Brian Casey
Analyst · Gabelli. Your line is now open
Good afternoon, and thanks for taking time to listen to our fourth quarter earnings call. I’ll start with some comments on the investment environment and then dive deeper into our investment performance and business. In the U.S., fears that had been present all year, including the risk of a fed policy mistake, an expectation for moderating economic data due to continued trade tensions with China, finally tipped the markets into a steep decline. Equities moved sharply lower as the S&P 500 posted one of the worst quarters in the last 50 years. Nearly every asset class posted a loss, and we saw the worst performance across asset classes in more than 100 years. Risk assets, like equities, remain susceptible to bouts of volatility as late-cycle fears linger, and upcoming events, such as a conclusion to the Mueller investigation, the March 01, trade deadline with China, Congress mulling ratifying the new USMCA report, Brexit and other events will inevitably be a distraction and potentially disruptive to the markets. Ultimately, we believe the net impact of these actions will continue to shift the investing landscape towards a more bifurcated market where losers are identified and punished and winners prevail. This landscape benefits active managers, as does higher volatility, which provides more mispriced securities and asymmetric reward/risk outcomes to invest in and lines up well with the way we’ve managed money for 35 years. Our U.S. Value products were not immune to the market pressures with our larger market cap strategies doing better than our smaller-cap strategies. Our LargeCap Value product outperformed against its primary benchmark, the Russell 1000 Value, for the eighth straight quarter. It finished the year 300 basis points ahead of the benchmark with strong top-quartile peer rankings for the year as well as over the last three year and five year time periods. The strategy is in the top decile of peers since inception after completing another strong year. Concentrated LargeCap, which we recently renamed LargeCap Select, completed its fifth year with 400 basis points of outperformance in 2018 relative to the Russell 1000 Value benchmark. LargeCap Select’s peer rankings are very strong with a top-quartile result for the year and first percentile since inception among its LargeCap peers. As mentioned last quarter, we’re excited about the prospects for new business growth, and our marketing and product development team is developing new presentation materials for a big push in 2019. Our SMidCap strategy was slightly better than its Russell 2500 Value benchmark for the quarter but nicely ahead for the year. We believe the SMid asset class continues to be underowned globally. Our long-term rankings since inception are very strong at the top 1% of peers, and we recognize the midterm rankings need improvement. But we believe we have the opportunity to grow this strategy again in the years ahead as relative performance improves. Our SmallCap strategy, which has produced strong returns for several years, was behind for the quarter and for the year against the Russell 2000 Value Index. It ranked in the top half for 2018 and top quartile over the trailing three and five years and in the top decile over the seven-year and since-inception time periods. SmallCap’s long-term record was validated earlier in the year as MorningStar selected Westwood to subadvise the SmallCap sleeve for their newly launched MorningStar U.S. Equity Fund. The lower volatility program profiles of our income-oriented products had a positive impact on their performance in the fourth quarter. Income opportunity captured only 40% of the market’s downdraft this past quarter and our mutual fund, WHGIX, rating was recently increased to four stars. We continue to invest in our Multi-Asset platform to fill out our product line up and recently launched our newest Multi-Asset strategy, Flexible Income. Flexible Income targets a 6% to 7% current income with a stable asset value, and a mutual fund was launched in December. Our Flexible Income strategy finished the year in the fourth percentile among its peers and has a strong three year track record in the second percentile. Over the years, we have built a series of products across the risk and return spectrum and now have an array of products tailored to a client’s specific risk profile. Multi-Asset is an area were clients value professional skill and judgment. More importantly, it is a difficult area to index and provides a moat against the competitive pressures all active managers face from index funds. Multi-Asset is an important area of growth for us, and we’re pleased to announce the addition of Adrian Helfert, who joined us last week from Amundi, to lead our Multi-Asset group. Adrian comes to Westwood with an impressive track record, having built and worked on collaborative global teams and has vast experience defining strategic investment direction, developing, launching and pitching new products, all while building a great reputation in the industry among clients and consultants. He will lead our Multi-Asset strategies group, which includes Income Opportunity and Flexible Income as well as our Global Convertibles and fixed income strategies. We are building on our history as a pioneer in the Multi-Asset space, having started balance portfolios in the 80s; Enhanced Balanced at Westwood Trust in the 90s; launched and built a successful Income Opportunity franchise, now a mature flag ship product for Westwood; and finally, launching Flexible Income to provide clients with diversified income. I believe taking Multi-Asset to the next level will help us deliver desired outcomes and display both skill and judgment that clients will value. Emerging Markets continued to present a challenging environment for investors for both the quarter and the year. Our high-quality bias helped us to lose less than the Emerging Market benchmarks and to perform well against our peers. We are working hard to put together another good year and improve our longer-term rankings. The Emerging Markets team is focused on identifying high-quality companies and thoughtfully constructing portfolios that adhere to our disciplined process. Our avoidance of heavily crowded trades, such as the benchmark-heavy Chinese technology companies, was an important source of alpha in 2018 when these markets were declining. We expect that markets will remain on edge until concerns surrounding trade tariffs and China’s growth prospect cease. The last few years have been rough on Emerging Markets but the market volatility has unearthed some attractive opportunities, and we believe valuations are compelling, given their superior growth potential. In Global Convertibles, the environment of slowing growth and increased equity