Q2 2021 Westwood Holdings Group Inc Earnings Call
Thank you for standing by and welcome to the Westwood Holdings Group second quarter 2021 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 will need to press star 1 on your telephone as a reminder, today's program may be recorded.
I'd now like to introduce your host for today's program, Julie Gerron Senior Vice President General Counsel and Chief Compliance Officer. Please go ahead.
Thank you and welcome to our second quarter earnings Conference call. The following discussion will include forward looking statements, which are subject to known and unknown risks uncertainties.
And Ts 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 and our form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30th 2020.
Recorded 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 the SEC rules concerning non-GAAP financial measures the records.
20th valuation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press 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.
Last quarter I spoke of our positive net flows backstopped by a pipeline of new business opportunities and its strongest level in recent years and are awarded but not yet funded pipeline, which grew to more than $800 million, including several large institution.
Reconciled wins and small cap the.
This quarter I'm happy to report more items that highlights the success of our efforts.
And on them improving performance across our U S value strategies.
Soft close of our small cap strategy, driven primarily by institutional wins, along with the capacity limitations.
Strength and Institute.
<unk> sales capping our best sales quarter since 2016, and as discussed previously we made the strategic decision and Q4, 2020 to exit the Standalone convertibles business and most of our global convertible securities team rejoined the Aviva investors.
Also the 1.6 bill.
<unk> funds that we sub advise for Aviva was returned to them on April 1.2021.
Excluding this shift positive net cash flows totaled nearly $900 million and the second quarter.
For Standalone convertibles business did not meet our hurdles and the Aviva transition results and a net positive.
The business in terms of revenue generation and profitability levels.
The Viva assets had an average base fee last year of 16 basis points and this quarter's new account fundings will earn a weighted average fee of 45 basis points.
Our long term shareholders will recall.
To our difficult decision and we reached in February of 2020 after years of steadily improving dividends to reduce our quarterly dividend from <unk> 73 to <unk> 43.
We took this action to preserve cash as we confronted the myriad challenges facing our industry and as the effects of the pandemic became clear we suspended.
All of the dividend entirely in April of last year.
We reinstated of 10 cent quarterly dividend. This past February as vaccinations became more widespread and as the economy showed signs of re emerging.
As many long term shareholders know, we have always been debt free with the strong balance sheet and a long history of generating cash.
And our debt with which to fund operations, including the payment of dividends.
And we review our ongoing capital allocation options at the board level and over the past several years, we have continued to reinvest in our business set up a larger share buyback plan and most recently reinstated our dividend.
With our cash balances nearing prepaid.
Pre pandemic levels, our board has decided to pay a special dividend of $2.50 per share and recognition of our long term shareholders loyalty and patience and the makeup for the dividends foregone over the past year.
We will continue to monitor the evolution of our business as we always do to determine.
Cash dividend policy moving forward.
I'll now turn the comments on investment performance the <unk>.
500 closed the quarter and all time high despite inflation concerns and uncertainty over the path of fed stimulus for smaller caps index performance was once again impacted by MIM stocks as investors speculate.
Our record it on the outperformance regardless of the company fundamentals.
Despite these moves the market focus more on the impacts of the decline and the 10 year treasury yield of falling VIX and a shift and leadership back to growth.
For our U S value strategies after 2 quarters of outperformance value took a pause relative.
<unk> growth.
This remains a key investor focus has many of the areas hit hardest by the pandemic have rebounded sharply and are no longer as cheap as they once were.
In this environment, our large cap strategy outperformed the Russell 1000 and value index for the quarter, our mutual fund Debbie H G. L X posted of top half peer.
And your ranking and remains of 4 Star rated fund by Morningstar, It's longer term rankings and Morningstar and institutional investment peer universes remain competitive.
Large GAAP benefited from positive net flows exceeding a $110 million, mostly due to some client rebalancing.
Our smid cap strategy underperformed against.
The Russell 2500 value index and had net outflows as the clients shifted the assets and 1 of their 2 accounts that were invested and Smith to a separate global strategy.
And small cap, we were pleased to see performance rebound against the Russell 2000 and value index. Despite the market's continued preference for low quality often.
Speculative securities.
Over the course of the quarter the effects of many of those elements except for the performance of the <unk> stocks began to moderate which allowed fundamentals to drive returns for the second quarter small cap outperformed its index and our mutual fund Debbie HG S X ranked and the 30.
The fifth percentile against peers and its Morningstar universe for the quarter and is 30 percentile year to date.
Its 10 year track record remains attractive with the 16th percentile ranking relative to peers.
