Westwood Holdings Group, Inc. (WHG) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Westwood Holdings Fourth Quarter 2020 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 session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Julie Gerron, General Counsel and Compliance Officer. Please go ahead.

Thank you, and welcome to our fourth quarter 2020 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-K for the year ended December 31, 2020, that is 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 the 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 President and Chief Executive Officer; and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey.

Good afternoon. Thank you for taking the time to listen to our quarterly earnings call. I've spoken in previous calls about the ongoing disruption in the asset management industry and the need for asset management firms to evolve to meet the challenges head on. We feel like we've made significant progress in the evolution of Westwood, by taking steps that will allow us to thrive and grow in the years ahead. Some of the highlights from the fourth quarter include the expansion of our dedicated multi-asset investment team with the addition of Scott Barnard to the Income Opportunity Fund and Seth Gould to the Alternative Income Fund, the transition of our Global Convertible investment team to Aviva Investors resulting in cost savings of personnel and the elimination of the lease and overhead expense of our Boston office. Received the Best Places to Work award for the seventh year in a row, raised the overall star rating in Morningstar for the WHG Funds family and experienced significant gains with our investment in InvestCloud. These accomplishments come on top of several actions taken in 2020 to reduce costs and increase competitiveness, namely the outsourcing of our institutional trading desk to Northern Trust, which saves us over $1 million per year. The closing of Westwood International Advisers in Toronto; a repositioning across our multi-asset lineup to broaden appeal and increase attractiveness; a repricing of our entire book to become more price competitive and attractive in new product streams; the introduction of several new strategies, including high alpha, credit opportunities, systematic large-cap growth and systematic small-cap growth that we initially launched for our Wealth clients and plan to launch in intermediary and retail channels, as they build longer performance records. Turning now to performance. I'll start with our U.S. value strategies. The year 2020 ended the longest bull market in history. Even with its correction in March, we still ended the year with a strong absolute return. There were three distinct parts of the year: downturn, recovery and a vaccine-induced rally, which started in November, each of which brought different challenges along with extreme rotations and style. In fact, according to Bank of America Merrill Lynch, there were 25 outsized style rotations of greater than four standard deviations in 2020, which is more than twice any other year in their database. The volatility resulted in mixed performances from our various strategies. Our AllCap strategy kept pace, while our large, SMid and small strategies were more challenged. LargeCap value lagged in the fourth quarter, but beat its benchmark Russell 1000 Value Index for the year 2020 and provided solid absolute returns for our investors. Flows out of the LargeCap strategy were amongst the largest contributors to firm outflows in the quarter, including some large client rebalances. However, we are encouraged as one large long-term client elected to add to their account in the fourth quarter and a second did the same in early 2021. We continue to see the potential for SMA wins and our mutual fund, WHGLX, is now a four-star rated fund. SMidCap Value underperformed in the quarter, but with its downside outperformance earlier in the year, it was able to finish the year ahead of the benchmark Russell 2500 Value Index. SMid continues to be one of the best-performing U.S. value strategies this year, finishing over 200 basis points ahead. Interest remains high for this strategy institutionally, as it's peer ranking in the eVestment databases in the top quartile over the last three years, and we are excited about its prospects going forward, especially with the introduction of our Ultra Share Class late last year. However, despite improved performance and portfolio manager stability, SMid locked a large subadvisory mandate this quarter. On the positive side, SMid had other clients contribute assets and a new institutional client began funding a defined contribution mandate in our new Ultra Share Class last quarter. Our SmallCap strategy was behind the Russell SmallCap Value index during the fourth quarter and for the year. The dispersion between high and low-quality stocks widened further and our style was out of favor. We saw improved results in December, and we're optimistic to see a reversion of this trend in favor of the quality value style that has served our clients well for 17 years. Overall in 2020, SmallCap was a popular strategy for us, and it saw net positive flows for the quarter and year. SmallCap won several new institutional mandates in the fourth quarter that funded approximately $45 million in new assets, and we have additional wins of another $190 million that will fund in 2021, and we continue to see new search flow from institutional consultants. To close with a comment on our U.S. Value product set, we believe that as the junk rally fades a broader opportunity set of high-quality companies will emerge. This is photo ground for bottom-up fundamental research to drive differentiated portfolios over passive investment and ultimately deliver differentiated performance. We believe our approach will be appreciated as transitory low-quality headwinds fade and our durable process delivers alpha as it has over our 37-year history. In our multi-asset group, rising prices were not just confined to equities, credit markets saw a tightening of credit spreads on improved business prospects and yields on the 10-year treasury bond rose in the quarter off their lows. Our team, which manages an array of strategies across the risk and return