Manning & Napier, Inc. (NYSE:MN) Q1 2021 Earnings Conference Call April 28, 2021 5:00 PM ET
Nicole Brunner - CMO
Marc Mayer - Chairman, CEO
Paul Battaglia - CFO
Conference Call Participants
Good evening. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Manning & Napier First Quarter 2021 Earnings Conference Call. Our hosts for today's call are Nicole Kingsley Brunner, Chief Marketing Officer; Marc Mayer, Chairman and Chief Executive Officer; and Paul Battaglia, Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at 8:00 PM Eastern today. The dial-in number is 404-573-3406 and enter PIN 407-2878. At this time, all participants have been placed in a listen-only mode. [Operator Instructions.]
It is now my pleasure to turn the floor over to Ms. Nicole Kingsley Brunner.
Thank you, Angela. And thank you everyone for joining us today to discuss Manning & Napier's first quarter 2021 results.
Before we begin, I would like to remind everyone that certain statements made during this call not based on historical facts, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements.
Manning & Napier assumes no obligation or responsibility to update any forward-looking statements. During this call, some comments may include reference to non-GAAP financial measures. Full GAAP reconciliations can be found in our earnings release or related SEC filings.
With that, I will turn the call over to our Chief Executive Officer, Marc Mayer. Marc?
Thank you, Nicole. There are several main points we would like to make today. 1) We continue to deliver good investment results for clients and we are receiving notable recognition for them. 2) The combination of those results as well as our marketing and PR efforts and investments in our client facing teams are positioning us well to continue improving the trend in net flows.
3) Our strategic initiatives are progressing well and we've launched the overhaul of our wealth management pricing model. And 4) as planned, we returned capital to shareholders in the first quarter. We will discuss each of these in detail as we progress throughout the call. First, let us begin as we always do with our investment results for clients.
Specific figures are available on pages six and seven of the earnings supplement. Performance remains strong across the risks spectrum for our traditional multi-asset class investment strategies for all the main stay of our holistic wealth management solutions. Each of our various risk-based strategies delivered positive ahead of benchmark total returns in the quarter.
There's several aspects to the first quarter that make us proud of these results. First, the three months of the year were the most difficult quarterly stretch for aggregate U.S. fixed income performance in almost 40 years. The rapid and nearly continuous rise in interest rates from extremely low levels challenge bond holders leaving many fixed income investors with losses in the order of low single-digit percentages.
For the portion of our more defensive portfolios that are heavily weighted to fixed income, this was a very difficult end-market environment broadly. The dynamism of our asset allocation is visible in many ways; moving it between asset classes; pressed to dial with these capitalizations and equity styles.
It is also visible within fixed income sectors and strategies. Our ability to allocate to our own high yield and unconstrained bond strategies within our multi-asset class portfolios notably aided performance in the first quarter, which was very important as municipal bonds normally the first choice for taxable investors had become extremely expensive and unattractive.
We're able to generate positive returns close to 3% in the case of high yields against the high yield benchmark that was flat where our core bond in municipal portfolios were down alongside the broader fixed income market. We run a significantly more concentrated high yield portfolio than many managers; carefully analyzing each credit to make sure we're more than compensated for the risk we take.
In the quarter, we were aided by much higher than benchmark exposure to cyclicals, energy and financials. And in the long-term, we have delivered performance in high yield that ranks in the top 11% over one, three, five and 10 years. We also have strong performance in unconstrained bond ranking in the top 16% of the competitive set over three years -- I'm sorry, over 10 years.
In the first quarter and over the medium-and-long term, our ability to deliver above benchmark performance in multi-asset class strategies while maintaining risk management disciplines highlights why we are pleased with the results we delivered for clients. We've been managing our dynamically allocated globally diversified multi-asset class investment strategies for decades.
These are tightly integrated complete portfolio solutions for use directly with wealth management clients as well as by third party financial advisors and consultants looking to provide high quality solutions to their clients; both individuals and institutions. We believe in accountability and our track record is fully audited; turning back to the inception of our flagship long-term growth strategy in 1973.
