Westwood Holdings Group Inc (WHG) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Second Quarter 2016 Westwood Holdings Group, Inc. Earnings Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Sylvia Fry, Senior Vice President, Chief Compliance Officer. Ma'am, please begin.

Thank you. Good afternoon and welcome to our second quarter earnings conference call.

I'd 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 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, 2015, filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on forward-looking statements.

In addition, in accordance with SEC rules concerning non-GAAP financial measures, a reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press release issued earlier today.

On our call today, we have Brian Casey, our President and Chief Executive Officer, and Tiffany Kice, our Chief Financial Officer. I would like to turn the call over to Brian Casey, our CEO.

Thanks, Sylvia and good afternoon, everyone. Welcome to the Westwood Holdings Group second quarter 2016 earnings call.

As the second quarter drew to a close, the aftershock of the UK's Brexit vote became front and center for investors as the unexpected became reality. In response, global bond yields fell sharply, while several central banks around the world quickly positioned themselves as liquidity backstop to the market. Equity markets initially posted steep losses, with the S&P 500 declining 5% over two days. However, a sharp rebound stood with most equity markets now trading at or above their pre-Brexit level.

For investors, the June FOMC meeting was also noteworthy and they've decided to go in the lower expected path, future rate hikes. The reduction in rate expectations also served to limit any material appreciation in the US dollar, which along with continued rebound in oil prices provided at least temporarily some relief for US corporate earnings. Lastly, but perhaps most importantly, the ever-growing amount of global debt now trading with a negative yield, approximately $12 trillion is impacting valuations across practically all asset classes, and not surprisingly intensifying investors' search for yield.

Given this, I'd like to start by talking about our investment teams and how they're navigating and performing in the environment, beginning with our U.S. Value Team. During the quarter, when price appreciation was largely driven by multiple expansions as opposed to an improvement in operating fundamentals, the low quality high P/E and high beta names were the top performers in the US market. Same holds true on a year-to-date basis. In terms of absolute performance, every Westwood U.S. Value strategy posted positive return in the second quarter and for the first half of the year.

Performance for our U.S. Value equity strategies was strong relative to peer groups with most ranking in either the top quartile or the top half of their category for the second quarter. However, while not severe as the first three months period, the second quarter remained a challenging environment for active management in general with benchmark indices topping most managers including Westwood for the period.

From a positive perspective, the peer group rankings of our large cap value and small cap value strategies continued to look attractive over both short and long-term time period. The peer group rankings for SMid and SMidCap Plus strategies showed some improvement for the quarter, but we realized we have more work to do to improve our 1, 3 and 5-year performance in the strategy.

Given Westwood's focus on downside protection, we were pleased with our strategies performed in June, particularly following the Brexit decision when all but one of our equity value strategies outperformed the benchmark and every strategy posted a positive return for the month. As was the case in the volatile first quarter, our flagship multi-asset strategy, Income Opportunity, continued to perform well in the second quarter with a gain of 3.8%, while experiencing significantly lower volatility than the broader market.

Lastly, we spoke on previous calls about how the down draft in the master limited partnership sector during 2015 and that our belief that the asset class would rebound and we were happy to see our MLP infrastructure renewal strategy registered a gain of almost 16% in the second quarter as investors took confidence in the rebound in crude oil prices.

Moving on to our Global and Emerging Markets Equity Team, the second quarter proved to be one of continued validation in our people, our process and our conviction. Despite renewed global market volatility due to Brexit and uncertainty over the outlook for economic growth in China, all five of the strategies managed by the team outperformed their respective indices during the period. With a more benign outlook and monetary tightening arising from a potential slowdown in the UK and in Europe, an environment of improving growth supported by ongoing liquidity appears positive for global equities and emerging markets. All the investment strategies now rank above median in their peer group over the past 12 months with the three-year numbers also showing significant improvement.

As for the Global Convertible Securities Team, our long-only global convertible strategy outperformed for the quarter and is ranked above median in its peer group over the one, three and five-year time period. The asset class has come under flow pressure globally as many investors that used convertibles within their fixed income allocation have [drained] their non-core fixed income exposure over the course of the last year. However, we've seen similar cyclical outflows previously and we believe the asset class is well positioned to benefit from an increase in market volatility. In addition, we are encouraged by an improvement in new issuance of convertible securities during the quarter.

