Q3 2022 Westwood Holdings Group Inc Earnings Call
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Yeah.
Hello, and thank you for standing by.
Looking to the third quarter 2022 Westwood Holdings Group earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker presentation.
Sure.
To ask a question during this session you will need to press star one one.
Telephone.
It's now my pleasure to introduce general Counsel Julie.
Gary.
Thank you and welcome to our third quarter 2022 earnings Conference call.
The following discussion will include forward looking statements, which are subject to known and unknown risks uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward looking statements.
Additional information concerning factors that could cause such a difference is included in our press release issued earlier today as well as in our Form 10-Q for the quarter ended September 30th 2022, which was filed with the Securities and Exchange Commission.
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 SEC rules concerning non-GAAP financial measures. The reconciliation 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 Chief Executive Officer, and Terry Forbes, Our Chief Financial Officer, I will now turn the call over to Brian Casey.
Good afternoon, and thanks for listening to our quarterly earnings call last quarter I shared with you. The impressive results posted by our investment teams as well as the exciting news of our agreement to acquire salient partners highly complementary asset management business.
As many of you know.
We've just celebrated an important milestone our 20th anniversary as a publicly traded company.
As we reflect on our journey we've delivered many notable accomplishments over these past 20 years through good times as well as in tougher years like this one as.
As we finalize the transaction and integrate the salient team and its attractive lineup of products. We are enthusiastic about our position as a firm and can't wait to build our expanded business together in the years ahead.
There were several notable items to highlight this quarter.
Our acquisition of salient partners asset management business is on track to close this year and is expected to be highly accretive to westwood's earnings.
Several U S value strategies outperformed their benchmarks.
In our multi asset strategies continue to post strong relative returns.
During the third quarter global equity markets extended their losses as many of the same risks of the previous quarter remained or even accelerated kantar.
Continued above trend inflation and central bank responses to deal with this threat of elevated the probability of recession, adding to the risk off sentiment that dampened demand for both equities and debt securities.
Political uncertainties in the upcoming U S mid terms arent, helping much either.
Against this difficult backdrop I'm pleased to report that nearly all of our U S value strategies outperformed this quarter.
And large cap our team beat the Russell 1000 value index by 175 basis points for the quarter and has now outperformed its benchmark year to date and overall trailing time periods of 135, and 10 years and since inception.
Among its peers in the Morningstar large value universe.
<unk> ranked in the 11th percentile for the quarter and is well positioned in the top third for trailing one five and 10 years.
Institutional peers and the investment large cap value universe large cap ranked in the 15th percentile for the quarter.
Score at the 30 <unk> percentile for the trailing one year ended September 30.
It's longer term rankings for the trailing five and 10 years or almost identical with comfortable top word postings.
Our mid cap smid cap at all cap strategies beat their benchmarks this quarter.
Performing the Russell Midcap value index by 222 basis points, the Russell 2500 value by 128 basis points and the Russell 3000 value by 101 basis points respectively.
Our smid cap strategy ranked in the 24th percentile among its investment institutional peers, and our small to mid cap value universe.
Our quality all cap mutual fund W. Q X ranked in Morningstar's 20 percentile for the quarter and ranked 36 percentile and investments all cap value universe.
To wrap things off for the quarter, our mid cap strategy is sitting pretty in the 10th percentile among investment mid cap value peers, and our mutual fund WWF and ex scored nine percentile among morningstar smid cap value peers.
Our smallcap strategy underperformed the Russell 2000 value index this quarter as the good performing high quality securities we seek experienced a reversion to the mean after previously outperforming.
In multi asset it was yet another difficult quarter for global stocks and bonds, but I am pleased to say that our three strategies total return income opportunity and high income alternatives good outperformance.
As equity markets extended their losses in government bond yields trended higher across all durations. The fixed income holdings selected by our multi asset teams contributed to outperformance in these strategies to put it simply our strategies benefited from reduced equity weights relative to their blended benchmarks the use of convertible securities.
And their decision to underweight U S treasuries and overweight corporates and selected high yield securities.
Our largest multi asset strategy income opportunity finished 130 basis points ahead of its benchmark consisting of 40% S&P, 560% Bloomberg Barclays aggregate Bond index.
Our total return strategy came in 204 basis points ahead of its benchmark, 60% S&P, 540% Bloomberg Barclays aggregate Bond index. Our total return mutual fund <unk> was in the 16th percentile by Morningstar's, 50% to 70% equity universe and did even.
Better posting an eight percentile ranking among investments global tactical asset allocation universe.
