Westwood Holdings Group Inc (WHG) 2022 Q3 法說會逐字稿

Hello, and thank you for standing by. Welcome to the Third Quarter 2022 Westwood Holdings Group Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce General Counsel, Julie Gerron.

Thank you, and welcome to our Third Quarter 2022 Earnings Conference Call. Following discussion will include forward-looking statements, which 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 factors that could cause such a difference is included in our press release issued earlier today as well as in our Form 10-Q for the quarter ended September 30, 2022, which was 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 have Brian Casey, our Chief Executive Officer; and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey.

Good afternoon, and thanks for listening to our quarterly earnings call. Last quarter, I shared with you the impressive results posted by our investment teams as well as the exciting news of our agreement to acquire Salient Partners, highly complementary asset management business. As many of you know, we've just celebrated an important milestone, our 20th anniversary as a publicly traded company.

As we have -- on our journey, we've delivered many notable accomplishments over these past 20 years through good times as well as in tougher years like this one. As we finalize the transaction and integrate the Salient team and its attractive lineup of products, we are enthusiastic about our position as a firm and can't wait to build our expanded business together in the years ahead.

There were several notable items to highlight this quarter. Our acquisition of Salient Partners Asset Management business is on track to close this year and is expected to be highly accretive to Westwood's earnings. Several U.S. value strategies outperformed their benchmarks, and our multi-asset strategies continue to post strong relative returns.

During the third quarter, global equity markets extended their losses as many of the same risks of the previous quarter remained or even accelerated. Continued above trend inflation and central bank responses to deal with this threat have elevated the probability of recession, adding to the risk-off sentiment that dampened demand for both equities and debt securities. Geopolitical uncertainties in the upcoming U.S. midterms aren't helping much either.

Against this difficult backdrop, I'm pleased to report that nearly all our U.S. Value strategies outperformed this quarter. In LargeCap, our team beat the Russell 1000 Value Index by 175 basis points for the quarter, and has now outperformed its benchmark year-to-date and overall trailing time periods of 1, 3, 5 and 10 years and since inception. Among its peers in the Morningstar Large Value universe, WHGLX ranked in the 11th percentile for the quarter and is well positioned in the top third for trailing 1, 5 and 10 years. Against institutional peers in the eVestment LargeCap Value universe, LargeCap ranked in the 15th percentile for the quarter and scored the 31st percentile for the trailing 1 year ended September 30. Its longer-term rankings for the trailing 5 and 10 years were almost identical with comfortable top third postings.

Our MidCap, SmidCap and AllCap strategies beat their benchmarks this quarter outperforming the Russell MidCap Value Index by 222 basis points, the Russell 2500 value by 128 basis points and the Russell 3000 value by 101 basis points, respectively. Our SmidCap strategy ranked in the 25th percentile among its eVestment institutional peers in the small to MidCap value universe. Our Quality AllCap mutual fund, WQAIX ranked in Morningstar's 22nd percentile for the quarter and ranked 36th percentile in eVestment AllCap Value universe.

To round things off for the quarter, our MidCap strategy is sitting pretty in the tenth percentile among eVestment MidCap Value peers and our mutual fund, WWMCX scored ninth percentile among Morningstar's MidCap value peers.

Our SmallCap strategy underperformed the Russell 2000 Value Index this quarter as the good performing high-quality securities we seek experienced a reversion to the mean after previously outperforming. In multi-asset, it was yet another difficult quarter for global stocks and bonds, but I'm pleased to say that our 3 strategies, total return, income opportunity and high income all turned in good outperformance. As equity markets extended their losses and government bond yields trended higher across all durations, the fixed income holdings selected by our multi-asset teams contributed to outperformance in these strategies. To put it simply, our strategies benefited from reduced equity weights relative to their blended benchmarks, the use of convertible securities and their decision to underweight U.S. treasuries and overweight corporates and selected high-yield securities.

Our largest Multi-Asset strategy income opportunity finished 103 basis points ahead of its benchmark consisting of 40% S&P 500 and 60% Bloomberg Barclay's Aggregate Bond Index. Our total return strategy came in 204 basis points ahead of its benchmark, 60% S&P 500 and 40% Bloomberg Barclay's Aggregate Bond Index. Our total return mutual fund, WLVIX, was in the 16th percentile among Morningstar's 50% to 70% equity universe and did even better, posting an eighth percentile ranking among eVestment's global tactical asset allocation universe.

