Thanks, Didi, and good morning, everyone. Welcome to Virtus Investment Partners discussion of our fourth quarter 2025 financial and operating results. Joining me today are George Aylward, our President and CEO, and Mike Angerthal, our Chief Financial Officer. After their prepared remarks, we will open the call for questions. Before we begin, I'll refer you to the disclosures on slide two. Today's comments may include forward-looking statements, which involve risks and uncertainties described in our news release and SEC filings. Actual results may differ materially. We also reference certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available in today's news release and financial supplement on our website. Now I'd like to turn the call over to George. George?
Thank you, Sean, and good morning, everyone. I'll start with an overview of the results we reported this morning, and then Mike will provide more detail. The Q4 reflected a challenging environment for us, given that quality-oriented equity strategies, which represent half of our AUM, remained out of favor, resulting in an increased level of net outflows. As we have previously noted, our quality-oriented equity strategies have delivered strong long-term performance across cycles and have previously been our largest drivers of growth when in favor. However, the market backdrop continued to favor more momentum-driven stocks, resulting in near-term underperformance. Importantly, the impact from our quality equity strategies has overshadowed areas of strength across the business, which in the quarter include positive net flows and strategies from several managers, including in growth equity, emerging markets debt, listed real assets, and event-driven.
Continued strong positive net flows in ETFs, product introductions of differentiated, actively managed ETFs, expansion into private markets with two strategic investments, solid long-term investment performance, with fixed income and alternatives also having strong near-term performance, continued return of capital with $10 million of share buybacks in the quarter, and a solid balance sheet, meaningful liquidity, and de minimis net leverage at year-end. We continued to execute our strategic priorities in the quarter, including broadening our product offerings with several ETF introductions and expansion into the private markets. For ETFs, we launched three new actively managed funds in the quarter, including a growth opportunities ETF from Silvant and US and international dividend strategies from our systematic team. We expect several additional active ETF launches over the next two quarters across managers, including Stone Harbor, Duff & Phelps, and Silvant.
We now have 25 ETFs spanning a range of strategies and continue to focus on broadening access to them in distribution channels. In addition, we have several other new offerings in process or filing, including interval funds and additional retail separate account strategies. And as mentioned, we also have expanded into private markets with the previously announced pending acquisition of a majority interest in Keystone National Group, an asset-centric private credit manager, and a minority investment in Crescent Cove, a venture growth manager. I will discuss both in more detail shortly. Looking at our fourth quarter results, assets under management were $159 billion at 12/31, down from $169 billion due to net outflows and the impact of market performance. Total sales of $5.3 billion, compared with $6.3 billion in the third quarter, which included a $0.4 billion CLO issuance.
Total net outflows were $8.1 billion, and across products, the outflows were almost entirely driven by equities. Looking at flows across asset classes, the equity net outflows largely reflected the continued style headwind for quality-oriented strategies. We had several meaningful institutional partial redemptions in such strategies, as well as some seasonal tax loss harvesting in funds. The fixed income net flows were modestly negative at $0.1 billion for the quarter, and we saw positive net flows in certain fixed income strategies, including multi-sector and emerging market debt. Alternative strategies were essentially break even for the quarter and positive for the trailing twelve months.
In terms of what we're seeing early in the first quarter, our U.S. retail funds continue to face headwinds, though there have been encouraging signs in the market of broadening investor sentiment, and January sales were at the highest level since June, and net flows at the best level since September, and fixed income net flows were positive. For ETFs, sales and net flows continue to be strong. Within retail separate accounts, while for the month we have seen an increase in sales, there was a large redemption from a client that rebalanced a lower fee, model-only mandate to a passive strategy. On the institutional side, trends are similar to the fourth quarter, with known redemptions exceeding known wins. Turning now to our financial results, earnings in the operating margin declined modestly, reflecting lower average AUM, partially offset by lower operating expenses.
The operating margin was 32.4%, which compared with 33% last quarter. Earnings per share, as adjusted of $6.50, compared with $6.69 in the third quarter. Turning to investment performance, recent performance reflects our overweight to quality equity, while long-term performance demonstrates we've generated solid performance over market cycles. For the three year period, while 39% of AUM outperformed benchmark due to challenging equity performance, fixed income and alternative strategies performed very well, with 76% and 60% of AUM, respectively, outperforming benchmarks. Over the 10-year period, 62% of our equity assets, 77% of our fixed income assets, and 71% of alternative assets beat their benchmarks. For just mutual funds, 65% of equity funds and 87% of fixed income funds outperformed their peer median for the 10-year period.
