Westwood Holdings Group Inc (WHG) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Westwood Holdings Group Inc fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Sylvia Fry, Senior VP, Chief Compliance Officer. You may begin.

Thank you.

Good afternoon, and welcome to our fourth-quarter 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 as in our annual report on form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as 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 we 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 CEO.

Thanks Sylvia, and good afternoon everybody. Thanks for taking time to listen to our fourth-quarter 2015 earnings call.

During the call I will discuss the performance of our business over the last quarter, provide an overview of the full year 2015, as well as our thoughts and implications of the current market environment. As we normally do, I will start by providing an update on each of our investment teams, beginning with the US value team.

For the calendar year 2015 most global equity and bond markets ended the year in negative territory. While the S&P 500 managed to finish the year with a slight gain, the range of return between the top and bottom performing sectors was almost 30%. Value proved to be far inferior to growth, and investors showed a strong preference for a select few companies that offered US growth with leverage to the US consumer.

Westwood's value equity strategies participated in the fourth quarter rally, with each posting a positive return for the period ranging from a gain of close to 6% for large cap value to 2% for small cap value. For 2015 performance was strong across our US equity strategies relative to both their respective benchmarks and peer groups. Throughout Westwood's 30-plus year history we have focused on downside protection, and we believe that process served our clients well in 2015.

We are especially pleased to report that performance in our large cap value strategy has rebounded strongly over the past year. It is now ahead of its benchmark and above median in its peer group over 1-, 3-, 5- and 10-year time periods. We are also pleased with the continued strong performance of our concentrated strategies, which now have two years of performance history.

In particular, our concentrated large cap value strategy ranks in the first percentile with an annualized return of 12.4%, approximately 800 basis points ahead of the benchmark since inception. These strategies, like all of our value strategies, focus on high-quality companies with sustainable business models and lower earnings volatility. We believe investors will continue to show a preference for these types of companies, which should support continued relative outperformance while offering a lower degree of downside risk.

Within our multi-asset strategies, Income Opportunity posted a gain of 3.3% in the fourth quarter, and in line with the benchmark, and continued to display the lower volatility profile that has attracted investors over time. Our newer global multi-asset strategy, Worldwide Income Opportunity, provided a similar risk return profile during 2015, and as a strategy we look forward to rolling out to the market in the years ahead.

After a very challenging first three quarters of the year, MLPs posted a decline of almost 3% in the fourth quarter, as crude oil and natural gas prices remained under pressure and sentiment towards the asset class declined. Westwood's largest MLP strategy declined 0.9% for the period, ranking in the top quartile of its peer group.

As we noted in our last earnings call, we feel that the sharp correction in the MLP sector has created an attractive opportunity for long-term investors in those companies with the financial ability to weather the current commodity price environment. While MLPs are a source of potential growth in the years ahead, it remains a very small product for us overall, representing less than 3% of total firm assets.

Turning next to our global and emerging markets equity team, we were pleased to see outperformance of our core emerging market strategies during the fourth quarter. As you all know, emerging markets have struggled in recent years, with performance significantly below returns posted by developed markets. We do not believe this to be a secular trend, but more so a function of the volatility that we've seen over time in the relative performance of emerging markets. History has proven that times like this provide investors with an excellent entry point into a part of the global economy that has potential to provide strong growth in the future.

From the team's perspective as we move into 2016 the market seem to be putting investor risk tolerances to the test, despite the micro -- macro outlook not looking as dour as the market mood might imply. Concerns such as Chinese growth, the impact from the strong US dollar, a correcting energy complex and concerns around Fed policy normalization have continued to weigh on the minds of markets globally, both developed and emerging.

The team believes that central banks globally will veer towards less restrictive, or even accommodative policies given the current economic and market environment we face. More importantly, the team has met with numerous management teams around the world, and they see opportunities outweighing the risks for the year ahead.

It is a little over a year since the global strategic securities team joined Westwood. As a reminder, the team manages both a long-only convertible strategy, as well as a liquid alternative strategy market neutral income. The appeal of the team to Westwood lay in their investment acumen, cultural fit, and the ability to add new strategies to meet the needs of institutional and retail investors globally. The long-only strategy, strategic global convertibles, is positioned as a lower risk equity alternative. It perform strongly during 2015, outperforming its benchmark by close to 2%.

