Westwood Holdings Group Inc (WHG) 2016 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Westwood Holdings Group Q3 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Sylvia Fry, Senior Vice President and Chief Compliance Officer. Please go ahead.

Thank you. Good afternoon and welcome to our third quarter 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 10K 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, 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 the 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 CEO.

Thanks Sylvia, and thanks to all of you for listening to today's call. I will begin comments on the investing landscape from our US Value Team. Despite a continued belief by many market participants that we would see a sustained period of increased market volatility, the third quarter produced strong performance in equity markets, with new all-time highs for major indices including the Dow, the NASDAQ, and the S&P 500.

The liquidity backdrop from the global central banks remains in full effect, and their influence continues to be felt in the form of lower risk premiums and higher multiples. It is also translated into the S&P 500 being unusually stable, with a string of 44 straight days without a move greater than 1% in either direction. That changed somewhat heading into September, as the Fed came back into investors' focus. However, at the most recent FOMC meeting, the Fed left rates unchanged, and continued on their previously laid path of lower for longer.

Despite little evidence of higher earnings estimates resulting from improving operating fundamentals, the top performers in the US equity market continue to be low quality, high beta, and smaller, more volatile names. Despite posting positive absolute returns, relative performance of Westwood's US value equity strategies lagged their respective benchmarks during the quarter. While Westwood's focus on high-quality companies with strong balance sheets and attractive valuations remains out of favor for the moment, we remain committed to our time-tested investment philosophy and our conviction in the long-term benefits of active management.

Performance for our multi-asset strategies continues to be competitive. These outcome-focused strategies remain in a secular investor demand trend within our industry. Another bright spot in our US value strategies were MLPs, which posted another quarter of positive performance, and remain one of the best performing asset classes on a year-to-date basis.

Moving to our global and emerging markets equity team, non-US markets behaved similarly to the US market during the period. After initial concerns over the impact of Brexit and the future outlook of the global economy abated, we saw a return of a risk-on market environment. While developed market returns tapered off as we entered September, emerging markets continued their strong performance, with a return of 9% for the third quarter.

All of Westwood's global equity in emerging market strategies remain ahead of their perspective benchmarks on a year-to-date basis, with most in the top quartiles of their peer groups. Among these strategies, the global equity strategy provided the best relative performance within the third quarter, continuing the strong rebound we've seen in the performance over the past year.

With global equity continuing to be one of the largest asset classes for investors around the world, performance of our global equity strategy has the potential to deliver meaningful growth for Westwood over the longer term. In addition, we expect to see more opportunities for growth in our three emerging market strategies as their three-year peer group rankings continue to improve.

As we move into the last quarter of 2016, our team expects to see a continued market volatility pickup, with mixed and at times contradictory economic indicators making for an uncertain short-term investment environment. However, it is this type of environment that has typically been favorable for long-term bottom-up investors like Westwood to find interesting investment opportunities and generate our performance.

Finally, from an investment team perspective, our global convertibles team has seen their asset class perform well, with US convertible bonds leading the way. Convertible issuance has been robust and well above expectations, as the traditional summer slowdown never materialized. Through September, the market is on pace to deliver $60 billion of issuance, which is on pace to match 2015 levels.

Convertible valuations are still theoretically cheap as a whole, but not at the extraordinary levels of undervaluation we saw in the first quarter of the year. Over the quarter, performance for our liquid alternative convertible focus strategy, known as market neutral income, remained strong on both an absolute basis, as well as relative to its peer group. It is the least equity sensitive of all of Westwood's offerings. This was once again evidenced during the quarter with strong performance during equity market pullbacks. Our long only convertible strategy lagged its benchmark during the quarter, but remains well-positioned relative to other global convertible funds.

During the quarter, the most significant news within the team was confirmation of their appointment as sub-advisor of the approximately $800 million Aviva Global Convertibles Usage Fund, a Luxembourg-based fund offered by Aviva Investors to non-US investors. The assets will be included as assets under advisement until such time as the Luxembourg Fund Regulator approves the move to sub-delegation. At that point, the assets will be categorized as assets under management. This appointment reflects an extension of our long-term strategic partnership with Aviva Investors, as they had previously appointed us to manage another of their funds in 2014.

Turning now to distribution, I'll start with our institutional business. Over our history, we have focused heavily on building our relationships with the institutional consultant community. Today we have clients in common with approximately 60 of those consultants globally. We've worked hard to ensure that the market is aware of our broad capabilities across our multi-investment team structure.

We believe that pairing our consultant efforts with a dedicated focus on direct planned sponsor sales in the US and increasing our footprint overseas will provide us with strong long-term growth opportunities. With that in mind, we recently entered into a partnership with a leading European-based third-party marketing firm, Cardinal Partners Global. The team comprises a group of senior distribution professionals with experience in growing UCITS and subadvisory businesses in Europe. Their presence initially in six continental European markets will supplement our own existing fly-in fly-out distribution model.

