Westwood Holdings Group - Q1 2024

Transcript

Operator (participant)

Please be advised that this conference is being recorded. I would now like to hand over, hand the call over to your speaker today, Jill Meyer, SVP, Director of Fiduciary Services. Please go ahead.

Jill Meyer (SVP, Director of Fiduciary Services)

Thank you, and welcome to our first quarter 2024 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-Q for the quarter ended March 31, 2024, that will be 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 SEC rules concerning non-GAAP, 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 Chief Executive Officer, and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey.

Brian Casey (CEO)

Good afternoon, and thanks for listening to our first quarter earnings call. First, I'll start with some highlights for the quarter. AUM and AUA reached just over $17.1 billion, the highest we've seen in six years. We achieved positive new flows in our institutional channel. We launched our Managed Investment Solutions, and feedback on the team and their capabilities has been very positive. Lastly, our first active ETF was launched on April the ninth. It's called the Westwood Salient Enhanced Midstream Income Fund, and it trades on the New York Stock Exchange under the ticker symbol MDST. It seeks to deliver current income and capital appreciation by investing in Midstream energy companies by combining a high conviction, actively managed, Midstream energy-focused equity portfolio with an options overlay to produce enhanced income distributions for investors.

Based on current dividend yields and option premium income, the fund targets a double-digit yield for investors, and we've priced it competitively with an all-in expense ratio of 80 basis points. Trading in the ETFs is off to a good start, with volumes exceeding expectations and tight trading spreads. It's available via Fidelity, Schwab, Vanguard, and on other platforms. Our intermediary sales team held lots of meetings over the past month to introduce our ETF to the RIA community, and the team has seen an encouraging level of interest. Several large RIAs are in the process of conducting due diligence to enable the ETF to be added to their approved list of investments. Due to our efforts, coupled with the attractive features of the fund, we expect trading volume and assets to grow in the weeks and months ahead.

As part of this process, we've built a very solid infrastructure to support future ETF offerings, and the next one, Enhanced Energy Income, will begin trading any day. Looking back over the quarter, equities carried their year-end momentum into the new year, but debt markets experienced mixed performance. Investors remain keenly focused on the trajectory of interest rates following one of the most aggressive monetary tightening cycles in history. Fixed income yields are at attractive levels, and an end or easing in the Fed's rate hikes would cause bonds to rally. On the equity side, large and mega cap stocks, especially those involved with artificial intelligence, or AI, led performance across the board. Company participation began to widen late last year, and this trend has continued into 2024, setting the stage for an improved investment environment for our strategies.

Equity markets will also benefit from an end to the Fed's rate hikes, and with the equity valuations elevated relative to history, multiple expansion is less likely, and high beta names may lose their luster as earnings growth again propels returns. Businesses with underappreciated earning potential, our sweet spot, should be rewarded. Within our equity strategies, our U.S. value strategies with relevant track records are all outperforming their benchmarks over the 3-, 5-, and 10-year periods, and also outperforming their benchmarks since inception. Among our peers, mid-cap and small cap continue to post strong Morningstar rankings, top third for small cap and top 10% for mid-cap over trailing 3-year periods. Relative performance for our multi-asset strategies strengthened as equity market participation continued to broaden out.

Half of our multi-asset strategies are better than top 50% Morningstar rankings for the trailing 3-year period, and three-quarters of them hold top quartile rankings over the trailing 5-year period. Our largest multi-asset strategy, Income Opportunity, was in the top third of its moderately conservative allocation category this quarter and beat similar asset allocator peers with an income bias. Over trailing 5-, 7-, 10-year periods and since inception, Income Opportunity is a top quartile Morningstar performer and holds a top 5% ranking since inception. Absolute returns for energy infrastructure were weak early on, but staged an impressive rally in the second half of the quarter to finish with double-digit returns. Over the past 3 years, the category has posted annualized returns exceeding 20%, as measured by the Alerian Midstream Energy Index, and our MLP SMA strategy has achieved returns far ahead of the Alerian index....

