11. Consolidated Sponsored Investment Products

In the normal course of its business, the Company sponsors various types of investment products. The Company consolidates an investment product when it owns a majority of the voting interest in the entity or it is the primary beneficiary of an investment product that is a variable interest entity. The consolidation and deconsolidation of these investment products has no impact on net income attributable to stockholders. The Company’s risk with respect to these investments is limited to its investment in these products. The Company has no right to the benefits from, and does not bear the risks associated with, these investment products, beyond the Company’s investments in, and fees generated from these products. If the Company were to liquidate, these investments would not be available to the general creditors of the Company. The Company does not consider cash and investments held by consolidated sponsored investment products to be assets of the Company other than its direct investment in these products.

As of June 30, 2014 and December 31, 2013, the Company consolidated eleven and eight sponsored investment products, respectively. During the six months ended June 30, 2014, the Company consolidated four additional sponsored investment products and deconsolidated one sponsored investment product because it no longer had a majority voting interest.

The following table presents the balances of the consolidated sponsored investment products that were reflected in the Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013:


	As of
	June 30, 2014			December 31, 2013
*($ in thousands)*
Total cash	$	12,319		$	531
Total investments		207,279			139,054
All other assets		3,285			9,595
Total liabilities		(16,011	)		(8,435	)
Redeemable noncontrolling interests		(10,397	)		(42,186	)

The Company’s net interests in consolidated sponsored investment products	$	196,475		$	98,559

Consolidation

The following tables reflect the impact of the consolidated sponsored investment products in the Condensed Consolidated Balance Sheets as of June, 30, 2014 and December 31, 2013 and the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013, respectively:

As of June 30, 2014


	Balance Before Consolidation of Investment Products			Consolidated Sponsored Investment Products		Eliminations and Adjustments (a)			Balances as Reported in Consolidated Balance Sheet
*($ in thousands)*
Total cash	$	170,367		$	12,319	$	—		$	182,686
Total investments		261,414			207,279		(196,315	)		272,378
All other assets		182,490			3,285		(160	)		185,615

Total assets	$	614,271		$	222,883	$	(196,475	)	$	640,679

Total liabilities	$	99,844		$	16,171	$	(160	)	$	115,855

Redeemable noncontrolling interests		—			—		10,397			10,397
Equity attributable to stockholders of the Company		514,529			206,712		(206,712	)		514,529
Non-redeemable noncontrolling interests		(102	)		—		—			(102	)

Total liabilities and equity	$	614,271		$	222,883	$	(196,475	)	$	640,679

As of December 31, 2013


	Balance Before Consolidation of Investment Products			Consolidated Sponsored Investment Products		Eliminations and Adjustments (a)			Balances as Reported in Consolidated Balance Sheet
*($ in thousands)*
Total cash	$	271,014		$	531	$	—		$	271,545
Total investments		135,692			139,054		(98,434	)		176,312
All other assets		187,627			9,595		(125	)		197,097

Total assets	$	594,333		$	149,180	$	(98,559	)	$	644,954

Total liabilities	$	101,465		$	8,560	$	(125	)	$	109,900

Redeemable noncontrolling interests		—			—		42,186			42,186
Equity attributable to stockholders of the Company		492,930			140,620		(140,620	)		492,930
Non-redeemable noncontrolling interests		(62	)		—		—			(62	)

Total liabilities and equity	$	594,333		$	149,180	$	(98,559	)	$	644,954

(a)	Adjustments include the elimination of intercompany transactions between the Company and its consolidated sponsored investment products, primarily the elimination of the investments and equity and recording of any noncontrolling interest.

The following table reflects the impact of the consolidated sponsored investment products in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2014 and 2013:

For the Three Months Ended June 30, 2014


	Balance Before Consolidation of Investment Products		Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Condensed Consolidated Statement of Operations
*($ in thousands)*
Total operating revenues	$	112,871	$	—		$	(122	)	$	112,749
Total operating expenses		89,450		919			(122	)		90,247

Operating income (loss)		23,421		(919	)		—			22,502

Total other non-operating income		8,198		8,082			(6,884	)		9,396
Income before income tax expense		31,619		7,163			(6,884	)		31,898
Income tax expense		12,106		—			—			12,106

Net income		19,513		7,163			(6,884	)		19,792
Noncontrolling interests		30		—			(279	)		(249	)

Net income attributable to the Company	$	19,543	$	7,163		$	(7,163	)	$	19,543

For the Three Months Ended June 30, 2013


	Balance Before Consolidation of Investment Products			Consolidated Investment Products			Eliminations and Adjustments (a)		Balances as Reported in Condensed Consolidated Statement of Operations
*($ in thousands)*
Total operating revenues	$	96,135		$	—		$	5	$	96,140
Total operating expenses		69,125			128			5		69,258

Operating income (loss)		27,010			(128	)		—		26,882

Total other non-operating (expense) income		(2,321	)		(2,543	)		2,083		(2,781	)
Income (loss) before income tax expense		24,689			(2,671	)		2,083		24,101
Income tax expense		9,318			—			—		9,318

Net income (loss)		15,371			(2,671	)		2,083		14,783
Noncontrolling interests		14			—			588		602

