Q4 2020 Westwood Holdings Group Inc Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again. Please standby your conference call will begin momentarily. Thank you for your patience. It please continue to hold.
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Ladies and gentlemen, thank you for standing by and welcome to the Westwood Holdings fourth quarter 2020.
Earnings Conference call at this time, all participants are in a 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, today's program is being recorded and now I'd like to introduce your host for today's program, Julie Gerron General Counsel and compliance officer.
Sir Please go ahead.
Thank you and welcome to our fourth quarter of 2020 earnings Conference call. The following discussion will include forward looking statements that 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 statements.
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-K for the year ended December 31st 2020 that is filed with the Securities and Exchange Commission, we undertake no obligation to publicly update or revise any forward looking statements 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 SEC 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.
The release issued earlier today.
On the call today, we have Brian Casey, our President and Chief Executive Officer, and Terry Forbes, 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.
Moving on previous calls about the ongoing disruption on the asset management industry on the need for asset management firms to evolve to meet the challenges head on we feel like we've made significant progress in the evolution of Westwood by taking steps that will allow us to thrive and grow in the years ahead.
One of the highlights from the fourth quarter include the expansion of our dedicated multi asset investment team with the addition of Scott Bernard to the income opportunity fund and Seth gold to the alternative income fund.
Our global convertible investment team to Aviva investors, resulting in cost savings are personnel and the elimination of the lease and overhead expense of our Boston office.
Received the best Places to work award for the seventh you're on the road.
Raised the overall star rating and Morningstar for their delegate street firms family.
<unk> experienced significant gains with our investment and our best cloud.
These accomplishments come on top of several actions taken in 2020 to reduce costs and increase competitiveness, namely the outsourcing of our institutional trading desks to northern trust, which saved us over $1 million per year.
Closing of Westwood International Advisors on Toronto.
Repositioning or across our multi asset lineup to broaden appeal and increase the attractiveness.
The repricing of our entire book to become more price competitive and attractive and new product screens.
The introduction of several new strategies, including high Alpha credit opportunities.
Nomadic large cap growth and systematic small cap growth.
We initially launched for our wealth clients and plan to launch an intermediary and retail channels as they build longer performance record.
Turning now to performance I'll start with our U S value strategies.
The year 2020 ended the longest bull market in history, even with its correction in March we still ended the year with a strong absolute return.
There were three distinct parts of the year.
Downturn recovery and a vaccine induced rally, which started in November each of which brought different challenges along with extreme rotations in style.
In fact, according to Bank of America Merrill Lynch. There were 25 outsized style rotations of greater than four standard deviation in 2020, which is more than twice any other year in their database.
Volatility resulted in mixed performances from our various strategies.
Our all cap strategy kept pace, while our large smid small strategies were more challenged.
GAAP value lagged in the fourth quarter, but beat its benchmark Russell 1000 value index for the year 2020, and provided solid absolute returns for our investors.
Flows out of the large cap strategy, we're amongst the largest contributors to firm outflows on the quarter, including some large client rebalancing.
However, we are encouraged as one large long term client elected to add to their account in the fourth quarter and our second did the same in early 'twenty and 'twenty. One we continue to see the potential for SMA wins, and our mutual fund W. H G. L. X is now a four star rated fund.
Smid cap value underperformed in the quarter, but with its downside outperformance earlier on the year. It was able to finish the year ahead of the benchmark Russell 2500 value index.
It continues to be one of the best performing U S value strategies. This year, finishing over 200 basis points ahead.
Interest remains high for this strategy institutionally as its peer ranking in the investment databases in the top quartile over the last three years and we're excited about its prospects going forward, especially with the introduction of our ultra share class late last year.
However, despite improved performance and portfolio managers stability Smid lost a large sub advisory mandate this quarter on.
The positive side Smith had other clients contribute assets and a new institutional client began funding of defined contribution mandate and our new ultra share class last quarter.
Our smallcap strategy was behind the Russell small cap value index during the fourth quarter and per the year the dispersion between high and low quality stocks widen further and our style was out of favor. We saw improved results in December and we're optimistic to see a reversion of this trend in favor of the quality value style.
Bill has served our clients well for 17 years.
Overall in 2020 small cap was a popular strategy for us and it's a net positive flows for the quarter and year.
Capital on several new institutional mandates on the fourth quarter debt funded approximately $45 million in new assets and we have additional wins of another $190 million that will fund in 'twenty 'twenty, one and we continue to see new search flow from institutional consultants.
