Sylvia Fry - SVP and CCO
Brian Casey - President and CEO
Mark Wallace - CFO
Mac Sykes - Gabelli & Company
Westwood Holdings Group, Inc. (WHG) Q4 2013 Earnings Conference Call February 6, 2014 4:30 PM ET
Thank you all for holding and welcome to the Westwood Holdings Group Fourth Quarter 2013 Earnings Conference Call. Today’s call will begin with a presentation followed by a question-and-answer session. (Operator Instructions) I would now like to turn the call over to your host for today’s conference; Sylvia Fry, Senior Vice President and Chief Compliance Officer. Ms. Fry, your line is now open.
Thank you. Good afternoon and welcome to our fourth quarter 2013 earnings conference call. I’d like to start by reading our forward-looking statements disclaimer.
The following discussion will include forward-looking statements. These forward-looking statements 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 statement. 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 Annual Report on Form 10K for the year ended December 31, 2012, 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 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 our call today we will have Brian Casey, our President and Chief Executive Officer; and Mark Wallace, our Chief Financial Officer. I will now turn the call over to Brian Casey, our Chief Executive Officer.
Thanks, Sylvia, and good afternoon everyone. Welcome to the fourth quarter earnings call. Thank you for taking the time to join us today. The fourth quarter of 2013 was a record-setting quarter in many respects across our business. Mark Wallace will cover the specific milestones with respect to revenues earnings and assets under management. But I would like to first take a minute to thank all of my colleagues for their effort and dedication to serving our clients. We always say that we believe that owners work harder than employees and that our business goes up and down the elevator every day. These results are proof that each and every person can make a difference for our clients and shareholders.
The past year was the 10th best year in the history for S&P 500 and Westwood’s domestic investment strategies finished the year well. Our SmallCap value team delivered a return of just over 11% for the quarter, outperforming a roughly 2000 value index by over 200 basis points, and for the year Westwood SmallCap value products returned 51% and outperformed the index by over 1600 basis points; ranking in the top 5% of its peer group for one year, and in the top decile for three years.
Our MLP and income opportunity strategies also delivered superior positive absolute and relative performance in the fourth quarter despite of volatile interest rate environment. For the year Westwood’s MLP product posted a return of nearly 37% while income opportunity gained over 16% with the volatility profile similar to the ten-year Treasury. Both strategies outperformed their respective indices by nearly 1000 basis points in 2013.
However SMid and SMid plus products kept up with their respective benchmarks in a strong fourth-quarter rally to round up the year. Given the continued relative bias towards SmallCap and growth starts we were particularly pleased to have matched these respective benchmarks for the quarter. We are excited for the prospects of SMid plus in 2014, with only a three year track record we have already amassed over 700 million in asset today.
After outperforming benchmarks in the second - third quarters our LargeCap value strategy lacks slightly in the fourth quarter. Investors showed a strong preference for smaller cap names, growth over value and it was tough for the LargeCap space. The fund is well-positioned for a less liquidity driven environment and we’re encouraged by the fund’s performance at the start of 2014 which puts us ahead on a trailing 12 months basis and for the year-to-date 2014.
With respect to institutional sales it was a year that proved more than ever the value of being positioned in higher demand, lower supply asset classes. From Westwood’s perspective this was most evident in terms of new business generated within our emerging markets and income opportunity strategies. We consistently gained new clients in both areas over the course of the year. We believe that the addition of our emerging markets SMid strategy will be a positive given the team’s reputation and the limited nature of competition in this market segment. In less than six months we have earned over 500 million in new client assets in emerging market SMid product and we looked at an additional 1 billion as we build the record in the years ahead.
The income opportunity strategy is well-positioned for further growth as a recent positive peer group performance particularly against some of the larger global tactical asset allocation strategies becomes evident to prospective investors. In the year ahead we intend to broaden the strategies that drive new business. Interest levels in MLP and SmallCap value have increased and the team is focused on earning new business after considerable effort to build market awareness and strong performance.
In addition of sales, we are focusing on marketing and communication. We hired a talented professional at the end of last year to help us better tell the Westwood story and better articulate our long track record of success. In part this will consist of enhancing our website, investing in both the quality and volume of our thought leadership and media presence and enriching our brand strategy. The aim of these initiatives is to grow the visibility and image of Westwood and to ensure a common message to our constituents, to let people know exactly who we are and why we are worth their attention.
During the fourth quarter of 2013, we received several strong industrial and media acknowledgements. We wrote an analysis of how certain asset classes are likely to perform in a rising rate environment and published research on the attractiveness of the MLPs. During the first quarter of 2014, we will continue to develop and distribute thought leadership teasers on US SmallCap value, the evolving environment in china, and opportunities available in the US healthcare sector. Look for these pieces on westwoodgroup.com.
While performance in Westwood emerging market strategy was up against the headwind we remained steadfast in our process, investment discipline and our focus on downside protection. The fourth quarter was the time to recalibrate and capitalize on investing opportunities for the longer term across all of the global and emerging markets mandates at Westwood International advisors. We were able to leverage short-term mix pricing to initiate a number of new positions that demonstrated attractive fundamental characteristics such as a unique business model or a sustainable competitive advantage.
We constantly review or investment thesis on all of our existing holdings and we are confident that we are well-positioned for the inevitable recovery that will occur. Our research and due diligence efforts remained rigorous and robust as evidenced by recent meetings with members of our team in London, Spain and Vietnam. From a business standpoint we were awarded of first Canadian pension plan client and we’re in the final stages of due diligence with a European client during the quarter.
