Sculptor Capital Management Inc (SCU) 2010 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Och-Ziff Capital Management Group 2010 second-quarter earnings conference call. My name is Katie and I will be your coordinator for today. At this time all participants are in a listen-only mode. All lines have been placed on mute to prevent any background noise. (Operator instructions.)

I would now like to turn the call over to Tina Madon, head of Investor Relations at Och-Ziff. Over to you.

Great. Thanks, Katie. Good morning everyone, and welcome. With me today are Dan Och, our Chairman and CEO, and Joel Frank, our Chief Financial Officer.

I'd like to remind you that today's call may include forward-looking statements. These statements reflect the current views of Management about, among other things, assumptions with respect to levels of assets under management, future events and financial performance, many of which by their nature are inherently uncertain and outside of our control. Och-Ziff's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. The Company does not undertake any obligation to publicly update or revise any forward-looking statement whether as a result of new information, future developments, or otherwise.

During today's call we will be referring to economic income, distributable earnings and other financial measures which are not prepared in accordance with US Generally Accepted Accounting Principles. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release, which is posted on the For Shareholders page of our website.

Furthermore, no statements made during this call should be construed as an offer to purchase shares of the Company or an interest in any Och-Ziff fund.

Today's call is being recorded and is copyrighted material of Och-Ziff Capital Management Group, LLC. Telephonic and webcast replays will be made available later today. You can find the details for both on our website at www.ozcap.com. With that, let me now turn things over to Dan.

Thanks, Tina. Good morning, everyone, and thank you for joining our call today. This morning I'll review our year-to-date investment performance through July 31st and assets under management as of August 1st. I'll briefly review the investment environment and share a perspective on capital flows, both for the hedge fund industry and Och-Ziff.

The market environment during the second quarter was more challenging than any we have seen in the last 18 months, and economic uncertainty remains high. However, against this backdrop the value of our investment process and our multi-strategy model was again readily apparent, as we continued to protect our fund investors' capital and generate strong risk-adjusted returns during the second quarter and through July.

As always, the quality of our performance is a function of our consistent, disciplined investment and risk management process, our low use of leverage, and our emphasis on diversification through our multi-strategy model. We have employed this approach to investing since the inception of our firm and believe these results are extremely valuable to fund investors.

While weaker global economic conditions and regulatory uncertainty resulted in sharp declines in global equity indices and increased volatility, our multi-strategy model and international capabilities enable us to effectively navigate this market environment. Our global reach allows us to understand macroeconomic risks worldwide and gives us the ability to create a robust and diversified investment portfolio.

Because we have the ability to capitalize on opportunities in various asset classes and geographies, rather than being dependent on a specific capital allocation to a strategy or on trying to predict market direction, we are able to build on our strong history of generating returns for our fund investors, even when market conditions are challenging. We are optimistic that we can continue to identify the best investment opportunities for them.

We are maintaining an active dialogue with current and perspective fund investors and believe that interest in our platforms remains high. However, let me reemphasize that institutions who allocate capital to us generally go through lengthy due diligence and approval processes because they make investment decisions for the long term. As a result, month-to-month capital flows can vary significantly.

Fund investors remain interested in managers who generate strong risk-adjusted returns, have a deep organization, a strong infrastructure, and provide portfolio transparency. We believe that as investors reengineer their traditional asset allocation models, they will increase the amount of capital they invest with alternative asset managers and we will remain a leading beneficiary of those flows. We continue to believe that our track record and the structure of our business differentiate our firm in the marketplace and will further increase our ability to gain market share over time in a competitive landscape that remains fragmented.

Now let me turn to our business results, starting with assets under management. As we announced this morning, our assets under management as of August 1st, totaled $25.9 billion. This amount reflects a year-to-date increase of $2.8 billion, or 12%, from $23.1 billion on December 31st, due to $2.2 billion of capital net inflows and $600 million of performance-related appreciation. These amounts includeed net inflows of $300 million on August 1st and $300 million of performance-related appreciation for the month of July.

Consistent with what we have seen over the last several quarters, our year-to-date inflows are coming from a well-diversified mix of existing and new fund investors. We have seen particular interest from pension funds, private banks, corporates and other institutions, including international pools of capital. We remain confident that the long-term secular growth drivers of assets under management remain intact for the hedge fund industry. Despite recent market volatility, we believe the capital allocation cycle is underway and confidence among institutional investors in this sector remains strong.

