Q2 2021 Pzena Investment Management Inc Earnings Call

Compared to the price you pay.

On the 1 hand. This is simple homespun version of value investing can cause a person to believe the value is just a factor.

But wait.

Factor in this case depends on the earnings power of the asset and that is where real research and real judgment come into play.

That's why I keep repeating on these calls and in most of my meetings with clients and consultants the value isn't a factor value as a philosophy.

1 other point I'd like to emphasize value investing wins in the long run we.

We don't get to win every month every quarter every year or even every 5 years, but serious research driven classic value investing is we practice. The art is a strategy that generates attractive long term returns.

This past quarter has growth stock investing seems to have regained favor.

People asking whether the prior 2 quarters, where the end of a very short value rally.

As economic growth reached a crescendo this spring from the combined impact of recovery and stimulus, but value skeptics reemerged.

This is how it always feels as a value investor.

Almost no 1 believes value will work until it already has.

But let me offer some perspective on the opportunity set we are presented with today.

Companies with attractive earnings growth rates selling at low multiples with very clean balance sheets.

Management that adapt to lead navigated the challenges of COVID-19.

And a cynical marketplace ignoring the shifting cycle.

Further.

Our value portfolios are finding diverse exposure Inc.

<unk> selected utilities and health care names areas, where value has been scarce for awhile.

Last but not least.

The cheapest quintile of stocks offer an earnings yield of 10% on a current basis based on first call estimates.

While the most expensive stocks offer less than a 2% yield on that.

10 year Treasury offers just above 1%.

The arithmetic on this difference is compelling enough to make my entire point.

Before I turn the call back to Jessica Let me briefly report on the state of our business.

We had $2.2 billion in positive net flows for the quarter. The second best in our history matching the pace of the post Internet bubble period.

Our strategy of partnering with some of the strongest and most sophisticated financial advisors in the world is paying off handsomely on.

Our pipeline remains robust with some relatively large searches nearing their final stages.

Thank you for listening and I look forward to your questions, but first let me turn it back to Jessica to discuss our financial results.

Yeah.

Thank you Vas.

We reported diluted earnings of 25 cents per share for the second quarter compared to 24 last corner from 13 cents per share for the second quarter on last year.

Revenues were $59 million for the quarter and operating income of $27.9 million.

Our operating margin was 54, 9% debt corner, increasing from 50, 152% last quarter and from 36, 4% in the second quarter on last year.

Taking a closer look on our assets under management, we ended the quarter at $53.1 billion up 7.9% from last quarter, which ended at $49.2 billion and at 68, 6% from the second quarter of last year, which ended at $31.5 billion the.

The increase in assets under management from last quarter, and Rich mentioned was driven by net inflows of $2.2 billion and market appreciation, including the impact of foreign exchange of $1.7 billion.

The increase from the second quarter on last year.

[noise] excuse me reflect $18.8 million in market appreciation, including the impact of foreign exchange and net inflows of $2.8 billion.

At June 30th our assets under management consisted of $20 billion and separately managed account $32 billion in sub advised accounts and $2.9 billion in our busy enough on <unk>.

Compared to last quarter overall assets under management increased the separately managed account assets, reflecting <unk> $6 billion in market appreciation and foreign exchange impacts.

7 advised account assets, reflecting $2.2 billion in net inflows and $1.1 billion in market depreciation and foreign exchange impacts.

And as I've been Pacyna funds remaining flat during the quarter.

Average assets under management from the second quarter of 2021, we're at $51.5 billion, an increase of 13% from last quarter and 72, 8% from the second quarter of last year.

Revenues increased 10, 9% from last quarter and 68, 9% from the second quarter of last year increased from last quarter and the second quarter of last year reflects the increase in average assets under management.

Our weighted average fee rate was 39.5 basis points for the quarter compared to 44 basis points last quarter, and 44 basis points for the second quarter of last year.

