Q3 2020 Manning & Napier Inc Earnings Call
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Good evening My name is complete and I'll be your conference facilitator today at this.
This time I would like to welcome everyone to the many end up here third quarter 2020 earnings teleconference.
Our host for today, our Nicole can we bronner, Chief Marketing Officer, Mark Mayor, Chief Executive Officer, and Paul Battaglia, Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at eight P.M. Eastern time Tonight. The dial in number is 4045373 406 and answer pin number 574 to 878.
At this time.
All participants have been placed and they listen only mode. If you should require operator assistance. Please press star zero.
We ask that you. Please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Mrs., Nicole <unk> leap runner.
Thank you it could be that and thank you everyone for joining us today to discuss many peers third quarter 2020 results.
Before we begin I would like to remind everyone that certain statements made during this call not based on historical facts, including any statements relating to financial guidance.
Maybe deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Because these statements.
He has been the forward looking statements involve known and unknown risks and uncertainties. There are important factors that could cause actual results to vary.
Actual results to differ materially from those expressed or implied by those before they can statement main appear assumes no obligation or responsibility to update any forward looking statements.
During this call sometime its neighborhood reference to non-GAAP financial measure.
Oh GAAP reconciliations can be found in the earnings release and related as you see filings.
With that I will turn the call over to our chairman and Chief Financial Chief Executive Officer, Mr. Mark Me Mark.
Thank you Nicole.
As always I'll begin with a review of our results for clients, starting with our multi asset class solutions globally diversified dynamic asset allocation strategies represent approximately 70% of total or you will have truck records dating back to the early 19 seventies.
Core to who youre as an active solutions oriented investment manager.
All performance bridges or billable on page six of the earnings supplement.
Our multi asset class results were strong on an absolute basis for the quarter was relative results falling slightly behind blended benchmarks.
Strong security selection and also the allocation decisions will offset for more defensive positioning from a set through an investment style standpoint positioning that we believe is appropriate given the current market and economic environment, Yes.
Year to date core performance remains far ahead of blended benchmarks in all of our multi asset class solutions.
Flagship long term growth strategy in order to track record dates to 1973.
Your head of its blended benchmark like 483 basis points year to date, the mutual fund versions of our multi asset class solutions all rank in the top 11% of their competitive groups year to date and all are well into the first quarter, while over the trailing one in three years.
Our ability to deliver strong absolute relative results, while simultaneously, providing a meaningful degree of downside protection during market drawdowns. This year clearly demonstrates the strength of our time tested investment disciplines.
Well there was open to material lag between excellent performance in or you weren't inflows. We believe these results position the firm well for future growth.
Similarly, we have a broad suite of targeted collective investment trust or crts, which are used in qualified retirement plans. These leverage the same multi asset class strategies referenced previously.
As pioneers in the target date space you see like these are a compelling offering and we have approximately $630 million across the target date collective and trust investment Trust suite as of the end of September all 11 targeted vintages rank in either the first or second percentile of their competitive sets year to date.
In core us equity for the third quarter, we delivered strong absolute performance, but underperforms by 92 basis points as we began to trim winners and moved to balance the growth tilt the portfolio had going into the quarter. The strategy is ahead of its benchmark by over 500 basis points year to date and over one year.
And on a rolling three and five year basis by over 300, and just under 200 basis points annualized respectively.
Our global equity strategy performance was even stronger having delivered strong absolute returns and good relative results strategy is ahead of its benchmark by over 800 basis points year to date on a rolling three and five year basis global equities, surpassing its benchmark by over 550, and 400 basis points annualized.
Respectively.
And then core non us equity results have been stronger still strategy delivered terrific absolute results and on a relative basis finished the third quarter over 500 basis points ahead of its benchmark for the year core non US equity is ahead of its benchmark by over 1300 basis points on a rolling three Empire.
Your basis by over 450, and 250 basis points annualized.
The outstanding success of our fundamental equity strategies in 2020 and in recent years has been driven by excellent individual security selection as well as superior country sector and investment style decision, making.
