Acadian Asset Management Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group earnings conference call and webcast for the fourth quarter and full year 2019. 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, February 6, 2020, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Brett Perryman, Head of Corporate Communications. Please go ahead, Brett.

Good morning, and welcome to BrightSphere's conference call to discuss our results for the fourth quarter and full year ended December 31, 2019. Before we get started, please note that we may make forward-looking statements about our future 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 these factors appears in our SEC filings, including the Form 8-K filed today containing our earnings release and in our 2018 Form 10-K. 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 will 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. Guang Yang, our President and Chief Executive Officer, and Sir and Rana, our Chief Financial Officer, will lead the call. And now I'm pleased to turn the call over to Guang.

Thanks, Brett. Good morning, everyone. Thanks for joining us today. Let me begin on slide five of the presentation by walking through some of the highlights for the fourth quarter and for a year. We reported ENI per share of $0.50 for the fourth quarter compared to $0.42 for the third quarter. ENI per share grew 19% quarter over quarter, driven by stronger than expected performance fees across several of our high-performing quantitative strategies, as well as ongoing share repurchases. Net flows for the quarter were negative $25.1 billion with negative $22.8 billion related to the previously announced reallocation of several Vanguard sub-advisory strategies managed by Burrow Henley. Excluding those reallocations, net flows for the fourth quarter were negative $2.3 billion and meaningful improvements compared to the prior quarter. As we have mentioned previously, the overall revenue impact of the Vanguard reallocation was limited, reflecting lower subadvisory fee rates and the reallocation of those accounts has a limited impact on our earnings going forward. As you will recall, Last quarter, we restructured our reporting to provide greater visibility into our business mix, which shows broad participation in high-growth segments of the industry. As you can see in the chart on the right, two-thirds of our revenue is generated from quant and solutions and alternatives, areas that have significant potential for continued growth and expansion. Turning to slide six, we continue to make progress across our long-term growth strategy. In the quant and the solution segment, Acadian has experienced recent headwinds in the U.S. and emerging markets, similar to other quant managers, but its performance in the non-U.S. developed markets is well above benchmarks over the 3, 5, and 10-year periods. The firm's long-term performance is excellent, with nearly 100% of its strategies beating the benchmarks over the 10-year period. Acadian's multi-asset cost strategy is off to an excellent start. in terms of both performance and client demands, as investor appetite for highly tailored and outcome-oriented solutions remains high. In the alternatives segment, we see strong interest in our differentiated strategies as investors around the world continue to increase allocations to illiquid and uncorrelated products. As previously mentioned, we're currently engaged with a wide range of clients in this segment and expect fundraising momentum to build throughout the year and into 2021. With our widely recognized investment expertise in this segment, we see significant opportunities for rapid capital deployment of new cash flows. In the liquid alpha segment, our affiliates continue to build long-term track records of our performance with strong investment returns over all relevant time periods. In particular, Borough Henley has strong performance across its diversified suite of offerings, including non-U.S. value, global value, emerging markets, and multiple fixed income strategies. Borrower's large-cap value composite continues to outperform over the critical three- and five-year periods, as well as the near term, and has ample capacity for additional investments. Borrower has a healthy new business pipeline, and management continues to enhance investment offerings. The next element of our strategy focuses on expanding capabilities in high-demand, higher-faith business. As we mentioned last quarter, our most recent innovation is an exclusive partnership with Mercer to offer a total solutions investment capability to institutional investors worldwide. Early response among potential clients has been very positive and we're currently engaged with investors across key global markets. Seeding has been a long-term element of our strategy, and we have well-established and successful track records of seeding new products, such as borrow-handless emerging markets equities and leveraged loan capabilities. as well as Acadian's single-factor and multi-asset cost strategies. Finally, we continue to evaluate opportunities to further diversify our business by acquiring new investment capabilities while maintaining pricing discipline as part of our capital management strategy focused on maximizing shareholder returns. Third, We remain focused increasing business from key global markets. We expanded our global distribution team in 2019 to increase our coverage in target markets such as Asia, Latin America, and the Middle East. Our seasoned sales professionals understand the needs of sophisticated institutional investors around the world. and the range of investment capabilities and solutions BrightSphere can provide to help meet their objectives. As a result, we have seen a significant increase in our search activity participation over the course of the year. Also, as previously discussed, we remain focused on expanding our presence in China although macro factors have impacted our pace. The recent U.S.-China phase one trade agreement helped get us back on track, but we were then slowed by the recent coronavirus outbreak. We are monitoring the situation carefully and are hopeful that things will stabilize over the near to medium term. When they do, we will be well positioned to move forward on a number of initiatives. Finally, we remain focused on driving shareholder value. We're pleased to have returned meaningful value to our shareholders through ongoing share repurchases throughout the year. We repurchased 2.9 million shares in the fourth quarter alone, for a total of 19.5 million shares in 2019, driving an additional 15% creation to ENI per share. Looking ahead, with a strong and recurring free cash flow from our diversified revenue streams, we remain focused on allocating capital to the highest return growth opportunities. Thank you once again. And now I will turn the call over to Soren to discuss our results in greater detail. Soren.

