Westwood Holdings Group, Inc. (WHG) Q4 2012 Earnings Report, Transcript and Summary

Thank you all for holding and welcome to the Westwood Holding Group Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host for today’s conference, Sylvia Fry, Vice President and Chief Compliance Officer. Ms. Fry, your line is now open.

Thank you. Good afternoon and welcome to our fourth quarter earnings conference call. I’d like to start off the call by reading our forward-looking statements disclaimer. The following discussion will include forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today, as well as in our Annual Report on Form 10-K for the year ended December 31, 2011, 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, economic earnings per share and economic expenses to the most comparable GAAP measures is included at the end of our press release issued earlier today. On the call, we will have Brian Casey, our President and Chief Executive Officer; and Mark Wallace, our Chief Financial Officer. I will now turn the call over to Brian Casey, our CEO.

Thanks, Sylvia, and thanks for joining our call today. We appreciate you being here. We’re pleased with our fourth quarter and our full-year results for 2012. We closed the year with record assets under management of $14.2 billion and the strongest balance sheet we’ve ever had, with over $63 million in cash and investments with no debt. It’s funny when I read that. It’s hard to believe that we have more cash and investments today than the value of our whole company was 10 years or 12 years ago and it really gets me excited to think about where we might be 10 years from now. I’ll turn it over to performance and make a few comments. Our Income, SmallCap and MLP products performed exceptionally well in 2012. Our MLP product beat its benchmark by over 7%, SmallCap completed a third consecutive year of outperformance and Income opportunity had a nice total return while also providing a generous yield. Our LargeCap, MidCap and AllCap funds showed improvement in the fourth quarter but fell short of their benchmarks for the calendar year. While all our products are designed to produce alpha, the investing environment for MidCap and LargeCap active managers has been specially challenging for the past few years. Our active share is high across all our products and our teams are very focused on building on the improvement shown in the fourth quarter in order to deliver exceptional performance for our clients this year. In addition to celebrating our 10-year anniversary as a public company last summer, we just celebrated a 10-year anniversary of our Income Opportunity fund. And as you may recall, this fund is designed to produce income and modest capital appreciation with low volatility. And if you take a minute and go to our website, under the Investor Relations section you can find a chart that I’m going to reference here in a second. This is a chart of 10-year results on a scatter plot compared to a number of different asset classes. And the first thing you’ll notice is that the fund earned 9.7% per year over the last 10 years, beating the S&P 500 return of 7.1% by over 2.5%. And they did it with only half the volatility of the broad market. Perhaps an even more impressive statistic is that the fund was less volatile than the HFRI Equity Hedge Fund Index and was also well ahead in performance. In fact some observers have even characterized Income Opportunity as a poor man's hedge fund, only with better results. And we really don't care what they call it, we're just pleased to see that the assets and the strategy have nearly doubled over the last year and we hope the momentum continues. The investment landscape over the past decade has been erratic to say the least and I applaud the efforts of Mark Freeman, Todd Williams and our research department for delivering such high quality results in what has been a really tumultuous period. In a fund like this it’s not one good decision but rather a series of good decisions that produce this type of record. So great job, everyone. In addition to high interest levels for our Income Opportunity strategy, our pipeline for new opportunities has never been stronger. We’re seeing search [indiscernible] activity in MLP, SmallCap, global and emerging markets. We’re talking to potential customers all over the globe and we've hosted numerous on-site due diligence meetings over the past several months. Historically our success rate is best when a potential customer visits our home office, where they can see our culture first-hand and we can efficiently showcase our talented professionals. Westwood International Advisors has hosted several on-site visits in Toronto and we’re working on converting a number of these high potential prospects into new institutional customers. And as I mentioned on last quarter’s call, we initiated a Canadian Mutual Fund partnership with the National Bank of Canada. Westwood International Advisors is sub-advising the Westwood Emerging Markets, the Westwood Global Dividend, and Westwood Global Equity Fund that NB Securities large wholesaling team is marketing to their network and advisors throughout Canada. The Westwood Emerging Markets Fund has been placed on several securities dealers' recommended list and we’re seeing positive inflows on a daily basis. We’re also working on the creation of several pooled vehicles, including a use it [indiscernible] fund that will be available to our European institutional investors. Our US mutual fund business continues to grow with Income Opportunity leading the way. As of yesterday, the Income Opportunity fund was over $950 million in size and on track to be our first $1 billion fund. The fund is rated 5 stars Morningstar and we see interest from financial advisors growing as well as direct investments from foundations and family offices. Advisors are particularly concerned about the prospect of rising interest rates and they’re moving money out of traditional bond funds into areas where they can enjoy meaningful yield and low volatility. This environment also bodes well for our short-duration, high-yield fund, which offers a yield in excess of 5% with lower volatility than a traditional high-yield fund. We’ve seen advisors using this fund as an alternative to bond fund and we’ve seen corporations using the fund as a vehicle for corporate cash. The fund is only a year old but we expect it to become more popular as we ramp up marketing. In an effort to increase sales, we’ve hired our first dedicated sales professional to sell directly to RIAs and regional broker dealers. We welcome Jeff Gubala, who joins us from Columbia Funds (sic) [Columbia Management]. Jeff is an industry veteran who's successfully raised assets for over 20 years and we’re very pleased to have him on board. We started our mutual fund business in 2005 and we've continued to invest in the future by adding at least 1 fund every year. Late last year we added 3 new funds: Westwood Emerging Markets, Westwood Global Equity and Westwood Global Dividend. We’ve had nice flows already, with the new Emerging Markets fund already reaching breakeven due to a large institutional fund placing money last week. Our belief in the success of the fund business is predicated on the fact that the public is under-served for retirement and under-invested in equity. Just in the past 4 years, over $1.1 trillion has been redeemed from active domestic equity managers. And we’ve been saying for some time that we do not expect that trend to continue indefinitely and in fact we’ve seen a reversal of industry outflows over the past few months, whether it is the independent RIA channel or the ever-changing 401(k) markets, we’re building an attractive platform with attractive funds and competitive expense ratios. And as industry funds -- flows turn positive we anticipate that the Westwood Fund will become an increasingly critical part of our overall business. Westwood Trust continued to grow and the complexities of estate planning and family wealth transfer intensifies, we felt it was critical to add an estate-planning professional to the team. Kelly Myers [ph] is a board-certified estate-planning and probate law attorney with whom we’ve worked for many years. We’re really pleased to have her on board and our clients will be even more excited. Recent client meetings to review last year have all been positive and I would say that most clients are surprised how well their enhanced balance portfolios performed. Whereas conversations in the fall were more about the election and the fiscal cliff, they’ve shifted more towards a renewed interest in the outlook for their portfolios. To capitalize on this renewed level, Westwood Trust Omaha has hired a VP of Marketing and Client Development who will start next month. The Omaha economy remains one of the strongest in the nation and we intend to build our customer base in the years ahead. In the corporate development area we remain interested in acquiring another private wealth business, in an attractive market that will add customers to our already strong and stable trust business. Over the last few months, we've begun identifying prospective acquisitions that have a strong culture, a scalable amount of assets under management, strong reputation and solid growth prospects. Identifying them is not a problem but, unfortunately, the entirely desirable profile of a company is usually not for sale. So the lead time is considerable. And while we do not expect anything to develop in the near term, we’re actively having discussions to explore potential partners. We've begun our second decade as a public company with a great deal of optimism and enthusiasm. I want to thank our clients for entrusting us with their money. We thank our stockholders for their continued confidence in Westwood. And we thank our employees for their hard work and commitment. We believe that the investments we’ve made in our strategies, infrastructure and our people over the past 10 years sets us up well for growth over the next 10 years. I’d like to welcome Mark Wallace, our new CFO, to our call but, before I turn it over to him, I want to publicly thank Bill Hardcastle, who has served as an exceptional CFO for over 10 years. Bill is here in the room today and he's excited to begin working on our global expansion and the creation of new fund vehicles for our prospective clients. So thanks, Bill, for doing a fantastic job over the past decade. I’ll now introduce Mark Wallace, our new CFO.

