Q1 2020 Earnings Call

Thursday

Dead dead. Hello and welcome to the Xena Investment Management results for the first quarter of 2020 conference call. All participants will be in listen-only mode. Should you need assistance. Please send you a conference specialist, you're pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press * then two, please Note 8 Days event is being recorded. Oh now I just the conference over at Jessica Doran. Mr. One please. Go ahead.

Thank you operator. Good morning. And thank you for joining us on the investment management first quarter 2020 earnings call. I'm Jessica. Derin Chief Financial Officer with me today if chief executive officer and co-chief investment officer Rich. Koyzina our earnings press release contains the financial tables for the periods. We will be discussing. If you do not have a copy it can be obtained in the investor relations section on our website at ww.w replays of this call will be available for the next two weeks on our website month before we start we need to remind you that today's call may contain forward-looking statements and projections. We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from today's comment, please note. We do not undertake to update such information to reflect the impact of circumstances or events going forward in addition.

Please be advised that you to prohibitions on selective disclosures. We do not as a matter of policy to close material that is not public information on our conference calls. Now. Let me turn the call over to Rich Choi discuss our current view of the investing environment.

Thanks, Jessica. I want to start my remarks and observations. I never thought I would make in my lifetime the daily volatility of the average stock. The end of March was as high as it was during the Great Depression in nineteen twenty-nine, the wild swings that we experienced or a sign of total uncertainty plus or minus 689 percent in a day for individual stocks. It's a world where greed and fear are on steroids. It means investors just don't have a clue ma'am a regular person trying to hit pitches thrown by a major league pitcher. The swings would be wild and only randomly would they even touched the ball?

Investing is not about wild swings and value investing is about taking advantage of those that are swinging as if their eyes are closed investors today are all asking one primary question. How long will this economic crisis last? Are we in the Next Great Depression? Let's consider both possible answers. The bear case says back in the early stages of the decline. We just don't know how bad it will get and for how long it will go on.

The bull case says this is a virus definitely temporary and while we don't know the exact timing or path the recovery will come and it will ultimately last.

We don't know which scenario will play out. So in the meantime, what do we do?

The broad Market response as usual during a crisis has been to flee flee to safety today. That means most mostly means government bonds month. And if one must be exposed to equities then flee to what is already worked and that means run away from value compared this environment to what actually happened during the Great Depression. If an investor had bought the broad market index after the November nineteen twenty-nine crash associated with a peek invalid Market volatility that investor would have lost almost 18% in the next year.

An investor who bought a basket of the deepest value stocks at the same time would have fared worse losing almost 34% and I think that's where the opportunity is created. Most people are unable to stay the course, but if the investor out of five year Horizon the results were far different the broad Market investor would have lost 10% per year while the value investor wage positive 10% per year and it's this. Turns out to be not depression like well, that's easy and almost every. We're volunteers pleased value outperform the market that's because uncertainty East and uncertainty is not healthy for the valuation of cyclical stocks.

One last Point as a comparison of the two environments. I think it is worthwhile to remember that government policy. Today is the polar opposite of the policy followed during the Great Depression for Herbert Hoover said tightened today central banks around the world have been doing everything in their power to Stave off an extended downturn.

And it's trough in March the S&P 500 and the msci all-country indices at each fall in about by about 34% By the way, that decline is not all that different from what happened at the start of the Great Depression are deep value portfolios fell further as the market punished businesses already out of favor of bush has created value opportunities that rival any in modern history and for companies with strong financial capacity to survive and thrive beyond the crisis. For example largest folding General Electric is nearly 80% off. Its three-year High g g e has more than fifty billion dollars in cash and short-term borrowing availability for ge's most profitable business the aviation segment nearly shut down.

There's enough liquidity for a multi-year downturn at current sales levels. And it roughly five times. Our estimate of ge's normal earnings. We believe it is well worth being patient just a word or two about our business while our earnings were zero this quarter due primarily to the losses in our investment portfolios and the fact that off until mid quarter. We were executing a growth strategy. We still managed to earn a 32% operating margin. The good news is that we finished the quarter with approximately $200 and net positive flows not a big positive but positive nonetheless. The flows came across client types and needless to say we are encouraged by a client on going to commitment to us and to our disciplined execution of our value strategy.

I look forward to answering your

Questions and I will now turn the call back over to Jessica.

Thank you is really is discloses both Gap and as adjusted Financial results. We did not make any adjustments to our results during the first quarter of 2025 or 2019. However our comparative results for the fourth quarter of last year adjust for certain non-recurring compensation and benefits expenses. As Rich mentioned we recorded diluted earnings of zero cents per share for the first quarter compared to as adjusted diluted earnings of twenty cents per share last quarter and Seventeen cents per share for the first quarter of last year truck is worth 34.7 million for the quarter and operating income was 11.1 million. Our operating margin was 32.1% this quarter decreasing from home as adjusted 45.5% last quarter and from 43.3% in the first quarter of last year taking a closer look at our assets under management. We ended the quarter at home.