Thanks, Quan. Turning to slide eight, it's an overview of the company's three segments that highlight our differentiated business mix. Our quantum solution segment, shown in the left column, which accounted for about 58% of our earnings in Q4, is well positioned to generate continuous long-term growth because clients are increasingly seeking highly sophisticated capabilities and customized solutions that we can deliver through this segment. Our alternative segment in the middle column, which accounts for 12% of our earnings and will increase from there, is expected to drive meaningful organic growth for us, particularly as several of our private market strategies get into their next vintage fundraising cycle. Our liquid alpha segment in the right column, accounting for 30% of our earnings, provides our clients a diverse mix of fundamental long-only strategies across a range of asset classes, regions, and cap ranges. And we continue to develop and see new, differentiated, higher-paid strategies in this segment. This segment is an important part of our comprehensive product suite and nicely complements our overall business. So, in summary, this attractive business mix positions the company very well to produce strong organic growth over the long term. On slide nine, we show the results for the quarter from our quant and solution segments. The AUM increased 6.7 percent from the third quarter $202 billion driven by market appreciation. Revenue increased 11%, and ENI increased 34% compared to the third quarter, driven by higher average AUM, and year-end performance fee of approximately $9 million. Long-term investment performance in this segment remains strong, with almost 100% of the strategies outperforming over a 10-year period. The five-year performance number declined from 90 percent to 58 percent as the large strategy was marginally below its benchmark by 14 bps. Now, let's turn to the alternative segment on the next slide, slide 10. As we've mentioned previously, this segment has historically posted strong growth, generating more than $12.5 billion of high fee flows in the 2016 to 2018 fundraising cycle. We would expect to get back to growing our AUM in this segment, starting in the back half of this year, as multiple strategies are nearing their next vintage fundraisers, and our track record continues to be very strong. In the fourth quarter, the revenue in this segment increased by $2.4 million compared to the third quarter due to lower placement agent fees. which you may recall was an item that we flagged on the last earnings call as something that was at a higher than normalized level in the third quarter. Turning to our third segment, liquid alpha segment, on slide 11, our AUM in this segment reduced from $98 billion to $79 billion, primarily due to dropping the Vanguard account, which was partially offset by market appreciation. As a result, the segment's revenue and ENI declined by 6.4% and 8.8% respectively. Also, as a result of dropping lower fee assets from Vanguard, our fee rate in this segment increased from 27 bps to 29 bps. The investment performance in this segment is strong across the 3, 5, and 10-year period. Slide 12 shows shows a snapshot of our key financial metrics for the last five quarters, showing generally solid and stable results. Slide 13 shows our net client cash flows and revenue impact of those flows, broken up by segments. The chart on the left-hand side shows that while the total net client cash flows in the liquid alpha segment were negative 24.9 billion, driven by the Vanguard account. Excluding the Vanguard reallocation, the net flows in this segment are improving, reducing to minus 2.1 billion in the fourth quarter. Note on the table at the bottom right that our inflows were at 39 BIPs fee, while outflows were at 21 BIPs. This resulted in an increase in our overall average fee rate from 36 BIPs On slide 16, we show our operating expenses. You will note an increase in G&A expenses from $29.9 million to $32.8 million, which was driven by Forex adjustment and year-end seasonality. Turning to our balance sheet on slide 19, we repurchased another $27 million of shares in the fourth quarter and paid down our revolver by $35 million compared to the third quarter, which now stands at $140 million drawn. Our net leverage ratio reduced to 1.7x compared to 1.8x last quarter. This shows that a strong recurring cash flow from our business allows us to deploy capital to accretive uses while managing our leverage. Now, I'd like to turn the call back to the operator And we're happy to answer any questions you may have.

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 the number sign. Please hold for a brief moment while we compile the Q&A roster. Your first question comes from Craig Siegenthaler from Credit Suisse. Please go ahead. Your line is open.

Thanks. Good morning, everyone. Good morning, Greg. Wang, now that the U.S. and China have phase one of the trade deal in place, can you remind us your long-term objectives for China, especially when we think about a resolution happening for the virus?

