Manning & Napier, Inc. Class A

Good evening. My name is Erica, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manning and Napier Fourth Quarter 2020 Earnings Teleconference. Our host for today's call are Nicole Kingsley-Brunner, Chief Marketing Officer, Mark Mayer, Chief Executive Officer, and Paul Bactelia, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 8 p.m. Eastern Time tonight. The dial-in number is 404-537-3406, and the PIN number is 829-7218. At this time, all participants have been placed in a listen-only mode. If you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Ms. Nicole Kingsley-Brunner.

Thank you, Erica, and thank you everyone for joining us today to discuss Manning and Appear's fourth quarter and full year 2020 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 and Appear 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 and our earnings relief in related SEC filings. With that, I will turn the call over to our Chief Executive Officer, Mr. Mark Mayer. Mark?

Thank you, Nicole. There are three main points we would like to make. One, we have made good progress on our strategic initiatives. Two, that progress has translated into excellent results for clients and an improvement in our financials. Three, our improved financial position will allow us to return capital to our shareholders. Paul and I will elaborate on each of these, but we will begin first, as we always do, and as we always should as fiduciaries, with a review of our results for clients in both the fourth quarter and full year. Let's begin with our traditional multi-asset class solutions, as they represent approximately 70% of total AUM, have track records dating back to the early 1970s, and are core to who we are as an active, fully integrated wealth and investment manager. Our fourth quarter multi-asset class results were competitive, with modest underperformance in more aggressive objectives and slight outperformance in the more conservative strategies. Broadly speaking, our small overweight to equities in a very strong quarter for global stocks compared to our blended benchmarks helped overcome some underperformance within our equity portfolios in the quarter. We are pleased to have helped clients strongly participate in the end of the year equity market rally. Our disciplined approach to dynamic asset allocation and risk has since led us to reduce the substantial overweight to equities that we had in place in the late spring and summer of 2020. For the full year, Our traditional multi-asset class strategies delivered significant outperformance versus benchmarks across all risk-based objectives. Our strong performance was a result of a combination of timely asset allocation adjustments during the first half of the year, as well as excellent sector positioning and security selection decisions. Most importantly, our time-tested disciplines in both security selection and asset allocation helped us deliver meaningful downside protection during the equity and credit market sell-off at the beginning of 2020. Then, subsequently, we adapted portfolios to the rapidly changing environment, allowing us to substantially participate in the sharp equity market rally since the end of March. Our long-term growth strategy is a globally diversified portfolio of stocks, bonds, and REITs. that is also available as our ProBlend Extended Mutual Fund. It represents our single largest pool of assets and was up 18.7% for the year, net of fees, slightly ahead of the S&P 500. Notably, it delivered those results with half the risk of the S&P 500. Our traditional multi-asset class strategies are the heart of our investment solutions for our wealth management clients. The strong absolute returns, moderate risk level, the nature of the performance pattern, and the advice we provided helped our clients stay on track during such an unusual year. 2020 was an important year in demonstrating our wealth management value propositions. As you may recall from prior quarters, 2020 coincided with the 50-year anniversary of our firm, making it a propitious time to look back upon what we have achieved over our first half century. From an investment standpoint, one of our most differentiated characteristics is that we have a very long, fully audited performance track record for flagship strategies dating back to 1973. This is exceptionally rare in the wealth management business, where the vast majority of financial advisors and RIAs who employ open architecture cannot quote the results they have delivered for clients. Over 47 years, long-term growth returned 10.4% net of fees, virtually identical to the S&P 500's 10.6% return over that time frame. Although, as just noted, our dynamically allocated portfolio is globally diversified and balanced among asset classes. Consequently, it delivered equity market-like returns with 30% less risk dating to inception almost half a century ago. It's important to note that we do not target specific absolute or relative risk levels. In fact, we think the most important measure of risk is the permanent loss of capital. Most of our clients make systematic withdrawals from their portfolios, whether it is individuals paying taxes or spending in retirement, pension funds paying retirement benefits, or endowments and foundations supporting good causes. The need to withdraw funds, often regardless of capital market results, can crystallize losses during severe downturns. This is a form of permanent impairment because it precludes subsequent compounding on those assets as markets recover. All else equal, lower volatility portfolios reduce the risk of this occurring. Putting risk return statistics into something more meaningful for our clients, $100,000 invested in our long-term growth strategy in 1973 would have grown to approximately $8.3 million today. Client in 1973, who had invested $100,000 in our second largest strategy by AUM, growth with reduced volatility, which dynamically allocates around a 40-60 stock bond mix, would have $5.8 million today. Turning back to our 2020 results. The excellent full-year performance of our multi-asset class strategies was also reflected in the strong performance of our risk-based mutual fund suite and in our retirement target date CITs. By way of example, most of our pro-blend suite of mutual funds finish the year in the top decile, and almost all of our various vintages of target date CITs finish in the top third percentile or higher versus Morningstar peers. In our fundamental all equity strategies, Our U.S. core equity, core