Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the First Quarter 2019. [Operator Instructions] Please note that this call is being recorded today, May 2, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Brett Perryman, Head of Investor Relations. Please go ahead, Brett.

Thank you. Good morning, and welcome to BrightSphere's conference call to discuss our results for the first quarter ended March 31, 2019. Before we get started, I would like to note that certain comments made on this call may constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as expect, anticipate, may, intent, belief, estimate, project and other similar expressions. Such statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These factors include, but are not limited to, the factors described in BrightSphere's filings made with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019, under the heading Risk Factors. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. We urge you not to place undue reliance on any forward-looking statements. During this call, we will discuss non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which is available in the Investor Relations section of our website, where you will also find the slides that we will use as part of our discussion this morning. Today's call will be led by Guang Yang, our President and Chief Executive Officer; and Suren Rana, our Chief Financial Officer. I will now turn the call over to Guang.

Thanks, Brett. Good morning, everyone, and thanks for joining us today. After my first full quarter as a CEO, I'm pleased to share our results and update you about our progress. BrightSphere is a strong, diverse business comprised of leading asset managers who offer a wide range of investment products that are in demand globally. We are optimistic about our growth prospects. Our business produced stable results for the first quarter, as we benefited from improved equity market conditions and net client cash flows. And our assets under management increased 8% to $222 billion. Looking at the right side of Page 2, we see many opportunities for growth and expansion within our business. While we currently serve clients across 30 countries, you can see in the first chart that our client base is still predominantly U.S.-based and 76% of assets compared to 9% in Europe, 5% in Asia and 5% in Australia, with a tremendous opportunity to grow our client base in key global markets. Similarly, while our revenue mix is both highly diversified and fairly well distributed across asset classes, we believe there is also opportunity to expand our alternative offerings, which currently contribute 21% of our management fee revenue. Quant solutions are an area we believe we're particularly in demand in the coming years. We have roughly 2/3 of our revenue coming from alternatives and quant strategies. Turning to Slide 3 and continuing on those themes, let me stay back for a moment to discuss the progress we have made so far and where we are positioning the business. As Suren and I discussed on the last quarter call, given the understanding of BrightSphere that we brought to our current responsibilities, we are able to hit the ground running in terms of implementing changes that would reposition the…

Thank you, Guang. Looking at Slide 5. We compare our key metrics for 1Q '19 with prior 4 quarters. On this call, I will primarily focus my comparisons on this page and elsewhere in the deck with a prior sequential quarter, Q4 2018. And that's to draw your attention to what's different this quarter since we discussed our results in Feb and implemented some of the plans we've mentioned then. Our quarter end AUM increased 8% from Q4 '18 to $222 billion, primarily driven by the market recovery. Our average AUM for the quarter was $216 billion, 1.6% lower than the prior quarter and that was because we started the quarter at a lower base due to the market decline in December. Looking at our fee rates down below, our weighted average fee rate increased from 36.9 bps in Q4 '18 to 39 bps in Q1 '19, which was driven by a higher mix of higher fee, global non-U. S. and alternative strategies and that, in part, was driven by the impact of market appreciation in higher fee asset classes such as emerging markets equity. Looking at revenues, our management fee revenue increased by 1.7% from $205 million in Q4 '18 to $209 million driven by the higher fee rate I mentioned. Total revenue decreased 3% from the prior quarter driven by lower performance fee of about $10 million. And that's typical because typically we would expect higher performance fee in fourth quarter. Our operating margin reduced from 36.6% in 4Q '18 to 33.3% this quarter, and that was a result of the lower total revenue due to the lower performance fee. So excluding performance fee, the operating margin declined from 35.1% to 34.5%. And that was driven by the seasonal expenses this quarter like payroll taxes, foreign currency, et…

[Operator Instructions] Your first question comes from Craig Siegenthaler with Crédit Suisse.

First, I just wanted to circle back to the joint venture opportunities. Is the focus here mainly China where this is still a requirement or are you searching for partners in other geographies still?