Within our quantitative strategies, our disciplined value suite performed well on an absolute basis in the third quarter, but underperformed by 103 basis points on a relative basis for the year those outcomes. Our reverse absolute results remain negative in a very challenging environment for the value style, but on a relative basis disciplined value.
Has outperformed by over 220 basis points year to date on a historical basis disciplined value remains far ahead of its benchmark and peer groups over the trailing one three and five years our.
Our Rainier International small cap team produced another quarter of excellent returns with our Rainier International Discovery fund delivering 600 basis points of relative outperformance in the quarter.
Fund is now ahead of its international small cap benchmark by almost 24 percentage points year to date and by over 25 percentage points on a rolling one year basis.
On a rolling three and five year basis. The Rainier International Discovery series is ahead of its benchmark by 825, and 405 basis points annualized respectively.
As it pertains to our remaining investment strategies, we continue to experience strong relative performance. Our real estate series is now ahead of its benchmark by over 500 basis points year to date, although the asset class is down almost 18% and has consistently excellent results over 135, and 10 years in fixed income our core Bob.
On series diversified tax exempt series and New York tax exempt series, all well ahead, good benchmarks year to date.
Let me put our recent results in perspective and offer a copy ops value investing has gone to a particularly difficult multiple year stretch.
Our fundamental core equity and multi asset class offerings have these specific disciplines and dynamic flexibility to find compelling opportunities among both growth and value stocks, our bottom up research can lead our core portfolios to be tilted towards either growth or value.
The past four years, they've been skewed towards growth, which has been the right style tilts, but they are dynamic and we have been added to value holdings over the past few months and have neutralized the style buys.
Disciplined value on the other hand is quantitatively driven and will always be a true value portfolio subject to value beta trends, which have been severely adverse compared to growth.
Firstly, our Rainier International team will always be looking for great small international growth companies.
There was also a great deal of data in the international small growth style and we will also be subject to style reversals there.
Style cycles are hard to predict but it's quite likely that better than expected developments with respect to vaccines treatments and outcomes for COVID-19, leading to positive economic in earnings surprises in 2021, and a steepening of the yield curves what.
Would correlate with the style reversal that could favor value, perhaps explosively at least for a while and we have seen such a value recovery over the past two months.
Now we are in no way attempting to communicate that investors should expect the performance in our strategies to be sub par going forward. We do however believe it realistic expectations and performance. This year in many of our strategies is warren or in some cases, a few standard deviation.
And above our normal excess return expectations, we firmly believe in the investment philosophies and processes that underpin these strategies and by focusing not on short term results, but on process execution. We believe we will deliver strong long term results through a cycle across our investment strategies.
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Finally in addition to the nearly universally strong year to date performance across our investment strategies, we've made substantial progress in our environmental social and governance integrations we.
We view, yes, she integration as a requirement for our long term success and during the quarter. We began formally implementing SG throughout our traditional core investment processes. These strategies have always formerly integrated SG considerations in our investment processes and they have always been a key consideration.
In assessing the risk seven investment by formalizing the integration of BSG, we are positioning ourselves and our strategy as well for success with future generations.
Yes. She integration is also part of our quantitative efforts and we have launched two dynamic quantitative SG multi asset class ETF strategies.
As we move through the rest of Twentytwenty and look towards 2021, we believe the current market environment can reward active investment managers with disciplines as well honed as ours.
There's a wide array of economic political and regulatory uncertainties that investors must grapple with today.
Avoiding mistakes and areas of excess is as important as ever.
Market sentiment rises and falls risks come and go but our time tested investment philosophies and processes stay the same we have a tireless focus on driving superior risk adjusted results for clients across full market cycles.
Having addressed our strategic priority of investment excellence in some detail I'll now address developments within some of our other strategic initiatives starting with sales productivity.
During the quarter, we witnessed continued early signs of momentum in our sales channels, while not yet substantial enough to turn flows positive. We are encouraged by the early results and fully believe we are on the right strategic path.
In wealth management, we added another financial consultant during the quarter, our fourth higher this year, bringing our total to 18.
