Westwood Holdings Group, Inc. (NYSE:WHG)
Q2 2014 Earnings Conference Call
July 30, 2014 04:30 PM ET
Sylvia Fry - Chief Compliance Officer
Brian Casey - President and CEO
Bill Hardcastle - CFO
Mac Sykes - Gabelli
Thank you all for holding and welcome to the Westwood Holdings Group Second Quarter 2014 Earnings Conference Call. Today’s call will begin with a presentation followed by a question-and-answer session. Instructions on that feature will begin later in the program. (Operator Instructions)
I would now like to turn the call over to your host for today’s conference; Sylvia Fry, Chief Compliance Officer. Ms. Fry, your line is now open.
Thank you. Good afternoon and welcome to our second quarter earnings conference call. Today 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 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 Annual Report on Form 10-K for the year ended December 31, 2013, 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 Bill Hardcastle, our Chief Financial Officer.
I will now turn the call over to Brian Casey, our CEO.
Good afternoon everyone and thank you taking the time to join our call today. Well, there’s never a shortage of work for us to do or goals for us to reach which is how we like it to be. It's the time of the year that pause to reflect on the fact that it was 12 years ago that we decided to become a public company. And thinking about that makes us profoundly grateful and we want to thank you our shareholders for the invaluable part that you’ve played and continue to play in the success of Westwood. At the time of Westwood’s spin off, only a small handful of asset management companies were public. The asset management industry had not yet been embraced the public form of ownership as an advisable move to make.
We felt like the ability to share ownership with all of the people that work at Westwood on behalf of our clients provided profitable alignment. We felt that a daily mark-to-market provided strong motivation to do our best for clients at all times and that the transparency that comes with being public to be an unbiased measure of our progress.
Finally being public allows us to run our business like the businesses that we’ve admired over more than 31 years. Mainly those companies that have supportive balance sheets that generate strong free cash flow, that share dividends with their shareholders in a meaningful way, that have long tendered employees and stable management, that has incidences of insider of ownership, that are disciplined with shareholder capital and are ethical beyond reproach.
These are characteristics that are top of mind at all times at Westwood and we want to express our deep appreciation to those shareholders who’ve been with us from the beginning. We simply would not be here where we are today without your support. We surpassed $20 billion in assets in our management for the first time in our history this quarter and had our highest level of revenues and earnings.
We also had positive absolute performance for every single strategy we manage. Relative performance was also largely positive in the second quarter as most strategies either outperformed or matched their respective benchmarks. Although equity correlations have continued to decline, we believe fundamentals and security selection will be key drivers of returns going forward and are pleased that our portfolio holdings continue to report solid results.
Westwood specialized strategies were strong performers as well. Our income opportunity product which came 5% for the quarter and ranked in the top decile of its peer group for the period, our MLP product which continues to build an impressive long term track record with a gain of approximately 15% in the second quarter and just over 20% for the first half of 2014 and our REIT product which posted a return of 7.6% in second quarter ranking in a top quartile of this peer group.
We return to our U.S. value strategies we find few exceptions to the positive trends. Westwood's all cap value strategy performed well in the second quarter on both an absolute and relative basis ranking in the top third of its peer group and our Smith Cap strategies also posted strong returns, ranking in the quartile of its peer group for the first half of the year. Our small cap value strategy modestly trailed its benchmark in the second quarter but the month of July has been very kind as our small cap product has moved slightly ahead of the benchmark year-to-date.
The small cap product ranks in the top third of its peer group on a one year basis and is in the top defile on a three year basis. Large cap under performed in the second quarter but I'm encouraged that inhering our large cap team update yesterday. It has been a difficult cycle for high quality managers. For over five years the market has favored low quality, low ROE, high data, non-dividend payers and small cap companies. The cycle has been elongated due to the unprecedented FED stimulus efforts and while it's been painful the wait for this cycle to turn, we are hopeful because we believe quality outperforms overtime.
Our large upside capture continues to improve even as the markets advance. Our downside capture in the three months we’ve had over the past year or, so namely June and August of last year and January of this year were all positive. Our portfolio of companies are high quality and trading below our estimate of their intrinsic value.
Our portfolio of companies are growing faster than the large cap benchmark and appear less expensive than the large cap benchmark while our active share is north of 77%. At some point the market will turn our way and we should exhibit the large cap outperformance that we’ve delivered over many market cycles in over three decades of managing money.