Asset mix across our strategies and distribution channel as well as performance based fees are generally the primary contributors to changes in our overall weighted average fee rate. However.

However changes in asset level may also impact our fee rate as the majority of our separately managed accounts have management fees pursuant to a schedule in which the rate we earn on the AUR declines as the amount of AUM increases.

Yeah.

Our weighted average fee rate for separately managed accounts was 53.3 basis points for the quarter compared to 54.5 basis points last quarter, and 55.2 basis points for the second quarter of last year.

The decrease from the first quarter of 2021, primarily reflects the shift in assets of certain strategies that typically carry lower fee rates.

The decrease from the second quarter of 2020, primarily reflect an increase in assets due to market appreciation.

Our weighted average fee rate for sub advised accounts was 27 basis points for the second and first quarters of 2021 compared to 26 basis points for the second quarter of last year.

Certain accounts related to 1 client relationship have fulcrum fee arrangements.

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 its benchmark.

During each of the second and first quarters of 2021, and the second quarter of 2020, we recognize 1 million dollar reduction in base fees related to these accounts.

These fees are calculated quarterly and compare relative performance over a 3 year measurement period.

To the extent that 3 year performance records of these accounts fluctuate relative to their relevant benchmark.

Mount of base fees recognized may vary.

Our weighted average fee rate for patina funds was $68.1 basis points for the quarter remaining flat from last quarter and increasing from $65.9 basis points for the second quarter of last year.

The increase from the second quarter of 2020, primarily reflects a reduction in fund expense cap reimbursements.

Looking at operating expenses, our compensation and benefits expense was $19 million for the quarter compared to $19.1 million last quarter, and increasing from $15.6 million for the second quarter of last year.

The change in compensation and benefits expense from the first quarter of 2021, primarily reflects an increase in compensation during the second quarter, which was offset by expenses recognized in the first quarter associated with tax payments on the company's employee profit sharing and savings plan, which generally do not recur.

On the air.

The increase in compensation and benefits expense from the second quarter of 2020.

Driven by an increase in compensation and in the market performance of strategies tied to the company's deferred compensation obligations.

G&A expenses were $3.9 million for the second quarter of 2021 compared to $3.7 million last quarter and $3.6 million from the second quarter of last year.

The increase from the first quarter, primarily reflects an increase in travel and entertainment and professional fees.

The increase from the second quarter of last year, primarily reflects an increase in professional fees and data and systems expenses.

Other income was $1.7 million for the quarter, driven primarily by the performance of our investment.

Turning to taxes, the effective rate for unincorporated and other business taxes was 3.6% this quarter compared to 3.2% last quarter and 4.1% in the second quarter of last year.

We expect the effective rate associated with the unincorporated and other business taxes on our operating company to be.

Between 3 and 5% on an ongoing basis.

Our effective tax rate for our corporate income taxes ex CBT and other business taxes was 24, 8% this quarter compared to our effective tax rate of 26, 4% last quarter and 26, 6% from the second quarter of last year.

Fluctuation in these effective rates also reflect certain permanently non deductible expenses.

We expect a free 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 78, 4% of the operating company's net income for the first and second quarters of 2020.1.

<unk> to 77, 7% in the second 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 through our stock buyback program, we repurchased and retired approximately 100000 shares of class a common stock and class B unit for $1.1 million.

At June 30th share was approximately $7 million remaining in the repurchase program.

Yesterday, we announced that our board of directors has approved a $40 million increase in the aggregate amount authorized under the current program to repurchase the company's outstanding class a common stock on class C units.

We plan to use available cash on hand to support our objective of minimizing dilution from a compensatory stock and unit related issuances over the next several years.

At quarter end, our financial position remains strong with $53.5 million in cash and cash equivalents as well as $7.3 million and short term investment.

We declared a <unk> <unk> 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.

I'd like to ask a question. Please press Star then 1.

