Cohen & Steers Inc (CNS) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, April 21, 2016. I would now like to turn the conference over to Mr. Adam Johnson, Senior Vice President and Associate General Counsel of Cohen & Steers. Please go ahead, sir.

Thank you and welcome to the Cohen & Steers first-quarter 2016 earnings conference call. Joining me are Chief Executive Officer Bob Steers, our President Joe Harvey, and our Chief Financial Officer Matt Stadler.

Before I turn the call over to Matt, I want to point out that during the course of this conference call we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements.

We believe that some of these factors are described in the Risk Factor section of our 2015 Form 10-K, which is available on our website at cohenandsteers.com. I want to remind you that the Company assumes no duty to update any forward-looking statements.

Also, the presentation we make today contains pro forma, or non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance. For disclosures on pro forma metrics and their GAAP reconciliations you should refer to the financial data contained in the earnings release and presentation materials we issued yesterday available on our website.

Finally, this presentation may contain information with respect to the investment performance of certain of our funds and strategies. I want to remind you that past performance is not a guarantee of future performance. This presentation may also contain information about funds that have filed registration statements with the SEC that have not yet become effective. This communication does not constitute an offer to sell or the solicitation of an offer to buy these securities. For complete information about these funds, including charges, expenses, and risks, please call 1-800-330-7348 for a prospectus.

With that, I'll turn the call over to Matt.

Thank you, Adam. Good morning, everyone. Thanks for joining us today. Yesterday we reported net income of $0.39 a share compared with $0.45 in the prior year and $0.13 sequentially.

The first quarter included a non-cash expense of $1.9 million, or $0.03 a share, associated with the accelerated vesting of certain restricted stock units. Excluding this item, earnings per share would have been $0.42.

As a reminder, the fourth quarter included $11 million of unrealized non-operating losses resulting from a change in accounting classification and an other than temporary impairment on certain of our seed investments. In addition, the fourth quarter included a higher tax rate resulting from a full valuation allowance on the tax benefit associated with those unrealized losses.

Excluding the non-cash expense on the accelerated vesting, operating earnings per share were $0.41 for the quarter, compared with $0.47 in the prior year's quarter and $0.41 sequentially. Page 5 of the earnings presentation, which is available on our website, displays the current and trailing four-quarter trend in revenue and breaks out investment advisory fees by vehicle.

Revenue was $79.7 million for the quarter compared with $83.8 million in the prior-year's quarter and $81.7 million sequentially. The decrease in revenue from last quarter was primarily attributable to lower average assets under management and closed-end funds which paid fees in excess of our firm average, and one less day in the quarter.

Average assets under management for the quarter were $51.6 billion compared with $55 billion in the prior-year's quarter and $52 billion sequentially. Operating income was $30.3 million as adjusted, compared with $34.5 million in the prior-year's quarter and $30.4 million sequentially.

Our operating margin increased to 38% as adjusted from 37.2% last quarter. Page 6 of the earnings presentation displays the current and trailing four-quarter trend in expenses, which decreased 3.7% on a sequential basis after adjusting for the non-cash accelerated vesting.

Decreases in compensation and benefits and G&A were partially offset by an increase in depreciation and amortization. Excluding the non-cash accelerated vesting, the compensation-to-revenue ratio was 32.75% for the quarter, consistent with the guidance we provided on our last call.

The decrease in G&A was primarily due to lower costs associated with hosted and sponsored events and lower fund organizational expenses when compared with the fourth quarter, which included the launch of the Cohen & Steers low duration preferred and income fund, partially offset by an increase in recruiting fees. The sequential increase in depreciation and amortization was primarily attributable to the write off of certain fixed assets that were taken out of service in the quarter.

We recorded a non-operating gain net of non-controlling interest of $643,000 for the first quarter compared with the non-operating loss of $12.1 million last quarter. The non-operating results were primarily due to unrealized gains and losses on our seed investments.

