Q1 2021 Manning & Napier Inc Earnings Call
Good evening My name is Angela and I will be your conference operator today at this time I would like to welcome everyone to the Manning and Napier first quarter 2021 earnings conference call.
Our hosts for today's call are Nicole Kingsley Brunner, Chief Marketing Officer, Marc Mayer, Chairman, and Chief Executive Officer, and Paul Battaglia, Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at eight P. M eastern today.
The dial in number is 40457, and 33406 and enter pin 407 to 878 and.
At this time, all participants have been placed in a listen only mode.
If you should require operator assistance, please press star zero.
It is now my pleasure to turn the floor over to Mr. Cole Kingsley Brunner.
Thank you Angela and thank you everyone for joining us today to discuss Manning and Napier first quarter 2021 and 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 may be deemed forward looking statements within the meaning of the private Securities Litigation Reform Act.
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Cause 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.
Manning <unk> Napier assumes no obligation or responsibility to update any forward looking statements.
During this call. Some comments may include reference to non-GAAP financial measures Bill GAAP reconciliation can be found in our earnings release and related SEC filings.
With that I will turn the call over toward Chief Executive Officer, Marc Mayer Marc.
Thank you Nicole.
There are several main points, we would like to make today.
One we continued to deliver good investment results for clients and we are receiving notable recognition for them.
To the combination of those results as low as our marketing and PR efforts and investments and our client facing teams are positioning us well to continue improving the trend in net flows.
Three our strategic initiatives are progressing well and we have launched the overhaul of our wealth management pricing model and for US planned we returned capital to shareholders in the first quarter.
We will discuss each of these in detail as we progress throughout the call.
First let us begin as we always do with our investment results for clients specific figures are available on pages six and seven of the earnings supplement.
Performance remained strong across the risk spectrum for our traditional multi asset class investment strategies that are the mainstay of our holistic wealth management solutions.
Each of our various risk based strategies delivered positive ahead of benchmark total returns and the core.
There are several aspects to the first quarter that make us proud of these results.
First the three months of the year, where their most difficult quarterly stretch for aggregate U S fixed income performance and almost 40 years.
A rapid and nearly continuous rise in interest rates from extremely low levels challenged bondholders, leaving many fixed income investors with losses and the order of low single digit percentages.
For the portion of our more defensive portfolios that are heavily weighted to fixed income. This was a very difficult and market environment broadly.
The dynamism of our asset allocation is visible in many ways movement between asset classes across geographies capitalizations and equity styles.
It is also visible within fixed income sectors and strategies.
Our ability to allocate to our own high yield and unconstrained bond strategies within our multi asset class portfolios, notably aided performance and the first quarter, which was very important as municipal bonds normally the first choice for taxable investors have become extremely expensive.
And on attractive.
We were able to generate positive returns close to 3% and the case of high yields against the high yield benchmark that was flat, while our core bonds and municipal portfolios were down alongside the broader fixed income market.
We run a significantly more concentrated high yield portfolio and many managers carefully analyzing each credit to make sure. We are more than compensated for the risk we take in the quarter, we were aided by much higher than benchmark exposure to cyclicals energy and financials over the long term we are.
Deliberate performance and high yield debt ranks and the top 11% over 135 and 10 years. We also have strong performance and unconstrained bond and ranking and the top 16% of the competitive set over three years I'm, sorry over 10 years in the first quarter and over.
The medium and long term, our ability to deliver above benchmark performance and multi asset class strategies, while maintaining our risk management disciplines highlights why we are pleased with results we delivered for clients.
We have been managing our dynamically allocated globally diversified multi asset class investment strategies for decades.
These are tightly integrated complete portfolio of solutions for use directly with wealth management clients as well as by third party financial advisors and consultants looking to provide high quality solutions to their clients both individuals and institutions.
We believe and accountability and our track record is fully audited.
Dating back to the inception of our one of our flagship long term growth strategy in 1973.
Before I finish talking about are our multi asset class strategies I want to talk a little bit about what went on and equities and.
And considering the equity components of our multi asset class portfolios, while equity market returns around the world were quite good on the order of 3% to 6% for the major equity indices within the broad aggregates. There was a great deal of turbulence Val.