High Income was 198 basis points ahead of its blended benchmark, 20% S&P 500 and 80% Bloomberg Barclay's Aggregate Bond Index and achieved a 17th percentile ranking among institutional peers in the U.S. tactical asset allocation universe. Our alternative income mutual fund, ticker WMNIX, rose 72 basis points on an absolute basis for the quarter. This alternative strategy has a meaningful allocation of convertible securities. But despite the headwinds of the lower equity market, our alternative income mutual fund finished in the 21st percentile for the quarter and 19th percentile both for year-to-date and trailing 1-year period in Morningstar's relative value arbitrage category.

Credit Opportunities, which we launched in 2020, trailed the ICE BofA High Yield Index by 26 basis points for the quarter. Although our portfolio was conservatively positioned relative to the index, it modestly underperformed due to a sell-off in certain distressed investments. Given the outlook for rising interest rates, we are limiting exposure to long duration investments, keeping overall portfolio duration shorter than the benchmark and focusing on opportunities with identifiable catalysts.

Like previous cycles, we'll deploy capital into attractive risk-adjusted investments while managing downside risk. The opportunity set for Credit Opportunities has vastly expanded recently, and we're excited about the future. Lastly, in our systematic strategies, LargeCap growth lead its benchmark, the Russell 1000 Growth Index by 197 basis points and landed in the 11th percentile in eVestment's LargeCap growth universe. Our SmallCap growth strategy struggled somewhat as its holdings were out of sync with market factor movements, but recent rebalances have gotten the strategy back on track and better performance is emerging. Our systematic SmallCap growth strategy remains ahead of the Russell 2000 growth benchmark year-to-date, its 18th percentile amongst SmallCap growth institutional peers. And the fund, WSCIX, is 22nd percentile among Morningstar SmallCap growth peers on a year-to-date basis.

We expect continued near-term volatility for equities and fixed income as the Fed's aggressive stance to combat inflation cools the economy, and this will likely be exacerbated as an increasing number of market participants adjust their forecast and response. While it's quite clear that the tightening actions of central banks across the globe present the biggest known risk to the markets, the geopolitical risk of the ongoing war in Ukraine and the volatility in the world's energy markets add even more uncertainty to the economic environment.

We firmly believe that our current environment lends itself well to our investing philosophy. Our U.S. value strategies constantly focus on quality and value as they seek high-quality businesses trading at an attractive price. By investing across the diversified allocation of asset classes and risk exposures, our multi-asset strategies target the most efficient alpha generation in the most attractive markets allocating risk between idiosyncratic and systematic risk. Our approach aims to generate attractive total returns with lower volatility, a key factor given market uncertainty.

Our wealth management strategies delivered mixed performance this quarter as Dividend Select and High Alpha outperformed the Russell 1000 value and Russell 1000 Growth indices by 26 basis points and 303 basis points, respectively. Dividend Select, which focuses on high-quality dividend-paying domestic securities, is ahead 357 basis points year-to-date and 108 basis points over the trailing period. With a dividend yield of 3.2% versus the S&P 500's dividend yield of 2.5%, it's an attractive alternative for high net worth clients seeking income and long-term capital appreciation.

High Alpha rebounded after lagging its benchmark earlier and beat its index by 303 basis points this quarter. A top third percentile finish in the eVestment enhanced AllCap equity universe.

Shifting now to institutional and intermediary distribution. Market performance was the largest driver of lower AUM this quarter, but I'm pleased to report that our institutional team saw strong client retention with the low client outflows. Our improved performance in many products positions us well to compete for new assets. This quarter's assets under management saw inflows of $159 million, offset by outflows of $309 million netting to (inaudible) in outflows.

Within our various strategies, SmallCap enjoyed positive net flows generated by our institutional team, and 2 new consultant-driven client accounts were added this quarter. Institutional client net flows were negative, but most of them were driven by client rebalances and participant-directed DC plan changes rather than client losses. Our pipeline of clients awaiting funding includes our first win from a major OCIO, outsourced CIO client into our SMidCap strategy using a newly launched collective investment trust specifically created to serve this channel.

We remain focused on serving our institutional clients while newly launched strategies such as SmallCap growth and MidCap, along with our expanding consultant approvals, underpin our key growth initiatives for this space.

In the intermediary channel, industry-wide outflows and risk assets are hitting multiyear highs, and outflows in the equity and fixed income asset classes are also hitting record highs. Against this backdrop, our AllCap, SmallCap alternative income, High Income and Total Return strategies all had positive flows. Overall, the level of mutual fund redemptions slowed relative to the second quarter and is running at a lower rate than our peers.

Our intermediary team continues to focus on client retention across the board, and we are hopeful that interest in equity and Multi-Asset products will increase as investors see sign to the market bottom.