Before I finish talking about our multi-asset class strategies, I want to talk a little bit about what went on in equities. In considering the equity components of our multi-asset class portfolios, while equity market returns around the world were quite good on the order of 3% to 6% for the major equity industries, within the broad aggregates there was a great deal of turbulence.
Value stocks laggards from much of the past decade until November of 2020 outpace growth stocks in the quarter. Many highly valued winners of prior years' declined 20% or more. Small cap stocks also long-term laggards surged ahead of large cap stocks. Our core team which had brought down equity weights in our multi-asset class portfolios has stocks soared in 2020 pivoted an increased equity allocations in the face on unattractive returns in fixed income.
Our analyst teams found opportunities throughout many areas of the equity markets; at home and abroad; in both growth and in value; in large caps and then small; navigating the rotations underway. Because we are neither dogmatic growth nor value investors but flexible core managers with well-defined disciplines for analyzing both growth and value stocks, we were successful in the first quarter.
As a result of both our asset allocation decisions as well as security selection, we are pleased we delivered positive absolute returns for all of our risk-based multi-asset investment strategies as well as who have delivered more than full participation in the ongoing equity boom market in the first quarter.
So, coming back to our multi-asset class strategies. Our goal is to deliver growth over the long-term, for individual clients specifically how those results are generated matter a great deal. The risk of our strategies take the volatility or its clients experience in the nature of the performance pattern we deliver, these are all critical pieces of decline solution experience.
A smoother ride helps clients remain invested in more difficult market environments enabling them to benefit when markets recover. So, this is why our multi-asset class strategies built in such significant risk management disciplines. Our aim is to deliver a degree of downside protection when clients needed most while providing us much participation as we feel is prudent during up market environments.
So, I thought was stating our track record in multi-asset class investing dates back to the inception of our long flagship long-term growth strategy in January 1973. Now, if we look at Morningstar data, there are 7776 strategies listed in the Morningstar allocation category. Out of those, approximately 1000 multi-asset class separate account composites have a 10-year track record.
And out of those 1000, only four multi-asset class separate account composites have an inception date in the 1970s. The two longest standing multi-asset class separate account composites belong to the same manager demanding an eight years long-term growth and a growth with reduced volatility separate account composites. Someone who invested a $100,000 in a long-term growth strategy added conception in January 1973 with that $8.5 million today having realized equity like returns with 30% less risk.
This is a testament to our time tested research disciplines and processes. No other wealth management firm has this kind of track record that clearly and definitively quantifies what we have been able to deliver for clients over a half century of different market economic and social environments. Continuing with performance during the first quarter, I'll focus now on our equity strategies.
A fundamental U.S. equity, non-U.S. equity, global equity and core equity unrestricted portfolios, each outperform to start 2021. Relative results ranged a modest degree of outperformance newest equity to substantial outperformance in our non-U.S. equity in global equity strategy. Across all of these portfolios, the chief driver of outperformance was strong security selection, a testament to our analyst abilities to find opportunities even when many portions of equity markets are as richly priced as they are today.
It's a reminder that we don’t buy the markets, we are buying individual securities that we believe represent very attractive return opportunities. Beyond our core fundamental portfolios, our results were more mixed for the quarter. Our Disciplined Value suite was a beneficiary on an absolute basis of the first quarters equity market shift from the growth style to value but its tilt towards quality within the value space led to modest relative underperformance versus its benchmark.
It's intermediate to long-term results remain very good and we believe the strategy is well-positioned to benefit as flows swing back to value equity style. After a remarkable 2020, our Rainier International Small Cap strategy underperformed by about 500 basis points in the first quarter driven primarily by the global style rotational value. Rainier strategy which is a separate but equally disciplined in time-tested research process from our core bottom up portfolios is growth oriented.
Despite relative retracement last quarter, Rainier International Discovery Fund remains ahead of its benchmark by over 500 and 400 annualized basis points over the trailing three and five years respectively. Rainier is noteworthy as well for its affective risk management over its nine history; its downside capture has been better than 92% of its peer group and its sharp ratio wins in the top 4% over that timeframe.
It's worth noting that in our fundamental equity strategies, idiosyncratic risk dominates our portfolios. Even that our returns are not simply explained by factor exposures, this is very important in an environment where not only isn’t there much alpha, a substantial amount of what passes for alpha is just factor beta. Since investors can buy factor beta very inexpensively through alpha which is is idiosyncratic in nature, is genuinely valuable.
