Q2 2020 Pzena Investment Management Inc Earnings Call

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After today's presentation there'll be an opportunity to ask questions.

Last question My Press Star then one on your touched on time.

It's all your question. Please press Star then too.

Please.

So then it's John recorded.

Now lets turn.

[music] concert.

Jessica Doran.

Chief Financial Officer. Please go ahead.

Thank you operator.

Good morning, and thank you for joining us on that because they know investment management second quarter 2020 earnings call.

Hi, Jessica Doran Chief Financial Officer with me today is our Chief Executive Officer, and co Chief investment Officer, which to me.

Our earnings press release contains the financial tables for the periods, we will be disgusting.

Do not have a copy it can be obtained in the Investor Relations section on our website at Www Dot TV Dot com.

Replays of this call will be available for the next two weeks on our website.

Before we start we need to remind you that today's call may contain forward looking statements and projections.

We ask you refer to our most recent filings with the FCC for important factors that could cause actual results could differ materially from today's comments.

Please note that 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 had prohibitions on selective disclosure, we do not as a matter of policies to close material that is not public information on their conference call.

Now, let me turn the call over to rich will discuss our current you will see investing environment.

Thanks Jessica.

Last quarter my remark centered on the extreme volatility on the market during March.

Happened once before during the Great depression.

Here, we are pretty much wider and volatility has moderated and optimism as return.

During the second quarter, Yes, 500 continue to rise on the growing dominant simplifying stocks, which now represent almost 13% of damned access market cap and 4.3%.

Good companies.

Well, we have generally outperformed the markets from a bottom.

Still lag behind the indices over longer periods of time, raising age old questions its value investing broken.

[laughter] value was supposed to protect on the downside why does it appear to be so much more volatile.

Given these questions we wrote a white paper this quarter what these two hypotheses first.

Well reserved extreme volatility has made value investing look bad today.

Long term investors should match their investment horizon, which were the period over which they measure volatility.

It just seems illogical to want to compare long term returns with monthly volatility was it which is what most every investor ducts.

So I can.

Now you investing looks bad today, because the endpoint the so just started.

Looking.

Long term performance over a variety of then it's a better representation of how many strategies Africa.

The idea, but something has changed that makes value investing different than in the past its not defensible.

Buckets of value investing it simply to take advantage of undervaluation created by investors emotional overreaction to recent events.

We believe there are opportunities to exploit these valuation anomalies without taking excessive risk.

Our study showed that while value strategies tend to have higher short term volatility done the market.

Our long term returns are actually less volatile than the markets.

Further while strategy is long term track record is commonly used to measure manager skills.

No.

In particular would turn data or highly influenced by their starting an ending point.

Once a manager has run a consistent investment process for many years, we get we can look at the average experience over time periods and remove the vagaries of starting an ending point.

15 months ago are focused value strategy posted the best absolute 10 year performance record in its history.

While our most recent tenure history is more representative of our long term average.

Meanwhile, the S&P 500, most recent 10 year record is substantially above its an average and appears to be anomalously high.

When we calculate a sharp ratio using our recent performance record and our higher short term volatility.

Our investment skill appears questionable versus the S&P 500.

However, when we do the same calculation using average tenure returns and the volatility of those 10 year returns, we accomplished see a completely different picture.

Which one actually represents our true investment skill after 25 years of deep value investing.

We suggest that the averaged 10 year return strikes a balance any better presents a better representation of our skill and to our investors experience.

Just a word about our business.

We finished the quarter with approximately 400 million and not outflows.

Close to for Us are notoriously bumpy.

For the previous 12 months, we had net positive flows approximately 300 million.

And for the last three calendar years, we had positive net flows.

As you May have seen we issued a press release last week that Weve been named the primary co manager abstain James's place global value Fund.

We attribute this milestone when to our new clients acknowledgment that we will not deviate from our value discipline and that's such a commitment is necessary to achieve long term investment success.

Forward to answering your questions and I'll now turn the call back over to Jessica.

Thank you rich.

We reported diluted earnings of 13 cents per share for the second quarter compared to zero last quarter and 18 cents per share for the second quarter last year.

Revenues were $30.1 million the corner and operating income was $11 million.