Of course from has already been addressed and you're going to enjoy yourself from Hugh Please press Star then 2.

Pause momentarily to assemble our roster.

Ladies and gentlemen, today's first question comes from Sam showroom upon from Associates. Please go ahead.

Good morning, Richard Jessica Great to see the strong positive net flows.

Could you talk about the sentiment and interest that you're seeing from institutions towards value right. Now I guess is the level of interest change or or institutions broadly thinking the value outperformance earlier was a head fake or are you kind of gaining traction with with a wider group today.

Yeah, Mike it's very mixed I would tell you the.

The vast majority are not paying attention on those.

We remain focused on growth.

Hum.

The growth has had this little bit of.

Rebound in recent weeks, a month or whatever it's been 2 months from Putnam has reinforced that so.

I would tell you.

There.

So it's all over the map it goes from the people that are being proactive and anticipating a longer cycle.

So the people who have.

Sort of engaged in conversations to be ready for when they want to pull the trigger.

We're not it's not floodgates mm mm.

It's early in the cycle. So this is this is what.

What has happened in all of the cycle or the first year.

GAAP the floodgates she got the floodgates when it helps the opportunity is already gone.

We don't think we're near the point, where half the opportunity has gone way up.

Just realized that maybe they're missing it.

But.

So.

It's on all of them all over the map.

Answer, but I will say that those that embraced us.

On the early side Hep C. We've seen a lot of positive flows into those accounts and that's that's what you've seen in the in the second quarter. It was it was more on.

Money coming into existing accounts, but it was a lot of new accounts, although there were some new relationships.

Okay.

How long is the characteristics of the ongoing value searches that you talked about on the prepared remarks compared to prior years theyre changing the size of the opportunities or maybe the mix between sub advised U S amaze or.

The change in fee sensitivity or anything like that.

Well do we.

The obvious answer to that question is that more of it.

I don't even think this is a change because this has been what we've seen for the last 5 or 6 years, but it's been focused on on non U S strategies with global and international on emerging markets being the primary source of interest this quarter, we saw a little more.

Flow into our.

Our flagship U S focused value product through the relationship that we have with John Hancock.

But that's.

The nature of what we're seeing isn't that different but we do find ourselves qualifying for searches.

With 5 years ago or more we wouldn't be on the running 4. So these are things that are multibillion dollar searches, but the with 1 win.

Can really move the needle now obviously those are long long processes, where we're competing against.

Substantial players. So you don't know that he was gonna windows, but we're in low and I think we're probably at the scale now where we qualify for almost any size search that anybody is contemplating in the world.

Okay and with this momentum or are you doing anything differently from a marketing or sales perspective.

Yeah, we're increasing our or the.

The size of our staff. So we have been reinvesting in both direct sales on distributions, we've beefed up our marketing Department, we're beefing up our RFP Department.

Adding more content, we're starting to get more sophisticated on.

On social media.

And packaging or content differently.

We're opening an office in Dublin and hopefully in.

Early January that's on target so that we can have.

A formal presence in the EU, which we had originally went.

Planned on having through our London office, but that became impossible post Brexit.

We think that will help with you a permanent in the European market.

So we are we are trying to continue to capitalize on what we think will be a multiyear opportunity set.

And expand our reach.

Okay. Great. My last question the board increased the buyback authorization by $40 million before completing the old remaining authorization has there been a change on the philosophy around the buyback going forward.

No there hasnt.

The reality is when we think.

You could get cloak close to using up.

From what the authorization is at some point in the next couple of quarters really based on on the unlikely case that we buy the maximum net were allowed to buy.

We proactively asked the board to expand it before we run out, but we're not changing our philosophy at all.

Okay, Alright, thank you guys.

Sure.

Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then 1.

Ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to the management team for any final remarks.

Yeah.

Thank you everyone for joining us on today's call and we look forward to speaking with you again soon take care.

Thank you Ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Yeah.