A word if I will on the current state of the capital markets and the implications for our thinking. Clearly, where now excess is visible, that go beyond high valuations on equities or bonds. With this the boom in special purpose acquisition vehicles so called stacks which have been around for long time but are now being used to bring two broader range of companies public. Some are there already and frankly many that's simply are not ready to be public.
Or the surge in the value of bitcoin. I'm not getting into any form of debate about the fundamental long-term consequences of cryptocurrency. It is hard to understand how coin base and exchange for trade in cryptocurrencies can go public at $85 billion laid up in the evaluation of nine stacked on which are trades, the London Stock Exchange or ICE which owns the New York Stock Exchange.
So, how Boerse coin which was started as a joke to be a 5000% this year and have an aggregate value of $50 billion. Incredible rise of online trading platforms most notably Robinhood has ushered in an important and useful democratizing force in finance. However, there is no question that the combination of addictive gamify trading apps with social media has led to provocative developments such as the rise-and-fall and rise of GameStop which has gone from $19 to $350 to $45 to a $150 all in the span of just the last four months.
With the incredible story of Archegos, a family office that levered about $20 billion by a factor of five or maybe more to buy total return swaps that didn’t require holdings disclosure. The banks that provided prime brokerage services for Archegos, has now announced losses of more than $10 billion; a massive failure in risk management. And a potent reminder that leverage only amplify results, it can't turn a bad investment into a good one.
The confluence of all these events and many more like them that we read about are disturbing. More so than the absolute valuation of stocks or bonds which are of themselves a source of concern. How we believe consistent with the consensus that we are in the midst of an economic and earnings boom greater than any sheen since the early 1980s; a great majority of professional investors have literally never seen a boom like this.
And the potency of operating leverage and consequently earnings is almost certainly being underestimated. This along with the low absolute level of interest rates, its legitimately supportive of higher equity valuations. However, notable parts of the equity market are certainly richly valued, as we discuss bonds are vulnerable to rising rates and increasing inflation although we do not forecast high and sustained inflation.
In conjunction with the specular of excesses I mentioned, all these factors call for a more muted outlook for the medium-term returns available in the markets as well as the recognition at a substantial equity air pocket at some point seems likely although the latter would probably be a healthy clearing of the air.
Turning now to an update on our strategic initiatives. Our excellent investment results are beginning to generate significant national recognition. We are pleased to have been recognized by Barron's as "The Best Mutual Fund Family For 2020." Additionally, we were recognized as a Refinitiv Lipper Funds Award Winner for the U.S. 2021 Best Mixed-Asset Class Small Fund Family Group over three years.
These awards are a terrific achievement in your own right but if there ever was a year for us to be particularly pleased to have this honor, it was during 2020 the year of unprecedented challenges and change. We and our clients are thankful for the skill and tireless dedication of our research team for a job very well done. It is critical that we resume net positive asset flows and we saw a further meaningful progress in the first quarter as the pace of net outflows continue to decline meaningfully from prior trends as Paul will cover in some detail.
We are optimistic with the pace of outflows will continue slowing throughout the year and that we will resume net positive flows before the end of this year. We believe that recognition such as the ones mentioned above as well as additional marketing PR and sales opportunities resulting from our long history of investment excellence will help promote our message and our story.
Along those lines, we added additional client facing personnel to our asset management business in the first quarter. As mentioned on prior calls, we will continue to bolster the size of our client facing teams throughout the rest of 2021 in both wealth and asset management. As mentioned on our prior call, in the first quarter we completed an overhaul of our pricing model for new clients in wealth management.
This comprehensive bundle fee incorporates wealth planning and advice investment solutions and custody. Current client's fees are grandfathered and our expectation remains that it'll be added to revenues over time. A digital transformation continues to move forward across multiple factors simultaneously. In 2021, we will implement a CRM an advisor portal with InvestCloud as well as portfolio counting and client reporting.
Our implementation of basic work worked at modules within finance has been completed and we are installing work dates business intelligence functionality as well as migrating all our human resource systems to work day. We'd expect full implement of Charles River for trading order management and compliance to be complete across all our portfolios by the end of the year.
