Acadian Asset Management - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Q2, 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 the star followed by one at any time during the call. If you need to reach an operator, please press the star followed by zero. Please note that this call is being recorded today, Thursday, August 3rd, 2023, at 11:00 A.M. Eastern Time. I would now like to turn the meeting over to Melody Huang, SVP, Director of Finance and Investor Relations. Please go ahead.

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

Good morning, and welcome to BrightSphere's conference call to discuss our results for the Q2 ended June 30, 2023. Before we get started, please note that we may make 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, our 2022 Form 10-K, and our Form 10-Q for the Q1 of 2023. Any forward-looking statements that 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 products. Suren Rana, our President and Chief Executive Officer, will lead the call. Now, I'm pleased to turn the call over to Suren Rana.

Suren Rana (President and CEO)

Thanks, Melody. Good morning, everyone, thank you for joining us today. As usual, I'll start off with the main highlights on slide 5 of the deck, then we can jump into Q&A. For Q2 2023, we reported ENI per share of $0.28, compared to $0.41 in the Q2 of 2022, compared to $0.28 in the Q1 of 2023. The drop in earnings compared to a year ago was primarily driven by higher OpEx due to the impact of foreign currency changes, inflation, and our ongoing investment in growth initiatives and operational infrastructure. Acadian's investment performance continues to be strong. As of June 30, 2023, 81%, 81%, and 90% of strategies by revenue beat their benchmarks over the prior three, five, and 10-year periods, respectively.

We reported modestly positive net flows, with $0.1 billion of net inflows, and it was our fourth straight quarter of positive net flows. At the same time, our sales pipeline remains strong. We continue to be on track to execute on our growth initiatives. Acadian's equity alternatives platform is off to a promising start. The investment track record is building well after we seeded the platform a couple of quarters ago. On systematic credit, the team continues to build out the models and infrastructure. We expect to start investing seed capital in the strategy in Q4 of this year. Turning to capital management, we had a cash balance of $141 million as of June 30, 2023.

Acadian has continued to pay down its revolving facility and ended the quarter with an outstanding balance of $38 million, compared to $87 million at the end of the last quarter. Like in prior years, we expect the facility to be paid down fully by year-end. 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 stock whenever opportunities come up. Our long-term strategy remains the same. We will continue to invest in our core capabilities and leverage our unique quant platform to grow and expand into new areas. We will continue using our free cash flow to support organic growth and to buy back stock, and we remain focused on maximizing shareholder value. Now, let me turn the call back to the operator. I'm happy to answer questions at this point.

Operator (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. Your first question comes from Mike Cyprys from Morgan Stanley. Please go ahead. Your line is open.

Mike Cyprys (Managing Director)

Hey, Suren, good morning. Thanks for taking the question. Maybe just on kicking off on, on buybacks. I don't think I saw any in the quarter, so just hoping you could update us on just your latest thoughts there, you know, how you're thinking about opportunities there to repurchase shares. Is there just any sort of limitations in place right now around available windows that may have prohibited you in the quarter? When do you think you might have a window begin to open up again as you look out?

Suren Rana (President and CEO)

Hi, Mike. yeah, I guess, yeah, no buybacks in the last quarter either. We do have cash on our balance sheet, as you've noticed. The uses are still, so no change really in our approach. The uses are to support our organic growth, which we've already laid out the near-term plans, and the rest of it is really toward buyback, when we have windows available. We don't know yet when we might have that. We're probably looking out at least a couple quarters before we can look at any buybacks.

Mike Cyprys (Managing Director)

Great. Then just maybe a follow-up question on the institutional pipeline. Maybe you could just update us, elaborate a bit on, on how that looks today versus last quarter, and maybe you can give us a little bit of flavor for the types of, of strategies that you're seeing in the pipeline as well. Thank you.

Suren Rana (President and CEO)

Yeah, thanks. Yeah, the pipeline continues to be strong and healthy. As we reported last quarter, there were some delays by, you know, a couple of weeks or three weeks, as we approached summer. Generally, things are moving through the pipeline. July was good. I guess last quarter, as I said, it was just modestly positive, but we had a good July, so hopefully that momentum continues. There's a, there's a variety of strategies. As you know, the firm overall has a large number of strategies, so we're pretty diversified, and that reflects in the pipeline, too. It's across a variety of strategies, including small cap, international.

