Q3 2020 Westwood Holdings Group Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Westwood Holdings Group's third quarter 2020 earnings Conference call. At this time, all participants are in listen only mode.

After the speaker's 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, todays program, maybe recorded and now we'd like to introduce your host for today's program, Julie Gordon General Counsel and Chief Compliance Officer. Please go ahead.

Thank you and good afternoon, welcome to our third quarter earnings Conference call. The following.

The 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 statement.

Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today as well as in our form 10-Q for the quarter ended September Thirtyth 2020 filed with the Securities and Exchange Commission.

We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information future events or otherwise you are cautioned not to place undue reliance on forward looking statements.

In addition in accordance with FCC rules concerning non-GAAP financial measures. The 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 for our Chief Financial Officer, I will now turn the call over to Brian Casey.

Good afternoon. Thank you for taking the time to listen to our quarterly earnings call. Today I Hope you all are healthy and persevering in these challenging times.

As we announced last quarter, we have now ceased operations or Westwood International advisors at Toronto, and almost all of its remaining cash over 37 million has been repatriated to the United States, adding to our financial flexibility.

We also wrote off some historical goodwill the accounting effects of our actions were primarily noncash and nonrecurring.

Well the investment performance produced by Westwood International Advisors proved disappointing and ultimately led to its demise the financial impact of owning we up for Westwood shareholders was positive for most of its eight years of operation.

We still believe that emerging market equities as an asset class with high potential for alpha generation lower pressure from passive indexing and attractive fees.

Institutional and retail investors are attracted to its growth profile and accordingly search activity is robust.

Westwood has the operational expertise to manage emerging markets equities with a new team and we continue to research available opportunities.

Despite september's market drop.

Equity markets climbed again, even as we head into the final stages of the presidential election.

The divergence in performance between the indices remains wide mega caps are dominating the large caps, which are outperforming small caps and growth is outperforming value across all market caps.

Well the small cap space remain challenged and is down for the year. The larger cap dominated S&P 500 is in positive territory year to date after posting its best quarter since 2010.

For sure the path forward is uncertainty and volatility has begun to pick up in tandem with the election rhetoric. We are hearing from both sides of the aisle.

Incidences of coated are proving equally volatile with some parts of the country experiencing declines well others are seeing spikes.

Overall recovery in reopening efforts continue to progress and along with them earnings estimates are rising from their trucks.

Our U.S. equity value products. Once again turned in a mixed performance or smid cap strategy kept pace with the markets move higher well, our large cap and large cap select products were more challenged by the rotation as lower quality stocks rallied along with growth during the third quarter.

Stiff headwinds caused some weaker relative performance, but our year to date performance remains strong thanks to our downside risks bogus, which help shelter our clients from the full brunt of the March sell off.

Despite falling behind in an up quarter large cap value remains ahead of the benchmark Russell 1000 value index on a year to date basis and over most trailing year periods amongst its e. batsmen database institutional peers largecap value remains in the top quartile for the trailing three and seven year time periods Largecap select.

Fell behind in the quarter, but as ahead year to date and overall trailing time period since inception in 2014.

Large capsule that commands a top quartile ranking in the investment largecap value manager universe over the trailing three year time period and boasts a top decile rankings since inception in 2014.

Our smidcap strategy strongly outperformed the Russell 2500 value index, and our portfolio managers continue to build a terrific record with solid stock selection.

Smid cap is one of our best performing strategies year to date at over 500 basis points ahead of the index, which puts it in the 20 nineth percentile, among small and mid cap value managers and the investment database and then the 20 threerd percentile over trailing three years.

Our small cap strategy underperformed, the Russell 2000 value index by less than 100 basis points, that's not earning low quality securities rallied, but it remains ahead year to date and over multiple trailing time periods.

Among its institutional peers small cap is in the top half year to date and ranks in the top quartile over trailing five years and top decile over the last 10 years. The curious headwind of companies rallying despite being non earning may begin to fade as levels of financial stress have risen and as the economic stimulus measures introduced.