non-U.S. equity, core equity unrestricted, and global equity portfolios all underperformed for the quarter by between one and three percentage points. However, each still finished the year with substantial outperformance, delivering 251, 1,432, 388, and 644 basis points, of relative gains versus their respective benchmarks. Our three- and five-year numbers for these strategies are all strong as well. These performance figures are available on page six of the earnings supplement. Our Rainier International Small Cap Strategy underperformed by 130 basis points in the fourth quarter, but finished the year having delivered remarkably strong returns. The mutual fund version of the strategy outperformed its benchmark by nearly 2,700 basis points for the full year, reflective of excellent security selection and portfolio management in a very attractive asset class for active management. Our disciplined value suite underperformed in the fourth quarter and full year as its tilt towards quality within the value space weighed on absolute and relative returns. While the strategy had a disappointing year on both the relative and absolute basis, its long-term track record remains compelling. On a three- and five-year basis, the fund is ahead of its benchmark by 96 and 198 basis points, respectively, and ranks in the 29th and 12th percentiles versus Morningstar peers. We had a very good quarter and year for our fixed income strategies, which are an essential part of our wealth management solutions and represent good opportunities for our intermediary business. Our aggregate fixed income strategy rose 9.4% for the year, outperforming by 187 basis points. Our unconstrained bond fund rose 7.5% for the year and is in the top quartile of its Morningstar category over the past decade. Our high-yield fund was in the top third of its category last year and is in the top decile for three, five, and ten years. Our real estate strategy underperformed for the quarter, but generated another strong year of relative performance, outperforming by 243 basis points. Our REIT strategy has outperformed consistently over the past decade. Our ETF-based multi-asset class solutions, managed by our quantitative strategies group, also outperformed during the year. Almost without exceptions, our performance was broadly excellent for the year and positions us well for the years ahead. Let me speak for a moment about our capital markets outlook, and in particular, the manner in which our core investment processes derive that outlook. While we leverage both bottom-up and top-down perspectives when making asset allocation decisions, our analysis of investment opportunity at the individual security level is our primary driver of asset allocation. We believe in being patient and flexible. While it is undeniable that both equity and debt valuations are elevated, we believe there are parts of the global equity markets that remain attractive. For example, and as seen during the February to April timeframe last year, in the event of equity and credit market dislocations, there were many stocks and bonds that are a fundamental interest to us and sharp declines may allow them to meet our valuation disciplines. After having been substantially underweight equities early last year and then substantially overweight after equities plunged in February and March, we are now around our neutral point in equity allocations in our multi-asset strategies. It is important to note that in equities we are neither dogmatic growth nor value investors. Rather, our disciplines give us very specific tools to evaluate both what we term profile stocks, which would look at home in the portfolios of growth managers, as well as what we term hurdle rate and bankable deal stocks, which have classic value characteristics. Today, our equity portfolios tilt towards value after five plus years of skewing towards growth. Humility in investing is a virtue. In that vein, we should note that the magnitude of our outperformance in many of our strategies should be viewed as an unusual occurrence, as should the very high proportion of our strategies that outperformed. While we will always strive to deliver excellent results for our clients, we expect to be hard-pressed to consistently repeat our results from 2020. Finally, and regarding absolute returns, while we don't make calls on broad equity or debt markets per se, we believe investors should be measured in their expectations given high current valuations. Let me now turn to a review of our progress against our strategic initiatives. We have just reviewed the most important initiative to deliver excellent investment results and well engineered solutions for our clients. We have articulated three other strategic initiatives, improving sales productivity while delivering exceptional client service, increasing operational efficiency, and ensuring a talent-rich, diverse organization with a great culture. We made important progress on each of these measures in the fourth quarter and throughout 2020. Speaking first of sales productivity and excellence in client service, We increased our investment in our client-facing teams throughout 2020. We hired five new financial consultants in wealth management, including one in the fourth quarter, bringing our total to 19. We plan on adding a comparable number in 2021. Our new hires did not bring books of business, and we anticipate that they will ramp up in productivity over the next few years. We created team structures in multiple geographies, which has enhanced client service and increased our capacity to generate new business. We also added a dedicated consultant relations director in the fourth quarter, supporting our institutional business. We also anticipate a ramp up here as institutional consultants move slowly. Our rate of outflows improved substantially in 2020, reflecting superior investment results and excellent client service during the pandemic. The ultimate measure of improvements in our client-facing areas will be positive net flows. While we continue to sustain net outflows in 2020, it was at a much lower rate than prior years. Megan Henry, president of the Exeter Trust Company, our captive trust company, which provides custody, discretionary trust services, and CIT administration, announced her plans to retire at the end of the first quarter of 2021. In addition to Exeter Trust Company, Megan is responsible for our client services area. Megan has been an important executive at our firm for 15 years, and we will miss her. Megan's responsibilities will be