Earnings Call: Q1 2021

Apr 28, 2021

Thank you for standing by, and welcome to the First Quarter 2021 Westwood Holdings Group, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. I'd now like to introduce your host for today's program, Julie Gerron, Chief is Senior Vice President, General Counsel and Chief Compliance Officer. Please go ahead. Thank you, and welcome to our 1st Quarter 2021 Earnings Conference Call. The following discussion will include forward looking statements, which are subject to known and unknown risks, Uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today as well as in our Form 10 Q for the quarter ended March 31, 2021, that is filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on forward looking statements. In addition, in accordance with SEC rules concerning non GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most Comparable GAAP measures is included at the end of our press release issued earlier today. On the call today, we have Brian Casey, our President and Chief Executive Officer and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey. Good afternoon. Thanks for taking the time to listen to our quarterly earnings call. I've spoken for some time about our efforts to meet the challenges presented by today's asset management industry. Last quarter, I listed several ways in which we are doing that. And this quarter, I have some more items to highlight the success of our efforts so far. Among them, Net flows moved to positive, capping our best sales quarter in 6 years. Our new business pipeline remains very strong at 2,700,000,000 Driven mostly by institutional wins, our high performing small cap strategy is approaching AUM capacity. First, I have a few comments on our investment performance. Financial markets continued the roller coaster that started last year. About a year ago, COVID sent most of us home. Now we, along with market observers around the globe, are convinced that widespread business reopenings will provide a Powerful impetus to our economies and its expectation is showing up in financial asset prices. Given this backdrop, Investors surmise that the most cyclical, riskiest assets would benefit most and we've seen meme stocks, SPACs and cheap high beta small securities Rise along with junk bonds as investors favored risk taking as the year got underway. Our U. S. Value strategies were challenged in this environment and underperformed. On the bright side, LargeCap Value enjoyed $140,000,000 in positive net flows with selected client rebalancing contributing to the strategy this quarter. We continue to see potential for separately managed account wins And our mutual fund WHGLX remains a 4 star rated fund by Morningstar. Our SMIDCAP strategy also had positive net inflows over $60,000,000 through client rebalances and the addition of a new institutional client. Markets favoring high beta and volatility have historically been short lived and we expect fundamentals to lead the markets with earnings growth reemerging as Key driver of valuations in 2021. Our small cap strategy remains a favorite product despite the market's preference so far this year for low quality Speculative Securities. Net positive flows for the quarter exceeded $330,000,000 including new institutional separate account mandates along with inflows from current clients and positive net flows generated by our intermediary team. SmallCap strategy also won several new mandates, which we expect will be funded this quarter. SmallCap has seen quite a bit of interest lately and it's now approaching capacity. To maintain product integrity and our alpha generation opportunities, we actively monitor capacity in all of our strategies. Based on current assets, committed new fundings and current market conditions, we are moving to a soft close in our small cap strategy this quarter. To finish up on U. S. Value, we believe that the crosscurrents now at play will lead the companies with strong financial positions outperforming as 2021 mutates into an environment where earnings matter and where companies at the intersection of quality and value can perform well. We believe that our approach will be appreciated as the low quality headwinds die down, leading to our durable investment process delivering the alpha it's historically known for. In our multi asset group, an overweight to equities versus fixed income and strong security selection helped our strategies outperform. After finishing 2020 strongly, our team's largest strategy, income opportunity, Posted another solid quarter of outperformance, nicely ahead of the benchmark 40% S and P 500, 60% Bloomberg Barclays Aggregate Bond Index. Our mutual fund, WHGIX remains a 5 star mutual fund and racks on the top quintile in its Morningstar peer group over 1, 3 5 year time periods and top decile over trailing 10 15 year periods. As income opportunities performance momentum has improved, Correspondingly, we have seen outflows slow and intermediary distribution income opportunity posted positive inflows and new prospect opportunities add to our sense of optimism for this strategy. As the team continues to build on this track record under the leadership of Adrian Helford, We are excited for the future of income opportunity and the broader franchise. Our other multi asset products, total return, high income, Alternative income and credit opportunities all added to their solid track records with positive absolute and relative performance. The Westwood Total Return Fund, WLVIX, finished the quarter ahead of the benchmark 60% S and P 500, 40% Bloomberg Barclays Aggregate Bond Index. Morningstar rates the fund as 5 star and it has delivered Our high