Value stocks laggards for much of the past decade until November of 'twenty, and 'twenty outpaced growth stocks in the quarter.
Many highly valued winners of prior years declined 20% or more.
Small cap stocks.
Also long term laggards surged ahead of large cap stocks, our core team, which had walked down equity weights and our multi asset class portfolios and stock soared in 2020 pivoted and increased equity allocations in the face of unattractive returns and fixed income on.
Analyst teams found opportunities throughout many areas of the equity markets at home and abroad, and both gross and and value and large caps and and small navigating the rotations underway.
Because we are neither dogmatic gross nor value investors, but flexible core managers with well defined disciplines for analyzing both gross and value stocks, we were successful and the first quarter.
As a result of both our asset allocation decisions as well as security selection. We are pleased to have delivered positive absolute returns for all of our risk based multi asset investment strategies as well as to have delivered more than full participation and the ongoing equity bull market and the first quarter.
So coming back to our multi asset class strategies.
Our goal is to deliver growth over the long term, but for individual clients specifically, how those results are generated matter a great deal flow.
Risk of our strategies take the volatility our clients' experience and the nature of the performance pattern. We deliver these are all critical pieces of the clients solution experience a smoother ride helps clients remain invested in more difficult market environments, enabling them to benefit when markets recover.
And so this is why our multi asset class strategies built and such significant risk management disciplines. Our aim is to deliver a degree of downside protection when clients need it most while providing as much participation as we feel is prudent and touring up market environments.
And so as I was stating.
And on track record in multi asset class investing dates back to the inception of our long flagship long term growth strategy and January 1973.
And if we look at Morningstar data there are 7776 strategies listed and the Morningstar allocation category.
And those approximately 1000 multi asset class separate accounts composites have a 10 year track record and about those thousand only for multi asset class separate account composites have and inception date in the 19 seventies.
The two longest standing multi asset class separate accounts composites belong to the same manager to Manning and Napier its long term growth and our growth with reduced volatility separate account composites.
Someone who invested $100000 and our long term growth strategy adage inception, and January 1973 would have eight and a half million dollars today.
Having realized equity like returns with 30% less risk.
And this is a testament to our time tested research disciplines and processes no. Other wealth management firm has this kind of track record that clearly and definitively quantify is what we've been able to deliver for clients over a half century of different market economic and social environments.
Continuing with performance during the first quarter and I'll focus now on our equity strategies.
Our fundamental U S equity non U S equity global equity and core equity unrestricted portfolios. Each outperformed to start 2021 relative results range from a modest degree of outperformance and U S equity to substantial outperformance and our non U S equity and global equity strategy.
Across all of these portfolios the chief driver of outperformance with strong security selection, a testament to our analysts abilities to find opportunities even when many portions of equity markets are as richly priced as they are today.
It's a reminder, that we don't buy the markets. We are buying individual securities that we believe represent very attractive return opportunities.
And beyond our core fundamental portfolios. Our results were more mixed for the quarter, our disciplined value suite was a beneficiary on an absolute basis of the first quarter's equity market shift from the gross style to value, but its tilt towards quality within the value space led to modest relative underperformance.
First is its benchmark.
And intermediate to long term results remain very good and we believe the strategy is well positioned to benefit as flows swing back to value equity style.
After a remarkable 2020, our Rainier international small cap strategy underperformed by about 500 basis points and the first quarter driven primarily by the global style rotation of value of Ranier strategy, which is a separate.
But equally disciplined and time test and research process from our core bottom up portfolios is growth oriented despite the relative retracement last quarter, our Rainier International Discovery Fund remains ahead of its benchmark by over 504 hundred annualized basis points over the trailing three and five.
Five years, respectively.
Right here is noteworthy as well so it's effective risk management over its nine year history. It's downside capture has been better than 92% of its peer group and a sharp ratio ranks and the top 4% over that timeframe.
It's worth, noting that and our fundamental equity strategies idiosyncratic risk dominates our portfolios, meaning that our returns are not simply explained by factor exposures. This is very important in an environment, where not only isn't there much alpha, but a substantial amount of what passes.
For Alpha is just factor base.
Since investors can buy factor beta very inexpensively.
True Alpha which is is idiosyncratic in nature is genuinely valuable.