In addition, global convertibles outperformed equities, investment-grade credit and high yield in 2015. And remains well placed to benefit from continued market volatility, given the embedded optionality in the asset class. The team currently manages $400 million on behalf of clients. During the fourth quarter we added a new client in the UK, and have seen some additional contributions to our UCITS funds in January.

In keeping with our goal of introducing new strategies to meet the needs of our institutional and retail investors, we launched a low volatility equity product at the beginning of this year. The low vol product draws upon the expertise of our US equity team and our global converts team. Unlike many of the quantitative low volatility equity approaches in the marketplace, the Westwood low volatility product seeks to outperform the Russell 1000 while providing structural downside protection by investing 20% to 40% of the portfolio in convertible securities. The strategy's off to a terrific start, outperforming its benchmark index by over 4% in January.

Turning now to distribution, we had positive flows into institutional and private wealth during the fourth quarter with negative flows in our mutual fund business. Importantly though, for the year we experienced positive organic growth across the firm. Institutional flows were positive for the fourth quarter, with a number of small new wins across a number of strategies, and also due to the conversion we referenced in last quarter's call of the sub-advisory account previously classified as assets under advisement.

With uncertainty amongst investors likely to be prominent at least in that the short term, we're fully focused on ensuring that we educate the broad institutional marketplace on the full array of strategies we offer. Some of the messages include, convertibles are generally a great place to be in a period of rising interest rates, and they're currently as cheap as we've seen since the financial crisis. High-yield and MLP market dislocations like we're experiencing right now have historically provided attractive entry points for new investors. Westwood has a demonstrated history of protecting downside through strong fundamental investing. And finally, emerging markets in our view are meaningfully undervalued and have traditionally produced attractive, multi-year returns coming off of market bottoms.

We have invested in institutional distribution and client service in recent years and believe we are in a good position to carry our message to the marketplace. Our institutional client retention last year was exceptional, with a retention rate well ahead of industry averages. We are pleased to win two new additional accounts in our small-cap product in December, which we expect to fund in the next few weeks.

As we mentioned earlier, mutual fund flows were negative during the fourth quarter. Most of the selling came towards the end of the year. And while there's no way to know for sure why we have the redemptions, it is likely that tax loss selling was a primary driver. On a more positive note, I'm pleased to note that we celebrated the 10th anniversary of our mutual fund business in December. We started the WHG funds in December 2005 with one fund, the Income Opportunity Fund. We now have over 15 funds.

We're most proud of the fact that we have had positive flows every single year that we've been in business. 10 consecutive years of positive inflows during a period of industry-wide outflows. We are particularly excited about the prospects for some of our newer funds as they develop a track record in the years ahead. While retail investors are currently fearful and cautious, their need for income remains a top priority, along with a strong desire to limit volatility. We believe we're well positioned to meet those needs across many of our funds, particularly with Income Opportunity, Short Duration High Yield and Market Neutral Income.

In our private wealth business, total assets at Westwood Trust increased to $5 billion across our Dallas, Omaha and Houston offices, with net flows being slightly positive for the quarter as well as the full year. Recent market volatility will be foremost on our clients' minds as we conduct their year-end meetings over the next couple of months. The depth and experience of our client service team has always served as a calming effect on worried clients. We evaluate their specific objectives and circumstances, and recommend changes to market exposures in a disciplined manner. By helping clients avoid the emotional decision in periods of market stress and focus on their long-term objectives, we give them a much improved chance to meet their desired financial goals.

As we look to differentiate ourselves from competitors in the private wealth market, we continually seek alignment with investment-minded clients. In addition, we aim to provide clients with the highest quality service. As part of this we completed our trust accounting software conversion to FIS at the end of 2015. This new system will provide efficiencies to our business and our clients, who will see a vastly improved online experience. We will convert our Houston office to FIS this spring so that Dallas, Omaha and Houston will all be utilizing the same trust accounting system, providing consistency of experience and efficiency across the business. Most importantly, this provides an attractive operating platform to attract potential acquisitions in the years ahead.

