Q1 2022 Pzena Investment Management Inc Earnings Call
What the impact of circumstances or events going forward.
In addition, please be advised that due to prohibitions on selective disclosure do not as a matter of policy disclose material that is not public information on our conference calls.
One of the complaints I hear often for my family don't worry I'm not going to offer a long list.
But I tend to repeat myself.
And the truth is there right.
I've been saying the same thing about value investing for my entire life. It just works.
It works because people are emotional and analytical works because people blindly project recent events indefinitely into the future.
Works because people tend to shy away from considering investments that have known problems.
As for me I'm comforted by the predictability that value investing works because of these very human tendencies.
My favorite chart. These days is one that shows a 70 year history of the price to earnings ratios for the most expensive quintile up stocks along with the cheapest quintile of stocks in the broad U S market.
While the expensive stocks pe's have fluctuated between 12, and 85 times and today sit very near their high point.
Cheap stocks have barely budged for 70 years, ranging between five and 10 for the entire period.
In other words as we sit here today.
I see an environment that is very normal for a value investor.
And so it seems to me perfectly reasonable to expect that the return opportunity for value strategies should be similar to what has been earned over the long term.
At the same time, given the valuation spreads it seems very difficult to imagine that growth strategies or the broad market for that matter.
Likely to earn returns similar to their long term nature.
And so we stay the course building concentrated portfolios of deeply undervalued companies, which have gone through a rigorous research process.
Bind into our portfolio that offers attractive long term return potential along with a diverse set of risk exposures just like we always have.
In addition to my enthusiasm for our investment opportunities looking ahead.
I wanted to share. This morning, something this morning about two subjects getting primary attention here at casino as well as amongst our clients all over the world.
They are diversity equity and inclusion and ESG.
Let me start with DTI.
We're extremely proud of the leadership roles women play in our organization here.
Here are just a few highlights.
Our executive Committee of six includes two women.
Our general counsel head of human resources, both co heads of our North American distribution team and our director of marketing operations are all women.
57% of our promotions transfers and partnership appointments over the past five years I've gone to women.
There are certainly more for us to do in this area and we continue to strive to increase the diversity in our applicant pool for all roles.
On the ESG, we have always viewed environmental social and governance factors is being integrated into our investment process.
As such the primary responsibility for our ESG analysis falls on our 28 person research team.
While we have added three ESG specialists to coordinate our issue identification documentation and tracking of these ESG issues. The entire research team is focused on ESG.
Unlike many managers, who have taken a quantitative approach focusing their investments on companies with high ESG scores.
We believe a better way.
To enable our clients to benefit from companies increased attention to ESG issues.
And to have more impact as responsible stewards of capital.
Is to focus our analysis on companies that are taking identifiable steps to improve their ESG standards.
We wrote a white paper, which highlights that ESG improvers actually make for a better investment than those with current high ESG scores.
We will keep updating this data as it is too short to have complete confidence, but the initial results are encouraging.
On the business front I can report that things are going well.
Net flows which have a very erratic pattern were flat this quarter.
But for the trailing 12 months, we're about $1 billion in net inflows and the pipeline is building slowly, but surely as we typically see after value cycles take hold.
Now for the details.
We reported fully diluted fully diluted earnings of <unk> 16 per share for the first quarter compared to 24 last quarter and 24 per share for the first quarter of last year.
During the current period.
<unk>, an additional $5 $9 million of expense associated with a change in the estimate of uncertain tax positions.
Due to a change in our interpretation of administrative rulings excluding.
Excluding the impact of this expense diluted up diluted earnings would have been 20 per share for the first quarter of 2022.
Taking a closer look at our results assets under management ended the quarter at $52 8 billion.
Up 0.6% from last quarter, which ended at $52 5 billion and up seven 3% from the first quarter of last year, which ended at $49 2 billion.
The increase in assets under management from last quarter was driven by market appreciation, including the impact of foreign exchange of 0.3 billion with no impact from net flows.
The increase from the first quarter of last year.
Flex $2 6 billion in market appreciation, including the impact of foreign exchange.
Net inflows of $1 billion.
As of March 31, 2021, our assets under management consisted of $19 4 billion in separately managed accounts.
37 billion in sub advised accounts.
And $2 7 billion and our Pacyna funds.
Impaired to last quarter separately managed account assets remained flat sub advised accounts and account sub advised assets.
Reflecting 0.3 billion in market appreciation and foreign exchange impact and zero point $1 billion in net outflows and assets in Pristina funds increased slightly due to 0.1 billion in net inflows.
Average assets under management for the first quarter of 2020 to $53 1 billion, an increase of three 1% from last quarter and an increase of 17% from the first quarter of last year.
Revenues for the first quarter totaled $52 8 million, increasing three 5% from $51 million last quarter, and increasing 15% from $45 9 million in the first quarter of 2021.