Institutional peers small cap performed similarly, well this quarter and maintains a top third ranking for the trailing 5.
5 and 7 year periods.
Small cap experienced the net positive flows of more than $800 million.
And this included new institutional separate account wins from our won but not yet funded pipeline last quarter.
All cap is approaching capacity and our implementation of the soft close will limit.
Inflows and maintain product integrity and alpha generating opportunities.
In summary value remains an area of potential search activity as the reversal of fortunes relative to growth has increased market interest and.
The nuance between value or investing and mispriced undervalued securities and simply.
New earnings statistically cheap companies will continue to become more apparent.
The performance took a step and the right direction as the outperformance of high beta securities moderated and fundamentals begin to carry more weight and.
This continues to unfold it should create and ongoing tailwind for our investment approach.
And our multi.
<unk> <unk> group are tactical allocation favoring equities over fixed income helped the performance.
Our team's largest strategy income opportunity posted another solid quarter of outperformance, beating its benchmark, 40% of S&P, 560% Bloomberg Barclays aggregate Bond index.
And our mutual fund <unk> IX remains of 5 Star Mutual fund and ranked in the 11th percentile for the quarter and its Morningstar peer group and and the top quintile over a year to date, 1 year time period and top decile over 3 and 10 year periods.
<unk> track record.
The remains compelling and the intermediary channel and we're excited to continue sharing that story with prospects as our teams work to secure key platform approvals.
And as income opportunities performance has improved we were pleased to see the strategy generate net positive flows for the quarter.
Income opportunity is approaching the 3.
Mark under the leadership of Adrian held for this milestone should further solidify the team's ability to attract interest and the marketplace as it finds ways to add alpha and a variety of market environments.
All of our other multi asset products total return high income alternative income and credit opportunities.
Added to their solid track records with positive absolute and relative performance for the quarter.
The Westwood total return fund WH Lv IX finished the quarter ahead of its benchmark, 60% of S&P, 540% Bloomberg Barclays aggregate Bond index and.
Morning Star gives 5 stars.
<unk> to this fund, which has delivered strong performance since coming under the wing of our multi asset team.
W. A L. The IX ranked in the top 40% of peer funds for the quarter and maintained top rankings longer term.
We look forward to engaging with more prospective clients on this strategy this year.
Our high income fund.
W. IHG H X again beat its benchmark, 20% of S&P, 580% Bloomberg Barclays aggregate Bond index this quarter.
BHG checks has produced strong results since our multi asset team began managing it and 2019.
<unk>.
For star rating by Morningstar, and ranking and the top decile for the quarter and trailing 1 year period among its peers.
Credit opportunity strategy posted positive absolute performance up nearly 300 basis points for the quarter.
Year to date the strategy has benefited from favorable security selection and the.
And being a <unk> tightening of credit spreads.
The portfolio combines attractive short dated securities and deep distressed investments positioning the fund to earn attractive returns, while limiting interest rate and spread risk.
Lastly, our systematic small cap growth strategy continues to perform well.
And beat its benchmark Russell 2000 growth index by nearly 500 basis points year to date.
Given such strong performance, we are launching and small cap growth mutual fund this quarter.
Multi asset team has spent several years developing a new innovative investment process capable of delivering outperformance across market cycles.
We expect that this will become evident through continued strong risk adjusted client returns within our small cap growth strategy and we're excited about the future potential of this platform as we consider additional asset classes and strategies.
Our suite of multi asset products remains uniquely positioned to take advantage of cross currents.
Between asset classes, capturing market inefficiencies with Mispriced Securities. This allows us to capture alpha from top down allocation as well as from bottom up repricing of our securities.
As our track record continues to develop we are and a strong position to share these strategies with different marketplaces.
We continue to believe.
At higher rates highlight the risks for different areas of fixed income and view of these risks allocations across multiple asset classes can provide diversification lower correlations stability and better outcomes.
The markets have recovered in many ways, we believe the potential for more dispersion in returns across.
Asset classes industries and companies will provide ample opportunities for our investment team to deliver superior risk adjusted returns.
Shifting to institutional and intermediary distribution and execution on our strategy continues to deliver strong results.
During our call last quarter I noted that.
Our global Convertibles team returned to Aviva investors and December and the operational support and corresponding AUM of $1.6 billion transition back to Aviva on April 1.
Due to the timing of the change reported AUM figures reflected this change during the second quarter of.
Our standalone.
Convertibles business did not meet our profitability hurdles and now with the strongest net flows and 6 years, we're replacing that business with higher fee assets.
