Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2019, Westwood Holdings Group earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be question and answer session to ask a question. During the session you will need to press star one on your telephone as a reminder.
These programs may be recorded and now I'd like to introduce your host for today's program Julie gear on General Counsel and Chief Compliance Officer. Please go ahead.
Thank you good afternoon welcome to our third quarter 2019 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.
All information concerning factors that can cause such a difference is included in our press release issued earlier today.
Well as in our Form 10-Q for the quarter ended September Thirtyth 2019 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 accordance with FCC rules concerning non-GAAP financial measures reconciliation of our economic earnings in our economic earnings per share to that 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 carry Forbes, our Chief Financial Officer, I'll now turn the call over to Brian Casey.
Good afternoon, and thank you for taking the time to listen to our quarterly earnings call as always I'll start with comments on the market environment, an investment teams and finish with comments on our business.
Volatility continue than the third quarter as markets worldwide fell in August only to rally much more in September .
In the U.S. the fed pivot officially became a 180 as expectations were realized in the fed cut rates twice.
Siding muted inflation slowing business investments and international uncertainties as rationale for their decision to cut rates.
At the aggregate global level concerns persisted over the direction of the economic cycle. Thanks to declines in leading economic indicators in key markets and uncertainty from the U.S., China trade dispute.
The U.S. added two investor apprehension at the end of the quarter with the launch of the presidential impeachment inquiry.
Increased volatility and an inverted yield curve in the U.S. created a favorable environment for high quality investments as investors turn to companies position to whether an economic slowdown.
Companies with strong cash generation and solid balance sheets performed better during the quarter.
History show that post a yield curve inversion such high quality factors can deliver alpha for several more quarters.
As a result of the third quarters volatility the U.S. markets were positive while global equity markets ended with a slight decline for the quarter.
With election rhetoric set to heat up approaching the 2020 presidential election, we anticipate further uncertainty as market to assess each candidates potential impact to the financial markets.
That continues its shift towards easing monetary policy constraints to further support the economy and our expectations are for global interest rate policy to remain supportive of equity markets.
We will remain vigilant and assessing absolute risk in client portfolios and protecting client capital as market volatility shows no sign of abatement.
Our first goal is to protect our clients capital, particularly as we move later and later into the business cycle. We do this by investing in high quality businesses, which we believe have limited downside risk principles that have served our clients well and continue to resonate with prospective clients.
Our U.S. value equity products emphasized in approach of high quality and value, which fared well during a volatile quarter and once again showed notable outperformance during August sell off.
Small cap delivered another strong quarter, particularly during the sell off in August and it's over 800 basis points ahead of the Russell 2000 value during the third quarter 2019.
Our small cap mutual fund W.H.G.S. X five star rated at Morningstar isn't the top decile on a trailing tenure and year to date basis, and then the top cortile on a trailing one three and five year basis through September Thirtyth of 2019.
This is a great accomplishment for our portfolio management team and our entire team of research analysts to provide investment ideas for the small cap strategy.
Interest in the strategy remains high and we're excited about its opportunity in the years ahead.
Our Smidcap strategy also finished better than its Russell 2500 value benchmark this quarter and for the first three quarters through September Thirtyth is over 500 basis points ahead for the year.
The trailing three year returns through September Thirtyth are ahead of the benchmark and have begun to improve relative to pure rankings.
We look forward to growing this strategy in the years ahead.
Largecap value added a quarter of outperformance against the Russell 1000 value with strong downside protection during the intra quarter sell off the large cap mutual fund W.H. G. L. FX has a top cortile ranking on a trailing one year basis and Morningstars large blend category and is in the top third through the third quarter.
Our institutional strategy also has strong rankings in the investment manager universe with top Cortile rankings here today and for the trailing one three and five year periods.
Largecap select also managed by the large cap value team outperformed adding further alpha to its more than five year track record.
This product has maintained its top ranking in the investment universe, among large cap value peers over the five year period and ended September Thirtyth and is in the second percentile over the last three years.
Within our multi asset strategies, our product line up now holds an array of strategies aligned across the risk and return spectrum that are tailored for a client specific risk profile and investment objective.
Income opportunity produced a quarter of strong absolute and relative returns good selection and active allocation into longer maturity fixed income securities helped provide very strong downside, while delivering strong performance.
The mutual fund W.H.G.I. X five star rated at Morningstar is ranked in the top decile on the Morningstar, 30% to 50% equity universe for the quarter and year to date through September Thirtyth.
