Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the first quarter 2020 westwards holding group earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone as a reminder, today's program.
He is being recorded I would now like to introduce your host for todays program truly garen.
Animals Council and Chief compliance Officer. Please go ahead.
Thank you and welcome to our first quarter 2020 earnings Conference call.
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 factors that could cause such a difference is included in our press release issued earlier today as well listen or.
Form 10-Q for the quarter ended March 31st 2020 that as 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 stay.
In addition in accordance with FCC rules concerning non-GAAP financial measures 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 time to listen to our quarterly earnings call. During these unprecedented times, we hope you're keeping safe and what are difficult circumstances for all of us as always I'll discuss our quarterly earnings and will cover the impact of the cobot 19 crisis on our company.
Looking back the past quarter was one for the record books, the global Cobot 19 pandemic swept across the globe, sending liquidity and returns sharply lower with much of the pain felt in March.
The S&P 500 separate the worst first quarter performance since 1928, well global equity and fixed income markets were equally better.
Investors remain focused on one the number of new cases that the virus may peak for clues about the future.
The path to economic recovery is anything but clear.
And our U.S. value equity products, the unprecedented sell off in equities with large in absolute terms, but higher quality companies up and down the market cap spectrum, where the best relative performers.
Every single one of our U.S. value strategies outperformed its pass a benchmark as the benefits of active management were clearly evident.
Our flagship Largecap value strategy showed resilience during the sell off capturing only about 85% of the downside and posting nearly 400 basis points of outperformance relative to the Russell 1000 value index.
Largecap value was ahead of the benchmark over multiple time periods and its ranking among institutional largecap value peers remains strong.
During the first quarter or large cap value strategy was in the top decile for the trailing three year period, and then the top cortile for the trailing one five and seven year periods. Our large cap select strategy also finished the quarter I had other Russell 1000 value benchmark and it now possesses a ranking and the top decile among.
Institutional peers in the investment Largecap value manager universe for the trailing three year time period.
Our smid cap strategy also beat the Russell 2500 value index by over 400 basis points and now has returns above the benchmark and most trailing year periods rankings. Among institutional peers were also strong strategy now ranks in the top half ranking for the trailing five and seven years and the top cortile for.
The trailing one and three year time periods.
Our portfolio managers have worked hard to improve the track record and we're seeing growing interest in the strategy from the institutional channel [laughter] small cap was the hardest hit sector of our U.S. value strategies, but our portfolio managers continue to focus on finding companies with strong fundamental qualities and finished the quarter ahead of the Russell 2000 value benchmark.
By approximately 260 basis points.
Our institutional strategy also maintained attractive peer rankings with a top one third placement for the quarter and trailing one year time period.
Small caps longer term tracker her places than in the top decile over the trailing 710 and since inception time periods.
As we work through the economic situation created by the Cobot night team market volatility will create an attractive investment opportunity for high conviction actively managed portfolio centered around quality and value well the value style, which emphasizes companies priced at low valuation levels has historically performed best coming out of recession.
Today, many companies have higher debt levels than in past cycles and may find themselves with limited options.
Financial distress is particularly acute in the energy sector and we're already seeing several companies filing for bankruptcy protection as the market pays more attention a balance sheets. The cream will rise to the top and the debt laden companies of the past cycle will falter.
Our investment process is always incorporated a fundamental understanding of a candidates balance sheet and that has historically served by our clients well in times of stress.
Many index funds held more than one third of their portfolio when companies with zero profit and high debt levels, increasing losses in debt will kill a lot of these companies and we believe this to be an opportune time for investors to sell index funds and lean in on active managers, who can thoughtfully navigate through the minefield of winners and losers.
There's.
Turning now to our multi asset group our product line up in multi asset holds an array of strategies aligned to cross the risk and return spectrum that are tailored for client specific risk profile and investment objective.
Income opportunity our largest strategy in the group showed attractive characteristics relative to the equity markets. However, investors rushed to assets perceived as safe pushing treasury or turns up and holding back our relative performance.
Asset classes, such as preferred convertible bonds and mortgage backed securities experience large declines during the quarter.