Thanks, Brian. Good afternoon, everyone. It’s good to be on my first earnings call since joining Westwood late last year. As normal, we have slides posted to our Investor Relations section on our website that should be helpful to put our 2012 performance in context with longer-term trends. As Brian mentioned, Westwood finished a successful year in 2012 with solid fourth quarter performance, record assets under management, strong balance sheet and excellent progress by our Westwood International team. Revenues increased 21% and $20.6 million compared to $17 million in the second quarter of the prior year. Advisory fees were up 15% as average assets under management increased due to market depreciation [indiscernible] and asset inflows from new and existing clients, partially offset by withdrawal requests from clients. Trustees increased 27% as trust assets under management were also up 27% due to market appreciation, vibration of assets from legacy Omaha products and Westwood Trust and net inflows from clients. During the fourth quarter, we also recognized a pre-tax gain of just under $1 million related to the sale of 100,000 shares of Teton Advisors. Economic earnings for the fourth quarter 2012 were $6.6 million and comparable to the fourth quarter of the prior year. Economic EPS, at $0.89, was slightly below the $0.92 we reported for the second quarter of 2011. Westwood International had assets under management at year end of $888 million. Our results reflect the significant investment we are making in the start up of Westwood International, including $3 million of costs in the fourth quarter. While our Canadian operations contributed less than $2 million of revenue in 2012, Westwood International is off to a great start, with strong momentum, a robust pipeline of prospective customers as well as consistent inflows to the Emerging Markets Fund that we sub-advise with National Bank of Canada. Total expenses for the quarter were $14.8 million compared to $10.7 million for the year-ago period. Economic expenses were $11.8 million compared to $8.2 million for the fourth quarter of 2011. Primary drivers of the increase in total GAAP expenses in the fourth quarter of this year were: amortization of $1.6 million related to multi-year bonus agreements; two, salary expense increased by approximately $720,000, primarily due to the addition of Westwood International employees as well as other new hires; and three, non-cash restricted stock expense of about $500,000. Assets under management increased 8% to a record $14.2 billion during 2012, reflecting market appreciation, asset inflows from new and existing clients, partially offset by withdrawals. Mutual fund assets of $1.6 billion at year end and now include 10 Westwood funds, a 24% increase for year-end 2011 due to market appreciation and net inflows into the funds. We finished the year with $64 million of cash and cash equivalents in investments, $76 million of stockholder's equity and no debt. Today our Board of Directors approved a quarterly dividend of $0.40 per share payable on April 1, stockholders of record on March 15. The annual rate of $1.66 per share represents dividend yield of 3.8% at yesterday’s closing price. The slides in our website reflect 5-year trends -- trend information. A few things I'd like to highlight on those slides include the following. Those slides reflect the achievement over 5 years of the [indiscernible] growth rate, assets under management of 12.5% while the S&P declined at 3%. $2.7 billion of net inflows during that period, a 16% compounded growth rate in assets-based fee revenue and, last, a very positive trend in our weighted average fee realization. That concludes my formal remarks on the financial results. I would like to take this opportunity to say that I’m very excited to have joined the Westwood team. I look forward to meeting everyone on the call today. I've worked closely with Bill Hardcastle over the last few months and I want to thank him very much for making my transition into Westwood as easy as possible. And now, I’ll turn the call back over to Brian.

