Westwood Holdings Group Q3 2023 Earnings Call Transcript

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October 31, 2023

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the 3Q 2023 Westwood Holdings Group, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

And I would now like to hand the conference over to your speaker today, Ms. Jill Meyer, please go ahead.

Speaker 1

Thank you, and welcome to our Q3 20 earnings conference call. The following discussion will include forward looking statements that 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 for the quarter ended September 30, 2023 that will be 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.

Speaker 1

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.

Speaker 2

Good afternoon and thank you for listening to our quarterly earnings call. We have plenty to share with you this quarter. Today, I'm going to tell you about our ongoing efforts to create positive investment outcomes for clients, the successful transitions we've made in our SMIDCAP, All cap and Broadmark Tactical Plus and tactical growth strategies and our initiatives to diversify and grow our offerings and revenue streams. As you know, at Westwood, we focus on helping our clients achieve their objectives by using our disciplined investment processes to generate portfolio alpha without taking excessive risk. This approach has delivered excellent compound rates of return for our clients throughout our 40 plus years of history.

Speaker 2

While the overall economic backdrop for asset managers has certainly been challenging these past few years, we feel really good about the Look first at capital market conditions. The Fed's rate adjustments have created difficulties for equities and fixed income alike. Taken together with the Fed Chairman Powell's comments, The Fed actions strained bond prices as rising interest rates pushed yields up and prices lower. The equity market experienced a sharp rise in volatility and price pressures as sentiment shifted lower. Selling waves did not differentiate between styles or market capitalizations were driven largely by fears of an interest rate trajectory that might be higher for longer.

Speaker 2

Against this backdrop of market volatility across a broad spectrum of Our first question comes from the line of David. Please go ahead. Our first question comes from the line of David. Over the trailing 5 year period, all our U. S.

Speaker 2

Value strategies with track records extending into this length are ahead of their benchmarks. Our U. S. Value investment team is highly experienced with remarkably long tenures averaging 11 years at Westwood and double that amount of time and overall investment experience. Our research driven culture along with a team based portfolio management approach and history of promoting from within underpin our investment process.

Speaker 2

These are the elements that have allowed us to Smoothly transitioned portfolio management of our SMIDCAP and ALL CAP strategies. A long tenured portfolio manager recently left Westwood, We seamlessly adjusted by bringing in 2 other long tenured team members, each of them with more than 25 years of investment experience. MidCap and Allcap have strong long term track records ahead of their respective benchmarks over trailing 1, 5, 7 10 years and since inception. Within our multi asset team, the group's skill and asset allocation was clearly on display in their overall performance results. 2 of our 3 strategies outperformed for the quarter and all 3 are outperforming for the trailing 3 year period.

Speaker 2

As of September 30, All 3 ranked in the top 40% of their MorningStar peer categories for trailing 3 years and the top 26% for trailing 5 years And top 21% for the trailing 7 years. Our absolute return strategies all performed well in an environment where the S and P 500 dropped more than 3%. They performed as expected, highlighting an ability to protect investor capital in times of uncertainty. New strategies posted positive results, while the 3rd slipped just 38 basis points for the quarter, placing them in strong relative positions against their peer universes. The Fed's higher for longer stance could well prompt U.

Speaker 2

S. Corporations to continue moving towards the convertibles asset class when raising capital. A dynamic shift like this would benefit our alternative income strategy by increasing the supply from traditional convertible issues And also expanding issuance from new sectors and industries. All of this could create opportunities for investment teams with the kind of long standing relationships and deep expertise that we have at Westwood. Our tactical growth and tactical plus funds are designed to help investors sidestep market downturns.

Speaker 2

As you know, equity valuations remain above historical averages, and we remain vigilant as the road ahead could be bumpy. If global economies enter a synchronized recession and markets correct, we expect these strategies to shine as investors look to protect capital. I'd like to take a moment to talk about Chris Guptill, who passed away suddenly this summer. Chris was Founder, Co Chief Investment Officer and Co Chief Executive Officer of Broadmark Asset Management, the majority owned subsidiary we acquired in last year's Salient transaction. As planned, Chris' long term colleagues and partners, Rick D'Amico and Rick Cortez, have taken over the roles they shared with him as CIO and CEO, respectively.

