Q3 2020 Pzena Investment Management Inc Earnings Call

Hello.

No it's a third quarter 2020.

All participants will be able to sell when should you need assistance. Please carpets, especially considering the star key followed by zero after.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then too.

Please note. This event is being recorded I'd now like to turn the call over to Jessica door.

Jessica Doran Chief Financial Officer. Please go ahead.

Thank you operator, good morning, and again, thank you for joining us on the to be non investment management third quarter 2020 earnings call I am Jessica Doran Chief Financial Officer, and with me today is our Chief Executive Officer, and co Chief Investment Officer Rich the banner.

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 Www Dot casino Dot com.

Replay for this call will be available for the next two weeks on our website before.

Before we start we need to remind you that todays call may contain forward looking statements and projections. We ask that you refer to our most recent filings with the FCC for important factors that could cause actual results to differ materially from todays 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 due to prohibitions on selective disclosure, we do not a matter of policy disclose material that is not public information on our conference call now.

Now, let me turn the call over to rich, who will discuss our current view of the investing environment.

[noise]. Thank you Jessica.

Right. So whether that's always been obvious investment strategy papered up beyond the beverage cycle.

So you say really.

So what's the few dominant technology masters of the universe that everyone loves sit back and enjoy the multiple expansion.

In the meantime.

Valuation spreads between cheap and expenses have reached all time highs all over the world.

Further volume of questions about what their value will never work again or whether there is a new definition of value how big.

Become common place.

It's reminiscent of the late 19 nineties Internet bubble when Michael Lewis sales 1999 book No New thing describing all you needed to know that.

Investors that like investors today, we're not sure that's more [noise].

The value stays calm pain.

Paying less than the present value of future cash flows remains a winning strategy for long term investments across the environment today makes us probably even more attractive than normal.

We would argue that the seeds for unwinding today, its extremes are right in front of us.

Absolutely as our cobot dominated world that's a lot us into the recession that history shows is the key marker for the show.

Consider the following for possible catalysts that could already be signaling that the shift is upon us.

First the recession is in place and the path toward economic recovery is becoming clear.

Examine a recession in the U.S. over the last 100 years and in Japan over the last 45 and the evidence is compelling.

The U.S. experienced 14 recessions during the past century and looking at the five year returns measuring from the beginning of the recession value.

Well you outperformed the broad market by an average of 5% per year.

Second.

Interest rates stop falling bringing multiple expansion for growth stocks to an ad.

Interest rates have been structural decline for the past 40 years. The trend has let us to a world where you can buy value stocks appease Ted just like at any time in the past seven years, well average bookstop multiples have doubled from 30 times to 60 times earnings.

Even if rates don't rise.

Tailwind in Georgia enjoyed by quote stocks should dissipate.

Exuberant growth expectations, but the technology masters of the universe revert to normal.

Consider them out using Microsoft as an example, Microsoft stock prices up 10 fold during the past 10 years, that's 25% per year helped by strong growth in cloud technology, replacing on premises hardware demand there.

This has led to an 8% annual growth in operating income.

Forget an 8% annual stock price.

Depreciation go follow going forward.

Given that Microsoft high multiple.

But now we acquired 20 years of 10% operating income growth possible.

Maybe but.

But considering that market analysts estimate that public cloud penetration of data needs has reached 30% to 35% and that the possible maximum penetration for the public cloud will be approximately 70%.

About halfway to the saturation so.

So where were at 20 years of growth come from we have yet to see.

The <unk>.

And finally, the conventional wisdom the technological change comes entirely at the detriment of the existing franchises groups to be mistaken.

Let's consider the case of electric cars and Tesla versus B. dolphin.

I mentioned on wisdom and stock price suggests that the answer is obviously Tesla will it.

But even as Tesla grows does it make sense that VW has to shrink.

That's what stock because one of the darlings rising over 10 fold during the past five years VW stock on the other hand has barely changed in the same period.

There are ultimately only two ways to win an auto manufacturer.

Charge higher prices in other words maintain a brand premium or to manufacture at lower cost.

It seems inevitable that these trends will apply to electric vehicles and that VW will succeed importing their brand strength think Porsche and Audi and.

And scale advantages into the electric vehicle competition back.

In fact, VW leads all competitors and the number of new electric vehicles that will be introduced over the next several years.

Turning to the business fraud.

We finished the quarter with approximately 1.1 billion in net inflows for the previous 12 months, we had net positive flows of approximately 2.1 billion back.