spectrum, has been very active in the last quarter. Late in the fourth quarter, we announced adjustments to the team as we continue to expand our multi-asset continuum. Adrian Helfert joined Westwood in January 2019 for Amundi Asset Management and has overseen the build-out of the team that manages our income opportunity, total return, high income, alternative income, credit opportunities and other dedicated fixed income strategies. The team now includes newly added portfolio managers, research analysts and a quantitative analyst. Scott Barnard, who worked with Adrian for 12 years at Amundi, joined income opportunity. And Seth Gould, who has been at Westwood since 2015, was added to the Alternative Income Fund. We have also added [Mr. Barnard] and Hussein Adatia to Westwood High Income. The multi-asset team receives support from our U.S. value research platform, and we expect to strengthen the multi-asset team over time with additional hires that broaden the team's capabilities. Income opportunity, which remains the largest strategy managed by the multi-asset team, finished with strong absolute returns that were aheadof its benchmark, 40% S&P 500, 60% Bloomberg Barclay's Aggregate Bond Index for the fourth quarter. Relative rankings for Westwood Income Opportunity Fund, WHGIX, were also strong as it finished 2020 as a five-star fund and the top 1/3 of the 30% to 50% equity universe in Morningstar, which places WHGIX in a top quartile over three to five years and top decile over a longer-term period. This strategy exits the year with strong momentum with its rotation towards a more value orientation along with an equity overweight paying off as the fourth quarter rally unfolded. Intermediary distribution is seeing growth in sales in this strategy, and we're optimistic going forward. Our other multi-asset products similarly added to their solid track records with strong absolute and relative results. Westwood Total Return Fund, WLVIX, finished the quarter over 300 basis points ahead of the 60% S&P 500; 40% Bloomberg Barclay's Aggregate Index; and over 1,100 basis points ahead for the full year. It finished the year as a five-star fund, and we're excited to bring this to market, given the strong return profile here and across our multi-asset continuum of strategies. High Income fund, WHGHX, outperformed by over 500 basis points in the quarter and finished the year over 400 basis points ahead of its benchmark, 20% S&P 500; 80% Bloomberg Barclay's Government Corporate Aggregate Index. The improvement in liquidity that came after the first quarter meltdown for global convertible securities came with a strong rebound in performance. Our Alternative Income fund, WNIX, finished the quarter up over 400 basis points and up over 1,000 basis points for the year in the top 1/3 for trailing one and three years in the eVestment universe and had positive net flows. We hope to increase assets in the fund with a strong four-year track record and flexible fee structure. Our newest multi-asset strategies introduced in 2020 are credit opportunities, systematic LargeCap growth and systematic SmallCap growth. These new strategies added excellent quarters totheir track records, and we're excited about their potential. The credit opportunity strategies, which we launched during the pandemic, had solid returns for the year, a testament to the multi-asset team strong alpha generation across asset classes during the year. We have shown that our size and ability to move quickly is a benefit to clients and there remains strong potential for continued financial distress in the economy, even with a vaccine, as the recovery proceeds unevenly. This provides opportunities for the credit opportunities team to find securities that are mispriced by the markets and to leverage our differentiated views on securities and asset classes. Last, as part of our strategic realignment of the multi-asset team to focus on core strengths, Westwood announced in the fourth quarter that we will no longer offer strategy solely focused on convertible securities. Therefore, members of Westwood's Global Convertible Securities team that exclusively managed stand-alone convertible strategies transition back to Aviva Investors, the firm from which they joined Westwood in 2014. Westwood is operationally supporting the strategies during the transition, and we expect to fully transition all responsibilities and assets to Aviva by the end of this quarter. We have worked to establish a consistent and repeatable alpha generation process underlying our multi-asset platform. The reach for yield, even with higher rates, comes with risks that can be better managed. The need for stability and returns can be achieved using multiple asset classes with greater diversification, lower correlations and better outcomes. Our suite of multi-asset products is uniquely positioned to take advantage of cross currents across asset classes, and we're well positioned to capitalize commercially as all four funds are rated four or five star by Morningstar. Shifting to institutional and intermediary distribution, our teams are executing on our growth strategy with new sales continuing to increase and outflows declining. Our recent mutual fund restructuring added new share classes, supporting both wins and new opportunities in the sub-$50 million institutional and defined contribution spaces. Fourth quarter inflows in intermediary were driven by strength from our SmallCap and Income Opportunity Mutual Funds. Institutional had inflows of over $435 million for the quarter, the highest level we saw in 2020. Inflows were offset by $605 million in outflows, driven primarily by the loss of the large sub-advised SMid mandate previously mentioned. For 2020, institutional sales reached $1.25 billion, offset by over $3 billion in outflows. 