Q3 2021 Pzena Investment Management Inc Earnings Call
Hello, and welcome to the container investment management reports results for the third quarter of 2021. My name is Charlie and I will be coordinating your call. Today. If you would like to ask a question. During the presentation. You May Register to do so by pressing star followed by one on your telephone keypad I will know how did you I bet your haste just.
French begin Jessica Please go ahead.
Thank you operator, good morning, and thank you for joining us on the Casino investment management third quarter 2021 earnings call I Am Jessica Doran Chief Financial Officer with me today is our Chief Executive Officer, and co Chief investment Officer Rich patina.
Our earnings press release contains the financial tables for the periods, we will be discussing if you do not have a copy it can be obtained in the Investor Relations section on our website at Www Dot casino Dot com.
Replays of this call will be available for the next two weeks on our website.
Before we start we need to remind you.
You that todays 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 could 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, so you'd 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 rich, who will discuss our current view of the investing environment.
Yeah.
Thanks Jessica.
So go.
We are human beings are irrational decision makers, it's not just my opinion.
Decades of behavioral economics research and shovel Nobel prizes have been handed out in support of this conclusion.
And simply take time to make wireless judgments sometimes.
At a recent experience.
Sometimes out of our hard wired predisposition towards loss aversion.
The evidence is powerful we.
Humans are simply irrational economic actors.
The truth is effectively the pep platform upon which value investing is built.
Times that all you investors capitalize on the realization of human biopsy biases impede rational decision making.
And the resulting mispriced assets are available for those willing to systematically override, thereby actually is.
And apply rational economic analysis for their decisions.
Let's consider the choice of which passed with glass offers the most attractive future return profile today.
Using our estimated normalized earning yield as a metric.
Cheapest quintile of the 2000 largest global stocks offers a yield of more than 13%.
Compare.
To the estimated normalized earnings yield of the full universe of global stocks of just over 6%.
And treasury bonds and euro bonds, each offering yields of just 2% or less.
And yet current sentiment investment literature stock price momentum all would have one believes that the.
The better choice is to be found among assets with lower projected earnings yields.
The rational actor would obviously prefer the double digit return opportunity embedded in the cheapest stocks.
But let's consider one of the most common current arguments for avoiding the cheapest stocks today, namely.
I prefer quality.
Okay. So let's look at the facts.
The cheapest quintiles of both U S and non U S stocks have 10 year average revenue growth rate of six 8%.
10 year average returns on equity of 17% and 13.
Percent respectively.
By any analytic frame I think it's fair to say that this is a fertile hunting ground for quality businesses.
That's also consider the near term projected earnings at the cheapest stocks.
Wall Street analysts are projecting value stocks to grow their earnings at more than two.
<unk> compounded annual growth rate through 2023, a higher rate than projected by analysts for growth stocks.
And we can buy these growing high quality value stock businesses.
Prices of 60% or more discounted to their growth rather than.
'twenty for some message in conclusion is clear.
We think the value cycle, it's still in its early stages.
There will no doubt still be bumps in the road ahead as there always are.
To ignore the data is to fall prey to the irrational decision makers fate of suboptimal outcomes.
You.
On us to always stay true to our value discipline and they're all therefore offer a counterbalance to this all to human reality.
Let me close with a few comments about our business we.
We closed the quarter with assets under management at nearly $51 billion.
We.
You can cut outflows of 1 billion for this quarter, but this comes after positive net flows last quarter of $2 2 billion.
As we have remarked over the years our flows can be lumpy.
I'd like to offer is evidence that the marketplace rewards our value discipline.
We still have positive.
Net flows for the year.
And if this holds we will achieve our fifth consecutive calendar year.
Over the last 10 years with positive net flows.
We are awaiting approval from the Irish regulatory officials to open our first European office in Dublin, which will offer us the ability.
If not for EU clients access to our strategies in whatever form they prefer.
I look forward to answering your questions and now I'll turn the call back over to Jessica.
Okay.
