Westwood Holdings Group Inc (WHG) 2021 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Third Quarter 2021 Westwood Holdings Group, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Julie Gerron, Senior Vice President, General Counsel and Chief Compliance Officer. Please go ahead.

Thank you, and welcome to our third quarter 2021 earnings conference call. The 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 the factors that could cause such a difference is included in our press release issued earlier today as well as in our Form 10-Q filed with the Securities and Exchange Commission for the quarter ended September 30, 2021. 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 the 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 President and Chief Executive Officer; and Terry Forbes, our Chief Financial Officer.

I will now turn the call over to Brian Casey.

Good afternoon. Thanks for taking the time to listen to our quarterly earnings call. Last quarter, I highlighted our successes on a variety of fronts, which included improving performance in our U.S. value strategies, the soft close of our SmallCap strategy and our best quarterly institutional sales performance since 2016.

This quarter, I'm very pleased to report good progress with our new mandates won and funded in the first half of the year, continued performance improvements across our U.S. value strategies, solid year-to-date performance in our multi-asset strategies, the launch of 2 new mutual funds and an improving new business pipeline for Westwood Wealth along with the rollout of a new client portal to better serve our Wealth clients.

Following our Board's regular capital allocation review, we have increased our regular quarterly dividend after paying both a regular dividend and special dividend last quarter. Our history of maintaining a strong balance sheet with no debt along with growing cash generation allows us to boost our dividend payouts and enhance shareholder returns while continuing to invest in our core business.

Now let's turn to our investment and asset flow performance. Markets were mixed during the third quarter as cross currents between economic data and rising coronavirus case loads impacted areas of the market differently. Investor anxiety led to declines across all U.S. value indices. While the S&P 500 continued its stretch of quarterly positive returns, despite its September decline, its worst monthly return since March of last year. Smaller cap and value-oriented stocks fell, while some more defensive and secular growth areas rose.

On the fixed income side, rates both declined and rallied over the quarter leaving many investment-grade returns in negative territory, while high-yield securities eked out small gains. The decline in interest rates after one of the largest quarter-to-quarter increases in rates, combined with fears of peak growth and rising inflation, caused the growth style to nearly erase its relative year-to-date performance deficit relative to value.

Our LargeCap strategy outperformed the Russell 1000 Value Index for the quarter. Several LargeCap clients rebalance their internal allocations to reduce equity exposure. Our mutual fund, WHGLX, landed in the top 26% of large value funds for the quarter and remains a 4-star rated fund in Morningstar. Its longer-term Morningstar rankings also remain competitive and relative to institutional peers, it scored in the top 36% of the eVestment universe.

Our SMidCap strategy outperformed its index, the Russell 2500 value by over 180 basis points and enjoyed net inflows as clients added to their accounts. For the quarter, our mutual fund, WHGMX, ranked in the top 24% of Morningstar Universe, and our institutional strategy ranked in the top 18% among eVestment peers.

In SmallCap, we finished just behind the Russell 2000 Value Index for the quarter as volatility in meme stocks, biotechnology and energy securities impacted performance. With the recent reconstitution of the Russell indices, much of the benchmark consists of securities that fail our high-quality criteria requirements, but whose price volatility often impacts relative performance.

SmallCap had negative quarterly net flows as clients reduced their asset allocations in the SmallCap category. On the positive side, many new SmallCap mandates won earlier in the year have now funded and this is beginning to show up in revenues, cash flow and profitability. The fourth quarter is off to a good start for the SmallCap team, and we look forward to closing out the year with improved absolute and relative performance.

Finally, the AllCap team beat the Russell 3000 Value Index by nearly 150 basis points and ranked in the 14th percentile among eVestment institutional peers for the quarter.

In summary, consultants and allocators are clearly interested in value as shifting market dynamics may warrant repositioning from growth towards value. Nuances between investing in mispriced undervalued securities and simply buying statistically cheap companies will continue to be critical on the value area.

