Q1 2021 Pzena Investment Management Inc Earnings Call

Good day, and welcome to the pzena investment management results for the first quarter of 2021 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press star eight thousand one on your touchtone phone to withdraw from the question queue, please press * then two, please note this event 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 pzena investment management first quarter 2021 earnings call. I'm Jessica Doran Chief Financial Officer home with me today is our chief executive officer and co-chief investment officer Richard pzena. Our earnings press release contains the financial tables for the. We will be discussing. If you do not have that copy can be obtained in the investor relations section on our website at ww.w replace at 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 dead.

In addition, please be advised that due to prohibitions on selective disclosures. We do not as a matter of policy disclose material that is not public information on our conference call. Now. Let me turn the call over to the actual discuss our current view of the investing environment.

Thanks, Jessica.

Last quarter in these remarks I observed that clients were asking us whether the fourth quarter is Big Value run was the start of a cycle or just another head fake in the decade-long run for growth. Now after two consecutive quarters of value outperformance, we're being asked did I miss the value cycle? Is it over?

Needless to say short-term thinking still dominates, so permit me to go out on a limb. I believe this is the beginning of the value cycle. I believe this cycle has a good chance of being wrong and I believe we are still in the Cycles very early days.

Asset Management has been defined as the practice of taking imperfect and incomplete information about the present and using it to make projections about the future. In other words. I know that I don't really know the future the certainties however for the past year we've been saying that the signs of a pro value cycle would appear in one or more of the following four ways. First recession would be recognized the COVID-19 induced recession was cleared all and looking at the data from the past fourteen recessions in the south over the last century. We see that in the five years following the start of recessions value strategies outperformed the broad Market by an average of 530 basis points per year.

Thank you interest rates would stop falling most of the developed World. They have already stopped falling and the tightening of the labor markets that we see as we talk with companies reinforces our expectations, but they are unlikely to reverse and start calling again third growth expectations for the High Flyers would slow down a while. This hasn't clearly happened consider this

Wall Street analysts consensus earnings growth estimates for a portfolio of deep value stocks over the next two years is around 23% a year versus 17% a year for the Russell 1000 growth in.

You can buy the Deep value stocks for 11 times. These forward earnings versus twenty-seven times for the growth stock portfolio.

Finally, the incumbents would not be destroyed by the disruptors.

And I would point to electric vehicle news from the incumbents to reinforce that all of the market is unlikely to shift to the new entrance.

Over the past fifty years pro value periods in the market have lasted on average 62 months and generated 138 percentage points of excess returns.

This Compares with six months and approximately 39 percentage points so far in this cycle.

Further the depth of Pryor anti value Cycles appears to be correlated to the length of the probative value cycle needless to say following the deepest and longest anti value cycle on record. We're optimistic about the opportunity for a long profile you cycle end.

Finally, let me make a few observations about our business.

We experienced a small net outflow of approximately two hundred million dollars in the first quarter.

Significant part of the outflow with flex clients rebalancing their portfolios after gross returns for the past 12 months ranging from 69% to 126% in our various strategies.

We wouldn't be surprised if some of this outflow continues.

Nevertheless, we've had positive net flows during the last four consecutive years ending in March and had had only one quarter in the past sixteen where are trailing-twelve-month netflow is where negative in addition our pipeline has started to show signs of growth and reflects the normal lag. We would expect as a pro value cycle begin.

Thanks for listening and I look forward to answering your questions. Later.

Thank you, Vicki. Texeira Financial results. We recorded diluted earnings of $0.24 per share for the first quarter compared to $0.22 last quarter of zero cents per share for the first quarter of last year revenues were 45.9 million with a quarter an operating income with twenty-three million dollars are operating margin was 50.2% this quarter increasing from 45.7% last quarter and from 32.1% in the first quarter of last year taking a closer. Look at our money under management. We ended the quarter at forty nine point two billion dollars up 13.6% from last quarter, which ended at forty three point three billion dollars and up 83.6% from the first quarter of last year which ended at twenty six point eight billion dollars the increase in assets under management from the fourth quarter of last year was driven by market appreciative.