Our effective tax rate for the quarter was 38%, also consistent with the guidance we provided on our last call. Page 7 of the earnings presentation displays our cash, cash equivalents, and seed investments for the current and trailing four quarters and reflects the portion of our cash and cash equivalents held outside the United States.

Our firm liquidity totaled $186 million compared with $202 million last quarter, and stockholders' equity was $238 million compared with $232 million at December 31. We continue to remain debt free.

In order to achieve greater transparency, consistency, and accuracy, beginning with this quarter the assets under management tables in our earnings release now reflect distributions as a separate caption following market appreciation, and reinvestments are now classified as inflows. Prior periods reflect these revised classifications.

Prior to this change, distributions from our Japanese sub-advisory business were recorded in net flows, and distributions from our mutual funds were recorded in market appreciation/depreciation net of reinvestments. Total assets under management, which can be found on page 8 of the earnings presentation, totaled $55.5 billion at March 31, an increase of $2.5 billion or 5% from December 31.

Assets under management in institutional accounts totaled $27.9 billion at March 31, an increase of $1.8 billion or 7% from last quarter. And open-end funds had assets under management of $18.1 billion, an increase of $686 million from last quarter.

Assets under management and closed-end funds remained at about $9 billion. Page 11 of the earnings presentation displays net flows by investment vehicle, and for the quarter institutional accounts recorded net inflows of $1.2 billion representing an annual organic growth rate of 18%.

During the first quarter sub-advised portfolios in Japan recorded net inflows of $864 million. Distributions increased slightly to $655 million from $583 million last quarter, and sub-advised accounts ex-Japan recorded net outflows of $51 million. Bob Steers will provide some color on the level of activity and our institutional pipeline in a moment.

Open-end funds recorded net inflows of $324 million during the quarter, representing an annual organic growth rate of 7%. Distributions totaled $133 million during the quarter, of which $96 million were reinvested and have been included in inflows.

Let me briefly discuss a few items to consider for the second quarter and remainder of 2016. With respect to compensation and benefits, we expect to maintain a 32.75% compensation-to-revenue ratio. We expect G&A to increase approximately 1% to 2% from 2015, which due to the management of our discretionary expenses is lower than the 4% to 6% increase we referenced on our last call.

We project that our effective tax rate will remain at approximately 38% for 2016. And finally, with respect to non-operating income, of the $63.2 million of seed investments at March 31, $42.6 million have either been consolidated or classified as equity method and as a result any unrealized gains and losses will be recorded in non-operating income on the income statement.

The remaining $20.6 million have been classified as available for sale, and any unrealized gains and losses will be recorded in other comprehensive income on the balance sheet. The strategy breakdown for the $42.6 million of seed investments with the unrealized gains and losses will be recorded on the income statement are as follows: $14.7 million in low duration preferred securities; $11.4 million in MLP and midstream energy; $11.2 million in commodities; and $5.3 million in global listed infrastructure.

And with that, I'd like to hand it over to Bob Steers

Thank you, Matt, and good morning, everyone. The first quarter proved challenging in myriad ways as you all know. But the most notable were the rapid shifts in sentiment and volatility.

Deep pessimism in the first six weeks of the year, which was fueled by $26 oil, negative interest rates, continued dollar strength, and fears that Deutsche Bank could actually omit dividends on certain corporate-preferred securities, resulted in a strong risk-off market. By mid-February, US REITs had declined by 9%. Thereafter market sentiment again shifted abruptly.

The dollar weakened, oil rallied 46% off the lows, emerging market concerns eased, and equities rebounded sharply. During this period US REITs went on a 15.5% tear and ended the quarter up about 6%.

Given the cross-currents in the quarter, our relative performance was decidedly mix. As we would expect in this environment our active commodity, natural resource equity, and multi-strategy, real asset portfolios posted solidly positive returns and materially outperformed their benchmarks.

However, our US and global real estate strategies and our preferred securities strategy underperformed their benchmarks in the quarter. As a result, over the past year 6 of 10 core strategies outperformed their benchmarks.