All of these IT efforts will simplify and modernize our operational processes as well as improve the efficiency and experience for employees. 2021 however will continue to be a year of investment with material efficiencies coming in future years. A fourth strategic objective envelops all of the others and that allows that everything we strive to accomplish at Manning & Napier.
We are committed to being a talent-rich, diverse, highly aligned organization with a powerful distinctive culture. We believe that diversity and inclusion leads to better decision making and superior business outcomes for all. We are committed to being a firm whose diversity of staff, leadership and board are broadly represented at other country and the communities in which we work.
We know these changes take time, we are establishing goals and policies and practices to make meaningful progress and we look forward to sharing more specifics soon. Finally, on corporate structure. Last quarter we told you of our commitment to both enhance employee alignment with our shareholders by increasing share ownership by our staff while also returning cash to shareholders and ensuring that increased employee ownership is not dilutive to other shareholders.
Our share buyback program began last quarter and Paul will provide more color in his remarks. Finally, I'd like to take a moment to reflect on where we are more than one year after the onset of COVID in the United States. The virus has challenged us as a society and as a company to work in different ways to live in different ways and to think in different ways. I'm truly proud of the courage and the creativity our team has shown over the past 12 months.
We have been able to continue to deliver excellent investment results and high quality service for our clients at a time of unprecedented change. Our operating results improved substantially and we have been able to generate best-in-class returns to shareholders. That same courage creativity and immense determination will continue to service well for the years ahead.
With that, I'll turn the call over to Paul for more details on our financials.
Thanks, Marc. Good afternoon everyone and thanks for joining us today. The highlights for the first quarter included continued improvement on net client flows and further evidence of stabilized AUM, increases in revenue and operating income and good traction on the share repurchase plan announced on our last call. I did do my remarks for the review of assets under management: with this March with AUM of $21.1 billion up from $20.1 billion as of December 31st.
Net outflows for the quarter were a $132 million or the more than offset by $723 million of market appreciation. Additionally, during the quarter we adjusted our reporting of assets under management to include model delivery business that we've previously excluded from our definition of AUM. Which was a one-time reclassification and as of March 31st 2021 we had approximately $470 million of model delivery assets.
When compared to this time last year, which was nearly the bottom of the market at the onset of the pandemic, AUM has increased by $4.1 billion or 24%. Although net flows have not yet turned positive, a $132 million of net outflows for the first quarter represent another quarter of improvement compared to prior periods. Further client inflows improved to approximately $625 million.
A channel we reported approximately $225 million of inflows from our wealth management channel and $400 million of inflows from our intermediary and institutional team. Gross client outflows of approximately $750 million represented the lowest level of quarterly outflows that we have reported in the last several years with $300 million of gross outflows from our wealth management relationships and $450 million from our intermediary and institutional team.
Our separate account retention rate during the quarter was approximately 96%. Before leaving AUM, I'll provide some additional background on our model delivery business. The most popular core and quantitative strategies has been available thorough model delivery providers for access by individual investors for the last several years. Model business has been an increasingly important part of the intermediary distribution strategy and in particular with smaller accounts that may not meet our separate account minimums.
This trend accelerated during 2020 given the strong performance run with our model delivery assets increasing from approximately $200 million at the start of the year to more than $400 million by the end of 2020. While this business is lower fee than our traditional separate accounts, it is an important part of our intermediary growth strategy and we're optimistic of our growth prospects for both 2021 and beyond.
Turning to our first quarter P&L. We reported revenue of $34.2 million for the quarter; an increase of 2% from last quarter and 10% from the first quarter of last year. Revenue margins during the quarter was 68 basis points consistent to what we've reported in prior periods. Operating expenses were $27.9 million in the quarter; a sequential decrease of $1 million and $1.2 million decrease compared to the first quarter of 2020.
Compensation related cost decreased by approximately $275,000 since last quarter. The decrease for the quarter is predominantly driven by reductions in our 2021 research bonus estimates compared to what we was incurred in 2020 based on the very strong performance that we achieved. As you may remember, our research bonus is based on absolute and realty performance metrics for the trailing one and three year time periods even as the bonus expense recognized in 2021 will be reflective of both current and prior period performance.