80% of those outflows were attributed to the closing of strategies, including the emerging markets, strategic convertibles and MLP strategy. Our intermediary team saw a strong recovery from the earlier COVID-induced flows. Inflows over the quarter for intermediary were $103 million, offset by $113 million in outflows. For the year, intermediary sales reached nearly $400 million, which were offset by approximately $485 million in outflows. In evaluating our growth strategy, both distribution teams executed and grew new sales compared to 2019. New sales and searches for SMidCap and SmallCap increased substantially in the second half of the year, and our one, but not yet funded mandate pipeline for 2021, stands at more than $250 million. SmallCap, SMidCap and income opportunity are competitive strategies, and we hope for continued sales going forward, driven by key consultant approvals won in 2020. Institutional and intermediary channels are poised to see improved net flows in 2021 with event-driven outflows expected to end and positive mutual fund flows continuing. SmallCap is especially promising with a good pipeline of search activity. We have competed recently in some very large finals presentations and awaiting decisions in the months ahead. Income Opportunity sales potential is improving every quarter with the worker teams have put into improving the process to drive strong performance. We could see new sales growth later in 2021 and into 2022. As I mentioned earlier, all our multi-asset funds are four-and five-star rated by Morningstar, resulting in an attractive suite of products across the asset class spectrum. Both institutional and the intermediary are off to strong sales starts in 2021 with net positive flows for the month of January. Turning to Wealth Management. Our teams in Dallas and Houston continue to be active in prospecting for new clients while finding new ways to engage and serve our current clients. Our wealth team is now managing approximately $4.5 billion in assets, and our Houston office exceeded $2 billion in assets for the first time in its history. Strong client retention of over 96% last year was driven by our great financial advisers, who've been adding value for clients by creating, reviewing and advising on over 200 financial plans. We expanded our digital presence with the rollout of our online client portal, which extends the connection from our advisers to our clients in a seamless way. Our Apple App has launched, and we will be sharing it with clients soon, placing increased flexibility at their fingertips, as they will be able to access their account information, connect with their adviser and eventually, complete transactions on most devices. Digital capabilities boost efficiency and offer considerable value to clients in our increasingly cyber world. Our wealth team has worked hard to update and expand our wealth management ecosystem. In addition to our digital efforts, we have also expanded our service offerings for clients with the introduction of alternative investment solutions and the availability of banking services offered through Westwood private bank. Westwood's investment in the private bank has been successful with faster-than-expected loan growth and well ahead of plan. Our Select Equity strategies, which are designed to achieve high-quality, low turnover and tax-efficient outcomes for our high net worth individuals, both posted strong double digit returns in the quarter. For the year, they posted downside capture in the mid-80% range. Over the past three years, both of the Select Equity strategies have achieved very attractive downside capture stats at 82% and 88%, respectively, versus the Russell 3000 Index. Dividend Select and high alpha, the new strategies we created for high net worth clients to benefit from market dislocations, have each performed very well. They are both picking up assets and helped diversify our investment offerings. Dividend Select posted strong double digit returns forthe quarter. High alpha, which we created for clients during the pandemic downturn last March, posted a fourth quarter return 300 basis points ahead of the index, and since its inception, in the first quarter of 2020, has returned over 90% versus 66% for the Russell 3000 Index. In 2020, we had a large focus on managing the expense side of our business. We first reported to you that our institutional trading had been outsourced to Northern Trust over the summer. We are pleased that this continues to progress well. Our clients are getting good execution, lower costs, and we're seeing savings for the firm. Feedback from clients and consultants has been positive. While we continue to build out our multi-asset strategies, we completed the closing of Westwood International Advisers and the transition of the strategy's focus solely on convertible securities to Aviva Investors. The remaining convertible assets will transition to Aviva at the end of this quarter. There are several key areas, which we're excited about as we look ahead. Our new online portal for our Wealth Management clients expands our digital presence, increases efficiency and strengthens our connection to our clients. The average Morningstar rating for our fund family increased with our WHGLX and WLVIX seeing increases to four and five stars. We've introduced new exciting products that are performing well and already gathering new assets. Finally, I want to update you on some great news regarding our InvestCloud investment. Last week, InvestCloud announced a recapitalization ata valuation of $1 billion. Along with InvestCloud founders, Westwood has tendered 75% of our ownership stake and has received $9.3 million in cash. We will roll our remaining 25% stake, approximately $4.5 million, into the newly capitalized company that includes two additional businesses that collectively form a global wealth solutions platform with over $4 trillion in assets. Our original investment in InvestCloud of $5.4 million wasin mid 2018, and in about 2.5 years, it grew 2.5x its original value. We are excited to remain an investor in InvestCloud and further strengthen our strategic relationship and continue to partner on new initiatives together. As confirmation of all we're doing to provide career opportunity and support for our employees. We are pleased to announce that we received the Best Places to Work award for the seventh year in a row. We remain committed to supporting our employees and clients as they navigate the challenges presented by the spread of the COVID-19 virus. Our team members continue to make extraordinary efforts each and every day, and I'm very grateful for all they do on behalf of our clients. I'll now turn the call over to Terry Forbes, our CFO.

