Earnings Call: Q2 2021

Jul 27, 2021

Thank you for standing by, and welcome to the Westwood Holdings Group Second Quarter 2021 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 may be recorded. I'd now like to introduce your host for today's program, Julie Garron, Senior Vice President, General Counsel and Chief Compliance Officer. Please go ahead. Thank you, and welcome to our 2nd quarter 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 filed with the Securities and Exchange Commission for the quarter ended June 30, 2021. 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. Thank you for taking the time to listen to our quarterly earnings call. Last quarter, I spoke of our positive net flows backstopped by a pipeline of new business opportunities at its strongest level in recent years and our awarded, but not yet funded pipeline, which grew to more than $800,000,000 including several large institutional wins in small cap. This quarter, I'm happy to report more items that highlight the success of our efforts. Among them, improving performance across our U. S. Value strategies, Soft close of our small cap strategy, driven primarily by institutional wins along with capacity limitations Strength in institutional sales capping our best sales quarter since 2016. And as discussed previously, We made the strategic decision in Q4 2020 to exit the standalone convertibles business and most of our global convertible securities team rejoined Aviva Investors. Also, the $1,600,000,000 in funds that we sub advised for Aviva was returned to them on April 1, 2021. Excluding this shift, positive net cash flows totaled nearly $900,000,000 in the second quarter. Our standalone convertibles business did not meet our hurdles and the AVEVA transition results in a net positive to our business in terms of revenue generation and profitability levels. Veeva assets had an average base fee last year of 16 basis points, and this quarter's new account fundings will earn a weighted average fee of 45 basis points. Our long term shareholders will recall the difficult decision we reached in February of 2020, after years of steadily improving dividends, to reduce our quarterly dividend from $0.73 to $0.43 We took this action to preserve cash as we confronted the myriad challenges facing our industry. $0.10 quarterly dividend this past February as vaccinations became more widespread and as the economy showed signs of reemerging. As many long term shareholders know, we have always been debt free with a strong balance sheet and a long history of generating cash with which to fund operations, including the payment of dividends. We review our ongoing capital allocation options at the Board level, And over the past several years, we have continued to reinvest in our business, set up a larger share buyback plan and most recently reinstated our dividend. With our cash balances nearing pre pandemic levels, our Board has decided to pay a special dividend of $2.50 per share in recognition of our long term shareholders' loyalty and patience and to make up for the dividends foregone over the past year. We will continue to monitor the evolution of our business as we always do to determine our regular dividend policy moving forward. I'll now turn to comments on investment performance. The S and P 500 closed the quarter at an all time high despite inflation concerns and uncertainty over the path of Fed stimulus. For smaller caps, index performance was once again impacted by meme stocks as investors speculated on outperformance regardless of company fundamentals. Despite these moves, the market focused more on the impacts After 2 quarters of outperformance, value took a pause relative to growth. This remains a key investor focus as many of the areas hit hardest by the pandemic have rebounded sharply and are no longer as cheap as they once were. In this environment, our large cap strategy outperformed the Russell 1,000 Value Index Our mutual fund WHGLX posted a top half peer ranking and remains a 4 star rated fund by Morningstar. Its longer term rankings in Morningstar and Institutional Investment, peer universes remain competitive. LargeCap benefited from positive net flows exceeding $110,000,000 mostly due to some client rebalancing. Our SMID cap strategy underperformed against the Russell 2,500 Value Index and had net outflows as the client shifted the assets in one of their two accounts that were invested in SMID to a separate global strategy. In small cap, we were pleased to see performance rebound against the Russell 2,000 Value Index despite the market's continued preference for low quality, often speculative securities. Over the course of the quarter, the effects of many of those elements, except for the performance of meme stocks, began to moderate, which allowed fundamentals to drive returns. For the Q2, SmallCap outperformed its index and our mutual fund, WHGSX ranked in the 35th percentile against peers in its Morningstar universe for the quarter and its 32nd percentile year to date. Its 10 year track record remains attractive with a 16th percentile ranking relative to peers. Among institutional