And my comments today regarding net flows for the quarter exclude the aviva shift.
This quarter, we experienced higher inflows with no client losses and our institutional.
And alone base.
Total our institutional and intermediary teams had over 1.2 dollars 9 billion and inflows only partially offset by outflows netting of inflows of approximately $1 billion for the quarter.
We were especially proud to have enjoyed positive institutional flows this quarter and our core strategy.
<unk> income opportunity large cap and small cap the.
The categories in which the strategies compete have been experiencing outflows and our wins definitely reflect an increase and market share.
Our intermediary team also delivered with inflows of $148 million, partially offset by outflows of 69 million.
<unk> net income positive $79 million.
The reduced withdrawals and the intermediary space have contributed to our net sales strength.
Our smid cap and multi asset strategies are competitive and continue to be and demand Smith.
Smid cap and the institutional channel is similar to small cap using the same investment process and research.
And for them.
Our institutional sales team is focusing on smid cap after the close of the small cap and unsecured <unk>.
The Sultan approvals and multi asset our intermediary team is focused primarily on income opportunity and alternative income funds, both with good long term track records.
Turning to wealth managers.
Search part of our Dallas and Houston teams experienced net outflows for the quarter outflows included some account closures and withdrawals to fund tax payments, but also reflected client assets being reallocated into private equity.
The teams continue to enhance their servicing and business development efforts to manage flows and reach new clients.
Management of the opening of our offices and the ability to conduct face to face meetings have allowed our advisers to intensify their personal interactions with clients and they are conducting more business development activities with prospects.
Allison Houston have attractive opportunity pipelines and we believe this will result in meaningful inflows for the remainder of the year.
Strategy is managed out of our Houston office had mixed results select equity, which aims for tax efficient outcomes lagged. The Russell 3000 index for the quarter due to of technology sector underway, but remains ahead year to date.
Select equity is designed with the risk management at its core which helps provide.
Year, lower volatility returns and good downside protection versus the Russell 3000 index.
Hi office strategy once again beat the Russell 3000, and benchmark with the return of 9% this quarter year.
Year to date the strategy remains far ahead of the index and is up over 90% since its.
Inception in March of last year.
To summarize the second quarter, we enjoyed our largest sales quarter since 2016 with net inflows of $1 billion.
Excluding the previously disclosed the Veeva transition.
Performance has remained strong and our multi asset products.
<unk> and our U S value strategies, we have implemented a soft close of small cap and performance across our strategies has picked up.
And the return of the value style should continue to be of tailwind for interest and our approach to investing.
I'm also pleased to report that as of July 6th our Westwood team is back and our offices and enjoying the opportunity.
<unk> to collaborate and support each other face to face.
I want to comment on the press release, we sent out on July 14th regarding the unsolicited offers from Americana partners to acquire Westwood.
As noted in the press release Westwood's Board of directors and consultation with its advisers and in accordance with its.
Its fiduciary duties previously reviewed America and his proposal and determine unanimously that it's significantly undervalues Westwood relative to the company's Standalone plan.
And reaching this determination. The board also considered then Americana has not provided to Westwood any evidence of America and its ability to finance.
Position and bid.
We have worked diligently to position Westwood for success and the years ahead of.
Our primary focus is to provide superior risk adjusted performance and high quality service to our clients.
Over the last few years, we've made significant investments and distribution resources and infrastructure.
Et cetera. These.
And these investments are paying off as we have recently won sizable new client mandates.
We will continue to leverage our distribution resources to pursue asset growth across multiple channels.
We continue to assess corporate development opportunities such as acquiring investment management, our wealth management firms.
The structure or hiring investment teams for.
Firms and our teams facing difficulty competing on a standalone basis can benefit from integrating into our robust distribution and operational platform.
Our solid balance sheet allows us to act promptly on external opportunities and ensures the stability of our team.
And through employee retention.
We've built out and expanded the holistic wealth management offering to include complex financial and the state planning private banking alternative investment opportunities and of new digital client portal.
Continue to incubate new investment strategies that serve demonstrated.
Firms needs and the marketplace.
Once these track records of season and demonstrate the ability to successfully deliver alpha.
We will bring these strategies to market and our institutional intermediary and wealth channels we.
We have made significant investments and technology across the firm in recent years and now have a very.
The client or an efficient operating platform.
Over the course of the last year, we have reduced expenses improved product performance reinstated the dividend bought.
Bought back stock and increase sales.
We are of great team in place and look forward to executing our plan to deliver long.
<unk> value for our shareholders.
