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spk01: Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Manning and Napier First Quarter 2021 Earnings Conference Call. Our hosts for today's call are Nicole Kingsley-Brunner, Chief Marketing Officer, Mark Mayer, Chairman and Chief Executive Officer, and Paul Pataglia, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 8 p.m. Eastern today. The dial-in number is 404-573-3406 and enter PIN 407-2878. 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.
spk02: Thank you, Angela, and thank you, everyone, for joining us today. to discuss Manning and Appear's first quarter 2021 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, are important factors that can 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 statement. During this call, some comments may include reference to non-GAAP financial measures. Full GAAP reconciliations can be found in our earnings release and related SEC filing. With that, I will turn the call over to our Chief Executive Officer, Mark Mayer.
spk03: Mark? Thank you, Nicole. There are several main points we would like to make today. One, we continue to deliver good investment results for clients, and we are receiving notable recognition for them. Two, the combination of those results, as well as our marketing and PR efforts and investment in our client-facing teams, are positioning us well to continue improving the trend in net flows. Three, our strategic initiatives are progressing well, and we have launched the overhaul of our wealth management pricing model. And four, as planned, we returned capital to shareholders in the first quarter. We will discuss each of these in detail as we progress throughout the call. First, let us begin as we always do with our investment results for clients. Specific figures are available on pages six and seven of the earnings supplement. Performance remains strong across the risk spectrum for our traditional multi-asset class investment strategies that are the mainstay of our holistic wealth management solutions. Each of our various risk-based strategies delivered positive ahead of benchmark total returns in the quarter. There are several aspects to the first quarter that make us proud of these results. First, the three months of the year were the most difficult quarterly stretch for aggregate U.S. fixed income performance in almost 40 years. The rapid and nearly continuous rise in interest rates from extremely low levels challenged bondholders, leaving many fixed income investors with losses in the order of low single-digit percentages. For the portion of our more defensive portfolios that are heavily weighted to fixed income, this was very difficult in market environment broadly. The dynamism of our asset allocation is visible in many ways, movement between asset classes, across geographies, capitalizations, and equity styles. It is also visible within fixed income sectors and strategies. Our ability to allocate to our own high-yield and unconstrained bond strategies within our multi-asset class portfolios notably aided performance in the first quarter, which was very important as municipal bonds, normally the first choice for taxable investors, had become extremely expensive and unattractive. We were able to generate positive returns, close to 3 percent in the case of high yields, against the high-yield benchmark that was flat while our core bond and municipal portfolios were down alongside the broader fixed income market. We run a significantly more concentrated high-yield portfolio than many managers, carefully analyzing each credit to make sure we are more than compensated for the risk we take. In the quarter, we were aided by much higher-than-benchmark exposure to cyclicals, energy, and financials. Over the long term, we have delivered performance in high yield that ranks in the top 11% over one, three, five, and 10 years. We also have strong performance in unconstrained bond, ranking in the top 16% of the competitive set over three years. I'm sorry, over 10 years. In the first quarter and over the medium and long term, our ability to deliver above benchmark performance in multi-asset class strategies while maintaining our risk management disciplines, highlights why we are pleased with the results we delivered for clients. We have been managing our dynamically allocated, globally diversified, multi-asset class investment strategies for decades. These are tightly integrated, complete portfolio solutions for use directly with wealth management clients, as well as by third-party financial advisors and consultants looking to provide high-quality solutions to their clients, both individuals and institutions. We believe in accountability, and our track record is fully audited, dating back to the inception of our flagship long-term growth strategy in 1973. Before I finish talking about our multi-asset class strategies, I want to talk a little bit about what went on in equities. And considering the equity component of our multi-asset class portfolios, while equity market returns around the world were quite good, on the order of 3% to 6% for the major equity indices, within the broad aggregates, there was a great deal of turbulence. Value stocks, Laggards for much of the past decade until November of 2020 outpaced growth stocks in the quarter. Many highly valued winners of prior years declined 20% or more. Small cap stocks, also long-time laggards, surged ahead of large cap stocks. Our core team, which had brought down equity weights in our multi-asset class portfolios as stocks soared in 2020, pivoted and increased equity allocations in the face of unattractive returns and fixed income. Our analyst teams found opportunities throughout many areas of the equity markets, at home and abroad, in both growth and in value, in large caps and in small, navigating the rotations underway. Because we are neither dogmatic growth nor value investors, but flexible core managers, With well-defined disciplines for analyzing both growth and value stocks, we were successful in the first quarter. As a result of both our asset allocation decisions, as well as security selection, we are pleased to have delivered positive absolute returns for all of our risk-based multi-asset investment strategies, as well as to have delivered more than full participation in the ongoing equity bull market of the first quarter. So coming back to our multi-asset class strategies, you know, our goal is to deliver growth over the long term, but for individual clients specifically, how those results are generated matter a great deal. The risk of our strategies take, the volatility, our