We have conviction in the energy sector, given its strong yields, positive earnings growth, and healthy balance sheets. Our fundamental approach to portfolio construction in this sector can add alpha to client portfolios. Global Real Estate and real estate income are both strategies that offer an attractive option for investors. No doubt, absolute returns in the category have been disappointing recently, but we firmly believe that REIT common stock and REIT preferred securities offer investors an attractive value proposition. REITs are paying robust dividends on their common and preferred shares, which means that our real estate investments are delivering consistent, durable income. Over trailing 3, 5, 7, 10-year periods, and since inception in 2001, our real estate income strategy has outperformed its benchmark, the ICE BofA Fixed Rate Preferred Securities Index.

Global Real Estate is similarly outperforming its benchmark, the FTSE EPRA Nareit Developed Index, since inception in 2018 and over trailing 3- and 5-year periods. Among its investment institutional peers, Global Real Estate ranks at the very top of the group over the same time periods. Turning to wealth management, client events and targeted engagement efforts contributed to keep client retention at 97%, while our new business efforts continue to gain traction. Gross inflows declined modestly, while net outflows rose due to normal seasonality, as clients typically make withdrawals at this time of the year to fund tax payments, required distributions, and pension payments. On the new business front, our focus on providing broader services to our clients, and not just money management solutions, is producing significant wins for the team. Our pipeline also looks promising, with many multimillion-dollar opportunities in the wings.

I wanted to take a couple of minutes to share a success story in our wealth group that highlights how our team works to establish trust, help clients solve problems, and create estate plans. We onboarded a new client recently, a younger entrepreneur in his fifties, who recently experienced a liquidity event from the sale of his business. Naturally, he'd spent most of his time building this business with little time left to focus on estate planning. Over the years, he had placed money with several investment managers without coordinated planning, and he lacked a collaborative approach to manage overall portfolio risk and optimize tax management. Our wealth team offered him a holistic approach, going beyond just money management, and assisted with estate tax savings, wealth transfer strategies for his children, and asset protection strategies. Our relationship with Vista Bank enabled us to match rates for his line of credit.

Knowing he has a competitive line of credit available for future use gives him comfort to add additional assets to his Westwood account. As his level of trust with us has grown, he has consolidated his family assets at Westwood, and we look forward to receiving additional asset flows this year as he liquidates additional businesses. Our wealth team will continue to target improvements that can enhance the overall client experience. Moving to our institutional and intermediary distribution activities. Our institutional team delivered our first net positive quarter since the first quarter of 2022. Inflows were driven by both new SMID-cap client accounts funding and client rebalances into our SMID-cap and small-cap strategies. Conversely, on the outflow side, client rebalances, led by large cap in our sub-advisory business, were the primary contributor to institutional outflows for the quarter.

We had just one client loss during the quarter, following a planned restructuring in which all of the client's equity managers were terminated. Our institutional pipeline remains healthy, with over $1.3 billion in business opportunities. In addition to our newly funded SMID-cap accounts, several other accounts that we won in late 2023 are expected to fund in the coming weeks and months. All our key consultant approvals remain in place for small cap and SMID-cap. Fortunately, search activity and placements continue to stem from these important approvals. Moving through the rest of the year, we aim to maintain our current good levels of stability with existing clients. In addition, we've also held constructive meetings with numerous prospects and consultants to introduce our managed investment solutions team.

Our internal teams have been hard at work building the analytical and operational systems needed to support the group, and we fully expect our new MIS capabilities to open significant new pools of capital for us. In the intermediary channel, the combination of economic uncertainty paired with a trend of risk-averse investors seeking higher cash yields continues to drive net outflows. However, outflows are stabilizing for most of our strategies. Our domestic equity strategies had positive net flows during the quarter, and despite strong evidence of outflows in Morningstar's small cap category, our small cap mutual fund had positive net flows. Our intermediary team is emphasizing several initiatives designed to foster new sales and focused on client retention. We anticipate continued opportunities in our intermediary channel, especially for multi-asset, real estate, and energy strategies, all of which offer compelling options for yield-conscious investors.

