Q2 2023 Westwood Holdings Group Inc Earnings Call
Yes.
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Good day and thank you for standing by welcome to the second quarter of 2023, Westwood Holdings Group, Inc. 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 this session you will need to press star one.
One on your telephone.
And wait for your name to be announced to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, John a hanger.
Head of legal.
Okay.
Thank you and welcome to our second quarter 2023 earnings Conference call.
The following discussion will include forward looking statements that 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 the 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 June 32023 that will be 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.
A 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 thank you for listening to our quarterly earnings call as.
As of July 1st Westwood has been a publicly traded company on the New York stock exchange with assembled W. H G for 21 years.
Our entire 40 year history Westwood has remained focused on helping our clients achieve their objectives by executing our disciplined investment processes to generate portfolio alpha without taking excessive risk and this has delivered excellent compound rates of return for our clients.
John wouldn't experiment a success has been in a central roadmap for us since our firm's inception and as principal storm the foundation of our firm's culture.
Our culture has enabled us to innovate and grow over time in a principled way, we've shared our long held values and principles with our new team members that failure as we think about new ways to serve clients using the broader spectrum of strategies that are now available to us.
We will continue to embrace our values as we tackle the substantial changes confronting our industry, including the continued speed of innovation and related demands for technology consolidation among many asset managers the rise of alternative investments and shifting demographics that have influenced buyer behavior and I didn't even mention AI.
Looking back over the first half of the year I am pleased to share several positive items with your large cap smid cap experienced positive net inflows in the institutional channel during the second quarter. Despite.
<unk> outflows affecting our industry Westwood retrained all of its institutional clients and maintained its consultant ratings.
Just as an example, the month of May saw the largest outflows in the large cap value category for 15 years, while Westwood large cap value flows were positive for the second quarter.
The broad market, particularly in the last two months of the quarter gained a surprising amount of bullish momentum. Despite many potential risks, including continued tightening of an already restrictive monetary policy.
The S&P 500 index gained 874% for the quarter, but these returns were skewed by a handful of growth in tech names, which pushed the index higher than <unk>.
Stock market has become very top heavy recently with performance driven by the largest market cap names in the index. However, we have also been seeing increasingly broad participation with more risk on stocks across the market cap spectrum.
Both stocks were the clear standout overall for the quarter outperforming value stocks by more than three to one in the large cap market indices.
Against this backdrop of continued market volatility and uncertainty 60% of our U S value strategies outperformed their benchmarks in the second quarter and 80% of them remain ahead for the trailing one year ending in June adding to their solid long term track records over the trailing five year period, all of our U S value.
Strategies with track records extending into those periods are ahead of their benchmarks.
Within our multi asset team, our broader asset allocation strategies bumped up against the largest and most expensive names and the high flying S&P 500 on the fixed income side bond prices declined and yields rose as investors priced and additional interest rate increases.
Interestingly funds with more exposure to lower quality bonds, such as leveraged loans and high yield corporate bonds fared better than higher quality bonds showing that investors are prepared to take on risk.
All of June all three of our multi asset strategies ranked in the top third of their Morningstar peer categories for trailing three and seven years and scored top 20% ratings for trailing five years.
Our newest strategies coming from the acquisition of salient partners asset management business performed well with two thirds of them, adding to their solid performance records against benchmarks, while Westwood broad Mark tactical growth in tactical plus both posted positive absolute returns.
Our tax flow growth and tactical plus funds are designed to help investors sidestep market downturns.
Equity valuations remain above historical averages and we remain vigilant as the road ahead is likely to be bumpy.
If global economies that are somewhat synchronized recession and markets correct. We expect these strategies to shine as investor capital is protected.
Our MLP and energy infrastructure mutual fund underperformed its benchmark amid the risk on rally, but the strategies fundamentals remained strong which should support future expansion and the midstream energy space.
In the short run asset outflows are continuing here as investors take profits following strong performance from the 2000, Twenty's pandemic driven lows.
Pleased to report that the MLP and energy infrastructure SM LP ex mutual fund ranked in the 26 percentile for the quarter and rose to claim for stars among its Morningstar peers.
Our global real estate and select income strategies delivered another quarter of positive returns for our investors as both funds remained ahead of their benchmarks year to date. These.
These funds are performing well as designed to deliver consistent income in the form of robust dividends on both their common and preferred shares.
For the quarter Global real estate and select income ranked in the top 10% versus Morningstar peers and global real estate score the top 1% among.
Among its investment non U S diversified REIT peers.
Over the trailing one year period ending in June both strategies landed in the top third and over the trailing three years they've made it into the top 15th percentile bracket and Morningstar universes.
Looking forward. These strategies can provide investors with alternative sources of income inflation protection be exposure to real assets low correlations to traditional asset classes and market volatility mitigation.
For wealth management, our strategies performance was mixed our newer high office strategy rebounded strongly with a top ranking among its investment peers are more seasoned select equity and dividend select strategies lagged in a market driven higher by the Priciest S&P 500 stocks. However, they provide broad exposure to large <unk>.
Blue Chip equities consistent with the investment objectives of our high net worth client base.