Speaker 2

The Tactical Growth and Tactical Plus strategies led by Chris for the last 18 years are now being managed by Rick D'Amico, Rick Cortez and Dyer Kennedy. All three are committed to their time tested disciplined investment process based on the 4 pillars of valuation, monetary policy, investor sentiment and volume and breadth based momentum. Chris was well respected and will long be remembered for his friendship, leadership, Investment Acumen and Disciplined Work Ethic. Our Westwood Salient strategies outperformed their benchmarks this quarter. Global Real Estate and Select Income Funds performed especially well and have top 30% MorningStar peer rankings year to date, Top 15% over the trailing 1 year and top 10% over the trailing 3 years.

Speaker 2

Our energy infrastructure strategies benefited as Crude oil rebounded by over 30% and they ranked among a small group of asset classes that posted positive absolute returns for the quarter. Asset outflows continue in the MLP space as investors take profits following a period of strong performance. But we believe MLP fundamentals and future performance potential remain attractive. These Westwood strategies Specifically designed to provide investors with alternative sources of income along with inflation protection via exposure to real assets, Low correlations to traditional asset classes and market volatility mitigation. And that is exactly what they've been doing.

Speaker 2

Our Wealth division performance was mixed with half of our strategies outperforming their benchmarks even as they provided exposure to large cap blue chip equities Consistent with the investment objectives of our high net worth client base, our wealth division has made great strides in supporting clients while bringing on new clients and improving efficiency. We've made a lot of progress in building out an RIA platform to efficiently serve a wider range of client needs. We're especially pleased that our holistic wealth management services and our nimbleness in reacting to client needs is resonating with younger entrepreneurial clients. For example, the last five relationships we've onboarded with over $10,000,000 have all been clients in their 30s 40s. As a result of these efforts, Westwood Trust Economic earnings increased 8% year over year.

Speaker 2

As mentioned previously, Vista Bank has now completed its acquisition of Carus Holdings and our ownership stake in Carus means that we are now a shareholder in Vista Bank. Vista is known as an Entrepreneur's Bank, serving North Central and West Texas through 14 banking locations. Our partnership with Vista brings us a range of services to deepen our client relationships, including access to a robust private banking practice for Vista's ultra high net worth clients. Shifting now to distribution. Our institutional channel experienced net outflows of $133,000,000 Primarily due to redemptions in our U.

Speaker 2

S. Value strategies, including a few partial redemptions and a loss of 2 clients, 1 to a passive ETF strategy and 1 to a broader change in asset allocation strategy. Outflows were partially offset by U. S. Value inflows, primarily for SmallCap.

Speaker 2

Our overall client base remains stable. And following the recent transition, our distribution and portfolio management teams worked hard And successfully to retain key consultant approvals for SMIDCap. And as a result, we had no SMIDCap client losses. In fact, we remain under consideration for several DC plan allocations in both SMIDCAP and SMALL CAP. Overall institutional outflows improved, but an industry wide lack of inflows to these categories have negatively affected net flows.

Speaker 2

The overall market environment continues to be challenging for gathering new flows given recession fears along with an attractive 5% risk free rate of return in cash products. As investors begin preparing to deploy capital differently, our pipeline has grown this quarter, reflecting increased search activity. Put some context around this growth in the pipeline. It literally grew 10 times in 3 months. We have 2 large searches in the $200,000,000 to $400,000,000 We know that he's seasoned because he previously worked here at Westwood and he's coming back to resume his coverage of the Northeast.