Word if I will on the current state of the capital markets and the implications for our thinking.
Clearly there are now excesses visible that go beyond high valuations on equities or box.
Witness the boom and special purpose acquisition vehicles, so called specs, which have been around for a long time, but are now being used to bring two broader range of companies public.
Some of that already and frankly, many that simply are not ready to be public.
Or the surge and the value of bitcoin.
Now without getting into any form of debate about the fundamental long term consequences of crypto currency it.
It is hard to understand how coinbase and exchange for trading crypto currencies could go public at $85 billion greater than the valuation of NASDAQ on which trades, the London stock exchange or ice, which owns the New York stock exchange.
Or how dogecoin, which was started as a joke could be up 5000% this year and have an aggregate value of $50 billion.
Incredible rise of online trading platforms, most notably Robinhood has ushered in an important and useful democratizing force and finance. However, there is no question that the combination of addictive game of five trading apps with social media and.
Led to provocative developments, such as the rise and fall and rise of Gamestop, which has gone from $19 $350 to $45 to $150 oil and the span of just the last four months.
Or the incredible story of our CAGR.
Our family office that Levered about $20 billion up by a factor of five or maybe more to buy total return swaps that didn't require holdings disclosure.
The banks that provided prime brokerage services for our <unk> and now amounts losses of more than $10 billion.
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And a potent reminder, that leverage only amplifies results it can't turn a bad investment into a good one.
The confluence of all these events and many many more like them that we read about are disturbing.
More so than the absolute valuation of stocks or bonds.
Which are of themselves a source of concern.
Now we believe consistent with the consensus that we are in the midst of and economic and earnings boom greater than any seen since the early 19 eighties.
The great majority of professional investors have literally never seen a boom like this.
And the potency of operating leverage and consequently earnings is almost certainly being underestimated.
And this along with the low absolute level of interest rates is legitimately supportive of higher equity valuations.
However, notable parts of the equity market are certainly richly valued and as we discussed bonds are vulnerable to rising rates and increasing inflation.
Although we do not forecast high and sustained inflation.
In conjunction with the speculative excesses I mentioned all of these factors call for a more muted outlook for the medium term returns available in the markets as well as the recognition that a substantial equity air pocket at some point seems likely.
Although the latter would probably be a healthy clearing of the air.
Turning now to an update on our strategic initiatives are excellent investment results are beginning to generate significant national recognition.
We are pleased to have been recognized by Barron's as the best Mutual fund family for 2020.
Additionally, we were recognized as a Refits Lipper Fund award winner for the U S 2021, best mixed asset class small fund family group over three years.
These awards are a terrific achievement in their own right.
And there ever was a year for us to be particularly pleased to have this honor. It was during 2020, a year of unprecedented challenges and change.
And our clients are.
Thankfully for the skill and tireless dedication of our research team for a job very well done.
It is critical that we resume net positive asset flows and we saw further meaningful progress and the first quarter as the pace of net outflows continued to decline meaningfully from prior trends as Paul will cover and some detail.
We are optimistic that the pace of outflows will continue slowing throughout the year and that we will resume net positive flows before the end of this year.
We believe that recognition such as the ones mentioned above as well as additional marketing PR and sales opportunities, resulting from our long history of investment excellence will help promote our message and our story.
Along those lines, we added additional client facing personnel to our asset management business and the first quarter and as mentioned on prior calls we will continue to bolster the size of our client facing teams throughout the rest of 2021, and both wealth and asset management.
As mentioned on our prior call in the first quarter, we completed an overhaul of our price a model for new clients in wealth management.
This comprehensive bundled fee incorporates wealth planning and advice investment solutions and custody current clients fees are grandfathered and our expectation remains that it will be additive to revenues over time.
Our digital transformation continues to move forward across multiple factors simultaneously in 2021 we will implement a CRM and adviser portal with the best cloud as well as portfolio counting and client reporting.
Our implementation of basic work Workday modules within finance has been completed and we are installing workdays business intelligence functionality as well as migrating all our human resource systems to work day.
We expect full implementation of Charles River for trader on trading order management and compliance to be complete across all our portfolios by the end of the year on.
All of these efforts will simplify and modernize our operational processes as well as improve the efficiency and experience for employees.