We remain confident in our process, and as the markets normalize that our relative performance will revert to more acceptable levels. And as a reminder, today over 80% of our open-end mutual fund assets are in strategies rated 4 of 5 stars by Morningstar.

As Matt mentioned, flows in the quarter were strong and net inflows came in at $1.4 billion for an 11% organic growth rate. It's also notable that we achieved net inflows in each of our three largest business segments: wealth management; institutional advisory; and in Japan.

Only the sub-advisory ex-Japan channel experienced net outflows, and they were a modest $51 million. Of course our ultimate goal is to achieve net inflows in all four of these segments simultaneously.

In the aggregate, open-end fund net inflows were $324 million for a 7% organic growth rate led by our five-star preferred securities and US REIT funds which drew the bulk of the net inflows. Looking ahead, the Cohen & Steers real estate securities fund was recently added as a focus fund by both JPMorgan Chase and Morgan Stanley Wealth Management, which should help bolster our domestic US REIT open-end fund sales efforts going forward.

As you know, we began the quarter with a $1.35 billion institutional pipeline. And as expected the advisory channel delivered $377 million of net inflows for a 20% organic growth rate.

Gross inflows of $699 million were the highest in four years, with a majority of the capital earmarked for global and Asia-focused real estate security strategies. Our pipeline of awarded but unfunded mandates currently stands at $730 million, and notably RFP activity has doubled year over year, with US REIT, real asset multi-strategy, and preferred securities activity especially strong.

Turning to Japan, we enjoyed our best inflows both before and after distributions in over five years. US REIT funds continued to be among the best selling retail products in Japan, and we've been the top performing manager in that marketplace.

Net inflows in the quarter were $864 million, derived mainly from Daiwa's US REIT fund. In addition, Daiwa will be launching their second REIT-preferred fund for institutional clients this month.

We also began sub-advising a corporate hybrid preferred securities fund for Shinsei Investment Management on March 30. Shinsei is now our fourth sub-advisory relationship in Japan alongside of Daiwa, Nomura, and MUCAM.

Before I open it up to questions, I'd like to refer you to the letter to shareholders in our 2015 Annual Report, which is intended to be an objective evaluation of the secular headwinds and also the opportunities currently facing our industry. We believe that its analysis and conclusions provide a road map and a call to action for Cohen & Steers, as well as a serious commitment to our clients and shareholders.

The simplest takeaway from the letter is that the asset management industry in its current form is no longer a growth industry for a majority of traditional active asset managers. Over capacity, chronically poor investment performance, high fees, competition from passive strategies, growing barriers to entry for access to distribution, and the rapidly growing cost of regulatory compliance taken together will challenge future growth and profitability for most legacy investment managers.

However, we're convinced that asset managers who are focused on a limited number of historically inefficient markets with strong brands and track records of consistent outperformance will be among the relatively small number of big winners. The challenge will be to execute strategies that can deliver more for less by staying focused, developing talent, and embracing new cost-efficient structures and technologies.

Going forward, we are redoubling our focus on delivering alpha consistently, which will entail additional investments in talent. As a integral part of this effort we're devoting time and resources towards deepening our bench of talent, with clear succession planning throughout the organization.

Because the cost of doing business will continue to rise and fee pressures will persist, we're implementing strategies to more aggressively manage expenses and improve productivity. In contrast to our commitment to stay focused on real assets and alternative income strategies as the most effective way to consistently deliver alpha, we remain committed to supporting a highly diverse and global distribution platform to deliver our expertise into those markets where these strategies are highly sought after.

To that end, we'll continue to invest in expanding our business development strategies in the US, Europe, and in Asia. Again, I would encourage you to take a look at our letter, which can be found on our website.

Lastly, in February we announced that my partner, Marty Cohen, who has been our Executive Chairman over the prior two years, was transitioning to Board Chairman. So although technically that means Marty is not a full-time employee, he of course remains closely connected and involved, especially in strategic issues as Chairman of our Board.