Our first quarter results also include the impacts of our deferred compensation plan that was implemented at the start of the year grow by a fraction of incentive compensation for our most highly paid employees is differed, invested into our mutual funds, invested over a multi-year period. Compensation related cost as a percentage of revenue improved to 55% for the quarter down from 57% in the fourth quarter of 2020 and our overall headcount stands at 275 employees as of March 31st.
Other operating cost was the other contributor to expense reductions. At $6.7 million of expense represented a $675,000 decrease from last quarter. A 9% decrease was driven by a number of factors including seasonality and timing of certain expenses and the reduction and expenses stemming from the Target Date Fund Merger that was completed during the third quarter of 2020. For the quarter, other operating expenses represented 20% of revenue.
However, as we look ahead to the remainder of 2021, we expect that other operating expenses were more than likely settle in the 22% to 24% of revenue range as we continue to incur cost to support our digital transformation and expect travel cost to increase as restrictions are eased. Operating income improved $6.2 million in the quarter; an increase of nearly 40% from the fourth quarter with operating margins of 18%.
On prior calls, we've stated our commitment to achieving operating profits of $20 million or more and operating margins of 20% or better over an investible timeframe. We continue to make progress towards achieving these goals while also acknowledging that we have plenty of hard work in front of us to bring our margins more in line with our industry peers. Non-operating income for the quarter was $460,000; a reduction from the $1.1 million of non-operating income that we reported last quarter.
Which included income stemming from changes in our tax receivable agreement liability as well as investment to returns on our marketable securities. As a result, on a GAAP basis we reported pre-tax income for the quarter of $6.7 million compared to $5.7 million last quarter. After accounting for approximately $900,000 of strategic restructuring cost, we reported economic income of $7.6 million. Our non-GAAP effective tax rate for the quarter was approximately 12% resulting in economic net income of $6.7 million or $0.29 per adjusted share.
Similar to last quarter, the reduced effective tax rate is again the reflection of discreet tax benefits recognized from option exercises during the quarter. We believe that the non-GAAP effective tax rate of 30% is more representative of what we expect in future quarters but this rate may vary based on activities during the quarter as well as based on any future tax lot changes. In order to apply the normalized 30% tax rate to our first quarter results, our earnings per adjusted share would have been $0.23.
Looking at the balance sheet as of March 31st. we reported approximately $70 million of cash in investments down from $81 million the year-end with no debt. Year-end incentive payments were the primary driver the reduction in cash. Additionally, we repurchased 412,000 shares of Class A common stock for approximately $3 million following the announcement of our $10 million share repurchase program in February.
Repurchased shares will be reported as treasury shares on our March 31st balance sheet and they remain in treasury until they are retired or reissued. We expect to have additional updates on our share repurchase program in future course. Since the start of the year, our adjusted share count has increased by approximately 1 million adjusted shares to 23.7 million adjusted shares as of March 31st. the majority of the increase as attributable to awards issued when they were on long-term incentive plan that will invest over five years.
And adjusted share count was reduced by the afore mentioned share repurchases, however those repurchases were generally offset by option exercises. As of March 31st, our adjusted share count now includes approximately 17 million Class A shares outstanding, 2 million private units held by legacy shareholders, 700,000 invested stock options and approximately 4 million unvested stock awards issued under our long-term incentive plan. As of March 31st, our employees and directors now own approximately 37% of the adjusted shares outstanding up from approximately 33% at the end of the year.
In closing, the first quarter marked another period of meaningful traction on our strategic initiatives coupled with further stabilization of AUM and improved financial results. Like Marc mentioned earlier, this progress has been achieved in large part due to the hard working results of our people who has stepped up to embrace every challenge that we have been faced with over the past 14 months.
We are thankful to our people for their excellent work and dedication and look forward to celebrating future successes with our team, our clients and our shareholders. That concludes today's call. If you have any questions on the topics addressed today, please contact at using the enquiries portal on our Investor Relations website and we'll properly address your enquiry. Thank you for listening and for your interest in Manning & Napier. And I'll now turn the call back over to Angela to wrap up. Thank you.
Thank you, guys.