This news, along with the announcement of the Aviva subadvisory business, shows our commitment to continuing to expand and diversify our global client base. In addition, we expect to see additional flows from non-US clients in the fourth quarter. From a product management perspective, the coming quarters will see a number of institutional strategies that we launched in 2013 and 2014 establish their three-year track records.

This most recent quarter saw the third anniversary of our emerging markets SMid strategy. We expect to see demand increase for smaller cap emerging market strategies, as investors seek access to more domestic consumption growth in emerging economies. While three-year track records don't automatically result in increased demand profiles, we do feel that the higher conviction nature of the strategies we've launched, combined with the good start to these track records, positions us well for the future.

Despite enduring the same broad headwinds facing the mutual fund industry, and particularly actively managed equity mutual funds, the Westwood Funds, our mutual fund business, is fairing relatively well. Total net outflows were less than $10 million in the third quarter, compared with outflows of $43 million in the second quarter, and $71 million in the first quarter. In fact, during the most recent quarter, flows would have been positive if not for one significant redemption by a single investor from our SMid-cap fund.

Our flagship multi-asset fund income opportunity had net inflows of $53 million during the period, and has now had six consecutive months of positive flows. As mentioned earlier, we believe this outcome-focused multi-asset strategy will continue to attract inflows from both institutional and advisor-sold markets. In addition, we feel positive about the sales prospects for a couple of our other high-conviction equity strategies, including small-cap value and emerging markets. Both strategies have performed well on short and long-term measures. They have strong ratings from fund rating agencies, and both operate in parts of the equity market that continue to see value-added performance from active management.

Total assets within our private wealth businesses remain broadly flat for the quarter. While client retention rates remain very high, we had one larger client lost during the period. This was the corporate pension plan that was invested in our Westwood trust commingled funds, that has decided to implement an LDI strategy by increasing their long-duration fixed-income allocation as they look to hedge their liabilities.

The pipeline across our three private wealth offices remains positive, but the pace of decision making remains slow, as high-network investors remain cautious over the election outcome and the changes that may subsequently occur. We continue to believe that the service, products, and diversification that we create cannot be replicated in a passive manner.

Wealthy individuals want to maintain and grow their wealth. They need retirement planning services more than ever, given the reality of likely lower long-term returns. In fact, in our Houston office, we're adding a second financial planner to assist with their long-term planning. We're looking at ways to broaden our array of services in Dallas and Omaha while improving accessibility via a digital platform.

From a corporate development perspective, we have continued to evaluate opportunities to expand our private wealth segment, through the acquisition of culturally-aligned businesses and strong geographic markets. We're thoughtful about our use of shareholder capital for expanding our business through acquisitions, and will only invest in the best opportunities that we discover and pass through our evaluation process. These discussions tend to be longer-term in nature, in line with how we think about the overall private wealth segment.

While the environment for the investment management industry continues to be more competitive, we feel that many of the decisions we've made in recent years allow us to look forward confidently. We are pleased to announce an increase to our dividend, which we have done every year since we became a public company over 14 years ago. It is our long-held belief that sharing dividends with shareholders who believe in our business is in everyone's best interests.

While none of us know what the future holds, we do feel that the combination of high-performing investment teams, broadened global distribution, thoughtful product development, and a top-tier operational infrastructure puts us at a competitive advantage versus other midsize firms. I will now turn it over to Tiffany Kice, our CFO, for comments on our financial results, and then we'll take your questions.

Thanks, Brian, and good afternoon everyone. Today we reported total revenues of $31.8 million for the third quarter of 2016, compared to $32.5 million in the prior year's third quarter. The decrease is primarily attributable to a $1.5 million decrease in asset-based advisory fees resulting from lower average assets under management as compared with the prior-year third quarter.

Net income was $5.9 million, or $0.72 per share, compared to $7 million, or $0.87 per share in the prior-year third quarter, with the decrease in asset-based advisory fees having the strongest impact. Economic earnings in non-GAAP metrics was $10.6 million, or $1.30 per share, compared to $12.4 million, or $1.55 per share in the prior-year third quarter.

Firm wide assets under management totalled $21.3 billion at quarter-end, and consisted of institutional assets of $12.2 billion, or 57% of the total. Private wealth assets of $5.3 billion, or 25% of the total, and mutual fund assets of the $3.8 billion, or 18% of the total. We experienced market appreciation of $637 million for the quarter, partially offset by net outflows of $337 million. Additionally, as Brian mentioned earlier, we've received an $800 million inflow into assets under advisement upon our appointment in September as a sub-advisor for Aviva Investors Global Convertibles Fund, further enhancing our partnership with Aviva.

Our financial position continues to be solid, with cash and investments at quarter-end totaling $80.5 million, and a debt-free balance sheet. We're pleased to announce that our board of directors approved an increase in our quarterly cash dividend of 9%, increasing it from $0.57 to $0.52 per share. The dividend will be payable on January 3, 2017 to stockholders of record on December 9, 2016. This represents an annualized dividend yield of 4.9% at yesterday's closing price.

We encourage you to review our investor presentation we have posted on our website reflecting third-quarter highlights, as well as a discussion of our business, product development, and longer-term trends in revenues, earnings and dividends. I will now turn the call back over to Brian to conclude.