Turning now to wealth management. Our Dallas and Houston teams delivered inflows of $123 million offset by outflows of $172 million. Inflows were driven largely by new clients, including a $48 million client win in the Dallas office and additions to several existing client accounts. Outflows were driven by a state settlement, client withdrawals in the normal course of business and some account closures. Wealth flows this year have had to overcome the market environment, adviser turnover and certain institutional clients who engage new consultants. Overall, our team is on track to meet its goal in gross new assets for the year. Business development has ramped up nicely, and currently, we have opportunities in the pipeline totaling over $200 million.

We continue to attract corporate professionals and entrepreneurs, including many clients who are leaving large banks for a more customized and holistic financial solution. A recent J.D. Power and Associates survey indicated that the defection rate for large, regional and midsized banks averaged between 10% and 12% of customers as new fees and core customer service have sparked an exodus. The 2022 survey conducted by Wealth-X database, the world's largest collection of intelligence on the world's wealthiest people demonstrates that the very high net worth population those having, between $5 million and $30 million, continues to grow here in the U.S. up 7.1% since 2019 in terms of individuals. Nearly 85% of them are self-made as in non-inherited wealth, and they present a perfect fit for our wealth team.

The complexity of asset choices and family and business relationships continues to rise, and a successful wealth group needs to offer a diverse set of skills and resources able to service complex clients. Nearly half of our advisers are attorneys, 15% are CFTs and 23% are CFAs, which allow Westwood to effectively serve extremely complex client needs. Our tested ability to serve such clients recently received a warm endorsement from a survey in which 95% of our current clients stated they would refer this to us.

Our 2 wealth offices are well positioned in 2 of the best growth markets in Texas. 40 years ago, the Dallas-Fort Worth Metroplex had fewer than 5 Fortune 500 headquarters, and today, it's home to 24 Fortune 500 companies, trailing only in New York and Chicago. DFW's economy has grown markedly faster than its largest rivals, including New York, Los Angeles and Chicago. And it has emerged from the COVID-19 pandemic with fewer unemployment losses than any other among the nation's 12 largest metro areas. Houston was recently identified as one of the wealthiest and fastest-growing cities in the world, and it's in the top 20 cities with the most millionaires. Our Houston office is on track for its best new sales year in its 40-year history, and it's gaining share in the Houston market. Over 60% of Houston's gross new sales are projected to come from new relationships this year.

Earlier this year, we announced an agreement to acquire the asset management business of Salient Partners, which has offices in Houston and San Francisco, where its tactical growth strategy is managed by Broadmark. Salient is a well-known, highly respected asset manager focused on energy infrastructure, real estate and tactical allocation strategies. As I noted previously, we expect the acquisition will be highly accretive for Westwood. Our team has been working closely with our Salient counterparts on integration planning, and it's clear to us that they are a great cultural fit. Salient's products are very complementary to our own product lineup, and they're also highly scalable which will enable us to leverage the capabilities of our combined distribution teams. We have started the proxy solicitation process to move Salient's 5 mutual funds to our Ultimus platform, and we expect the transaction to close before year-end. Deal-related costs recorded this quarter were approximately $575,000.

Putting it all together as the year comes towards an end and looking out over the next few months, while markets have faltered and asset flows have slowed, we're pleased with our investment team's performance improvements, and our wealth group is growing in a promising environment. We are busy working on closing and integrating the Salient acquisition. We're all looking forward to working together. We like the opportunities presented by our current strategies. We're ready for Salient's exciting new products, and we can't wait to begin the future now. I'll now turn the call over to Terry Forbes, our CFO.

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $15.4 million for the third quarter of 2022 compared to $15.6 million in the second quarter and $17.9 million in the prior year's third quarter. Revenues were lower than the second quarter and last year's third quarter, reflecting lower average assets under management mainly attributable to the downdraft affecting markets worldwide.

The third quarter net loss of $1.2 million or $0.15 per share compared unfavorably with a net loss of $0.4 million or $0.05 per share in the second quarter due to lower revenues and higher expenses primarily employee compensation and benefits. Non-GAAP economic earnings were $0.8 million or $0.10 per share in the current quarter versus $1.6 million or $0.20 per share in the second quarter.

The third quarter net loss of $1.2 million or $0.15 per share compared unfavorably with last year's third quarter net income of $1.9 million or $0.24 per share primarily on lower revenues and higher expenses related to our acquisition of Salient Partners Asset Management business. Economic earnings for the quarter were $0.8 million or $0.10 per share compared with $3.7 million or $0.47 per share in the third quarter of 2021.