I think both. I mean, in terms of China, as you know, for the mutual fund business, you have to have a joint venture. The foreigners can own up to 51%. They still need to have the local shareholders to be the 49% or combined 49%. But also we're - if you're looking at institutional business, not the retail business, we could own up to 100%. But for that, we will still likely partner with someone because it would be very expensive to give it to distribution channel ourself and we have been talking to a number of institutions. There is a strong interest to team up with BrightSphere. And actually we see the same initial interest from other markets as well, other geographies because people - or those institutions really like - they're really impressed by over 100 strategies our Affiliates collectively offer.

Got it. And just as my follow-up on the global distribution expansion. I want to get a better feel for the size. Could you share with us how many senior salespeople you employ today? And what this number was a year ago? And also give us some color in terms of how you're expecting to expand this number in terms of actually salespeople outside of U.S.?

There are a couple of things I would comment there. One is that we're really looking at building high level firm-to-firm relationships with some of the large institutions outside of the U.S., as you can tell, which is something we as a firm did not do in the past. So in terms of very high level experienced relationship team members, you're not talking about the quantity, it's really the quality. And since our call in February, we have been able to implement that strategy and we have been able to identify and been able to bring onboard a number of those very senior, experienced team members. But in terms of the cost, we're now looking at a huge amount of cost because like we mentioned, we're creating more entrepreneurial structure - culture here. We'll try to keep the fixed cost as low as possible, but with a very large variable compensation if they can deliver. So for the purpose of you considering our incremental cost, there will be incremental cost, but it's not going to be a very big number. Those are particularly like Suren said, for us it's more like reallocating our resources from other parts of the organization really to the growth part.

Your next question comes from Bill Katz with Citi.

I was wondering if you could just maybe - maybe I missed that, I apologize, busy morning. On the performance fee reversing going negative and I'm wondering as I look at the performance across your buckets, it seemed like the alternative performance was relatively flat against what's pretty good comps among many other peers out there. So I'm wondering if you can maybe dive into the drivers behind those 2 elements if you don't mind?

Billy, did you talk about our alternatives performance?

Yes.

Well, we haven't disclosed our alternatives performance on a quarter-on-quarter basis, so maybe you could refer me to particular point.

I'm looking at your AUM roll - I'm sorry, if I'm looking at your AUM roll-forward, and you show your - the component piece to that. So if I look at the market or the NAV contribution, that was relatively flattish, I believe. And just given the very strong marks in real assets, private equity, credit, infrastructure among many of the larger players, I'm just wondering what may have happened there and did that affect the performance fee number in the quarter?

Thanks, Bill. No, actually the performance fee, in particular, wasn't Landmark related. It's just that in Q4, typically a lot of these measurements happened and it's more from other Affiliates. At our alternatives platforms, as you know in the alternatives business, it's lumpy and the marks may not necessarily track public markets and often don't. So the data that you see there in the flows, I would say is not reflective of the performance. The performance has been consistent and Landmark has been able to deploy capital in attractive opportunities faster than expected and are getting great appetite from clients for new strategies.

Okay. And just maybe 1 big picture question, so would you leverage your ratio now at 2.3x, maybe two-part question. What kind of contingencies do you have for the financial statement to the extent we would go through any kind of downturn in the equity markets? And then secondly, how you're thinking about such growth from here? Is there capacity to do more deals or is it more of the de novo opportunity that you're so speaking to in terms of developing your sales and deeper penetration outside the United States?

Yes, certainly. So we - from a leverage perspective, we want to continue to stay in the 1.75 to 2.25 range that we have articulated in the past. And part of the reason for that is exactly that we want to keep some conservatism for downturn scenarios. So in terms of funding the growth, we have cash flows coming from our business, which is strong. We would look to use that to fund our growth investments. And opportunistically, if we have really attractive opportunities, we may use the more of our revolver on a temporary basis keeping in mind the larger leverage considerations.

Your next question is from Robert Lee with KBW.

So I guess, the first one maybe just following up Bill's - maybe it's a little bit more short term and tactical, but on the capital front, since you're kind of bumping up against the high end of your target range, is it kind of reasonable to assume that incrementally at this point maybe cash flow over the balance, you're maybe more dedicated towards getting your debt back down towards kind of the midpoint of your range or how - just want to think about that kind of in the near term?