Point eight billion dollars down 35% from last quarter which ended at 41.2 billion and down 27.8% from the first quarter of last year which ended at 37.1 volts the decrease in assets under management from the fourth quarter of last year was driven by market appreciation of fourteen point six billion dollars partially offset by net inflows of two billion dollars on the decrease in the first quarter of last year reflect ten point eight billion dollars in Market depreciation partially offset by net inflows of five billion dollars at March thirty first two thousand assets under management consisted of ten point eight billion dollars and separately managed accounts, 14.3 billion and sub devised accounts and one point seven billion dollars in our Cuisine of fun month compared to last quarter assets under management across all channels decreased with separately managed accounts reflecting 5.7 billion dollars in Market depreciation partially offset by 2.1 billion. Yep.

And that includes some advised accounts reflecting eight point 1 billion dollars in Market appreciation. And that's that's in Pasadena fun. Seeing point eight billion dollars in Market appreciation partially up to a point 1 billion dollars a net inflow average assets under management for the first quarter of 2020. We're thirty five point four billion dollars a decrease of 7.1% from last quarter end up 1.9% from the first quarter of last year revenues decreased 9.8% from last quarter and 7.3% from the first quarter of last year the decreases the last quarter in the first quarter of last year reflect decreases in average assets under management and weighted average fee rate the decrease from the first quarter of last year primarily reflect a decrease in average assets under management during the quarter. We did not recognize any performance fees similar to last quarter and compared 2.4 million dollars recognized in first quarter of last year are weighted average fee rate was 13 month.

.1. Basis points for the quarter

Compared to 40.4 basis points left quarter and 41 basis points for the first quarter of last year. Excuse me, 4141 basis points for a quarter of last year asset mix and the impact of swings and performances and Fulcrum fees are all contributors to changes in our overall weighted average fee rate are weighted average fee rate Thursday. We managed accounts to 52.6 basis points for the quarter compared to 54.1 basis points the last quarter and fifty five basis points for the first quarter of last year and the decrease from the fourth quarters of 2019 reflect the shift and assets just to toward strategies that typically carry lower fee rates.

Are weighted average. For seven months accounts was 26.6 basis points for the quarter compared to 27.3 basis points left quarter and 29.5 basis points off first quarter of last year. The weighted average pay rate for the quarter reflects the reduction in the base see the certain account related to the fulcrum fee Arrangements of one point relationship these be arranging require a reduction in the base. See if the investment strategy underperforms. It's relevant Benchmark or allow for our performance see if the strategy outperforms its Benchmark during the first quarter of two thousand twenty fourth quarter of 2019 and first quarter of 2019. We recognized a $1000000 point eight million and two million dollar reduction in basis respectively am related to this client relationship.

These fees are calculated quarterly and compare relative performance over a three-year measurement. To the extent the 3-year performance records of these accounts fluctuates relative to their relevant Benchmark amount of feces recognize my very are weighted average pay rate for busyness funds with 62.5 basis points for the quarter decreasing from 69 basis points last quarter ton, 67.9 basis points for the first quarter of last year the decrease from the 4th and first quarters of 2019 reflects an increase in funding expense cap reimbursements recognition during the first quarter of 2020, which are presented net against Revenue the remainder of the decrease from the 4th and first quarters of 2019 reflects the shift in assets toward products that General lower fee rate total operating expenses for twenty three point six million dollars for the first quarter of 2020 decreasing from 43.7 million for the fourth quarter wage.

2019 and increasing from twenty one point two million dollars for the first quarter of 2019 the decrease from the fourth quarter of 2019 reflects the absence of a one-time expense related to the issuance of certain unit-based Awards and a reduction in the costs related to employee departures offset by headcount growth the increase from the first quarter of 2019 reflects an increase wage and headcount growth and the cost of employee departures offset by a decrease in the bonus accrual.

Other expense was $9 for the quarter as Rich mentioned driven primarily by the performance of our investments.

Effective rate for unincorporated and other business taxes was 29.9% this quarter compared to 3.3% last quarter and 3.9% in the first quarter of last year of fluctuation is effective rates affect the impact of permanently non-deductible expenses as well as unrealized losses. We expect the effective rate associated with the unincorporated other business taxes of our operating company to be between three and 5% on an ongoing basis are effective rate for our corporate income taxes and other business taxes reflected 100% this quarter compared to our effective tax rate of 27.6% last quarter and 30.6% for the first quarter of last year the fluctuation effective rates reflect the impact of permanent differences and the revaluation of deferred taxes. We expect this rate excluding these items to be between $23 and 25% on an ongoing birth.