I would also note that 84% of our rated retail fund assets were in three, four, and five-star funds, and 23 of our retail funds are rated four and five stars. As it relates to equities, despite the style headwind, our quality-focused managers continue to invest with high conviction businesses with durable fundamentals and long-term potential. Their disciplined approach has delivered excellent returns over cycles, and we remain confident that as companies with quality characteristics come back in favor, these strategies are well positioned. With the environment year to date, we are pleased that although it's a short period, several of these strategies have generated very compelling performance. In terms of our balance sheet and capital, we continue to have financial flexibility to balance our capital priorities of investing in the business, returning capital to shareholders, and appropriate leverage.
During the quarter, we repurchased approximately 60,000 shares for $10 million. The full year, we used $60 million to repurchase over 347,000 shares, representing 5% of beginning shares. We ended the quarter with significant liquidity, including $386 million of cash and equivalents and an undrawn $250 million revolver, positioning us for the upcoming first quarter obligations, including the closing payment for Keystone National. Before turning the call over to Mike to review our financial results in more detail, I would like to provide some highlights on the Keystone National and Crescent Cove transactions, which will allow us to provide private market offerings and differentiated strategies with strong track records.
We will acquire a 56% majority interest in Keystone, a boutique private credit manager specializing in asset-based lending, with approximately $2.5 billion in assets across a tender offer fund, and two private REITs. Keystone's approach differs from traditional direct lending. Its financings are secured by specific collateral, are self-amortizing with regular payments of principal and interest, have shorter durations, and are structured with robust covenants and triggers. This collateral-backed, covenant-rich design provides meaningful downside protection for investors who are underexposed to private markets and serves as a differentiated complement for those already invested in traditional private credit. We see significant growth opportunities for Keystone across both retail and institutional channels. Their strategies are already available in an at-scale tender offer fund used by an established base of wealth management firms, and we believe we can expand that meaningfully.
In addition, over time, we also expect to introduce their capabilities to U.S. and non-U.S. institutional clients. We're excited to welcome Keystone's Salt Lake City-based team to Virtus and expect to close the transaction during the first quarter. With regard to Crescent Cove, a private investment firm that focuses on providing flexible capital solutions to high-growth, middle-market technology companies, we completed a 35% minority investment. Crescent Cove has built a strong track record, growing to over $1 billion in AUM across multiple private funds with a diversified client base. Their venture debt strategy offers a compelling risk-managed way for investors to gain exposure to private technology companies. We see long-term growth potential for Crescent Cove, including extensions into other products for broader client usage, and we're excited to be partnering with their team.
With that, I'll turn the call over to Mike to provide some more details on the financials. Mike?
Thank you, George. Good to be with you all this morning. Starting with our results on slide 10, assets under management. Our total assets under management at December 31 were $159.5 billion, and average assets declined 3% to $165.2 billion. Our AUM continues to be well-diversified across products and asset classes. By product, institutional accounts were 33% of AUM, retail separate accounts, including wealth management, represented 27%, and U.S. retail funds represented 26%. The remaining 14% consisted of closed-end funds, global funds, and ETFs. Within open-end funds, ETF AUM increased to $5.2 billion, up $0.5 billion sequentially on continued strong net flows and up 72% year-over-year.
We are also well-diversified by asset class, with broad representation across domestic and international equities, including mid, small, and large cap strategies, and a fixed income platform diversified across duration, credit quality, and geography. Turning to slide 11, asset flows. Total sales were $5.3 billion, compared with $6.3 billion in the third quarter. Reviewing by product, institutional sales were $1.4 billion, versus $2 billion last quarter, which included the issuance of a $0.4 billion CLO. Retail separate account sales were $1.2 billion, compared with $1.4 billion in the third quarter. Open-end fund sales were $2.8 billion, consistent with the prior quarter, and included $0.8 billion of ETF sales. Total net outflows were $8.1 billion, compared with $3.9 billion last quarter.