Thanks, Greg. Yeah, China. As we communicated before, China is very important for us. It's very important for us in terms of a market, longer term. Since the beginning of 2019, we have expanded our team there, presence there. We engaged with a number of institutions, potential partners on the distribution side, as well as just outright clients. But that effort, in a way, was put on hold in May when the U.S.-China trade negotiations stopped. At that point, we kind of pivoted our efforts to Hong Kong. We were engaged with a number of our institutions there, but again, we kind of hit another roadblock when the you know, the protest happened in Hong Kong. So now with the phase one trade agreement in place, we're engaged with those institutions again. And we actually had a number of meetings lined up right after Chinese New Year. But now because the coronavirus, those meetings are canceled. I think it probably will be another quarter, maximum two-quarter event, so to speak. Just like the SARS that happened 15, 16 years ago, it's a two-quarter event. So we are fully prepared to have our team engaged. Of course, right now for the health consideration, we don't have our team traveling there. But we're prepared to get moving once the situation resolves.

Thanks, Kwong. And just as my follow-up on Landmark, in the future, do you think they'll be spreading their fundraising out across many periods rather than sort of a concentrated fundraising cycle in a given year? And it looks like the next big year probably is in 2020. Based on what you said, it's probably more going to be like 2021.

Hi, Craig. This is Saran here. Yeah, I guess we'd expect in our alternative segment, you know, sort of the fundraising going on in earnest really starting back half of this year. And, yeah, you'll see more of the activity in 21 rather than 20. And with our affiliates in the alternative segment, the timing really is more of a function of capital deployment. We do see good opportunities across our strategies in terms of capital deployment. And the timing sort of comes out of that. We would expect over time that different strategies do spread out a little bit more in terms of timing. Your observation is right that most strategies, the deployment and the timing of additional raises was a bit contemporaneous, but we would see over time it spreads out.

Thank you, Soren. That's it for me.

Your next question comes from Robert Lee from KBW. Please go ahead. Your line is open.

Great. Good morning. Thanks for taking my questions. I guess the first one is I'm just curious on capital management with the steady buyback. Are there any kind of – if we look ahead to 2020 and kind of assuming you keep up a similar pace, are any kind of issues you run into given – you know, Paulson's ownership, I guess, you know, his ownership stake's been creeping up as you buy back. So as you get towards that kind of 24.9, 25% level, if you keep buying at this pace, does that create any kind of issues with the future buybacks?

Hi, Rob. This is Saran here. Yeah, I guess for capital deployment in general, as we've said, we do look at all the potential accretive uses for our capital and that goes into organic growth investments like seed capital, pre-purchases is one of them. De-leveraging is also a use and then we continue to look for good acquisition targets as well. So we would say we have enough recurring cash flow to do all of those, to pursue all of those opportunities. And as you saw in this quarter, we did some repurchases and we also reduced our leverage. So we would say that we have enough of headroom right now in terms of accessing the repurchase opportunity. And if you're approaching a level that you pointed to where our largest shareholder is the threshold of exceeding a 25% level, there are several alternatives that we've discussed with them that would allow us to continual repurchases should there be an opportunity.

Great. And maybe a follow-up on kind of new business trends, and I apologize that this is something you mentioned. I had to jump off the call for a moment. But maybe, Guang, if there's any type of color you could give on kind of RFP or pipeline activity. I mean, if you look at your RFP activity as a way of kind of quantifying that it's It's up 10, 20% year-over-year or something, or any kind of granularity on RFP activity in the pipeline would be great.

I don't think we're ready to provide a numerical number, but all I'm saying is that our team, sales team, are very busy. They get a lot of meetings. Since you mentioned about RFP, for example, even for our, the total solution capability with Mercer, some early discussion already got involved into the RFP stage already. But as you know, in our business, it's really hard to predict the timing when those mandate will be weighing and funded? What's the conversion ratio for RFP to the final weighing? But at least I would say the early indications are quite encouraging.

And maybe as a partial follow-up to Craig's question, you know, just really on kind of your distribution initiatives and your global initiatives and maybe outside of China. I know you've spent some, you know, put some effort there. Could you update us on kind of, do you feel like that some of the investments, other investments you've made are complete and now it's about kind of execution or is there still more kind of build that you feel you may need to do?

Yeah. As a, as we communicate, uh, before we added, uh, senior, uh, distribution team members in Latin America, the Middle East and Asia, and we're getting quite a lot of meetings, search activities, for example, in Latin America right now, and some in the Middle East, and Asia, particularly China, right now it's on pause, but we still have a lot of ongoing conversations through conference calls and emails, but in terms of the physical meetings, They have been rescheduled to a later date. Originally, there have been many meetings scheduled right after Chinese New Year, but now those have to be canceled.

