2015 Stockholder Letter


In general, a look back would suggest 2015 was an uninspiring year for investors. The U.S. equity market, as measured by the S&P 500 Index, rose by about 1%, while the Dow Jones Industrial Average was essentially flat. The NASDAQ Composite Index, which is heavily weighted with technology companies, was the most fruitful area for equity investors, returning nearly 6%. Fixed income markets also faced headwinds last year, with 30-year U.S. Treasury bonds declining 3% on a total return basis and the 10-year Treasury returning about 1%. High yield bonds declined by almost 5% as investors focused on credit risk and the impact of low commodity prices. Money market returns were slightly positive. In one of the more telegraphed policy moves in history, the Federal Reserve raised its federal funds target rate in December by 0.25%, bringing to an end its seven-year zero interest rate policy.

Overseas equity returns varied greatly. Emerging markets declined, with Latin America selling off sharply. China experienced extraordinary volatility but posted a solid gain. Most developed equity markets treaded water, although Japan generated strong returns. The strength of the U.S. dollar curtailed returns of U.S. investors in overseas markets.

If last year was generally unrewarding for investors, the start of 2016 has been downright challenging. U.S. equity markets began the year with their worst first week in history, and weakness continued through January. Concerns over the Chinese economy and falling commodity prices contributed to the sharp sell-off. The year does have a long way to run, however, and hopefully markets will stabilize over the course of the next several months.


With generally modest market returns and only slightly positive net new cash flows from investors, our asset growth was modest in 2015. Net new cash flow was $1.6 billion, down from the net new cash flow in 2014 of nearly $4 billion. Our solid investment performance was the major contributor to the rise in assets under management, from $747 billion at the beginning of the year to $763 billion on December 31, 2015. Average assets for the year were nearly $768 billion.

Reflecting the increase in assets under management, our net revenues increased from nearly $4 billion in 2014 to $4.2 billion in 2015. Net income remained essentially flat at $1.2 billion in 2015 as our operating expenses increased due to investments in talent, technology, and new business opportunities. Fully diluted earnings per share increased by nearly 2%, from $4.55 last year to $4.63 in 2015. This increase was primarily attributable to the fact that we had fewer shares outstanding during the year. Return on equity, a good measure of corporate profitability, was about 24%.

In recognition of our strong financial position, our Board of Directors increased our regular annual dividend in February 2015 from $1.76 to $2.08 per share. This increase marked the 29th consecutive year of dividend increases since our initial public offering (IPO) in 1986. We are one of a select group of companies recognized by Standard & Poor's for having increased dividends for at least 25 consecutive years. We are again proud to be included on that list. Reflecting our strong liquidity position in 2015, the Board of Directors also declared a $2.00 per share special dividend last spring as our cash balances continued to increase due to our strong operating cash flow. We responded to our stock price decline by purchasing 13.1 million shares of our common stock, about 5% of our outstanding shares. Combining our regular dividend, the special dividend, and these share repurchases, we returned just over $2 billion to stockholders in 2015.


Strong investment performance, world-class service, and a client-driven focus are keys to our long-term success. While market returns were low, many of our leading investors did an outstanding job for our clients. Their efforts are, in part, reflected in our growth in assets under management. David Giroux (Capital Appreciation Fund) and Brian Berghuis (Mid-Cap Growth Fund) were nominated by Morningstar as portfolio managers of the year in their respective categories. Larry Puglia, manager of the Blue Chip Growth Fund, and Joe Fath, portfolio manager of the Growth Stock Fund, both delivered outstanding performance in a challenging investment environment. David Eiswert did a fine job managing our Global Stock Fund, and Paul Massaro excelled managing our Floating Rate Fund. Overall in 2015, our investors' strong efforts led to 80%, 80%, 78%, and 88% of our mutual funds outperforming their Lipper averages over one, three, five, and 10 years, respectively. The performance of the firm's institutional strategies remains very competitive.

