BrightSphere Investment Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to the BrightSphere Investment Group Earnings Conference call and webcast for the second quarter 2023. 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 the 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, August 3rd, 2023, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Melody Wong, SVP, Director of Finance and Investor Relations.

Please go ahead.

Good morning, and welcome to BrightSphere's conference call to discuss our results for the second quarter ended June 30th, 2023. Before we get started, please note that we may make forward-looking statements about our 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 this risk and uncertainties appears in our SEC filings including the Form 8-K filed today containing the earnings released, our 2022 Form 10-K, and our Form 10-Q for the first quarter of 2023. 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 of future events. We may 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 here shall be deemed to be an offer a solicitation to buy any investment products. Saren Rana, our President and Chief Executive Officer, will lead the call. And now, I'm pleased to turn the call over to Saren.

Thanks, Melody.

Good morning, everyone, and thank you for joining us today. As usual, I'll start off with the main highlights on slide five of the deck, and then we can jump into Q&A. So for Q2 23, we reported ENI per share of 28 cents compared to 41 cents in the second quarter of 2022 and compared to 28 cents in the first quarter of 23. The drop in earnings compared to a year ago was primarily driven by higher OPEX due to the impact of foreign currency changes, inflation, and our ongoing investment in growth initiatives and operational infrastructure. Acadian's investment performance continues to be strong. As of June 30, 23, 81%, 81%, and 90% of strategies by revenue beat their benchmarks over the prior three, five, and 10-year periods, respectively. We reported modestly positive net flows with 0.1 billion of net inflows. and it was our fourth straight quarter of positive net flows. At the same time, our sales pipeline remained strong. We continue to be on track to execute on our growth initiatives. Acadian's equity alternatives platform is off to a promising start. The investment track record is building well after we seeded the platform a couple of quarters ago. On systematic credit, the team continues to build out the models and infrastructure. We expect to start investing seed capital in the strategy in Q4 of this year. Turning to capital management, we had a cash balance of $141 million as of June 30, 2023. Acadian has continued to pay down its revolving facility and ended the quarter with an outstanding balance of $38 million. compared to $87 million at the end of the last quarter. Like in prior years, we expect the facility to be paid down fully by year-end. As our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and to buy back stock whenever opportunities come up. Our long-term strategy remains the same. We will continue to invest in our core capabilities and leverage our unique quant platform to grow and expand into new areas. We will continue using our free cash flow to support organic growth and to buy back stock. And we remain focused on maximizing shareholder value. Now, let me turn the call back to the operator.

I'm happy to answer questions at this point.

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 star one again. Please hold for a brief moment while we compile the Q&A roster. Your first question comes from Morgan Cypress from Morgan Stanley. Please go ahead. Your line is open.

Hey, sir. Good morning. Thanks for taking the question. Maybe just on kicking off on buybacks. I don't think I saw any in the quarter. So just hoping you could update us on just your latest thoughts there, how you're thinking about opportunities there to repurchase shares. Is there just any sort of limitations in place right now around available windows that may have prohibited you on the quarter? And when do you think you might have a window begin to open up again as you look out?

Hi, Mike.

Yeah, I guess no buybacks in the last quarter either. We do have cash on our balance sheet, as you've noticed, and the uses are still, so no change really in our approach. The uses are to support our organic growth, which we've already laid out the near-term plans, and the rest of it is really toward buyback when we have windows available. We don't know yet when we might have that. We're probably looking at least a couple quarters before we can look at any buybacks.

Great. And then just maybe a follow-up question on the institutional pipeline. Maybe you could just update us, elaborate a bit on how that looks today versus last quarter, and maybe you can give us a little bit of flavor for the types of strategies that you're seeing in the pipeline as well. Thank you.

Yeah, thanks. Yeah, the pipeline continues to be strong and healthy, as we reported last quarter. There were some delays by, you know, a couple weeks, three weeks as we approached summer. But generally, things are moving through the pipeline. July was good. I guess last quarter, as I said, it was just modestly positive. But we had a good July, so hopefully that momentum continues. And there's a variety of strategies. As you know, the firm overall has a large number of strategies, so we're pretty diversified. And that reflects in the pipeline, too. So it's across a variety of strategies, including small cap, international. There's interesting long short as well, enhanced versions of various strategies. So it's pretty robust. We got sales from global equity, from all country tax US. So hopefully that gives you a flavor.

Great. Thank you.

Our next question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.

Hi, good morning and thank you. I had a question about the fee rate maybe in the back half of the year, just with kind of like emerging markets down so far in the quarter and U.S. up a little bit. What do you think like the trajectory of the fee rate might look like?

Yeah, a fee rate is affected a lot by the mix. So it's hard to tell, but But my best guess would be we continue to be around the 38-bits in the near term where we are. Emerging markets has a higher fee rate, and as you know, U.S. markets, at least in the last couple quarters, you know, beat the emerging market indices. But there are other factors, too. We're getting some higher fee inflows and losing lower fee outflows. So the result, we have 38 bits now compared to 37 bits a year ago. So I would say we probably stay put here. Longer term, there are things, particularly our initiatives, for example, where we have higher fee strategies that would hopefully pull that fee rate higher. But at least in the near term, my best guess would be we stay around here.

Gotcha. And then just on G&A in the second half, I think that generally the expense ratios probably go down from here. But in terms of dollars, where do you see fixed comp and G&A going over the next two quarters?

Yeah, I think more or less at this level, in the last few quarters, as I mentioned in my remarks, we have invested in our operational infrastructure. over the last couple quarters. We also have invested in the new initiatives. We've added to the headcount. We've added to, you know, the data, et cetera. So that, we've done a fair bit, and we probably have also built up some scale as we've done that. And we've, some of the has increased because of inflation, as I said earlier, in terms of just the higher cost of data, and compound increase to help folks with inflation. And there have been some temporary things as well, like the Forex impact. Last year we had a benefit of the Forex impact. This year it went the other way. So some of that should go away. But I would say basically we're probably, in terms of dollars, will probably stay at this level more or less.

Great. Thank you very much. Thanks, John.

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

Hi. Good morning. Thanks for taking my question. Just at a high level, more broadly, I wonder if you could just talk about what you're seeing in terms of client sentiment or positioning. and then perhaps maybe some kind of indication what that, you know, potential implications for organic growth over the near term. Thanks.

Yeah, thanks, Ken. Yeah, as you know, we're basically primarily institutional business, so our clients and the consultants tend to have longer-term views, you know, with the sales cycles often going in the 9 to 12 months. So it doesn't change that much quarter to quarter. As I said earlier, we've seen, you know, pipeline is good. We're seeing interest across a number of strategies. So that's really good. We also don't see much of, you know, any kind of exodus from any particular strategies or any groups of strategies. So that's good as well. Maybe one exception I would say is that in terms of the outflows that we had, a good part was still from the managed vols group of strategies. Maybe that's probably one area where we saw some clients take a position that in the trending beta rewarding market, maybe they cut down some exposure to the managed vols. Longer term, of course, our clients believe that manageable strategies really for the risk-adjusted return is better than many others. But that's where I would say maybe we had some directional decisions. But other than that, really, clients want to invest, and they're taking the meetings. The pipeline is good. So we're cautiously optimistic.

Gotcha. Very helpful there. That's all I had. Thanks again. Thank you, Ken.

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

Thank you. I'd like to thank everyone for taking the time. Look forward to chatting next quarter.