Yes, so we want to use our cash flow primarily toward our growth strategy. And as we've articulated that about a good chunk of our business is already benefiting from being in the right growth segments that are seeing demand from clients. And we want to develop that further. So we're looking at adding to our capabilities, adding more alternative capabilities for looking at various themes and platforms to bring them onboard here. We're looking at our distribution capabilities, both organic and partnership and other approaches. So we are - we would want to deploy capital to that effort rather than paying down debt. We are comfortable where we are on our current debt. And as our EBITDA grows from these growth efforts, we would see the ratio come down. And as I said earlier, we also - I wouldn't say that, if compelling opportunities come up, we would selectively consider going above the ranges for the right opportunity.

Okay. Maybe the follow-up on some of the growth initiatives, particularly kind of reinvesting back in Global Distribution in different ways. Can you talk a little bit about what the Affiliate buy-in maybe and one of my impressions may be incorrect, is that I guess in the past, one of the challenges is that maybe not every Affiliate may use or bought into the Global Distribution capability as it was - maybe to the extent it would have been hoped. I mean, is that the case? Is Acadian and Barrow, and everyone else kind of all win on this or is there still some convincing that has to be done some Affiliates?

I would say this. I mean, as you know, we have a very strong - a collection of very strong Affiliates and some of them are - some of them already have very good presence in many markets including some of those markets outside of U.S. And some has less presence outside the U.S. But altogether, I think a combined entity, which manage over USD 220 billion is very important in terms of reaching out and open the door to talk to some of those large clients outside the U.S. So for that, I think we have a buy-in, the term you used, from our Affiliates. In terms of exactly how we work with them, it will vary from market to market, but I would say overall in some of those global markets, there is a strong benefit for everyone to work together.

And I would add one thing, I guess, if you look at our business, we have 3 broad buckets, right? We have quantitative strategies and solutions, which is largely at Acadian. Then we have alternative at Landmark and Campbell Global and then we have some of the active outflow managers and all 3 require slightly different kind of sales approach. And thankfully, we do have specialist sales people sitting in each of these 3 buckets. And as Guang pointed out, we need some generalist salespeople to open the doors for the specialist salespeople. So we do have all the right pieces of the puzzle, but to really get to the right endgame, you do need the generalist as well as specialist, and that's the model we are working toward.

Great. And maybe just 1 follow-up. Strategically, plenty years ago, the firm made a decision to kind of access U.S. retail at least predominantly through sub-advisory relationships and clearly some of them are at Barrow are very long standing. But given changes in a lot of intermediary distribution, a lot of your peers talk about it becoming a more institutional type sale to head offices. Is there any thought or opportunity that rethinking the kind of the retail strategy in the U.S. with some of your Affiliates. I mean, you could maybe see products at an Acadian, for example, could have interest in different channels. I mean, any - is that an area of investment or something not on the drawing board at this point?

Yes, it is absolutely yes. Why because if you see - if you look at our mix, right, we have great products in all of those 3 buckets that I mentioned in quant and solutions, in alternatives and in active managers, but we're selling them almost exclusively in institutional channels. So retail is relatively untapped opportunity for us and those products as we understand from feedback would be in high demand. But you're right that rather than building boots on the ground, Army, we are more focused on having partnerships, joint ventures and the like to access that opportunity. We do, for example, have sub-advisory business to access the retail opportunity. We want to expand that effort and look at other types of partnerships, which can give us access to the retail business.

Your next question comes from Patrick Davitt with Autonomous Research.

I think - this might have come up earlier. So I apologize if you already said it. But were you talking about the potential for some step-out strategies at Landmark coming to the market soon or something else?

I mean, as a general matter, we don't comment on fundraisings. But what we've said is that we are pleased with the capital deployment and our clients are pleased and we're always looking to expand each of our businesses in adjacent strategies that make sense for the clients.

