Investment Securities

6 Months Ended

Jun. 30, 2020

Investment Securities

Investment Securities

4. Investment Securities

Investment securities at June 30, 2020 and December 31, 2019 were as follows:

	June 30,		December 31,
	2020		2019
		(in thousands)
Available for sale securities:
Commercial paper	$	2,728	1,977
Corporate bonds		203,799	254,291
Total available for sale securities		206,527	256,268
Trading debt securities:
Commercial paper		12,502	1,977
Corporate bonds		79,136	84,920
U.S. Treasury bills		6,001	5,979
Mortgage-backed securities		2	4
Term loans		39,643	44,268
Consolidated sponsored funds		49,413	43,567
Total trading securities		186,697	180,715
Equity securities:
Common stock		39,252	34,945
Sponsored funds		144,320	178,386
Sponsored privately offered funds		848	845
Total equity securities		184,420	214,176
Equity method securities:
Sponsored funds		41,408	37,187
Total securities	$	619,052	688,346

Commercial paper and corporate bonds accounted for as available for sale and held as of June 30, 2020 mature as follows:

		Amortized
		cost	Fair value
		(in thousands)
Within one year	$	53,380	54,005
After one year but within five years		148,049	152,522
	$	201,429	206,527

Commercial paper, corporate bonds, U.S. Treasury bills, mortgage-backed securities and term loans accounted for as trading and held as of June 30, 2020 mature as follows:

		Fair value
		(in thousands)
Within one year	$	31,322
After one year but within five years		83,599
After five years but within 10 years		21,868
After 10 years		495
	$	137,284

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at June 30, 2020:

	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value
	(in thousands)
Available for sale securities:
Commercial paper	$	2,728	—	—	2,728
Corporate bonds		198,701	5,098	—	203,799
	$	201,429	5,098	—	206,527

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2019:

	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value
	(in thousands)
Available for sale securities:
Commercial paper	$	1,976	1	—	1,977
Corporate bonds		250,982	3,314	(5)	254,291
	$	252,958	3,315	(5)	256,268

A summary of available for sale investment securities with fair values below carrying values at June 30, 2020 is as follows:

	Less than 12 months			12 months or longer		Total
			Unrealized		Unrealized		Unrealized
	Fair value		losses	Fair value	losses	Fair value	losses
	(in thousands)
Commercial paper	$	2,429	—	—	—	2,429	—

A summary of available for sale investment securities with fair values below carrying values at December 31, 2019 is as follows:

	Less than 12 months			12 months or longer		Total
			Unrealized		Unrealized		Unrealized
	Fair value		losses	Fair value	losses	Fair value	losses
	(in thousands)
Corporate bonds	$	4,538	—	8,056	(5)	12,594	(5)

The Company’s investment portfolio included 1 available for sale security in an unrealized loss position at June 30, 2020.

The Company evaluated available for sale securities in an unrealized loss position at June 30, 2020, including reviewing credit ratings, assessing the extent of losses, and considering the impact of market conditions for each individual security.  The Company concluded no allowance for credit losses was necessary as it expects to recover the entire amortized cost basis of each security.  The unrealized losses in the Company’s investment portfolio were primarily caused by changes in interest rates.  At this time, the Company does not intend to sell, and does not believe it will be required to sell these securities before recovery of their amortized cost.

For equity securities held at the end of the period, net unrealized gains of $28.1 million and $5.1 million were recognized for the three months ended June 30, 2020 and June 30, 2019, respectively and net unrealized losses of $7.8 million and net unrealized gains of $18.2 million were recognized for the six months ended June 30, 2020 and June 30, 2019, respectively.

Sponsored Funds

The Company has classified its equity investments in the Funds as equity method investments (when the Company owns between 20% and 50% of the fund) or equity securities measured at fair value through net income (when the Company owns less than 20% of the fund).  These entities do not meet the criteria of a variable interest entity (“VIE”) and are considered to be voting interest entities (“VOE”). The Company has determined the Funds are VOEs because the structure of the investment products is such that the voting rights held by the equity holders provide for equality among equity investors.  

Sponsored Privately Offered Funds

The Company holds an interest in a privately offered fund structured in the form of a limited liability company.  The members of this entity have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote.  This entity does not meet the criteria of a VIE and is considered to be a VOE.