We have further solidified our team based approach across key regions by leveraging teams, we are expanding sales capacity and improving the client experience in the process. In addition, as we will discuss further we also began a pilot implementation of the best clouds client portal, including modern planning tools early client feedback.
Mike has been very positive.
There are early signs of improving productivity, including a strong increase in the number of new relationships informs within wealth management early signs of progress are encouraging and our wealth management strategic plan remains resolutely focused on building for the long term.
In our asset management businesses of intermediary institutional and Taft Hartley distribution. We are also seeing improving momentum as our excellent investment performance drives growing interest.
In the intermediary channel, we're seeing good inflows into the Rainier International small cap strategy as well as other ones. It is worth reiterating as we have on prior calls that are outstanding investment results may well lead to a near term acceleration and growth sales in our intermediary business, which is the most performance sensitive of our channels.
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For the first time in years, we are seeing consultant driven placements and we are looking to strengthen our consultant relations efforts within the institutional and Taft Hartley business were recently awarded a number of core us equity wins, demonstrating that there is still demand for truly differentiated active us equity strategies.
Turning now to operational efficiency, we continue to make substantial progress in the major technological transformation that we began late last year, we have begun a pilot launch of our new client portal, the new tools will dramatically improve the digital experience of working with us as the balance of the best cloud implementation progress is key.
2021, we will streamline operations improve back office efficiencies.
Our Charles River deployment for trading and account management has moved forward throughout the third quarter as well when fully implemented an integrated with the data warehouse and performance reporting capabilities and the best cloud, which will occur in Twentytwenty. One we will have meaningfully improved our processes, we're implementing in reporting on client portfolios.
Our implementation of Workday made key strides during the quarter as well workdays industry, leading tools now are the underpinning and now were underpinning most of the key portions of our finance platform will begin implementing workday for human resources at the beginning of 2021 as the workday deployment progresses.
We look forward to the insights efficiencies and overall improved internal experience it will provide.
Outside of our technology overhaul, we completed an important realignment of our investment offerings that will have substantial economic benefits during the quarter. We merged our leverage target date mutual funds into our four pro blooms mutual funds by Roland are subscale money, losing target date mutual funds.
Sweet into our existing fully scaled risk based mutual fund suite, we will realize meaningful cost savings a number of target date mutual fund clients also migrated to our targets a collective investment trusts, whose excellent performance we outlined previously.
In summary, we fully believe our strategic initiatives are progressing well and our overall firm's strategy is on the right track, we're seeing a number of positive green shoots of growth in several areas and we remain resolutely focused on building the foundation of our business for the long term.
And with that I'll turn the call over to Paul for more detail on our financials.
Thanks, Mark good.
Good afternoon, everyone and thanks for joining us today.
I hope everyone on the call is healthy and doing well my remarks will be focused on the third quarter and year to date 2020 financial results starting with assets under management.
We finished September with a U.M. of $19.2 billion.
Up from 18.6 billion as of June Thirtyth.
The 3% increase was the result of approximately $1 billion in market appreciation being partially offset by $385 million of net client outflows when compared to September Thirtyth 2000, 1980, AUM has decreased by $1.2 billion or 6%.
The $385 million of net client outflows represents continued improvement in the rate of net outflows.
Gross client inflows of nearly $600 million is consistent with the level of production we've reported in prior quarters. Despite the continued impacts of the COVID-19 environment.
We reported approximately $250 million of inflows through our wealth management channel up from $200 million last quarter, and approximately $350 million of inflows to our intermediary and institutional team generally in line with last quarter.
Gross client outflows for the quarter were $980 million an improvement from our trailing four quarter average gross outflows of over 1.5 billion in the lowest level of outflows we've reported in the last several years.
Our separate account retention rate during the quarter was approximately 97%.
Altogether, we reported net client outflows from our wealth management business of approximately $54 million during the quarter and net outflows of 331 million from the institutional intermediary team.
Before turning to our financials I'll add a few closing remarks regarding our outlook on ATM inflows.
As Mark mentioned, we continued to see sales productivity and momentum building across channels, albeit slowly however.