The team's liquid alternative strategy, Market Neutral Income, which has an absolute return focus, has also performed well this year and since the inception of our mutual fund vehicle in 2015. In fact, we earned a nice performance fee from this product during the quarter. We believe this strategy is suitable to fixed income alternative in this environment given both the yield and the inherent short duration profile.

As for flows, the institutional net flows for the quarter were disappointing. While our year-to-date client retention rate remained above 95%, we have seen a number of redemptions from US equity clients to fund allocations through alternative asset classes. In addition, we saw some reductions in mandate size in a number of our sub-advisory relationships where the underlying investors are retail investors.

While these are not new phenomena, this quarter, the net impact is more visible, given that our gross sales have been lower than we've seen in recent years. This is partly driven by the continued slowdown in decision making by investors, given the uncertain environment they face, but also by the timing of some unfunded wins. These unfunded wins amount to over $1.3 billion in new assets. The wins are across a number of strategies including emerging markets and income opportunity. However, the largest unfunded win is the new sub-advisory mandate for our Global Convertibles Team. While a lower fee mandate, it does bring our global convertible strategy to such scale that we believe they will make the strategy more appealing to other prospects.

On the mutual fund side, mutual fund net sales showed improvement during quarter 2 with our year-to-date redemption rate now below what we experienced in 2015. While slightly negative overall, we were encouraged to see that our largest fund, the Income Opportunity fund had positive net sales in each month over the period. Another point to note, the small cap value fund remains one of the strongest performing fund over all time period. It's five star rated and has some of the best track records in the industry, over the past five years. In addition, the Westwood large-scale value fund (inaudible) with four stars and celebrated 10-year anniversary during the quarter.

Similar declines in other market segments, private wealth investors, face a difficult environment in which to make investment decisions. Our job is to help our clients maintain their focus on the long-term objectives of their investment portfolio.

I'm going to turn it over to Tiffany for just a minute.

So, I'm going to go ahead and move into our financial report.

For the second quarter of 2016, we're reporting total revenues of $31 million compared to $37.3 million from the same period of 2015. Asset-based advisory fees decreased $4.8 million due to lower average assets under management, primarily related to net outflows and asset depreciations form the second quarter of 2015. Additionally, we earned performance-based advisory fees of $0.4 million in the current quarter compared to $1.9 million in the second quarter of 2015.

Net income was $5.7 million compared to $9.8 million in the second quarter of 2015. The decrease was primarily due to the decrease in asset advisory fees and included one-time implementation costs for information technology improvement of $0.6 million net of tax. Diluted earnings per share was $0.69 compared to $1.23 for the prior year quarter. Economic earnings, the non-GAAP metric, decreased to $10.4 million from $14.4 million in the second quarter of 2015. In turn, economic earnings per share fell to $1.27 in the second quarter of 2016 compared to $1.80 per share in the prior year quarter.

Firm-wide assets under management totaled $21 billion at quarter end and consisted of institutional assets of $11.9 billion or 57% of the total; private wealth assets of $5.4 billion or 25% of the total; and mutual fund assets of $3.7 billion or 18% of total. We experienced net outflows of $860 million for the quarter partially offset by market appreciation of $697 million.

Our financial position continues to be very solid with cash and investments at year end totaling $73.9 million and a debt-free balance sheet. Our Board of Directors approved the quarterly cash dividend of $0.50 per share payable on October 3, 2016 to stockholders of record on September 9, 2016. This represents annualized dividend yield of 4.1% at yesterday's closing price.

We encourage you to review our investor presentation we posted on our website reflecting second quarter highlights, as well as a discussion of our business, product development and longer-term trends in revenues, earnings and dividends.

I'll now turn it back over to Brian.

Thanks, Tiffany.

I apologize for the break that I have had a cold and I was having a coughing cyst, so I'll start back up.