In fact, we have had positive net flows for each of the last three calendar years and six of the last eight years.

No small feat.

In a world of questioning the App.

Efficacy of value investing.

I'll now turn the call back over to Jessica Doran.

Thank you rich.

We reported diluted earnings of 16 cents per share for the third quarter compared to 13 cents last quarter and 19 cents per share for the third quarter of last year.

Revenue or $33.9 million for the quarter and operating income of $15 million.

Our operating margin was 44.1% this quarter, increasing from 36.4% last quarter and decreasing from 46.3% in the third quarter last year.

Okay, well good luck and our assets under management, we ended the quarter at $33.3 billion.

7% from last quarter, which ended at $31.5 billion and down 7% from the third quarter of last year, which ended at $35.8 billion.

The increase in assets under management from last quarter was driven by net inflows of $1.1 billion mansion and market appreciation, including the impact of foreign exchange point $7 billion a day.

<unk> decreased in the third quarter of last year, roughly $4.8 billion in market depreciation, including the impact of foreign exchange, partially offset by net inflows of $2.1 billion.

September Thirtyth 2020, our assets under management consisted of $13.3 billion and separately managed account 18.

$18 billion me, Bob advised accounts and $2 billion magazine a fun.

Parents last quarter separately managed account assets increase.

Reflecting point $4 billion in market appreciation and foreign exchange impacts, partially offset by point $1 billion in net outflows.

Subadvised accounts that that increase reflecting $1.3 billion in net inflows and.

And point $3 billion in market appreciation and foreign exchange impact and that that's going to xena funds decreased slightly to $2.1 billion and net outflows.

Average assets under management for the third quarter of 2020 or $33.1 billion, an increase of 11.1% from last quarter and a decrease of 8.1% from the third quarter of last year.

Revenues increased 12.7% from last quarter and decreased 8.4% from the third quarter of last year.

The fluctuation revenue primarily reflects the variance in Africa assets under management over the period.

Well as the impact of performance fees and fulcrum fees recognized.

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

Last quarter and compared to <unk> point $3 million recognized in the third quarter of last year.

The third quarter also reflects a reduction in the B C. Certain accounts related to the whole cross the arrangement of one client relationship.

These theories notes require a reduction to be seen at the investment strategy underperformed the relevant benchmark or allow for performance fee. If the strategy outperformed that benchmark during the third and second quarter 2020, we recognized $1 million production they see related to these accounts.

Compared to $8.5 million reduction in base fees during the third quarter of 2019.

These fees are calculated quarterly compare relative performance over a three year measurement period.

To the extent that three year performance record of this account fluctuate relatives with relevant benchmark the amount of the fees recognized may vary.

Our weighted average fee rate was 41 basis points for the quarter compared to 40.4 basis points last quarter, and 41.2 basis points for the third quarter of last year.

That mix and the impact of swings in performance fees and fulcrum fees are all contributor to changes in our overall weighted average fee rate.

Looking at operating expenses, our compensation and benefits expenses of $15.8 million for the quarter.

Compared to $15.6 million last quarter and $16 million for the third quarter of last year.

DNA expenses were $3.2 million for the third quarter of 2020 compared to $3.6 million last quarter and $3.9 million for the third quarter last year.

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

Other income $1.5 million for the quarter, driven primarily by the performance of our investment.

Looking at taxes yeah.

Affective tax rate for our unincorporated and other business taxes was negative 6.8% this quarter.

Her to a positive 4.1% last quarter and negative 5.1% in the third quarter of last year.

A negative effective tax rate.

At quarter end in the third quarter of last year reflect the benefit associated with the reversal of uncertain tax position liabilities and interest due to the expiration of the statute of limitation we.

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

Our effective tax rate for our corporate income taxes actually BT and other business taxes was 26.5% this quarter compared to our effective tax rate of 26.6% last quarter. Thanks.

24.4% for the third quarter of last year.

Actuation any the effective rate reflects certain permanently non deductible expenses.

We expect this rate excluding these items to be between 23 and 25% on an ongoing basis.

Yeah allocation to the non public members of our operating company was approximately 78% of the operating company's net income for the third.

Third quarter of 2020 compared to 77.7% in the last quarter.

74.5% in the third quarter last year.

Koreans in these percentages is 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 102000 shares of class a common stock.

$5 million at September Thirtyth was approximately $10.7 million remaining in the repurchase program.