Before wrapping up the call I would like to speak briefly on the current environment and our thoughts on active management. From the depths of the great financial crisis in March 2009, investors have enjoyed a strong rebound across capital markets with a lower than normal level of volatility. It appears that volatility is now back, and likely to be with us for a period of time. Our fundamentally focused investment teams welcome this return of volatility, as periods like this have traditionally been favorable to the processes we follow across the organization and has provided investors with downside protection.

From a business perspective, as you all know, we have grown our investment capabilities over time, as well as our distribution platforms, both in the US and oversees for our UCITS funds. We've also invested in the infrastructure of our business to increase productivity and efficiency. We've done all of this while maintaining a strong balance sheet and growing the dividend for our shareholder base. Our experience of investing and managing our business for nearly 33 years while maintaining strong personnel retention positions us well for the future.

We're very proud of what we've done in the past, but we are not resting on our laurels. We'll continue the path we've always followed, one of thoughtful managed growth.

With I thank you for your time. And I'll turn the call over to Tiffany Kice, our CFO.

Thanks Brian, and good afternoon everyone.

For the fourth quarter of 2015 we're reporting total revenues of $31.6 million, up 12%, or $3.3 million from the same period of 2014. Asset-based advisory fees were relatively flat, while trust fees increased 53%, or $2.7 million, and include revenue generated by Woodway, which we acquired on April 1, 2015.

Net income of $4.7 million decreased 22% from $6 million in the fourth quarter of 2014, and diluted earnings per share was $0.58 compared to $0.77 for the prior-year quarter. Our 2014 fourth quarter diluted EPS was negatively impacted by a $0.13 per share tax adjustment related to prior period uncertain tax positions and an $0.08 per share non-cash contemplation charge.

The tax adjustment resulted in an effective tax rate of 45.4% for the fourth quarter of 2015. For 2016 we expect a normalized effective tax rate of approximately 34%. Economic earnings, a non-GAAP metric, increased 7% to $10.4 million from $9.7 million in the fourth quarter of 2014. Economic earnings per share of $1.28 was 3% higher than in the prior-year quarter of $1.24.

For FY15 total revenues were $131 million, up 16%, or $17.7 million from 2014. Net income of $27.1 million was relatively flat with 2014, while economic earnings increased 12% to $46.5 million compared to $41.4 million in 2014. Diluted earnings per share declined to $3.33 and was negatively impacted by $0.10 for the tax adjustment and $0.08 for the non-cash compensation charge. Economic earnings per share of $5.71 was up 9% from the prior year of $5.24.

Firm-wide assets under management totaled $20.8 billion at year end and consisted of institutional assets of $11.8 billion, or 58% of the total; private wealth assets of $5.4 billion, or 26% of the total; and mutual fund assets of $3.6 billion, or 17% of the total. Net outflows for the quarter were concentrated in our emerging markets and income opportunity strategies partially offset by the movement of the sub-advisory mandate to assets under management from assets under advisement.

Our financial position continues to be very solid with cash and investments at year end totaling $95 million and a debt-free balance sheet. Our Board of Directors approved a quarterly cash dividend of $0.57 per share payable on April 1, 2016 to stockholders of record on March 11, 2016. This represents an annualized dividend of 5% at yesterday's closing price.

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

I will now turn the call back over to Brian to conclude.

Thanks, Tiffany. If you have any questions, if you'll let the operator know.

(Operator Instructions)

Mac Sykes, Gabelli.

Good afternoon. Thanks for taking my questions. I've first a question, it's a little multifaceted, and then one follow-up.

The first question is really around oil. And when I say multifaceted, the first part is, on the asset gathering side, have you have seen any impacts from the commodity declines in terms of your trust businesses in terms of appetite for investing flows, et cetera? The second part, as it relates to asset management, what are you doing now in terms of your strategies, whether it is MLPs, income opportunity, international, perhaps in terms of positioning around oil investments? Thank you.

Okay. Thanks, Mac. I appreciate your questions.

