Q4 2020 Manning & Napier Inc Earnings Call
Good evening.
And.
And that's true.
And welcome everyone.
And the fourth quarter 2020 earnings teleconference.
Your host for today's call are Nicole Kingsley Brunner, Chief Marketing Officer, Marc Mayer Chief Executive Officer.
Chief Financial Officer, today's call and speaking.
Reported.
The level for replay beginning at eight P M Eastern time Tonight.
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And three four.
And the pin number is eight to nine.
And then Q1.
At this time, all participants and placed in a listen only mode. If you should require operator assistance. Please press star zero and it is.
Now my pleasure to turn the floor.
The whole Kingsley Brunner.
Thank you Erica and thank you everyone for joining us today to discuss many of the peers fourth quarter and full year 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 forward looking statements involve known and unknown risks and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements.
Many of the per it seems no obligation or responsibility to update any forward looking statements.
During this call. Some comments may include reference to non-GAAP financial measures full GAAP reconciliations can be found and our earnings release and related SEC filings.
With that I will turn the call over to our Chief Executive Officer, Mr. Marc Mayer Marc.
Thank you Nicole.
The three main points, we would like to make.
One we have made good progress on our strategic initiatives true what progress has translated into excellent results for clients.
And and improvement in our financials.
Three of our improved financial position will allow us to return capital to our shareholders.
Paul and I will elaborate on each of these.
But we will begin first and so we always do and as we always should as fiduciaries what day.
The review of our results for clients of both the fourth quarter and full year.
Let's begin with our traditional multi asset class solutions as they represent approximately 70% of total of U N.
Track Records dating back to the early 19 seventies and are core to who we are as and off the fully integrated wealth and investment manager.
Our fourth quarter and multi asset class results were competitive with modest under performance and more aggressive objectives and slight outperformance and the more conservative strategies.
And what are we speaking are small overweight to equities and a very strong quarter for global stocks compared to our blended benchmarks helps overcome some underperformance within our equity portfolios and the core.
We are pleased to have helped clients strongly participate and the end of the year equity market rally.
Our disciplined approach to the dynamic asset allocation and risk and since led us to reduce the substantial Oh boy the equities that we had in place and the late spring and summer of 'twenty and 'twenty for.
For the full year, our traditional multi asset class strategies deliberate significant outperformance versus benchmarks across all of which space objectives.
Our strong performance was the result of a combination of timely asset allocation adjustments during the first half of the year as well as excellent set of positioning and security selection decisions and most importantly, our time tested the disciplines and both security selection and asset allocation and helped us deliver meaningful.
Downside protection from the equity and credit market sell off at the beginning of 'twenty and 'twenty.
And subsequently we adopt the portfolios to the rapidly changing environment, allowing us the substantially participate and the sharp equity market rally since the end of March.
Our long term growth strategy is a globally diversified portfolio of stocks bonds and routes that is also available as a pro blend extended mutual fund.
It represents our single largest pool of assets and was up 18, 7% per the year net of fees slightly ahead of the S&P 500.
Notably it delivered those results with the.
And the risk of the S&P 500.
Our traditional multi asset class strategies are the heart of our investment solutions for our wealth management clients the.
The strong absolute returns moderate risk level, the nature of the performance pattern and the advice. We provided helped our clients stay on track for such an unusual year.
'twenty 'twenty was an important year and demonstrating our wealth management value proposition.
As you may recall from prior quarters, 'twenty and 'twenty coincided with the 50 year anniversary of our phone.
Making it a propitious time to look back upon what we have achieved or over our first half century.
From an investment standpoint, one of our most differentiated characteristics is that we had a very long fully audit performance track record for flagship strategies dating back to $19 73.
This is exceptionally rare in the wealth management business, where the vast majority of financial advisors, and our A's who employ open architecture.
And of quote the results they have delivered for clients.
Over 47 years long term growth returned 10.4% net of fees virtually identical to the S&P five hundred's 10, 6% return over that timeframe.
