BrightSphere Investment Group Inc.

Please note that this call is being recorded today, Thursday, February 1st, 2024 at 11 a.m. Eastern Time. I would now like to turn the meeting over to Melody Huang, SVP, Director of Finance and Investor Relations. Please go ahead, Melody.

Good morning and welcome to Bryce Baer's conference call to discuss our results for the fourth quarter ended December 31st, 2023. Before we get started, please know that we 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 each of the first, second, and third quarters 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 or 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 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 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.

Thank you, Malati. Good morning, everyone, and thanks for joining us today. Well, I'll start off with some of the main highlights on slide five of the deck, and then I can answer questions. So, for the fourth quarter of 23, We reported record E&I per share of 77 cents compared to 67 cents in the fourth quarter of 2022 and 45 cents in the third quarter of 2023. The 15% increase in E&I per share compared to the year-ago quarter was primarily driven by management fee revenue being 10% higher than the year-ago quarter due to higher AUM from market appreciation that we saw in 2023. Acadian's investment performance remained great and strengthened further in the fourth quarter. As of December 31, 2023, more than 90% of strategies by revenue outperformed their respective benchmarks across three-, five-, and 10-year periods. The net client cash flows for the quarter were negative $2 billion. As we saw some additional outflows in the quarter, related to our managed volatility strategies and select large reallocations. Our growth initiatives continue to be on track. Acadian's equity alternatives platform, seeded about a year ago in Q4 of 22, continues to show good investment outperformance. And Acadian's systematic credit initiative was just seeded in November 23 with $15 million of feed capital in the high yield strategy. and that has now started to build its track record. Turning to capital management, in 4Q23, the company's board provided a new authorization for share buybacks of up to $100 million. Starting in December of 23, and to date so far in 24, we repurchased approximately $43 million of shares, or 2.1 million shares, which was about 5.2% of our outstanding shares. Regarding our balance sheet, we had a cash balance of $147 million as of December 31, 23. Acadian fully paid down its revolver at the end of Q4 compared to the $13 million that was outstanding at the end of Q3. I'd like to end with reiterating that from a longer-term perspective, we remain focused on maximizing shareholder value. And we'll continue using our free cash flow to support organic growth and to buy back our shares. I'll now turn the call back to the operator and I'm happy to answer any 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 the line of Kenneth Lee from RBC Capital Markets. Please go ahead. Your line is open.

Hey, good morning. Thanks for taking my question. Just one on potential for what's the outlook for cash usage this year? How much are you expected to allocate in terms of seed capital and ultimately, What's the best way to think about potential for excess cash on balance sheet? Thanks.

Good morning, Ken. So, yeah, the way we size it is, you know, we have 147 million of cash balance, as I said, at the end of the year. And of that, we will probably do 20 million of feed in the first quarter of 24. call it 20 to 25 million we generally keep for operating cash. So that's 45-ish million out of that 147. So that leaves 100 million for buybacks. So that's how we sized it. Of that 100, as I said, we've used 43 million so far until yesterday. And we hope to use the rest, you know, in the coming weeks and months, hopefully. So that's That's the plan now as we continue to execute this year and the cash from operations builds up, that will build additional capacity for buybacks or to see more organic growth. As you said, those are the two uses.

Gotcha. Very helpful there. And just one follow-up in terms of the share repurchase. Would it be fair to say it would be mainly opportunistic, or is there any other pace there that we should think about?

Yeah, we'll generally keep all of the factors in mind. And yes, I think opportunistic is a fair way to say it.

Gotcha. Thanks. Very helpful. Thank you.

Your next question comes from the line of Michael Cypress from Morgan Stanley. You're open.

Great, thanks. Good morning. I was just hoping you could maybe elaborate a bit on the flows in the quarter, the $2 billion or so of outflows, and also on the gross sales that we saw in the quarter. It looked like there's some areas of strength on the gross sales there. Maybe you can unpack where you're seeing some of the areas of strength, and maybe you can comment a bit on the institutional pipeline, how that's shaping up here so far in 24.