Earlier this year begin to phase out.

This scenario is likely to create additional headwinds for these companies and once again the market should recognize the higher quality nature of our portfolio.

Let's turn now to our multi asset group, which manages an array of strategies across the risk and return spectrum.

Our suite of multi asset products remains uniquely positioned to benefit from the crosscurrents affecting asset classes, while taking advantage of market inefficiencies by finding mispriced securities with.

With heightened volatility not just for equities, but within credit asset classes to having more targeted ownership of securities within a multi asset vehicle can help clients preserve their return potential while lowering volatility and limited exposure to key macro risks.

We are convinced that dispersion returns as asset classes industries and companies react to unfolding economic social and political developments will provide ample investment opportunities for our skilled investment teams in the period ahead.

Our largest multi asset strategy income opportunity outperformed its benchmark by 61 basis points of 40% S&P, 560% Bloomberg Barclays aggregate index this quarter our.

Our process is based on asset allocation in stock selection using fundamental analysis to achieve the twin objectives of attractive returns and lower volatility.

Absolute performance was strong for our income opportunity mutual fund ticker symbol, W.H.G.I.X., which finished the quarter and the 20, Onest percentile and Morningstar, 30% to 50% equity category and then a top half year to date loss.

Longer term income opportunities Morningstar rankings are also strong in the top 20% over trailing three five and 10 year time periods and it places it in the top 30% amongst its institutional peers year to date.

Our other multi asset products. Similarly added to their solid track records with strong absolute and relative results liquidity and the convertibles market has improved over the last couple of quarters and returns have improved substantially from their lows last March.

In this environment, our global Convertibles and alternative income strategies have performed exceptionally well our mutual fund W.M. and I X finished the quarter in the 25th percentile year to date and the Morningstar market neutral group its top quartile for the trailing one year period and 27th percentile for the trailing five year period total return out.

Performed its benchmark, 60% S&P, 540% Bloomberg Barclays government corporate aggregate index by nearly 200 basis points this quarter high.

Hi income also outperformed its benchmark, 20% S&P, 580% Bluebird Barclays government corporate <unk> aggregate index by over 300 basis points.

Our newest strategy credit opportunities is posting strong returns as the team identifies miss pricings in various asset classes and Leverages Westwood's strong fundamental research.

A wash out event may well occur as some businesses fail to whether the consumer storm and this often leads to periods of dislocation in illiquidity, which our investment team can profitably mine to discover mispriced quality candidates to add to the funds portfolio.

Shifting to wealth management, our teams in Dallas, and Houston continue to actively engage with clients to assist them through the market's uncertainties.

Constantly impressed by the ability of our distribution team to conduct virtual and physical meetings. Despite the constraints of kogan, our new colleagues are integrating well and last quarter's launch of our online portal has expanded beyond the initial beta test group with a new release plan for rollout over the next several weeks.

A stronger online portal will allow us to enhance our digital client engagements, even more by supplementing our traditional hands on advice and support.

Despite current uncertainties, our clients trust us to remain focused on a goals based approach to achieve their long term goals dipped.

Deploying an increasingly holistic approach to interacting with our clients assets have remained sticky and client retention is stable.

This past quarter, our teams brought in new business of about $88 million offset by client withdrawals to make delayed tax payments.

We also experienced some outflows from closed strategies and pension distributions.

Referrals are on the rise and we've seen a definite uptick since labor day with a particular focus from folks wanting a state planning advice client conversations like these typically takes several months to result in fund conversion and we're looking forward to new business inflows later this year and into early 2021.

Our select equity strategies with over $700 million in assets posted strong returns for the quarter.

Select equity strategy posted an absolute return of nearly 9%.

Downside capture at below 80% measured on a daily returns basis for both strategies was strong and the additional alpha gained from tax loss harvesting helped the tax sensitive version outperformed the Russell 3000 index on a year to date basis.

