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 first quarter 2020. 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 star followed by the number one at any time during the call. If you need to reach an operator, please press star followed by zero. Please note that this call is being recorded today Thursday, May 7th, 2020 at 11 a.m. Eastern Time. I'll now like to turn the meeting over to Brett Perryman, Head of Corporate Communications. Please go ahead, Brett.

Good morning and welcome to Bright Spirit's conference call to discuss our results for the first quarter ended March 31st, 2020. 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 risk 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 8K filed today containing our earnings release and in our 2019 Form 10K. 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 an offer or solicitation to buy any investment product. Surin Rana, our President and Chief Executive Officer, will lead the call. And now, I'm pleased to turn the call over to Surin.

Thanks, Brad. Good morning, everyone, and thanks for joining us today. First of all, I hope everyone on this call and their families are healthy and well. Our thoughts are with all the people who have been impacted by the virus. On behalf of the BrightSphere family, I want to sincerely thank the courageous healthcare workers who have been on the front lines battling this crisis. Turning to our business, let me start with slide five of the presentation and provide some key updates on our business in the first quarter. We reported E&I per share of 40 cents for the first quarter of 2020, same as what we reported for the first quarter of 2019. While our revenue declined compared to the year-ago quarter due to the impact on our AUM from the market decline, our continuing discipline on the operating expenses and the built-in variability on other major cost items helped reduce the impact of the revenue decline on our E&I. And then our repurchases helped us to maintain our E&I per share relative to the first quarter last year. We expect that we will see more of an impact of the market decline on our revenues and earnings in the second quarter due to the full quarter effect of the reduced AUM. Net flows for the quarter were $1 billion positive for the first time since Q118, as we saw growth sales increase, particularly in our quantitative strategies, including managed volatility, non-U.S., and factor-driven strategies. Let me now share some key highlights on each of our three segments. In our quant and solution segment, we were pleased with a strong investment performance, as our largest business, Acadian, outperformed the respective benchmarks in the first quarter in 67% of their strategies by revenue, which helped them to further improve on their continued strong long-term track record across three, five, and 10-year periods. In our alternative segments, as we have shared previously, this year we are embarking on our next vintage fundraising cycle across three key secondary strategies, private equity, real assets, and real estate. The demand for private alternative asset class continues to be strong. At the same time, the availability of secondary investment opportunities is expected to increase in this environment as potential sellers look to shore up liquidity or rebalance their portfolio. So we continue to be hopeful about our fundraising targets in this segment that we have previously communicated, though we do expect a delay in the timing of the asset raises due to the travel restrictions and disruptions in the normal fundraising process as a result of the virus outbreak. In our liquid alpha segments, our largest affiliate in that segment, Barrow Hanley, posted improved sales in large cap value and global equity strategy, which turned their net lows positive for the quarter. For the segment overall, the flows are still negative, though much improved, being negative 1 billion in the first quarter of 2020 compared to negative 3 billion in the year-ago quarter. I now turn to slide seven to recap our strategy for the company, as well as share updates on this front. As we announced last month, we have made some changes to reposition our corporate center and simplify our growth strategy to be much more targeted. I stepped up to the CEO role to lead this targeted approach, and I'm looking forward to the continued progress of our business. The primary basis of our growth strategy is really the first section on this page, our strong one-position mix of affiliates. More than two-thirds of our business comes from two areas, font and solutions, which is primarily driven by Acadian, and alternatives, which is primarily driven by landmarks. We're seeing secular growth tailwinds in both these areas. Each of Acadian and landmarks are leading scale players in their respective fields, and both have completely self-sufficient operations and fully built global distribution infrastructure. We have been maintaining additional distribution at the center to supplement the direct distribution we have at the affiliate level. But we found that these supplemental efforts were not very productive. Given the specialized nature of Acadians and landmark strategies, the specialist and distribution resources at the affiliate level are much better placed to produce sales, whereas the generalist resources from the center were less effective. With our other affiliates, too, in the liquid alpha segment, who contribute the remaining third of our earnings, we found that the affiliate level efforts were much more productive than centralized efforts due to closer coordination with investment and client service teams. So since the supplemental distribution and related efforts from the