earlier.
Analysts surveyed by Thomson Reuters I/B/E/S had expected,
on average, 43 cents a share.
Despite the earnings beat, some analysts remained cautious
about the company's outlook.
"We expect WDR's flows to remain relatively modest (barring
a powerful equities rally), given collateral damage related to
recent negative headlines," Sandler O'Neill analyst Michael Kim
wrote in a note to investors. He rates the stock "hold."
Later, Kim told Reuters that Butch's comments on inflows
Asset Strategy took in $216 million during the third
quarter, according to previous Lipper data, a turnaround from
the weeks just after the flash crash. The fund is among a
growing number of "flexible portfolio" funds allowed to invest
in a wide range of securities, including metals and futures,
more like a hedge fund than a traditional mutual fund.
Its performance tailed off in May and June compared to
peers, though Lipper data also show its third-quarter
performance improved. The test now is whether Asset Strategy
can keep posting good results to consolidate its comeback.
"People have put a lot of money into the fund and are
holding on to it, but obviously people with new money are being
more cautious," said Stifel Nicolaus analyst Jeffrey Hopson.
Waddell & Reed Chief Executive Henry Herrmann said in a
statement that third-quarter inflows came despite "poor
investor sentiment toward equities."
Assets under management rose to $76 billion at Sept. 30
from $64 billion a year earlier, and since then have risen to
just under $79 billion, Herrmann said on the conference call.
On the same call, Asset Strategy manager Michael Avery did
not discuss trading in May, though he previously acknowledged
his funds were being reviewed by regulators.
Asked about the upcoming U.S. elections, in which
Republicans are expected to make gains in the U.S. Congress,
Avery said potential policy gridlock in Washington might not be
as good for the financial industry as some contend.
"Gridlock is good when things are going well. If we have a
situation where both houses of Congress are split in terms of
loyalties, at a time when you have structural problems with the
economy, I would conclude that gridlock would not be good."
(Reporting by Ross Kerber; Editing by Matthew Lewis and John