The drop in convertible securities has provided opportunities not seen since the global financial crisis and has created an opportune time for investors to look at strategies, such as our global convertible in alternative income strategies that have historically delivered solid risk adjusted results.
Our global convertible in alternative income strategies performed as expected and acted as diversifiers, an asset allocation mix during a very difficult and volatile time.
Correlations across capital markets went to one and volatility shot up to levels last seen during the global financial crisis. The Westwood alternative income strategy ticker symbol W.M. and I X was raised a four stars by Morningstar.
Among institutional peers, our alternative income strategy ranked in the top 20% for the trailing one year and top decile and the trailing five seven and 10 year time periods.
In emerging markets. The valuation case remains positive, particularly relative to develop markets. Following the asset classes underperformance of recent years in our strategies performance fell behind primarily due to our underweight in China, and Hong Kong globally emerging markets had unprecedented volatility and the reaction to cope with nights.
Team with Swift and indiscriminate.
Investors reach for any kind of liquidity and these markets were particularly impacted by this flight to liquidity in safety.
This reaction also caused currencies in several emerging market countries in which we invest including Brazil, Indonesia, Mexico, Chile to see larger Selloffs. We do not believe this volatility is over yet the duration and depth of the shock waves are still to be determined and will vary across geography.
Outside China some of the largest emerging markets are in the middle block Downs and government economic reactions are evolving.
As an or other strategies dislocations in these markets have created opportunities to invest in companies with strong management team's strong cash flow and solid balance sheets.
All right emphasis on quality companies has enabled us to manage through past prices and gives us conviction that our holdings will be well position for the long run.
Shifting to wealth management, our teams in Dallas, and Houston had been actively contacting clients to assist them through the market uncertainty.
Many of our larger high net worth clients are choosing to add to their accounts. During this time to take advantage of the selloff and positioning themselves for an eventual recovery.
We have brought in service offerings at Westwood private bank for high net worth clients, improving our ability to retain clients and the Westwood branded ecosystem. The combination of banking services integrated with Westwood's existing financial planning Trust and investment services is resonating well with our clients.
As we move forward Westwood Trust will begin rolling out our new digital portal to allow us to better engage with clients.
The select equity strategy managed out of Westwood Trust, Houston office thoughts risk management metrics work as expected this quarter posting outperformance against its benchmark.
Select equity and its tax efficient counterpart is designed to provide a high quality low turnover portfolio with risk controls for downside protection.
At the market's lows this quarter, both held up well due to the emphasis on risk control and investments in companies with high quality balance sheets.
Both versions of our strategy recently completed their three year track record and are ahead of their global benchmark.
Additionally, we taxloss harvests throughout the year instead of waiting until year end, which helps lower our clients tax bills and has provided over 200 basis points of additional annualized alpha over the last three years.
And our institutional an intermediary sales group, we had inflows of nearly 400 million and 950 million and outflows for total net outflows of 560 million.
Most of the outflows were in our sub advisory relationships and large cap value global converts alternative income and emerging markets.
Small cap was again are most successful strategy with net inflows in the quarter as existing clients added funds to their accounts and new clients were earned into our mutual fund.
With the strong relative performance and our U.S. strategies, we feel that we're well positioned to capture sales in the current environment.
The investments, we've made and distribution infrastructure and alignment of investment teams vehicles pricing product definitions risk guidelines and messaging have allowed us to create a cohesive message that positions our sales teams for success.
Our intermediary and institutional investment teams continue to work on adding consultant approvals and overall, our pipeline remains healthy and spread across several different strategies.
New opportunities were added in small cap and income opportunity during the quarter and a large portion of our pipeline is in the mid to late stage and we are hopeful of decisions throughout the year.
We have made it well within the Red zone on approvals for our small cap fund at several of the largest warehouses.
Although cobot 19 has created market disruptions and slowed the sales cycle with prospects. Our distribution teams continue to execute on our plan to build a broader more sustainable distribution business and our client services teams continue to provide strong service to our clients.
Well, we're not able to conduct face to face meetings. Our teams are functioning quite normally we did an online campaign to 25000 advisors a few weeks ago, and we were thrilled to see over 10000 views.
Conference calls portfolio updates Rps and questionnaires continue as usual, we're cognizant of the fact that clients and consultants need timely and relevant communication.