The positive results of our second quarter were further bolstered by the strong performance of Westwood Trust, which saw its assets under management increase by over $100 million. We have made three significant new hires this year and our new business development remains robust with prospect meetings trending nearly 40% above the prior quarter’s pace. We're excited about the growth potential for Westwood Trust and look forward to seeing the results with the increase in new business prospecting activity in the year ahead.
While we’re encouraged by all this, nothing better exemplifies the exceptional performance of the second quarter as well as our overall positive trajectory than the Westwood mutual funds. Total mutual fund assets finished the quarter at 3.3 billion in assets under management. The performance of our income opportunity fund particularly stands out. The fund reached $2 billion in assets with net flows of $129 million as investment advisors and their investors continue to favor multi-asset class strategies that demonstrate low volatility.
The fund has now doubled since last year and continues to attract assets. We continue to see income opportunity being used in a number of ways by institutional investors. This year, its use as a liquid alternative or absolute return strategy has been the most prevalent. This has resulted in a significant number of new clients choosing to invest through both our mutual fund and separate account vehicles. Most notable in Q2 was a $200 million separate account created by a large Midwestern public fund.
When we consider that mutual funds have largely been in outflow mode for over a decade, it’s all the more impressive that Westwood funds have had inflows and have grown and grown so rapidly. The critical mass asset level that every mutual fund seeks to meet is to have a 100 million under management. In fact a majority of mutual funds never reach the $100 million level. Of our 10 Westwood mutual funds, six of them have assets that have met and exceeded that mark.
Our UCITS fund, which is not even a year old, has reached over $835 million in assets. We welcomed a significant new investment of $130 million in client assets from a Dutch private bank and the prospects for additional flows look promising.
Our first UCITS fund has exceed expectations and the structure is now in place to launch additional sub-funds and other strategies for non-U.S. investors as demand dictates. This kind of growth isn’t accidental. It’s the direct result of our commitment to maintaining a world class research department, both in Dallas and Toronto. We often quote John Wood, the famous UCLA Basketball Coach and the inspiration for our name Westwood, who said, it’s the little details that are vital. Little things make big things happen.
Our research department’s tireless attention to the little details is the key to our major successes and this is has been particularly acute recently with the detailed work of our Westwood International Advisors team. The WIA team continued its intensive on-the-ground research efforts in the second quarter, focusing at first on Asia, North America and Africa. Our analysts covered an array of potential companies with visits across Mainland China focusing on the industrial segment as well as visits to Indonesia, Malaysia, Thailand, Singapore and the Philippines. Patricia even visited Nigeria and Ghana to meet with companies and the local authorities. All-in-all the team visited an excess of 80 companies on these trips alone. The laborious travel and extensive research has begun to bear fruit with the EM strategies well ahead of their benchmarks and on the top of their peer groups' year-to-date.
Our strategies in emerging markets continue to receive a high level of engagement from investors, both within in North America and overseas. This has continued so far in the third quarter with the notable funding of a $500 million mandate by a large Canadian investor over the last few weeks. We have also been awarded three new mandates in the Emerging Markets Plus Strategy that intend to fund in the coming months.
This will help significantly increase the current level of assets and assist us in future fund raising efforts. For a number reasons we believe our newest strategy, EM SMID, is well placed for growth. Most notably it’s been less than a year since it was launched and yet it’s one of very few strategies to have 500 million in assets under management in its particular part of the market.
Our corporate development team has been evaluating established private wealth firms with strong reputations and client bases. We’ve had some meaningful discussions recently but remain disciplined with our shareholder capital. We continue to believe that Westwood is the ideal partner for business owners that want to continue to grow their own business while partnering with a Company with a trusted reputation, a long history of customer satisfaction and a liquid, publically traded stock.
Westwood launched a new corporate website at the beginning of June and we’re now in the process of upgrading our Investor Relations site. In addition the second quarter, also marked the release of several thought leadership pieces. For the third quarter we planned to release a thought piece on the media industry and a video update on the income opportunity.
For the remainder of the year and into 2015 we’re focusing on enhancing the overall investment messaging of Westwood’s products and the brand and look of our marketing materials. As I mentioned at the beginning, it’s a time of genuine gratitude at Westwood. We’re very thankful for the many successes of our second quarter. In particular we’re pleased to earn another significant performance fee and I’d like to thank the great work of our research department and in particular Todd Williams and Matthew Na for another great year for the MLP product.