We also visited Sydney and Melbourne in Australia to meet with an existing client as well as potential new client sponsors and consultants. We continue to be encouraged by the potential business prospects of the global institutional marketplace. In addition, we continue to leverage the usage structure that we created in 2013 in response to client demand for our AM strategy in a pooled vehicle for non-US investors. The usage pipeline anticipates two additional clients in the coming months and we are pleased with our fast start to this new line of business.
The Westwood mutual funds family had an exceptional 2013 with 800 million total net flows, and with an organic growth rate of 50%. Flows were concentrated in the Westwood income opportunity fund but 8 of the 10 funds had positive net flows on the year. We were particularly pleased to see flows from broker dealers in RIAs which is encouraging because we only began targeting just this year with the hiring of a veteran wholesaler. Our short duration high yield fund most recently added to a broker dealer model portfolio and experienced positive flow during the fourth quarter.
We have recently had discussions with a long-term plan, who was making a large contribution to the fund this quarter in 2014 that will increase the size of this short duration fund by nearly 50%. Westwood trust had another good year with a steady flow of new clients in Dallas and Omaha. Telling the Westwood story and establishing market relationships is the key to future growth in this category. We are also searching for dedicated and knowledgeable advisors to assist us in growing our business model and hope they have more to tell you on that next quarter. Our clients continue to provide positive feedback regarding our service levels. Last year we had two trust attorneys to the team, one in Dallas and the other in Omaha which increases our debt on the legal side of our trust offering.
In 2013 we actively evaluated a number of opportunities to expand our company through the acquisition of a private wealth business. None of them were a good set. Attractive private wealth firm acquisitions that fit well with our culture and business strengths can be challenging to find and may require long lead time in order to develop into a merger. We feel that we’re an ideal partner for business owners who want to join a company with a strong brand name who desire liquidity in a publicly traded stock and who wish to join an entrepreneurial culture in which they and their employees can thrive and grow. We continue to be diligent and thoughtful and locating opportunities to grow our company in the future and will always use our corporate capital on a shareholder friendly way.
I’ll now turn it over to Mark Wallace to review your financials and I’ll be available to answer your questions.
Thanks, Brian, and good afternoon everyone. Today we reported record financial results for both the fourth quarter and full year 2013. For the quarter revenue were up 22% to $25.3 million from the same period in 2012 and were 10% higher on a sequential basis. Diluted earnings per share for the quarter were 55% higher than last year and economic EPS was up 31%. Our results were driven by firm-wide net inflows for the fourth quarter exceeding $660 million, net flows were concentrated in or income opportunity, LargeCap and in emerging market strategies.
For the year revenue was up 18% to $91.8 million with diluted earnings per share increasing 42% to $2.34 per share. Economic EPS was 24% higher. Total assets under management increased $4.8 billion during the year with more balance and the diversifications across distribution channels. Institutional assets under management at year-end where $12.1 billion representing 64% of total AUM, private wealth now stands at $4 billion or 21% and mutual funds at $2.8 billion or 15%.
Westwood International synergies now comprise 13% of total AUM with clients diversified across the US, Canada Australia and Europe. We believe it’s important to maintain a strong and liquid balance sheet that allows us to both invest in our business and provide an attractive current yield to our shareholders. Cash and investment increased $11 million during the year to $75 million and we continue to have no long-term debt. Today, our Board of Directors approved a quarterly cash dividend of $0.44 per share payable on April 1 to stockholders of record on March 14. That represents an annualized dividend of 3.2% at yesterday’s closing price.
We encourage you to review the presentation posted on our website which reflects highlights of our fourth quarter and full-year results as well as longer term trends. Over the past five years we have achieved a compound annual growth rate exceeding 21% in assets under management and 18% of the incurring fee revenues with net inflows $2.2 billion. We have achieved a strong weighted growth in dividend and earnings per share on both the GAAP and economic basis. As Brian mentioned on our last call we have now paid dividend to shareholders in excess of $100 million since our spinoff in 2002. In closing, we believe we executed well on our strategic initiatives in 2013 and are well-positioned to continue delivering value for our shareholders.
I’ll now turn the call back over to Brian
Thanks Mark and we’ll be happy to take any questions if you have one
(Operator instructions) And our first question comes from the line of Mac Sykes with Gabelli & Company; your line is now opened.
Mac Sykes - Gabelli & Company
Congrats gentlemen on the record AUM and strong year, and also maintaining your entrepreneurial culture. My question is in terms of your spend (Ph) resources for 2014, how are you thinking about allocating some of that capital, are you focusing on a distribution International, perhaps just some color on your growth plans for next year?
Well Mac we have made a concerted effort over the last year so to expand our distribution platform we hired a new head of institutional global sales last year, we hired a wholesaler last year, we are looking for a dedicated institutional sales person this year. So we continue to do that. Historically, we have always spend our capital on investment talent and building out our investment platform, but look for us to continue to build that out as well as our sales.
Mac Sykes - Gabelli & Company
The short duration fund, how much does that have?
At the end of the year it had a little over $100 million.
Okay, do we have any questions?
I’m not showing any further questions in the queue.
Very good, we will also conclude our call and we appreciate everybody listening. If you have any questions please give us a call, Mark or myself; or visit our website at westwoodgroup.com. Thanks for your interest
Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day everyone.
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