Now let me turn to our funds' investment performance. Year to date through July 31st our Master Fund was up 2.8% net; our Europe Master Fund was up 2.6% net; our Asia Master Fund was up 3.6% net; and our Global Special Investments Master Fund was up 5% net. These returns were generated with less than half the volatility of the S&P 500. Our year-to-date performance was driven by our credit-related strategies, convertible arbitrage, and private investments. As I mentioned earlier, our performance reflects the benefit to our fund investors of our active risk management process and the flexibility of our model.

In light of the sharp decline in global equity markets and the resulting increase in volatility during the second quarter, we reduced our equity exposures and increased our allocation to cash. We are continuing to see attractive opportunities in all of our strategies, although we are being more selective and disciplined in terms of entering and exiting investment disciplines and geographies.

With that, now let me turn the call over to Joel.

Thanks, Dan. This morning I will review our 2010 second-quarter results and how we are thinking about expenses going forward.

For the 2010 second quarter we reported a GAAP net loss of $89.4 million, or $1.05 per basic and diluted Class A share. As always, a discussion of our GAAP results is contained in our press release for your reference.

Now, let's turn to the details behind our 2010 second-quarter economic income, beginning with revenue. Management fees totaled $108 million, of which $107 million was attributable to the funds segment and $1 million to other operations, an 8% increase from the 2010 first quarter, due to the increase in assets under management from January 1st to April 1st of approximately $1.8 billion. From April 1st to July 1st our assets under management remained unchanged at approximately $25.3 billion as net inflows were offset by an equivalent amount of performance-related depreciation. Our average management fee remained at approximately 1.7%. This is a blended rate that includes the effect of our nonfee-paying assets.

Now let me turn to the 2010 second-quarter expenses. Comp and benefits totaled $21 million during the second quarter with $17 million attributable to the funds segment and $4 million to other operations. Of the total, salaries and benefits were $19 million, essentially unchanged from the 2010 first quarter, with $15 million attributable to the funds segment and $4 million to other operations. Second-quarter comp and benefits also included $2 million of guaranteed bonus expense, which is essentially all attributable to the funds segment. Total salaries and benefits were 18% of management fees in the second quarter. We expect this ratio to be approximately 18 to 20% for the third quarter.

Now, turning to noncompensation expenses -- noncomp expenses totaled $21 million in the second quarter, declining slightly on a sequential basis, with $22 million attributable to the funds segment and a $1 million credit attributable to other operations. The majority of this credit resulted from a reimbursement of organizational expenses related to establishing a new real estate investment fund. Noncomp expenses totaled 19% of management fees in the 2010 second quarter. We expect this ratio to be approximately 19 to 22% for the third quarter of this year.

Our 2010 second-quarter effective tax rate was 20%. The sequential increase in the quarterly rate was principally due to a lower deduction for the divesting of RSUs, which declined during the quarter due to the decrease in our stock price and the expected flow of our annual revenues and expenses through our legal entity structure. We anticipate that our effective tax rate during the third quarter of this year will be in the range of 20 to 25%.

As I said on our first-quarter call, our 2010 full-year effective tax rate is subject to variables which generally would not solidify until the fourth quarter of this year, including the amount of incentive income we earn, the resulting flow of revenue and expenses through our legal entity structure, and the effect that changes in the stock price may have on the deduction for vesting RSUs. As a result of these factors, our quarterly and annual tax rates may vary, sometimes substantially, from our estimates.

Our 2010 second-quarter distributable earnings were $57 million, or $0.14 per adjusted Class A share. As you saw in our press release this morning, our dividend for the 2010 second quarter will be $0.11 per Class A share. As is typical, we use cash to fund items related to the operation of the business. The most significant of these were withholding taxes to be paid upon the vesting of RSUs and principal repayments on our variable-rate borrowings.

In closing, I would like to reemphasize the importance of the relationship between our investment performance and the earnings power of our business over the long term. Our ability to protect fund investor capital, especially when market conditions are volatile, and generate competitive returns as markets normalize, is extremely valuable to our current and prospective fund investors. The consistency of our performance is key to the stability and growth of our assets under management, which in turn drives our earnings growth.

I would also like to reemphasize the scalability of our model, as this is an equally important factor in increasing our earnings and expanding our margins as our business grows. As I have said on prior calls, growth of assets under management will drive growth in our management fees, which we expect to more than offset any increase in our fixed expenses over time. In addition, our revenues are collected in cash, flow right to the bottom line, and are now subjected to claw-backs.

With that, we will be happy to take your questions.

(Operator instructions.) Bill Katz; Citigroup.

