Westwood Holdings Group Inc (WHG) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Westwood Holdings Group Incorporated third quarter 2015 earnings conference call and Webcast. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Sylvia Fry, Senior Vice President and Chief Compliance Officer. Please go ahead.

Thank you. Good afternoon, and welcome to our third quarter 2015 earnings conference call. I would like to start by reading our forward-looking statements disclaimer.

The following discussion will include forward-looking statements. These forward-looking statements 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 in our annual report on Form 10-K for the year ended December 31st, 2014, 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 our call today we will have Brian Casey, our President and Chief Executive Officer, and Tiffany Kice, our Chief Financial Officer. I will now turn the call over to Brian Casey, our Chief Executive Officer.

Thanks, Sylvia, and good afternoon, and thanks to all of you for taking time to listen to our third quarter earnings call.

The third quarter was volatile and challenging for all asset managers with indiscriminate selling across all market segments. As we sit here today with markets at much higher levels, it appears that the selloff was part of a normal correction and so far has merely represented a good buying opportunity.

Before we discuss performance and distribution trends across our business, I'm pleased to announce the dividend increase of 14%. Our dividend now stands at an annual rate of $2.28, representing a dividend yield of 4% at yesterday's closing price.

Our balance sheet remains solid with over $80 million in cash and liquid investments and no debt. Consistent with our stated goal 13 years ago of becoming a superior dividend grower, we have raised our dividend every year since we've been public. In fact, nearly 50% of the total return at Westwood has come from dividends.

Our compound annual growth rate of our quarterly dividend since inception has been nearly 29%. And we've paid out over $127 million to shareholders as a public company.

Turning now to our investment teams, I'll start with the Dallas-based US value team. As I discussed in my opening remarks, the third quarter was a challenging period for investors and asset managers alike. Both US and international equity markets posted their worst quarterly performance since the third quarter of 2011, with the S&P 500 index declining nearly 7%.

Most of the weakness came in August as an unexpected devaluation in China's currency and concerns over global growth continued or contributed to a selloff in risk assets and a sharp spike in market volatility.

Commodities remained under pressure as crude oil prices declined over 25% in the quarter, pressuring energy and energy-related assets, such as MLPs, with the Alerian MLP Index falling more than 23%, the worst quarterly performance in the history of the index, which dates back to 1996.

Relative returns for the quarter were mixed with our large-, small-, and all-cap value strategies performing ahead or in line with the benchmark. On a year-to-date basis, our US value equity strategies continue to perform well on a relative basis with each strategy ahead of its respective benchmark and all ranking in the top half of their peer group.

Importantly, our value equity strategies have demonstrated stock-picking skill by protecting the downside in an environment where our customers really needed us.

Westwood's multiasset strategies, including income opportunity, saw declines for the quarter but continued to exhibit lower-volatility profiles. Over its more than decade-long history, the income opportunity strategy has proven the ability to deliver an attractive longer-term risk-reward profile in an area of continued high demand from investors.

As noted earlier, MLPs were by far the most challenged US asset class in the third quarter. And our strategy was no exception, posting a decline of 26% for the period. We felt at the time that the correction was far too severe, and we took advantage of the opportunity to buy high-quality names at very attractive prices. So far, that's proven to be a winning strategy, as we've seen a nice rebound in October.

Turning now to our Toronto-based global and emerging markets equity team, their perspective on the quarter was that it was a combination of already nervous market participants who were further spooked by the relative small devaluation of the Chinese currency and disappointing trade and economic data from China.

While the quarter was going well up to this point, the Fed's decision not to increase interest rates led to further selling. And REM product ended the quarter slightly behind our benchmark.

As with our MLP team, the emerging market team is focused on the long-term fundamentals of companies and, as such, took advantage of the volatility by adding to existing holdings as well as adding some new names to the portfolios that reach compelling buy levels.

Over time, as we all know, emerging markets have endured bouts of large underperformance relative to developed markets. These periods have historically provided attractive entry points for investors.

The US dollar has strengthened considerably in recent years, and that's provided a strong headwind to US investors in emerging markets, which we do not expect to be as significant of a detractor in the years ahead.