Although it's just noted are dynamically allocated portfolio is globally diversified and balanced among asset classes comps.
Consequently, it's the Liberty equity market like returns with 30% less risk data to inception, almost all of a century ago.
It is important to note that we do not target specific absolute or relative risk levels.
In fact, we think the most important measure of risk is the permanent loss of capital.
Most of our clients make systematic withdrawals from their portfolios.
Whether it is individuals paying taxes or spending and retirement pinch.
Pension pension funds paying retirement benefits or endowments and foundations supporting good causes.
The need to withdraw funds, often regardless of capital market results and crystallize losses during severe downturns.
This is a form of permanent impairment because it precludes subsequent compounding on of those assets as markets recover.
All else equal lower volatility portfolios reduce the risk of this of chrome.
Putting risk return statistics into something more meaningful for our clients.
$100000 invested and our long term growth strategy and 1973 would have grown to approximately $8.3 million today.
Our clients and 1973, what invested $100000 and our second largest strategy by AUR growth with reduced volatility, which dynamically allocates around the 40 60 stockpile of mix would have $5.8 billion today.
Turning back to our 'twenty and 'twenty results.
The excellent full year performance of our multi asset class strategies was also reflected and the strong performance of our risk based mutual fund suite and and our retirement target date Cit's by way of example, most of our pro blend sweet of mutual funds and finished the year and the top decile and almost all of.
Of our various vintages of target date, Cit's finished and the top third percentile or higher versus Morningstar peers.
And our fundamental all equity strategies, our U S core equity core non U S equity core equity unrestricted and global equity portfolios.
The underperformed for the quarter by between one and three percentage points. However.
However, each still finished the year with substantial outperformance delivering 251, 1400, and 32, 388, and 644 basis points of relative gains versus the respective benchmarks.
Our three and five year numbers for these strategies are all swarm as well. These performance figures are available on page six of the earnings supplement.
Our Rainier international small cap strategy underperformed by 130 basis points and the fourth quarter and finished the year, having delivered remarkably strong returns and the mutual fund version of the strategy outperformed its benchmark by nearly 2700 basis points for the full year.
Reflective of excellent security selection and portfolio management, and a very attractive asset class for active management.
Our disciplined value suite underperformed in the fourth quarter and full year as its tilt towards quality within the value space weighed on absolute and relative returns while the strategy had a disappointing year on both the relative and absolute basis. Its long term track record remains compelling.
And of three and five year basis. The fund is ahead of its benchmark by 96, and 198 basis points, respectively, and ranks and the 29th and 12th Percentiles vs Morningstar peers.
We had a very good quarter and year for our fixed income strategies, which are in a central part of our wealth management solutions and represent good opportunities for our intermediary business. Our aggregate fixed income strategy rose nine 4% per the year outperforming by a 187 basis points.
And our unconstrained Bond fund rose seven five per cent per the year, and it's and the top quartile of its Morningstar category over the past decade.
Our high yield fund was and the truck third of its category last year and isn't the top decile for three five and 10 years.
Our real estate strategy underperformed for the quarter the generated another strong year of relative performance outperforming by 243 basis points.
Our REIT strategy has outperformed consistently over the past decade.
Our ETF based multi asset class solutions managed by our quantitative strategies group also outperformed during the year.
Almost without exception our performance was broadly excellence of the year and positions us well for the years ahead.
Well, let me speak for a moment about our capital markets outlook.
And in particular and the manner in which our core investment processes derived that outlook.
While we leverage both bottom up and top down perspectives, when making asset allocation decisions.
Our analysis of investment opportunity at the individual security level is our primary driver of asset allocation.
We believe and being patient and flexible.
While it is undeniable that both equity and debt valuations of elevated we believe there are parts of the global equity markets that remain attractive.
For example, and of senior during the February to April timeframe last year.
In the event of equity and credit market dislocations.
There were many stocks and bonds that are of fundamental interest to us and sharp declines may allow them to meet our valuation disciplines.
After having been substantially underweight equities early last year, and then substantially overweight after equities plunged in February and March were narrow around our neutral point and equity allocations and our multi asset strategies.