They need communication on how the pandemic is affecting portfolios and our portfolio investment decisions and they're interested to know how our business continuity plan is functioning and changing.
Our success working remotely is also a key point of inquiry as clients worked to understand how we've protected the integrity of our business in this environment.
Prior to Cobot 19, the asset management industry was already experiencing disruption on several fronts.
Including fee compression margin erosion, and rising data technology and other costs.
As I've noted in the past Westwood made major investments in technology to reduce costs gain operational efficiencies prepare our business for disruptions and increase our agility.
Given recent events these have proven to be a wise investment as we have not only increased efficiency, but we're able to move to a fully operational remote working environment with little to no disruption.
We will continue to evaluate our business and take meaningful steps to reduce our cost structure.
To date, we've identified over 750000 of cost reductions that are being implemented or in process over the balance of the year.
We've been researching the outsourcing of trading for the past six months and recently made the decision to move forward with this project.
We will move to an outsourced trading model later this summer and expect to save over $1 million per year beginning in 2021.
We will continue to utilize technology to define our future state to be more efficient wherever possible we.
We will close or eliminate commercially on Bible funds and put only our best products and people on the field.
Although financial performance over the last year has been disappointing.
We continue to execute on numerous initiatives to strengthen our foundation for the future.
Our partnership with them Best cloud continues to reap operational benefits the U.S. value at multi asset strategies are delivering alpha.
And we have commitments from private wealth clients for a new credit opportunities fund that we launched a few weeks ago.
We expect industrywide disruption to continue and the steps we've taken to reinvent ourselves have placed us in a position to survive and grow.
Finally, I want to emphasize that the health and safety of our employees and their families is our first priority all our employees are well.
Working remotely and completing their work in an efficient manner, we understand that we have the business Darren and we're working hard to balance the company's needs with the employees personal needs.
I'm really proud of everyone at Westwood and how well everyone is working together yet apart during this difficult time.
Our customers still have goals and priorities and we will continue to service them to the best of our ability.
I'll now turn the call over to Terry Forbes our CFO.
Thanks, Brian and good afternoon, everyone. Today, we reported total revenues of 16.7 million for the first quarter of 2020 compared to 18.6 million in the fourth quarter of 2019, and 23.9 million in the prior years first quarter the decrease from the fourth.
Quarter and the prior years first quarter was primarily due to lower average assets under management.
First quarter net income was 1.1 million or 13 cents per share compared to 2.5 million or 30 cents per share in the fourth quarter of 29 team.
The decrease primarily related to lower total revenues and unrealized losses on private investments, partially offset by lower operating expenses net income taxes.
Economic earnings a non-GAAP metric was 4.2 million or 50 cents per share in the current quarter versus 5.4 million or 64 cents per share in the fourth quarter of 2019.
First quarter net income of 1.1 million or 13 cents per share compared to <unk> point, fourmillion four or five cents per share in the prior years first quarter.
The increase primarily related to lower operating expenses, particularly employee compensation and benefits foreign currency transaction gains and income taxes, partially offset by lower revenues and unrealized losses on private investments.
Economic earnings for the quarter was 4.2 million or 50 cents per share compared to 4.1 million or 49 cents per share in the first quarter 2019th.
Firm wide assets under management totaled 11.6 billion at quarter end and consisted of institutional assets of 6.3 billion or 55% of the total wealth management assets of 3.8 billion or 33% of the total and mutual fund assets of 1.5 billion EUR 12.
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Over the quarter, we experienced market depreciation of 3 billion and net outflows of point 6 billion.
Our financial position continues to be very solid with cash and short term investments at quarter end totaling 82.4 million and the debt free balance sheet.
In the first quarter, we repurchased approximately 272000 shares of our common stock for an aggregate purchase price of 4.9 million in April we repurchased an additional 407000 shares for an aggregate purchase price of approximately 8.1 million.
This completed the amount authorized under our share repurchase program.
That brings our prepared comments to close we encourage you to review our Investor presentation, we have posted on our website, reflecting first quarter 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.
Certainly ladies and gentlemen, 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 move yourself from the Q. Please press the pound key.
And our first question comes the line up Mac Sykes from Gabelli Your question. Please.