It's been a full year since we hired our Boston-based global convertible securities team. And in sharp contrast to the effects endured by our equity strategies, the strategies managed by our global convertible securities team held up extremely well over the quarter.

The absolute return-focused market-neutral income strategy posted a positive absolute return. And the strategic global convertible strategy was down less than 4%, which is an approximate 40% participation rate with the MSCI World Equity Index.

After the end of the third quarter, our advisory mandate for the European-based Aviva global convertible absolute return fund moved to delegated status. While there's no change to our revenue realization from this account, this will result in approximately $330 million of assets, which were classified as assets under advisement as of September 30th, moving now to assets under management in the fourth quarter.

Turning now to distribution, I'll start with comments on the institutional business, which is our largest channel segment. In line with the broader industry, we've suffered the headwind of a continued rebalancing away from US equities. This has been driven not only by investors looking to invest in other asset classes, but also by the outperformance of US equities, as typically institutional investors will rebalance their asset allocation back to target weightings.

However, it's important that I emphasize that the outflows we have seen have generally been partial redemptions and not a loss of client relationships. In fact, our institutional business client retention rate has exceeded 95% on a year-to-date basis.

From a new business perspective, we believe the recent market volatility has resulted in a delay in decision making for many investors. We noticed this in particular in relation to two finals presentations we made for $100 million to $150 million emerging markets mandates during the quarter, where the decision to invest was deferred by the institution. We expect these delays to be temporary, and we hope to see a decision by these institutions in the fourth quarter or early next year.

As we look forward, we believe that the continued strong performance over both short-term and long-term periods of our established small-cap value, all-cap value, and income opportunity strategies, as well as the strong initial performance of our new strategies has put us in a strong competitive position.

Of the newer strategies, our concentrated large-cap value strategy is the best-performing large-cap value strategy in the Investment Database, the most widely used screening database for institutional investors, since the strategy's inception nearly two years ago.

As we look to the end of the year, we expect to see the funding of new mandates in our small-cap value, strategic global convertible, and emerging market strategies during the fourth quarter. In addition, the pipeline remains quite strong, and we continue to actively represent our broad capabilities to investors around the world.

Turning next to private wealth, new business development efforts across Dallas, Omaha, and Houston, and prospecting activity levels remained high despite the typical seasonal slowdown associated with the summer months. As we look forward to the fall, our support of local nonprofit organizations and the opportunity to get in front of many prospective clients at charity events sponsored by Westwood Trust picks up significantly.

We also have speakers and events scheduled for all three offices for existing clients and prospects over the next few weeks in Dallas, Omaha, and Houston, which has historically been a great avenue to build sales momentum into the New Year.

As we continue to look to improve the client experience, the Dallas and Omaha offices will be converting to the FIS trust accounting platform at the end of this year. Clients will benefit from a vastly improved online experience as well as enhanced statements and reporting.

Since closing the Woodway Financial Advisors acquisition on April 1st, we've worked diligently to integrate them into Westwood. We are proud to have Woodway as the Houston office of Westwood Trust, which is now known as Woodway Financial Advisors, a Westwood Trust company.

Houston is a strong and growing private wealth market. And Woodway is well positioned as the premier private wealth firm in Houston.

We continue to actively evaluate opportunities to expand our company through the acquisition of private wealth companies in strong geographic markets. We feel that our private wealth business is the strong diversifier of our overall company, as our superior client service efforts have led to long-term customers and relationships with exceptionally high client retention rates.

As we discussed in our last earnings call, our mutual fund complex has grown to 15 funds. We've seen the Morningstar ratings of some of our funds increased during the year, with the small-cap value fund now at five stars.

In addition, we now have funds in nonequity Morningstar categories, including world allocation and market neutral. In fact, the market neutral income fund, which we launched on May 1st, has started with very encouraging performance, including positive returns in August during the height of the market volatility.

This has caught the attention of some investors and even resulted in a West Coast-based RIA investing in the fund during the first week of October. We believe this fund is an attractive offering as a sleeve for discretionary models looking to construct an overall portfolio that includes low volatility or liquid alternative funds.