I will start with the asset gathering side, and it is has not affected our trust businesses. In fact, our flows into the private wealth business have been positive. I would say in Houston -- I was there last week, and I'm heading there this afternoon after this call for our Westwood Trust Board meeting tomorrow. I think the drilling has certainly slowed down. Anyone in the drilling business, if you have a lot of debt has a lot of challenges. But most of the clients that we have at our Houston-based trust company have already exited the oil industry. They may have been involved at one time, but they've taken their savings and they're having it professionally managed by our trust company. So it hasn't affected our asset gathering at all. In fact, it was positive for the fourth quarter.

As far as positioning within our portfolios, we have a really deep bench and we have been investing in MLPs now for well over a decade. We continue to like the asset class. If you look back over history, any time there have been dislocations of this magnitude, the returns in the ensuing 6 to 12 months have been hugely positive, upwards of 50% total return. You have to be selective, but we've got a team of three very talented guys that focus exclusively on MLPs. And we've got additional energy analysts who are sorting through the opportunities and feel really good about the prospects going forward.

Then, congrats on the performance of the large cap products. How are you thinking about leveraging that performance? What specific distribution channels are you targeting? And what are you expecting in terms of the most progress from one of the channels?

Thanks for your comments first. It is great to see large cap performance come back. It is our oldest product, it is our flagship product. We've been managing it for over 30 years.

One of the things that we noticed, the US equity market, and especially the large cap area, has been in outflow mode for over a decade, really going on 15 years. And we have had great success in the sub-advisory area with our large cap product. And even though that institutions continue to look at large cap as a source of funds to invest in private equity and real estate and hedge funds and other things, there's still plenty of money out there that is in the large cap space that we can compete for in the sub-advisory area.

The other thing we've done is, two years ago we established a concentrated large cap strategy. And as I mentioned in my comments, the first two years have been spectacular, at 800 basis points ahead of the benchmark. This concentrated strategy is a subset of our broader large-cap mandate. So in our broader large-cap mandate we might have 45 stocks, and in our concentrated large-cap mandate we would have roughly 25 of those 45 stocks. So it is simply a subset and it is higher conviction on those names.

So it seems to be that if people are going to pay for active management they want a higher conviction strategy. And once we come up on three years for that product, I think we are literally in the first percentile in the large-cap database. I expect we will begin to see some real traction there institutionally as well as from our retail investors. Some of our trust company customers have actually embraced the strategy as well and have started establishing separate accounts based on the concentrated large cap strategy.

Great. Thank you very much.

Thanks, Mac

(Operator Instructions)

Bob Mitchell, Conestoga.

Sure. Hello, Brian. Hello, Tiffany. This is Bob Mitchell from Conestoga Capital.

Hey, Bob.

I just wanted to see -- obviously, you guys have built some infrastructure, particularly in the technology side. How do you want the investors to think about the expenses, infrastructure building in 2016?

We're clearly working on building our infrastructure, and IT is a big focus of ours. So I think when you are looking at expenses you will probably see some increases on that line.

I would say, Bob, that while we have always kept pace with technological innovations around here, we have really made it a concerted effort to build out a platform that we believe will allow us to get much bigger in the years ahead. We hired Fabian Gomez as our Chief Information Officer last year in the middle of the year and he has really done a great job of looking across the organization to see where we believe that technology can ultimately make us more efficient and enhance everything that we're doing.

One of the first initiatives that we have is to move all of our server-based infrastructure to the cloud, which we anticipate doing by this spring. So there will be some one-time costs associated with that. But the ongoing ROI from that effort will allow us not only to be bigger, but all of us to have the latest and greatest software, and potentially the best security in the business. It's necessary. And it is time that we do it. And I'm really excited about what it will bring.

Thank you.

Thanks, Bob.

(Operator Instructions)

I'm not showing any further questions. I would now like to turn the call back to Management for any further remarks.

Okay, thanks very much.

As I said, Tiffany and I are off to Houston for our Westwood Trust Board meeting. If you have any follow-up questions, just let us know and we will find some time to give you a call back. I'd also mention that we are going to be in Boston and New York in about a month for our annual meetings with shareholders. So we have a number of those scheduled. If anybody on the call would like us to see them while we're in either of those two cities, just let us know and we will add you to the schedule.

Thanks for your time, and appreciate you being a Westwood shareholder.

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