Two questions, I guess. One, I was sort of curious in terms of your discussion with existing and prospective clients, is there any discussion around pricing relative to maybe length of the investment? And then my second question is, given your very strong operating results this quarter, any thoughts to maybe accelerate reinvestment in the business to expand the platform in any way?

Bill, in terms of the first question, other than the three-year structure we had mentioned previously, no other discussions along those lines. And we feel very good about the three-year structure and its receptivity amongst investors.

In terms of investing in the business, as Joel has said many times, we're constantly investing in the business, whether that is to internal growth, expanding some of the platforms that we've talked about in the past. Hiring in particular is important; this is a very good environment for us in terms of attracting people. So we are very focused on that and we think it is creating opportunities for the future.

Cynthia Mayer; Bank of America.

You mentioned you increased the allocation of cash in 2Q. I'm just wondering if you can give the current allocation and maybe talk a little bit about what it would take for you to get more constructive.

Yes. Why don't I give you the full allocation -- it's 20% to cash, but let me give you it across the board. It's 22% to long/short equities; convertible arbitrage 19%; structured credit 20%; private investment 10%; other credit 10%; and [merger org] 2%.

And Cynthia, in terms of the second part of your question, yes, what we're constantly doing and have done since inception is in evaluating the risk return opportunities in each of our sectors, as well as the overall risk in the environment. The combination of those two factors caused us to increase the cash position.

We do see opportunities to redeploy the cash and it's really balancing the risk/return opportunities with the overall risk in the environment. Clearly in the second quarter we were down approximately 1.37% in our main fund, with the S&P down 11%. And that defensive posturing, that constant risk management, is very important to our investors and very important to our investment mandate.

Okay. Maybe just one more on investing -- looks like the Global Special Investments Fund is really outperforming this year. Can you maybe give a little color on what the main drivers are for that there?

Well, as we said, the performance drivers have largely been in the credit areas and some of the private investments. So it is part of a natural overweighting towards those areas.

Okay. And maybe just update us also -- I think earlier this year you removed your perpetual high-water mark. And just curious, in talking to clients since then and looking at the inflows, did that have any measurable effect, do you think, on flows that you could talk about? And yes, I guess, if you could just give a sense of the impact, if you've seen any.

We don't think it's had any measurable effect. We do think it was noted. I mean, I think not gating and suspending or locking up has had a measurable effect. The level of transparency and disclosure we offer has had a measurable effect. The results of the due diligence on our operational processes and our financial controls has had a measurable effect.

The movement, the high-water mark, as we said at the time in polling our investors -- is there anything we can be doing better? This is something that they felt would be a positive adjustment. I think it's indicative of how we think about investors and how proactive we are. And there is clearly a very overall positive feeling in terms of all those issues amongst the investor base. But we are constantly striving with our investors -- is there anything we could be doing better? What is important to you? Where can we be best in class?

Great. Thank you.

Roger Freeman; Barclays Capital.

It's Steven Truong here for Roger. Can you talk about what drove the incentive income during the quarter? Was it redemptions or was there something else in there, please? Thanks.

Yes. Basically it was prior redemptions that drove incentive growth.

Okay, thanks. And, Dan, just in terms of the comment with regards to your market share gains, how do you see the M&A landscape within hedge funds? Or can you talk about organic growth as you see it going forward across your strategies? And is that enough to really drive the market share that we're referring to? Thanks.

Sure. I don't have any comments, really, on M&A within the hedge fund industry. We think that our opportunity, if we continue to perform and continue to add the value -- as I said, an interesting aspect of the business is the second quarter, where we lost 1.37%. So, clearly being down is not the goal at the beginning of the quarter, but to be down 1.37% with an S&P down 11% is huge value added. If we keep doing all the things we're doing, we see -- we think the market share gains are coming from a 16-year record of doing what we do of generating the returns, low leverage, managing the risk appropriately and all of the other factors that I mentioned on the last question. So our focus is not on M&A or any of these other areas.

Thanks. And with regards to the increased cash, can you talk about how you look at things across geographies, say, with the European Master Fund and the Asia Master Fund versus the main Master Fund? Thank you.

Well, Joel, why don't you give the geographic allocations in the Master Fund, which will indicate how we're blending all of that across the portfolios?

Yes. It's about 55% US, about 31% in Europe, and about -- difference of about 14% in Asia.

Okay. Thank you.

We do feel very, very good about the international opportunities on a long-term basis. And we think the fact that throughout the various crises that have occurred, either in Europe or in Asia, the fact that we've not only stayed fully committed but have continued to expand has increased our competitive advantage in those areas. And we think that the international linking in the world is going to continue to grow and become more important.