The new strategies, we created for our high net worth clients to exploit market dislocations dividends select and high Alpha have each performed very well and picking up assets.

There have certainly been challenges to meeting clients and prospects in this environment that we continue to find new and better ways to connect we recently held an online event to discuss the upcoming election with more than 150 participants and we're pushing that recording via you too to over 2300 clients prospects and third party advisors.

We're excited about the future of our wealth business and the prospects for growth in the years ahead.

In institutional and every media sales, we had inflows of approximately 326 million and about 847 million and outflows, which are mostly the result of closing our emerging markets and MLP strategies, along with client rebalancing and global converts and large cap small cap was our most successful strategy.

For the quarter and year to date Largecap, while negative for the quarter has positive inflows from selected clients and income opportunity stabilize with net outflows below $5 million for the quarter.

Income opportunity flows appear to have stabilized and are gaining momentum across the channel.

Intermediary sales improved after suffering industrywide from the pandemic and sales for the third quarter rose versus the second quarter and are now running ahead of 2019 and pre pandemic levels.

We're pleased to see our mutual funds moved into net positive territory with strength coming from our small cap and income opportunity strategies.

We discussed a key new platform approval for small cap on last quarter's call and details have now been finalized and we are on track to launch as a focus manager with the platform advisors next month.

As we look forward, we believe that continued strong performance in our U.S. value in multi asset strategies should lead to an increase in consultant searches and additional wins in the mutual fund and modeled delivery space. Our pipeline is growing with attractive opportunities in our small cap smid cap and income opportunity strategies, our investment teams separately.

Disciplined in their process and execution, which has allowed our distribution teams to focus their talents I'm presenting our strategy is to the marketplace.

We are focused on managing the expense side of our business and we're pleased to report that our first full quarter of outsourced trading was very successful our clients are getting better execution and more competitive transaction costs, while our portfolio managers have access to a bigger trading desk to obtain market data and more frequent updates.

We have initiated many internal efficiencies in our front and middle office areas, which are expected to generate over a million dollars a year and reduced expenses.

Well before the pandemic up ended the status quo the asset management industry was undergoing significant disruptions and its impact is exerting even more pressure on companies to evolve to meet the challenge.

These extraordinary circumstances have tested organizations and ours is no exception and they will result in a lasting change we truly believe that the steps we started taking well before the pandemic have placed us in a strong position not just to survive but to thrive and grow.

Success in the asset management industry requires a well thought out plan.

Followed by focused execution in four key areas number one alpha generation is critical to all buyers institutional and retail.

Westwood value strategies have delivered excess return in every one of our strategies over multiple time periods are multi asset strategies have developed the outcomes our clients want and our flagship fund income opportunity has recently been upgraded morningstar's highest category of five stars number two distribution.

As a team sport.

Gone are the days of salespeople randomly knocking on doors and sending newsletters to stale contactless.

Sales Alpha is delivered via a combination of excellence and brand awareness thought leadership digital engagement and product management delivered by experienced sales professionals using technology to optimize productivity.

We now have the largest most experienced distribution team and our history.

Number three.

Wealth management has evolved from simply being about products to comprehensive solutions.

For decades, all that was required was a competitive financial product a client meeting once or twice a year and a paper statement in the mail at the end of the month.

While many firms still operate this way.

Winners are pivoting to a solutions based model delivered digitally.

Westwood has been working for several years to build a broader platform of solutions, we have grown our financial planning resources added depth and estate planning built tax sensitive investment strategies and added private equity and private banking to our rave solutions.

These services are quickly moving to table Stakes for wealth management and in our view firms that haven't made the shift will not survive.

Number four financial technology will accelerate growth for firms that embrace its transformative powers.

We are using technology to improve our efficiency and screening investment ideas building company models and populating our sales team with data to help them better target potential buyers.

We are rolling out our enhanced digital portal to wealth clients and we are building additional platforms with invest cloud that will be announced in the coming months.

