Westwood Holdings Group, Inc. (WHG) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the Westwood Holdings Group Incorporated’s Fourth Quarter 2020 [ph] Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today's program is being recorded. I would now like to introduce your host for today's program, Julie Gerron, General Counsel and Chief Compliance Officer. Please go ahead.

Thank you and welcome to our fourth quarter 2021 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, 2021 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're 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 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. Thanks for taking the time to listen to our quarterly earnings call. Last October, I highlighted the progress we were making including new mandates one and funded in the first half of last year, performance improvements, the launch of new mutual funds, and an improving new business pipeline for Westwood Wealth. Throughout the last couple of years, Westwood has taken decisive steps to strengthen our foundation and position ourselves to capitalize on future opportunities. In 2021, we finished the year ahead of their benchmarks in most of our multi-asset and retained their strong multiyear rankings in several US value and multi-asset strategies. We delivered sales results, posting the best new business quarter in five years in the second quarter and overall net flows came in at approximately $1 billion for the full year, excluding the transition of the global convertible securities assets back to Aviva. Our new mandates one primarily in SmallCap have now funded and the team has delivered good results for our new clients since they came on board. We experienced positive fund flows in nearly all of our key products. It took several actions to optimize our range of investment strategies by opening three mutual funds SmallCap Growth, Quality AllCap and Quality MidCap and we initiated a soft close in our SmallCap strategy as it neared capacity. We expanded our Wealth Management business by adding new accounts and introduced our new client portal to enhance our high net worth investor experience. On the financial front, I'm very pleased to report that we have returned to profitability, we've reduced expenses we bought back stock and we reinstated our dividend. Let's turn to our investment and asset flow performance for the last quarter of 2021. Markets proved resilient despite the emergence of Omicron, which led to increased market volatility at mid-quarter. Stocks quickly recovered as strong corporate earnings growth helped keep equities moving upwards. The uncertainty created by rising inflation and anticipated rate hikes weighed heavily on investment-grade fixed income returns. However, high-yield securities performed well. Looking ahead, we remain positive on the US economic outlook for the year. Corporate balance sheets remain solid and S&P 500 earnings growth should support risk assets. In addition, the American consumer remains in good financial shape and spending continues at a robust clip. However, interest rate hikes, inflation and geopolitical concerns are creating near-term headwinds, which will undoubtedly add to volatility throughout the year. Then our US value team, our LargeCap strategy outperformed the Russell 1000 Value Index for the quarter while our mutual fund WHGLX landed in the top 25% of LargeCap value funds and remains a four-star rated Morningstar fund. Its longer term Morningstar rankings remain competitive and relative to institutional peers in the eVestment database, it's in the top 30% of the investment universe for the quarter. Several LargeCap clients rebalance their internal allocations, which reversed the outflows in the third quarter and LargeCap finished the year with net inflows close to $90 million for the quarter. Relative performance dispersion between large capitalization securities and small market caps negatively impacted our SMidCap strategy, which caused it to underperform the Russell 2500 Value Index. After a slow start last year, SMid performed much better in the remaining three quarters and is positioned to deliver good results in the coming year. In SmallCap beating the Russell 2000 Value Index by 370 basis points last quarter helped it recover from a tough start and it finished ahead of the index for the year. For the quarter, our mutual fund WHGSX achieved an 11th percentile Morningstar ranking for small blend funds and our institutional strategy is at the 21st percentile for small value strategies in the eVestment peer ranking universe. Funding of SmallCap mandates one earlier last year is now beginning to drive revenues, cash flow and profitability. Two SmallCap clients tweak their internal allocations during the last quarter, which generated net outflows. Lastly our newly launched MidCap value strategy came in 170 basis points ahead of the Russell MidCap Value for the quarter. Our new mutual fund Westwood Quality MidCap WWMCX is also off to a strong start which is great to see. All-in-all, we continue to assess the market environment as one that favors stock picking. With factor returns compressing we expect quality to reemerge as a key contributor to performance, i.e., had an impressive run last year and it may take a breather, but as economic developments unfold, the environment should remain favorable for this style of investing. The jump rally that propelled low-quality securities in previous years has ended and our strategies are positioned to capture alpha, as we move through the economic cycle. This should produce differentiated performance versus other value managers and also against the benchmark as better and higher-quality businesses outperform. In our multi-asset group, income opportunity finished last year behind its benchmark of 40% S&P 500, 60% Bloomberg Barclay's Aggregate Bond Index. Income Opportunity Mutual Fund WHGIX retained its strong 4-star peer rankings in the 30% to 50% equity universe over trailing year periods, including a 20th percentile ranking for the trailing three years ending December 31, 2021. Our Total Return Mutual Fund, ticker WLVIX, trailed for the last quarter but retained its top 5-star rating in the Morningstar universe. The 4-star High Income Mutual Fund, WHGHX beat its benchmark 20% S&P 500, 80% Bloomberg Barclay's Aggregate Bond Index and muscled its way into the top 10% of peer funds for the year. Our Alternative Income Mutual Fund, ticker WMNIX, improved its solid track record with positive absolute performance for both the fourth quarter and the full year. Credit Opportunities beat its benchmark, the ICE BofA High Yield Index by approximately 50 basis points for the quarter and by over 300 basis points for the year. Lastly, our systematic SmallCap Growth strategy continues to outperform, beating the Russell 2000 Growth Index by over 300 basis points last quarter and by an incredible 1,250 basis points for the year. The heels of this successful start we added it to our mutual fund lineup by launching the Westwood SmallCap Growth Fund, WSCIX. Multi-Assets' Chief Investment Officer, Adrian Helfert has spent years developing an investment process capable of delivering outperformance through market cycles and we are evaluating other strategies that could benefit from it. As the market evolves, allocators are seeking ways to overcome the challenges of low rates and tight spreads and the reduced benefits in asset allocation risk reduction. We've developed an array of multi-asset solutions with various outcomes that can fit into asset allocation models in a variety of ways. We look forward to targeted reintroductions on the institutional side in the coming year and gaining additional traction in the intermediary space. Our performance for high net worth investors was mixed this past quarter. Dividend Select which concentrates on the domestic higher dividend-paying