There's interest in long short as well, enhanced versions of various strategies. It's pretty robust. We got, we got sales from global equity, from all country, ex-US. So, hopefully that gives you a flavor.

Mike Cyprys (Managing Director)

Great. Thank you.

Operator (participant)

Our next question comes from John Dunn, from Evercore ISI. Please go ahead. Your line is open.

John Dunn (Managing Director)

Hi, good morning, and thank you. I had a question about the, the fee rate, maybe in the back half of the year, just with emerging markets down so far in the quarter and, U.S. up a little bit. What do you think, like, the trajectory of the fee rate, might look like?

Suren Rana (President and CEO)

It is affected a lot by the mix. So it's hard, it's hard to tell, but my best guess would be we continue to be at around the 38 basis points in the near term, where we are. The emerging markets has a higher fee rate, and as you know, US markets, at least in the last couple of quarters, you know, beat the emerging market indices. But there are other factors, too. We're getting some higher fee inflows and losing lower fee outflows. So the result, we have 38 basis points now compared to 37 basis points a year ago. So I would say we probably stay put here.

Longer term, there are things, particularly our initiatives, for example, where we have higher fee strategies that would hopefully pull that fee rate higher. At least in the near term, my best guess would be we stay around here.

John Dunn (Managing Director)

Then just on G&A in the H2, I think the, generally, the expense ratios probably go down from here, but in terms of dollars, where do you see, you know, fixed comp and G&A, you know, going over the next two quarters?

Suren Rana (President and CEO)

Yeah. I would say more or less at this level. You know, in the last few quarters, as I mentioned in my remarks, we have invested in our operational infrastructure over the last couple of quarters. We also have invested in the new initiatives. We've added to the headcount, we've added to, you know, the data, et cetera. So that we've done a fair bit, and we've, we probably have also built up some scale as we've done that. We've, some of the OpEx has increased because of inflation, as I said earlier, in terms of just the higher cost of data, and comp increase, you know, for to help folks with inflation.

There has been some temporary things as well, like the forex impact. Last year, we had a benefit of the forex impact. This year, where it's, it, it went the other way. Some of that should, you know, go away. I would say, basically, we're probably in terms of dollars, we're probably stay at this level, more or less.

John Dunn (Managing Director)

Great. Thank you very much.

Suren Rana (President and CEO)

Thanks, John.

Operator (participant)

Your next question comes from Kenneth Lee from RBC. Please go ahead. Your line is open.

Kenneth Lee (Managing Director)

Hi, good morning. Thanks for taking my question. Just at a high level, more broadly, I wonder if you could just talk about what you're seeing in terms of client sentiment or, or positioning, and then perhaps maybe some kind of indication what that, you know, potential implications for organic growth over the near term. Thanks.

Suren Rana (President and CEO)

Yeah. Thanks, Ken. Yeah, we're basically primarily institutional business. Our clients and the consultants tend to have longer term views, you know, with the, the sales cycles often going, you know, nine to 12 months. So, this, it doesn't change that much quarter to quarter. As I said earlier, we, we've seen, you know, pipeline is good. We're seeing interest across a number of strategies. That's, so, so that's, that's really good. We, we also don't see much, much of, you know, any kind of exodus from any particular strategies or any groups of strategies. That's good as well.

Maybe one exception, I would say, is that in terms of the outflows that we had, a good part was still from the managed vol group of strategies. Maybe that's probably one area where we saw some clients take a position that in the trending, better rewarding market, maybe they cut down some exposure to the managed vol. Longer term, of course, our clients believe that managed vol strategies, really for the risk-adjusted return, it is better than many others. We, we that's where I would say maybe we had some directional decisions.

Other than that, really, clients want to invest, and they're, they're taking the meetings, and the pipeline's good. We're cautiously optimistic.

Kenneth Lee (Managing Director)

Very helpful there. That's all I had. Thanks again.

Suren Rana (President and CEO)

Thank you, Ken.

Operator (participant)

This concludes our question and answer session. I'd like to turn the conference call back over to Suren Rana.

Suren Rana (President and CEO)

Thank you. Well, I'd like to thank everyone for taking the time. Look forward to chatting next quarter.