Consolidated Sponsored Funds

The following table details the balances related to consolidated sponsored funds at June 30, 2020 and December 31, 2019, as well as the Company’s net interest in these funds:

	June 30,		December 31,
	2020		2019
	(in thousands)
Cash	$	3,459	1,530
Investments		49,413	43,567
Other assets		1,290	483
Other liabilities		(1,737)	—
Redeemable noncontrolling interests		(25,857)	(19,205)
Net interest in consolidated sponsored funds	$	26,568	26,375

During the six months ended June 30, 2020, we consolidated one Ivy Fund in which we provided initial seed capital at the time of the fund’s formation. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements.  

Fair Value

Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of the asset.  Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset.  An individual investment’s fair value measurement is assigned a level based upon the observability of the inputs that are significant to the overall valuation.  The three-level hierarchy of inputs is summarized as follows:

● Level 1 – Investments are valued using quoted prices in active markets for identical securities.

● Level 2 – Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities.  

● Level 3 – Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments.

Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value due to the short time between purchase and expected maturity of the investments. Depending on the nature of the inputs, these investments are generally classified as Level 1 or 2 within the fair value hierarchy. U.S. Treasury bills are valued upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer. Term loans are valued using a price or composite price from one or more brokers or dealers as obtained from an independent pricing service. The fair value of loans is estimated using recently executed transactions, market price quotations, credit/market events, and cross-asset pricing. Inputs are generally observable market inputs obtained from independent sources. Term loans are generally categorized in Level 2 of the fair value hierarchy, unless key inputs are unobservable in which case they would be categorized as Level 3. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.

The following tables summarize our investment securities as of June 30, 2020 and December 31, 2019 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

June 30, 2020	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
	(in thousands)
Cash equivalents: (1)
Money market funds	$	54,598	—	—	—	54,598
Commercial paper		—	28,503	—	—	28,503
Total cash equivalents	$	54,598	28,503	—	—	83,101
Available for sale securities:
Commercial paper	$	—	2,728	—	—	2,728
Corporate bonds		—	203,799	—	—	203,799
Trading debt securities:
Commercial paper		—	12,502	—	—	12,502
Corporate bonds		—	79,136	—		79,136
U.S. Treasury bills		—	6,001	—	—	6,001
Mortgage-backed securities		—	2	—	—	2
Term loans		—	35,990	3,653	—	39,643
Consolidated sponsored funds		—	49,413	—	—	49,413
Equity securities:
Common stock		39,252	—	—	—	39,252
Sponsored funds		144,320	—	—	—	144,320
Sponsored privately offered funds measured at net asset value (2)		—	—	—	848	848
Equity method securities: (3)
Sponsored funds		41,408	—	—	—	41,408
Total investment securities	$	224,980	389,571	3,653	848	619,052

December 31, 2019	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
	(in thousands)
Cash equivalents: (1)
Money market funds	$	4,203	—	—	—	4,203
Commercial paper		—	38,143	—	—	38,143
Total cash equivalents	$	4,203	38,143	—	—	42,346
Available for sale securities:
Commercial paper	$	—	1,977	—	—	1,977
Corporate bonds		—	254,291	—	—	254,291
Trading debt securities:
Commercial paper		—	1,977	—	—	1,977
Corporate bonds		—	84,920	—		84,920
U.S. Treasury bills		—	5,979	—	—	5,979
Mortgage-backed securities		—	4	—	—	4
Term loans		—	40,368	3,900	—	44,268
Consolidated sponsored funds		—	43,567	—	—	43,567
Equity securities:
Common stock		34,942	—	3	—	34,945
Sponsored funds		178,386	—	—	—	178,386
Sponsored privately offered funds measured at net asset value (2)		—	—	—	845	845
Equity method securities: (3)
Sponsored funds		37,187	—	—	—	37,187
Total investment securities	$	250,515	433,083	3,903	845	688,346

(1) Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at net asset value and are classified as Level 1. Cash investments in commercial paper are measured at cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization and are classified as Level 2.

(2) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.  The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

(3) The Company’s equity method investments are investment companies that record their underlying investments at fair value.

The following table summarizes the activity of investments categorized as Level 3 for the six months ended June 30, 2020:

	For the six months ended
	June 30, 2020
	(in thousands)
Level 3 assets at December 31, 2019	$	3,903
Additions		6,501
Transfers in to level 3		9,877
Transfers out of level 3		(12,395)
Losses in Investment and other income		(1,127)
Redemptions/Paydowns		(3,106)
Level 3 assets at June 30, 2020	$	3,653
Change in unrealized gains for Level 3 assets held at June 30, 2020	$	43