High income was 198 basis points ahead of its blended benchmark, 20% S&P, 580% Bloomberg Barclays aggregate Bond index and achieved a 17th percentile ranking among institutional peers in the U S tactical asset allocation universe.
Our alternative income mutual fund ticker W and X rose 72 basis points on an absolute basis for the quarter.
This alternative strategy as a meaningful allocation that convertible securities.
The headwinds of a lower equity market. Our alternative income mutual funds finished in the 20 <unk> percentile for the quarter and 19th percentile both for year to date and trailing one year periods and morningstar's relative value arbitrage category.
Credit opportunities, which we launched in 2020 trailed the ICU Bofa high yield index by 26 basis points for the quarter.
Although our portfolio is conservatively positioned relative to the index it modestly underperformed due to a selloff in certain distressed investments given.
Given the outlook for rising interest rates, we are limiting exposure to long duration investments keeping overall portfolio duration shorter than the benchmark and focusing on opportunities with identifiable catalysts like.
Like previous cycles, we will deploy capital into attractive risk adjusted investments, while managing downside risk.
The opportunity set for credit opportunities has vastly expanded recently and we're excited about the future.
Lastly, in our systematic strategies large cap growth led its benchmark. The Russell 1000 growth index by 197 basis points and landed in the 11th percentile and investments large cap growth universe.
Our small cap growth strategy struggled somewhat as its holdings are out of sync with market factor movements, but recent rebalance as they've gotten the strategy back on track and better performance is emerging.
Our systematic small cap growth strategy remains ahead of the Russell 2000 growth benchmark year to date.
18th percentile amongst small cap growth institutional peers and the fund W. S C.
Next is 20 <unk> percentile among Morningstar small cap growth peers on a year to date basis.
We expect continued near term volatility for equities and fixed income as the fed's aggressive stance to combat inflation caused the economy and this will likely be exacerbated as an increasing number of market participants suggest their forecast in response.
Well, it's quite clear that the tightening actions of central banks across the globe.
Is that the biggest known risks to the markets.
Geopolitical risk and the ongoing war on new Crane and the volatility in the worlds energy markets add even more uncertainty to the economic environment.
We firmly believe that our current environment lends itself well to our best in class fee, our U S value strategies constantly focus on quality and value as they seek high quality business is trading at an attractive price.
By investing across a diversified allocation of asset classes and risk exposures are multi asset strategies target. The most efficient alpha generation and the most attractive markets allocating risk between idiosyncratic and systematic risk.
Our approach aims to generate attractive total returns with lower volatility a key factor given market uncertainty.
Our wealth management strategy has delivered mixed performance this quarter as dividends selected high Alpha outperformed the Russell 1000 value and Russell 1000 growth indices by 26 basis points and 303 basis points respectively.
Dividends select which focuses on high quality dividend paying domestic securities is ahead 357 basis points year to date at 108 basis points over the trailing period.
With a dividend yield of three 2% versus the S&P five hundred's dividend yield of two 5%.
An attractive alternative for high net worth clients seeking income and long term capital appreciation.
I Alpha rebounded after lagging its benchmark earlier and beat its index by 303 basis points. This quarter, a top third percentile finish and the investment enhanced all cap equity universe.
Shifting now to institutional and intermediary distribution.
Performance was the largest driver of lower AUM this quarter, but I am pleased to report that our institutional team saw strong client retention with low client outflows.
Our improved performance in many products positions us well to compete for new assets. This quarter as assets under management saw inflows of $159 million offset by outflows of $309 million netting to a $150 million in outflows.
Within our various strategies small cap enjoyed positive net flows generated by our institutional team and two new consultant driven client accounts were added this quarter.
Institutional client net flows were negative but most of them were driven by client rebalancing and participant directed DC plan changes rather than client losses are.
Our pipeline of clients awaiting funding includes our first win from a major CIO outsourced CIO clients into our smid cap strategy using our newly launched collective investment Trust specifically created to serve this channel.
We remain focused on serving our institutional clients, while newly launched strategies, such as small cap growth and mid cap along with our expanding consultant approvals underpin our key growth initiatives for this space.
In the intermediary channel industry wide outflows in risk assets are hitting multiyear highs and outflows in the equity and fixed income asset classes are also hitting record highs.
Against this backdrop, our all cap small cap alternative income high income and total return strategies all had positive flows.
Overall, the level of mutual fund redemptions slowed relative to the second quarter and is running at a lower rate than our peers.
Our intermediary team continues to focus on client retention across the board and we are hopeful that interest in equity and multi asset products will increase as investors see signs of a market bottom.
Turning now to wealth management, our Dallas and Houston teams delivered inflows of $123 million offset by outflows of $172 million.