It is also ranked in the top 12% for the trailing one in three years top cortile over a five year basis and top decile over the trailing 10 years as of September Thirtyth.
We expect this strategy to deliver an active allocation at a point in the cycle were managing both fixed income and equities can help provide higher income with less volatility than either an investment in fixed income or equity alone would provide.
Our convertible strategies, both global long only and U.S. long only strategies, we're ahead of their respective benchmarks for the quarter.
While our market neutral income strategy continued to build on its excellent start to the year.
The market neutral income mutual fund W.M. and I X is ranked at the top 30% appears for the quarter and year to date through September it isn't the 11th percentile and 6% on a trailing one year basis, among the Morningstar U.S. market neutral universe.
With the volatility in global markets likely to persist the asymmetric nature of convertible bonds gives investors a lower risk equity proxy that should perform well relative to stocks their low correlation equity markets, coupled with low volatility and steady returns positions convertibles wellness environment.
Our confidence that the uncertain future will create more volatility in markets has us extremely excited for the prospects of our convertible strategies.
In emerging markets the Asia Pacific region performed best with strong performance in Korea, Taiwan in India, China.
China posted yet another unimpressive quarter with the loss as the deepening domestic slowdown was met with only a tepid response from policymakers.
Although still down on the quarter, India saw strong rally in September following a massive fiscal stimulus in the form of corporate tax rate cuts.
Latin America fell at central banks, and the largest three markets, Brazil, Mexico, and Chile implemented further monetary easing in the form of rate cuts.
Our emerging market strategies, all outperformed in the quarter and remain well ahead of their benchmarks here today.
Emerging markets outperformed the M.S.C.I. emerging markets index by over 100 basis points in the third quarter and is over 350 basis points ahead for the first three quarters.
M. plus also outperformed the index in the quarter and year to date through September well IBM Smid cap beat the M.S.C.I.M. Smid cap index by over 250 basis points in the third quarter and is over 600 basis points ahead year to date through September Thirtyth.
Markets remain volatile and react swiftly and often irrationally to global and regional development. We continue to be very focus on constantly evaluating the impact of developments around our holdings and taking advantage of the irrational overreactions by the markets where appropriate.
Shifting now to wealth management, our teams in Dallas and Houston continue to produce great results client retention remains high at over 97% and our Houston Group again posted strong new business flows that were up nearly 100% year over year.
In fact, Houston has set a new high watermark and new assets gained.
We held several klein events that had been effective towards maintaining close relationships with existing clients and building trust with our prospective clients.
Business in Texas is booming with job creation and significant wealth creation, providing a nice tailwind for our private wealth pipeline.
Our tax efficient select equity strategy managed out of the Houston office outperform the Russell 3000 index for the quarter.
Select equity is designed to provide a high quality low turnover tax efficient portfolio with strong risk controls for downside protection.
We saw our risk management metrics in full action in August when markets fell nearly 2% on tariff concerns and the strategy outperformed its benchmark.
Your today through September our downside capture and this strategy has remained below 80% on days when the market was down more than 1%.
Select equity gained assets in both our Houston and Dallas offices with assets under management, surpassing 700 million.
This is an impressive start for a product that began in 2017 and we look forward to completing a three year record at year end.
Westwood private bank held its grand opening last week, and we had over 60 clients and prospective clients and attended the concept of having everything in one place with the ability to lend against an existing portfolio combined with bill paying and concierge private banking services is resonating extremely well with our clients.
As we perfect the model in Dallas, we intend to work with Westwood private bank to extend the brand to Houston pending regulatory approval.
In institutional into intermediary sales, our institutional and retail businesses had third quarter inflows of approximately 260 million that were offset by outflows of 700 million producing net outflows of 440 million.
Outflows were primarily in the income opportunity strategy, however, other strategies, including emerging markets Largecap and smid cap also had outflows.
Breaking down activity on the strategy level, our small cap franchise continues to gain momentum with searches and inbound inquiries on both the institutional and retail fraud.
Smallcap is our most successful strategy year to date in terms of net flows.
Our expanded and reorganized institutional intermediary sales and service groups are fully in place.
Both groups are generating significant meeting activity and growing our new business opportunity pipeline with key platform approvals advancing our small cap strategy an intermediary space.
Our portfolio managers have done several interviews recently in an attempt to increase visibility in tandem with our five star rating attracting greater interest.
We have recently been approved at one of the top three consulting firms and we are beginning to see search activity.
