Acadian Asset Management - Q1 2023

Transcript

Moderator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group earnings conference call and webcast for the first quarter 2023. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. To be added to the queue, please press star followed by one at any time during the call. If you need to reach an operator, please press star followed by zero. Please note that this call is being recorded today, Thursday, May fourth, 2023 at 11:00 A.M. Eastern Time. I would now like to turn the meeting over to Melody Huang, Senior Vice President, Director of Finance and Investor Relations. Please go ahead, Melody.

Melody Huang (SVP and Director of Finance and Investor Relations)

Good morning, welcome to BrightSphere's conference call to discuss our results for the first quarter ended March 31, 2023. Before we get started, please note that we may take forward-looking statements about our business and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding this risk and uncertainties appears in our SEC filings, including the Form 8-K filed today containing the earnings release in our 2022 Form 10-K. Any forward-looking statements we make on this call are based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. We may also reference certain non-GAAP financial measures.

Information about any non-GAAP measures referenced, including a reconciliation of those measures to GAAP measures, can be found on our website, along with the slides that we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or solicitation to buy any investment product. Suren Rana, our President and Chief Executive Officer, will lead the call. Now I'm pleased to turn the call over to Suren.

Suren Rana (President and CEO)

Thanks, Melody. Good morning, everyone, thanks for joining us today. As usual, I'll start off with the highlights on slide five of the deck. For Q1 2023, the company reported ENI per share of $0.28 compared to $0.52 in Q1 2022. The drop in earnings was driven by lower AUM due to equity market declines throughout 2022 and also lower performance fee in the quarter compared to Q1 2022. We're pleased, however, that Acadian's investment performance has continued to be strong throughout this volatile period. As of March 31, 2023, 87%, 86%, and 90% of strategies by revenue beat their benchmarks over the prior three, five, and 10-year periods, respectively. We also reported third straight quarter of positive net flows with $0.1 billion of net inflows, our sales pipeline remains strong historically.

We remain on track on executing on our organic growth initiatives. On systematic credit, we have the core team mostly in place, and they continue to work on progressively more advanced versions of the investment model and data and infrastructure. We expect it all to be ready in the second half of 2023, and at that point, we expect to start investing in the strategy with seed capital. On Acadian's equity alternatives platform, you may recall we seeded it in Q4 of 2022 with $15 million of seed capital and are now building an investment track record. We're off to a good start on that front. Over time, we expect these initiatives to help generate sustained organic growth for Acadian. Turning to capital management, we had a cash balance of $154 million as of March 31, 2023.

During the quarter, Acadian drew down on their operating revolver and ended the quarter with an outstanding balance of $87 million. As we have discussed in prior years, this revolving credit facility is at Acadian operating level and is not linked to our corporate cash balance. Acadian draws on this facility at the beginning of the year for first quarter seasonal needs, mainly to pay prior year's annual bonuses, and the facility is then paid down fully by year-end from cash generated by the business. We expect this year to be no different. As our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and to buy back our shares whenever opportunities come up. Let me conclude with our long-term strategy on slide 15.

We will continue to invest in our core capabilities and leverage our unique quant platform to expand into new areas like we're doing with systematic credit and equity alternatives initiatives. We will continue using our free cash flow to support organic growth and for share repurchases whenever opportunities are available, and we remain focused on maximizing shareholder value. Now let me turn the call back to the operator. Happy to answer questions at this point.

Moderator (participant)

At this time, those with questions should lift their phone receiver and press star followed by the number one on their telephone keypad. To cancel a question, please press star one again. Please hold for a brief moment while we compile the Q&A roster. Our first question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

Michael Cyprys (Managing Director)

Hey, Suren. Good morning. Thanks for the question. I did see any buybacks in the quarter. Is that just because you didn't find it compelling here in this backdrop, or was it more about the lack of having any sort of available window? If maybe you could kind of just update us on your thinking there around buybacks then also M&A, adding teams and bolt-ons, just, you know, how your appetite for that is evolving?

Suren Rana (President and CEO)

Yeah, hi, Mike. Yeah, I guess our thinking hasn't changed with respect to capital management and buybacks. As we've said, yeah, we have a strong cash balance, and that basically the only two uses are seeding organic growth opportunities and buybacks. With regards to seeding, we've already seeded the equity alternatives platform. We expect another $15 million or so towards the second half, maybe end of Q3 or early Q4 to seed the systematic credit platform for this year. Rest of the cash is primarily for buybacks. Yeah, the timing will depend on, you know, market opportunities and open windows, and such. So it's really that's basically capital management, really unchanged. With regards to M&A and bolt-on opportunities, we're not looking for any acquisitions outside our space.

We remain open to bringing on teams who bring specific capabilities that are synergistic with our overall quant platform. We're not looking to bring anything unrelated. It's unlikely that we will use much of the capital for any acquisitions. If anything, it would be more towards bringing on a team or something like that for that ultimately is more of an organic opportunity. Broadly, yeah, we remain open to, you know, partnerships and with for any value-enhancing opportunity. We're always open for that.

Michael Cyprys (Managing Director)

Were there any available windows in the quarter for buybacks? Should one presume that because there were no buybacks, that there weren't any windows then, just given what you articulated?

Suren Rana (President and CEO)

Yeah, that's a fair assumption.

Michael Cyprys (Managing Director)

Okay. Just a follow-up question on the institutional pipeline. Maybe you could just elaborate a little bit on how that looks today versus a year ago versus last quarter. You know, what sort of strategies are you guys seeing interest in? Any color on maybe the softness on gross sales in the quarter versus a year ago and the prior quarter.

Suren Rana (President and CEO)

Yeah, the pipeline is very healthy and strong. Compared with history, it's at the, you know, towards the higher end. We're pleased with that. There are a number of mandates that are sort of in the advanced or one category that those are also higher by historical standards. That's pretty good. We don't have anything specific, any specific areas that we view to be at risk. You know, things, choppy things do happen from time to time that is in one quarter. First quarter, we did have a rather large outflow of about $700 million due to a client deciding to rebalance to fixed income for their specific portfolio.

Things like that happen, but we don't have anything specific that we see as a persistent source of outflow. So that's on balance. We think it's well-positioned just given the strength of the pipeline, and as we look at our at-risk bucket. First quarter, yeah, just a question of timing when specific things in the pipeline come towards closure. It's things move from one quarter to the other quarter, all the time.

Michael Cyprys (Managing Director)

Any color on the strategies where you guys are seeing interest from customers, the strength on the gross sales?

Suren Rana (President and CEO)

It's fairly broad-based. You know, we have interest in our, in our flagship strategies like global equity, emerging markets, you know, outside the U.S., internationally, even regional areas like Australian equities. We continue to see interest in sustainable versions of strategies. It's fairly broad-based.

Michael Cyprys (Managing Director)

Great.