Okay. Thanks.

Dan Fannon; Jefferies.

Was wondering, is there any real change in your investor mix? And then, are you guys giving that breakdown on a quarterly basis? And then talk about a little bit of where you see the opportunity within that customer mix going forward or see the most potential opportunity for market share gains.

Yes, Dan. Let me give you the breakdown by investor. No material changes. Pension's about 24%; fund-to-fund's about 22%; foundation and endowments about 18%; corporate, institutional and other about 10%; and affiliated still 10%; family and office individual about 8%; and private banks 8% as well.

And in terms of opportunities I think in general the pension funds, large international, and private banks are probably the best secular opportunities just in looking at total assets within those areas and the percentage of those assets invested in alternatives. But I think that's a relatively standard perception within the alternative asset management industry.

Okay. And then maybe a different look at investing in your business -- I mean, are you guys out looking at personnel and hiring in certain areas or expanding in this market?

We are. We think it's a very good opportunity for us to be bringing people in. We think that there are a lot of things that are making Och-Ziff even more attractive to people on a career basis. We've continued to expand the things that we do internally that make this place attractive to people. We're very focused on it. There are some things going on within the industry, both within the alternative investment industry and within the financial services industry that are causing some levels of instability that are making a firm such as Och-Ziff, we believe, even more attractive. And we continue to bring people in where appropriate.

Okay. And the lastly, on the regulatory front, is there anything out there that you guys are monitoring besides the carried interest that continues to be kind of ongoing? But is there any other potential legislation that comes up that you guys are following or monitoring?

Look, Dan, on an overall basis of course we monitor everything that's going on. But, as we'll always tell you, we think that well thought out legislation that affects everybody equally and is good for the country we're in favor of. So we'll have to wait and see what actually happens.

Okay. Thank you.

Kent Worthington; JPMorgan.

This is Tim Shea speaking for Ken. We had seen about nine solid months of inflows and then last month a reversion back to outflows. And we're just wondering whether or not that can be attributed to some type of a one-time item or whether or not it might indicate that perhaps things have become more fragile with regard to flows?

Well, first of all, our very strong belief is that the secular trend that began about 12 months ago is intact. That's based on conversations that we're having, studies that have been published, statements that have been made by large institutional investors, and the continued ability to perform and provide what investors are looking for. We've also stressed that each -- month-to-month numbers can vary. They can vary to the upside and they can vary to the downside. We don't think that last month is an indication of the long-term trend. But obviously our goal is to generate the performance, focus on what's important to the investors and all other aspects of the business and operations. And if we do that, we think that we will benefit from the long-term trend.

All right. Thank you.

Marc Irizarry; Goldman Sachs.

The distribution picture on the high net worth side and retail side for alternatives, it seems that all investors, including high net worth, are interested in it. Can you talk a little bit about what your plans are on the distribution side or what you have going on to grow that side of the business there?

We don't have any material plans in place to change anything that we're doing. Our primary focus continues to be on the institutional side. You are correct, Marc, that there is more and more interest in these types of products from the high net worth side. On that side we're being more responsive to approaches that are being developed, responses to structures that are developing. Our focus really is on the institutional side. But if you're asking on a long-term basis do we think that there is a large opportunity on the high net worth individual side and do we think if we continue to do what we do that we will attract a reasonable share of that, we would absolutely agree with that.

In terms of -- maybe just to be a little more specific -- were you added to any high net worth platforms over the past year? Are there any new platforms where maybe we can expect to see some new flow going forward?

We don't comment on any specific investors for confidentiality reasons, but I think it's fair to say if we continue to put ourselves in a position where we're viewed as one of the premier firms, then we will be given the choice of the best opportunities. And that is our approach.

Okay. And then just on the comment on the reengineering of asset allocations, I know there's been a lot of -- this has been ongoing. But what's -- when you talk to your LPs about their -- the reason for sort of coming to Och-Ziff, can you differentiate a little bit between the flow coming from reallocation versus maybe manager replacement? Is that a notable trend? And then, is there any sort incremental change in the ways LPs are thinking about asset allocation that's worthy of noting?

Well, on the first question, obviously we don't know exactly where the capital comes from. But it does appear to us that the main focus is not manager replacement. It's new allocations. It's either institutions coming into the space for the first time or it's institutions increasing their allocations to the space.

And I'm sorry, what was the second question? Marc?