However, we still have vulnerability in certain segments of our business, most notably with institutional relationships, where a third party consulting is involved in those that use our blended investment strategies.
As an illustration of this we received redemption notices from two large relationships one institutional client in one platform relationship. The total outflows of approximately $500 million during the fourth quarter expected from these.
In both cases, the client was satisfied with our performance, but redeemed because they represented a larger proportion of the strategy. They were invested in their investment policy allowed.
Our institutional and Taft Hartley teams are focused on retaining these types of relationships to.
To continue the ATM stabilization that we've demonstrated so far this year.
Turning to our third quarter PNM, we reported revenue of $32.1 million for the quarter with overall revenue margins of 66 basis points compared to revenue of $30.3 million reported last quarter.
Operating expenses were $27.8 million in the quarter, an increase of approximately 520000 compared to the prior quarter, but a $3 million a decrease from the third quarter of 2019.
Compensation and related costs increased by $1.2 million or 7% since last quarter.
The increase is primarily driven by our analyst bonus accruals that are reflective of strong one in three year absolute and relative investment performance.
This increase in variable compensation is offsetting some of the fixed compensation savings that have been achieved.
Quarterly compensation costs are down by $900000 or 5% from the third quarter of last year.
Compensation and other related costs were 58% of third quarter revenue consistent with what we have reported in the last several quarters.
Distribution servicing and custody expenses increased by $170000 or 7% in the quarter generally in line with the increase to average fund and collective trust assets and represent approximately 18 basis points of average funding collective assets.
Other operating expenses were $6.6 million in the quarter, a decrease of approximately $880000 from last quarter and a 1.7 million from the third quarter of 2019.
Similar to Q2 third quarter other operating expenses are lower than prior quarters. As a result of the cobot environment with limited travel in facility usage. However, the reduction observed. This quarter is also driven by a $1.2 million gain that offset other operating expenses. The gain is stemming from reimbursements we receive.
During the quarter from our affiliated mutual fund and collective trust. The reimbursements were related to expenses. We originally paid in pursuit of claims against the third party with the reimbursement received upon settlement of those claims.
When adjusting for various one time items like the gain described above other operating expenses continue to be approximately 23% to 25% of revenue and it is our expectation that they will remain in that range as we move forward.
The increase in revenue and decrease in other operating expenses contributed to improvement in operating income from $3.1 million in Q2 to $4.3 million in the third quarter with an operating income margin of 13.3%.
In non operating income we saw some normalization compared to prior quarters with $550000 of income reported for the quarter.
As you'll recall during both Q1 and Q2 of 2020, we had significant non operating income and losses stemming from changes to our Trs liability, resulting from the cares act as well as investment gains and losses caused by the market volatility earlier in the year.
The reduced level of non operating income in the quarter reflects the quieter nature of this quarter.
Compared to the first half of 2020.
As a result on a GAAP basis, we reported pretax income for the quarter of $4.8 million compared to $5.7 million last quarter.
After accounting for approximately $400000 of strategic restructuring costs, we reported economic income of $5.2 million.
Our effective tax rate for the quarter was 39%, resulting in economic net income of $3.2 million.
The increased EQT effective tax rate during the quarter is indicative of the volatility we experienced earlier in the year and the impact it had on our full year earnings projections and estimated cash.
It is our expectation that our estimated effective tax rate will be in the low to mid 30% range in future quarters barring any tax changes.
Economic net income per adjusted share was 14 cents, a 6% improvement from last quarter. The increase is attributable to the weighted the updated weighted average adjusted share count now approximately $22 million adjusted shares outstanding this.
This is the first quarter in which our weighted average adjusted share count is fully reflective of the redemption transaction that closed earlier this year.
With that I'll summarize our year to date results.
We reported revenue of $93.5 million down 9% from $103.3 million. This time last year with overall revenue margins of 66 basis points in both periods.
Operating expenses were $84.3 million, a decrease of nearly $12 million or 12% from last year comp.
Compensation and related costs of $55.2 million have decreased by approximately 5.9 million since last year and were 59% of revenue.