At quarter end, our financial position remains strong with $49.2 million in cash and cash equivalents as well as $70.3 million and short term investments.

Declared a three cents per share quarterly dividend last night.

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

We will now begin the question and answer session Task. Your question you May Press Star then one on your talk show FFO.

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

This time, we will pause momentarily to assemble our.

Our first question will come from Sam Sheldon functional associates. Please go ahead.

Good morning, Richard Jessica Thanks for taking my questions, maybe you could start by giving US a sense for the pipeline of new opportunities that you see sales business and how that might compare to that.

You said you had coming into 2020.

Sure Sam this is Rick.

The pipeline no sales fairly comparable to where it was when we were coming into 2020.

Which is somewhat below where it was.

The peak.

[noise] averaged significantly better than average versus where it's been was over the last call. It four or five year average so.

I'd describe it this way there is there's no there's not a lot of value searches going on number one number two.

Well they are going off course, we still tend to get included.

And really.

We've been as you know.

For a longer period of anti value, but in particular the last three years.

And so the only people that are aggressively searching for value for deep value kind of managers right now you would call the early adopters.

So I saw I described it as saying our pipeline has given given the performance of value. The pipeline is good given the last five years. The pipeline is is above average, but it's not as strong as it.

As strong as it was.

Pre 2018.

Okay. That's helpful.

If you were to characterize the outflows you have experienced in recent quarters, how much of it is attributable to find strong and the toll on value versus sort of shifting funds to other areas like passive or private equity.

You know again, we don't we don't really know we know what they tell us.

And I would tell you that.

There's there's a.

There's a range there are some that have thrown in the towel, but but not.

Not a lot.

And the ones that have thrown hotel tower, where there where there is significant but there were significant.

Hi, Dan.

Particularly in the sub advisory channel have been where they they just made a complete re determination of an overall strategy more of the outflows have been.

Within our sub advisory channel there.

The gross outflows have been within our sub advisory channel, where the ultimate customer has become.

This heartened by value performance and is behaving more in reaction to the performance that's mostly been rare on the institutional side and the flows have been more net positive on the institutional side. Obviously, we won one very large new sub advisory manager.

Oh mandate.

During the quarter well that was funded during the quarter that kind of skewed the numbers.

Favorably.

Okay.

And with some of these headwinds can you give us a sense for how much pressure your feeling on fees you guys have done a nice job looks like the weighted average speed is essentially flat over the last year at 41 basis points, but can you give us a sense for how much pressure your feeling on that piece.

[laughter] fee pressure feels very very similar to what the fee pressure has been for the last few years here or there are.

Clearly trends towards lower fees in the institutional world.

Well, we haven't seen any real pressure here.

That you would tie specifically to recent investment performance, so I would say.

The.

The pressure stay is real.

We have always been committed to treating all of our clients fairly an equally so we won't cut fees for one client without doing.

Without doing it across the board and we've maintained that discipline and I think our clients understand that that's how we operate so and weve actually been firm on that so that the.

As long as were fair and reasonable and in line with market the markets.

Where we are okay, and and so I would say this is the same fee pressure that we've seen for several years.

Okay.

One last question for me you guys close a mutual fund in the quarter can you talk about that decision and how are you feeling about the remaining mutual fund business today.

Yeah, we.

We closed the long short mutual fund.

And if you.

The strategy was was in a simple way of putting it long value in short growth.

So the performance was pretty poor.

We actually still believe that that's a smart way to do so we're we've still continued on a separately managed basis to manage some of our own money in that in that way.

But once you get it in something that's long short, but you're expecting to preserve.

Capital by being hedged the idea that the.

We could.

Ever make a goal of that particular fund was low probability. So so we closed on the mutual fund in general in the mutual fund business in general our commitment remains very high.

We are we have actually more we've increased resources rather than decrease from and.

In a world where investment performance is what it is we don't expect a lot a near term success, but having said that there are a number of.

Oh intermediaries.

But that consider or use our funds that are all thinking about what should they do if value reemerges and so we're in a lot of these kind of long drawn out conversations that we sort of feel they're not ready to pull the trigger to to what they are.

Ones on there are our funds on their recommended lists or on their on their model managers are portfolios, but.

They want to know that they really understand us and know us so that when they decide to pull that trigger they can do it and.

Much more.

[noise] expedited fashion, so I call. It I'd say, we haven't learned anything about whether we can be successful in this given the performance, but we're certainly not giving up.

Okay. Thank you for taking my questions.

Sure.

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