Reviewing by product, institutional net outflows of $3 billion were primarily due to redemptions of quality domestic and global large cap growth strategies. Of the total gross outflows in the quarter, 75% were partial redemptions rather than full terminations. Retail separate accounts had net outflows of $2.5 billion, driven by quality, small, and midcap equity strategies. Open-end fund net outflows of $2.5 billion, compared with $1.1 billion last quarter, also driven by quality-oriented equity strategies, which more than offset positive ETF flows. ETFs continued to deliver strong momentum, generating $0.6 billion of positive net flows and sustaining a strong double-digit organic growth rate. Before turning to the financial results, I would note that outlook commentary that I provide beyond the first quarter contemplates a full quarter impact of Keystone National.
Turning to slide 12, investment management fees, as adjusted, were $168.9 million, down 4% due to lower average AUM at a modestly lower average fee rate. The average fee rate was 40.6 basis points, which compared with 41.1 basis points last quarter. For the first quarter, an average fee rate of 41-42 basis points is reasonable for modeling purposes. Looking beyond the first quarter, we anticipate the average fee rate will be in the range of 43-45 basis points. As always, the fee rate will be impacted by markets and the mix of assets. Slide 13 shows the five quarter trend in employment expenses. Total employment expenses, as adjusted, of $95.8 million, decreased 3% due to lower variable incentive compensation.
As a percentage of revenues, employment expenses, as adjusted, were 50.7% and within our range of 49%-51%. As a reminder, the first quarter will include seasonal employment expenses, which are incremental to this range. Looking beyond the first quarter, we anticipate that employment expenses as a percentage of revenues will be in a range of 50%-52%, as the benefit from the addition of Keystone is more than offset by the decline in equity AUM. As always, it will be variable based on market performance, in particular, as well as profits and sales. Turning to slide 14. Other operating expenses, as adjusted, were $30.2 million, down from $31.1 million due to discrete M&A-related costs in the prior quarter.
We have maintained other operating expenses within our $30 million-$32 million quarterly range for several years, and for modeling purposes, this remains appropriate for the first quarter. Looking beyond the first quarter, we believe a quarterly range of $31 million-$33 million is reasonable. Slide 15 illustrates the trend in earnings. Operating income, as adjusted, of $61.1 million, compared with $65 million in the Q3, with the decline due to lower average assets, partially offset by lower operating expenses. The operating margin, as adjusted, of 32.4%, decreased 60 basis points from the third quarter. With respect to non-operating items, non-controlling interests of $1.5 million decreased from $2.1 million due to the increase in ownership of our majority-owned manager. For modeling purposes, this level is appropriate for the first quarter.
Beyond the Q1, we believe that a reasonable range for non-controlling interests will be $5 million-$6 million, which factors in the Keystone minority ownership. Our effective tax rate of 25.3% was lower by 70 basis points sequentially due to an update to our blended state tax rate, and this rate is appropriate for modeling purposes in the Q1. Beginning with the second quarter, we anticipate an effective tax rate of 23%-24% due to the addition of Keystone. Net income, as adjusted, of $6.50 per diluted share, declined 3% from $6.69 in the prior quarter. Slide 16 shows the trend of our capital liquidity and select balance sheet items. Cash and equivalents at December 31 were $386 million.
In addition, we had $306 million of other investments, including seed capital, to support growth initiatives. The $1 million decline in outstanding debt reflected the quarterly required amortization payment on the new term loan. Gross debt to EBITDA was 1.3x, and we ended the quarter with $13 million of net debt. During the fourth quarter, we repurchased 60,290 shares of common stock for $10 million. Other uses of capital during the quarter included the $40 million closing payment for Crescent Cove. That is included in the $61 million of investments equity method row, which also includes our minority investment in Zevenbergen, as well as $9 million for an increase in equity of our majority-owned manager, which was the last of the scheduled equity purchases.
In the Q1, cash usage will include our annual incentive payments, typically our highest operating cash outlay of the year, and the annual revenue participation payment, which we expect to approximate $22 million, which represents most of the remaining obligation. As previously mentioned, we will make the $200 million payment for Keystone National upon closing the transaction. Taking into account that payment and other first quarter activity, we would anticipate net leverage at March 31st of 1.2x EBITDA. With that, let me turn the call back over to George. George?
Thank you, Mike. We will now take your questions. Didi, will you open up the line, please?