To close with a comment on our U S value products that we believe that as the junk rallies fades a broader opportunity set of high quality companies will emerge.
This is fertile ground for bottom up fundamental research to drive differentiated portfolios over passive investment and ultimately deliver differentiated performance. We believe our approach will be appreciated as transitory low quality headwinds fade in our durable process delivers alpha as it has.
Over our 37 year history.
And our multi asset group rising prices were not just confined to equities credit markets saw a tightening of credit spreads on improved business prospects and yields on the 10 year Treasury bonds rose in the quarter off their lows.
Our team, which manages an array of strategies across the risk and return on spectrum has been very active in the last quarter.
Late in the fourth quarter, we announced adjustments to the team as we continue to expand our multi asset continuum.
And help her joined Westwood on January 2019 for my Monday asset management and is overseeing the build out of the team that manages our income opportunity total return high income alterative income credit opportunities and other dedicated fixed income strategies.
The team now includes newly added portfolio managers research analysts in a quantitative analyst.
Scott Bernard who worked with Adrian for 12 years at a merely joined income opportunity and Seth Gold who has been at Westwood. Since 2015 was added to the alternative income fund.
We have also added Mr Bernard and Hussein adopt tier two Westwood high income.
The multi asset team received support from our U S value research platform and we expect to strengthen our multi asset team over time with additional hires that broaden the team's capabilities.
Income opportunity, which remains the largest strategy managed by the multi asset team finished with strong absolute returns that we're ahead of its benchmark, 40% S&P 560 per cent Bloomberg Barclays aggregate bond index for the fourth quarter.
Relative rankings for Westwood income opportunity Fund W. H D. I X were also strong as it finished 2020 as a five star fund in the top one third of the 30% to 50% equity universe, and Morningstar, which places Debbie H D I X and a top quartile over three to five years and top decile.
Over a longer term period.
This strategy exits the year with strong momentum with its rotation towards a more value orientation, along with an equity overweight paying off as a fourth quarter rally unfolded.
Intermediary distribution is seeing growth in sales in this strategy and we're optimistic going forward.
Our other multi asset products. Similarly added to their solid track records with strong absolute and relative results.
Westwood total return fund W. L V. I X finished the quarter over 300 basis points ahead of the 60% S&P, 540% Bloomberg Barclays aggregate index and over 1100 basis points ahead for the full year.
It finished the year as a five star fund and we're excited to bring this to market given the strong return profile here and across our multi asset continue on those strategies.
High income fund WH G H X outperformed by over 500 basis points on the quarter and finished the year over 400 basis points ahead of its benchmark 20 per cent S&P, 580% Bloomberg Barclays government corporate aggregate index.
The improvement in liquidity that came after the first quarter meltdown per global convertible securities came with a strong rebound in performance.
Our alternative income fund W. N I X finished the quarter up over 400 basis points and up over a thousand basis points for the year in the top third for trailing one and three years and he best friend Universe.
And had positive net flows.
We hope to increase assets in the fund with the strong four year track record and flexible fee structure.
Our newest multi asset strategies introduced in 2020, our credit opportunities systematic large cap growth and systematic small cap growth. These new strategies added excellent quarters for their track records and were excited about their potential the credit opportunity strategy, which we launched during the pandemic had solid.
The returns for the year, a testament to the multi asset team strong alpha generation across asset classes. During the year, we have shown that our size and ability to move quickly as a benefit to clients and there remains a strong potential for continued financial distress in the economy, even with a vaccine as the recovery proceeds unevenly.
This provides opportunities for the credit opportunities team to find securities that are mispriced by the markets and to leverage our differentiated views on securities and asset classes.
Left as part of our strategic realignment of the multi asset team to focus on core strengths Westwood announced in the fourth quarter that we will no longer offer strategies solely focused on convertible securities.
Therefore members of Westwood Global convertible securities team that exclusively managed standalone convertible strategies transition back to Aviva investors the firm from which they joined Westwood in 2014.
Westwood is operationally supporting the strategies during the transition and we expect to fully transition all responsibilities and assets to have either by the end of this quarter.
We have worked to establish a consistent and repeatable alpha generation process underlying our multi asset platform.
The reach for yield even with higher rates comes with risks that can be better managed the need for stability and returns can be achieved using multiple asset classes with greater diversification lower correlations and better outcomes.