center were proving to be somewhat redundant, we decided to discontinue these efforts. Going forward, we will focus our distribution effort exclusively at the affiliate level. Our larger affiliates, Acadian and Landmark, already have fully built distribution organizations, and the sales team at our other affiliates are appropriately sized for their business. We are doing select additions as appropriate in some cases. We believe this targeted approach is much more effective in generating sales and the cost savings at the center from the implementation of this approach will add $20 million to our free tax ENI by 2021. Going forward, the corporate center will focus primarily on capital allocation. Our businesses generate strong free cash flow, and we will focus on deploying this free cash flow accretively to one, feeding new products for our affiliates that can drive future growth. Two, maintaining a strong balance sheet. And three, repurchasing our stock given that our stock trades at a meaningful discount to fundamentals. On number one, regarding feeding opportunities, we will continue to encourage our affiliates to consistently innovate for their clients and develop new strategies. On number two, our balance sheet continues to be strong. Our net leverage ratio increased to 2x as of the end of the first quarter compared to 1.7x as of December 31, 2019. This increase was driven by seasonality as we pay majority of our variable comp in one queue, but we then build up cash from queue two to queue four. Looking ahead to the next few quarters, we plan to fully pay down the 220 million drawn on our revolver, and we will then increase repurchases thereafter. and continue repurchasing our shares as long as they trade at a discount to the fundamentals. Given our stock's trading levels, we believe that repurchases are a much more optimal way of returning capital to shareholders compared to dividends. Hence, we reduced our dividends from 10 cents to 1 cent a quarter per share. Year-to-date, we have repurchased 6.4% of our outstanding shares for about $34 million. These year-to-date repurchases have been at an average price of $6.15 per share, which is three and a half times our 2019 EPS of $1.76 per share. In summary, we've adjusted our approach to growing our business and creating value for our shareholders to be more simplified, direct, and targeted. Slide eight summarizes the key aspects of each of our segments and demonstrates the strength of our business mix. On the left is our quantum solution segment, comprising 53% of our earnings and is primarily driven by Acadian. This business is well positioned because our broad quant capabilities and technology allow us to effectively provide the specific exposures that the clients desire. For example, in the first quarter, amidst the extreme volatility and market chaos, we saw increased demand for our managed volatility and factor-specific strategies. Another example is our multi-acid class strategies. which we seeded a couple of years ago and leveraged the core technology to offer a customizable, multi-asset class solution beyond equity. We're seeing very good client momentum in this strategy. In the middle is our alternative segment, comprising 18% of our earnings, and it's primarily driven by landmarks. This business is very well positioned for growth. because the demand for private alternatives continues to grow, and secondary strategies can efficiently meet that growing demand by deploying capital quicker while providing diversification across GPs, fund vintages, and underlying investments. As I mentioned earlier, we are embarking on our next vintage fundraisers across key strategies in this segment and are confident in our growth. On the right is our liquid alpha segment, comprising 29% of earnings, and is primarily driven by Barrow-Handley and TSW. In this segment, we provide a mix of fundamental long-only strategies in equities and fixed income across capitalization ranges and regions. This segment diversifies and complements our overall business well. As you know, we generally have a value-oriented investment philosophy in this segment across the affiliates. As value has underperformed growth for almost 12 years, including recently amidst the virus outbreak, we believe the segment would be well-positioned to benefit when value returns to favor. Slide 9 shows the current composition of our business by segments. As I mentioned, more than two-thirds of our business is in quantum solutions and alternative segments. With the upcoming fundraising in the alternative segment and continued growth in quantum solutions, we expect that this proportion will increase. Turning to our flows on slide 13, we saw positive flows of $1 billion as net inflows in quantum solutions and alternatives offset net outflows in liquid alpha. Looking ahead, we are encouraged by these trends and are hopeful that the fundraising in the alternative segment will pick up pace near the end of this year and further help our flow. I would like to touch on one more point on our balance sheet on slide 19. We discussed earlier how our net leverage ratio increased from 1.7x to 2x due to the seasonality of paying bonuses in the first quarter. You may note that our gross leverage increased a bit more from 2x to 2.5x. This was because we drew down incrementally on our revolver to set aside a meaningful amount of excess cash compared to our normalized levels of cash. We would have been comfortable with around 50 million of cash compared to the 125 million we actually carried at the end of Q1 in order to be prepared for a variety of extreme scenarios. Now, I'd like to turn the call back to the operator. Happy to answer any questions you may have. Thank you.