Thank you ran.
Looking at Arizona turned the corner, we reported diluted earnings of 27 cents per share.
So our third quarter compared to 25 last quarter and <unk> 16 per share for the third quarter of last year.
Revenues were $51 6 million for the quarter and operating income was $28 4 million or.
Our operating margin was 55% this quarter remaining relatively flat from 54.
There are 50% last quarter and increasing from 44, 1% in the third quarter of last year.
Taking a closer look at our assets under management and as Rich mentioned, we ended the quarter at $58 million down four 3% from last quarter, which ended at $53 $1 billion.
And that 50.
96% from the third quarter of last year, which ended at $33 $3 billion.
The decrease in assets under management from last quarter was driven by net outflows of $1 4 billion and market depreciation, including the impact of foreign exchange of <unk> 9 billion.
The increase from the third quarter of.
Two here reflects $17 3 billion in market appreciation, including the impact of foreign exchange and net inflows of <unk> 2 billion.
At September 30th 2021, our assets under management consisted of $18 8 billion in separately managed accounts $29 3 billion and 70.
<unk> background and $2 7 billion in our Kadena funds.
Compared to last quarter assets under management decreased in each channel with separately managed account assets, reflecting <unk> 9 billion in net outflows and <unk> 3 billion in market depreciation and foreign exchange impact sub advised account assets reflecting.
Acting <unk> 5 billion in market depreciation.
Point 4 billion in net outflows.
And assets in Covina funds, reflecting point 1 billion in net outflows and point 1 billion in market depreciation and foreign exchange impacts.
The decrease in assets under management, primarily occurred toward the end of the quarter, resulting.
And average assets under management of $52 $4 billion, an increase of one 7% from last quarter and 58, 3% from the third quarter of last year.
Revenues increased one 5% from last quarter and 52, 1% from the third quarter of last year.
These increases from last quarter in the third quarter of last year reflects the average assets under management.
Our weighted average fee rate was $39 four basis points for the quarter compared to 39.5 basis points last quarter, and 41 basis points for the third quarter of last year.
Asset mix across.
Cross our strategies and distribution channels as well as performance based fees are generally the primary contributors to changes in our overall weighted average fee rate.
However changes in asset levels May also impact our fee rate as the majority of our separately managed account payoffs management fees pursuant to a schedule.
And which the rate we earn on the AUR declines as the amount of AUM increases.
Our weighted average fee rate for separately managed accounts was 53.4 basis points for the quarter compared to 53, three basis points last quarter and $54 nine basis points for the third quarter of last year.
The decrease from the third quarter of 2020, primarily reflects an increase in assets due to market appreciation as the rates we are in and the majority of our fee schedules decline as the assets increase.
Our weighted average fee rate for sub advised accounts was 27.6 basis points for the third quarter of 2021.
One compared to 27 basis points for both the second quarter of 2021, and the third quarter of 2020.
The increase from the second quarter of 2021 in the third quarter of 2020 reflects the shift in assets to strategies that typically carry higher fee rates.
Certain accounts related to one client relationship.
You bet.
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 the third and second quarters of 2021, and the third quarter of 2020.
<unk> should be recognized $1 million reductions in base fees related to these accounts.
These fees are calculated quarterly and compare relative performance over a three year measurement period.
To the extent that 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 for the Pacyna funds was 69 basis points for the quarter, increasing from $68, one basis points last quarter and from $68 seven basis points for the third quarter of last year.
The increase from the second quarter of 2021 reflects the shift in mix toward products and strategies that typically carry higher.
And the increase in the third quarter of 2020, primarily reflects a reduction in expense reimbursement paid.
Looking at operating expenses, our compensation and benefits expense was $18 9 million for the quarter compared to $19 million last quarter and increasing from $15 8 million for the.
Fever order of last year.
The increase in compensation and benefits expense from the third quarter of 2020 was primarily driven by an increase in compensation and the market performance of strategies tied to the company's deferred compensation obligations.