It is important to note that and equities, we are neither dogmatic gross nor value investors.
Rather our disciplines give us very specific tools to evaluate both what we term profile of stocks, which will look at home and the portfolios of growth managers as well as what we term hurdle rate and bankable deal stocks, which have classic value characteristics.
Today, our equity portfolios tilt towards value.
Of the five plus years of skewing towards growth.
Humility and investing is a virtue and.
And that vein, we should note that the magnitude of our outperformance and many of our strategies should be viewed as an unusual occurrence.
And should the very high proportion of our strategies that outperformed.
While we will always strive to deliver excellent results for our clients, we expect to be hard pressed the consistently repeat our results from 2020.
Finally, and regarding absolute returns.
While we don't make calls on broad equity or debt markets per se.
We believe investors should be measured and their expectations given high current valuations.
Let me now turn to a review of our progress against our strategic initiatives we.
We have just reviewed the most important initiatives to deliver excellent investment results and well engineered solutions for our clients.
We have articulated three other strategic initiatives, improving sales productivity, while delivering exceptional client service increasing operational efficiency.
And ensuring of talent rich diverse organization with the great culture.
We made important progress on each of these measures and the fourth quarter and throughout 2020.
Speaking first of sales productivity and excellence and client service.
We increased our investment and our client facing teams throughout 'twenty and 'twenty, we hired five new financial consultants and wealth management, including one in the fourth quarter, bringing our total to 19.
Plan on adding a comparable number in 2021.
Our new hires did not bring books of business and we anticipate that they will ramp up and productivity over the next few years we.
We created team structures and multiple geographies, which has enhanced client service and increased our capacity to generate new business.
We also added a dedicated consultant relations director and the fourth quarter supporting our institutional business.
We also anticipate of ramp up here as institutional consultants move slowly.
A range of outflows improved substantially in 'twenty, and 'twenty, reflecting superior investment results and excellent client service during the pandemic the.
The ultimate measure of improvements and our client facing areas will be positive net flows while we continued to sustain net outflows and 2020. It was at a much lower rate and prior years.
Megan Henry President of the exit of Trust company are capped of Trust company, which provides custody discretionary trust services and C. I T administration and.
Announced plans to retire at the end of the first quarter of 2021.
In addition to exit of Trust company, Meg and is responsible for our client services area.
Megan has been and important executive at our firm for 15 years, and we will miss him.
Higgins responsibilities will be taken up by Scott Morabito.
Who heads of operations and fund services.
We are truly fortunate the Megan has agreed to remain as the chair of the extra the board and she will provide valuable experience and continuity. So all of us and management and to Scott as he takes on his expanded responsibilities.
We recently implemented a revised pricing plan for new wealth management clients.
For our entire history, we only charge for our investment solutions plus custody of clients custody their assets with us.
Our aggregate fees for advice, which we simply never charge for plus investments were substantially below the combined fees charged by competing firms.
We received no competitive benefit from this pricing structure.
Going forward, new wealth management clients will be charged of bundled seat, but incorporates wealth planning and advice investment solutions and custody.
This fee is higher than our current investment only pricing and will be additive to revenues over time.
And setting the new foods, we carefully studied the competitive environment and we believe our new bundle of fees are highly competitive.
Current clients fees will be grandfathered and will not change also institutions, who use us for and asset class sleeve of a larger portfolio and not for comprehensive advice will also be exempt.
With respect to improving operational efficiency of technological overhaul was and the thick of the execution phase as we push forward across several key initiatives simultaneously, replacing the entirety of our technology infrastructure.
And the fourth quarter, we launched the first deliverable from our implementation of the desk cloud to support all of our distribution initiatives. The first deliverable was a new client portal that has been very well received by clients across channels and 'twenty 'twenty, one we will be implementing additional major capabilities within <unk>.
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We also completed the implementation of workdays General Lebert ledger of functionality and 2020, and we'll be rolling out its budgeting and financial analysis module and 2021.
