Thanks, Jacinda, and good morning, everyone. Welcome to Virtus Investment Partners' discussion of our Q2 2026 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 will 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 will start with an overview of the results we reported this morning, and then Mike will provide more detail. While our results continue to reflect the challenging environment for quality-oriented equity strategies, there are several positive underlying trends during the quarter, which included a meaningful improvement in total net flows, over $1 billion of positive net flows excluding the quality equity strategies, our strongest quarter of institutional sales and net flows in nearly three years, positive net flows in alternatives, fixed income, and multi-asset strategies, higher sales across multiple products, including institutional wealth management and ETFs, and continued return of capital to shareholders while reducing debt. We also continue to broaden our product offerings in areas where we see attractive growth opportunities.
During the quarter, we introduced new actively managed ETFs from Duff & Phelps and Sylvan, further expanding our ETF platform and providing clients with differentiated investment solutions. ETFs have continued to generate positive net flows, and for perspective, our ETF business has grown significantly from just $1 billion five years ago and generated $2 billion of net flows in the past year alone. We remain focused on expanding our capabilities and product offerings in ETFs and other areas where we see growing client demand and attractive opportunities for long-term growth. Turning to investment performance, outside of quality equity, our performance remains strong across periods. Fixed income and alternative strategies have had consistently strong performance, with 80% and 67%, respectively, beating benchmarks for the three-year period. Over the longer 10-year period, 73% of our fixed income and 67% of alternative strategies beat their benchmarks.
Our equity investment performance reflects our overweight to quality-oriented equity strategies. These strategies have had the opportunity to demonstrate strong performance in more constructive markets, which have been absent for the past two years. We have seen indications of the impact of such opportunities. For example, in the most recent period since late June. While it is still early in the quarter and a very short timeframe, nearly every quality strategy has been outperforming its benchmarks quarter-to-date, and some meaningfully so. The improvement has coincided with a broadening market environment that is more supportive of fundamentally driven active security selection and is consistent with the type of market in which these strategies have historically performed well. With such a short period, it is difficult to draw a conclusion on the cycle, but it does demonstrate the opportunity when it does change.
Looking at our Q2 results, assets under management were $152 billion at June 30th, up from $149 billion, primarily due to market performance. Total sales increased 5% to $6.1 billion, with higher sales of institutional wealth management in ETFs. For institutional and wealth management, it was our highest level of sales in several years. Total net outflows improved to $5.6 billion from $8.4 billion due to both higher sales and lower redemptions. By product, net flows improved sequentially for institutional, intermediary sold retail separate accounts, ETFs, and wealth management. Looking at flows across asset classes and consistent with prior quarters, the net outflows reflected the continued style headwind for quality-oriented strategies. Outside of those strategies, positive net flows were broad-based across managers spanning fixed income, alternatives, multi-asset, and equity strategies that do not have a quality orientation.
In terms of what we've seen in July, U.S. retail fund sales and net flows are tracking more favorably than in each month of the Q2, and ETF net flows continue at a similar pace. On the institutional side, while known redemptions do exceed known wins, the sales pipeline is stronger than it has been in a year and is diversified across five managers and six strategies. We anticipate issuing a new CLO later this year. Turning now to our financial results, earnings per share and the operating margin each increased sequentially due to the impact of prior quarter seasonal expenses, offset partially by a discrete non-cash expense item related to previously issued investment professional stock awards. The operating margin was 26.1%, up from 24%, and excluding the discrete item, was 28.2%.
Earnings per share as adjusted of $5.54 increased from $5.38 and were $5.97 excluding the discrete item. In terms of our balance sheet and capital, we ended the quarter with cash and equivalents of $176 million, CLO and other investments of $273 million, and $220 million of undrawn capacity on our revolving credit facility. During the quarter, we repurchased approximately 70,000 shares for $10 million and paid our quarterly dividend. We continue to have financial flexibility to balance our capital priorities of investing in the business, returning capital to shareholders, and maintaining appropriate leverage. I'll turn the call over to Mike to provide more detail on the results. Mike.
Thank you, George. Good to be with you all this morning. Starting with our results on slide seven, assets under management. Our total assets under management at June 30th were $152.2 billion, up 2%, primarily due to market performance. Average assets were $153.3 billion, down 3% sequentially. Our AUM is well-diversified across products and asset classes. By product, institutional accounts were 33% of AUM, U.S. retail funds represented 27%, and retail separate accounts, including wealth management, represented 24%. The remaining 16% consisted of closed-end and tender offer funds, ETFs, and global funds. Within open-end funds, ETF AUM increased to $5.8 billion, up $0.4 billion sequentially, reflecting continued positive net flows and up 58% year-over-year. By asset class, fixed income represented nearly 27% of AUM, with offerings diversified across duration, credit quality, and geography.