21, However, we will continue to be a year of investment with material efficiencies coming in future years.
Our fourth strategic objective and develops all of the others and relates to everything we strive to accomplish at Manning and Napier.
We are committed to being a talent rich and diverse highly aligned organization with a powerful distinctive culture.
We believe that diversity and inclusion leads to better decision, making and superior business outcomes for all.
We are committed to being a firm whose diversity of staff leadership and board are broadly representative of our country and the communities and which we work.
We know these changes take time.
We are establishing goals and policies and practices to make meaningful progress and we look forward to sharing more specifics soon.
Finally on corporate structure.
Last quarter, we told you of our commitment to both enhance employee alignment with our shareholders by increasing share ownership by our staff.
I'll also returning cash to shareholders and ensuring that increased employee ownership is not dilutive to other shareholders.
Our share buyback program began last quarter and Paul will provide more color in his remarks.
Finally, I'd like to take a moment to reflect on where we are more than one year. After the onset of COVID-19 in the United States.
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And as a company to work and different ways to live and different ways and to think and different ways.
And I'm truly proud of the courage and creativity. Our team has shown over the past 12 months.
We have been able to continue to deliver excellent investment results and high quality service for our clients at a time of unprecedented change.
Our operating results improved substantially and we have been able to generate best in class returns to shareholders.
Same courage.
Activity and immense determination will continue to serve us well for the years ahead.
With that I'll turn the call over to Paul for more details on our financials.
Thanks, Mark and good afternoon, everyone and thanks for joining us today.
The highlights for the first quarter included continued improvement on net client flows and further evidence of stabilized day U N.
Increases in revenue and operating income and good traction on the share repurchase plan announced on our last call.
I'll begin my remarks, with a review of assets under management.
We finished march with AUM of $21.1 billion up from $20 1 billion as of December 31.
Net outflows for the quarter were $132 million, but were more than offset by $723 million of market appreciation and.
Additionally, during the quarter, we adjusted our reporting of assets under management to include novel delivery business that we had previously excluded from our definition of a U N and.
This was a onetime reclassification and as of March 31, 2021, we had approximately $470 million of model delivery assets.
When compared to this time last year, which was nearly the bottom of the market at the onset of the pandemic.
AUM has increased by $4 $1 billion or 24%.
And although net flows have not yet turned positive a 132 million of net outflows for the first quarter represented another quarter of improvement compared to prior periods.
Gross client inflows improved to approximately $625 million by channel, we reported approximately $225 million of inflows from our wealth management channel and.
$400 million of inflows from our intermediary and institutional team.
Gross client outflows of approximately $750 million represented the lowest level of quarterly outflows that we have reported and the last several years with $300 million of gross outflows from our wealth management relationships and 450 million from our intermediary and institutional team.
Our separate account retention rate during the quarter with approximately 96%.
Before leaving a U M I'll provide some additional background on our model delivery business.
And our most popular core and quantitative strategies have been available through mail delivery providers for access by individual investors for the last several years model business has been and increasingly important part of the intermediary distribution strategy and in particular with smaller accounts that may not meet our separate account minimums.
This trend accelerated during 2020, given the strong performance run with our model delivery assets, increasing from approximately $200 million at the start of the year to more than $400 million by the end of 2020.
While this business has lower fee than our traditional separate accounts. It is an important part of our intermediary growth strategy and we are optimistic about growth prospects for both for both 2021 and beyond.
Turning to our first quarter P&L, we reported revenue of $34 $2 million for the quarter on increase of 2% from last quarter and 10% for the first quarter of last year.
Revenue margins during the quarter were 68 basis points consistent with what we've reported in prior periods.
Operating expenses were $27 $9 million and the quarter, a sequential decrease of $1 million and $1 $2 million decrease compared to the first quarter of 2020.
Compensation and related costs decreased by approximately $275000 since last quarter.
The decrease the decrease for the quarter is predominantly driven by reductions and our 2021 research bonus estimates compared to what we incurred in 2020 based on the very strong performance that we achieved.
As you May remember our research bonuses based on absolute and relative performance metrics for the trailing one and three year time periods, meaning that the bonus expense recognized in 2021 will be reflective of both current and prior period performance.