With that, I'd be happy to open the floor to questions.

Thank you.

(Operator Instructions)

Adam Beatty, Bank of America Merrill Lynch.

Thank you and good morning. Just a quick question on the lower expense guidance. You mentioned attention to costs and what have you.

Does that reflect -- you had previously been spending some money on what I would call broader marketing efforts around the real asset institute and what have you. Do the lower expenses reflect any completion of initiatives like that, or is it more cost-cutting around the edges? Thanks.

Yes. I think, Adam, there's a couple of things. One, broader is a lot of little things which don't really accumulate in and of themselves, but when you aggregate them they are meaningful.

So I think and overall discipline and tone at the top has been helpful. With respect to the conferences though, we've not eliminated them.

But now that we've got a couple of years of history behind us, we've targeted them in a more cost-effective way. And that's translated into an overall save as well. So they're still ongoing, but they're more efficient and cost effective.

Great. Thank you.

That said, Adam, as Matt mentioned over the past six months as part of our strategic planning process, and again I think some of our conclusions and strategies are contained in the letter to shareholders.

We are bringing a meaningfully different view and cultural shift internally on -- even in an environment where we think we can sustain organic growth and top and bottom line growth. Given our outlook for the industry, I think extreme discipline is required on everything from IT and marketing and compensation and so forth. We tried to reflect that in the first quarter, and we want to sustain that mentality going forward.

You're really walking the talk internally.

It's a serious thing. Again, that's why we thought it was important to share our philosophy in the letter to shareholders. In effect say it out loud. And as I've said we do it as a call to action on the part for our employees and a commitment for shareholders and our clients.

Great. Thank you. I also wanted to ask about the institutional advisory market generally, especially given your thoughts around active management. One of the themes in the past has been the idea of institution's pension funds and others structurally underallocated to real estate and other real asset securities.

What are the trends like in that area right now? And how do you view the climate just in terms of some news headlines around people -- institutions pulling back from hedge funds and alternatives? Thanks.

Sure. I would say that large institutions are not underallocated to real assets. The largest endowments and sovereign wealth funds have had a 10% to 30% allocation to real assets for some time.

However, most of those allocations have been executed through private equity strategies. Where the underallocation is most pronounced is both in the wealth and what I would call the retirement channel, the defined contribution channel, which as you know we've been adding to our OCIO/DCIO team because there's virtually no representation in the 401k market in real assets.

What we are seeing so far this year is with the rally in commodities, the recovery in oil, we are seeing preliminarily a very substantial ramp up in institutional RFP activity in certain real asset strategies like resource equities, commodities, very significant uptick there. I think those two areas are viewed as statistically cheap, very attractive, and relatively underallocated in most portfolios. I wouldn't -- real estate is pretty well represented in institutional portfolios.

Got it. Thank you for the color and clarification. Appreciate you taking my question.

Thank you.

John Dunn, Evercore ISI.

Hello. Good morning. Just to go back to the real assets institutes, now that we're a few years into the process, can you give us a state of the union about what is gone well, what's maybe been different than you thought when you started, and maybe some of the things that haven't lived up to your expectations?

Sure, John. I think the institutes have been extremely well received. The feedback from all participants has been top notch.

An important byproduct of that is I think the effort -- the time and effort that we've spent there has been recognized and appreciated in home offices, by fund selection units, and by heads of distribution. I'd say what has not gone as well as we had hoped was that when we started doing this about over two years ago, a number of real assets were rallying and there was strong follow-through from those conferences and flows. A very tight cause-and-effect.

As you know, outside of REITs commodities, resource equities, and other real asset strategies have not performed well. We've continued -- I think we've been effectively building brand and I think we're viewed at least in the listed real asset space as the thought and investment leader there. Outside of REITs there hasn't been a groundswell of demand, at least not in the retail space.