income fund WHGHX beat its benchmark 20% S and P 500, 80% Bloomberg Barclays Aggregate Bond Index by over 3 50 basis points this quarter. WHGHX has produced strong results since our multi asset team began managing it in 2019 And it is a 4 star fund at Morningstar with top decile performance over the trailing 1 year period. Alternative income, WMNIX delivered absolute returns up over 200 basis points and remains a 4 star fund in Morningstar with top quartile performance for the trailing 1, 3 5 year time periods. Investor interest remains high in alternative income given rising interest rates, the headwinds faced by traditional fixed income products and the uncorrelated performance it has traditionally provided. Credit Opportunity Strategy, a new strategy we launched in 2020 for our high net worth clients, posted absolute returns up nearly 500 basis points. Credit markets show the welcome mat to even the most highly levered complex borrowers and many below investment grade companies have taken advantage with 1st quarter high yield issuance at the highest quarterly level ever recorded. Our team has taken advantage by participating in selected new issuances with attractive risk reward characteristics. Our systematic equity strategies continue to perform well. Systematic large cap growth is building on its track record and our small cap growth strategy posted a strong quarter over 400 basis points ahead of the benchmark Russell 2,000 Growth Index. Given our performance track record in small cap growth, we continue to evaluate the potential to offer a new mutual fund later this year. Our suite of multi asset products remains well positioned to take advantage of dislocations across asset classes, while benefiting from market inefficiencies with mispriced securities. As we build our track records in these strategies, we are excited to present them to different marketplaces. Higher rates have eliminated the risk for different areas of fixed income. Stable returns can be achieved by using multi asset strategies with greater diversification and lower correlations, which produce better outcomes. Although markets have generally recovered from 2020 lows, The potential for dispersion of returns across asset classes, industries and specific companies will continue to provide ample opportunities for our investment team to deliver superior risk adjusted returns. Shifting to institutional and intermediary distribution, The team's execution on the strategy we began implementing in 2019 delivered strong results this quarter. We experienced slowing outflows and a large increase in inflows producing positive net flows for the first time in 6 years and bringing us closer to fulfilling our 2021 sales goals for both institutional and intermediary. Our institutional group was thrilled to deliver quarterly inflows of over 7 $32,000,000 for the quarter, its best quarter since 2015. Institutional flows were driven by client rebalances in our large cap and small cap strategies, as well as funding new small cap mandates won last year. Inflows were partially offset by outflows of $219,000,000 from client rebalances and one client loss, which left us with positive net flows of over $500,000,000 this quarter. Our intermediary team also delivered strong flows this quarter, inflows of $438,000,000 partially offset by outflows of $209,000,000 netted positive flows of $229,000,000 Intermediary is winning some larger mandates and is focused on growing the number of new advisors using our products as face to face meeting activity increases. In this regard, meeting activity, a strong gauge of potential sales activity, has risen substantially this year, up nearly 30% from the 4th quarter. Search activity is increasing And our pipeline is healthy with opportunity spread over several strategies. We are particularly pleased to note that our one, but not yet funded book has expanded with several large institutional wins in small cap and most of these new mandates are expected to fund this quarter. SMIDCAP and our multi asset strategies are competitive and continue to be in demand. We are positioning SMIDCAP In the institutional channel as a similar strategy to SmallCap, which uses the same investment process and research platform. In multi asset, the income opportunity fund is selling well in the intermediary space and remains a 5 star rated fund. Turning to wealth management, our teams in Dallas and Houston experienced net outflows for the quarter. They have both enhanced their servicing and prospecting efforts to manage client flows and reach new customers. Our Houston team is spearheading an effort to ensure that clients have comprehensive estate plans in place and our Dallas team has recently added a new financial planner to enhance its The rollout of COVID vaccines, the reopening of our offices and the return of face to face interactions, Our advisors are poised to conduct more business development activities with prospects. Both Dallas and Houston have attractive pipelines and we believe this will result in meaningful inflows for the remainder of the year. Our select equity strategies, which are managed out of the Houston office and are designed to achieve high quality tax efficient outcomes for our high net worth clients posted strong results in the quarter and outperformed the Russell 3,000 Index. Dividend Select strategy rose nearly 10% Hi Alpha gained nearly 14%, far outpacing the market as measured by the Russell 3,000's return of 7.8%. High Alpha created last March now has a trailing 1 year return of 96.7%. Last quarter, I spent some time talking about our focus on managing the expense side of the business. We've now transitioned our