In addition, small market cap valuations are attractive relative to other equities, and many broker-dealers are highlighting this as a viable investment option. As this trend continues, it is expected to benefit our smaller market cap strategies. To recap, we firmly believe that our expanding suite of strategies is poised for a successful year, and our sales teams are hard at work promoting our products. On last quarter's call, I told you about $400 million in wins that had not yet funded. For those updating models, just over $200 million funded in the first quarter, and nearly $300 million of additional capital is expected to fund in the coming weeks and months. Exact dates are out of our control, but many are likely to fund in June.

Notably, several of these new accounts will go into our collective investment trust vehicle, which is an attractive option for defined contribution plans. It often takes longer for record keepers to onboard a CIT versus a mutual fund, but the good news is that CITs frequently receive inflows as participants consistently contribute via 401(k) deductions from their paychecks. We submitted two large RFPs for our small cap and energy products recently, and a tier one consultant has added SMID Cap to its select list. Select is the highest rating, and as a result, our SMID Cap strategy becomes the default option for the consultant's clients, and we are very encouraged to see the related pipeline build. Many of these searches are replacements in the OCIO, or outsourced chief investment officer, area, so the status as a default option in the category bodes well for Westwood.

I'm also pleased to report that we have five pending approvals from tier two consultants. These can take a bit longer to implement, but should yield positive search results for smaller plan providers. In addition, we've had several good meetings with family offices who are showing interest in small cap and energy. In summary, our traditional strategies are performing well, our pipeline's filling up nicely, and we're excited about our new investment offerings, namely Managed Investment Solutions and our ETF strategies. We are particularly eager to see how our ETFs grow as we appeal to a different audience and build awareness efficiently via digital marketing efforts. We're working hard to build out the infrastructure to support our Managed Investment Solutions team, and we recently added another team member who was a former colleague. The reception from clients and prospects to our new MIS capabilities has been nothing short of exceptional.

We are 12 for 12 on meeting requests and are making sure to update our potential clients on the progress we are making. We expect to finish the basic infrastructure in the third quarter and hope to onboard a new client in the fourth quarter for the MIS strategies. I'll now turn the call over to Terry Forbes, our CFO.

Terry Forbes (CFO)

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $22.7 million for the first quarter of 2024, compared to $23.2 million in the fourth quarter and $22.7 million in the prior year's first quarter. Revenues were comparable to both the fourth quarter and last year's first quarter. Our first quarter comprehensive income of $2.3 million, or $0.27 per share, compared with $2.6 million or $0.32 per share in the fourth quarter due to higher employee compensation and benefits expenses, partially due to seasonality of incentive compensation, offset by changes in the fair value of contingent consideration. Non-GAAP economic earnings were $3 million or $0.36 per share in the current quarter versus $3.6 million or $0.43 per share in the fourth quarter.

Our first quarter comprehensive income of $2.3 million or $0.27 per share, compared favorably with last year's first quarter income of $0.7 million or $0.09 per share, primarily due to changes in the fair value of contingent consideration, offset by higher income taxes. Economic earnings for the quarter were $3 million or $0.36 per share, compared with $1.7 million or $0.22 per share in the first quarter of 2023. Firm-wide Assets Under Management and Advisement totaled $17.2 billion at quarter end, consisting of Assets Under Management of $16.2 billion and Assets Under Advisement of $1 billion.

Assets under management consisted of institutional assets of $7.7 billion or 48% of the total, wealth management assets of $4.2 billion or 26% of the total, and mutual fund assets of $4.2 billion or 26% of the total. Over the quarter, our assets under management experienced market appreciation of $0.9 billion and net outflows of $168 million, and our assets under advisement experienced market appreciation of $45 million and net outflows of $80 million. Our financial position continues to be very solid, with cash and short-term investments at quarter end totaling $46.6 million and a debt-free balance sheet. I'm happy to announce that our board of directors approved a regular cash dividend of $0.15 per common share, payable on July 1, 2024, to stockholders of record on June 3, 2024.