Our first quarter results also include the impacts of our deferred compensation plan that was implemented at the start of the year, whereby a fraction of incentive compensation for our most highly paid employees as deferred.
Invested into our mutual funds invested over a multiyear period.
Compensation and related costs as a percentage of revenue improved to 55 per cent for the quarter down from 57% and the fourth quarter of 2020, and our overall head count stands at 275 employees as of March 31.
Other operating costs was the other contributor to expense reductions and $6 $7 million of expense represented a $675000 decrease from last quarter.
The 9% decrease was driven by a number of factors, including seasonality and timing of certain expenses and a reduction and expenses stemming from the target date fund merger that was completed during the third quarter of 2020.
For the quarter other operating expenses represented 20% of revenue. However, as we look ahead to the remainder of 2021, we expect that other operating expenses were more than likely settle in the 22 to 24 per cent of revenue range as we continue to incur costs to support our digital transformation and expect travel cost to increase.
And as restrictions are eased.
Operating income improved to $6 $2 million and the quarter on increase of nearly 40% from the fourth quarter with operating margins of 18%.
On prior calls we have stated our commitment to achieving operating profits of $20 million or more and operating margins of 20 per cent or better over and investable timeframe.
We continued to make progress towards achieving these goals. While also acknowledging that we have plenty of hard work in front of us to bring our margins more in line with our industry peers.
Non operating income for the quarter was $460000 a reduction from the $1 $1 million of non operating income that we reported last quarter, which included income stemming from changes in our tax receivable agreement liability as well as investment returns on our marketable securities.
As a result on a GAAP basis, we reported pretax income for the quarter of $6 $7 million compared to $5 7 million last quarter.
After accounting for approximately $900000 of strategic restructuring costs, we reported economic income of $7 $6 million.
Our non-GAAP effective tax rate for the quarter was approximately 12%, resulting and economic net income of $6 7 million or <unk> 29 per adjusted share.
Similar to last quarter, the reduced effective tax rate is again, a reflection of discreet tax benefits recognized from option exercises during the quarter.
We believe that the non-GAAP effective tax rate of 30% is more representative of what we expect in future quarters, but this rate may vary based on activities during the quarter as well as based on any future tax law changes if.
If we were to apply the normalized 30% tax rate to our first quarter results our earnings per adjusted share would have been 23.
Looking at the balance sheet as of March 31, we reported approximately $70 million of cash and investments down from $81 million at year and with no debt.
And incentive payments were the primary driver of the reduction and cash.
Additionally, we repurchased 412000 shares of class a common stock for approximately $3 million. Following the announcement of our $10 million share repurchase program and February three.
And the repurchase shares will be reported as treasury shares on our March 31 balance sheet and will remain and treasury until they are retired or reissued we.
We expect to have additional updates on our share repurchase program and future quarters.
Since the start of the year, our adjusted share Count has increased by approximately 1 million adjusted shares to $23 7 million adjusted shares as of March 31st.
The majority of the increase is attributable to awards issued under our long term incentive plan that will vest over five years.
The adjusted share count was reduced by the aforementioned share repurchases. However, those repurchases were generally offset by option exercises.
As of March 31, our adjusted share Count now includes approximately 17 million class a shares outstanding 2 million private units held by legacy shareholders 700000, vested stock options and approximately 4 million Unvested stock awards issued under our long term incentive plan.
As of March 31st our employees and directors now own approximately 37% of the adjusted shares outstanding up from approximately 33% at the end of the year.
And closing the first quarter marked another period of meaningful traction on our strategic initiatives, coupled with further stabilization of AUM and improved financial results.
Like Mark mentioned earlier this progress has been achieved and large part due to the hard work and resolve of our people who have stepped up to embrace every challenge that we have been faced with over the past 14 months, we are thankful to our people for their excellent work and dedication and look forward to celebrating future successes with our team our clients and our shareholders.
That concludes today's call. If you have any questions on the topics address today, please contact us using the inquiries portal on our Investor Relations website and will properly addressed your inquiry.
You for listening and for your interest and Manning and Napier and I will now turn the call back over to Angela to wrap up thank you.
This does conclude today's conference call. Please disconnect. Your line at this time and have a wonderful day.
Thank you.
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