Investment Securities

6 Months Ended

Jun. 30, 2017

Investment Securities

Investment Securities

3.Investment Securities

Investment securities at June 30, 2017 and December 31, 2016 are as follows:

	June 30,		December 31,
	2017		2016
		(in thousands)
Available for sale securities:
Certificates of deposit	$	10,001	—
Commercial paper		4,985	—
Corporate bonds		34,147	—
Sponsored funds		145,937	122,806
Sponsored privately offered funds		—	570
Total available for sale securities		195,070	123,376
Trading securities:
Mortgage-backed securities		12	13
Corporate bonds		16,098	—
Common stock		110	101
Consolidated sponsored funds		215,116	145,710
Sponsored funds		30,945	29,541
Sponsored privately offered funds		631	—
Total trading securities		262,912	175,365
Equity method securities:
Sponsored funds		40,154	26,775
Sponsored privately offered funds		3,691	3,234
Total equity method securities		43,845	30,009
Total securities	$	501,827	328,750

Certificates of deposit, commercial paper and corporate bonds accounted for as available for sale and held as of June 30, 2017 mature as follows:

		Amortized
		cost	Fair value
		(in thousands)
Within one year	$	24,008	24,007
After one year but within five years		20,140	20,126
After 10 years		5,000	5,000
	$	49,148	49,133

Mortgage-backed securities and corporate bonds accounted for as trading and held as of June 30, 2017 mature as follows:

		Fair value
		(in thousands)
Within one year	$	6,014
After one year but within five years		10,089
After five years but within 10 years		7
	$	16,110

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at June 30, 2017:

	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value
	(in thousands)
Available for sale securities:
Certificates of deposit	$	10,000	2	(1)	10,001
Commercial paper		4,981	4	—	4,985
Corporate bonds		34,166	1	(20)	34,147
Sponsored funds		149,078	1,630	(4,771)	145,937
	$	198,225	1,637	(4,792)	195,070

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2016:

	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value
	(in thousands)
Available for sale securities:
Sponsored funds	$	129,427	828	(7,449)	122,806
Sponsored privately offered funds		265	305	—	570
	$	129,692	1,133	(7,449)	123,376

A summary of available for sale investment securities with fair values below carrying values at June 30, 2017 and December 31, 2016 is as follows:

	Less than 12 months			12 months or longer		Total
			Unrealized		Unrealized		Unrealized
June 30, 2017	Fair value		losses	Fair value	losses	Fair value	losses
	(in thousands)
Certificates of deposit	$	4,999	(1)	—	—	4,999	(1)
Corporate bonds		24,146	(20)	—	—	24,146	(20)
Sponsored funds		33,506	(1,190)	35,900	(3,581)	69,406	(4,771)
	$	62,651	(1,211)	35,900	(3,581)	98,551	(4,792)

	Less than 12 months			12 months or longer		Total
			Unrealized		Unrealized		Unrealized
December 31, 2016	Fair value		losses	Fair value	losses	Fair value	losses
	(in thousands)
Sponsored funds	$	71,051	(1,834)	34,182	(5,615)	105,233	(7,449)

Based upon our assessment of these investment securities, the time frame the investments have been in a loss position and our intent to hold the investment securities until they have recovered, we determined that a write-down was not necessary at June 30, 2017.

Sponsored Funds

The Company has classified its investments in the Ivy Funds, Ivy Nextshares, Ivy ProShares and IGI Funds as either trading, equity method investments (when the Company owns between 20% and 50% of the fund) or as available for sale investments (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 Ivy Funds, Ivy NextShares and Ivy ProShares 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.  The Company has determined that the IGI Funds are VOEs as their legal structure and the powers of their equity investors prevent the IGI Funds from meeting characteristics of being a VIE.

Sponsored Privately Offered Funds

The Company holds interests in privately offered funds structured in the form of limited liability companies.  The members of these entities have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote.  These entities do not meet the criteria of a VIE and are considered to be VOEs.

Consolidated Sponsored Funds

The following table details the balances related to consolidated sponsored funds at June 30, 2017, and at December 31, 2016, as well as the Company’s net interest in these funds:

	June 30,		December 31,
	2017		2016
	(in thousands)
Cash	$	3,706	6,885
Investments		215,116	145,710
Other assets		7,847	763
Other liabilities		(6,800)	(390)
Redeemable noncontrolling interests		(28,718)	(10,653)
Net interest in consolidated sponsored funds	$	191,151	142,315

During the six months ended June 30, 2017, we consolidated certain of the Ivy Funds, Ivy NextShares and Ivy ProShares in which we provided initial seed capital at the time of the funds’ formation. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements.  During the first six months of 2017, we closed three IGI Funds and deconsolidated three Ivy ProShares, as we no longer have a controlling interest in the funds. Accordingly, we deconsolidated $2.6 million from cash and cash equivalents, $7.3 million from investments and $9.9 million from redeemable noncontrolling interests. Four IGI Funds remain consolidated as of June 30, 2017. There was no impact to the consolidated statements of income as a result of the closures and deconsolidations, as the funds were carried at fair value.

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 pricing approaches evaluated differently depending upon the specific asset to determine a value.  The fair value of corporate bonds is measured using various techniques, which consider recently executed trades in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer. 

The following tables summarize our investment securities as of June 30, 2017 and December 31, 2016 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

June 30, 2017	Level 1		Level 2	Level 3	Other Assets Not Held at Fair Value	Total
	(in thousands)
Available for sale securities:
Certificates of deposit	$	—	10,001	—	—	10,001
Commercial paper		—	4,985	—	—	4,985
Corporate bonds		—	34,147	—	—	34,147
Sponsored funds		145,937	—	—	—	145,937
Trading securities:
Mortgage-backed securities		—	12	—	—	12
Corporate bonds		—	16,098	—		16,098
Common stock		110	—	—	—	110
Consolidated sponsored funds		132,187	82,929	—	—	215,116
Sponsored funds		30,945	—	—	—	30,945
Sponsored privately offered funds measured at net asset value (1)		—	—	—	631	631
Equity method securities: (2)
Sponsored funds		40,154	—	—	—	40,154
Sponsored privately offered funds measured at net asset value (1)		—	—	—	3,691	3,691
Total	$	349,333	148,172	—	4,322	501,827

December 31, 2016	Level 1		Level 2	Level 3	Other Assets Not Held at Fair Value	Total
	(in thousands)
Available for sale securities:
Sponsored funds	$	122,806	—	—	—	122,806
Sponsored privately offered funds measured at net asset value (1)		—	—	—	570	570
Trading securities:
Mortgage-backed securities		—	13	—	—	13
Common stock		101	—	—	—	101
Consolidated sponsored funds		100,847	44,863	—	—	145,710
Sponsored funds		29,541	—	—	—	29,541
Equity method securities: (2)
Sponsored funds		26,775	—	—	—	26,775
Sponsored privately offered funds measured at net asset value (1)		—	—	—	3,234	3,234
Total	$	280,070	44,876	—	3,804	328,750

(1) 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.

(2) Substantially all of the Company’s equity method investments are investment companies that record their underlying investments at fair value.