These variances primarily reflect the change in average assets under management over the respective periods.
Our weighted average fee rate was $39 seven basis points for the quarter compared to 39 six basis points last quarter, and 44 basis points for the first quarter of last year.
Asset mix across 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 rates as the majority of our separately managed accounts past management fees pursuant to a schedule in which the weight rate we earn on the AUM declines as the amount of AUM increases.
Our weighted average fee rate for separately managed accounts was $53 two basis points for the quarter compared to 53 nine basis points last quarter and $54 five basis points for the first quarter of last year.
The decrease from last quarter, primarily reflects a shift in assets to certain strategies that typically carry lower fee rates.
The decrease from the first quarter of 2021, primarily reflects an increase in assets due to market appreciation as the rates we earn on the majority of our fee schedules decline as the assets increased.
Our weighted average fee rate for sub advised accounts was 28 five basis points for the first quarter of 2022 compared to 27 four basis points for the fourth quarter of 2021 and 27.0 for the first quarter of 2021.
Certain accounts related to one client relationship a full comp broadcom fee arrangement.
The arrangements require a reduction in the base fee if the investment strategy underperforms its relevant benchmark.
We will allow for a performance fee if the investment if the strategy outperforms its benchmark.
During the first quarter of 2022, we recognized a zero point $5 million of performance fees related to these accounts.
During the fourth quarter of 2021, and the first quarter of <unk>.
The first quarter of 2021, we recognized zero point $9 million and 1.1 million reductions in base fees related to these accounts.
These fees are calculated quarterly and compare relative performance over a three year measurement period.
Yeah.
To the extent the three year performance record of these accounts fluctuate relative to their relative relevant.
Benchmark.
Out of base fees recognized may vary.
Our weighted average fee rate for Pacyna funds was $69 five basis points for the quarter decreasing from $71 seven basis points last quarter and increasing from $68 one basis points for the first quarter of last year.
The decrease from the fourth quarter of 2021, primarily reflects a shift in assets to certain strategies that typically carry lower fee rates.
The increase from the fourth quarter of 2021, primarily reflects an increase in performance fees recognized in the first quarter of 2022.
Okay.
Our operating margin was 55% this quarter decreasing from 52 point.
Last quarter and increasing from 52% in the first quarter of last year.
Looking at operating expenses.
Compensation and benefits expense was $21 2 million for the quarter, increasing from $20 million last quarter and from $19 1 million for the first quarter of last year.
The increase from the fourth quarter of 2021 reflects compensation expenses recognized in the first quarter.
So say with tax payments and the <unk> companies employee profit sharing and savings plan, which generally not recur during the rest of the year.
The increase in compensation and benefits expense from the first quarter of 2021.
Reflect an increase in employee head count and compensation.
G&A expenses were $4 9 million for the first quarter of 2022.
Compared to $4 5 million last quarter, and $3 7 million for the first quarter of last year.
The increase from last year and first quarter.
From last quarter and the first quarter of last year, primarily reflects an increase in professional fees and travel and occupation travel and occupancy costs.
Other income was <unk> 1 million for the quarter, reflecting the performance of our investments.
Turning to taxes, the effective tax rate for our unincorporated and other business taxes was 27, 5% this quarter compared to four 3% last quarter and three 2% in the first quarter of last year.
The increase in the effective tax rate this quarter reflects the aforementioned $5 9 million dollar expense.
<unk> with a change in estimate of uncertain tax positions due to a change in interpretation of administrative rulings.
The effective tax associated with the unincorporated and other business taxes of our operating company to be between 4% and 6% on ongoing basis.
Our effective tax rate for our corporate income taxes, excluding new BT and other business taxes was 28, 3% this quarter compared to 24%.
Four 6% last quarter and 26, 4% for the <unk>.
First quarter of last year.
We expect this rate to be between 25 and 27% on ongoing basis.
The allocation to the nonpublic members of our operating company was approximately 77, 3% of the operating Companys net income for the first quarter of 2022 compared to 78% last quarter and 78% <unk> four.
4% for the first quarter of last year.
The variance in these percentages is the result of changes in our ownership interest in the operating companies.
During the quarter through our stock buyback program.
Purchased and retired approximately 273000 shares of class a common stock and class b units for $2 $4 million.
At March 31.
There was approximately $38 9 million remaining in the repurchase.
Program.
Yeah.
At quarter end, our financial position remains strong with $35 6 million in cash and cash equivalents equivalents.
We declared a 3% quarterly dividend last night.
Thank you for joining us and wed now be happy to take your questions.
Thank you if you'd like to ask a question that you can press star one on your telephone keypad.
I would like to withdraw your question you can press star two please ensure you're on mute lately.
King your question.
Oh.
Yeah.
Yeah.
As a reminder, if you'd like to ask a question you can press star one on your telephone keypad.