Okay. Great. Thank you for taking my question. Your next question comes from Patrick Davitt from Autonomous. Please go ahead. Your line is open.

Hey, good morning. On the other side of that last question, I guess, are there any large redemptions to call out coming?

Hi, Patrick. I guess, obviously, you noted the Vanguard redemption in the fourth quarter. We don't have anything large and lumpy like that and anything else, you know, institutional business can, it's difficult to predict. So where we are as of right now in this quarter, you know, so far so good. We haven't seen anything, but, you know, it's not necessarily predictable. Nothing to report as of now.

Great. In that vein, could you remind us, how much of the outflow in the first three quarters of 2019 and then for the full year of 2018 came from the Vanguard assets that are now out? As we kind of try to reset what the run rate could be without that headwind?

Yeah, I think what we may have shared in the past is we had about a billion plus, a quarter of outflow from that pocket. So that's sort of a high-level number. It moves around. It's flown around. But if you wanted a high-level run rate, that could be. That's probably a good number. Okay. Thank you.

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

Hi, thanks for taking my question. Just wanted to get your latest thoughts on the potential outlook for M&A. How would you characterize the current level activity there, and are you still focused on looking at potentially individual investment teams versus firms? Thanks.

Hi, Ken. This is Surin. Yeah, on M&A, we are actively looking at targets. in both platforms as well as teams. And we're looking in areas that are on the product side that are high growth on the alternatives or solutions or on the distribution side that are providing us channels where we aren't. But we continue to be very disciplined on the strategic fit as well as the financial accretion. So while we have a pipeline that we process, it's hard to predict when something might come to the finish line that is satisfactory to us on the strategic fed accretion and as well as be more accretive compared to the other capital uses we are looking at. On the investment teams, again, that's obviously a little bit simpler. There, again, the question is right cultural fit and the right alignment of structure. And we are in conversations with multiple teams.

So, in other words, we're highly focused on the strategic value. We're not interested in simply just bringing another affiliate.

Understood. Thanks. And just one follow up, if I may, when I look at the 2020 operating expense ratio guidance, I think it's like 43% of the management fee revenues. Just wonder what's driving that to increase year over year versus last year. Just want to see if there's any key factors there. Thanks.

Hi, Ken. Yeah, on the operating expense, on the dollar levels, as we've said, we are very disappointed on cost and will continue to be so. So we won't expect a material increase in the absolute level of OPEX. But the ratio that you see is our guarded conservatism on the denominator. which is the management fee. And as you noted, we have a little bit lower fee from removal of a large account. There is, for example, in January, the market's down. So it's a ratio. So it's a function of the numerator and the denominator. We don't expect any material change on the dollar level of expenses.

Understood.

Very helpful. Thanks again. Your next question comes from John Dunn from Evercore. Please go ahead. Your line is open.

Thank you. Just maybe a little bit more on the Mercer relationship because it seems like it could eventually be a good source of growth. Maybe just how you think about the sales cycle there and maybe the average size of mandates that might come through. And you mentioned it's a global effort, so maybe just geographically where you're seeing some traction? Sure.

Yeah, I think it's a very unique offering Bradshaw and Mercer bring into the institutional investors globally. And the solution will primarily have basic offerings, but with some percentage potentially allocated to a third party. managers as you know Mercer is really expert in terms of rating managers and also make asset allocation portfolio construction decisions and since the underlying portfolios could be you know involving a number of strategies we would expect the size of the mandates would be quite meaningful because otherwise that's not really make sense. And the institutions we're talking to, in general, there are also very large institutions, some of those funds, insurance companies, et cetera, et cetera. It's really hard, as you know, in this business to pin down exactly the sales cycle, the time, but I would say at least The early reaction has been very positive since things tend to move a lot faster than a normal sales cycle, I would say.

Could you talk about your thoughts about potentially any expense synergies under the covers to offset maybe some of the good investments you're making?

Hi, John. I guess at this point, we don't expect further expense synergies. We are focusing on growth investments at this point. But as I said earlier, we wouldn't expect a material increase in our expenses because whatever pockets of opportunities we are finding on the cost side, we are reinvesting that and probably then some on the expense side to grow our capabilities.

Great. Thank you. Your next question comes from Chris Harris from Wells Fargo. Please go ahead. Your line is open.

Great. Thanks. So $12 to $13 billion, I believe, of net inflows from the last fundraising cycle in all states Is there any reason why you guys couldn't do at least that much in the next cycle in 2021 and 2022?