To meet client needs, we introduced a variety of new investment strategies, including the Emerging Markets Value Stock Fund and an expanded suite of global fixed income funds, including the Global Unconstrained Bond Fund, the Global High Income Bond Fund, and the Global Investment Grade Corporate Bond Fund. We have continued to invest in our sales and distribution capabilities as we seek to prudently grow our business in the years ahead. We have bolstered our institutional sales capabilities around the world and expanded our reach in the advisory channel in the U.S.

Financial Highlights

(in millions, except assets under management and per-share data)
  2014 2015
Assets under management
at December 31 (in billions)
747 763
Net revenues 3,982 4,201
Net income 1,230 1,223
Net cash provided by operating activities 1,291 1,506
Basic earnings per common share 4.68 4.74
Diluted earnings per common share 4.55 4.63
Cash dividends per common share 1.76 4.08*
Stockholders' equity at December 31 5,395 4,762
*Cash dividend declared and paid in 2015 includes a special dividend of $2.00.


This year was particularly notable in that, in May, Jim Kennedy announced his intention to retire as our CEO at the end of 2015. Jim had a long and distinguished career with the company beginning in 1978. He served as equity analyst, director of equity research, head of our U.S. equity business, and finally, as CEO and president. We owe Jim our most sincere gratitude for his many contributions on behalf of our clients and our firm. We also want to thank our Board of Directors, which guided us through this period of management transition. Thank you, Jim, for everything you've done.


Concurrent with the announcement of Jim's retirement, we announced that Bill Stromberg would become our president and CEO as of January 1, 2016. Bill also joined our Board of Directors on that date. Bill has been with the company since 1987 and has served in a number of key roles. He was an equity analyst, the first portfolio manager of the Dividend Growth Fund, director of equity research, and head of our global equity business. One of Bill's first moves as CEO was to broaden the membership of our Management Committee, which oversees the daily activities and operations of the company. We are pleased to welcome Head of U.S. Investment Services Scott David, Chief Human Resources Officer Deanna Fidler, Head of Global Investment Services Robert Higginbotham, and Head of U.S. Equity Eric Veiel, who join the five current members of the Management Committee.


In anticipation of two upcoming retirements, we added two new directors to our Board in 2015. Alan Wilson, CEO of McCormick & Company, Inc., and Larry Culp, retired CEO of Danaher Coporation, are both outstanding business leaders. They will provide us with insightful guidance and prudent counsel in the years ahead. This April, two of our longtime directors will retire at our upcoming Annual Meeting of Stockholders. Don Hebb has served as a director since 1999. Don has always brought a sound, long-term perspective to our Board deliberations. His investment industry experience and thoughtful counsel have been invaluable. Dr. Al Sommer joined the Board in 2003. Al's global experience, strong governance background, and keen analytical skills have consistently enriched our discussions. On behalf of all stockholders, we extend our most sincere appreciation to Don and Al for their contributions over the years.


As we look ahead to 2016, our expectations for global economic growth and financial market returns are modest. The U.S. economy should continue to grow at a positive, albeit moderate, rate. Continued employment gains, solid consumer confidence, and rising wage growth contributed to the Federal Reserve's decision to raise short-term rates for the first time in seven years. In Europe, growth has been slow, but we believe that economic activity is likely to pick up in 2016. In Asia, investors remain focused on China and Japan where growth has come under pressure. The continued decline in commodity prices suggests economic activity in China might be weaker than the Chinese government is projecting. Financial markets will likely be volatile as a result. We expect that fixed income securities will face some headwinds. Money market rates should move up slightly, and fixed income yields may rise a bit. Continued U.S. dollar strength could weigh on U.S. corporate earnings. We believe that among equities, investors should prepare for a more subdued return environment. We always hope that our return expectations are exceeded on the upside, yet our experience suggests that it is prudent to have a conservative outlook as we begin the year.

As always, we are prepared for whatever unexpected developments occur. Our strong competitive position, broad investment capabilities, and financial strength will enable us to grow the long-term value of your investment.