Q4 2020 Pzena Investment Management Inc Earnings Call
Good morning, and welcome to the the Zena investment Management, Inc. Announces fourth quarter full year 2020 earnings conference call. All participants will be out lots of lumping up but do you need assistance. Please signal a conference specialist by pressing the star key followed by the Sierra.
After todays presentation, there will be an opportunity to ask questions.
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Please note because of that is being recorded I would now.
Like to turn the conference over to Jessica Doran. Please go ahead.
Thank you operator, good morning, and thank you for joining us on the casino investment management fourth quarter and full year 2020 earnings call I Am Jessica Doran Chief Financial Officer with me today is our Chief Executive Officer, and co Chief Investment Officer, Richard Pacyna.
Our earnings press release contains the financial tables for the periods, we will be discussing if you do not have a copy of can be obtained in the investor Relations section on our website at www Dot Pacyna dotcom.
Replays of this call will be available for the next two weeks on our website.
Before we start we need to remind you that today's call may contain forward looking statements and projections. We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from today's comments.
Please note that we do not undertake to update such information to reflect the impact of circumstances or events going forward.
In addition, please be advised the do the prohibitions on selective disclosures, we do not as a matter of policy of disclose material that is not public information on our conference call.
Now, let me turn the call over to rich, who will discuss our current view of the investing environment.
Thanks Jessica.
Everyone asks me the same question. These days so it seems I should start my remarks by trying to address that question.
The fourth quarter, the start of the long awaited value cycle.
Was it just another head fake.
The outcome was pretty fantastic for the value style, but so much more for deep value.
Most of our strategies outperformed their benchmarks by 10 to 20 percentage points in one quarter.
It was the highest alpha generating quarter in our 25 year history.
The truth is though I really don't know the answer to that question and having lived through several several cycles I know that I won't really know until its all become history.
Let's consider what we actually you know so far.
First the.
I'll use cycles and recessions are highly correlated.
We have written extensively about this relationship and the data is compelling Val.
Value rallies generally start sharp shortly after recession start.
Because once the recession starts investor start looking forward for signals of the for the recovery.
This relationship has held in the U S for nine of the last nine months sessions from the day.
The outside the U S is similarly, well boss.
Again value stocks actually become momentum stocks when value cycles began as the.
The recovery translates into strong earnings growth for these beaten down stocks.
Consider the choice of investors are being offered today.
I of portfolio of deep value stocks.
With two year forward expected earnings growth rates by the consensus of 23% of year and you can buy that for 11 times earnings.
Or by a portfolio of of the Russell 1000 growth stocks with two year forward earnings expected growth of 17% of year and that sells for 27 times earnings.
The deep value stocks have sharp expected earnings growth as they rebound from recession lows, while the growth stocks are having difficulty growing at rates fast enough to keep up with their highflying multiples.
And as investors embrace these truths value stocks gain the momentum.
Even though the fourth quarter resulted in the highest alpha generation in our 25 year history.
The spreads between expense and cheap stocks of barely moved.
In the U S. The spread reduction in the quarter was a small fraction of the previously abnormally widespread.
And the story of similar everywhere in the world.
And still I know as I am as I'm speaking there are many out there we're saying no that quarter was just an aberration the fee.
<unk> Tec the future is disruption the attack the future is carbon loss the future is.
Well you can go ahead and fill in the blank with any of the commonly reported themes.
Our research keeps us pointed at the long term truths buying good businesses at low prices as of winning investment strategy.
Let me share a few words about our business as we closed 2020.
We finished with our fourth consecutive calendar year with positive net flows.
And that makes it seven out of the past nine calendar years.
I have to say on behalf of my partners and in honor of our clients. We are very proud of that record coming in an environment that has been anti active and anti deep value.
Our AUM closed the year and its all time high of $43 3 billion and we are current encouraged about the pipeline as we look forward into 2021, I look forward to answering your questions.
Yeah.
Thank you rich.
To review our financial results for the period I'm I'll share some of our quarterly results detail.
The periodically present, both GAAP and as adjusted financial results we.
We did not adjusted results for the fourth quarter, our full year of 2020, However, our results for the fourth quarter and full year of 2019 were adjusted to exclude $22.7 million in nonrecurring compensation and benefits expenses.
For the purpose of this discussion I will reference the 2019 as adjusted information.
We reported diluted earnings of 22 cents per share for the fourth quarter compared to 16 from last quarter and as adjusted diluted earnings of 20 cents per share for the fourth quarter of last year.
Revenues were $39 $9 million for the corner and the operating income was $18 $2 million.