G&A expenses were $4 3 million for the quarter compared.
Third the $3 9 million last quarter, and $3 2 million for the third quarter of last year the.
The increase from the second quarter and third quarter of last year, primarily reflects an increase in professional fees and data and systems expenses.
Other income was <unk> 4 million for the quarter driven.
Compare narrowly by the performance of our investments.
Turning to taxes, the effective rate for unincorporated and other business taxes was negative five 4% this quarter.
Compared to a positive three 6% last quarter and negative six 8% in the third quarter of last year.
And from a negative effective tax rate this quarter and in the third quarter of last year reflects a benefit associated with the reversal of uncertain tax position liabilities and interest due to the expiration of the statute of limitations.
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 ex V T and other business taxes was 24, 2% this quarter compared to our effective tax rate of 24, 8% last quarter and 26, 5% for the third quarter.
<unk> last year.
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 nonpublic members of our operating company was it.
Quarter of at least 78, 8% of the operating company's net income for the third quarter of 2021.
Compared to 78, 4% last quarter and 78% for the third quarter of last year.
The variance in these percentages is the result of changes in our ownership interest in the operating company.
Praxair in the quarter through our stock buyback program, we repurchased and retired approximately 234000 shares of class a common stock for $2 $6 million.
At September 30th there was approximately $44 $4 million remaining in the repurchase program.
At quarter end our financials.
It remains strong with $70 million in cash and cash equivalents as well as $7 $3 million in short term investments.
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.
Because if she would like to ask a question tasteful star followed by one on your telephone keypad now if you change your mind it just stopped haulage by Chi.
We have.
It's Shane from some Sheldon of Punch and Associates. Your line is open. Please go ahead.
Hey, good morning, Richard Jessica maybe you could start by giving some color on the pipeline and interest trends that you guys are seeing on the sub advised and separately managed sides of the business.
Yeah.
The question I'll give you a little bit of.
Colors.
The pipeline has.
Then relatively stable for maybe maybe off a little bit, but I'll I'll call it mostly stable over the loss.
12 months.
And.
And then continues to be.
They only widely scattered over.
All of our strategies there are chunkier.
Searches.
That come and go.
They call them and we win we win some of the we lose some of them.
We always hopeful that we're going to win long, but the opportunity set to remain.
Reasonably stable I think is the best way to put it.
When we do our own projections.
Go or what.
Have them.
We see enough of a pipeline continue to feel to feel comfortable about positive flows but.
I would say not.
Enough took to see big big growth rates.
Okay. That's helpful and maybe how you're feeling about the mutual fund business today do you plan on adding additional resources or funds, there and I guess would you expect that to be the sort of last account type to benefit from improved sentiment towards value is maybe retail kind of chase's returns.
Yeah, I mean, we did we do it we did out of bond. This year I don't know if it was in the last I don't remember what started it started in the quarter. So we added an international value.
Mutual fund.
Obviously, it's very early and it has a small amount of assets of it.
And.
We we have added we added another salesperson, we're actually still.
Looking to expand our investment a little further.
We continue to believe the being very.
And aggressive on the message about value investing.
We will pay dividends when when and if we believe it's when I hate to use the word if but it's fair to use it there's a big flow of funds into value.
Out there we started to see a little bit of it but.
Hmm.
We clearly are investing.
Head of our belief that this is going to happen.
Okay got it.
I've got a question on performance.
As you know it looks like you haven't recorded significant performance fees year to date, but.
The performance in your strategies has been pretty strong recently.
So on what you see today, where do you think that is going in the next few quarters.
Remember almost all of our performance fees are.
<unk> three year Rolling average performance.
So when you look back three years, Youre looking youre, including the beginning of the pandemic and you're also including.
This pretty anti value environment that existed in the second half of 2018 and attitude.
Into 2019.
So mostly those will roll out over time.
I don't think it's a quarter away, but I think it's it's a year away before but the negative on our and our performance.
Regulations are gone and you'll see some of the more recent performance generate performance fees.