peers, SmallCap performed similarly well this quarter and maintains a top third ranking for the trailing 5 7 year periods. Mallcap experienced net positive flows of more than $800,000,000 and this included new institutional separate account wins from our 1, but not yet funded pipeline last quarter. SmallCap is approaching capacity and our implementation of a soft close will limit new inflows and maintain product integrity and alpha generating opportunities. In summary, value remains an area of potential search activity As the reversal in fortunes relative to growth has increased market interest, the nuance between value or investing in mispriced undervalued securities and simply buying statistically cheap companies will continue to become more apparent. Performance took a step in the right direction as the outperformance of High data securities moderated and fundamentals began to carry more weight. As this continues to unfold, It should create an ongoing tailwind for our investment approach. In our multi asset group, our tactical allocation favoring equities over fixed income helped Performance. Our team's largest strategy, income opportunity, posted another solid quarter of outperformance, beating its benchmark 40% S and P 500, 60% Bloomberg Barclays Aggregate Bond Index and our mutual fund, WHGIX Remains a 5 star mutual fund and ranked in the 11th percentile for the quarter in its MorningStar peer group and in the top quintile over year to date, 1 year time period and top decile over 3 10 year periods. WHGIX Track record remains compelling in the intermediary channel, and we're excited to continue sharing that story with prospects as our teams work to secure key platform approvals. As income opportunities performance has improved, we were pleased to see the strategy generate net positive flows for the quarter. Income opportunity is approaching the 3 year mark under the leadership of Adrian Helford. This milestone should further solidify the team's ability to attract interest in the marketplace as it finds ways to add alpha in a variety of market environments. All of our other multi asset products, total return, high income, alternative income and credit opportunities added to their solid track records with positive absolute and relative performance for the quarter. The Westwood Total Return Fund, WLVIX finished the quarter ahead of its benchmark, 60% S and P 500, 40% Bloomberg Barclays Aggregate Bond Index. Morningstar gives 5 stars to this fund, which has delivered strong performance since coming under the wing of our multi asset team. WLVIX ranked in the top 40% of peer funds for the quarter and maintains top rankings longer term. We look forward to engaging with more prospective clients on this strategy this year. Our high income fund, WHG HX again beat its benchmark 20% S and P 500, 80% Bloomberg Barclays Aggregate Bond Index this quarter. ViaHGHX has produced strong results since our multi asset team began managing it in 2019, achieving a 4 star rating by Morningstar and ranking in the top decile for the quarter and trailing 1 year period among its peers. Credit Opportunity Strategy posted positive absolute performance, up nearly 300 basis points for the quarter. Year to date, the strategy has benefited from favorable security selection and the continued tightening of credit spreads. The portfolio combines attractive short dated securities and deep distressed investments, positioning the fund to earn attractive returns while limiting interest rate and spread risk. Lastly, our systematic small cap growth strategy continues to perform well and beat its benchmark Russell 2,000 Growth Index by nearly 500 basis points year to date. Given such strong performance, we are launching a small cap growth mutual Multi Asset team has spent several years developing a new innovative investment process capable of delivering outperformance across market cycles. We expect that this will become evident through continued strong risk adjusted client returns And we're excited about the future potential of this platform as we consider additional asset classes and strategies. Our suite of multi asset products remains uniquely positioned to take advantage of crosscurrents between asset classes, Capturing market inefficiencies with mispriced securities. This allows us to capture alpha from top down allocation as well as from bottom up repricing of our securities. As our track record continues to develop, we are in a strong position to share these strategies with different marketplaces. We continue to believe that higher rates highlight the risks for different areas of fixed income. In view of these risks, allocations across multiple asset classes We believe the potential for more dispersion and returns across asset classes, industries and companies will provide ample opportunities for our investment team to deliver During our call last quarter, I noted that our global convertibles team returned to Aviva Investors in December and the operational support and corresponding AUM of $1,600,000,000 transitioned back to AVEVA on April 1. Due to the timing of the change, reported AUM