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $17.1 million for the fourth quarter of 2020 compared to $18.6 million in the prior year's fourth quarter and $15.5 million in the third quarter of 2020. The decrease from the prior year was principally due to lower average assets under management. The increase from the prior quarter was a result of higher advisory performance based fees, trust fees and other revenues. Fourth quarter net income of $2.8 million compared to a third quarter 2020 net loss of $10.3 million, the current quarter benefited from higher revenues, lower operating expenses and lower income taxes, and the third quarter was impacted by several nonrecurring items. Economic earnings, a non-GAAP metric, was $4.6 million or $0.58 per share compared to the third quarter's economic losses of $1.7 million and $0.22 per share. Fourth quarter net income of $2.8 million or $0.36 per share compared to $2.5 million or $0.30 per share in the prior year's fourth quarter, the increase principally related to lower operating expenses, particularly employee compensation and benefits and lower income taxes, partially offset by lower revenues. Economic earnings was $4.6 million for the current quarter or $0.58 per share, down from $5.4 million or $0.64 per share in the fourth quarter of 2019. For fiscal 2020, total revenues of $65.1 million compared to $84.1 million in 2019. The decrease was due to a $19 million decrease in asset-based advisory fees and a $1.9 million decrease in Trust fees, reflecting lower average AUM, partially offset by a $2 million increase in performance-based advisory fees earned in 2020. Fiscal 2020 net loss was $8.9 million or $1.12 per share compared to 2019's net income of $5.9 million or $0.70 per share. The current year was impacted by lower revenues, several nonrecurring items impacting the third quarter and unrealized losses on private investments, partially offset by lower operating expenses, foreign currency transaction gains and lower income taxes. Economic earnings of $7.3 million or $0.91 per share compared to $18.2 million or $2.15 per share in 2019. Firm-wide assets under management totaled $13 billion at quarter end and consisted of institutional assets of $6.6 billion or 50% of the total, private Wealth assets of $4.3 billion or 33% of the total and mutual fund assets of $2.1 billion or 17% of the total. Over the year, we experienced net outflows of $2.7 billion and market appreciation of $0.5 billion. Our financial position continues to be very solid with cash and short-term investments at quarter end totaling nearly $83 million and a debt-free balance sheet. I'm happy to announce that our Board of Directors reinstated the cash dividend at a rate of $0.10 per share for this quarter, payable on April 1, 2021, to stockholders of record on March 2, 2021. This represents an annualized dividend yield of 2.8% as of the closing price on February 9, 2021. That brings our prepared comments to a close. We encourage you to review our investor presentation posted on our website, reflecting fourth quarter and fiscal 2020 highlights, as well as the discussion of our business, product development and longer-term trends in revenues, earnings and dividends. We thank you for your interest in our company, and we'll open up the lines to questions.