Okay.
It looks like headcount is up around 10% over the last year, just curious to hear how.
How much of that is the opening of the Dublin office and what roles you Phil.
<unk> got firm and maybe just broadly how retention has trended recently.
But the Dublin office will.
Initially out for people and it.
Hum they're already employed.
Although I don't know that they were in the.
Filling a big they are employed in October bought into trouble. So they wouldn't be in that head count number yet.
Hum.
Mostly the head count growth has happened and are all on the distribution side kind of tune the support but marketing support.
Or.
So it's in the RFP team between the publication and.
And content and distribution.
Area, we did opportunistically out some research we had actually at three research analyst that we hired in the quarter somewhat couple will reply.
That's what we took advantage of the ability to find some good talent, which is comfortable that's but that you've come across that in a lumpy fashion just like we come across our accounts and our longest lumpy fashion and we.
So so we're pretty.
I mean were completely fully stuff now.
Replacement investment side, although.
We've decided to continue to be more proactive with having a steady pipeline of investment talent rather than hiring in chunks like we've done in the last couple of years.
So.
But over the.
Mel August growth area for us.
And head count over the last five years has been on the client side of it.
And the sales and marketing.
Okay.
The last question for me is around the Dublin Office can you just talk more about how that launch is going in.
Maybe you could speak to the importance of having a formal presence in the EU.
Well, we already have a big business in the EU.
This is a Brexit reaction actually so.
The London rug registration and ability to pass for that into the.
They do.
Disappeared with Brexit, we have a temporary solution in place while we were figuring out what our options were we decided that.
Being regulated in Dublin, since we already have funds that were available and ready.
Yeah.
By the Central Bank of Ireland.
Was it an easier process.
But we believe that there they're fair.
Fairly.
Reasonable to deal with so the impact really.
<unk>, so that we can hmm.
Not have.
Complicated process by which we offer various strategies. So we offer separately managed accounts we offer UCITS.
And.
<unk> are co mingled vehicles, all of which are a different kind of regulatory requirements.
And we were using third parties to two.
Facilitate.
Our ability to operate there and it's it's.
It's less than optimal.
It does add a little bit of cost at the beginning startup costs of ads.
A little bit more ongoing expense.
But that will be offset if the assets get bigger and that's what we hope.
So.
So yes. This is just investing everywhere in the world that we need to invest to get access.
Our markets and.
I don't think there's anything more so than that unless you have any other questions.
Oh got it thanks for taking my questions today.
Sure.
Sure.
Our next question comes from Tom Burnout of Rote point Advisors. Your line is open. Please go ahead.
Great. Thank you operator, and thanks for taking my question good morning, guys.
I think I'll take the first question I guess.
A couple on <unk> first question.
Around the pipeline and the market opportunity rich with strikes me.
As I heard you're answering <unk> question, it's interesting over the last.
I guess two three maybe even four quarterly calls we've heard you talk about.
The inflection.
Between growth and value strategies performance and interest in those strategies and you had said that there has historically been.
They are pretty solid sort of 12 month lag between the.
The performance of the relative strategies any interest, especially on the institutional side and it strikes me that now.
I realize it hasn't.
We haven't had any we didn't have a clean break last fall that has persisted, but if you took last October is.
A little bit of a demarcation point here, we are 12 months.
Hence.
Was wondering given your flows in the most recent quarter whether are.
You would still feel as though there will be a large P.
Interest and activity.
Any time now or whether this time it feels different to you.
Well, all I'll say that the flows in the quarter or more the outflows that we had were caught caused by a couple of things one.
Pick up.
Is the fact that we have been up.
Round, 50% over the prior year.
Year.
And there was just rebalancing. So this is this benefits us obviously, when we underperform it hurts us when we outperform that's the issue.
Existing account, we also had one.
Reasonably large sub advisory relationship and this was in Canada.
And.
They decided to bring in house.
Terminated a lot of managers, so we had kind of to what.