This is all of that I plan to say on the subject today, and we will not address speculative questions and I.
I will now turn the call over to Terry Forbes our CFO.
Thanks, Brian and good afternoon, everyone. Today, we reported total revenues of $17.5 million for the.
A long term of 2021 compared to $18.3 million and the first quarter and $15.9 million and the prior year second quarter revenues were lower than the first quarter, mainly due to lower performance based fee revenues were higher than last years second quarter, reflecting higher average assets under management.
Second quarter net.
Income of $1 million or <unk> 12 per share was lower than net income of $4.1 million or <unk> 52 per share and the first quarter, primarily due to higher realized and unrealized gains on private investments recorded in the first quarter, partially offset by lower income taxes, and the second quarter non-GAAP economic earnings were $2.8.
<unk> quarter for 35 per share and the current quarter versus $6.3 million or <unk> 79 per share and the first quarter.
Second quarter net income of $1 million or <unk> 12 per share outperformed for 2022nd quarter net loss of $2.6 million or <unk> 33 per share primarily on higher revenues.
And lower operating expenses, particularly foreign currency transaction losses economic earnings for the quarter was $2.8 million or <unk> 35 per share compared with the <unk> 2 million or <unk> <unk> per share and the second quarter of 2020 for.
Firm wide assets under management totaled $14.4.
Billion at quarter end and consisted of institutional assets of $7.1 billion of 49% of the total wealth management assets of $4.4 billion of 31% of the total and mutual fund assets of $2.9 billion or 20% of the total.
Over the quarter, we experienced the market appreciation of 600.
And $36 million and net outflows of 722 million and our financial position continues to be very solid with cash and short term investments at quarter end totaling $92.3 million and debt free balance sheet.
We declared a regular cash dividend of <unk> 10 per common share payable on October 1.2021 to stockholders.
Of record on September 3.2021. In addition, we are pleased to declare a special dividend of $2.50 per common share payable on August 22021 to stockholders of record on August 6.2021.
That brings our prepared comments to a close and we encourage you to review our investor.
The presentation, we have posted on our website, reflecting second quarter highlights as well as the discussion of our business product development and longer term trends and revenues and earnings and we thank you for your interest and our company and we'll open the line for questions.
Certainly the ladies and gentlemen, if you have a question at this time please press.
Star then 1 on your Touchtone telephone if for your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
And we have a question from the line of Mac Sykes from Gabelli Your question. Please.
Good afternoon gentlemen.
And just to.
2 questions first on the the.
The pipeline can you just go over the specifics again, what it was at the end of <unk>. What it is today at the end of <unk>.
And what was funded and replaced.
I'm wondering if my numbers straight on that.
Yeah.
Okay and your second.
Good question.
And just given the strong growth this quarter in.
In terms of those inflows does that.
Create a halo effect for the firm to leverage the other.
Things that you may be working on at this point did you see that helping with the close other sales.
Thanks.
Okay, well I'll answer that.
1 first Mac thanks for your questions.
I do think that positive momentum in the institutional sales side begets more positive momentum and other and other products. For example, we've had a lot of success recently in small cap and as we are approaching of soft close.
We've announced the soft close of small cap and approaching capacity.
And we're hopeful that we're able to draft off of that success with our smid cap product, which is really next up for growth.
<unk> been approved by 2 of the major consulting firms and buy rated and.
And we expect to see some good activity and that product drafting off of the success, we've had and small cap.
As far as the pipeline goes we're trying to look back at what we said last quarter and.
And where we are today and it looks like.
The numbers of.
<unk> and <unk>.
$5.14.
Relative to the ins and outs.
Okay and then 1 last question, Brian how should we think about the expense benefit from the Aviva chain.
Change in the second half.
Well the personnel left in <unk>.
Early December of last year, and as part of our transition services agreement with the VEBA. We agreed to continue to manage the funds until April 1 of this year.
And so all of the all of the office expense.
Spence associated with the Boston office, and all of the expense associated with the global Convertibles team.
Went back to Aviva. So you will not see debt expense going forward.
Okay, great. Thanks, guys.
And helpful. Okay. Thanks Mac.
Thank you once again, if you have the question at this time. Please press Star then 1.
And this does conclude the question and answer session of today's program I'd like to hand, the program back to Brian Casey for any further remarks.
Thank you Jonathan and thank everyone for taking time.
Time to listen to the call today do you have any further questions. Please visit our website at Westwood group Dot com or call Terry or myself directly. Thank you.
Okay.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
[music].
Yes.
And.
Yes.
Yeah.
[music].