We were on private wealth and as I said our job is to help our clients maintain their focus on long-term objectives. And while our client retention rates remained strong, we've been a reticence by many potential clients to make active decisions in the first half of the year. And we emphasize with that and we continue to build our prospective pipeline across the geographies that we're involved. And as we've expressed on previous calls, we remain interested in expanding our private wealth business in other locations. This has resulted in continued discussion all at varying stages with a number of groups.

Before wrapping up, I'd like to address the business environment that Westwood as an active manager is facing given the current industry dynamics. While these dynamics are not new, they've undoubtedly strengthened over the past few years. Morningstar released data last week that underscored the depth of the current challenges. June mutual fund flows for actively managed US equity funds were the worst since 2008 and over the past year, American favors have withdrawn $236 billion out of active equity funds, while $229 billion has moved to passive and quasi-passive equity funds. This in part reflects the fact active managers as a broad group has underperformed since the end of the great financial crisis.

We as part of the broader industry acknowledges, but we question whether the moved index fund, as well as many of the smart beta approaches is in the process of going too far. We've seen periods of cyclical outperformance of passive over active in the past and we do not believe the current period as a secular phenomenon. Active managers as a group have traditionally preserved capital better during volatile market environment and during corrections. Investors have said that they value downside protection and that is the hallmark of the Westwood investment approach across all of our teams.

We are truly active managers with conviction in our approach. We believe that all consistent investment processes will see periods of underperformance. In fact, we believe they should. The benefits of a consistent approach will be seen over a full market cycle as evidenced by the fact that all of our institutional strategies with greater than a 10-year track record that is those that have seen both bull and bear markets have outperformed their respective indices. As many of you know, Westwood start to expand its investment capabilities in recent years to reduce its reliance on US equity strategies. Today, we are a diversified business with significant assets in both multi-asset and emerging market strategies.

We have also incubated a significant number of new strategies in recent years that we feel have investor demand. Many of these have shown strong initial performance and we'll approach the critical three-year milestone at various points over the next few years. This diversification by type of investment strategy as well as our global client diversification positions us well to weather the current industry challenges and to prosper over the long term.

With that, I'll pause and thank you for your support of Westwood. Apologize for the interruption there. I'll turn it over to you, ask any questions that you have. Thanks.

(Operator Instructions)

Mac Sykes, Gabelli.

So, I have a couple of questions. You actually came a little bit muffled during your comment about the convertible funds. Could you just actually repeat what you had said about the nature of that relationship, I think, you commented on fees or and the potential size for that?

What I said was that the unfunded wins amount to over $1.3 billion in new assets, and that the wins are across a number of strategies including emerging markets and income opportunity. But the largest unfunded win is a new sub-advisory mandate for our Global Convertibles Team. And as a sub-advisory mandate, it will come with a sub-advisory fee, which is below-market rate. However, there are some other unfunded wins that would come at a rate that would be more closer to what our typical overall fee is, but there some from existing clients and existing clients, as you know, have tiered-fee schedules and some of those assets would come in at lower tiers.

So we're excited about the new money, but it's not all coming in at the rate that everybody's used to see from us, but we're thrilled to have it.

How should we think about the trajectory of this pipeline, is this spread out over the second half or can you see some visibility in the next quarter or?

It's hard to say, some of it has come in, the smaller parts of it have come in, the big sub-advisory is a slow moving animal and will probably take anywhere from 30 days to 120 more days to get it off all across the line. It is hard to know. As far as other unfunded wins, they'll come in as they typically do over the balance of this quarter or certainly over the course of the rest of the year.

Then one last thing on this new convertible sub-advisory, is this the new counterparty relationship or do you have the ability to perhaps market some of your other products there?

I think honestly this is going to be for now the only product that we'll be able to market to this particular group. And I'm not at liberty to say who it is at this point, but they are hiring us specifically for our expertise in this area.

(Operator Instructions)

Do we have any other questions in the queue?

I'm showing no additional audio questions at this time, sir.

Thank you very much. If you have any further questions, feel free to call us. Go to westwoodgroup.com, to our website. We appreciate being shareholders and appreciate your interest in Westwood. Thanks again.

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