In Smid cap, we lost a client due to manager consolidation, but with improved performance. We're now able to move into offense and are participating in several new searches.
Market neutral income was our largest gainer of net new assets during the quarter as our partner a veeva investors allocated additional assets to the strategy.
In income opportunity our sales and service teams are working to ensure all parties clearly understand our path forward and our portfolio managers continue to work on producing the quality results that are clients expect.
However, as we've discussed in the past not all consultant seven braced our expanded approach and investment team changes as a result, there were some consultant recommendations earlier this year to clients recommending a move away from income opportunity.
Over some of those clients have been slow to act and outflows and then come opportunity were less than expected in the third quarter.
We are capitalizing on income opportunities five star rating and top decile Morningstar investment performance and peer rankings year to date.
The new sales campaign in the retail space and a roadshow across all territories in the fourth quarter.
Sales in our Largecap strategy remain challenging due to lack of demand for active management. Despite the strategy strong performance.
Recent outperformance has resulted in some clients overweight of in the large cap asset class, necessitating a rebalance, which gave rise to outflows in the third quarter for the strategy.
We have taken it continued to take steps to strengthen our relationship with intermediaries clients and consultant.
Formax has strengthened across many of our strategies and we are optimistic in our ability to grow our sales and service teams are focused on target that activity and client engagement.
Our on the ground wholesaling is lifting sales, particularly in the previously uncovered territories with over 900 meetings held during the quarter.
We are pursuing more platform approvals to make our funds more widely available to investors and we hope to see positive flows into our mutual funds and 2020.
With increased sales activity, our pipeline is healthy and spread across several different strategies. We expect some of the active opportunities to approach decisions later this year or early in 2020.
Our product management and investment teams continue to work closely together to ensure that our product offerings are aligned properly for commercial success and focused in areas, where we can add value and grow assets under management.
We spent most of this year completing our investment in distribution and getting the right talent on the field.
We have spent considerable time on product evolution and assessing the commercial viability of our product line.
We have closed for non core products and evolved others, along the multi asset continuum with an eye towards a clear vision and focus on our core competencies.
We're now positioned to serve investors across absolute return income oriented and total return outcomes, which will be formally announced early in November .
Also conditional on the Fccs approval, we expect to announce a new sensible fees structure and three mutual funds as part of our mission to better align fees with client outcomes.
As we invest in building retail intermediary distribution is critical for the positioning of our brand in the marketplace that we emphasize high quality value equity and expanded multi asset franchise in emerging markets expertise.
We have invested heavily to get the right technology and people in place. So we are positioned to take on new opportunities support our clients' needs and return Westwood to a growth trajectory.
Our sales resources and activity levels are at the highest point in our history, but building new relationships reinvigorating longstanding relationships and introducing new strategies teams and capabilities takes time.
Westwood strategies are well positioned in areas, where active management can take advantage of mispriced securities and deliver excess return and specific outcomes.
Clients are looking for differentiated results and we have demonstrated an ability to deliver a differentiated client experience as evidenced by our high active share equity strategies with strong track records.
The asset management industry has reached a point of overcapacity and appears ripe for consolidation in the years ahead.
With passive taking more than a 50% market share there is less active management opportunity, which is driving price cutting while at the same time all firms are experiencing rising data and technology costs.
We are seeing a number of opportunities to acquire stranded teams or small firms looking for enhanced distribution.
Ideal candidate would be a firm with fixed income expertise differentiated equity manufacturing and a private wealth business with an attractive demographic profile.
We continue to look for accretive opportunities and will always be disciplined with our shareholder capital.
Well near term results are clearly disappointing we've been building and transforming ourselves over the last few years in the face of adversity and industry headwinds.
While many in the industry or simply waiting for the active management come back we have made major investments and are taking bold steps to reinvent ourselves to become less of a product focus from and more of a solutions oriented firm.
We have reduced head count cut underperforming or commercially unbuyable funds built the largest salesforce in our history.
Added transformative technology, including a private wealth platform dedicated to connecting digitally with younger generations.
Added financial planning and estate planning private equity and partnered with chair as to create Westwood private bank.
In the years ahead, the industry is likely to consolidate pricing in compensation will adjust to new levels and only the strong will survive.
We believe the investments we've made will not only allow us to survive but to be a leader a place that teams or firms want to join.
We're excited to see the array of solutions. We have created gained traction in the years ahead, well regaining sales momentum with our traditional institutional and retail products.
We appreciate our shareholders patient and firmly believe that the future is bright for Westwood and all our stakeholders.