Our operating margin was 45, 7% this quarter compared to $44 one per cent last quarter and as the as adjusted operating margin of 45, 5% in the fourth quarter of last year.
We reported diluted earnings of 52 cents per share for the full year of 2020 compared to as adjusted diluted earnings of 73 cents per share for the full year of 2019.
Revenues were $138 $6 million for the year and the operating income of $55 $3 million. This compares to revenue of $157 million and as adjusted operating income of $68 $4 million for the full year of 2019.
Our operating margin was 39, 9% for the full year of 2020 decreasing from the as adjusted operating margin of 45.4 per cent for the full year of 2019.
Taking a closer look at our quarterly results. We ended the quarter with assets under management at the rich mentioned of $43 $3 billion of 30% from last quarter, which ended the $33 $3 billion.
The 5.1% from the fourth quarter of last year, which ended at $41 $2 billion the.
The increase in assets under management from last quarter was driven by market appreciation, including the impact of foreign exchange of $10 $3 billion, partially offset by net outflows of $3 billion the.
The increase from the fourth quarter of last year reflects $1 $6 billion and market appreciation, including the impact of foreign exchange and net inflows of $5 billion.
At December 31, 2020, our assets under management consisted of $17 $3 billion in separately managed accounts.
One of $3 $3 billion in sub advised accounts and $2 $7 billion and our Pacyna funds.
Compared to last quarter separately managed account assets increased reflecting $4 $1 billion of market appreciation and <unk>.
Foreign exchange impact, partially offset by $1 billion of net outflows sub.
Sub advised account assets increased reflecting $5.5 billion in market depreciation and foreign exchange impact, partially offset by net outflows of $2 billion.
And assets intervene of funds increase due to point $7 billion in market depreciation and foreign exchange impact.
Average assets under management for the fourth quarter of 2020 were $37 $7 billion, an increase of 13, 9% from last quarter and the decrease of 1% from the fourth quarter of last year.
Revenue increased $17 seven per cent from last quarter and increased three 9% from the fourth quarter of last year. The fluctuation in revenue primarily reflects the variance in average assets under management over the periods as well as performance fees and fulcrum fees recognized during the period.
During the quarter, we recognized $1 $1 million and performance fees compared to no performance fees being recognized during last quarter or in the fourth quarter of last year.
The fourth quarter also reflects the reduction in base fees of certain accounts related to the fulcrum fee arrangements of one client relationship.
These fee arrangements require a reduction in the base fee if the investment strategy underperforms its relevant benchmark or allow for a performance fee. If the strategy outperformed the benchmark during the fourth and third quarters of 2020, we recognized a 1 million dollar of reduction in base fees related to these accounts.
Compared to $8 $8 million reduction in base fees during the fourth quarter of 2019.
These fees are calculated quarterly and compare relative performance over a three year measurement period.
To the extent the three year performance record of these accounts fluctuate relative to their relevant benchmarks the amount of base fees recognized may vary.
Our weighted average fee rate was $42 three basis points from the quarter compared to 41 basis point last quarter, and 44 basis points for the fourth quarter of last year.
Asset mix and the impact of swings in performance fees and fulcrum fees are all contributors to changes in our overall weighted average fee rate.
Looking at operating expenses, our compensation and benefits expense was $18 million per the quarter, increasing from $15 $8 million last quarter and from the as adjusted the amount of $16 $2 million for the fourth quarter of last year the.
The increase from last quarter is driven by an increase in the bonus accrual and in the market performance of the strategy is tied to our deferred compensation obligations. The increase from the fourth quarter of 2019 reflects increases in compensation.
G&A expenses were $3 $7 million for the fourth quarter of 2020 compared to $3 $2 million last quarter and $4 $8 million for the fourth quarter of last year. The increase from last quarter, primarily reflect an increase in professional fees and data and systems expense and the decrease from the fourth.
Quarter of last year, primarily reflects the reduction in travel cost and professional fees.
Other income was $6 $1 million for the quarter, driven primarily by the performance of our investment.
The effective rate for unincorporated and other business taxes of two 9% this quarter compared to negative six 8% last quarter and three 3% in the fourth quarter of last year the.
The negative effective tax rate last quarter reflects the benefit associated with the reversal of uncertain tax position liabilities and interest due to the expiration of the statute of limitations. We expect the if the effective rate associated with the unincorporated and other business taxes of our operating company to be between three and five per se.
On an ongoing basis.
Our effective tax rate for our corporate income taxes ex U B G and the other business taxes was 24, 5% this quarter compared to our effective tax rate of 26, 5% last quarter and our as adjusted tax rate of 27, 6% for the fourth quarter of last year the.