One of our newest strategies for high net worth clients. Our regional banking strategy. Just finished its first full quarter by outperforming by more than 400 basis points.
The RBS strategy Leverages, our strong fundamental research and our lab clients to take advantage of the market dislocation experienced by the banking industry earlier this year.
Expectations for continued volatility underscore the importance of active risk management, our wealth strategies are positioned to preserve capital was strong down capture and benefit investors out flight to safety as.
As I mentioned last quarter Vista Bancshares completed the acquisition of Caris Holdings as a result of our ownership stake in carrots. We're now stakeholder in Vista back, which is known as an entrepreneur as back serving north central and West, Texas through its 14 banking locations.
We plan to expand our relationship with Vista is our wealth clients want competitive deposit yields and friction free loans and we begin to earn referrals from vista's 15000, plus customer base.
Shifting now to distribution persistent inflation central bank rate increases, including the latest just last week economic uncertainty and stretched equity valuations have weakened sales activity generally within the industry.
In our institutional channel outflows in income opportunity in large cap were the largest drivers of flows in the quarter as inflows of $163 million were offset by outflows for net outflows of $275 million.
60% of the outflows reflected one income opportunity account loss, however that client remains a long term partner with Westwood investing in our large cap value strategy since the year 2000.
In terms of the client retention other outflows were driven by client rebalancing and we had no client losses in the quarter.
Our industry continues to experience an extremely challenging sales environment due to fears of a recession and a risk free rate of return of more than 5%.
Bright spots include the retention of our consultant ratings in several key categories and one large consulting firm upgraded its rating for income opportunity.
The technology enhancements, we implemented earlier this year have led to greater than 50% increase in outsourced CIO meetings and our RFP activity. This year has outpaced activity for all of 2022.
These factors underpin our optimism for the second half and into 2024.
Within our intermediary channel gross inflows of $179 million were fully offset by outflows, resulting in net outflows of $195 million for the quarter.
Outflows were centered in our MLP and tactical growth strategies.
Energy sector flows continue to be negative industry wide as investors take profits. Following two years of strong performance coupled with a decline in crude oil from a peak of 130 early last year to below $70 at the end of June .
Tactical growth outflows resulted from one client loss.
And a shift by investors towards risk on categories, rather than asset preservation and.
A market correction, we expect our tactical growth in tactical plus strategies will provide investors with downside protection.
Highest net positive intermediary flows occurred in alternative income and select income with the addition of new client assets.
Looking at intermediary flows nationally across all product categories, we've seen the largest year over year dispersion in well over a decade.
So far this year 14 of the top 20 categories for net inflows focused on fixed income, particularly short and intermediate term investment grade securities as cash yield now exceed 5%.
Equity products experiencing net inflows aside from the S&P 500 index funds are mostly international equity funds.
This scenario contrasts dramatically with 2022, when the top 20 categories for net inflows featured strong representation from U S equities.
The pendulum has swung very far in terms of industry asset flows, but we anticipate that markets will find the middle ground as we move into 2024 and beyond.
Considering the addressable market for categories in which we compete our share remains stable or is actually growing for example, our alternative income strategy, which competes in the relative value arbitrage category and select income which competes in the preferred stock category have both enjoyed net inflows this year despite large cattle.
Lori outflows.
Westwood is broadly outperforming its U S value and multi asset peers in terms of asset retention in these challenging times the reception in the west with new products added via the <unk> transaction has been very positive and we believe they will provide meaningful benefits to our distribution efforts over the longer term.
As part of growing our alternatives business. This year, we completed successful asset raises for three funds from highly regarded fund sponsors, including an energy fund our real estate fund and a Marina fund.
We don't have final numbers until we've received all subscription documents, but early indications are that we raised nearly $60 million across these three private funds, bringing our private alternatives to nearly $250 million.
Expect to hear more as we expand into the alternative space and asset class with strong secular growth trends and better fields.
Moving to our wealth management business overall flows were negative due to tax payments and client distributions, but we're pleased that client losses were few our client retention rate remains above 95% as the group experienced inflows of $67 million offset by outflows of $132 million for the quarter.
Our strategic projects are beginning to bear fruit, we've been carefully assessing how to best serve each of our clients marrying their unique investment needs with our wealth capabilities.
Pleased with the expansion of several funds, including several now and the incubation stage.
We're getting closer to finding a seat investor for our sustainable Energy Fund and we just launched an energy secondaries fun last week.
We are noting a shortage of available capital in the traditional energy space and many investors are selling for non fundamental reasons too.
To us energy fundamentals look strong and we're happy to buy L. P interest that discounts of 25% to 50%, especially since oil and gas demand should grow more than 20% annually over the next two decades and the world will need to invest 12 trillion dollars in capital by 2050, just to keep up with the demand.
I'd like to close with one observation in my 31 years at Westwood I've never seen our sales team busier than they are today.
Our sales team completed 995 meetings during the quarter, which set an all time record.
Near term flows may not reflect our team's schedules of heavy travel and extensive meetings, but.
But we strongly believe that they will in time.
Meanwhile, we're focused on things we know can deliver results.
The first is attitude the.