Inflows were driven largely by new clients.
<unk>, a $48 million client win in the Dallas office and additions to several existing client accounts.
Outflows were driven by a state settlement client withdrawals in the normal course of business and some account closures.
Wealth flows this year has had to overcome the market environment adviser turnover and certain institutional clients to engage new consultants.
Overall, our team is on track to meet its goal of gross new assets for the year.
Business development has ramped up nicely and currently we have opportunities in the pipeline totaling over $200 million.
We continue to attract corporate professionals and entrepreneurs.
<unk> many clients. So we're leaving large banks for a more customized and holistic financial solution.
Our recent J D power and Associates survey indicated that the defection rate for large regional and midsized banks average between 10 and 11% of customers as new fees and core customer service have sparked an exodus.
In 2022 survey conducted by <unk> database, the world's largest collection of intelligence on the world's wealthiest people demonstrates that the very high net worth population those having between $5 million and $30 million continues to grow here in the U S up seven 1% since 2019.
In terms of individuals'.
Nearly 85% of them are self made as a non inherited well and they present a perfect fit for our wealth team.
<unk> of asset choices and family and business relationships continues to rise and a successful wealth group needs to offer a diverse set of skills and resources able to service complex clients.
Nearly half of our advisers, our attorneys, 15% or <unk> and 23% our CFO .
Which allows westwood to effectively serve extremely complex client needs.
Our test of the ability to serve such clients recently received a warm endorsement from our survey in which 95% of our current clients. They did they would refer.
To us.
Our two wealth offices are well positioned in two of the best growth markets in Texas.
30 years ago, the Dallas Fort worth Metroplex had fewer than five fortune 500 headquarters and today. It is home to 24 Fortune 500 companies Trail.
Trailing only in New York and Chicago.
DFW is economy has grown markedly faster than its largest rivals putting in New York, Los Angeles, and Chicago and it has emerged from the COVID-19 pandemic with fewer unemployment losses than any other among the nations 12 largest metro areas.
Houston was recently identified as one of the wealthiest and fastest growing cities in the world and it's in the top 20 cities with the most millionaires.
Houston Office is on track for its best New sales here and its 40 year history, and it's gaining share in the Houston market.
Over 60% of Houston's gross new sales are projected to come from new relationships. This year.
Earlier this year, we announced an agreement to acquire the asset management business, a salient partners, which has offices in Houston and San Francisco, where it's tactical growth strategy is managed by broad Mark.
Salient is a well known highly respected asset manager focused on energy infrastructure real estate and tactical allocation strategies.
As I noted previously we expect the acquisition will be highly accretive for Westwood.
Our team has been working closely with our salient counterparts on integration planning and it's clear to us that they are a great cultural fit.
We have started the proxy solicitation process to move salient five mutual funds to our ultimate <unk> platform and we expect the transaction to close before year end.
Deal related costs recorded this quarter were approximately $575000.
Putting it all together as the year comes towards an end and looking out over the next few months while markets have faltered in asset flows have slowed we are pleased with our investment team's performance improvements and our wealth group is growing and a promising an environment.
We are busy working on closing and integrating the salient acquisition, we're all looking forward to working together.
We like the opportunities presented by our current strategies, we're ready for salient exciting new products and we can't wait to begin the future now.
I'll now turn the call over to Terry Forbes our CFO .
Thanks, Brian and good afternoon, everyone. Today, we reported total revenues of $15 4 million for the third quarter of 2022 compared to $15 6 million in the second quarter and $17 9 million in the prior year's third quarter revenues were lower than the second quarter and last year's third quarter, reflecting lower average.
Assets under management, mainly attributable to the downdraft affecting markets worldwide.
The third quarter net loss of $1 2 million or <unk> 15 per share compared unfavorably with a net loss of <unk> 4 million or <unk> <unk> per share in the second quarter due to lower revenues and higher expenses, primarily employee compensation and benefits.
non-GAAP economic earnings were <unk> 8 million or 10 per share in the current quarter versus $1 6 million or <unk> 20 per share in the second quarter.
The third quarter net loss of $1 2 million or <unk> 15 per share compared unfavorably with last year's third quarter net income of $1 9 million or 24 per share primarily on lower revenues and higher expenses related to our acquisition of salient partners asset management business.
Economic earnings for the quarter were <unk> 8 million or <unk> 10 per share compared with $3 7 million or <unk> 47 per share in the third quarter of 2021.
Firm wide assets under management totaled $11 5 billion at quarter end consisted of institutional assets of $5 5 billion or 48% of the total.