We will continue to work hard to find new investors and remain positive in our efforts to position this fund as a truly differentiated strategy in the marketplace.

From a business development perspective, we hired Jonathan Dale as our first National Accounts Director to engage in an increased marketing effort of our mutual funds and separately managed accounts to financial institutions, such as national broker-dealers, mutual fund platforms, defined contribution platforms, and trust companies.

The intent is that, since a number of our mutual funds are new and have short mutual fund track records, but have longer-tenured institutional track records, we're seeking to market these funds to those investors that control discretionary models.

Discretionary model investors perform their due diligence on Westwood as an asset manager and are not tied to solely analyzing the record of the mutual fund itself.

From a subadvisory perspective, our existing partnerships remain strong, and we continue to seek opportunities to establish new partnerships with firms across a number of our strategies.

Before we wrap up, I'd like to revisit the future growth potential of our company from a broader perspective. We believe that our primary mission is to deliver superior investment performance and an exceptional client service experience that exceeds our clients' expectations.

We will continue this focus and, as always, do it within a framework of how we think about asset allocation trends in the marketplace and the types of strategies we want to offer investors.

Many of you will remember that Westwood started as a single investment team with a single strategy. And today, we have 10 strategies, each with over $300 million in assets under management. We offer close to 20 institutional strategies and 15 mutual funds. We started a UCITS fund less than two years ago, and we have three UCITS funds now that allow us to expand accessibility to Westwood for non-US investors.

Over the past two years, we've started seven new strategies in areas that we believe are relevant to investors. These include high-conviction or concentrated equity strategies, low-volatility strategies, global multiasset strategies, and liquid alternative strategies.

We believe that all of these new strategies will provide us with additional growth engines as we move forward. Furthermore, we'll continue to look at ways to build new strategies that benefit from the core competencies of our existing teams and also look at inorganic opportunities to add new investment talent to our company.

We believe the strength of our investment capabilities, aligned to our strong client retention rates and the increased breadth of our distribution, positions us well for the future.

We've seen a nice recovery since the end of the third quarter. And with the Aviva transfer and some new accounts, we estimate assets under management to be just shy of $22 billion as of last Friday.

With that, I'd like to thank you for your continued interest in Westwood and turn the call over to Tiffany Kice, our CFO.

Thanks, Brian, and good afternoon, everyone. For the third quarter of 2015, we are reporting total revenues of $32.5 million, up 15%, or $4.4 million from the same period in 2014. Asset-based advisory fees are up 9%, or $2.1 million. And trust fees are up 51% or $2.7 million. Our trust fees include revenue generated by Woodway, which we acquired on April 1st of the current year.

Net income of $7 million was relatively flat with the third quarter of 2014, while diluted earnings per share of $0.87 decreased slightly from $0.92 per share in the same period of 2014.

Shares issued or contingently issuable in relation to the Woodway acquisition contributed $0.02 of the decrease in diluted EPS.

Economic earnings, a non-GAAP metric, of $12.4 million increased 14% as compared to $10.9 million in the third quarter of 2014. Economic earnings per share increased to $1.55 per share from $1.41 per share in the same period of 2014.

Firm-wide assets under management decreased to $20.4 billion, primarily due to the overall decline in global markets during the third quarter. At quarter end, our assets under management consisted of institutional assets of $11.3 billion, or 55% of the total, private wealth assets of $5.3 billion, or 26% of the total, and mutual fund assets of $3.8 billion, or 19% of the total.

Our balance sheet continues to be very strong. We currently have cash and investments of $80 million and no debt.

Our Board of Directors approved a quarterly cash dividend of $0.57 per common share, an increase of 14% from the previous quarterly dividend rate, payable on January 4th, 2016, to stockholders on record on December 15th, 2015. This represents an annualized dividend yield of 4% at yesterday's closing price.

We encourage you to review the presentation we've posted on our Website reflecting third quarter highlights as well as longer-term trends in the growth of our assets under management, revenues, earnings, and dividends.

I'll now turn the call back over to Brian to conclude.