What I'm, hoping we'll be big outliers on the outflow side.
The inflow side is where in.
In the long run growth well have to come from obviously.
And so what if we.
We've had kind of a.
I'm going to quote normal pattern of new account openings. It has not picked up.
Along the lines that you would say if there was truly a 12 month lag period are.
Are we seeing that.
Now what do I make of that.
You know even as recently as the if you look at the and the performance in the third quarter.
This was a very unusual quarter, where I would say.
Obviously this is a little bit of an exaggeration, but it.
It was almost like every other day, we outperformed the market the market was very much.
Saying you know this is a gross market value market as a growth market as a value market.
So we haven't seen that.
Clear clear.
Idea that we're in this cycle.
And when you get that kind of behavior.
The fear of missing out on a value rally or the looking in the rearview mirror and saw.
I'll, let you have missed out it just hasn't.
Yet.
Realized.
Well it I Hope October is off to a good start for us from a performance perspective globally. It doesn't feel like it did in the third quarter. It feels more like it did.
And.
Earlier, this year and late last year.
<unk>.
Material.
Okay.
I don't know if the environment is.
Tim.
I don't have a good words to explain it it's obviously not there yet, but we haven't lost the hope or the belief that this is yet to come.
Probably the best way to put it.
Right, but so not a material pickup in interest.
Institutional sort of gatekeepers.
Yes, I think this is what I'm hearing.
Correct Yeah.
Got it okay Super helpful. Thanks.
So we're going through all that.
Then my next question was going to be additional color on the redemptions and so you.
Helpful commentary and that next question would be on the buybacks Jessica I think I heard you say in your prepared comments it sounded like you did buy back some shares.
This third quarter and I think I heard you say a $44 million remaining on the authorization is that open ended or is it is there an end date to that authorization.
It is open ended and is up and then there is an end date and there is not.
Got out.
In.
Okay.
What was it originally.
Originally when we.
When we originally.
And.
We went through the buyback program in 2000 and.
Our 2000, and I want to say that 2000 and.
We started with $10 million.
And then beginning.
And we have added the buyback program at twice since.
St and time.
In second quarter of last year excuse me in the second quarter of this year, we added another $49 the buyback program.
Got it.
Perfect and can you just talk a little bit about your strategy around.
Yes.
The buyback program and the implementation of that and how you think about you know potential dilution to public shareholders. As a result of some of it.
Programs you have.
As part of your incentive comp plans.
I can answer that question.
We try to.
The back as much as we can when prices are reasonable to offset the dilution.
We we've always.
Sort of had this view.
And have been operating pretty much that way that on average.
We're gonna.
By about one or 2% to the share count because this is a talent business.
And aligning the next generation of.
Investment talent and leaders.
Okay.
By using equity as a part of the compensation.
Is.
AD is.
It's critical to our business plan.
So.
Now.
Obviously, our the liquidity of our share base of our shareholder base is not enormous.
So we can't buy enough back.
Is totally offset.
But we do think that the benefits that we received through.
Modest annual dilution, obviously, I get I get equally dilutive.
In my opinion.
Having investment talent that is completely aligned from a business.
Hector.
It is the.
The best way to have the time to implement.
Investment strategy and the business strategy that we have it's.
<unk> also been a spectacular retention tool for the senior people in the organization.
Yes, so it's two completely understand.
Per spend totally get it and that actually is I'm glad I asked the question because I havent really heard it.
I'm not suggesting you Havent said it you probably that.
I just missed it but that's helping the snake.
About that 1% to 2% increase in share count sort of a as a steady state year in and year out is a.
Understand is a helpful data point.
In the back of our minds. So thanks for sharing that I. Appreciate it that's all good no more questions from me. Thanks a lot.
Okay.
Yeah.
As a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Yeah.
There are no further questions on the lines at this time, so I'll hand, the call back over to the team.
Thank you everyone for joining us on today's call. We look forward to speaking with you next quarter.
Yes.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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Okay.
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Yes.
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