And then the bond outflow accelerated pretty meaningfully in a quarter when most active bond managers have pretty good inflows. Is there something unique to that or a particular product that saw a big outflow?

You're looking at the - our U.S. equity?

No. Fixed income bonds.

Yes, fixed income is - there's no pattern there, just one-off lumpy outflow depending on the specific situation of that particular client. So this would happen every once in a while.

Okay. Last one real quick. You mentioned the 1 seated product contraction. Could you update us on the pipeline of other kind of seated products that might be reaching the point of increased saleability?

Yes, there are a few products that we have seated and incubated and developed that are starting to reach the key milestones and so solutions broadly speaking is an area where either we are providing a multi-asset capability or specific single factor exposure to clients. So there, we are seeing good traction. We've already seen some closings and we have a nice pipeline developing. On the active equity side too, we're seeing strong interest from clients on the emerging markets, equities, on global equities. And we are seeing some green shoots for large cap value too, where people think that our clients are interested in seeing that's a good opportunity because it's now been the longest period during which value has underperformed growth. And then we're seeing interest also in our various alternative strategies.

Your next question is from Chris Harris with Wells Fargo.

So appreciate all the comments about strategy. I can't imagine it's all that easy for a U.S.-based manager to grow outside the U.S. It sounds like some of what you're trying to do is through partnerships. So, I guess, what I'm wondering is how long might it take for some of these partnerships to come together? And then what are some of the other potential challenges you might face trying to drive faster growth outside the U.S. and how do you plan to overcome those?

So on the February call, we told you that, that's our focus going forward to build our team outside the U.S. We have done that. The team is actively locking the door and meeting, I would say, many large institutions outside of the U.S. Some of those meetings already kind of going out for a few rounds already, and we think we probably would be able to reach some of those agreements that we can disclose within this year. But it's hard to put a time frame on it. All I would say is that for many institutions outside of the U.S., they are quite impressed by the fact that we have over 100 strategies within BrightSphere Group. And some of those strategies are kind of in the interest where they say they have the demand flow to talk about, for example, quant, when we talk about alternatives, when we talk about solutions. And just the story was not previously told to those institutions. So that's what I would say. Hopefully we will have some milestone within this year.

Okay. Very good. And then sort of another question on non-U. S. Do you guys think that Brexit is a material impediment to your global equity business? And obviously, asking that question because wondering if maybe we get a resolution to that, that could potentially be a catalyst for your flows.

We obviously, like other asset managers, we have been aware of this for a long time and have done a lot of contingency planning around Brexit, and the final shape will eventually depend on what really happens. But we have been prepared and have all the ducks in the row, if you will, for whatever outcome may come.

Well, Guang, I guess, what I'm asking is do you think it's had a negative impact on your flows?

No, I don't think Brexit itself has impacted us because in a way, it's more related - U.K. itself was never a big part of our business. And we were using U.K. as one of the bases for our Global Distribution sales force, which we have workaround for. So we don't see - we haven't seen any direct impact of Brexit on our sales efforts.

Your next question is from Kenneth Lee with RBC Capital Markets.

Just a follow-up on the prepared remarks. Wondering if you could just further flush out how you intend to meaningfully expand the alternatives exposure for the company over the next, call it, 1 to 2 years. It's sounding as if it's mainly through organic growth, seeding new products especially through Acadian, but wondering whether it could potentially be inorganic opportunity as well?

Both. We will continue to seed new products in alternative space, in the solution space for our current periods. But also we will be open to looking at the emerging managers where they have a good team, have a good track record, but they don't really have a scale and with our global reach and distribution and plus our safe capital, if we can help them to really grow, that would be something interesting to us as well.

Okay. Very helpful. And just 1 follow-up on the potential to expand your presence in Asia. What source of distribution channels are you looking to gain exposure there? I would presume it's probably likely the banks channel. And if so, what sorts of JV partner are you looking for right now? Would it be sort of like along the line of a major bank or another asset manager?

Yes. I would say bank would be very attractive for us or even their wealth management platform owned by one of those banks would be interesting. Insurance companies would be interesting as well. Pretty much anyone who have the distribution channel who can allocate meaningful amount of AUM to work with us, we would be interested.