I think actually that's probably a really good number to think of. I mean, nobody knows what will happen when you're actually in the marketplace and raising money or by the time you close. But I think that would be a good number to think of as a reference.

Okay, very good. And I just want to clarify the situation in China, just so I'm understanding correctly. We got through the phase one trade deal, and so that opened up the opportunity for you to have meetings in China. Assuming we get past this coronavirus thing and you're able to take those meetings again, and those meetings are constructive, can you actually get mandate wins So essentially fundings from China based on just the phase one trade deal, or do we need to get beyond potentially phase two and phase three for there to be potential mandate wins that happen from that region?

Of course, it's an evolving process. One benefit from the phase one agreement is that basically the firm like us, a foreign asset managers now can apply for 100% owned mutual fund license. In the past, as you know, there is a limit in terms of how much the ownership of foreign asset managers can have. Started with 33% and moved to 49%, now it's 100%. So that's one thing we plan to do is to get our license because that's very important. And also in terms of the meetings, the discussions we have had so far there, including some potential partnerships, joint ventures, those conversation has been going on for months. But I think with the phase one, agreement in place, we can really try to push those conversations to the finish line.

Okay, great. Your next question comes from Michael Cypress from Morgan Stanley. Your line is open. Please go ahead.

Great. Hey, good morning. Thanks for taking the question. I just wanted to come back, sir, to your point on the the seating. Um, just curious to kind of get an update on how your guys are thinking about the seating strategy. Um, I think you may have mentioned where it was in the book, uh, in the deck in terms of the size, but just curious how that compares versus a year ago and, and kind of the gross ads versus recycling, how you see that playing out and any sort of views on what strategies make sense, uh, as you're looking out over the next year or two in terms of seating next.

Yeah. Hi, Michael. As we've said, you know, our, uh, The portfolio currently is about 160 million, give or take. It has been transitioning a little bit more from exclusively long-only strategies to a mix of long-only solutions and illiquid alternative strategies. So we probably see that trend continue as we are seeing opportunities that are more solutions-oriented, including, for example, the Total Solutions product, so products like that, and as we continue our growth on the alternatives side, we'll see things moving in that direction. There's a good amount of velocity there that, as strategies, either prove themselves out and get third party clients or sometimes we do have failed experiments as well and we move the capital to something else. Does that answer your question?

And then just in terms of funding it, is it just all through recycling or are you looking to grow the size of the Seedbook as you move forward from here?

Yeah, we are open to growing that size that we would be comfortable growing it from 160 million to 200 million. A little bit of it also depends on the timing of opportunities. We work collaboratively with our affiliates to see the next best ideas that will that would drive growth. So I think over time we would grow it from 160 to about 200. Okay, great.

And just to follow the question on the quant and solution segment, I know you mentioned some recent headwinds on investment performance. Just curious what sort of actions are being taken to address that and What, if any, sort of expectations do you guys have in terms of any potential impact on flows? Is it reasonable to assume that that segment could be a little bit more challenging from a flow standpoint as we look forward over the next couple quarters?

Yeah, what we see on the performance there, I guess, in the last year and a half or so, definitely, you know, multiple factors have underperformed, you know, just because few growth stocks have had an outside influence on core benchmarks. Now clients understand that. That's not a sustainable trend and like a more holistic approach that considers all the multitude of factors that our quantum solutions segment focuses on. Similarly, there are large strategies like low volatility strategy that would tend to underperform in the short term in a rising market but those strategies are delivering low volatility but also giving up some upside and I would say clients understand that too so while the near term like a one year number may may look off I mean that is what I would say majority of clients signed up for that's why we have said that Our clients, being that we are primarily institutional, our clients tend to focus on the longer term track records and we have strong performance on the longer term. Similarly, emerging markets, for example, tend to be volatile and any one year period could be quite off, but the longer term performance there is strong and and the model clearly works. So to your question, whether there are any changes to our models, we have high conviction that the philosophy, approach, model, and technology have worked very well through time over longer periods.

Great. Thank you.

Your next question comes from Michael Carrier from Bank of America. Merrill Lynch, please go ahead. Your line is open.

Great, thanks. I just have one question. You provided the expense guidance, which is helpful, but can you provide maybe a little bit more color on where you're making investments to try and drive growth ahead, either on the products with the affiliates or on the distribution front ex-China?

Yes, certainly. So I guess clearly we are investing on where the growth is and hence increases needed. For example, in our alternatives segment, we are increasing the expenses there naturally as we are growing our AUM and capital will need to be deployed. We are investing on the distribution side and continue to do so. as we access new markets or as we get into channels where we were not and we are adding people and we expect to do more of that this year.

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

Thank you all for joining us today.