investments underperformed the Russell 1000 Value Index for the quarter. Dividend Select lost ground in last year's first quarter, as low-quality highly leveraged securities outperformed. However, strong security selection helped it recover throughout the year and we feel good about its current positioning. Its yield of about 2.8% is attractive in a low interest rate environment, especially for high net worth clients who prefer dividend-paying blue chip stocks. Select Equity beat the Russell 3000 Index while it's more tax-sensitive counterpart match the benchmark. We positioned Select Equity to benefit from economic recovery, pent-up demand and a gradual return to normalcy in a post-COVID world. It performed well early last year, as COVID began to stabilize, vaccination rates increased and the economic outlook improved. However, it lost ground as the Delta variant emerged. Select Equity posted good performance in many sectors last year, including strong downside protection with an 81% capture rate on those days when markets fell more than 1%. We believe that strong risk management is more important than ever and as risks and equity markets grow, controls like sector and subsector limits and low correlations among portfolio holdings should continue to appeal to our wealth clients who are focused on wealth preservation. High Alpha took a breather in this past quarter amid Delta and Omicron variant concerns and it lagged the Russell 3000 Index for the year, but remained ahead since its inception in March of 2020. High Alpha will continue to emphasize the themes of companies transformed by COVID, clean energy, health care innovation and radical improvements in supply chain technologies. Shifting to institutional and intermediary sales, our teams generated $337 million of inflows, offset by just over $500 million in outflows, as clients made asset allocation decisions along with two lost accounts resulting in negative flows for the quarter. In LargeCap two existing clients rebalanced and shifted additional assets into the strategy. Our key products all experienced net positive flows for the year, except for income opportunity with modest net outflows of $21 million. In 2021, we collectively turned in our first net positive sales year since 2017, and it was our best net sales year since 2013. Institutional team generated gross sales of $2.17 billion for the year beating our internal sales goal and 16 new clients were added along the way, which bodes well for the future. Client losses were much lower with only six terminations all year. The intermediary team delivered gross sales of $543 million, while achieving net positive flows for each quarter last year. For 2022, our institutional team will continue to focus its sales activities across our value strategies, leveraging consultant recommendations for SMidCap and SmallCap Value where our mutual fund WHGSX remains open to accept new fundings. Newly launched vehicles including the SMidCap CIT and Quality AllCap Ultra Share Mutual Funds will provide clients with broader access to these strategies. Marketing new multi-asset products under Adrian Helfert's leadership will be an exciting initiative including strategies like systematic SmallCap Growth and Credit Opportunities, which have delivered strong performance since being launched in 2020. Gross sales may moderate with SmallCap Value soft close but stronger demand for our value products relative performance improvements across the board and muted client outflows will enable us to build on last year's net sales gains. Summing up the institutional and intermediary sales story in 2021, we reversed outflows, stabilized at-risk products and delivered strong net sales gains by executing on our distribution and product alignment strategy. We'll continue to leverage our strong client relationships and focus new business activities on strategies with approved consultant and platform relationships. We are poised to accelerate sales growth as higher demand and continued performance improvement across value products encouraged by our interest. Gross sales may moderate from 2021's high levels but we are ready to take advantage of our successful US value franchise institutionally and expand our multi-asset footprint in intermediary. Turning to Wealth Management. Our teams produced inflows totaling $386 million last year including $151 million during the fourth quarter. Cost inflows benefited from additions to existing accounts and employer pension contributions while Houston inflows were primarily driven by new account relationships. Total outflows totaled $805 million for the year, of which $211 million came in the fourth quarter. Most outflows reflected scheduled pension and client distributions, account closures, external private equity commitments and transfers to Westwood Management. Houston outflows stem from account closures, client gifting distributions and external private equity commitments. Our wealth teams finished last year strongly and are optimistic about the outlook for this year. We improved our employee retention efforts and made solid hires to enhance our Dallas and Houston teams. New assets reached $100 million in the fourth quarter and this momentum has carried into the New Year. Our advisers plan to expand and deepen relationships with centers of influence partners with each adviser targeting at least two centers of influence engagements per quarter. Our efforts this year should result in meaningful flows, new estate planning opportunities and higher levels of client retention. Assets under management and Select Equity taxable, High Alpha and Dividend Select exceeded $950 million in 2021 and these wealth strategies are an important part of our wealth business. Alternative investment opportunities continue to resonate with existing and prospective clients. We provide several alternative investment options ranging from well-known global managers to lesser known niche managers and locally focused opportunities. We completed several capital raises for external private offerings and have had good demand for our latest offerings, continue to leverage Westwood Private Bank's capabilities to meet our clients' needs. The bank's rapid approval and funding of lines of credit encourages new business opportunities for Westwood Wealth. As many of you know, a key Westwood strategic initiative has been to improve our cost structure and maximize efficiencies. In 2020, we appointed Northern Trust as our outsourced trading partner resulting in improved execution and transaction cost analysis for our clients and cost savings and internal efficiencies for Westwood. In 2021, we identified our mutual fund administration relationship as another opportunity to realize cost savings and efficiencies. We selected Ultimus Fund Solutions, as our new mutual fund administrator, based on their attractive cost structure, integrated service model and enhanced distribution tools and services. The move to Ultimus was a significant undertaking that required a proxy vote for all seven funds. We successfully completed the transition last November. Westwood committed to cover all reorganization costs, which amounted to approximately $750,000 which were all expensed in 2021. The estimated financial benefit over the first three years is just over $1 million per year, with approximately 70% initially accruing to Westwood with the balance flowing to fund shareholders through reduced fund expense ratios. Summing up, as we look back over the last year, we recognized the long road we have traveled and celebrate the progress we have made. We are moving forward with conviction, knowing that we've built resilience into our business and accordingly stand ready to surmount the challenges that come our way while taking full advantage of an exciting array of opportunities. I will now turn the call over to Terry Forbes, our CFO.