The fluctuation in these effective rates reflect certain permanently non deductible expenses.
We expect this rate excluding these items to be between 24 and 26% on an ongoing basis.
The allocation to the non public members of our operating company was approximately 77, 3% of the operating company's net income for the fourth quarter of 2020 compared to 78 per cent last quarter and 74, 6% in the fourth quarter of last year. The variance in these percentages is the result of changes in <unk>.
Our ownership interest in the operating company.
During the quarter through our stock buyback program, we repurchased and retired approximately 31 9000 shares of class a common stock and class b units for $2 million.
The December 31st end of approximately $10 $5 million remaining in the repurchase program.
At quarter end, our financial position remains strong with $65 $5 million in cash and cash equivalent as.
As well as $7 $3 million of short term investment.
We declared a <unk> 25 per share year end dividend last night.
Thank you for joining us we'd now be happy to take any questions.
We will now begin the question and answer session.
The question in the press Star then one on your Touchtone from if you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two the.
This time, we will pause momentarily to assemble our roster.
Our first question today will come from Sam Sheldon with Punch of Associates. Please go ahead.
Yes.
Good morning, Richard Jessica Rich you spoke about the strong investment performance in the fourth quarter with plenty of opportunities in the deep value corner of the market can you flesh all of these opportunities a little bit more I guess, what sectors are you spending the most of time researching and investing in today.
Yeah, I mean for the for.
For the most board our portfolios are.
Pretty well stable and not the norm.
The changing very dramatically.
Remember a lot of this performance from the fourth quarter came from the fact that the same stocks all had been killed in the previous 12 months, leading into the pandemic and through the pandemic. So.
Our our exposure continues to be.
Skewed towards financial services energy consumer Cyclicals, and industrial cyclicals with fairly light exposures.
Consumer Staples real estate.
Mostly on the electric utilities.
Okay.
How would you characterize the current environment for the value managers searches and has there been any noticeable changes the RFP activity with values Brian <unk>.
Performance in your record Alpha in the fourth quarter.
I would say there's a big.
Increase very very noticeable.
In the.
The.
I'll call it free.
Search activity phase.
So for example, we did a webcast to potential clients and prospects and existing clients.
The a week or two ago.
Those are getting five to 10 times the volume of attendees than we had been getting for the past few years.
So.
While I would tell you that our pipeline is fine and it's stable.
And client is and I don't mean to sound bad, but the work fine.
Theirs.
The search activity.
Continues to be kind of around the pace that it's been maybe a little uptick is all I can say.
Put the.
But the pre search activity volume was pretty strong.
Got it okay.
Thanks.
I'm, sorry, I was just kind of add to that the.
You look at prior cycles.
It takes.
Probably a good year.
For you to get into the positive side of the value of cycle before you see strong movement in cash flows at least that's been the observation I would make from history. So we'll see if that's the same this time and obviously, we're very early in this.
Sure that makes sense.
Okay, maybe you could update us specifically on the sub advisory business I guess, what is the sentiment there and is there any large relationships up for renewal on the horizon.
You know as as you may be aware the.
All of the advisory businesses are always up for renewal.
There's we have a generally have an initial term.
Then it's just review of ball at will by our partners. So I would tell you that the cycle of renewing is not something that we are.
Concerned about there's been.
You know there's been some increase in activity in sub advisory.
From the standpoint the.
Yes.
It's hard to characterize it as trends, but I would tell you.
We had some very positive rebalancing that happened during the pandemic and now we had a big account win during the year, we established a very new a new sub advisory relationship.
And we're and we're involved in discussions about about incremental sub advisory relationships going forward.
But I would so I would say renewal isn't the issue the issue for us as well.
Will any of this.
Hmm.
These existing relationships start allocating more towards us as the value of cycle.
They recognize their lack of ore or too low of the level of exposure to valley.
So that I think will happen the some of the conversations are going on.
And then there's the law.
Looking for new sub advisory relationships I think you know that we like this business a lot.
And the partners that we've had in sub advisory of tended to be very very long lives.
Mostly because we do what we say, we're going to do and from everything I can tell the relationships continued to be strong so I E.
I think theres upside going forward, but I hope that gives you a flavor.
Sure.
Helpful.
Maybe you could walk us through your philosophy around the special year end dividend and buybacks.
All of that philosophy might've changed overtime.
Hmm.
The the philosophy really hasn't changed at all we weave.
Tried to use our true.