Sorry. And then is there -- on the reengineering of the asset allocation, is there any discernible change in the way investors are thinking about the alternative allocations? Has the market sort of caused investors to have to think more strongly about the role that multi-strat plays in their portfolios? Or has recent hedge fund performance maybe caused some contemplation about whether or not they should be upping their allocations?

I think what you're referring to is a longer-term process that's in place. And we've actually seen some public studies about that, where CIOs are effectively looking at hedge funds, looking at multi-strategy hedge funds in comparison to their equity allocation. Obviously over the past 10 years there have been some issues with the equity allocation. In our view, if you asked us over the past 12 months has there been a lot of that flow, probably not. If you asked us is that a very, very large opportunity going forward, absolutely. Obviously, to receive allocations from the equity allocation, that is generally a much larger pool than the pure alternative asset bucket.

Okay, great. And then just more if I can on the regulatory -- on financial regulation. Can you talk a little bit, as a market participant, what you expect the impact of Fin Reg to be? And then also, what do you think about running the business in terms of maybe talent or competition? What's your thought there?

On Fin Reg, Marc, you know there's a lot more to be interpreted and to be defined. And that's going to take a period of time. So we have to wait and see how that's going to affect everybody in the marketplace once that is defined.

And on the second part, Marc, at the margin -- as I said, some of the instability and some of the changes we believe are benefiting us in terms of the ability to attract people. But our focus is on giving people reasons to want to be at Och-Ziff as opposed to focusing on any other issues affecting others.

Great. Thanks.

Cynthia Mayer; Bank of America.

Thanks for letting me ask a follow-up. Just briefly, on the relationship between the dividend and the distributable earnings, this quarter $0.11 versus $0.14, as we look ahead to 4Q should we assume that the dividend will be sort of a similar percentage of earnings as last year's 4Q? Or should we think about the ratio for this quarter? And how do you look at that depending on what the eventual incentive income is?

Look, like we always say, we're always going to distribute the majority of our distributable earnings. And what the business needs in terms of cash needs we will use. And that's going to be your difference. So we're not -- we can't project that; there's no way of projecting that. But our intent is always to distribute the majority of our distributable earnings.

Okay. And can you just remind us, in terms of the part that's held back what the major uses are right now?

For this quarter it was withholding on RSUs and the pay-down of our variable rate loan.

Okay. Thank you.

Mark Lane; William Blair & Company.

I just had a question regarding fund performance. And it seems -- and this is including reported results in July -- it seems like the swing in performance relative to the market, at least in 2010, has been dampened a little bit if you look at how you performed relative to the market in 2008 and 2009, both during down and up markets. So was there a view, and is there a view, as you were positioned earlier in the year, to be a little bit more conservative or reduce some of the volatility in the portfolio?

No. The performance in 2010 we think is very consistent with our performance over our 16-year history. In 2008, for reasons that I think everyone is aware of, especially in the fourth quarter the performance did deviate from our normal historical performance. But if you go back and look at especially our performance during the down months in the S&P each year, which we focus on a lot, because one major factor in preserving capital is how do we do when the market goes down. If you look at that performance, you'll see that 2010 is extremely consistent. Rough numbers, if you look, the S&P has had several down months and our out-performance -- you can call it alpha, you can call it noncorrelation -- has been very, very strong. Our preservation of capital during those [three] months has been extremely strong. And 2010 is very consistent with our performance throughout the 16 years, 2008 being the aberration.

So even with a month in July with global equity markets up high-single digit, performance of a little bit over 1%, or 1.3, 1.4% in July, is -- you think that July was kind of a typical month in the way you were positioned, then?

When one looks to truly generate consistent positive absolute returns, be well hedged, have minimal if any market exposure, and generate alpha -- as I said, over the last 16 years that's generated a very high compounded rate of return, with virtually -- with very little correlation and downside. Obviously, in months when the equity markets -- May and June, for example, when the equity market dropped dramatically, one can look after the fact and say it was very good to have no market exposure. In months like July when the equity markets rise dramatically one can look after the fact and say it would have been nicer to have more market exposure. We're not market timers. We feel that for 16 years we've demonstrated that we're going to do what we do, and it's going to generate absolute returns in alpha for investors, and we don't deviate.

Okay. Thanks for answering the question.

At this time you have no further questions. I would now like to hand the call back over to Tina Madon for closing remarks. Please proceed.

Thanks, Katie. Thanks, everyone, for joining us today and for your interest in Och-Ziff. If you have any questions, please don't hesitate to contact me at 212-719-7381. And media inquiries should be directed to Carina Davidson or Chuck Dohrenwend at 212-371-5999.

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.