Firm-wide assets under management totaled $11.5 billion at quarter end and consisted of institutional assets of $5.5 billion or 48% of the total; wealth management assets of $3.5 billion or 31% of the total; and mutual fund assets of $2.4 billion or 21% of the total. Over the quarter, we experienced market depreciation of $0.4 billion and net outflows of $225 million.

Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $74 million and a debt-free balance sheet. I'm happy to announce that our Board of Directors approved a regular cash dividend of $0.15 per common share, payable on January 3, 2023, to stockholders of record on December 2, 2022. That brings our prepared comments to a close. We encourage you to review our investor presentation posted on our website, reflecting quarterly highlights as well as a discussion of our business, product development and longer-term trends in revenues and earnings. We thank you for your interest in our company, and we'll open the line to questions.

(Operator Instructions) Our first question comes from the line of Charles (inaudible) with BellSouth.

I was looking at the results. And while there's a loss for the quarter, there is an impact of income tax. I was wondering why you would have to pay income tax if we retain the loss.

Well, the income tax is going to be based on the effective rate. So it's what's expected over a year. And there's also some permanent differences that you don't get to deduct for income tax purposes.

(Operator Instructions) Our next question comes from the line of Macrae Sykes with GAMCO.

I actually had 2 questions. 2 separate ones. I'll just ask them and you can address them first. Brian, I just wanted to get your thoughts on the rise in fixed income rates and expected returns there. What they mean for the industry in terms of those that offer multi-asset solutions will be more competitive for those kind of fixed income products. And then secondly, I wanted to just get an update on how Salient is tracking from an AUM perspective from the -- I guess, during the announcement in May.

Okay. Great. Well, thanks, Mac, for your question. First of all, this has been an unprecedented period this year in terms of having both stocks and bonds go down at the same time. So we have an industry that has lots of unhappy clients because they've always counted on bonds to really be their anchor, and it's been anything but that this year. We think that rates are reaching pretty constructive levels, high single digits for investment grade and just under double digits for high yield. And I think that bodes really well for those that construct multi-asset portfolios like we do. In fact, it's a part of our portfolio that we've actually been increasing a bit here of late. And it's an area that I think as baby boomers retire and start to look at how they allocate their money, it's going to be something that's definitely a much more attractive part of the mix given the yields that are available to them now and the fact that so many are on fixed income.

And then second, as far as Salient tracking on AUM, it's down from where we announced as all markets are down, but it's not down probably as much as a lot of others. It's roughly $4 billion now. And we're on track, we think, to close the transaction here in mid-November. And that's contingent upon getting the proxy -- successful proxy votes for all the funds and the client consents for all the institutional clients. But we see positive momentum on both of those fronts, and look forward to closing this and working together.

I'd also add that this place doesn't run that well at $11 billion. It runs a lot better at $15.5 billion. And I'm pleased to report that, as of this morning, that our assets are just under $12 billion as of today. As I mentioned in my prepared remarks, we earned a couple of new SMid clients from a consultant outsourced CIO program this month. And we expect to earn more. Each time this consultant onboards a new client, we'll get a new client, and that's a terrific pipeline for us for the next year, 1.5 years. We also earned 2 new wealth clients this month in the $30 million to $50 million range and have other sizable relationships, which could close before year-end. And as I said, I think we're literally weeks away from getting the Salient transaction across the finish line, and we're on a path to immediately accretive earnings and broader sales opportunities.

And one of the most exciting aspects to the Salient integration is the complete lack of overlap between the distribution teams. And we have roughly 1,500 clients together, and there are less than 50 in common where they have both Westwood and Salient. And there's only 2 in common where they have over $1 million with Westwood and $1 million with Salient. And Salient has a big presence in the national wires. We have a really good footprint in the RIA space and the regional broker-dealers. So we feel like we should be able to take our products to their clients and channels and they take their products to ours, and it's going to be fun to watch as our expanded sales force takes our new message to market.

So on the institutional side, money has been slow to move around institutionally, but our pipeline is now in excess of $700 million, and we're optimistic that we'll see some sales.

And so we look forward to reporting to you again next quarter, hopefully, with better results, and appreciate you taking the time to listen to the call. And if you have any further questions, you can visit westwoodgroup.com or call Terry or I directly.

Thank you. I'll now hand the call back over to CEO, Brian Casey for any closing remarks.

Well, thank you. Those are my closing remarks as I didn't see any further questions. So again, if you have -- if you do have questions, please feel free to call Terry or I directly. Thanks for taking the time to listen. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.