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

(Operator Instructions)

Mac Sykes, Gabelli.

Good afternoon, everyone, and, first off, congrats on the Cowboys' start to the year, it's great.

Thank you, Mac (multiple speakers). (Inaudible) Cowboy fan.

I have a couple of questions, Brian. First of all, a technical one. In terms of the upcoming quarter, how should we think about the economic impact on fee revenue as you transition the $800 million of AUA to AUM?

Yes. So, as I've said in the last call, when we anticipated this new business, it is a sub-advisory piece of business, so it's going to be lower than our average fee, and the process of sub-delegation could take all the way up until the end of the first quarter before that is done. Things move pretty slowly over there post-Brexit. It is difficult to get legal documents and things moving very quickly. But it will move.

The economic impact going from assets under advisement to assets under management is nothing, it doesn't make any difference, it's simply a categorical move. The impact of the asset is meaningful, mostly because it allows our global converts team to reach the kind of skill they need to get more visibility as they are out marketing to new customers.

And then, with this new partnership, could you provide some more color on why you chose this specific group? What products you're looking to leverage through them at this time, and have they identified any immediate channels of opportunity?

Yes. So, we've examined for the last 1.5 years, and really studied the best way for us to target Europe, and really a number of countries around the UK. We've been using a suitcase model -- fly in/fly out. That is inefficient, but it is also less expensive than opening an office on Downing Street in the middle of London. So, we decided we would look at third-party marketing firms.

We met these guys over a year ago, and spent a long time negotiating with them. They are all seasoned veterans, and they have a lot of good contacts throughout Europe. And the primary thrust of their efforts is going to be for the global converts guys, because they have historically had a lot of business in Europe. As you know, they at one time managed $5 billion for customers primarily in Europe for Aviva. So there's a lot of folks that know them, and we have actually turned over a lot of our leads to them. So I think there is some low-hanging fruit there for them to get started and hopefully have some near-term success.

Okay. And then, this week we've heard a lot from different management teams about the impacts and implications of the changes from the DOL. I was wondering if you could weigh in on the industry changes from Westwood's perspective.

Yes. So, it is obviously a big challenge for the industry to prepare for next April. For us, I guess the good news is we've historically had a lot more institutional customers than retail customers, so we don't face a lot of the same challenges that the wirehouses do, or that a lot of managers who have business with the wirehouses do.

One great benefit that we have learned throughout this discovery process is that our trust company is actually one of the only areas that is exempt from the DOL rules. So we can continue to offer our common trust funds to our customers, and be under that exemption. So that is actually a real positive for us, that we have learned.

So, just a follow-up on that. So, do you think there's a decent opportunity then around that, given what could be some money in motion in the next couple of quarters? Is that a place that you could leverage?

Yes. It is hard to say. I mean, I think it's definitely an advantage, it's obviously not easy to go and start a trust business. Especially one that is now 20 years old, in the case of Dallas, and even longer than that, in the case of Houston. And Omaha has been around for over a decade.

These businesses are not easy to get going, so I think the barriers to entry are higher. So we have an advantage there. As far as money in motion, it is hard to know exactly what is going to happen. But we think we have a compelling product. It is well priced, we give people diversification custody, we can do their benefit checks, we can provide a lot of services that give us an advantage over somebody that is simply offering funds.

Great. Thank you very much.

Thanks for your question, Mac.

(Operator Instructions)

Brian Alexitch, Greenwich Investment.

Hi, Brian, hi, Tiffany. How are you?

I am good. How are you?

I am doing well, thank you. You've commented that outflow -- sorry, you would have had net inflow if not for one large redemption. I have a two-part question. Can you comment on just AUM concentrations, say along your top 10 or top 20 clients, and the second part of the question is --

Yes, so (multiple speakers). I'm sorry, go ahead.

Sorry, go ahead.

I'm sorry, I thought you were done. You had a second part to the question?

Oh, it was -- the client that didn't have large redemption, did they provide you any feedback with why they were leaving? Or withdrawing some assets, or (inaudible)?

Yes. So, just to be clear, the flows to our trust company would have been closer to positive had we not had this one withdrawal. The withdrawal had to do with a client who has been with us for a long time. And it was a pension plan, and as pension plans approach the level where they become nearly fully funded, many of them choose to consider an LDI option, where they utilize fixed income to immunize the rest of their liabilities. And that's simply all that happened there. We do not have an LDI product. I wish we did.

Okay.

But, that was their rationale. And then, as far as concentrations, that is listed in our K. We historically have not had -- it's not -- we're not like a lot of firms where there's 10 clients that make up to both of the assets. We are very well diversified. Probably our biggest client is not even -- is under $1 billion. I would have to check to verify that, but I'm pretty sure that would be on the high end, for us.

Okay. Great, thanks for taking the question. Have a good rest of the day.

And you do the same, thanks for your question.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Brian Casey.

Okay. There are no further questions in the queue?

There are no further questions.

Okay. Well, thanks everyone for participating. We appreciate your support.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.