Hi, Mike. Yeah, we're seeing, as we've said, you know, on the managed volatility strategy, we've seen pressure for almost two years now in this, you know, good beta rewarding market. Those are low beta strategies, and they've underperformed, you know, the average beta market. Those strategies have actually outperformed their beta, but they've underperformed the the core indices. So we're seeing a number of clients from time to time either trim their positions or move to something else. So we saw some of that in this quarter as well. And then as we said, from time to time in some quarters, we see clients doing some reallocations, particularly that has happened. So we saw that from a larger one from a client So that was sort of what was responsible for the larger net outflows in the quarter. So that was really driven by the outflows. The sales, you know, it could be better. You know, we still have, as I mentioned, I guess, a few times in the past year, the pipeline is still healthy. It's strong. That hasn't worsened. Maybe it's probably only gotten a little bit better. But things are taking a little bit longer than they used to. We're seeing a good pipeline across a variety of strategies, you know, all-country strategies outside the U.S., Acquiax U.S., as we call it. A lot of interest in small-cap strategies, both international emerging markets as well as U.S. You know, there's some pipeline in emerging markets as well, and there's there's pipeline and, you know, different enhanced versions of these strategies. So really good pipeline there, and hopefully, you know, more and more of it converts. But we are probably, we do expect to see continued pressure on managed volatility strategy, and there may be still, you know, episodic things that happen with client reallocation.

Great, thanks. And then just a follow-up question on the systematic credit as well as the EquityAlts platform. Just maybe you can give us a bit more of an update on the progress there. What would success look like for you, some of the metrics you're tracking, and how are conversations progressing with clients?

Yeah, we're pretty satisfied and reasonably happy with how things are progressing. They're on track on both of those initiatives. Equity Alls is a little bit older, so we started it about a year ago in Q4 of 22. So that's racking up a nice track record of our performance. We do have a reasonable-sized client in there. We're hoping to get more in this year. I mean, generally, traditionally, in our business, people have looked for three-year, five-year, and 10-year track records. But this one, as well as systematic credit, are different enough that we're having good conversations with clients, hoping to get them in early on. And we do have a client in equity alts, and the track record is good. So client conversations are progressing, and we're hopeful to, you know, add at least some more clients in that strategy before it gets to a three-year track record. Systematic credit, just seeded. It's only been maybe a little bit more than a month. It was seeded in November, so I guess, yeah, a little more than a month. So far, so good. It's progressing well. On the performance side, of course, it's too early to say, but it's moving along as we expected. But the client conversations were happening already even before we seeded it as we were preparing The infrastructure and the models and clients are eager to see how this plays out, and there's a good amount of interest. And we hope to get some clients again early in 24, even though traditionally people have looked for three-year track records generally.

Great. Thank you. Your next question comes from a line of John Dunn from Evercore ISI.

Please go ahead. Your line is open.

Thanks, Aaron and Melody. Just to extend the institutional pipeline question maybe a little bit, do you have a line of sight to anything chunky in or out over the next quarter or so? And I understand things are taking longer, but what's a decent assumption for how time to fund going through the pipeline?

Yeah, thanks, John.

You know, I guess outside of managed volatility strategy that I touched on, we do probably expect more outflows there, you know, particularly in light of the environment as there is a soft landing and markets do well. Then, you know, that maybe it's more of a defensive strategy that's played out over long periods as it is promised to do. deliver the same or better returns at market with lower risk. But this is not the ideal environment for it. So we probably expect more outflows from that strategy. But outside of that, there's nothing specific that we know of that's larger and chunky in terms of what we see at risk. But in terms of other strategies, we are It's a good pipeline, pretty diversified across different strategies. And how it converts, it really just depends on, it's hard to have some rules or guideposts because it's pretty diversified by stage as well. Some are in late stages, some are in middle stages, some are very early. And this is also in terms of time to convert. It ebbs and flows. Some move quickly, some move slower. So it's not that anything structurally, that things are just taking longer structurally, just like those things also change. So it's really hard to say, but we're pretty satisfied and happy with the pipeline that we have. And yeah, the team's really on it and connecting with clients and serving them and, you know, hoping to get some of these wins. We do have some mandates that have been won that we're expecting to fund, so they're really across different stages.

Got it. And then, you know, you talked about some of the puts and takes of Managed Val institutional pipeline, but it being diversified. Can you just go through kind of the puts and takes for the fee rate for the next stretch?

We would expect it to be pretty stable around this level, 38 bps, for the next few quarters. What would really change it going forward, I guess from a longer-term perspective, would be as we execute more on our equity alls and our systematic credit strategies, those are higher fees. So as we start to get larger flows in those two strategies, particularly equity alt, because that has a much higher fee. And systematic credit, we're starting with high yield, which is higher fee as well. So that will start to change the mix toward higher fee. And as you may have noticed, generally also the outflows are coming out from managed volatility strategy, which has been low fee traditionally. And the inflows have been coming from These other strategies, you know, AQUI-XUS and small cap, and those are higher fee. So I would say for the next few quarters, probably 38 dips is a good baseline. And longer than that, we would expect it to start to go up a little bit gradually.

Thanks. Very helpful. Appreciate it.

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

Thank you, Operator. Thanks, everyone, for joining us today. We appreciate it.