In addition in 'twenty and 'twenty, one we will be implementing workday for human resources and talent management.
We made important progress and implementing Charles River for trade order management trading and portfolio of compliance and portfolio implementation and 2020 and important steps remain and completion is targeted and 'twenty 'twenty one.
By the end of 'twenty 'twenty, one the fully integrated suite of software and service platforms that we are implementing will enable substantial operating efficiencies, allowing us to offer better client experiences increased targeting and discipline and sales and service improved productivity and trade processing.
And and portfolio implementation, and providing us greater and more actionable business insights.
Our fourth strategic initiative is to ensure that we have of talent rich diverse and inclusive team with a powerful distinctive culture.
Cowen density is the lifeblood of our business. It helps us analyze manage and optimize our investment strategies and helps us relate reach and connect to more people amplifying our strategy solutions and our story and at <unk>.
US innovate and remain nimble and our revolving highly competitive industry.
We want to be a destination of choice for the most capable and promising talent.
Ours is largely of homegrown team with the majority of staff entering as recent graduates. So we are focused on finding the best developing the best and retaining the best.
It is a false dichotomy to believe that the pursuit of meritocracy and diversity cannot be accomplished at the same time.
It is our belief that in principle, the demographics of our firm should broadly reflect the demographics of our nation and the communities and which we do business we.
We are committed to getting there, but acknowledge that it will take time.
And we must commit to making consistent progress.
While we are close to gender equality and our work force overall that has not yet entirely true without management ranks today, 30% of our executive Committee is female and 40% of our more extensive group of management our leadership Council is female.
Our ratio and ethnic diversity has a longer way to go.
The proportion of our organization that are people of color is not representative of our nation while.
While 20% of our executive committee are people of color.
For our broader leadership team the percentage is less than 10%.
As has been repeatedly demonstrated we have no doubt the greater diversity of background experience and perspectives lends itself to stronger decision, making a more solids culture and superior outcomes for all stakeholders.
Our corporate culture will embrace and celebrate all of our differences and so they will make us a stronger more successful and more or less and business.
With that said, we still have much work to do and I look forward to providing further tangible updates on this essential initiative and the quarters ahead.
And some we believe our full year 'twenty and 'twenty was broadly positive as we continue to execute on our long term strategic plans.
And on building the foundation of our firm and a way that positions us for sustained sustained success.
I'd now like to briefly address our newly announced share repurchase program.
We are committed to botox, both increasing employee ownership of the firm.
And ensuring attractive returns to our shareholders too.
Two years ago, we announced our intention to meaningfully increase employee ownership over time.
We have made progress with a $5 million long term incentive plan last year and comprised of stock grants vesting over five years.
And then identically structured $6 million, one recently granted and 'twenty 'twenty one increase.
Increased employee ownership is critical to stimulating the employee base and ensuring a culture that is committed effective and engaged helping drive value for our clients and our shareholders.
Importantly, it is not it is not our intention to dilute public shareholders as we increase of employee ownership. We are guided by these dual principles.
As a result today, we announced the share repurchase program meant to accomplish that goal and Paul will provide more details.
So in conclusion.
We continue to believe that we are progressing well with our strategic initiatives that the progress has begun to translate into improving financial results and that we are committed to sharing that financial improvement with our shareholders, who return of capital. We are optimistic that we will see more tangible proof of this progress in the coming year.
And with that I'll turn the call over to Paul for more detail on our financials and Paul.
Okay.
Thanks Mark.
Good evening, everyone and thanks for joining us today and hope everyone on the call is doing well my.
And my remarks will be focused on our fourth quarter and full year, 'twenty and 'twenty results, starting with assets under management.
We finished December with AUM of $20.1 billion up from $19 2 billion as of September 30th.
The 5% increase was the result of approximately $1.7 billion of market appreciation.
$800 million.
Clubs.
Gross client inflows were just over 600 million for the quarter with $290 million of inflows from our wealth management channel and 315 million true our intermediary and institutional team.
