Brian Casey
Analyst · Gabelli. Your line is now open
Thanks, Sylvia, and good afternoon. And thanks to all of you for taking time to listen to our third quarter earnings call. The third quarter was volatility and challenging for all asset managers with indiscriminate selling across all market segments. As we sit here today with markets at much higher levels it appears that the sell-off was part of a normal correction and so far has merely represented a good buying opportunity. Before we discussed performance and distribution trends across our business, I'm pleased to announce the dividend increase of 14%. Our dividend now stands at an annual rate of $2.28, representing a dividend yield of 4% at yesterday's closing price. Our balance sheet remained solid with over $80 million in cash and liquid investments, and no debt. Consistent with our stated goal 13 years ago of becoming a superior dividend grower, we have raised our dividend every year since we have been public. In fact, nearly 50% of the total return in Westwood has come from dividends. Our compound annual growth rate of our quarterly dividend since inception has been nearly 29% and we’ve paid out over $127 million to shareholders as a public company. Turning now to our investment teams, I will start with the Dallas-based U.S. value team. As I discussed in my opening remarks, the third quarter was a challenging period for investors and asset managers like, both U.S. and international equity markets posted their worst quarterly performance since the third quarter of 2011, with the S&P 500 Index declining nearly 7%. Most of the weakness came in August, as an unexpected devaluation in China's currency and concerns over global growth continued or contributed to the sell-off and risk assets and a sharp spike in market volatility. Commodities remained under pressure as crude oil prices declined over 25% in the quarter, pressuring energy and energy-related assets such as MLPs, with the Alerian MLP Index falling more than 23%, the worst quarterly performance in the history of the index which dates back to 1996. Relative returns for the quarter were mix with our Large, Small and AllCap Value strategies performing ahead or in line with the benchmark. On a year-to-date basis, our U.S. value equity strategies continued to perform well on a relative basis with each strategy ahead of its respective benchmark and all ranking in the top half of their peer group. Importantly, our value equity strategies have demonstrated stock-picking skill by protecting the downside in an environment where our customers really need this. Westwood’s multi-asset strategies including income opportunity saw declines for the quarter but continued to exhibit lower volatility profiles. Westwood’s more than decade-long history, the income opportunity strategy has proven the ability to deliver an attractive longer term risk reward profile in an area of continued high demand from investors. As noted earlier, MLPs were by far the most challenged U.S. asset class in the third quarter and our strategy was no exception, posting a decline of 26% for the period. We felt at the time that the correction was far too severe and we took advantage of the opportunity to buy high-quality names at very attractive prices. So far that’s proven to be a winning strategy as we have seen a nice rebound in October. Turning now to our Toronto-based global and emerging markets equity team, their perspective on the quarter was better with the combination of already nervous market participants who were further spooked by the relative small devaluation of the Chinese currency and disappointing trade and economic data from China. While the quarter was going well up to this point, the Fed’s decision not to increase interest rates led to further selling and REM product ended the quarter slightly behind our benchmark. As with our MLP team, the emerging market team is focused on the long-term fundamentals of companies and as such took advantage of the volatility by adding to existing holdings as well as adding some new names to the portfolios that reach compelling bio levels. Overtime as we all know, emerging markets have endured balance of large underperformance relative to the developed markets. These periods have historically provided attractive entry points for our investors. The U.S. dollar has strengthened considerably in recent years and that’s provided a strong headwind to U.S. investors in emerging markets, which we do not expect to be a significant tractor in the years ahead. It’s been four years since we hired our Boston base Global Convertible Securities team and sharp contrast to the FX endured by our equity strategies. The strategies managed by our Global Convertible Securities team held up extremely well over the quarter. The absolute return focused market neutral income strategy posted a positive absolute return. And the strategic global convertible strategy was down less than 4%, just an approximate 40% participation rate with the MSCI world equity index. After the end of the third quarter, our advisory mandate for the European-based Aviva Global Convertibles Absolute Return Fund moved to delegated status. While there is no change to our revenue realization from this account, this will result in approximately $330 million of assets which were classified as assets under advisement as of September 30th, moving now to assets under management in the fourth quarter. Turning now to distribution. I’ll start with comments on the institutional business which is our largest channel segment. In line with the broader industry, we've suffered the headwind of a continued rebalancing away from U.S. equity. This has been driven not only by investors looking to invest in another asset classes but also by the outperformance of U.S. equities. It’s typically institutional investors will rebalance their asset allocation back to target ratings. However, it's important that I emphasize that the outflows we have seen have generally been partial redemptions and not a loss of client relationships. In fact, our institutional business client retention rate has exceeded 95% on a year-to-date basis. From a new business perspective, we believe the recent market volatility has resulted in a delay in decision-making for many investors. We noticed this in particular in relation to two final presentations we made for $100 to $150 million emerging markets mandates during the quarter where the decision to invest was deferred by the institution. We expect these delays to be temporary and we hope to see decision by