Our suite of multi asset products is uniquely positioned to take advantage of cross currents across asset classes, and we're well positioned to capitalize commercially as all four funds are rated four or five star by Morningstar.
Shifting to institutional and intermediary distribution.
Our teams are executing on our growth strategy with new sales continuing to increase and outflows declining.
Our recent mutual fund restructuring added new share classes supporting both wins and new opportunities in the sub 50 million institutional and defined contribution spaces.
Fourth quarter inflows in intermediary were driven by strength from our small cap and income opportunity mutual funds.
Institutional had inflows of over 435 million per the quarter the highest level we saw on 2020.
Inflows were offset by 605 billion in outflows driven primarily by the loss of the large sub advised smid mandate previously mentioned.
For 2020 institutional sales reached 1.25 billion offset by over 3 billion in outflows.
80% of those outflows were attributed to the closing of strategies, including the emerging market strategic convertibles and MLP strategies.
Our intermediary team saw a strong recovery from the earlier COVID-19 induced lows.
Inflows over the quarter for intermediary were 103 million offset by a 113 million in outflows.
For the year intermediary sales reached nearly 400 million, which were offset by approximately 485 million in outflows.
In evaluating our growth strategy, both distribution teams executed and grew new sales compared to 2019.
New sales in searches for smid cap and small cap increased substantially in the second half of the year and our won but not yet funded mandates pipeline for 2021 stands at more than $250 million.
All cap smid cap and income opportunity, our competitive strategies and we hope for continued sales going forward driven by key consultant approvals, one and 2020.
Institutional and intermediary channels are poised to see improved net flows in 2021 with event driven outflows expected to end in positive mutual fund flows continuing.
Small cap is especially promising with a good pipeline of search activity. We have competed recently and some very large finals presentations in a waiting decisions in the months ahead.
Income opportunity sales potential is improving every quarter with the work our teams have put into improving the process to drive strong performance, we could see new sales growth later in 'twenty and 'twenty, one and into 2022 as I mentioned earlier all of our multi asset funds are four and five star rated by Morningstar, resulting in an attractive.
Suite of products across the asset class spectrum.
Both institutional and intermediary are off to a strong sales starts in 'twenty and 'twenty one with net positive flows for the month of January.
Turning to wealth management, our teams in Dallas, and Houston continue to be active in prospecting for new clients, while finding new ways to engage and serve our current clients or wealth team is now managing approximately $4 5 billion in assets in our Houston office exceeded 2 billion in assets for the first time in its history.
Free.
Strong client retention of over 96% last year was driven by our great financial advisors who've been adding value for clients by creating reviewing and advising on over 200 financial plan.
We expanded our digital presence with the rollout of our online client portal, which extends the connection from our advisers to our clients in a seamless way.
Our Apple App has launched and we will be sharing it with clients in placing increased flexibility at their fingertips as they will be able to access their account information connect with their advisor and eventually complete transactions on most devices.
Digital capabilities this deficiency and offer considerable value to clients and are increasingly cyber world.
Our wealth team has worked hard to update and expand our wealth management ecosystem. In addition to our digital efforts. We have also expanded our service offerings for clients with the introduction of alternative investment solutions and the availability of banking services offered through Westwood Private bank Westwood's investment on the private bank has been successful.
With faster than expected loan growth and well ahead of plan.
Our select equity strategies, which are designed to achieve high quality low turnover and tax efficient outcomes for our high net worth individuals both posted strong double digit returns in the quarter for.
For the year, they posted downside capture in the mid 80% range over the past three years, both at the select equity strategies have achieved very attractive downside capture stats at 82% and 88% respectively versus the Russell 3000 index.
Dividends select and high Alpha the new strategies, we created for high net worth clients to benefit from market dislocations have each performed very well, they're both picking up assets and help diversify our investment offerings.
Evidenced select posted strong double digit returns for the quarter high Alpha, which we created for clients. During the pandemic downturn last March posted a fourth quarter returned 300 basis points ahead of the index.
And since its inception in the first quarter of 2020 has returned over 90% versus 66 per cent for the Russell 3000 index.
In 2020, we had a large focus on managing the expense side of our business. We first reported to you that our institutional trading had been outsourced to northern trust over the summer. We are pleased that this continues to progress well our clients are getting good execution lower cost and we're seeing savings for the firm feedback.