clients' experience, and the nature of the performance pattern we deliver, these are all critical pieces of the client's solution experience. A smoother ride helps clients remain invested in more difficult market environments and enabling them to benefit when markets recover. And so this is why our multi-asset class strategies build in such significant risk management disciplines. Our aim is to deliver a degree of downside protection when clients need it most, while providing as much participation as we feel is prudent during upmarket environments. And so as I was stating, our track record in multi-asset class investing dates back to the inception of our flagship long-term growth strategy in January 1973. Now, if we look at Morningstar data, there are 7,776 strategies listed in the Morningstar allocation category. Of those, approximately 1,000 multi-asset class separate account composites have a 10-year track record. And of those 1,000, only four multi-asset class separate account composites have an inception date in the 1970s. The two longest-standing multi-asset class separate account composites belong to the same manager, demanding an APR's long-term growth and a growth with reduced volatility separate account composites. Someone who invested $100,000 in our long-term growth strategy at its inception in January 1973 would have $8.5 million today, having realized equity-like returns with 30% less risk. This is a testament to our time-tested research disciplines and processes. No other wealth management firm has this kind of track record that clearly and definitively quantifies what we have been able to deliver for clients over a half century of different market, economic, and social environments. Continuing with performance during the first quarter, and I'll focus now on our equity strategies. Our fundamental U.S. equity, non-U.S. equity, global equity, and core equity unrestricted portfolios each outperform to start 2021. Relative results range from a modest degree of outperformance in U.S. equity to substantial outperformance in our non-U.S. equity and global equity strategy. Across all of these portfolios, the chief driver of outperformance with strong security selection, a testament to our analysts' abilities to find opportunities even when many portions of equity markets are as richly priced as they are today. It's a reminder that we don't buy the markets. We are buying individual securities that we believe represent very attractive return opportunities. Beyond our core fundamental portfolios, our results were more mixed for the quarter. Our disciplined value suite was a beneficiary on an absolute basis of the first quarter's equity market shift from the growth style to value, but its tilt towards quality within the value space led to modest relative underperformance versus its benchmark. Its intermediate to long-term results remain very good, and we believe the strategy is well-positioned to benefit as flows swing back to value equity styles. After a remarkable 2020, our Rainier International small cap strategy underperformed by about 500 basis points in the first quarter, driven primarily by the global style rotation of value. Our Rainier strategy, which is a separate but equally disciplined and time-tested research process from our core bottom-up portfolios, is growth-oriented. Despite the relative retracement last quarter, our Rainier International Discovery Fund remains ahead of its benchmark by over 500 and 400 annualized basis points over the trailing three and five years, respectively. Rainier is noteworthy as well for its effective risk management. Over its nine-year history, its downside capture has been better than 92% of its peer group, and its Sharpe ratio ranks in the top 4% over that timeframe. It's worth noting that in our fundamental equity strategies, Idiosyncratic risk dominates our portfolios, meaning that our returns are not simply explained by factor exposures. This is very important in an environment where not only isn't there much alpha, but a substantial amount of what passes for alpha is just factor beta. Since investors can buy factor beta very inexpensively, true alpha, which is idiosyncratic in nature, is genuinely valuable. A word, if I will, on the current state of the capital markets and the implications for our thinking. Clearly, there are now excesses visible that go beyond high valuations on equities or bonds. Witness the boom in special purpose acquisition vehicles, so-called SPACs, which have been around for a long time but are now being used to bring too broad a range of companies public, some that are ready, and frankly, many that simply are not ready to be public, or the surge in the value of Bitcoin. Now, without getting into any form of debate about the fundamental long-term consequences of cryptocurrency, it is hard to understand how Coinbase, an exchange for trading cryptocurrencies, could go public at $85 billion, greater than the valuation of NASDAQ, on which it trades, the London Stock Exchange, or ICE, which owns the New York Stock Exchange, or how Dogecoin, which was started as a joke, could be up 5,000% this year and have an aggregate value of $50 billion. The incredible rise of online trading platforms, most notably Robinhood, has ushered in an important and useful democratizing force in finance. However, there is no question that the combination of addictive, gamified trading apps with social media has led to provocative developments, such as the rise and fall and rise of GameStop, which has gone from $19 to $350 to $45 to $150, all in the span of just the last four months. or the incredible story of Archegos, a family office that levered about $20 billion, up by a factor of five or maybe more, to buy total return swaps that didn't require holdings disclosure. The banks that provided prime brokerage services for Archegos have now announced losses of more than $10 billion, a massive failure in risk management and a potent reminder that leverage only amplifies results. It can't turn a bad investment into a good one. The confluence of all these events and many, many more like them that we read about are disturbing, more so than the absolute valuation of stocks or bonds, which are of themselves a source of concern. Now, we believe consistent with the consensus that we are in the midst of an economic and earnings boom greater than any seen since the early 1980s. The great majority of professional investors have literally never seen a boom like this. And the potency of operating leverage and consequently earnings is almost certainly being underestimated. This along with the low absolute level of interest rates is legitimately