Your next question is from Michael Cyprys with Morgan Stanley.

You mentioned solutions as one of the areas of growth that you see. Just curious if you could talk a little bit about the capabilities on the solutions front that you have today. How much in AUM? I think you mentioned it's part at Acadian. If you can also talk about how you envision evolving your approach to distribution with respect to solutions capabilities? What you need to do differently in the marketplace today to accelerate growth within solutions?

Thanks, Mike. We've always had strong investment capabilities on the solutions side, particularly at Acadian, for example, but also at our other Affiliates. But it was - on the distribution side, it wasn't an organized - as organized an effort as it could be. So, for example, the multi-asset class product, we have products that are customized for clients to be low vol. So these are products in general that are responding not to be beating a particular benchmark, but essentially to provide a particular exposure that a client is seeking, whether it's through combining different asset classes to provide yield with specific parameters. So we do have that at a number of our Affiliates and where we're look - and as we have spoken with clients around the globe and potential partners around the globe, there is strong appetite there. So it's one of those things where we have both sides and we just really need to work harder and have the right infrastructure to make the match, but we already have sizable presence.

Got it. Okay. And just maybe peeling the onion back a little bit more on the approach distribution. I think historically, a lot of distribution has been done out of - to the individual Affiliates with respect to institutional distribution. How do you see that sort of approach? You mentioned maybe doing things a little bit more, maybe more partner ask, I think, collaboratively maybe to put words in your mouth, if I may, I think you mentioned the word partner there. I guess, just how do you see that approach evolving? Would you see doing more out of the center? And how do you see shifting your approach of distribution at the firm?

Yes, I mean, as I touched on earlier that we do think that broadly speaking, there are - we do have some highly customized and specialized products selling, which do require specialized approaches. So we do have specialist sales force for our quantitative strategies and solutions strategies. We have specialist sales force obviously for alternative and same goes for our differentiated equities. But these specialists don't necessarily have the expertise or focus to - for the kinds of the general relationship management with a particular client on a broader basis. Similarly, potential partnerships beyond just products. So those are the types of things that we will focus at the center to have partnerships and joint ventures and other forms of cooperation with clients that go beyond 1 product. To maintain the relationships with - broad relationships with the clients at the right levels. So that we - as we have products that are in demand and as we develop more products, the doors are open and those clients to be receptive, as opposed to a mandate-driven one-off sale at a time.

And if I may, just one quick cleanup question on investment performance. I saw your footnote at the 1-year percent beating the benchmark on Slide 6, 27% on a revenue-weighted basis. Do you have what that is on an equal-weighted basis and asset-weighted basis in terms of investment performance on the 1-year bench?

Yes, I don't have it handy right now, but we'll get that number to you. But yes, the 1-year number because it's directionally probably similar because on the 1 year as we mentioned, that the growth strategy obviously did well in this quarter with a quick market recovery compared to value and the benchmarks were broad rather than value specific. Similarly for a low volatility strategy, even though clients want longer-term performance on low volatility as opposed to every quarter because the volatility is the main objective there, the benchmarks were broad. So clients would expect that and we expected that, that in this kind of a quarter with a quick market recovery, those would be the performances of the strategy.

Your next question is from Michael Carrier with Bank of America Merrill Lynch.

Given the focus on the international and the institutional distribution, is any color on the institutional pipeline or RFP activity, just any progress being made thus far?

Yes, certainly we are - there is good pipeline that we have in our strategies, particularly the new products that have - as I mentioned that have matured and have performance track records that are longer. So we're seeing a good pipeline there that I mentioned, many of them on the solutions side, some of them the emerging market and global strategies. And we're starting to see some RFP activity for large cap value too. So that could be a sign, but overall, it's a very healthy pipeline.

This concludes our question-and-answer session. I'd like to turn the conference back over to Guang Yang.

Okay. Thank you all. Let me just say this. The BrightSphere is, we will be very focused on continuing to create value for our shareholders and we're super excited about our growth prospect. Thank you for joining us today.