Oh good afternoon.
I was wondering can you talk a little bit about the outsourced treating aspect.
How is that work and how does it viewed in terms of institutional operational due diligence shares.
Sure all that thanks for your question. So we've spent about six months researching this and as we've described over a series of calls we've always been.
Very interested in being as efficient as possible technology really allows you to be efficient and we've spent a lot of time and energy on our technology journey over the last three and a have four years. This is simply a continuation of that journey.
Trading is something that has become much more automated in the last few years.
I was reminded of my first visit to the New York Stock Exchange, which was about 1985.
And it was a you had paper up to your ankles and everyone was yelling at screaming and I went took my family. There are few years ago to visit and it was it was like being in church. It was quiet.
People are.
Spending their day on their computers and it was a a completely different experience. So the world has become connected technologically trading is done technologically and it's it's simply the next a wrong in the latter for us in terms of our evolution to becoming a more a fish.
And and cutting edge technological firm.
Okay, and just along that line in terms of the wealth management, you've been making some inroads in terms of the.
Applications.
<unk> clients I mean, given that we've seen some stress in the markets and that would have been oh.
I'm pleased to improve engagement what did you see in terms of technology, there and the client conversations and.
And I guess engaging with the newer technologies that youve put forth.
Well, it's been a really amazing you know you plan you test you do everything you can to try to anticipate what might happen if.
If you're not able to come to work and and I guess when you think about that you think of things like an earthquake or a flood or a I don't think worldwide pandemic was was really on the forefront of anybody's mines, but nonetheless, we knobs to be able to come to work.
And we have not miss to be at Westwood I mean, we have been communicating every day as a management team.
We have communicated a couple of times, a week on or crisis management team to deal with any issues or problems, but as far as reaching out to clients. We're able to do it through a number of different ways and I think more than anything just picking up the phone and calling our clients the good old fashion.
One way is a good way to to remind them that we're here remind them that we care and that we're here to help and and we had a number of existing clients add money.
To their accounts to take advantage of some of the volatility.
But certainly in terms of just to answer your question about technology, we have.
The ability to communicate in multiple ways and and I think you. What you learned is what is the preferred way that a customer wants to communicate with you and with some people that some person with some people that's on the phone. Some people. It's a you know you get on and do a face time or as a meeting or you know just.
All the things that all of us have been doing but yeah, I think clients have really warmed up to the idea that you know we can we can still get a lot done without having to you know drive park their current come into an office.
Does that answer your question.
Hey, anything else Matt.
Sorry, just one last question in terms of the wealth management engagement the physical presence how do you see that evolving.
I'm kind of is it states open up how do you how do you see the office management and getting in touch with clients.
Hum physical basis, and the bank as well.
Well, it's interesting I you know I think we we have to you know two different client groups I would say not only at Westwood, but in the industry. You know historically the wealth management industry has catered to the baby Boomer generation because they're the ones that had all the money and that is is shifting now to.
The Gen X Gen wise, the millennials and their preference all the long forget about the pandemic is to communicate.
Through technology not to comment and visited office. So I I really think it will it may evolve to where the you know the the baby boomers don't feel like they need to come to the office as often as some of them like to come. So it's a it's going to be a profound change I think for the world, it's going to be interesting to see yeah.
Looking out my window in Dallas It at lots of cranes of office buildings going up in 60 days ago, we were close to zero percent unemployment and you know one of the fastest growing cities in America, and a it'll be interesting to see how that changes when we do up and backup.
Great. Thank you.
Okay. Thanks for your questions back.
Thank you once again, if you have a question at this time. Please press Star then one.
And this does conclude de question and answer session of today's program I'd like to hand, the program back to Brian Casey for any further remarks.
Okay, well, thanks again for less than to the call and you know in closing I'd like to add that you know, while we would qualify for government loans, Yeah, we really want that money to go to those who need at the most so we have not applied for nor do we intend to apply for a any government loans I hope everybody stays healthy in safe and we appreciate.
Right you're interested in Westwood. Please visit Westwood group Dot Com, if you have a any questions or give us a call directly thanks so much.
Thank you ladies and gentlemen few participation in today's conference. This does conclude the program you may now disconnect good day.
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