More important than simply allocating to value or growth is the role of active management and bottom-up stock picking as returns generated through factor selection have diminished, idiosyncratic outcomes often drive returns and quality fundamentals become more important.

Multi-Asset group's largest strategy, income opportunity, remains ahead of its benchmark of 40% S&P 500, 60% Bloomberg Barclay's Aggregate Bond Index year-to-date despite trailing the benchmark this quarter. The team's strong year-to-date record gained them a 30th percentile ranking in the Morningstar, 30% to 50% equity category; a 20th percentile ranking for trailing 3 and 5 years; and a 14th percentile ranking for the trailing 10-year period.

We are excited to share our message with prospects as we continue to improve our process and outcomes. Our mutual funds, Total Return, ticker WLVIX and high-income ticker WHGHX also trailed their blended benchmarks this past quarter, but like income opportunity remain ahead on a trailing 1-year basis. We're very pleased that these strategies generated positive quarterly flows driven primarily by strong sales performance by our intermediary team.

Our alternative income mutual fund, ticker WMNIX, improved its solid track record with positive absolute performance for the quarter and posted a very strong ninth percentile ranking in Morningstar's Relative Value Arbitrage category.

Lastly, our systematic SmallCap growth strategy continues to outperform, beating its benchmark Russell 2000 Growth Index by 368 basis points this quarter and it's now nearly 900 basis points ahead year-to-date. Head of our Multi-Asset team has spent years developing an investment process capable of delivering outperformance across market cycles and we're very enthusiastic about this investment process as we consider other asset strategies that could benefit from it.

As markets continue to evolve, allocators search for ways to overcome today's challenges in fixed income, where low rates and tight spreads minimize return potential without the lower correlations of the past. We've created a continuum of Multi-Asset solutions to deploy within asset allocation strategies.

In the coming year, we are planning a targeted reintroduction of our Multi-Asset solution on the institutional side and expect to gain traction in the intermediary space where our strategies are 4- and 5-star rated.

Shifting to institutional and intermediary sales. As I noted earlier, several clients rebalanced their portfolios to reduce exposure to equities during the quarter, which resulted in $226 million of net outflows. Beyond the normal course of rebalancing, we are pleased to see several strategies with positive net flows, including SMidCap, income opportunity, alternative income, high income and total return. At the end of the quarter, we launched 2 new mutual funds, Westwood Quality AllCap Fund, ticker WQAIX; and Westwood Systematic Small-Cap Growth, ticker WSCIX. The AllCap strategy has been around for a long time, and we were pleased to move one of our long-term clients into the new fund.

Consultants who have a buy rating for the strategy have advised us that they have a pipeline of small clients appropriate for the fund. We look forward to expanding these discussions as the fund track record grows. The Systematic SmallCap growth mutual fund is based on a process developed over many years by the Head of our Multi-Asset team.

The mutual fund provides us with a platform on which to build a track record in SmallCap growth, which has enjoyed nice flows over the past several years. In some ways, the third quarter represented a pause from the pace of prior quarters. However, strong net sales gains have been achieved this year, thanks to execution of our distribution and product alignment strategy in the intermediary and institutional channels.

Client retention has been strong as this quarter's outflows were dominated by client rebalancing away from an overweight in equities. We continue to leverage our strong client relationships and focus new business sales on strategies with approved consultant and platform relationships.

Our institutional sales team has shifted its focus to SMidCap with the soft close of SmallCap and has some exciting opportunities on the horizon. Intermediary team is focused on our multi-asset platform, especially alternative income and income opportunity, now approaching a 3-year track record under our Multi-Asset team. Overall, the pipeline is well balanced with opportunities spread among strategies and across time lines from early to late stage.