Yeah.
First question for today comes from Mac Sykes of.
Mike Your line is now open.
Hi, good morning, rich and congratulations to Jessica.
I had two questions. The first was just maybe you could provide a little more color on the.
Tax expense this quarter and whether this is likely to.
Come up in the future may be a benefit to you guys I just wanted to get a little more time.
Uh huh.
Understanding about.
They have happened there.
Yeah actually.
We are not changing any tax positions.
We increased the reserve.
Due to an adverse tax ruling or tax court case.
And a company that has similar but not identical characteristics to us.
On the <unk> the unincorporated business tax so we don't anticipate any change in filing position and.
We expect.
If things go our way that we will reverse these reserves, but we thought.
That development was prudent to have a bigger reserve, but that's why we took that.
Understood.
Okay, and then just in terms of the value investing universe today.
It seems like we've had some pretty significant volatility I mean, one of the stocks traditional gross doctors now compressed quite a bit today.
My question would be you know in.
In light of some of the outperformance and some stocks in the value universe, and obviously, some fallen angels or whatever you want to call. It from the growth aspect do you feel like Theres, an opportunity to expand some of your core competencies.
The industries that you follow just given some of the dynamics today.
Or do you just see a path, where you're focusing on what you've done traditionally.
If you mean by expanding our core competencies is moving into more of growth or open or starting up.
Both type strategies I would say no we don't see any change in that if you if you're asking the question to say are there companies that have historically been viewed as growth stocks that come into the value universe.
Of course, we're open to that.
We don't think we're anywhere near that being a dominant situation given how wide the spreads were.
And even though they've narrowed.
When you look at it on a.
On a fully on a cap weighted basis, the narrowing hasn't been tremendous and when you look at it on a company specific basis.
Most I'm not going to say all but most.
Lines in valuation in the growth stock universe.
Come.
From companies, where the valuations were.
Hi, Lee.
Yes.
Relative.
Earnings, which have not yet materialized.
As opposed to the big successful franchises.
Really having that that have operating earnings really getting into.
So I would say, they're just not.
Our range broadly speaking.
No.
Yes.
We certainly have owned in the past companies that are today considered.
Growth stocks that are fairly expensive companies like Microsoft and Google have been in our portfolio is in the past 10 years.
But I wouldn't say that there is a broad opportunity for us to be looking at those yet so I don't know if I exactly answered your question hopefully I did.
That was terrific. Thanks, rich congratulations on the quarter.
Thank you.
Thank you.
Next question comes from Tom Brown from Rock point Advisors your.
Your line is now open.
Yeah.
Great. Thanks good.
Richard Good morning, everybody.
Just following up on that last question I was wondering if you could talk a little bit about the performance in the first quarter.
The investment performance that is perhaps focusing on your sort of large cap domestic strategy and then secondly, just real quickly last quarter I think we talked a little bit about in the social following onto that last question you talked about.
I don't know if launching is the right word, but at least contemplating moving into high yield plus distressed.
Perhaps.
The area that you might explore and I'm just wondering if that's still alive or or not thanks.
Sure.
Yeah.
Across the board.
We outperformed our benchmarks in the first quarter.
The first quarter sort of look like.
It was a continuation of this great.
Value cycle recovery up until the Russian invasion of Ukraine.
Where.
Where things turned back a little bit so I would say the first half of the quarter.
We had very wide leads against our.
And against the broad market indices, and they narrowed a bit in the second half of the quarter, but the quarter still wound up being b.
A good quarter for us.
Not just in U S large cap value, but broadly speaking across all of our all of our strategies.
And.
I would say that the issues were.
That are typically associated with value cycles.
While our not only the the.
The Ukrainian situation there also.
Here's that has re emerged in the marketplace around recession, mostly tied to what appears to be consensus views that interest rates will go up dramatically too.
Help ward off inflation.
And so obviously, we always take a long term approach and generally are not reacting to macro events.
So we've stayed the course with that sort of broadly describes how our investment performance looked.
As far as our move into high yield in.
And leverage loans.
No worse, where we made the decision that that this is a potential area of.
The opportunity for us.
Primarily because we think that our.
The Street research on our company specific research.
Can provide us with a pretty nice competitive position.
<unk> position in the marketplace for investing in high yield.
<unk>.
We are.
This is a long term investment.
So we don't expect to be able to even be thinking about offering any of these products or services to our clients.
For the foreseeable future we have been.
Building up our our knowledge and expertise in systems and administrative capability and plan to.
Fund.
And incubation strategy sometime before the end of the second quarter.
But I don't think it's reasonable to think that theres any significant revenues for us for the next couple of years.
Yeah.
As a reminder, if you'd like to ask a question you can press star one on your telephone keypads.
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Okay. We have no further questions. So that concludes today's conference call. Thank you for joining you may now disconnect.
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