[Operator Instructions] Our first question comes from the line of Mac Sykes from Gabelli.

Congratulations, gentlemen, on a strong quarter. Just a couple of questions. I think you talked about the closing of the funds impacting flows this quarter. If you were to exclude those impacts, what was the kind of aggregate flows for quarter? And if you have that for the year as well?

If we exclude the closed strategies, what were the flows for the quarter?

Yes.

I'm going to ask Terry to give you that number. Yes. Terry will be looking for a number. What's your other question, Mac?

So on the digital offerings, how should we think about the efficiency there? Are you thinking about the digital offerings driving more sales in the future or just increasing client engagement and having something that you need to have for the platform?

Well, I think the additional offerings are really what we've intended to do for a number of years now, which is to continue to build out our multi-asset capabilities. And we have a lot of strategies now across the spectrum, where we -- at one time, only had income opportunity. They've all exhibited a lot of strong performance. They're in categories within Morningstar now where we feel like they can win. They're priced competitively, and we hope to see some good traction on flows in the years ahead, and the performance for multi-asset was exceptional last year. As far as the digital goes, it's really a comprehensive solution. It's interesting, if you read a lot about wealth management, 77%, I think, of people want to engage digitally with the firm that they work with, but they also want to have a human being that they can call and connect with when they have specific questions. So it's really about a hybrid model of having a digital capability that people can use on any device, any time a day and then have the ability to connect with the human. And it sounds simple to pull off, but it's taken us years to get our platform to a position where we can actually execute and deliver this really cool digital solution for clients.

Mac, the -- excluding the flows from closed strategy, your net outflows for the quarter was around 800.

Okay. And just trying to expand on the digital. We've seen obviously an explosion in the platforms like Robinhood, and I'm not suggesting that's the best way to service clients, but do you think now, with your capability, there's an ability to reach different segment of clients potentially, just given all the investments you've made today?

Well, we hope so. It's going to require a number of things. We'll have to: number one, retrain the folks that work with our customers in a way that as we all learn the capabilities of the system, what's really neat about it is that it really has infinite capacity. So we'll have to figure out lots of ways to use it and retrain ourselves. And then what I think it will allow us to do is engage with a segment of the high net worth world that we have not had a lot of success in and that's the younger generation, which I would call sort of the 35 to 50-year-old, who's working, working hard, making money, they -- maybe they pick something when they were in their 20s or 30s, and they haven't thought a lot about it. This is a way for us to really engage with them. The other things we've been doing is, we've built out private banking and state planning and financial planning. Our group in Houston, last year, ahead of the election, a lot of people were concerned about changes to the state tax, and so everybody wanted to redo their financial plan and take a look at their state plan. So we were exceptionally busy doing that for clients. But what it always does is it cements that relationship a little further because they become more tied to the advice that we give. And when we can deliver that to them digitally so that when they hit the Westwood app, they go to the Apple Store and download it, and they go to their account, they're able to find their financial plan, their state plan, any important documents that they have, we can keep a running balance sheet for them of all of their financial assets and do it in a way that's easy for them to look at and engage with. And other things that we've done is, we have done a couple of really good investments in private equity. In fact, some of our clients invested in InvestCloud, which was a tremendous win for them and for us. So that was a good one. And then we're doing some other things that are exciting in the private equity world that people really have pretty good uptake on.

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to hand the program back to Brian Casey for any further remarks.

Okay. Well, great. Well, thank you Mac for your question, and thank you all for listening. I'd just close by saying that so far, year-to-date, our flows are positive and actually net positive for the year. We've got some big news coming over the next couple of months on some searches that we're in, in SmallCap that could be materially interesting. And we're pleased to reinstate our dividend this quarter at a rate of $0.10 and really reflects our confidence in the business, in the future, and we hope that we can build it over time as we did over 17 years before. Thanks for your time.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.