Thanks, Tiffany. If anybody has any questions, you can ask them now. Thank you.

(Operator Instructions). Mac Sykes, Gabelli & Company.

That's Mac Sykes from Gabelli. But, thank you for taking my questions. And congratulations on the October to-date AUM. I have just two questions. First, on the AUA move to AUM, can I assume the revenue and margin impact will change accordingly?

No, as I said, maybe not clearly, was that there'll be no revenue impact. It's simply moving the assets under advisement to assets under management. I will say, though, that the performance of the fund has been really, really good. And the sales team at Aviva has spent a lot of time with our guys. And they were -- in fact, they were there as recent as last week out selling the fund and having some good success.

Great. And then what sort of -- what sorts of distribution channels are you targeting for the concentrated value product at this point?

I think it'll still be home base for us, which is the institutional consulting community. They know us well. And they have said for years now that they have a preference for high active share managers. And in our case, if you look across our spectrum of equity products, we have a very high active share in excess of 75% in most cases.

So, we think this will be well received. We've got to get our three-year record behind us. We're nearly two years into it. And the numbers have been spectacular.

And just to elaborate a little bit further on that, this is not a different product from the standpoint of having a completely different set of stocks. This is a subset of our traditional large-cap value product, which would have historically 45 names. In this product, we have 25 names. And those 25 are simply higher-conviction weightings of the 45 names that we have in the traditional product.

Great. Thank you. And congrats on the dividend. I'm sure the investors will appreciate that.

Great. Thanks, Mac. Appreciate your question.

Larry Carlin, Conestoga Capital.

Good afternoon, Brian, Tiffany. And this is another investor that very much appreciates that dividend. So, thank you very much.

All right. Terrific.

And you commented that you have 95% client retention year to date, if I understood that correctly. Have you looked at that metric during previous periods of market volatility, or is there any industry benchmark? That seems like a very impressive number.

Yes, so, let me be clear in the different between client retention rate and a redemption rate. A client retention rate means that you have retained the client. And we have retained in excess of 95% of the clients we had at the beginning of the year; we still have them.

And I would say that an industry rate is closer to 90% or less. So, we have enjoyed over a long period of time a very high client retention rate.

As far as redemption rate goes, that's the amount of money that leaves the complex. And you have a natural rate of redemption in any one of our categories. So, for example, in the trust area, you have people who have saved money, and eventually they have to live off that money. So, you're going to see a natural rate of redemption there.

Pension funds that you manage money for have to pay their benefits to their pensioners. So, you'll see a natural amount of money leave there. And then endowments and foundations typically have a 5% spend rate. So, you see some money go out the door there.

We did a study of industry-wide redemption rates over the last three years. And that number is in excess of 23%. And our number is well below 20%. So, redemption and client retention are two different things. But, I appreciate your question. And hopefully that clarifies it.

That clarifies it very well, and certainly impressive numbers. And, Brian, could you just maybe comment a little more on the Woodway acquisition? How did it turn out in terms of personnel and client retention? And what are your strategies for growth there?

Sure. Well, I think we're still all very much in the honeymoon stage. We're so happy to have them as part of Westwood. And the clients have embraced the greater depth of resources that we may bring to the table and the fact that we're not going to come in and try to change things right away. So, those two things are going well for us.

As far as growth goes, we are actively looking for at least one, probably two folks to join Woodway in a trust officer position or a new business development position. The market is quite hot right now. And it's important to us that we find somebody that is a really good fit culturally. But, that assignment in the hands of the recruiters right now. And they're actively looking for some people.

Okay. Great. Well, thank you very much. And we appreciate the great results. And thanks again for the dividend.

Okay, Larry. Thanks for your call. I appreciate your question.

Great. Thank you.

(Operator Instructions). And I am showing no further questions at this time. I would now like to turn the conference over back to Brian Casey for any further remarks.

Great. Well, thank you very much. We appreciate everyone's support of Westwood, many of you over a long period of time. And we're always here and available to answer your questions. So, please give us a call, or go to our Website westwoodgroup.com. Thanks, again, for your time.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.