Alternatives and multi-asset together represented over 28% of AUM, up from 21% a year ago, and included positive net flows in alternatives and the addition of Keystone in the Q1. We also have broad representation across domestic and international equities, including mid, small, and large-cap strategies. Turning to slide eight, asset flows. Total sales increased 5% to $6.1 billion, up from $5.8 billion in the Q1, with higher sales in institutional, wealth management, and ETFs. Reviewing by product, institutional sales increased to $2.2 billion from $1.2 billion, with higher sales in alternatives, equities, and fixed income, and included a large global listed real estate inflow. This was the highest level of institutional sales in three years. Retail separate account sales of $1.2 billion declined from $1.4 billion in the Q1, as higher wealth management sales were more than offset by lower intermediary sold.
Wealth management sales were at their highest level since the Q4 of 2023. Open-end fund sales declined 14% to $2.6 billion, as higher ETF sales were more than offset by lower U.S. retail and global funds. Total net outflows improved to $5.6 billion from $8.4 billion last quarter. By product, institutional net outflows of $0.7 billion improved meaningfully from $3.2 billion last quarter, driven by both higher sales and lower redemptions, and represented our best quarter of institutional flows in nearly three years. The majority of the redemptions continued to be concentrated in quality-oriented equity strategies. Retail separate account net outflows of $3.1 billion improved from $3.9 billion last quarter, with the outflows driven by intermediary sold quality-oriented equities. Wealth management net flows were positive. Open-end net outflows of $1.8 billion compared with $1.3 billion last quarter and included positive net flows in fixed income.
Within open-end funds, ETFs continued to grow, generating $0.3 billion of positive net flows and sustaining a strong double-digit organic growth rate. For closed-end funds and tender offer funds, we reported essentially break-even net flows. Turning to slide nine. Investment management fees as adjusted were $164.8 million, up 1%, as a higher average fee rate was partially offset by lower average assets. The average fee rate of 43.1 basis points up from 41.9 basis points last quarter and included approximately 1.2 basis points of incentive fees. For modeling purposes, the Q2 fee rate is reasonable. As always, the fee rate will vary with market levels and asset mix. Slide 10 shows the five-quarter trend in employment expenses.
Total employment expenses as adjusted of $102.1 million declined 4% sequentially, reflecting the impact of prior quarter seasonal items partially offset by a full quarter of expenses of a new manager and a $3.8 million discrete expense item. This non-recurring item consisted of a non-cash expense related to multiple annual investment professional stock-based awards that were fully expensed, primarily due to required acceleration upon achievement of employee retirement eligibility in the quarter. These multi-year performance-based awards will fluctuate over the measurement periods and are currently marked at the maximum level of the award's performance range. As a percentage of revenue, employment expenses were 55.6%, or 53.5% excluding the discrete item, essentially in line with our outlook. For modeling purposes, 54% is a reasonable level for the Q3. As always, results will vary with flows and market performance. Turning to slide 11.
Other operating expenses as adjusted were $31.9 million and included the annual equity grant to the board of directors of $0.7 million. Excluding the grant, the modest increase in other operating expenses reflected the full quarter impact of a new manager. I would note that even with that addition, other operating expenses declined modestly compared with the prior year period. For modeling purposes, a quarterly range of $30 million-$32 million is reasonable going forward. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $47.9 million increased from $43.8 million due to prior quarter seasonality and higher investment management fees, partially offset by the discrete item. The operating margin as adjusted was 26.1% or 28.2%, excluding the discrete item. With respect to non-operating items, interest expense increased by $0.4 million due to higher average gross debt.
With the repayment of a portion of the credit facility during the quarter, we would anticipate a modest decline in interest expense in the Q3. Turning to income taxes, our effective tax rate for the Q2 was 13.3%, essentially unchanged from the prior quarter level. As a reminder, our effective tax rate includes the economic benefit of our intangible tax assets. Looking ahead, an effective tax rate in a range of 13%-14% would be reasonable to expect. Net income as adjusted of $5.54 per diluted share included the $0.43 discrete expense item. The increase from $5.38 in the prior quarter reflected Q1 seasonality and higher revenues. Slide 13 shows the trend of our capital liquidity and select balance sheet items.
Cash and equivalents at June 30th were $176 million, up from the prior quarter due to cash earnings in excess of return of capital and repayment of debt. In addition, we had $273 million of other investments, including seed capital to support future growth opportunities. Return of capital to shareholders in the Q2 included the repurchase of 70,097 shares of common stock for $10 million. We also repaid $20 million of the outstanding amount on our revolving credit facility and anticipate repaying the remaining $30 million in the short-term. Gross debt at the end of the quarter was $427 million, down from $448 million at March 31st. Net debt was $251 million, or 0.9x EBITDA. With that, let me turn the call back over to George. George?
Thank you, Mike. We will now take your questions. Jacinda, would you open up the lines, please?