Including the impact of foreign exchange of six point 1 billion dollars partially offset by a net outflows of two billion dollars the increase in the first quarter of last year reflects off to point four billion dollars in Market appreciation and foreign-exchange impact and March 31st, 2021 our assets under management consisted of 19.4 billion in separately managed accounts twenty six point nine billion dollars and advised accounts and two point nine billion dollars in our convenient funds.

compared to last quarter

assets under management across all channels increased with separately managed account assets reflecting 2.4 billion dollars in Market appreciation and foreign-exchange impact partially offset by point three thousand dollars in that outflows of advise the account assets reflecting three point four billion dollars and Market appreciation and foreign-exchange impact and point two billion dollars in that info and that's what's in pzena funds being point three billion dollars and Market appreciation for an Exchange impact partially off that five point 1 billion dollars and that outflows average assets under management or the first quarter of 2021 or forty five point four billion dollars an increase of 20.4% from last quarter and 28.2% from the first quarter of last year revenues increased 15.1% from last quarter and 32.3% from the first quarter of last year the fluctuation in Revenue primarily reflects the very birth

An average assets under management over the. As well as performance fees and filter and fees recognized.

During the first quarter of 2021 no performance fees were recognized compared to one point 1 million and performance fees recognized last quarter and no performance fees being recognized by the first quarter of last year revenues also reflect the reduction and the basis of certain accounts related to the fulcrum C relationship of fulcrum fee Arrangements. Excuse me, boss relationship. You see Arrangements require a reduction in the base fee at the investment strategy underperforms. It's relevant Benchmark or allow for a performance see if the strategy outperforms Exmark during the first quarter of 2021 as well as the 4th and first quarters of 2020. We recognized $1000000 reductions in base fees related to these accounts off. These fees are calculated quarterly and compare relative performance over a three-year measurement. To the extent of three or performance record of these accounts fluctuate relative to their relevant Benchmark the amount of

Since he's recognized may vary.

Are weighted average fee rate with 40.4% for the quarter compared to 42.3 basis points last quarter and 39.1 basis points for the bulb first quarter of last year.

Impact your performance fees and Fulcrum fees as well as shifts and asset mix are all contributors to changes in our overall weighted average.

Looking at operating expenses are compensation and benefits expense was 19.1 million dollars for the quarter increasing from $18 last quarter and remaining flat from $19,000 for the first quarter of last year the increase in fourth quarter of 2020 reflect compensation expenses recognized in the first quarter associated with tax payment and the companies in a profit sharing and savings plan, which generally do not require during the year.

DNA expensive

For three point seven million dollars for the first quarter of 2021 compared to three point seven million dollars left quarter and four point four million dollars for the first quarter of last year the decrease in general and administrative expenses from the first quarter of 2020 primarily reflects a decrease in travel and entertainment and professional teeth.

Other income was 4.2 million for the quarter driven primarily by the performance of our investments.

Looking at taxes the effective tax rate for unincorporated and other business taxes with 3.2% This quarter compared to 2.9% last quarter and 29.9% in the first quarter of last year the tax rate for the first quarter of last year was impacted by the decline in income before taxes during the. We expect the effective rate associated with the unincorporated and other business taxes of our operating company to be between three and 5% on an ongoing basis.

Our effective tax rate for our corporate income taxes and other business taxes was 26.4% this quarter compared to our effective tax rate of 24.5% left of our effective tax rate for the first quarter of last year was 100% again reflecting the the decline in income before taxes During the period the fluctuation of these effective rates also received a certain permanently non-deductible expenses. We expect this rate excluding these items to be between 24 and 26% on an ongoing basis.

Yeah locations and the non-public members of our operating company with approx. 78.4% of the operating companies. Net income for the first quarter of 2021 compared to 77.3% last quarter and 74.5% for the first quarter of last year. The variance in these percentages is the result of changes in our ownership interest in the operating company during the quarter to our stock Buy-Back program. We repurchased and retired approximately 294000 shares of class a common stock and class the units for two point five million dollars at March 31st. There was approximately eight million dollars remaining and the repurchase program.

At quarter-end our financial position remains strong with twenty nine point seven million dollars in cash and cash equivalents as well as 7.3 million dollars and short-term Investments. We declare a cent per share quarterly dividend last night.

Thank you for joining us. We'd now be happy to take any questions.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble after.

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