these institutions in the fourth quarter or early next year. As we look forward, we believe that the continued strong performance over both short-term and long-term periods of our established small cap value, all-cap value and income opportunity strategies as well as the strong initial performance of our new strategies has put us in a strong competitive position. Of the newer strategies, our concentrated large cap value strategy is the best performing large-cap value strategy in the investment database, the most widely used screening database for institutional investors since the strategies inception nearly two years ago. As we look to the end of the year, we expect to see the funding of new mandates on our small-cap value, strategic global convertible and emerging market strategies during the fourth quarter. In addition, the pipeline remains quite strong and we continue to accurately represent our broad capabilities to investors around the world. Turning next to private wealth, new business development efforts across Dallas, Omaha and Houston and prospecting activity levels remain high despite the typical seasonal slowdown associated with the summer months. As we look forward to the fall, our support of local non-profit organizations and the opportunity to get in front of many prospective clients insured event sponsored by Westwood Trust picks up significantly. We also have speakers and events scheduled for all three offices for existing clients and prospects over the next few weeks in Dallas, Omaha and Houston, which has historically been a great avenue to build sales momentum into the New Year. As we continue to look to improve the client experience, the Dallas and Omaha offices will be converting to the FIS trust accounting platform at the end of this year. Clients will benefit from a vastly improved online experience as well as enhance statements and reporting. Since closing the Woodway Financial Advisors acquisition on April 1, we worked diligently to integrate them into Westwood. We are proud to have Woodway as the Houston office of Westwood Trust which is now known as Woodway Financial Advisors, a Westwood Trust Company. Houston is a strong and growing private wealth market. And Woodway is well positioned as the premier private wealth firm in Houston. We continue to actively evaluate opportunities to expand our company through the acquisition of private wealth companies in strong geographic markets. We feel that our private wealth business is a strong diversifier of our overall company as our superior client service efforts have led to long-term customers and relationships with exceptionally high client retention rates. As we discussed on our last earnings call, our mutual fund complex has grown to 15 funds. We’ve seen the Morningstar ratings of some of our funds increased during the year with the small cap value fund now at five stars. In addition, we now have funds in non-equity Morningstar categories, including world allocation and market neutral. In fact, the market neutral income fund which we launched on May 1st has started with very encouraging performance, including positive returns in August during the height of the market volatility. This has copy attention of some inventors and even resulted in a West Coast-based RIA investing in the fund during the first week of October. We believe this fund is an attractive offering as a sleeve or discretion model looking to construct an overall portfolio that includes low volatility for liquid alternative funds. We will continue to work hard to find new investors and remain positive in our efforts to position this fund as a truly differentiated strategy in the marketplace. From a business development perspective we hired Jonathan Dale as our first National Accounts Director to engage in an increased marketing effort of our mutual funds and separately manage accounts to financial institutions such as national broker/dealers, mutual fund platforms, defined contribution platforms and trust companies. The intent is that since the number of our mutual funds are new and have short mutual fund track records but have longer tenured institutional track records, we are seeking to market these funds to those investors that control discretionary model. Discretionary model investors perform their due diligence on Westwood as an asset manager and are not tied to solely analyzing the record of the mutual fund itself. From a sub-advisory perspective our existing partnerships remain strong and we continue to seek opportunities to establish new partnership with firms across a number of our strategies. Before we wrap up, I would like to revisit the future growth potential of our company from a broader perspective. We believe that our primary mission is to deliver superior investment performance and an exceptional client service experience that exceeds our client's expectations. We will continue this focus and as always do it within a framework of how we think about asset allocation trends in the marketplace and the types of strategies we want to offer investors. Many of you will remember that Westwood started as a single investment team with the single strategy and today we have 10 strategies each with over $300 million in assets under management. We offer close to 20 institutional strategies and 15 mutual funds. We started the UCITS fund less than two years ago and we have three UCITS funds now that allow us to expand accessibility to Westwood for non-US investors. Over the past two years, we've started seven new strategies in areas that we believe are relevant to investors. These include high conviction or concentrated equity strategies, low volatility strategies, global multi-asset strategies and liquid alternative strategies. We believe that all of these strategies will provide us with additional growth engines as we move forward. Furthermore we will continue to look at ways to build these strategies that benefit from the core competencies of our existing teams and also look at inorganic opportunities to add new investment talent to our company. We believe the strength of our investment capabilities allied to our strong client retention rates and the increased breadth of our distribution positions us well for the future. We’ve seen a nice recovery since the end of the third quarter and with the Aviva transfer and some new accounts, we estimate assets under management to be just shy of $22 billion as of last Friday. With that, I’d like to thank you for your continued interest in Westwood and turn the call over to Tiffany Kice, our CFO.