Gross client outflows for the quarter were $1 $4 billion with the increase from prior quarters due to the few institutional and platform redemptions that we mentioned during our last call, which accounted for approximately 500 million of the total outflows.
By sales team the wealth management team had net client outflows of $142 million during the quarter and the institutional intermediary team has $674 million and net outflows.
For the full year of 2020, we reported $2 3 billion of net client outflows and improvement from the $4 5 billion of net outflows and 2019.
This result was consistent with our outlook on flows going into 'twenty and 'twenty, which was net net client flows for the year would be improved from prior years, though still negative as we work towards stabilizing the U S.
While gross client inflows decreased slightly from $2 7 billion to $2 4 billion. We saw significant improvement in gross outflows down from $7.2 billion and 2019 to $4 7 billion and 2020.
Our separate account retention rate improved to 96 per cent for the 12 months ended December 31.
Turning to our fourth quarter P&L, we reported revenue of $33 $5 million for the quarter with over and all overall revenue margins of 68 basis points compared to revenue of $32 1 million reported last quarter with revenue margin of 66 basis points. The increase in revenue was due to changes and average.
And so and in bids in and of our business mix during the period.
Operating expenses were $28 $9 million and the quarter, an increase of $1 1 million compared to the previous quarter, and and $8 $3 million decrease compared to the fourth quarter of 2019.
Compensation and related costs increased by approximately $550000 of 3% compared to last quarter.
The increase was driven by finalizing our analyst bonuses as well as one time severance costs from reductions and our workforce, our compensation and related costs as a percentage of revenue was 57%.
Distribution servicing and custody expenses decreased by $190000 or 7% during the quarter the team.
And can be explained by a 4% decrease in average mutual fund and collective trust assets as well as changes and the overall funding collective business mix. These expenses continue to represent approximately 18 basis points of average funding collective trust assets.
Other operating expenses were $7 $4 million and the quarter, an increase of 780000 from last quarter and.
Majority of the increase is attributable to activity from last quarter and specifically the one time, one point of $2 million gain recognized last quarter. It was reported as a reduction of other operating expenses.
These expenses represent 22 per cent of revenue for the quarter.
Non operating income increased by five by approximately $550000 for the quarter predominantly due to the investment returns on our invested cash.
As a result on a GAAP basis, we reported pre tax income for the quarter of $5 $7 million compared to $4 8 million last quarter.
After accounting for approximately $750000 of strategic restructuring costs, we reported economic income and non-GAAP measure of $6 $4 million.
Our non-GAAP effective tax rate for the quarter was 10, 4%, resulting and economic net income of approximately $5 7 million.
The effective tax rate was down from our usual rate and the low 30% range and from the 39% reported during the third quarter the <unk>.
Reduction was due to a number of factors specific to the fourth quarter, including the discrete tax benefit recognized during the quarter from the RFU investing and options exercised during the period, coupled with the higher than projected taxable income for the quarter and updated tax impacts of IRS rule 162, and based on final regulations.
Issued in December.
As a reminder of our effective tax rate as the non-GAAP measure that is intended to represent the taxes that we would incur all of our earnings were talks of the C Corporation.
Considering current federal and state tax rates, we continue to assume that our future effective tax rate will be and the low 30% range. However, as we learned during 2020 this rate may change from quarter to quarter as events unfold.
All told we reported fourth quarter economic net income per adjusted share of <unk> 26 cents.
The 12% improvement from 14 cents per adjusted share last quarter.
With that I will summarize our full year results.
We reported revenue of $127 million down 7% from $136 million last year with overall revenue margins of 67 basis points.
Operating expenses were $113 million of 20 million dollar decrease of 15% from last year with reductions in compensation and other operating costs driving the overall decrease.
Compensation and related costs of approximately $74 million decreased by $6 6 million since last year and represented <unk> 59 per cent of revenue.
We finished 2020 with 276 employees down from 307 at the start of the year.
Other operating expenses decreased by $11 $2 million when compared to last year and drew.
The decrease compared to 2019 was due to a combination of a few factors, most notably reductions and operating costs coming from the COVID-19 restrictions that existed for much of the year.