Now we've done real asset institutes institutionally, and those have been very effective. And I think that's one of the reasons why starting late last year and very much accelerating this year, institutional RFP activity starting with the macro multi-strat real asset fund, but also in some of the underlying individual strategies, is really strong. If our institutional pipeline is going to grow over the coming year, that will be the reason why.

Got you. Can you give us more of a flavor of the non-Japan subadvisory mix, and what are some of the bigger relationships there, and how you think that channel is going to play out over the next couple of quarters?

You know that is a tough question, John. We have half a dozen larger relationships in that pool. I prefer not to name them specifically.

They are each very different ones; a large annuity portfolio, another is a significant European distributor. It is varied. We've been disappointed that subadvisory ex-Japan has gone sideways over the last few years, and we're working on ways to improve that.

To some extent that is out of our control because we're subadvising, and so we're not out there doing the -- performing the client service and marketing efforts. And so it's not totally in our control, but we are focusing on that because it is -- of our four major segments its the only one that isn't solidly in positive organic growth right now.

Great. Thanks for the color. Thanks.

Thanks, John.

Glenn Schorr, Evercore.

Sorry -- asked and answered. Sorry.

Adam Grossbard, Sidoti & Company.

Good morning. My first question is in regard to the increased interest in the institutional preferreds and whether that is directly related to the new subadvisory relationship.

I think the interest -- the rising interest in institutional from the institutional market in preferreds is frankly more a product of a multi-year push on our part to convince institutions that preferreds really are a strategy they should consider. Because historically the view has been that preferreds are perpetual securities, they don't have duration, and so the volatility and related risks were unacceptable.

Whether it is in Japan where we're seeing -- preliminarily we're seeing some strong institutional interest on the part of Japanese insurance companies, or domestically here we've continued to educate the market. And so we're seeing increased interest from a variety of institutions.

Great. Thanks. My next question was in regards to maybe if we can get a little update on the progress of the launch of the low duration preferred fund, and the expectations for the ramp up with that offering as well as the new subadvisory relationship. Thanks.

This is Joe Harvey. We launched the low duration preferred open-end mutual fund late last year, and circumstances are such that it was not great timing as it relates to what the markets have done. We don't try to time market action like that, but the reality is that what's happened since that time is that credit spreads early in the quarter, the first quarter, blew out.

Then attitudes about interest rate increases changed. So there hasn't been a lot of interest so far.

But since that mid-first quarter market turbulence, which Bob laid out, things have calmed down. So credit spreads have come in and it now looks like thoughts on interest rates might begin to change.

But the big picture is we're at zero interest rate, so there's going to be an ongoing concern about rising interest rates. What we have been doing is been signing up selling agreements, and we've made some progress on that front.

And that will continue over the coming months. In the meantime we're working on performance and building a track record; and we think that on an intermediate-term basis that this is a good addition to our lineup because of zero interest rates and the search for yield.

Thank you. I guess just one last question. The increase in the global real estate segment really jumped this quarter. Was that mostly related to one shipping allocation, or was it more of a general shift?

It was primarily due to one new institutional relationship that -- as a Asia-Pacific real estate strategy.

Perfect. Thanks very much.

Ann Dai, KBW.

Hello, good morning. Thanks for taking my question. I wanted to just start on the subadvisory flows.

It looks to me -- I know we have limited data points around this, but it looks like the flows are being driven both by slowing redemptions and then also better inflows. Is there any specific color you could provide around that, if it directly related to where rates have gone in Japan? Anything you could provide would be great.

Sure. I think there are a number of factors at work there on the inflow side. I was there the week that Japan went negative on interest rates, and at that time the expectation was the end would remain weak and that dollar-denominated yield strategies like US REITs seemed to be very well positioned.

In addition, as we've spoken about several times, Daiwa added one of the most powerful distributors in Japan late last summer as part of their group that sells their funds. That's Japan Post Bank. Very, very powerful partner of Daiwa Asset Management.

Japan Post has been extremely productive in capital raising, particularly for our US REIT, or Daiwa's US REIT portfolio. So that's been a huge benefit.