The majority of the decrease is due to the reduced size of our workforce down from 380 employees at this time last year to 281 as of September Thirtyth.
Distribution servicing and custody expenses decreased by 20% when compared to last year as a result of both reductions in funding collective assets as well as our mutual fund fee restructure project that was completed in March of 2019.
Other operating expenses have decreased by $4 million compared to last year. The decrease is attributable to a number of factors, including the reduction of the overall size of our workforce the operational changes resulting from coded.
In the operating expense reduction recognized this quarter that I mentioned earlier.
As a result on a GAAP basis, we reported pretax income for the first nine months of the year of $8.2 million when.
When adding back our strategic restructuring costs, we reported economic income of $10.2 million in economic net income of 8.7 million account.
Economic net income per share using our weighted.
Our weighted average adjusted share count through September Thirtyth of approximately 50 million adjusted shares outstanding is 17 cents and on a pro forma basis that would be 39 cents per share based on our current share count.
Turning to the balance sheet, we reported approximately $76 million of cash and investments with no debt as of September thirtyth.
The increase since June Thirtyth is driven by cash from operations, including earnings during the quarter adjusted for noncash items and changes in operating assets and liabilities.
There were no significant changes to the adjusted share count during the quarter.
As a reminder, following the redemption completed in May we are reporting adjusted shares outstanding of approximately 22 million shares which includes about 60.4 million class a shares outstanding 2 million private units held by legacy shareholders and Unvested Stock Awards issued under our long term incentive plan.
As of September Thirtyth, our employees and directors own approximately 30% of the adjusted shares outstanding.
I'll conclude with some thoughts on 2021, but before doing so I'd like to reflect on what has been accomplished throughout 2020.
First and foremost we've achieved outstanding returns for our clients over the first 10 months of the year.
The volatility, resulting from COVID-19 created a market environment that allowed us to demonstrate the value that active management can provide to investors.
These results along with improved sales and service processes.
Has has helped us to again reduce the rate of net client outflows, while gaining traction with prospects across channels.
Meanwhile, we have made significant enhancements to our technology infrastructure in overall business workflow.
And we took a significant step in improving our corporate structure through the accretive redemption that took place in may.
The fact that these accomplishments have taken place in the midst of a global pandemic as the test is a testament to our team and we thank all of our employees for their efforts this year.
As most everyone on the call can probably a test 2020 one's potential it will be somewhat tied to what happens with COVID-19 in the outcome of the election.
Further stabilization of our AUM, which is obviously related to the performance of equities around the world and continued improvement in gross client inflows in overall net flows are critical to improving financial results.
We anticipate further margin improvement in 2021, albeit short of the stated longer term target of $20 million of operating income.
We expect to have further head count reductions, even as we continue to add to our sales team.
Fixed compensation costs and overall operating expenses should continue to decrease those decreases will be at least partially offset by non cash expenses, such as stock based compensation as well as depreciation and amortization related to prior year expenditures from our digital transformation.
Our cash position, which obviously is not impacted by these noncash charges should continue to increase throughout the year.
In conclusion, our strategic priorities for 2021 are largely centered around continuing or finishing the work that's already underway.
We will continue to prioritize results for clients, which means prioritizing our people our investment team under Ebrahim Busheri. His direction has done a tremendous job for our clients and ensuring that our firm attracts and retains top talent is central to this.
We will drive increased sales productivity through the traction we have gained this year.
Gross client inflows are on track to be inline with last year. Despite the fact, the COVID-19 travel restrictions have hampered sales efforts through the first three quarters of this year.
Our performance, our advisory service offerings, and our pricing allows us to create differentiation within the channels that we distribute.
And we'll finish the job of carrying out our outdated technology and partnering with best in class technology partners to improve the experience for both our clients and our employees.
Our new technology will provide a foundation for achieving additional operational efficiencies and improvement in our operating margins.
That concludes today's call.
If you have any questions on the topics addressed today, please contact us using the inquiries portal on the Investor Relations Web site, and we will probably address your questions.
Thank you for listening and for your interest in many in appear and I'll now turn the call back over to the operator operator.
Thank you.
This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
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