That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website, reflecting quarterly highlights as well as the discussion of our business, product development, and longer-term trends in revenues and earnings. We thank you for your interest in our company, and we'll open the line to questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. One moment for our first question. Our first question comes from Macrae Sykes with GAMCO. Your line is open.

Macrae Sykes (Portfolo Manager)

Oh, good afternoon, everyone.

Brian Casey (CEO)

Hi, Mac.

Macrae Sykes (Portfolo Manager)

Two things. First, could you just give me a little more detail on the funded wins in 1Q and coming up in 2Q? Are they all for the same CIT, I believe, in strategy?

Brian Casey (CEO)

Most of it is for the CIT. We did have one small cap in there as well, separate account.

Macrae Sykes (Portfolo Manager)

Okay. And then could you dig a little bit more in the ETF launch? ... maybe what you've learned after sort of going through the process. I mean, obviously, it seemed pretty successful out of the gate, good volumes, et cetera. I was curious as to get your little more granular feedback on, on the process, what you were pleased with, and, and what was some of the feedback you got from the investors, both on the vehicle approach as well as the strategy?

Brian Casey (CEO)

Sure. So we started this project about eight months ago, and we've had a team internally that has been studying the space and trying to figure out how can we best play in the ETF space. And we wanna be in the income-oriented part of the market. And there's a lot of those types of ETFs, but what we found is there were none that did what we ended up doing, which is building a midstream energy portfolio and writing covered calls against those positions to take what is normally a 6% or 7% yield and increasing that to north of an 11% yield.

The other thing that we learned in the process is that advisers and their customers really appreciate getting a monthly distribution. So we are providing that and producing a monthly, you know, just under 1% a month for people. So it's a very competitive income-oriented strategy. We hired some consultants to help us. We hired another firm to help us market the strategy. So we have, I think, a really good team in place, and we're very, very happy with the launch of the first ETF, which came out a few weeks ago on the New York Stock Exchange. Today, we launched our second ETF, WEEI, on Nasdaq.

The reason we did Nasdaq is we wanna see how each of these ETFs perform on these two exchanges, so that as we launch others in the future, we'll have a good feel for what we can expect. So, we're very pleased. You know, the important thing with ETFs is that you have good, consistent volume, which we've been able to see so far with our first ETF. Our team was in New York today, and for the launch on the Nasdaq, and had a lot of good meetings, a lot of good press around those meetings. So this is a very different approach than we've historically done around here. The marketing is done primarily through media interviews, digital, and really just, you know, word of mouth through the advisor community.

So our guys that have been out selling have had really good reception to the products. I was in with one of our large institutional investors last week. We had the longest conversation on energy that I've had in probably five years, and they both took down the ticker symbols of our ETFs, and they're gonna buy them personally. So I think we may have found a good spot here. Time will tell, and we'll see what the volume looks like and the kind of interest we'll attract, but we're certainly certainly excited about it. The other thing I would mention is there were some expenses associated with the launch of the ETF, which was over $250,000, about $257,000 in the first quarter.

We also have expense associated with the launch of our Managed Investment Solutions business, which is about $821 thousand for the quarter. And we had some synergies and severance costs of about $572 thousand. So a lot of things that happened in the first quarter that impacted our earnings. It's also an unusual quarter, seasonally because we pay our bonuses in February, so we have taxes of $100 thousand, and we have a 401(k) match. Many people take part of their bonus and max out their 401(k) in the first quarter. So in total, that's about $465 thousand. On the positive side, we did receive a revenue-sharing payment from InvestCloud in the amount of $512 thousand.

So that was a real positive, and we were pleased to see it. So, we're happy with the quarter, we're happy with the pipeline. Our AUMs higher than it's been in five years, and we look forward to talking to you guys again next quarter. We appreciate all of you who voted for the proposals in our proxy today, and we appreciate your support. So please, visit westwoodgroup.com or give Terry or myself a call if you have further questions. Thanks very much. Have a great afternoon.

Operator (participant)

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.