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $19.4 million for the fourth quarter of 2021 compared to $17.1 million in the prior year's fourth quarter, and $17.9 million in the third quarter of 2021. The increase from the prior year was principally due to higher average assets under management. The increase from the prior quarter was the result of higher average assets under management and higher performance-based fees. Fourth quarter net income of $2.8 million exceeded the third quarter's net income of $1.9 million, due to higher revenues and unrealized depreciation on private investments, partially offset by one-time expenses related to administrative, reorganization of our mutual funds. Economic earnings and non-GAAP metric were $4.7 million, and $0.59 per share compared to the third quarter's economic earnings of $3.7 million and $0.47 per share. Fourth quarter net income of $2.8 million or $0.36 per share was consistent with the prior year's fourth quarter net income of $2.8 million or $0.36 per share, as revenues and expenses increased at the same pace. Economic earnings were $4.7 million for the current quarter or $0.59 per share, up from $4.6 million or $0.58 per share in the fourth quarter of 2020. For fiscal 2021, total revenues of $73.1 million compared to $65.1 million in 2020. The increase was attributable to an increase in asset-based advisory fees and interest fees both primarily due to higher average assets under management and an increase in performance-based advisory fees, primarily due to higher realization of performance fees in 2021. 2021 net income of $9.8 million compared to 2020's net loss of $8.9 million on higher revenues, higher realized gains on private investments, and the impact of non-recurring items during 2020, partially offset by higher income taxes and mutual fund expenses. Diluted earnings per share was $1.23 compared with a loss of $1.12 per share for 2020. Economic earnings per share of $2.20 compared with $0.91 in 2020. Firm-wide assets under management totaled $14.5 billion at quarter end and consisted of institutional assets of $7 billion or 49% of the total private wealth assets of $4.4 billion or 30% of the total, and mutual fund assets of $3 billion or 21% of the total. Over the year, we experienced net outflows of $0.8 billion and market appreciation of $2.2 billion. Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $80.2 million, and a debt-free balance sheet. I'm happy to announce, our Board of Directors approved a quarterly cash dividend of $0.15 per share payable on April 1, 2022 to stockholders of record on March 4, 2022. This represents an annualized dividend yield of 3.4% as of yesterday's closing. That brings our prepared comments to a close. As some of you may have noticed our Investor Relations presentation was inadvertently posted to our website ahead of schedule earlier today. As a result we released earnings during the day. We encourage you to review our investor presentation reflecting fourth quarter and fiscal 2021 highlights, as well as a 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 the line to questions.