global convertibles team back to Further reduced headcount and completed the sublease for part of our excess office space in Dallas, which will generate significant annual savings. We're pleased to maintain our recently reinstated dividend, reflecting our confidence in the growth trajectory of the business. We took advantage of some intra quarter drops in our share price to buy back 92,491 shares of our stock at very attractive prices with more than half of the purchases made below book value. We have long maintained a strong balance sheet, which now And at $86,900,000 in cash and short term investments. This financial strength enables us to take advantage of stock buyback opportunities and to take other appropriate business actions as they present themselves. To summarize the quarter, we had net inflows of $595,000,000 and the largest pipeline of new business opportunities in several years. More importantly, the one but not yet funded new client accounts should open and fund this quarter or early next quarter. We are very encouraged by the daily increase in vaccinations throughout our nation And we're looking forward to a return to normalcy. As for our Westwood team, we plan to be fully back in the offices on July 6 and we can't wait. COVID has forever changed the way we work and a flexible work environment will be part of that. Though we have become very efficient working from home, Our employees work best when colleagues can collaborate, support and learn from each other face to face. Maintaining our culture of collaboration, trust, Community involvement and close bonds with each other and our clients is vital. Reopening our office environment to everyone supports our employees' efforts to create that atmosphere and to better serve our clients. Thank you for listening. And I will now turn the call over to Terry Forbes, our CFO. Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $18,300,000 for the Q1 of 2021 compared to $17,100,000 in the Q4 of 2020 $16,700,000 in the prior year's Q1. Revenues were higher than the 4th quarter and last year's Q1, principally as a result of higher average assets under management and higher performance based fees. 1st quarter net income of $4,100,000 or $0.52 per share exceeded net income of $2,800,000 or $0.36 per share in the Q4, primarily due to net realized gains on private investments of $5,600,000 as well as higher revenues, partially offset by higher operating expenses and income taxes. Non GAAP economic earnings were $6,300,000 or $0.79 per share in the current quarter versus $4,600,000 or $0.58 per share in the 4th quarter. 1st quarter net income of $4,100,000 or 0 point 5 $2 Exceeded net income of $1,100,000 or $0.13 per share in the prior year's Q1, primarily due to net realized Gains on private investments of $5,600,000 as well as higher revenues, partially offset by higher operating expenses and income taxes. Economic earnings for the quarter was $6,300,000 or $0.79 per share compared with $4,200,000 or $0.50 per share in the Q1 of 2020. Firm wide assets under management totaled $14,500,000,000 at quarter end and consisted of institutional assets of $7,600,000,000 and net inflows of $595,000,000 Our financial position continues to be very solid with cash and short term investments at quarter end totaling 86 $900,000 and a debt free balance sheet. Happy to announce that our Board of Directors approved a quarterly cash dividend of $0.10 per share payable on July 1, 2021 to stockholders of record on June 4, 2021. This represents an annualized dividend yield 2.3% as of the closing price on April 27. That brings our prepared comments to a close. We encourage you to review our investor presentation posted on our website reflecting Q1 highlights as well as a discussion of our business, product development and longer term trends in revenues and earnings. We thank you for your interest in our company and we'll open the line to questions. Our first question comes from the line of Mac Sykes from Gabelli. Your question please. Hey, Brian and Seamus, nice quarter. So I just had two quick questions. First, on the soft close for the small cap strategies, could you just clarify The constraints on retail versus institutional separate accounts. Sure. So we have some RFPs in queue for institutional, which we will honor, and then we will manage those flows very carefully. As far as intermediary or retail goes, we will be open for business to for folks to be able to transact In the intermediary space. So the mutual fund will remain open. Okay. And then the comp line rose a little bit this quarter. Was that a reflection of the better sales activity? And assuming that the pipeline funds next quarter Good continued progress. Would that push a little more pressure on the comp line, which I assume is a good thing? Yes. So the revenue did rise and we do expect significant unfunded wins to fund this quarter. Hopefully, sometimes they bleed into the Q3, but we've won some significant pieces of business And we're excited about it. As far as the comp line goes, yes, it will rise in tandem as a result of Those folks that are on commission who are paid based on sales. Thank you. And this does conclude the question and answer session of today's program. I'd like to hand the program back Brian Casey for any further remarks. Well, thanks everybody for taking the time to listen. I know it's a busy day for earnings. Please visit westwoodgroup.com for more information on any of our filings and our Investor Relations presentation. Feel free to call myself or Terry if you have any further questions. Thanks for your interest in Westwood. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.