Wealth management assets of $3 5 billion or 31% of the total and mutual fund assets of $2 4 billion or 21% of the total.
Over the quarter, we experienced market depreciation of <unk> 4 billion and net outflows of $225 million.
Our financial position continues to be very solid with cash and short term investments at quarter end totaling $74 million in it.
Debt free balance sheet.
I'm happy to announce that our board of directors approved a regular cash dividend of <unk> 15 per common share payable on January three 2023 to stockholders of record on December <unk> 2022.
That brings our prepared comments to a close we encourage you to review our investor presentation posted on our website, reflecting quarterly highlights as well as a discussion of our business product development and longer term trends in revenues and earnings. We thank you for your interest in our company and we'll open the line for questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Again, if you have a question at this time. Please press star one one I apologize Thats star one one to ask a question one moment, while we compile the Q&A roster.
Our first question comes from the line of Charles <unk> with Bill cells.
Hey, good morning, or good afternoon, I was looking at the result.
There is a loss for the quarter.
Is that an impact of income tax I was wondering why you would have to pay income taxes.
If we retained loss.
While the income taxes is going to be based on the effective rate. So thats whats expected over a year.
Okay. Thank you and there is also there is also some permanent differences that you don't get to deduct for income tax purposes.
Okay.
Okay. Thank you very much.
Thank you.
And as a reminder to ask a question. Please press star one one.
Our next question comes from the line of Macrae Sykes with Gamco.
Good afternoon gentlemen.
I actually have two question.
Two.
Separate ones I'll, just ask them and you can draw some first Brian I just wanted to get your thoughts on the rise in fixed income rates and expected returns there.
What they mean for the industry in terms of those that offer multi asset solutions will be more competitive.
Are those kind of fixed income products and then secondly, I wanted to just get an update on how salient is tracking from an AUM perspective from the I guess.
The announcement in May.
Okay, great well thanks for your question.
Yes first of all with this has been an unprecedented period. This year in terms of having both stocks and bonds go down at the same time, so we have.
An industry that has lots of unhappy clients because they always counted on bonds to really be there.
Their anchor and it's been anything but that this year.
We think that rates are reaching pretty constructive levels high single digits for investment grade.
Just under double digits for high yield.
And I think that bodes really well for those that construct multi asset portfolios like we do in fact.
It's a part of our portfolio that we've actually been been increasing a bit here of late.
It's an area that I think is as baby boomers.
Retire and start to look at how they allocate their money its going to be something thats.
Definitely a much more attractive part of the mix given the yields that are available to them now and the fact that so many are on fixed.
Fixed income.
And then second as far as salient tracking.
On AUM.
It's down from where we announced as all markets are down, but it's not down probably as much as as a lot of others, it's roughly $4 billion.
Now and we are on track, we think to close the transaction here in mid November and if that is contingent upon getting.
The proxy successful proxy votes for all the funds and the client consents for all the institutional clients, but we see positive momentum on both of those fronts.
And look forward to closing this and working together.
I'd also add that.
This place doesn't run that well at $11 billion. It runs a lot better at $15 5 billion and I'm pleased to report that as of this morning that our assets are just under $12 billion as of today.
As I mentioned in my prepared remarks, we earned a couple of new smid clients from a consultant outsource CIO program. This month.
And we expect to earn more each time this consultant onboard a new client will get a new client and that's that's a terrific pipeline for us for the next year year and a half. We also earned two new wealth clients. This month in the $30 million to $50 million range and have other sizable relationships, which could close before year end and as I said I think we're literally weeks of.
Way from getting the salient transaction across the finish line and we're on a path to immediately accretive earnings and broader sales opportunities.
And one of the most exciting aspects to the salient integration is the complete lack of overlap between the distribution teams.
We have roughly 500 clients together and there are less than 50, and common where they have both Westwood and salient and Theres only two income and where they have over a $1 million with Westwood and $1 million with salient.
Salient is has a big presence in the national wires, we have a really good footprint in the RA space in the regional broker dealers. So we feel like we should be able to take our products to their clients and channels and they take their products to ours.
Is gonna be fun to watch as our expanded sales force takes our new methods to market.
So on the institutional side money has been slow to move around institutionally, but our pipeline is now in excess of $700 million.
And we're optimistic that we'll see some sales.
Thank you.
I'll now hand, the call back over to CEO , Brian Casey for any closing remarks.
Well. Thank you those are my closing remarks as I didn't see any further questions. So again, if you have if you do have questions. Please feel free to call Terry or I directly thanks for taking the time to listen.
Have a good day.
Ladies and gentlemen. This concludes today's conference calls thank you for participating and you may now disconnect.
Okay.
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