Our operating margin, 36.4% of corridor, increasing from 32.1% left corner and decreasing from 46.4% in the second quarter last year.

Taking a closer look in our assets under management, we ended the quarter at $31.5 billion.

17.5% from last quarter, which ended at $26.8 billion and down 15.5% and the second quarter last year, which ended $37.3 billion.

The increase in assets under management from last quarter was driven by market appreciation, including the impact of foreign exchange, a $5.1 billion, partially offset by net outflows <unk> point $4 billion.

A degree <unk> second quarter of last year, roughly <unk> point $1 billion in market depreciation, including the impact of foreign exchange, partially offset by net inflows <unk> point $3 billion.

At June Thirtyth 2020, our assets under management consisted of $13 billion and separately managed account.

$16.4 billion, and Subadvised accounts and $2.1 billion, an hour convener fun.

Third to last quarter assets under management across all channels increased with separately managed account assets, reflecting $2 billion and market appreciation and foreign exchange impact.

$2 billion net inflows.

Subadvised accounts, that's reflecting $2.8 billion market appreciation and foreign exchange impact, partially offset by point $7 billion net outflow.

And I think the Venus on being point $3 billion and market appreciation and point $1 billion in that inside.

Average assets under management for the second quarter, 2020, or $29.8 billion, a decrease of 15.8% from last quarter and a decrease of 19.7% from the second quarter last year.

Revenue decreased 13.1% from last quarter, and 20.4% <unk> second quarter last year.

The decreases from last quarter and second quarter last year, primarily reflects a decrease in average assets under management.

During the quarter, we did not recognize any performance he.

Similar to last quarter and compared to point $3 million nine in the second quarter last year.

Our weighted average fee rate was 40.4 basis points for the quarter compared 39.1 basis points last quarter and 41 eight basis point, the second quarter last year.

Asset mix and the impact Weve been performance fee and fulcrum fees are all contributor to changes in our overall weighted average theory.

Our weighted average day rate and separately managed account for 55.2 basis points for the quarter.

There are 52.6 basis point last quarter, and 64.5 basis point for the second quarter of last year.

The increase from the first quarter 2020 reflects the addition of assets the strategy, but typically carry higher fearing.

Our weighted average fee rate Subadvised accounts 26 basis points for the quarter compared to 26.6 basis point point for last quarter, and 28.7 basis point for the second quarter of last year.

The weighted average fee rate for the quarter reflects a reduction in the base fees certain account related to the full bofi arrangement of one client relationship you fear arrangements require a reduction in the basi investment strategy underperformed, that's relevant benchmark or allow for perform and see if the strategies outperformed that.

Mark.

During each of the second and first quarters of 2020, we recognized $1 million reductions and B C related to these account.

Compared to <unk> point 5 million dollar reduction NBC during the second quarter last year.

These fees are calculated quarterly and compare relative performance over a three year measurement period to the extent the three or four month record of account fluctuate relative to its relevant benchmark amount of B B recognized may vary.

Our weighted average fee rate being a fun with 65.9 basis points for the quarter, increasing from 62.5 basis points last quarter and decreasing from 69.4 basis point for the second quarter last year.

Increase.

From the first quarter of 2020 reflect inflows into fun, but generally carry higher fee rate.

The decrease from the second quarter 2019 reflects an increase in fund expense cap reimbursement, which I presented net against revenue.

Looking at operating expenses, our compensation and benefits expense was $15.6 million for the border.

Decreasing from $19.1 million last quarter and from $16 million for the second quarter last year.

The decrease from the first quarter reflect the absence of the cost of employee departures.

<unk> expenses associated with tax payments and the company's employee profit sharing savings plan, which generally do not recur during a year.

The decrease from the second quarter of 2019 reflects a decrease in the bonus accrual.

DNA expenses were $3.6 million for the second quarter of 2020.

Compared to $4.4 million last quarter.

$4.3 million for the second quarter of last year.

The decrease from last quarter and the second quarter of last year, primarily reflects a reduction in travel costs.

Rational feed.

Other income was $3.2 million for the quarter, driven primarily by the performance of our investment.