It is truly amazing to see sequential revenue growth of over 19% with expense growth of only 1%. This is the definition of operating leverage and it’s one of the many reasons to invest at a growing asset management company.
Before I turn the call over to Bill Hardcastle, I’d like to thank Bill for stepping back into the role of Interim CFO. He’s done a terrific job, while giving us time to search for a permanent CFO. We expect to make an announcement on our new permanent CFO in a few weeks and we’ll file a press release and 8-K at that time.
I’ll now turn things over to Bill and I’ll be available for questions when he’s concluded his remarks.
Thanks, Brian. Good afternoon everyone. Today we reported strong financial results for the second quarter 2014. Our total revenues for the quarter were $30.9 million, a 32% increase compared to $23.5 million in the second quarter of 2013. Comparing second quarter revenue in 2014 versus 2013, asset based advisory fees increased by 34%, performance based fees exclusively in our MLP strategies increased by 36% and trust fees increased by 13%.
GAAP net income was $8.8 million, an 81% increase compare to $4.9 million for the second quarter 2013. GAAP EPS was a $1.14 per diluted share versus $0.65 for the second quarter 2013. Economic earnings were $11.6 million, compare to $8 million for the second quarter of 2013 and economic EPS was $1.50 per diluted share versus $1.7 in the prior year quarter.
Non-GAAP performance measures, economic earnings and economic EPS are defined and reconcile with the most comparable GAAP financial measures and tables included at the end of our earnings release. Total expenses for the quarter were $17.2 million a 9% increase compared to $15.7 million for the second quarter a year ago.
Firm wide assets under management were $20.1 billion as of June 30 2014, an increase of 27% over the prior year. Institutional assets at quarter end were $12.7 billion, representing 63% of total AUM, private wealth now stands at $4.1 billion or 21% of the total and mutual funds total $3.3billion or 16% of total AUM.
Included in this numbers Westwood International strategies now comprise 15% of our total AUM. Our Board of Directors has approved a quarterly cash dividend of $0.44 per share, payable on October 1, 2014 to stockholders of record on September 15, 2014. This represents an annualized yield of 3.4% at yesterday’s closing price.
We have posted a presentation on the Inventor Relations session of our Web site at westwoodgroup.com that I encourage you to review. The slides reflect second quarter financial highlights as well as longer term trends and the growth of our AUM revenue, earnings and dividends. I’ll also note that we are filing our 10Q later this afternoon. If you have any questions after reviewing any of this information feel free to give me a call at the phone number listed on our website.
That concludes my discussion of our financials and I’ll turn the call back over to Brian.
Great, Bill. Thanks. If anybody has any questions press pound.
(Operator Instructions) And our first question comes from the line of Mac Sykes from Gabelli. Your line is now open.
Mac Sykes – Gabelli
On a compensation line it was unchanged on a sequential quarter. So really nice leverage there. Were there any unusual items there or is that -- was it just the benefit of the higher AUM?
Any unusual items in the comp [ph] line?
Mac Sykes - Gabelli
Right. Was anything affecting that or is that…
No, no Mac. That wouldn’t be tied to the AUM. [Indiscernible] to answer your question.
Mac Sykes - Gabelli
Okay. Just moving on here, usage assets are really growing nicely and I'm assuming that the fee rates in that is additive to the complex just giving [ph] results. I was wondering if you can just give a little more color on that.
Well, sure I think we’ve posted before what our average fee is, pretty simple to figure out, take the revenue divided by the assets. But the great thing that’s happening with all of our newer products carry a fee that’s higher than our average fee and any of the outflows that we’re experiencing tend to be in products that have a much lower fee. So while year-to-date, our flows have been mixed, the mix itself has improved quite a bit. And in fact the trade-off is in that positive in terms of revenues. Does that answer your question?
Thanks, Matt. (Operator Instructions). Any other questions?
And I am showing now further questions on the phone lines at this time.
Well, great. Well we appreciate your time. If you have any further questions, please call Bill or I directly, visit our website at westwoodgroup.com and again many thanks for being a shareholder for 12 years. It’s awesome. Thank you very much.
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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