The to pay out between 60 and 70% of our earnings.
As the dividend.
And then kind of reserved the rust ore for stockpiles.
Buyback.
The Sierra is no different than that.
Obviously, we had a down year.
You know we pay our dividend.
Some of it.
Since the vagaries of the market are very difficult to predict.
We've operated for over the.
The decade, yeah, its probably for over a decade with the.
Of modest quarterly dividend following the followed by yearend dividend its pretty much just the calculation based on the historical profitability, which was down last year because as you know we went through a big dip even though our assets under management ended the year of their high.
We were at.
At the bottom.
Was substantially lower so our revenues were lower this year and our earnings were lower and that's what led to the dividend.
Philosophically, that's no different we've tended to try to be smart.
About timing of the stock repurchases.
Buying when there's softness in our share price.
And for the most part we've accomplished that we would we've acquired shares.
Yeah.
Reasonably attractive prices over time, we hope to continue doing that.
And we hope to the.
To deploy the excess cash that we have to buy back stock we do it in a fashion the.
Is cognizant of the volume of our trading activity. So you can't turn it on and off in <unk>.
Rapid.
<unk>.
Strokes as you might imagine, but given those constraints, we wanted to take advantage of softness and try to redeploy as much of the capital as possible to offset dilution that comes from our.
Share issuances under our employee compensation programs.
Okay.
Maybe last from me your cash and investment balance continues to grow could you update us on capital allocation priorities.
Maybe what your growth initiatives are.
The in place of the business today.
Yeah, you have to remember about the seasonality of our cash are our cash.
Is sort of at its high at the end of the year.
And then there are substantial cash requirements.
The first quarter.
Cause we pay our bonuses and we pay our our year end distribution.
So mostly we manage to the minimum cash balance which occurs in March or April every year.
And we try to have the.
A modest cushion.
So the so when you see where we are at the low where theres not you wouldn't think of there being a whole lot of excess cash. So the cash that we have all of our balance sheet is mostly temporary and.
So it's mostly focused on and short term investments that are not risky the only money that we put at risk.
Hum of some of it is seeding new products and strategies and that we will continue to do and some of it is to fund our employees.
Deferred compensation program, which allows our employees to allocate their deferred comp too.
To our own investment strategies, and then we take those funds and actually invested in those investment strategies.
So it has some impact on our quarterly.
Earnings performance of out of favor.
Well the one this quarter.
What.
You know the.
The the the.
The strategy continues to be primarily too.
Due to.
To increase the distribution of our existing brought up the.
To.
Incubate new products that we think might have interesting and the interest in the future.
And that's that's pretty much what we're doing.
Yeah.
Okay. Thank you for taking my questions of.
Of course.
Our next question will come from Tom from now with rocket point. The advisors. Please go ahead.
Pardon me might be near the dog in Euro.
Hi, Good morning, I apologize you are correct I was muted just to be clear, it's top of auto with rock point advisors.
Rocket point might sound, better and actually might be of great name for us at some point for the type of English as rock point of advisors.
We'll take rocket point.
Thanks for taking the question if I could ask you to circle back to the.
Sales and marketing initiatives I was.
So this might be slightly repetitive, but the inc.
<unk> by your comment that you were encouraged by your pipeline.
Curious to hear you say that it usually takes about a year for the interest in.
Value mandates to sort of gain traction I'd be curious to know what you'd think of as being the start date.
In the cycle of one when that might have started secondly.
Interested to hear about the participation in your webcast I guess my question is is that primarily coming from the consultant speak.
The space or are those actual numbers of the investment management community that are participating in those webcasts and.
Depending on the answer to that question. What are you hearing from the consultant space in terms of interest and deep value strategies. Net lastly could you just comment quickly on the whether there is any.
Change in the sort of geographically, where the interest might be coming from and whether you're seeing greater or less interest in deep value strategies domestically or is that coming from abroad. As I think I'm aware of you are built out some of your.
Sales and marketing efforts internationally so thanks.
Okay I hope will all hit all of these if I didn't you'll remind me.
You know most people are gating the start of the value cycle to October 1st.
You can be.
The Matt if you want and if you will and we can data back to the actual bottom of the of the market in March of last year.
But I would I would say that there was from from March 23rd which was one of which would have been our bottom.
October 1st there was a little bit of the what we kept up with the market. We were a little ahead I wouldn't call that of dramatic value cycle. So the fourth quarters of dramatic value cycle or at least of dramatic value performance. We hope it turns into a cycle. So I think October 1st would be my guess of where the.
Starting point would be.
The increase in interest is actually in.