From clients and consultants has been positive.
While we continue to build out our multi asset strategies, we completed the closing of Westwood International advisors and the transition of the strategy is focused solely on convertible securities to Aviva investors. The remaining convertible assets will transition to aviva at the end of this quarter.
There are several key areas, which we're excited about as we look ahead, our new online portal for our wealth management clients expands our digital presence increases efficiency and strengthens our connection to our clients.
The average Morningstar rating for our fund family increased with R. W. H G L Ax and W. A L V I X seeing increases to four and five stars.
We've introduced new exciting products that are performing well and already gathering new assets.
Finally, I want to update you on some great news regarding our invest cloud investment.
Last week, and best Cloud announced a recapitalization at a valuation of $1 billion.
Along with the best cloud founders Westwood has tendered 75 per cent of our ownership stake and has received $9 3 million in cash we will rollout remaining 25% stake approximately $4 5 million into the newly capitalized company that includes two additional businesses that.
Collectively form a global wealth solutions platform with over four trillion on assets.
Our original investment and in best Cloud a $5 4 million was in mid 2018.
In about two and a half years it grew two and a half times its original value.
We are excited to remain an investor in our best cloud and further strengthen our strategic relationship and continue to partner on new initiatives together.
As confirmation of all we're doing to provide career opportunity and support for our employees. We are pleased to announce that we received the best places to work award for the seventh year in a row.
We remain committed to supporting our employees and clients as they navigate the challenges presented by the spread of the COVID-19 virus. Our team members continue to make extraordinary efforts each and every day and I'm very grateful for all they do on behalf of our clients.
I'll now turn the call over to Terry Forbes our CFO.
Thanks, Brian and good afternoon, everyone. Today, we reported total revenues of $17 1 million for the fourth quarter of 'twenty 'twenty compared to $18 6 million in the prior year's fourth quarter and $15 5 million in the third quarter of 2020, the decrease from the prior year was principally due to lower average.
Assets under management the increase from the prior quarter was a result of higher advisory performance based fees trust fees and other revenues.
Fourth quarter net income of $2 8 million compared to a third quarter 2020, net loss of $10 3 million. The current quarter benefited from higher revenues lower operating expenses and lower income taxes in the third quarter was impacted by several nonrecurring items.
Economic earnings a non-GAAP metric was $4 6 million or 58 cents per share compared to the third quarter's economic losses of $1 7 million and 22 cents per share.
Fourth quarter net income of $2 8 million or 36 cents per share compared to $2 5 million or 30 cents per share in the prior year's fourth quarter, the increase principally related to lower operating expenses, particularly employee compensation and benefits and lower income taxes, partially offset by lower revenue.
Economic earnings was $4 6 million for the current quarter or 58 cents per share down from $5 4 million or <unk> 64 per share in the fourth quarter of 2019.
For fiscal 'twenty 'twenty total revenues of $65 1 million compared to $84 1 million in 2019. The decrease was due to a $19 million decrease in asset based advisory fees and a $1 9 million decrease in trust fees, reflecting lower average AUM.
Partially offset by a $2 million increase in performance based advisory fees earned in 2020.
Fiscal 2020, net loss was $8 9 million or a dollar in 12 cents per share compared to 2019 net income of $5 9 million or 70 cents per share the.
The current year was impacted by lower revenues, several nonrecurring items impacting the third quarter and unrealized losses on private investments, partially offset by lower operating expenses foreign currency transaction gains and lower income taxes economic earnings of $7 3 million or <unk> 91 per share compared to $18 2 million or <unk>.
$2.15 per share in 2019.
Firm wide assets under management totaled 13 billion at quarter end and consisted of institutional assets of $6 6 billion or 50 per cent of the total private wealth assets of $4 3 billion or 33% on the total and mutual fund assets of $2 1 billion or 17% of the total.
Over the year, we experienced net outflows of $2 7 billion in market appreciation of <unk> 5 billion.
Our financial position continues to be very solid with cash and short term investments at quarter end totaling nearly $83 million and the debt free balance sheet.
I'm happy to announce that our board of directors reinstated the cash dividends at a rate of 10 per share for this quarter payable on April one 2021 to stockholders of record on March 2nd 2021. This represents an annualized dividend yield of two 8% as of the closing price on February 19 2020.
One.
That brings our prepared comments to a close we encourage you to review our investor presentation posted on our website, reflecting fourth quarter and fiscal 2020 highlights.