I'll now turn the call over to Terry Forbes our CFO .
Thanks, Brian and good afternoon, everyone. Today, we reported total revenues of 19.9 million for the third quarter of 2019 compared to 21.7 million in the second quarter and 29.9 million in the prior years third quarter. The decrease from the second quarter was primarily due to lower average.
Assets under management, resulting from net outflows the decrease from the prior years third quarter was primarily due to lower average assets under management, resulting from net outflows, partially offset by higher performance based fees.
Third quarter net income of 1.1 million or 13 cents per share compared to 1.9 million or 22 cents per share in the second quarter decreased primarily related to lower total revenues, partially offset by 8.3 million foreign currency gain net of tax and the current quarter economic earnings.
non-GAAP metric was 3.9 million or 46 cents per share in the current quarter versus 4.8 million or 56 cents per share in the second quarter.
Third quarter net income of 1.1 million or 13 cents per share compared to 5.4 million or 62 cents per share in the prior years third quarter decreased primarily related to lower total revenues, partially offset by lower incentive compensation expense and a point 3 million foreign currency gain net of tax in the current costs.
Sure.
Economic earnings for the quarter was 3.9 million or 46 cents per share compared to 9.5 million or $1.11 cents per share in third quarter 2018.
Firm wide assets under management totaled 15 billion at quarter end and consisted of institutional assets of 8.3 billion or 56% of the total wealth management assets, a 4.3 billion or 29% of the total and mutual fund assets of 2.3 billion or 15% of the total over.
For the year, we have experienced net outflows of 3.8 billion end market appreciation of 2.2 billion.
Our financial position continues to be very solid with cash and short term investments at quarter end totaling 101.2 million and a debt free balance sheet.
Our board of directors approved a quarterly cash dividend of 72 cents per share payable on January 2nd 2020 to stockholders of record on December six 2019. This represents an annualized dividend yield of 10% as at the closing price on October 29.
That brings our prepared comments to a close we encourage you to review our investor presentation, we have posted on our website, reflecting third quarter highlights as well as a discussion of our business product development and longer term trends in revenues earnings and dividends. We thank you for our interest in our company and we'll open the line to questions.
Certainly ladies and gentlemen, as a reminder, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the Q. Please press the pound key.
And our first question comes in my mind up Mark Sykes from Gabelli Your question. Please.
Good afternoon, everyone.
Good afternoon Mac.
Could you comment about the outlook for fund raising for strategies.
Performances improved this year.
Are you seeing in terms of end market demand for those products.
Well the E M asset class is certainly one that has it when that it's back I think when.
Investors look around the world and they look at the various asset classes that are.
Known for.
Being likely to produce Alpha EM is certainly one of them. We've had some good activity recently with the improved performance.
Hope to have something to announce next quarter with one of the larger firms that we are and chats with.
On a on the E M strategy so.
We're excited to talk to you about that and at a future date.
Great.
The balance sheet.
Hi.
No.
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And we find that it's something that's important for us as a.
As long term shareholder.
As far as.
The second part of your question with respect to organic growth.
I would say that we have worked really hard to build a sales team like we've never had before and that sales team.
If we add in the platform meetings that they had in addition to the meetings that are wholesalers had with advisors around the country.
We had over a thousand meetings during the quarter.
Going into 2020.
In addition, we have had a number of conversations with platforms and as you know platforms are shrinking their product shelf and it's very difficult to get onto a platform. These days, but we have made a lot of progress and really have three live opportunities and hope to have something.
Announced when I talk to you next next quarter.
Just to clarify in terms of.
The last question was more about inorganic growth and your desire to potentially.
Fixed income, perhaps wealth management I, just wanted to understand a little bit more.
Capacity.
Cash investments to fund those.
Against this is our ability to keep the payout high.
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I see okay, I'm, sorry, I missed.
Question I thought it was around organic growth.
Well, certainly having a strong balance sheet with over 100 million in cash allows us the flexibility to talk to very high quality firms that would have an interest in joining.
And joining Westwood.
As far as a dividend goes that's something we talk about every quarter and we'll talk about it again next quarter.
Okay. Thank you very much.
Thanks, Mike.
Thank you once again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
And I'm not showing any further questions in the queue at this time I'd like to hand, the program back diminishment for any further remarks.
Great well. Thank you appreciate everybodys time in less than today's call. If you have.
Like further information please visit our website at Westwood group Dot com pianist any specific questions feel free to call myself for or Terry Forbes, our CFO have great afternoon. 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.