The allocation to the non-public members of our operating company with approx, 77.1% of the operating companies and income for the first quarter of 2020 compared to 74.6% last quarter and 74.1% for the first quarter of last year. The various needs percentages is the result of changes in our ownership interest in the operating company during the quarter through our stock Buy-Back program. We repurchased and retired approximately 919000 shares of common stock and Class C units for six point two million at March 31st. There was approximately twelve point six million dollars remaining and the repurchase program in spite of the Market's decline. We have ample resources to continue operating unaffected. We ended the quarter with twenty point five million dollars in cash and cash equivalents as well as 7.1 million dollars in short-term Investments. We declared a $0.03 per share quarterly dead.

And last night. Thank you for joining us. We now be happy to take any questions.

Yes, thank you. We will now begin the question-and-answer session to ask you a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the case to enjoy your question, please press * then two at this time. We will pause momentarily to assemble the roster.

And the first question comes from Sam Shelton with punch.

Hi Rich in Jessica. Thanks for taking my questions Rich. Maybe if you could start with what sectors are most attractive to you and deep value today, and maybe if you could give your thoughts on investing the interview space today as well.

Sure energy is up there on the list, but I will also say almost everything cyclical where I'm surprised is not threatened by the the decline in revenues associated with the economic downturn. So that would include industrial cyclicals summer Consumer cyclicals Financial Services. That's that's the Grange energy is an interesting life generally speaking because for companies don't have that the climbs and energy prices, even though there's substantial generally won't lead to negative cash flows because the companies have the ability to shut down their Capital spending and so the the

even at fairly low low price

Only stresses that will come president stresses that will call them are companies that are of existential leverage. So we've been buying in energy and effort service where we fought that despite very very weak current results. There was enough natural resources to make it through we expect wage but the supply response will be big the demand response came first obviously from the shutdown of the global economies and the supply response is now happening. And so when things do recover which they will that's only the timing that's unknown. The oil price almost has to returned wage levels that will cause investment to re-emerge and therefore these companies given how much they fall in or selling it incredibly attractive prices.

Great, maybe on the on the client-side. Can you talk about how your existing clients are reacting to the current environment and conversations that you're having with them? And are you sensing life-changing interest about value investing in the last two months during conversations with institutions?

I would say that the investigator the investors are reacting in about as cold as we can. Hope for they said they understand what we do and what they signed up for broadly speaking. Nobody's happy with the results. Obviously, we're not happy with the results, but the results are not out of line with what they would have expected given the environment and so the general reaction has been to rebalance towards us. So a lot of the flows that happened to us during the quarter happened in the last six weeks of the quarter as as valuations really got low and we we saw us doing what we would hope it would do which is dead.

Reallocate towards us and rebalance their portfolios as we became our percentage because of the Market's moves Monday more of the flows that we've seen have come from existing accounts other than new accounts. So let's say that there's a big change out there in the marketplace of people suddenly embracing value. I I don't think I would say that I would say that we're having lots and lots of conversations with with with clients and Consultants those what is being explored is is this month, so that's an incredible time that you have almost no choice but to try and put money to work in these kinds of companies and but that doesn't mean they're making

Decision, I would say or type.

Why is good continues to be good? There are actually finals that are going on. There are actually client and Prospect presentations to say that I sense a major shift know but certainly a lot of interest.

Okay, great my last question and then I'll let somebody else on but on the mutual fund business. It's obviously been an area of investment for you guys in recent years. Can you talk about how that box has performed versus your expectations over the last two years and how close is it to breaking even today?

It's a very it's a I'm going to give you a wishy-washy answer. But if you look purely at the neutral fun business and didn't count the sub-advisor relationships, we that we want as a result of our Outreach efforts. You would say, it's just not braking. It's below break-even. We went to it with expectations that we will be Beyond break-even by now dead of course performance hasn't helped and it's anti value environment for a firm. That's extremely

Deep valley it's not very conducive to growing a mutual fund business. So the question is do you like to keep going until conditions are better, which is Thursday.

Instinct having said that the accounts that we've won as the result of our of our calling on intermediaries dead and gone into our front where we've still managed the money as a sub advisor or in some other fashion way way more than pay for the cost that we expended on this.

Into a reason to change the strategy where we going to want to. A good format.

Looks in Garner aspects during a period of good performance then hopefully then we'll have been proven to be right and if it turns out that we can't seem to figure out what to do at that point.

All right. Thank you. And that concludes question-and-answer session as well as the conference. Thank you for attending today's presentation. You may notice that your lines.

Thank you.