taken up by Scott Morabito, who heads operations and fund services. We are truly fortunate that Megan has agreed to remain as the chair of the Exeter board. and she will provide valuable experience and continuity to all of us in management and to Scott as he takes on his expanded responsibilities. We recently implemented a revised pricing plan for new wealth management clients. For our entire history, we only charged for our investment solutions plus custody if clients custodied their assets with us. Our aggregate fees for advice, which we simply never charge for, plus investments, were substantially below the combined fees charged by competing firms. But we received no competitive benefit from this pricing structure. Going forward, new wealth management clients will be charged a bundled fee that incorporates wealth planning and advice, investment solutions, and custodies. This fee is higher than our current investment-only pricing and will be additive to revenues over time. In setting the new fees, we carefully studied the competitive environment, and we believe our new bundle fees are highly competitive. Current clients' fees will be grandfathered and will not change. Also, institutions who use us for an asset class sleeve of a larger portfolio and not for comprehensive advice will also be exempt. With respect to improving operational efficiency, our technological overhaul is in the thick of the execution phase as we push forward across several key initiatives simultaneously, replacing the entirety of our technology infrastructure. In the fourth quarter, we launched the first deliverable from our implementation of InvestCloud to support all our distribution initiatives, that first deliverable was a new client portal that has been very well received by clients across channels. In 2021, we will be implementing additional major capabilities within InvestCloud. We also completed the implementation of Workday's general ledger functionality in 2020, and we'll be rolling out its budgeting and financial analysis module in 2021. In addition, in 2021, we will be implementing Workday for human resources and talent management. We made important progress in implementing Charles River for trade order management, trading and portfolio compliance and portfolio implementation in 2020 and important steps remain and completion is targeted in 2021. By the end of 2021, the fully integrated suite of software as a service platforms that we are implementing will enable substantial operating efficiencies, allowing us to offer better client experiences, increased targeting and discipline in sales and service, improved productivity in trade processing and portfolio implementation, and providing us greater and more actionable business insights. Our fourth strategic initiative is to ensure that we have a talent-rich, diverse, and inclusive team with a powerful, distinctive culture. Talent density is the lifeblood of our business. It helps us analyze, manage, and optimize our investment strategies. It helps us relate, reach, and connect to more people, amplifying our strategies, solutions, and our story. And it helps us innovate and remain nimble in our evolving, highly competitive industry. We want to be a destination of choice for the most capable and promising talent. Ours is largely a homegrown team with the majority of staff entering as recent graduates. So we are focused on finding the best, developing the best, and retaining the best. It is a false dichotomy to believe that the pursuit of meritocracy and diversity cannot be accomplished at the same time. It is our belief that in principle, the demographics of our firm should broadly reflect the demographics of our nation and the communities in which we do business. We are committed to getting there, but acknowledge that it will take time, but we must commit to making consistent progress. While we are close to gender equality in our workforce overall, that is not yet entirely true in our management ranks. Today, 30% of our executive committee is female, and 40% of our more extensive group of management, our leadership council, is female. Our racial and ethnic diversity has a longer way to go. The proportion of our organization that are people of color is not representative of our nation. While 20% of our executive committee are people of color, for our broader leadership team, the percentage is less than 10%. As has been repeatedly demonstrated, We have no doubt that greater diversity of background experience and perspective lends itself to stronger decision-making, a more solid culture and superior outcomes for all stakeholders. Our corporate culture will embrace and celebrate all our differences for they will make us a stronger, more successful and more lasting business. With that said, We still have much work to do, and I look forward to providing further tangible updates on this essential initiative in the quarters ahead. In sum, we believe our full year 2020 was broadly positive as we continue to execute on our long-term strategic plans, focusing on building the foundation of our firm in a way that positions us for sustained success. I'd now like to briefly address our newly announced share repurchase program. We are committed to both increasing employee ownership of the firm and ensuring attractive returns to our shareholders. Two years ago, we announced our intention to meaningfully increase employee ownership over time. We have made progress with a $5 million long-term incentive plan last year, comprised of stock grants vesting over five years. and that identically structured $6 million one recently granted in 2021. Increased employee ownership is critical to stimulating the employee base and ensuring a culture that is committed, effective, and engaged, helping drive value for our clients and our shareholders. Importantly, it is not our intention to dilute public shareholders as we increase employee ownership. We are guided by these dual principles. As a result, today we announced a share repurchase program meant to accomplish that goal, and Paul will provide more details. So in conclusion, we continue to believe that we are progressing well with our strategic initiatives, that the progress has begun to translate into improving financial results, and that we are committed to sharing that financial improvement with our shareholders who return of capital. We are optimistic that we will see more tangible proof of this progress in the coming year. And with that, I'll turn the call over to Paul for more detail on our financials. Paul?