Net income (loss) attributable to the Company	$	15,385		$	(2,671	)	$	2,671	$	15,385

For the Six Months Ended June 30, 2014


	Balance Before Consolidation of Investment Products		Consolidated Sponsored Investment Products			Eliminations and Adjustments (a)			Balances as Reported in Condensed Consolidated Statement of Operations
*($ in thousands)*
Total operating revenues	$	220,726	$	—		$	(106	)	$	220,620
Total operating expenses		164,364		1,234			(106	)		165,492

Operating income (loss)		56,362		(1,234	)		—			55,128

Total other non-operating income		11,195		8,992			(7,640	)		12,547
Income before income tax expense		67,557		7,758			(7,640	)		67,675
Income tax expense		26,116		—			—			26,116

Net income		41,441		7,758			(7,640	)		41,559
Noncontrolling interests		40		—			(118	)		(78	)

Net income attributable to the Company	$	41,481	$	7,758		$	(7,758	)	$	41,481

For the Six Months Ended June 30, 2013


	Balance Before Consolidation of Investment Products			Consolidated Investment Products			Eliminations and Adjustments (a)		Balances as Reported in Condensed Consolidated Statement of Operations
*($ in thousands)*
Total operating revenues	$	182,256		$	—		$	52	$	182,308
Total operating expenses		134,010			264			52		134,326

Operating income (loss)		48,246			(264	)		—		47,982

Total other non-operating expense		(1,165	)		(1,691	)		1,610		(1,246	)
Income (loss) before income tax expense		47,081			(1,955	)		1,610		46,736
Income tax expense		17,768			—			—		17,768

Net income (loss)		29,313			(1,955	)		1,610		28,968
Noncontrolling interests		32			—			345		377

Net income (loss) attributable to the Company	$	29,345		$	(1,955	)	$	1,955	$	29,345

(a)

Adjustments include the elimination of intercompany transactions between the Company and its consolidated sponsored investment products, primarily the elimination of the investments and equity and recording of any noncontrolling interest.

Fair Value Measurements of Consolidated Sponsored Investment Products

The assets and liabilities of the consolidated sponsored investment products measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 by fair value hierarchy level were as follows:

June 30, 2014


	Level 1		Level 2		Level 3		Total
*($ in thousands)*
Assets
Debt securities	$	—	$	112,333	$	450	$	112,783
Equity securities		93,332		1,164		—		94,496
Derivatives		15		31		—		46

Total Assets Measured at Fair Value	$	93,347	$	113,528	$	450	$	207,325

Liabilities

Short sales	$	9,024	$	2,020	$	—	$	11,044

December 31, 2013


	Level 1		Level 2		Level 3		Total
*($ in thousands)*
Assets
Debt securities	$	—	$	47,114	$	—	$	47,114
Equity securities		91,940		—		—		91,940

Total Assets Measured at Fair Value	$	91,940	$	47,114	$	—	$	139,054

The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated sponsored investment products measured at fair value.

Investments of consolidated sponsored investment products represent the underlying debt and equity securities held in sponsored products which are consolidated by the Company. Equity securities are valued at the official closing price on the exchange on which the securities are traded and are categorized within Level 1. Level 2 investments include certain equity securities for which closing prices are not readily available or are deemed to not reflect readily available market prices and are valued using an independent pricing service as well as most debt securities, which are valued based on quotations received from independent pricing services or from dealers who make markets in such securities. Pricing services do not provide pricing for all securities and therefore indicative bids from dealers are utilized, which are based on pricing models used by market makers in the security and are also included within Level 2. Level 3 investments include debt securities that are not widely traded and are illiquid that are priced by dealers based on pricing models used by market makers in the security.

The following table is a reconciliation of assets of consolidated sponsored investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value.


	Debt securities (a)
Balance at December 31, 2013	$	—
Purchases		450

Balance at June 30, 2014	$	450

(a)

None of the securities in the above table are internally fair valued at June 30, 2014.

The Company recognized no gain or loss in the three and six months ended June 30, 2014 related to changes in market value of these investments.

There were no transfers between Level 1, Level 2, and Level 3 during the six months ended June 30, 2014 and 2013, respectively.

Derivatives

Beginning in the second quarter of 2014, the Company consolidated investment products which include derivative instruments as part of their investment strategies. These derivatives may include futures contracts, options contracts, and forward contracts. The fair value of such derivatives at June 30, 2014 was immaterial. The change in fair value of such derivatives, which is recorded in realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net, was immaterial for the three and six months ended June 30, 2014. In connection with entering into these derivative contracts these funds may be required to pledge to the broker an amount of cash equal to the “initial margin” requirements that varies based on the type of derivative. The cash pledged or on deposit is recorded in the Condensed Consolidated Balance Sheet of the Company as Cash pledged or on deposit of consolidated sponsored investment products.

Short Sales

Some of the Company’s consolidated sponsored investment products may engage in short sales, which are transactions in which a fund sells a security that it does not own (or that it owns but does not intend to deliver) in anticipation that the price of the security will decline. Short sales are recorded in the Condensed Consolidated Balance Sheet within Other liabilities of consolidated sponsored investment products.