The effective rate for unincorporated and other business. So that was 4.1 about this quarter compared to 29.9% last quarter.

4.3% in the second corner of last year.

We expect the effective rate associated with the unincorporated and other business taxes of operating company me between three and 5% on an ongoing basis.

Our effective tax rate for our corporate income taxes Act BBC and other business actually was 26.6% the quarter compared to our effective tax rate of 100% last quarter and 23.8% for the second quarter of last year.

The effective rate to be between 23, and 25% on an ongoing basis.

The allocation the nonpublic members of our operating company with approximately 77.7% I'm the operating companies net income and second quarter of 2020.

Compared to 74.5% both last quarter and in the second quarter of last year.

Variance in these percentages the result of changes in our ownership interest in the operating company.

During the quarter through our stock buyback program, we repurchased and retired approximately 266000 shares of class a common stock for $1.4 million at June Thirtyth, there was approximately $11.2 million remaining in the repurchase program.

At quarter end, our financial position remains strong with $33.1 million in cash and cash equivalent as well a $7.3 million in short term investment.

We declared a three cents per share quarterly dividend last night.

Thank you for joining us we'd now be happy to take any questions.

So when I'll begin the question answer session last question Microstar them worn on their touchtone phone.

You are using a speakerphone please pick up handset before Christmas you to withdraw your question. Please press Star then too.

That's a Tom will pause momentarily with some more Austin.

Oh.

As a reminder, if your question. Please press Star then one.

Our first question Awesome, Jim No one else here, Jim Mellanox and associate.

[laughter].

Yes, good morning, and I appreciate you taking my call I'm.

Worried about the the next six months and I'm looking at the financials and looking at the assets going down $51 billion over six months.

And wondering Oh, where you think we had if there's a second.

Oh round of Kobe. This we have a spike and how that will affect the the markets and.

Your strategies.

Well.

Our our the companies that we in Boston our companies Oh.

Generally speaking had substantial reductions in their share prices.

Sure I got a glimpse of what it was like.

When we were in the bottom in March.

We thought that March was one of those very very unique environments, where things were right.

As if the great depression was almost a certainty I'm talking about value stocks not the broad market at this point in time.

Although the broad market was was kind of reflecting that's what we talked about what the ended the quarter.

Now we've got a recovery the markets how to recovery. So you've got a believed that there are some risk of market downturn is got to believe.

There's.

It or from a risk, but what are up in coal bed is going to Oh.

Caused economic activity to pause.

If that is the case.

We believe that Weve underwritten our investment portfolio to pay.

Substantial.

Oh negative case, meaning the companies that we've been basket Im.

Shouldn't be able to survive a fairly extended period of negative rapidly.

Oh no revenues.

Kind of bottom level that we've seen them so.

As of now well, there's there's not much in our portfolio that we will do we're required to be 100% invested in equities all the time.

There's massive gap in valuation between the cheapest and the most expensive.

So it seems to me that.

There are.

The risks that we have our risk.

Oh I thought of as short term nature I'll call. It a relatively short term nature.

And we have plenty of flexibility in our own organization with fairly healthy cash balance and fairly flexible expense structure.

Not it's not that we have any plans of reducing our workforce with that's not even on our radar screen, but.

But bonuses are very big discretionary portion of our of our compensation plans. So it did that happen I don't think we would be in financial stress. So the reality is it may happen things may get worse.

Our our asset decline, which is our average assets declined remember from from where we were at the peak.

No that's already happened in March.

Our assets are actually up substantially from where they were at the end of March but when you do the weighted average of the second quarter versus the first quarter, that's what you're that's what you're referring to.

Well my answer is I think we have plenty of flexibility there is not.

We would we would carry on and if the.

Investment landscape of presented opportunities again like.

Were presented in March we wouldn't be shorter jumbos.

So.

I look at the investments going from 55.9 billion to 29.4 billion.

Well I wonder if there were you kinda snapped back.

Over the weird.

Well I would just to clarify we were never had 55 billion. So I'm not sure exactly what you're looking out but are.

Our peak was just over 40 billion.

Okay.

Alright, thank you.

Sure understood.

And just as a final reminder, do you ever question. Please press Star then one.

At this time, we have no further questions.

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