Candidly, the non-REIT portfolios over there that we're subadvising have been out of favor. And candidly outside of US REITs there are very few mutual funds in Japan that are seeing net inflows. We are going sideways in some of those others.

The redemptions -- the distributions are pretty constant, unfortunately very reliable. So we don't expect that to change.

Related to that, it may be worth pointing out that in the quarter and the last few quarters we've seen our top lines, our gross inflows ramping up nicely. One of the things that we are focused on is redemptions, whether it's in the wealth management side or even still some rebalancings out of the institutional side, we would hope and expect to see those numbers to decline going forward.

And we're hopeful that will be an additional catalyst to net inflows going forward. Obviously it's hard to predict. But we would hope and expect the growth outflows to begin to decline.

Great. I appreciate the color. The other question I had for you was about your non-US cash.

I don't think we focused on it too much, but just curious whether -- how much of that cash you feel is liquid, whether there is some amount you would really want to be holding in cash abroad or some amount that's required by regulators? So essentially how much of that cash is liquid, and then how do you think about the use cases for that?

Sure. That is a great question. All of our non-US cash is liquid. We do have some capital requirements and regulatory requirements in Hong Kong and the UK.

But relative to US standards and based on the activity levels that we do over there, they are minor. We have been whenever possible tax efficient, using the non-US cash to help seed some of our non-US products that we launched.

Or we seeded a global listed infrastructure's sleeve in our Luxembourg SICAV. And we used non-US cash in order to that. But otherwise there's not -- currently there's no other use for it. It is virtually all liquid.

And so we are keeping up to date on legislation in Washington and issues like that that potentially if there is a holiday at some point it's cost effective to bring it back. Certainly we would consider that.

Terrific. And just one last question on the pipeline. The $730 million you mentioned, over what time period would you expect those mandates to fund? Is it the next quarter or two?

Yes. Certainly over the next two quarters and a significant amount in this quarter.

Right.

Great. Thanks for taking my questions.

Sure.

(Operator Instructions)

Mac Sykes, Gabelli.

Good morning, gentlemen. Thank you for the extra disclosures, I appreciate that.

Going back to the preferred market, could you just give us some more color on the actual market? Maybe how big it is, how much is dominated by financial firms?

Well it's a large and growing market. It's almost $1 trillion in size, and it breaks down into the over-the-counter component and then an exchange listed component. The bigger part of it is the over-the-counter market.

Issuances dominated by financial firms; banks are the largest issuer, insurance companies are a smaller component of financials. There also issued by REITs or utility companies.

It is very dominated by financials, and what's happening is that you've got growth in issuance as banks meet the rising regulatory capital requirements that are being implemented around the world. On the other side, they are calling other types of securities which get lesser capital treatment.

But net/net it's a very large and growing and dynamic market. It's very inefficient in our view, these securities have very wide-ranging and complex structures to them. That's why our team of experts, specialists have had 13-year record of outperforming the market, because that is all they do is they focus on the market and it's very complex.

We believe that there are going to be more countries that are issuing from the banking sector, issuing preferreds to meet their capital requirements. We're hearing that Australia and Japan are going to be more active, whereas a lot of the issuance recently has been from European and US banks.

Terrific. One follow up, you obviously have a terrific line up of real assets. Are there any other product gaps or capabilities there where you would be looking to add to over the next year?

Well we think that with the line up of the strategies that we have right now we're going to be pretty fully occupied. That said, we'd like to find the extensions to strategies that we have. We've talked before about infrastructure debt as an example of that.

If you go back to Bob's earlier comments on our annual letter and our vision for the future, we believe in being specialists. We believe in being focused.

We're not going to add something that's very core -- core style box. But if we could find extensions to what we do and if we can find situations where we can get more scale in some of our newer real asset strategies, we are interested in doing that.

Great. Thank you very much.

Mr. Johnson, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or a closing remark.

Thank you all for dialing in and look forward to speaking to you next quarter. Thank you.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.