Speaker 2

Our institutional team is also working hard to expand our presence and brand awareness in the OCIO, outsourced Chief Investment Officer and multifamily office spaces. Intermediary flows continue to feel the impact of a buyer Due to economic uncertainty and higher cash yields offering attractive safe haven for risk averse investors, Westwood has been outperforming peers as measured by redemption as a percentage of assets under management in the key categories where our strategies compete. Despite these headwinds, our team continues to work hard and wholesaler activity remains robust. Financial advisors may not be allocating many client funds into non cash strategies, But they're exploring investment opportunities for an environment in which cash is no longer the most attractive option. Overall, our intermediary channel experienced net outflows $159,000,000 for the quarter, driven primarily by taxable growth and MLP redemptions.

Speaker 2

Outflows were partially offset by demand for our small cap, select income and alternative income strategies. To recap, this market environment has caused many investors to take a pause and industry activity has slowed overall. Market fluctuations may impact revenues or AUM temporarily. Our focus remains on executing our investment disciplines And delivering strong client service. We think this is a great time to deepen existing relationships and forge new relationships with added offerings.

Speaker 2

As part of our efforts to diversify our product range and revenue sources, we've begun to build out our private market capabilities and are exploring the actively managed ETF space. We expect that our initial product focus in these areas will leverage the deep Experience of our energy infrastructure team. In private markets, we've launched a new strategy called the Westwood Energy Secondaries Fund. This product blends our in-depth bottom up investment process with our ability to source investments. Our reputation as a leading institutional investor in public energy markets and our strong relationships with leading sponsors that allow us unique access to energy related private investments.

Speaker 2

We believe it's an exciting time to invest in oil and gas Because institutional investors are selling fossil fuel related investments for ESG and other non fundamental reasons, which creates a supply demand imbalance and provides opportunities for secondary investors. And 2, the outlook for commodity prices is bullish due to a global underinvestment And finally, valuations are historically low, while companies see elevated levels of profitability, which opens an opportunity to buy mature assets at large discounts in the secondary market. I'm also excited to share a significant development with the Earlier today, we unveiled our latest addition, the Cutting Edge Managed Investment Solutions team. Managed Investment Solutions' Chicago based team boasts an average of 25 years of institutional experience. They have proven track records in providing customized index solutions for institutional clients, including public plans, Sovereign Wealth Funds, corporate pension plans, defined contribution plans, endowments, foundations and consultant groups Managed Investment Solutions' consultative and customized approach has gained the trust of clients and the team has developed several asset management capabilities.

Speaker 2

Our Managed Investment Solutions business is an important addition to our product suite, allowing clients to access different market and thematic exposures. Our new capability is adaptable, transparent and tailored to address the shifting needs of a multifaceted client base. Managed Investment Solutions team's approach is a commitment to understand client needs in-depth. They assess current exposures and overarching objectives to ensure that desired outcomes align with the prospects portfolio as a whole. By identifying trade offs between various methodologies, Investment Solutions fine tunes answers to fit the customer's unique goals and objectives.

Speaker 2

We're energized by the opportunities this new development brings to Westwood. We continue to diversify our product offerings. We're working hard to broaden our client base, and we continue to enhance our revenue streams. We believe that current market conditions are right for the successful introduction of Managed Investment Solutions and our new team members are ready to go, Officially joining Westwood next week. It represents another important entry for Westwood into a substantial market segment that is signaling strong demand for our solutions business and it fits nicely within our existing investment capabilities.

Speaker 2

As you know, our primary focus has long been to deliver superior risk adjusted returns, excellent client service and an Spanned an array of investment opportunities and solutions. We continue to invest in strategic initiatives to improve our business And underpin Westwood's return to a long term growth trajectory, and we're looking forward to keeping you updated on our progress. Thanks again for your time today and for your interest in Westwood. I'll now turn the call over to Terry Forbes, our CFO.

Speaker 3

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $21,900,000 for the Q3 of 2023 compared to $21,900,000 in the 2nd quarter $15,400,000 in the prior year's Q3. Revenues were comparable to the 2nd quarter. Revenues were higher than last year's Q3 reflecting higher average AUM following the acquisition of Salient Partners Asset Management Business during the Q4 of last year. Our 3rd quarter comprehensive income of $3,400,000 or $0.41 per share compared favorably with $2,900,000 or 0.3 $6 per share in the 2nd quarter due to the receipt of life insurance proceeds offset by changes in the fair value of contingent consideration.