As well as the discussion of our business product development and longer term trends in revenues earnings and dividends.
Thank you for your interest on our company and we'll open up the lines to questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
Our first question comes on the line of Mac Sykes from Gabelli Your question. Please.
Congratulations gentlemen on a strong quarter just.
Just a couple of questions.
You talked about the closing of the funds impacting flows this quarter. If you were to exclude bill.
Those impacts what was the COVID-19.
This quarter, if you have that for the year as well.
Yeah.
If we exclude the closed strategies what were the flows for the quarter.
Yeah.
But as Terry and I will give you that number.
Yes, Oh, sorry, I'll be looking for a number what's your other question Mac.
On the digital offerings, how should we think about.
The efficiency there.
No.
Or do you think about the digital on increased driving more sales in the future purchased increasing client engagement and having something that you need to have for the platform.
Well I think the additional offerings are really what we'd been tended to do for a number of years now which is to continue to build out our multi asset capabilities and we have a lot of strategies now across the spectrum, where we at one time only had income opportunity they've all exhibited.
Strong performance there in categories within Morningstar, now, where we feel like they can when they're priced competitively and we hope to see some good traction on flows in the years ahead on the performance for multi asset was exceptional last year as far as the digital goes it's really a comprehensive solution.
It's interesting if you if you read a lot about wealth management.
77% I think that people want to engage digitally with the firm debt. They work with but they also want to have a human being that they can call on connect with when they have.
Specific questions. So it's really about a hybrid model of having a digital capability that people can use on any device anytime a day and then have the ability to connect with the humanity and it sounds simple to pull off but it's taken us years to get our platform to.
And where we can actually execute and deliver this a really cool digital solution for our clients.
Mac.
Excluding the closed flows from closed strategies, you're net outflows for the quarter was around 800.
Okay.
Thank you.
Just trying to understand on the digital.
We've seen I've seen explosion in.
On the platforms like Robinhood and I'm not suggesting that's the best way.
Certain clients, but.
Do you think now with your capabilities versus ability to reach different segment of appliance potentially just given all the investments you've made today.
Well, we hope so it's going to it's going to require a number of things we'll have to.
Number one rig retrain.
The folks that work with our customers in a way that is.
As we all learn the capabilities of the system, what's really neat about it is that it really has any.
Infinite capacity, so we'll have to figure out lots of ways to use it and retrain ourselves and then well I think it will allow us to do is engage with a segment of the high net worth world that we.
I have not had a lot of success in and that's the you know the younger generation, which I would call sort of the 35 to 50 year old Who's working working hard on making money you know they maybe they pick something when they were in their twenty's or thirty's and I haven't thought a lot about it. This is a way for us to really.
Gauge with them the other things we've been doing as we built out private banking and state planning and financial planning our group in Houston last year ahead of the.
The election, a lot of people were concerned about.
Changes to the estate tax and so everybody wanted to redo their financial plan and take a look at their state plants. So we were exceptionally busy.
Doing that for clients, but what it always does as it cements that relationship a little further because they they'd become more tied to the advice that we give and when we can deliver that to them digitally so that when they hit the Westwood out they go to the Apple store and download it.
They go to their accounts they are able to find their financial plan. Their state plan any important documents that they have we can keep a running balance sheet for them.
Of all of their financial assets.
And do it in a way that it's easy for them to to look at and engage with them.
Other things that we've done is we have.
Done in a couple of really good investments in private equity.
In fact, some of our clients invested in best cloud, which was a tremendous win for.
For them and for and for Us So.
So that was a good one and then where we're doing some other things that are exciting and the private equity world that people really.
Pretty pretty good uptake on.
Okay great.
Thanks for the feedback great quarter I appreciate guys.
Thank you alright, thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then one.
Okay.
And I'm not showing any further questions at this time I'd like to hand, the program back to Brian Casey for any further remarks.
Yeah.
Okay, well great well. Thank you on Mac for your question and thank you all for listening I, just close by saying that.
So far year to date our flows are positive.
Actually net positive for the year.
We've got some big news coming on.
Over the next couple of months on some searches that were in in small cap that could be materially and interesting and where we're pleased to reinstate our dividend this quarter at a rate of 10 cents and really reflects our confidence in the business in the future and we hope.
We can build it over time as we did.
Over 17 years before thanks for your time.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Yeah.
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Yeah.