Number of areas, but the one webcast I was specifically referring to.
<unk> had a lot of financial intermediaries on these are people that are advising clients, they're not consultants in the.
The institutional consulting community, but they were on as well.
The the.
But the big bulk.
On the intermediaries, he's our brokers that are probably answering their own clients questions about value and are trying to two of be educated on that.
We do see consultants and institutions looking more closely we see it in conversations of I'm going to use that same word I used before pre search activity.
<unk> calls the consultants are doing educational conference calls.
For broad swaths of consultants, who are engaged in the same kind of questions with their clients about should I change my.
The investment allocation, given how well growth has done and given maybe that this is the beginning.
So.
I'd say its kind of across the board.
And Europe.
You're right to say the most of the people that we're talking to our intermediaries rather than the ultimate investment decision.
The decision maker, but but my sense is debt that this is getting communicated an onward and there's enough of those direct investors that it's encouraging.
They're also asking for existing clients are asking for more engagement with their boards and committees and we've had lately. So all of those things are the things that give me.
The the May have made we made the statement that pre search activity is getting pretty pretty interesting now.
Where is it coming from everywhere.
Don't think that there's a geographic bias.
I, probably can look at data and see if that's the case, but.
This is my guess.
Got instinct from the conversations I've had over the last few months that it's pretty much across the board.
Great. Thank you I did I did I get every one of your questions.
All of it.
Thank you.
Okay lets you bypass the question. The Star then one Star then one task of the question.
There being no further questions at this time I would like to turn it back to Jessica Doran the us an email question.
Thank you operator, I will read a question from an investor that we received the email. This morning debt is a question for rich who is operator trying to get back on the line.
Right now so if you could keep an eye out for that as I read the question.
Well, just give rich a moment kit to them to get on and respond.
And so the question that came in is our debt.
This follows.
The markets are very worrying lately from observing large scale runaway valuations like Tesla Bitcoin and games that it makes me think of stories that I read from the late twenties and dotcom bubble.
While I understand it's impossible to predict when or what might happen I'm wondering your assessment of the greater risks that might affect casinos assets under management.
I in your view is there large scale that finance speculation or other risks that could cause significant and permanent capital loss from the market.
Further how do you assess the potential impact of these risks on the assets you manage and what are your clients hesitation on how busyness of assets are positioned to weather the coming years.
Yeah.
Okay. Thanks, I apologize I got disconnected for a quick a quick second.
But.
Okay.
The the.
I'll use the word the craziness in the market.
Has.
Very little impact on us because we just don't have any exposure to any of these kinds of companies.
We don't have exposure to the high flying growth stocks that are that are traditional things that people have invested in and certainly the items that have caused the market to two to have these giant dislocations, where you stare in amazement that you could have of the.
Size of magnitude that you've had.
We're not in those I wish I could tell you that we owned the Advair.
And we benefited from that.
Okay.
Okay.
What happens is when the market.
While the like this and volatility gets introduced to the marketplace.
It actually creates opportunity for us and by having a very very disciplined approach to thinking about valuation and to assessing valuation. We can exploit when the market goes crazy in one way or another by buying things that get debt.
Debt Punitively price.
Lightning up.
And when we have something that would run.
Now does this cause our clients to worry about their investment overall in equities I'm sure. It does.
Do I think that it's likely to have much impact on us I really don't because one thing that we've succeeded at over 25 years of being in business.
Is making sure that our clients understand exactly what it is that we do so there aren't.
They understand and we've been repetitive over and over and over.
Okay.
Because most of all of our clients.
Particularly with the two of them.
Sure.
Because where the.
Your money, which which.
Which aspect of equities do you want to put your money in and give me.
Uh huh.
There's this.
Yes.
Kind of stable steady operator, executing the same strategy year over year.
We instill some of them.
The wood.
Would exempt us from this kind of.
Fear that that it would impact our business from the only thing I can point to is what happened during <unk>.
Bob will because we were having a lot of the same discussions at the end of 1999 in thousands of them, we would stare at amazement.
Can't believe the going on in the marketplace.
And when it unwound, we actually had the five best years of flows into our business and good investment performance because the stocks. The we owned attracted capitalized people withdrew capital.
In companies with market values. Many many many times the size of ours.
<unk>.
And people just buy and sell at the wrong time, and we try to take advantage of it.
Hi, I know it was of Red question and I don't know if I address the thrust it well enough, but hopefully you can hear my sentiment.
This will conclude our question and answer session.
And at this point the conference is now concluded thank.
Thank you for attending today's presentation you may now disconnect.