The third quarter expense reimbursement I, just mentioned and a reduction and expenses related to our digital transformation compared to 2019.
As a result on a GAAP basis, we reported pretax income per the year of $13 $8 million.
After accounting for strategic restructuring costs, we reported economic income of $16 7 million and economic net income of $14 4 million.
With economic net income per adjusted share of <unk> 33.
On a pro forma basis, using our adjusted share count out our adjusted shares outstanding as of December 31st 2020 earnings would have been 64 cents per adjusted share.
Before wrapping up the call with the comments regarding our balance sheet and ownership.
And I'll reiterate a few final points on our outlook for AUM client flows and the P&L.
We anticipate further improvement in gross client inflows and net flows and continued stabilization of overall AUM during 2020, given our investment results, our strength and delivery of comprehensive wealth management solutions and.
And I anticipate the easing of Covid related restriction and if eliminate prospecting effort for the last year.
Similarly, we expect continued improvement in topline revenue operating margin and free cash flow as we work our way toward our stated goal of $20 million of operating income.
We will recognize incremental revenue as a result of the wealth management pricing changes that Mark mentioned earlier, but we do not expect that the material impact our overall revenue margins in 'twenty and 'twenty one.
Fixed compensation costs should continue to decrease as we continue to reduce the size of our work force.
Also noteworthy we recently implemented the deferred compensation plan, whereby a fraction of incentive compensation for our most highly paid employees will be invested into our investment strategy invested over a multiyear period.
The implementing this plan is an important step and increasing employee investment and our strategies and will provide additional P&L relief during 2021.
Yeah.
I'll begin to wrap things up with some comments on our balance sheet and ownership per year, and we reported approximately $81 million of cash and investments with no debt and the.
The increase in September 30th was driven by cash from operations, including earnings during the quarter and changes and as operating assets and liabilities.
The strength of our balance sheet and expectations for free cash flow. This year were factors and the decision.
Two announced the repurchase of stock that Mark mentioned earlier.
Our board of directors authorized the buyback of about $10 million of stock for the rest of 2021, which will be funded by our existing cash position and free cash flow that will be generated this year.
And the return of capital to shareholders has always been a priority for us and.
The other operating results continued to improve we feel it is important to restart this effort and the form of of share buyback.
Regarding ownership, our adjusted share count increased from $22 2 million adjusted shares outstanding as of September 30th to 22 7 million shares as of December 31.
The increase is driven by previously issued stock options and the divested during the quarter.
The $22 7 million adjusted shares outstanding as of December 31 includes approximately $16 9 million class a shares.
$2 million privately held units held by legacy shareholders.
160000, vested stock options and 3 million Unvested stock awards issued under our long term incentive plan.
And as of December 31st our employees and directors own approximately 33% of the adjusted shares outstanding including Unvested Awards.
As Mark mentioned earlier this month, we issued $6 million of long term incentives to key employees, it's part of our year end cycle.
And these awards will vest over the next five years and will be reflected in our adjusted share count as of March 31.
Delivering equity has been a meaningful tool for us to recognize and routine of our key employees and the long term characteristics of these awards have helped to ensure alignment between our employees our clients and our shareholders.
Retaining key employees by utilizing awards from our equity compensation plan and he's been a long standing objective.
These key contributors are delivering solutions for clients, while providing a framework for future growth and shareholder value creation.
However, it has not been our intention to create significant dilution to our existing shareholders and the process.
As we look at our balance sheet and capital structure. There is now an opportunity to create value for shareholders through share buybacks by.
And by returning capital to shareholders, while ensuring that we are retaining our key contributors we are positioned to deliver best in class solutions to our clients, while driving growth and value creation for our shareholders.
That concludes today's call do you have any questions on the topic of address today. Please contact you. Please contact us using the inquiries portal on our Investor Relations website, and we will promptly address your inquiry.
Thank you for listening and for your interest and Manning and Napier and I'll now turn the call back over to the operator Erica.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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