volatility focused attention on some of the primary attributes of our convertible strategies. That is, they performed extremely well compared to equities by capturing only a portion of the domestic and global equity declines and outperformed an array of credit indices. Our global long-only convertible bond strategy enjoyed a solid year relative to its benchmark overall, with peer rankings in the top half of its universe. The fourth quarter was somewhat behind the benchmark, but its peer rankings during the period remained in the top half. Our U.S. long-only convertible bond strategy strongly outperformed its benchmark for the quarter and year and finished the year with a peer ranking in the top-decile ranking. Market Neutral Income was a standout performer amongst all asset classes as it was down only 52 basis points last year. This relatively flat performance was exceptional, given the worst year for asset class performance in over a century. As we look ahead, the fund is positioned with arbitrage positions that should benefit from persistent, high-equity volatility and yield-orient securities which will benefit from widening credit spreads. It is times like today when the strategy demonstrates its highest value as a low-correlation, diversifying investment and a welcome addition to a risk-averse Multi-Asset portfolio. Shifting now to sales. We have continued to recognize an add to our sales, service and infrastructure support teams. We recently hired a new Head of Intermediary Sales, Harvey Steele, who joins Westwood with a successful history of building intermediary distribution at several firms. Under our new structure, we are investing in retail and institutional distribution and shifting our sales focus to utilize data and analytics to make our sales process more efficient and proactive. The team has also begun to roll out a new sales campaign and an innovative pricing structure for LargeCap Select. LargeCap Select and SmallCap strategies will be key areas of sales focus in 2019. We’re excited to see the impact of our sales teams in the latter part of the year. Our SmallCap strategy recently won a new mandate with a large state pension fund worth approximately $125 million, which has not yet funded. And as previously mentioned, we were pleased to have been selected to subadvise the SmallCap sleeve for the newly launched MorningStar U.S. Equity Fund. This fund is a multi-strategy, multi-managed fund and available to clients of MorningStar Investment Services. The account funded in fourth quarter, and we have some additional flows already this year. We cannot yet gauge the near-term flows for this new fund, but we’re optimistic that our portion of the fund could reach $200 million in the next few years. Net outflows for the fourth quarter were $2.3 billion and primarily institutional. We anticipated losing a couple of large institutional accounts as mentioned in last quarter’s call due to the sale of the fund complex we were sub-advising and to a new consultant reallocation to passive investment strategies, but we were further disappointed to see terminations in our SMidCap and EM strategies. Near-term performance has improved in both of these strategies and we feel well positioned for a volatile equity environment this year. We have added a new, strong professional to our institutional sales team, Peter McCarthy, who started late last year, and we’re looking forward to the contribution to our institutional sales effort. The balance of the outflows was in our mutual fund business and mainly in our Income Opportunity strategy. We are hopeful that the recent increased to four stars will result in stabilization of flows this year. On the Private Wealth front, our Houston team had the best year for new business in over a decade. They also did a great job of client service by increasing the client retention rate to 96%. Our Select Equity strategy managed out of the Houston office performed well and posted a respectable down capture ratio of just 80% during the sell-off of the fourth quarter. Assets in the strategy now have reached nearly $600 million and we are finding it to be a popular strategy across our taxable account base. We have several events planned in Houston this year and have secured exclusive naming rights to the Society of Performing Arts talk series, which will be called the Westwood Talk Art series. We continue to hire opportunistically to build our Houston office and feel like we have good momentum into the new year with several new relationships started in January. The pipeline is strong and increasing in both volume and potential relationship size. Most of the new business is coming at the expense of big banks, and we are optimistic that our high-touch service model will exceed their expectations. In the Dallas Private Wealth business, we have expanded our array of services, and our pipeline of prospective high-end customers is higher than it has ever been. We continue to focus on personalizing the Westwood experience, and we posted a variety of new events that align with our clients’ interest. A primary area of focus is to attract a younger client base, and to do that, we must be viewed as an indispensable, holistic and trusted financial advisor across all aspects of their life. We are building a digital platform to provide friction-free and easy-to-use applications. Clients can use all or a portion of our services, which will include asset management, banking services through a partner bank, simple or complex financial planning, estate planning and private equity wrapped in a state-of-the-art digital platform, using technology from our partner, InvestCloud. We believe that adding these capabilities and focusing on solutions that truly create a unique experience will help us reach our ultimate goal, a Westwood client for life. While we’ve been disappointed with our outflows last year, we are not standing still and we feel good about where we are going. We are meeting the challenges head-on as our investment teams are working diligently to ensure they hold their best ideas and maintain and improve performance across our actively managed strategies. We are thoughtfully building out our distribution teams with new hires in both institutional and intermediary sales. We’re using data and analytics to help us be more efficient with our prospecting, and we’re introducing innovative pricing to roll out our top-performing LargeCap Select product. It is likely to become more and more difficult for smaller firms to make the investments in technology, compliance, human capital and infrastructure to compete in the disrupted world of asset management. We can be a helpful partner, and we believe we will have many opportunities to meet high-quality firms in the years ahead. I will now turn the call over to Terry Forbes, our CFO.