Turning to Wealth Management. Performance of our Wealth Management strategies were mixed this quarter. Dividend Select, which focuses on domestic higher dividend-paying investment, outperformed the Russell 1000 value index by over 100 basis points. Select Equity, which aims for tax-efficient outcomes lag a Russell 3000 index as its inclusion of foreign domiciled ADRs to produce a more well-rounded portfolio caused it to underperform a U.S.-centric index.

High Alpha took a breather this quarter and lagged the same index. High Alpha remains ahead of the index year-to-date and since its inception in March of last year. Many of our Wealth clients filed for extensions for their tax returns, triggering larger-than-normal tax payments this time of year. These payments, along with some account closures resulted in outflows for the wealth channel.

Our teams continue to enhance their servicing and business development efforts to manage flows and reach new clients. Dallas and Houston have attractive pipelines that should result in meaningful inflows well into the next year. Our service offerings such as financial planning assistance and estate planning with Westwood Trust serving as trustee for families are attractive to our clients and prospects.

Clients like the access to private equity funds that we provide as well as investing in our own strategies, including credit opportunities, income opportunity, high alpha and SmallCap growth. The ability of clients to obtain a friction-free loan against their securities portfolios via Westwood Private Bank has proven beneficial in strengthening client relations and delivering attentive high-quality service.

We've begun rolling out our new portal with InvestCloud to clients with a mobile app for the iPhone and iPad on its way this coming quarter. We have all the tools needed for a vibrant Wealth Management business with an expanded holistic Wealth Management offering, including complex financial planning, estate planning, access to our private banking partner, alternative investment opportunities in a new digital client portal.

We're excited to be in Texas, especially in Dallas and Houston, where the demographics suggest continued population migration and economic expansion in the years ahead. We're ready to take all that we've built over the past few years to market and grow our Wealth business.

On the expense side, we've continued to reduce expenses wherever possible and have taken decisive actions such as last year's outsourcing of our equity trading to Northern Trust. We're pleased to report that this relationship has progressed well, and one of our former traders has integrated fully into the Northern Trust platform in Chicago, while remaining our primary daily resource.

Our portfolio managers were happy with the new arrangement and Westwood achieving close to $1 million in savings per year. As we move forward, we expect to see our Multi-Asset team leveraging more than Northern Trust trading team in fixed income and other products that we will develop in the years ahead. Also this month, we successfully completed a proxy solicitation process with our mutual fund shareholders and will move our mutual fund family from the current administrator to Ultimus Fund Solutions effective November 1.

This project started last year and has taken considerable time and effort, but we expect net savings will accrue to both Westwood shareholders and our mutual fund shareholders as a result. Westwood is paying all costs related to the fund reorganization, totaling approximately $700,000 in 2021. Following the reorganization, we expect to achieve cost reductions of approximately $1 million per year, split between mutual fund shareholders in the form of a reduced expense ratio and Westwood in the form of higher effective fees earned.

In summary, while asset flows have slowed from second quarter strong levels, we're pleased with our value team's performance improvements and with Multi-Asset holding its year-to-date rankings and strong star ratings. We've launched new mutual funds and the pipeline and our institutional and wealth groups is healthy. We continue to work hard for our shareholders to grow top line revenue, reduce expenses, improve investment performance and deliver exceptional client service.

We've increased our dividend and bought back stock to enhance our shareholder returns. We're excited to see how this year finishes up and look forward with confidence to the year ahead.

I will now turn the call over to our CFO, Terry Forbes.

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $17.9 million for the third quarter compared to $17.5 million in the second quarter and $15.5 million in the prior year's third quarter. Revenues were comparable to the second quarter. Revenues were higher than last year's third quarter, reflecting higher average assets under management, partially offset by lower performance fees.

Third quarter net income of $1.9 million or $0.24 per share exceeded net income of $1 million or $0.12 per share in the second quarter due to the combination of somewhat higher revenues and lower operating expenses.