Thanks, Mark, great job. If you have a question, please press one on your phone, I'll be happy to answer it.

First question by Mac Sykes.

I have 2 questions. As we look forward in 2013, could you rank what you see as the most promising growth prospects among your products? And then secondly, what is on your wish list in terms of adding additional investment strategies?

Max, we’re excited about a lot of products. The -- starting here in Dallas, with the MLP product, it has been one that we’ve worked at for a long time. And part of our mission with MLP has been to educate the investing public on the merits of MLPs. So there’s been a lot of time invested in having meetings to help people understand what an MLP is, what are the tax ramifications of owning MLPs and what are some of the benefits. And that’s starting to pay off; it's not happening as fast as we’d like for it to, but we are in some searches and we do expect to fund some new accounts here in the first quarter. Our SmallCap portfolio has had 3 years of consecutive out performance and we’re in a number of search opportunities that we hope to capitalize on those. Income has been really unbelievable. The mutual fund, especially, is taking in flows on a daily basis. And we’ve really started to see more opportunities from separate accounts. I think about a year ago, we had almost nothing in separate accounts for our Income Opportunity fund and we’ve got probably 12 or so now and we’ve got a couple of finals that I know of in the next couple of weeks coming up. And interest continues to grow. As interest rates are at historic lows, when we can show the chart that you find on the website to a prospective customer, that looks pretty appealing in today’s environment. In terms of Westwood International Advisors, the interest level is very high. The Emerging Market product is in great demand. We’re off to a terrific start. The Global and Global Dividend funds had exceptional performance during the third and fourth quarter, in the top quartile of their peer groups. So while those who don’t have as long a record or are as well known as the Emerging Market, there is levels of interest there, as well. So we’re really excited. As I mentioned in my prepared remarks, the pipeline for new business has never been as good as it is today. And then secondly, what’s on our wish list for new products? I would say for right now we have just about all that we can handle. And we’re not looking at developing or starting anything else. What we’re really focused on is looking at acquisition opportunities in the private wealth area and we’ve started to gear up conversations with potential partners in the private wealth space.

[Operator Instructions] At this time, there are no more questions in queue.

Very good. Well, we appreciate your time today and if you have any further questions, please go to our website at westwoodgroup.com, or give myself or Mark Wallace a call, we’d be -- look forward to talking to you. Thanks again.

That concludes today’s conference. Thank you for your participation. You may now disconnect.