Speaker 3

Non GAAP economic earnings were $6,300,000 or $0.77 per share in the current quarter versus $5,700,000 or $0.70 per share in the 2nd quarter. Our 3rd quarter comprehensive income of $3,400,000 or $0.41 per share compared favorably with last year's 3rd quarter loss of $1,200,000 or Economic earnings for the quarter were $6,300,000 or $0.77 per share compared with $800,000 or $0.10 per share in the Q3 of 2022. Firm wide assets under management and advisement totaled $15,500,000,000 at quarter end consisting of assets under management of $14,400,000,000 and assets under advisement of $1,100,000,000 Assets under management consisted of institutional assets of $6,700,000,000 or 47 percent of the total, Wealth management assets of $3,800,000,000 or 26 percent of the total and mutual fund assets of $3,900,000,000 or 27 percent of the total. Over the quarter, our assets under management experienced market depreciation of $300,000,000 and net outflows of 289,000,000 And our assets under advisement experienced market appreciation of $2,000,000 and net outflows of 63,000,000 Our financial position continues to be very solid with cash and short term investments at quarter end totaling $48,500,000 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, 2024 to stockholders of record on December 1, 2023.

Speaker 3

That brings our prepared comments to a close. We encourage you to review our investor presentation we have 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

Thank One moment please for our first question. Our first question will come from Mac Sykes of GAMCO. Your line is open.

Speaker 4

Good afternoon, Brian and Terry.

Operator

Good afternoon,

Speaker 2

Mac. Good afternoon, Mac.

Speaker 4

So I have two questions. I'll just ask them together they're obviously linked. My first is, how should we think about the revenue cost dynamics with this new group that's just been brought in? And then on the revenue side, How should we think about the revenue generation from that? I assume that's kind of a consultant basis points fee on AUM?

Speaker 2

Yes. So I would look at it like we're hiring 3 people at market rates And we're opening a very small office in Chicago, so the cost of the office will be minimal. And I would look at it as these are 3 investment Professionals that have 25 years plus experience, they've done a lot of things in their career, but what they did in their prior life was they built And Index Solutions business at their former employer where they grew the business from 0 to over $100,000,000,000 in AUM. The average fee on the assets that they managed was very wide ranging. It was anywhere from 3 basis points to 55 basis points.

Speaker 2

And they do a lot of interesting things like tax managed and sector focused thematic, all kinds of different approaches. So it's an exciting new business line for us. It's certainly not a change to our business. It's a new business line and we've been known as active managers for 40 years and we intend to continue delivering superior risk adjusted returns in the active space, but we also have a history of solving problems for clients and this group Has a great history of creative problem solving for their clients. And so we're excited for them to join Westwood.

Speaker 2

They start next Monday And we'll hit the ground running.

Speaker 4

Great. And then typically to on a mandate like this As they gain mandates, what is the sort of lead time for securing them in terms of when they start to prospect and get that solution and then implement it?

Speaker 2

I think probably the 1st 90 days, we'll be getting all of the operational Aspects of the business up and running and then they'll be reaching out and talking to the folks in the industry that they know well. And if they have the same kind of success that they had at their prior shop, we should start to see, see some flows at the end of next year.

Speaker 4

Great. Thank you very much. Happy Halloween.

Speaker 2

Same to you, Mac. Thanks.

Operator

Thank you. And speakers, I see no further questions in the queue. I would now like to turn the conference back to our CEO, Brian Casey for closing remarks.

Speaker 2

Great. Well, thanks everybody for taking some time to listen to our call today. If you ever have any further questions, please look at our website westwoodgroup.com or call myself or Terry Forbes. Have a great day. Thanks.

Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.

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Earnings Conference Call
Westwood Holdings Group Q3 2023
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