Non-GAAP economic earnings were $3.7 million or $0.47 per share in the current quarter versus $2.8 million or $0.35 per share in the second quarter. Third quarter net income of $1.9 million or $0.24 per share compared favorably with last year's third quarter net loss of $10.3 million or $1.31 per share, primarily due to higher revenues on higher average AUM and several nonrecurring items impacting the prior year third quarter. Economic earnings for the quarter were $3.7 million or $0.47 per share compared with economic losses of $1.7 million or $0.22 per share in the third quarter of 2020.

Firm-wide assets under management totaled $13.8 billion at quarter end and consisted of institutional assets of $6.7 billion or 49% of the total. Wealth Management assets of $4.2 billion or 31% of the total and mutual fund assets of $2.9 billion or 20% of the total. Over the quarter, we experienced market depreciation of $184 million and net outflows of $423 million.

Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $76.6 million and a debt-free balance sheet. To announce that the Board of Directors has approved a regular cash dividend of $0.15 per common share, payable on January 3, 2022, to stockholders of record on December 3, 2021. This represents an increase of over 50% over the previous regular cash dividend and a yield of 3.3% as of yesterday's close.

That brings our prepared comments to a close. 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 and earnings. We thank you for your interest in our company, and we'll open the line to questions.

(Operator Instructions)

And our first question comes from the line of Mac Sykes from Gabelli.

The first one, did you buy back some stock in the quarter? It looked like it, but I didn't see that in the press release.

We did. About 25,000 shares or so.

Okay. And could you just remind on the Systematic Growth, I mean, it seems like a very leverageable situation now. Can you just remind us how much AUM is across those strategies? And then just kind of your thesis on kind of leveraging different products there. I know you have the fund, the mutual fund stuff, but I mean, is this kind of a consultant [intermediary]. Where is the most traction you can get kind of in the interim to leverage this track record?

Well, thanks, Mac. That's a great question. So we have developed a proprietary database that really was started by Adrian Helfert who heads Multi-Asset along with Scott Barnard, who worked with Adrian for over a decade in a prior firm. And the database really is designed to minimize or effectively eliminate human bias. And we ran a paper portfolio for about a year, and we started in the wealth channel about a year ago.

And we've got, I don't know, something I want to say $10 million or so in the wealth channel. And we thought the record is exceptional. It's over 1,000 basis points ahead of the Russell Growth Index, 2000 Growth Index since inception. So we wanted to start a mutual fund, which we just did a couple of weeks ago.

So we've just got corporate seed money in there now. But if we continue to deliver these kinds of results, it will go through all of the normal channels that we would typically have success in both the wealth channel, the institutional channel, and then as it gets a little more traction in the, intermediary channel.

Okay. Great. And then just the last thing. I think you had talked about the pipeline last quarter, and it seems like there was a little bit of turnover this quarter. Is there an update on kind of that pipeline today?

Yes, sure. So you're starting to see the effects of the wins that we had over the last couple of quarters. You're seeing increased revenues, increased net income. We were able to increase our dividend. And we are now -- while the flows that actually closed during the quarter slowed a little bit, we still have a lot in the pipeline. And we really, as we've said in prior quarters, we define it as sort of early stage, mid-stage and late stage.

And combined, that's over $1 billion with more than half of that is what I would consider late-stage opportunities. And those are through your typical institutional channels with consulting firms. As we pivot from a closing -- soft closing our SmallCap product, we really want to see growth in our SMid product.

And we had really good performance this quarter. It's got an excellent long-term record. And we are a buy rated at 2 or 3 of the top consulting firms, and we're starting to see some flows there. In fact, we had positive net flows in SMid in the third quarter and we've got some good opportunities lined up in the fourth quarter and for the year ahead.

(Operator Instructions) And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Brian Casey for any further remarks.

Thanks again for taking time to listen to the call. We really appreciate your support of Westwood, and feel free to call myself or Terry, if you have any further questions or to visit westwoodgroup.com for more information under the Investor Relations tab. Have a great afternoon.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.