[Operator Instructions] Our first question comes from the line of Mac Sykes from GAMCO. Your question, please.

Good afternoon, everyone. Thanks for taking my question. So I'll ask both of them associated with cost. The first one, I'll just ask both together. But you had achieved some nice progress in margins last year, how are you thinking about more progress in 2022 and beyond? And against the backdrop of what we're seeing is a little bit higher volatility in the markets? And then secondly, maybe you could talk a little bit about as we come out of the pandemic and supporting kind of this accelerated sales productivity that you're that you've achieved in terms of higher spend travel et cetera. So just a little more color on how you see the sales process evolving as we get to a more personal world? Thanks.

Thanks Mac. I appreciate your question. So we've done a lot to improve our margins. You do that two ways. One you have higher revenues and two you have lower expenses and we've done both of those. So we really feel good about where we're headed in 2022 and we still think there's a few things that we can do on the expense side to reduce our expenses. As far as the pandemic goes, and the accelerated sales and the productivity we've had I think, it's particularly acute on the retail side where most of the wire houses are still closed. You still can't go in to see advisers. So that creates a challenge. Our guys have – just to give you some stats pre-COVID our guys were doing about 1,000 meetings a month, and after COVID hit that went to about 200 meetings a month. We're back up to over 600 a month. And I think that will steadily rise as the world begins to open up and that creates opportunities for us. We have a lot of highly rated funds. We have 10 funds now that are available. Several of them have been around for a long time and are four and five-star rated. So we feel really good about those two things coming together more availability of meetings and good funds to get out there and sell. Do you have any further questions?

No. Thank you. Appreciate it.

Thank you. [Operator Instructions] Our next question comes from the line of Subhash Kithany from SK Group Inc. Your question please.

Yes, I was wondering about that takeover offer you got earlier and the price was about 25. And are you guys doing anything to bring the price up to close to that takeover price? Somebody must have seen the value at $25.

I'm not sure what your question is, but clearly what we're trying to do is enhance shareholder value every day that we come to work. And I think we've done a really good job of improving our profile over the last year.

Are you doing anything about the stock buyback or something or special dividend?

We've done both of those things. We paid a special dividend last year and we bought the stock back last year.

Okay. Thank you.

Thank you.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Brian Casey for any further remarks.

Thank you Jonathan, and thanks everybody for taking time to listen to our call today. If you have any further questions, please reach out to myself or to Terry or visit our website at westwoodgroup.com. Have a great afternoon.

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