The second is activity and the third is breath, a product knowledge to inform and help advisors best serve their clients.
I believe that Westwood has these characteristics in abundance and when the tide comes back in the Spadework. We're doing now will lead to much better flows ahead.
I will now turn the call over to Terry Forbes are CFO .
Thanks, Brian and good afternoon, everyone. Today, we reported total revenues of $21.9 million from the second quarter of 2023 compared to $22.7 million in the first quarter and $15.6 million in the prior year second court.
Revenues were lower than the first quarter on lower performance based fee revenues were higher than last year second quarter, reflecting higher average AUN. Following the acquisition of sailing partners asset management business during the fourth quarter of last year.
Second quarter net income of $2.9 million or 36 cents per share compared favorably with $1.7 million.09 per share in the first quarter due to changes in the fair value of contingent consideration offset by lower revenues and higher income taxes.
non-GAAP economic earnings or $5.7 million or 70 per share in the current quarter versus $3.6 million or 45 cents per share in the first quarter.
Second quarter, net income with $2.9 million or 36 cents per share compared favorably with last year second quarter net loss of $1.4 million or five per share primarily due to changes in the fair value of contingent consideration and higher revenues, partially offset by higher expenses, primarily employee compensation and benefits expenses.
Following the acquisition of sailing partners asset management business in 2022.
Economic earnings for the corner, where $5.7 million or 70 per share compared with $1.6 million.20 per share in the second quarter of 2022.
Firmwide assets under management, and advisement totaled $16.2 billion at quarter, and insisting up assets under management of $15 billion and assets under advisement at $1.2 billion <unk>.
That's under management consisted of institutional asset to 7 billion or 46% of the total wealth management assets of $3.9 billion or 26% of the total mutual fund assets, a $4.2 billion or 28% of the total.
For the quarter, our assets under management experienced market appreciation of point $5 billion in net outflows of $482 million and our assets under advisement experienced market appreciation of $46 million in net outflows $56 million.
Our financial position continues to be very solid with cash and short term investments at quarter end totaling $38 $1 million and a debt free balance sheet.
I'm happy to announce that our board of directors approved a regular cash dividend of 15 cents per common share payable on October 2nd 2023 to stockholders of record on September 1st 2023 <unk>.
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 discussion of our business product development and longer term trends in revenues and earnings.
Thank you for your interest in our company and we will open the lines of questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one one again, one moment for questions.
Our first question comes from <unk> with Kemkers you May proceed.
Good afternoon, everyone.
Best Merrimac.
Great I had just to question said that the first was.
Given where we moved away now from the closing date of this merger do you think there's any attrition or churn that.
Sometimes it occurs with mergers do you think that is affecting any of the flows at this point.
I think we've done a really good job of hanging onto our clients I think the.
The any deterioration in AUN has come from related primarily the energy sector and that has been more.
Due to the big decline in price from 130 last year to under 70 in June .
Simply just Ah.
Ah Ah Ah Ah real.
Bias towards not owning energy I mean I've been in this business a long time and I can remember one energy was north of 20 per cent of the SMP and it's less than five per cent now.
And yet it is something that we all use every single day. So it is it is interesting what's going on where value investors at heart and we like to see opportunities and we think there's a lot of opportunity in the energy space.
Great and.
I Wonder if you could go a little bit cheaper kind of on the wealth management.
He's done a good job, putting the salient in Westwood together.
Wealth is.
Been some outflows.
It seems like you have the brand and you have to attack at this point you know the local scale, what's what's sort of missing there to get to healthier trance.
I don't know that anything is missing I think we've worked really hard to put all the pieces together.
There's there's clearly a lot of competition and the wealth space everybody's got a little different mouse trap. We've spent a lot of time in the last few years building on the planning side of our business, which is.
Much slower sales cycle, when you start with a financial plan.
Sometimes it takes many months many quarters to get somebody across the line and I'm always reminded that one where prospecting for new business.
And our high net worth business.
You're talking to somebody who may have had a relationship with an advisor for decades, and so we've got to show them that.
We have a much better offering and we have to disrupt the relationship that they have so it's it's not easy to bring in new business into the wealth channel, but when you do if you do a good job forum overtime. They tend to stick with you and we've had across the board.
Pretty good performance and our wealth products, they're designed to protect capital on the downside and participate on the upside. We've also done some unique and interesting things that are more opportunistic.
We did a.
Bank fund here than that and the a couple of months ago. We've done an electric vehicle fund we've done high Alpha that is very much a growth oriented strategy. So we have a lot of entrepreneurs that our clients and they like for us to give.
Give them an opportunity to show the expertise that we have and where entrepreneurs too. So it's fun to to respond to that with the product offering that they're.
They're excited about it and that we have fun managing.
Great. Thank you and congrats on the strong strategy performance this quarter.
Great. Thanks back appreciate your questions.
Thank you have anybody else.
No more further questions.
I can turn it back to Brian Casey for any closing remarks.
Great well, thanks, very much for taking the time to listen to our call. Today. We appreciate you being interested in Westwood and being a shareholder. Please visit our website Westwood group Dotcom Tol me directly or or CFO . If you have any additional questions.
Great afternoon.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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