[noise] industry disruptions have been building for some time and the added shock to the pandemic presents a perfect storm of challenges. Fortunately Westwood has been making major investments in technology to reduce costs gain efficiencies and prepare for industry disruptions.

Weve been careful to nurture a strong balance sheet, which allows us the flexibility to pursue an array of future growth initiatives frankly.

Frankly, the disruptions confronting our industry will present rewarding opportunities for firms like ours that have kept our powder dry.

In the month of the years ahead, we're planning to capitalize on the infrastructure, we have been building to support a much larger business.

We remain committed to supporting our employees and clients as they navigate the challenges presented by the spread of the virus. Our team members continue to make extraordinary effort each and every day and I'm very grateful for all they do on behalf of our clients.

I will now turn the call over to Terry Forbes our CFO.

Thank you, Brian and good afternoon, everyone. Today, we reported total revenues of $15.5 million for the third quarter of 2020 compared to $15.9 million in the second quarter of 2020 and $19.9 million in the third quarter of the prior year revenues were somewhat lower than the second quarter.

Due to closing emerging markets strategies, which slightly reduced our average fee rate.

Revenues were lower than last year's third quarter, principally as a result of lower average assets under management.

The third quarter net loss of $10.3 million or a $1.31 per share exceeded the net loss of 2.6 million or 33 cents per share in the second quarter. The loss primarily related to several one time items, including a 4.2 million noncash reclassification of foreign currency translation.

Adjustments from accumulated other comprehensive loss to net loss with no impact on stockholders equity following the closure of Westwood International advisors as well as 1.1 million in incremental Canadian withholding taxes net of federal tax deduction paid to repatriate more than 37 mill.

Ian from Westwood International Advisors to the U.S. as well as a 3.4 million noncash write off of historical advisory goodwill to reflect lower market capitalization and advisory net outflows.

These one time items were partially offset by lower operating expenses and lower foreign currency transaction losses.

Non-GAAP economic loss was 1.7 million or 22 cents per share in the current quarter versus economic earnings of <unk> point 2 million or three cents per share in the second quarter.

Third quarter net loss of $10.3 million or one.

Dollar 31 per share compared unfavorably to net income of $1.1 million or 13 cents per share in the prior year's third quarter, primarily due to the onetime items previously noted partially offset by lower operating expenses, particularly employee compensation and benefits economic loss for the quarter was one point.

7 million or 22 cents per share compared with economic earnings of $3.9 million or 46 cents per share in the third quarter of 2019.

Firm wide assets under management totaled 12 billion at quarter end and consisted of institutional assets of $6 billion or 51% of the total wealth management assets of $4.1 billion or 34% of the total and mutual fund assets of $1.8 billion or 15% of the total.

Over the year, we experienced market depreciation of point 9 billion and net outflows of 2.4 billion.

Our financial position continues to be very solid with cash and short term investments at quarter end totaling $77.6 million and a debt free balance sheet.

That brings our prepared comments to a close we encourage you to review our investor presentation, we have posted on our website, reflecting third 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 you touched on telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

We have a question from Mac Sykes from Gabelli Your question. Please.

Oh good afternoon, everyone.

Good afternoon, Matt.

Brian.

I saw in your comments you talked about finals for several large mandates. So obviously showing some continued.

Good business momentum there maybe you could just put some more color on those opportunities, what's what's driving them in terms of strategies that are in demand.

And.

And perhaps where are you seeing opportunities institution.

Yes.

Just a little more color on.

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You're seeing in terms of distribution.

Sure well thanks for your question Mac as I've talked about for the last several quarters. We have worked really hard to build a robust distribution team and they work that they've been doing is starting to really pay off both in terms of institutional consultant approvals that are happening.

At two of the largest consulting firms in the world, where we are by rated and a couple of strategies, we complemented that with a couple of initiatives that we have done one was reviewing all of our products to make sure that our fees were positioned in a way that they were attractive.