figures reflected this change during the Q2. Our standalone convertibles business did not meet our profitability hurdles And now with the strongest net flows in 6 years, we are replacing that business with higher fee assets. My comments today regarding net flows for the quarter exclude the AVEVA shift. This quarter, we experienced higher inflows with no client losses in our institutional client base. Total, our institutional and intermediary teams had over $1,290,000,000 in inflows, only partially offset by outflows netting inflows of approximately $1,000,000,000 for the quarter. We were especially proud to have enjoyed positive The categories in which these strategies compete have been experiencing outflows and our wins definitely reflect an increase in market share. Our intermediary team also delivered with inflows of $148,000,000 partially offset by outflows of 69,000,000 Netting a positive $79,000,000 reduced withdrawals in the intermediary space have contributed to our net sales strength. Our SMID cap and multi asset strategies are competitive and continue to be in demand. SMID cap in the institutional channel is similar to small cap using the same investment process and research platform. Our institutional sales team is focusing on SMIDCAP after the close of SmallCap and on securing Consultant approvals. In multi asset, our intermediary team is focused primarily on income opportunity and alternative income funds, both with good long term track records. Turning to wealth management, our Dallas and Houston teams experienced net outflows for the quarter. Outflows included some account closures and withdrawals to fund tax payments, but also reflected client assets being reallocated into private equity. Teams continue to enhance their servicing and business development efforts to manage flows and reach new clients. The opening of our offices and the ability to conduct face to face meetings have allowed our advisors to intensify their personal interactions with clients and they are conducting more business development activities with prospects. Both Dallas and Houston have attractive opportunity pipelines, and we believe this will result in meaningful inflows for the remainder of the year. Strategies managed out of our Houston office had mixed results. Select Equity, which aims for tax efficient outcomes, lagged the Russell 3,000 Index for the quarter due to a technology sector underway, but remains ahead year to date. Select Equity is designed with risk management at its core, which helps provide lower volatility returns and good downside protection versus the Russell 3,000 index. High Alpha strategy once again beat the Russell 3,000 benchmark with a return of 9% this quarter. Year to date, this strategy remains far ahead of the index and is up over 90 percent since its inception in March of last year. To summarize the 2nd quarter, We enjoyed our largest sales quarter since 2016 with net inflows of $1,000,000,000 excluding the previously disclosed AVEVA transition. Performance has remained strong in our multi asset products. In our U. S. Value strategies, we have implemented a soft close of small cap and performance across our strategies has picked up. The return of the value style should continue to be a tailwind for interest in our approach to investing. I'm also pleased to report that as of July 6, our Westwood team is back in our offices and enjoying the opportunity to collaborate and support each other face to face. I want to comment on the press release we sent out on July 14 regarding the unsolicited offers from Americana Partners to acquire Westwood. As noted in the press release, Westwood's Board of Directors, in consultation with its advisors and in accordance with its fiduciary duties, previously reviewed Americana's proposal and determined unanimously that it significantly undervalues Westwood relative to the company's standalone plan. In reaching this determination, the Board also considered that Americana has not provided to Westwood any evidence of Americana's ability to finance its acquisition bid. We have worked diligently to position Westwood for success in the years ahead. Our primary focus is to provide superior risk adjusted performance and high quality service to our clients. Over the last few years, we've made significant investments in distribution resources and infrastructure. These investments are paying off as we have recently won sizable new client mandates. We will continue to leverage our distribution resources to pursue asset growth across multiple channels. We continue to assess corporate development opportunities, such as acquiring investment management or wealth management firms or hiring investment teams. Firms and or teams facing difficulty competing on a stand alone basis can benefit from integrating into our robust distribution and operational platform. Our solid balance sheet allows us to act expanded holistic wealth management offering to include complex financial and estate planning, private banking, alternative investment opportunities and a new digital client portal. We continue to incubate new investment strategies that serve demonstrated client needs in the marketplace. Once these track records season and demonstrate the ability to successfully deliver alpha, we will bring these strategies to market in our institutional, Intermediary and Wealth Channels. We have made significant investments in technology across the firm in recent years and now have a very modern, efficient operating platform. Over the course of the last year, we have reduced expenses, We have a great team in place and look forward to executing our plan to deliver long term value for our shareholders. This is all that I plan to say on this subject today, and we will not address speculative questions. I will now turn the call over to Terry Forbes, our CFO. Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $17,500,000 for the Q2 of 2021 compared to $18,300,000 in the 1st quarter $15,900,000 in the prior year 2nd quarter. Revenues were lower than the first quarter mainly due to lower performance based fees. Revenues were higher than last year's Q2, reflecting higher average assets under management. 2nd quarter net income of $1,000,000 or $0.12 per share was lower than net income of $4,100,000 or $0.52 per share in the 1st quarter, primarily due to higher realized and unrealized gains on private investments recorded in the Q1, partially offset by lower income taxes in the 2nd quarter. Non GAAP economic earnings were $2,800,000 or $0.35 per share in the current quarter versus $6,300,000 or $0.79 2nd quarter net income of $1,000,000 or $0.12 per share outperformed 20 20's 2nd quarter net loss of $2,600,000 or $0.33 per share, primarily on higher revenues and lower operating expenses, particularly foreign currency transaction losses. Economic earnings for the quarter was $2,800,000 or $0.35 per share compared with $200,000 or 0 point $14,400,000,000 at quarter end and consisted of institutional assets of $7,100,000,000 or 49 percent of the total wealth management assets of $4,400,000,000 or 31 percent of the total and mutual fund assets of $2,900,000,000 or 20 percent of the total. Over the quarter, we experienced market appreciation of $636,000,000 and net outflows of $722,000,000 Our financial position continues to be very solid with cash and short term investments at quarter end totaling $92,300,000 and a debt free balance sheet. We declared a regular cash dividend of $0.10 per common share payable on October 1, 2021 to stockholders of record on September 3, 2021. In addition, we are pleased to declare a special dividend of $2.50 per common share payable on August 20, 2021 to stockholders of record on August 6, 2021. That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website reflecting Q2 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. And we have a question from the line of Mac Sykes from Gabelli. Your question please. Well, good afternoon, gentlemen. I just two questions. First on the pipeline, can you just go over the specifics Again, what it was at the end of 1Q, what it is today at the end of 2Q, and what was funded and replaced? Just I wanted to get my numbers straight on that. Okay. And your second question? And just given the strong growth this quarter in terms of those inflows, does that create a halo effect for the firm to leverage other things that you may be working on at this point? Do you see that helping with close other sales? Thanks. Okay. Well, I'll answer that one first, Mac. Thanks for your questions. I do think that Positive momentum in the institutional sales side begets more positive momentum in other products. For example, We've had a lot of success recently in small cap and as we are approaching a soft close, We've announced the soft close of SmallCap and approaching capacity. We are hopeful that we are able to draft off of that success With our SMIDCap product, which is really next step for growth, we have been approved by 2 of the major consulting firms And buy rated, and we expect to see some good activity in that product drafting off of the success we've had in small cap. As far as the pipeline goes, we are trying to look back at what we said last quarter And where we are today and it looks like the numbers of 1,000,000,000,514 Relative to the ins and outs. Okay. And then one last question, Brian, how should we think about the expense benefit from the AVEVA change in the second half? Well, the personnel left in early December of last year And as part of our transition services agreement with AVEVA, we agreed to continue to manage the funds until April 1 this year. And so all of the office expense associated with the Boston office and all of the expense associated with The Global Convertibles team went back to AVEVA. So you will not see that expense going forward. Okay, great. Thanks guys. That's helpful. Okay. Thanks, Mac. Thank you. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Brian Casey for any further remarks. Thank you, Jonathan, and thank everyone for taking time to listen to the call today. If you have any further questions, Please visit our website, westwoodgroup.com or call Terry or myself directly. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.