And so that anybody doing a search looking for our products will find our not only our performance to be attractive, but our fees to be attractive.

In addition, we have added share classes to some of our funds that are designed for.

Smaller to medium size institutional customer.

Customers. So we have a share class that has.

Essentially no other fees that.

That is for $10 million and above and then we have another share class that is designed for a defined contribution plans.

As I noted in my comments the intermediary intermediary distribution team was really gaining a lot of momentum through the first quarter and then cobot hit in all of the.

Wirehouses shut their offices and it was difficult for our guys to make contact and to get into see people and they have worked really hard to be creative about how to.

Make new touch points with folks and do meetings outside the office and some of that momentum has begun to pick up September was particularly promising and we have a number of searches on the horizon that we're excited about and one of the things that is really.

Appealing to US is the income opportunity fund, where we lost a lot of clients a year and a half two years ago.

A number of those clients put money with other managers that have underperformed and some of those are starting to come back. Other performance has been exceptional as I noted income opportunity is now a five star fund.

And we think going to be a very.

Very attractive in this type of environment, where we have lots of volatility. This is a fun. This design to produce some income a nice total return with low volatility.

Okay, and then your balance sheet continues to be a source of strength.

Can just update us.

On how are you thinking about using that in the next year.

Repurchases or potential.

I think you've talked about in the past potentially looking at wealth managers.

Yeah, well. Thanks for your question there you know I can't even begin to understand how our stock is trading where it is today when we have 77.6 million and short term investments and 11, and a half million and long term investments, which includes our investment in in best cloud and our investment.

In a bank Westwood private bank, which are both doing exceptionally well and growing and.

And our stock is actually trading below those levels today.

As I indicated in my comments the asset management industry has been under significant pressure.

And so we are seeing.

More opportunities than we've ever seen in our entire history as a public company.

Both proactively looking for opportunities, but also having opportunities presented to us. So we want to make a really good decision with.

With our capital and we think there's an opportunity to.

To buy.

You know a firm if it makes sense to do so and it's the right thing to do but we talk about it every quarter to our directors meeting we talked about it today and one of the things that you see when when you have markets like today in the last couple of days as you're really glad that you know that you've been conservative over the years that you have a.

Fortress like balance sheet and no debt.

Yeah. The other thing I would mention too from investors that I've noticed.

Recently is that Theres a lot of cash on the sidelines. There is a lot of cash in banks.

You know some of our clients are starting to tiptoe backend. During this pullback in fact, just before I got on this call one of our clients indicated they're going to send another hundred million on Monday to add to their account and we have some of our wealth customers who were also taking advantage of this pullback to to add.

The market.

But all told to answer your top your question some of the opportunities. We're seeing there's there's roughly three to 350 million.

Accounts that we've won that have not yet funded.

It will fund between now and the end of the year or into the first quarter.

Great. Thanks, Brian.

Thanks, Matt appreciate your questions.

Thank you. Our next question comes from the line of Daphne Armstrong from you when see your question. Please.

Hello. My question is how has the recent influx of retail investors due 2019 to.

Your company and the asset management industry as a whole.

Okay. The recent influx of retail investors.

You know for us when we think about retail investors. We're we're typically tried to reach retail investors through advisors and we spend about half of our time, calling on advisors, who would have the retail customers and then we the other half of our time, our spec calling on the wire houses where.

We're trying to get our products approved so as far as you know Pete if you were to think about private wealth is retail I.

I guess, you could think of it that way, but that tends to be a higher.

Average assets under management.

Okay that makes sense. Thank you.

You're welcome Thanks for your question.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Brian Casey for any further remarks.

Well, thanks, and we appreciate you listening to our call today. If you have any further questions. Please feel free to call if.

If you'd like to set up a shareholder call we'd be happy to do that Terry and I can make ourselves available and address your questions. So have a great day stay safe to stay healthy.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

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