supportive of higher equity valuations. However, notable parts of the equity market are certainly richly valued, and as we discussed, bonds are vulnerable to rising rates and increasing inflation, although we do not forecast high and sustained inflation. In conjunction with the speculative excesses I mentioned, All these factors call for a more muted outlook for the medium-term returns available in the markets, as well as the recognition that a substantial equity air pocket at some point seems likely, although the latter would probably be a healthy clearing of the air. Turning now to an update on our strategic initiatives, our excellent investment results are beginning to generate significant national recognition. We are pleased to have been recognized by Barron's as the best mutual fund family for 2020. Additionally, we were recognized as a Refinitiv Lipper Fund Award winner for the US 2021 Best Mixed Asset Class Small Fund Family Group over three years. These awards are a terrific achievement in their own right, But if there ever was a year for us to be particularly pleased to have this honor, it was during 2020, a year of unprecedented challenges and change. We and our clients are thankful for the skill and tireless dedication of our research team for a job very well done. It is critical that we resume net positive asset flows And we saw further meaningful progress in the first quarter as the pace of net outflows continued to decline meaningfully from prior trends, as Paul will cover in some detail. We are optimistic that the pace of outflows will continue slowing throughout the year and that we will resume net positive flows before the end of this year. We believe that recognition such as the ones mentioned above, as well as additional marketing, PR, and sales opportunities resulting from our long history of investment excellence, will help promote our message and our story. Along those lines, we added additional client-facing personnel to our asset management businesses in the first quarter. As mentioned on prior calls, we will continue to bolster the size of our client-facing teams throughout the rest of 2021. in both wealth and asset management. As mentioned on our prior call, in the first quarter we completed an overhaul of our pricing model for new clients in wealth management. This comprehensive bundle fee incorporates wealth planning and advice, investment solutions, and custody. Current clients' fees are grandfathered, and our expectation remains that it will be additive to revenues over time. A digital transformation continues to move forward across multiple vectors simultaneously. In 2021, we will implement a CRM, an advisor portal with InvestCloud, as well as portfolio counting and client reporting. Our implementation of basic Workday modules within finance has been completed, and we are installing Workday's business intelligence functionality, as well as migrating all our human resource systems to Workday. We expect full implementation of Charles River for trading, order management, and compliance to be complete across all our portfolios by the end of the year. All of these IT efforts will simplify and modernize our operational processes, as well as improve the efficiency and experience for employees. 2021, however, will continue to be a year of investment, with material efficiencies coming in future years. strategic objective envelops all of the others and relates to everything we strive to accomplish at Manning and Apier. We are committed to being a talent-rich, diverse, highly aligned organization with a powerful, distinctive culture. We believe that diversity and inclusion lead to better decision-making and superior business outcomes for all. We are committed to being a firm whose diversity of staff, leadership, and board are broadly representative of our country and the communities in which we work. We know these changes take time. We are establishing goals and policies and practices to make meaningful progress, and we look forward to sharing more specifics soon. Finally, on corporate structure. Last quarter, we told you of our commitment to both enhance employee alignment with our shareholders by increasing share ownership by our staff, while also returning cash to shareholders and ensuring that increased employee ownership is not diluted to other shareholders. Our share buyback program began last quarter and Paul will provide more color in his remarks. Finally, I'd like to take a moment to reflect on where we are more than one year after the onset of COVID in the United States. The virus has challenged us as a society and as a company to work in different ways, to live in different ways, and to think in different ways. I am truly proud of the courage and the creativity our team has shown over the past 12 months. We have been able to continue to deliver excellent investment results and high-quality service for our clients at a time of unprecedented change. Our operating results improved substantially, and we have been able to generate best-in-class returns to shareholders. That same courage, creativity, and immense determination will continue to serve us well for the years ahead. With that, I'll turn the call over to Paul for more details on our financials.
spk00: Thanks, Mark. Good afternoon, everyone, and thanks for joining us today. The highlights for the first quarter included continued improvement on net client flows and further evidence of stabilized AUM, increases in revenue and operating income, and good traction on the share repurchase plan announced on our last call. I'll begin my remarks with a review of assets under management. We finished March with AUM of $21.1 billion, up from $20.1 billion as of December 31st. Net outflows for the quarter were $132 million, but were more than offset by $723 million of market appreciation. Additionally, during the quarter, we adjusted our reporting of assets under management to include model delivery business that we had previously excluded from our definition of AUM. This was a one-time reclassification, and as of March 31, 2021, we had approximately $470 million of model delivery assets. When compared to this time last year, which was nearly the bottom of the market at the onset of the pandemic, AUM has increased by $4.1 billion, or 24%. Although net flows have not yet turned positive, 132 million of net outflows for the first quarter represents another quarter of improvement compared to prior periods. Gross client inflows improved to approximately $625 million. By channel, we reported approximately 225 million of inflows from our wealth management channel and $400 million of inflows from our intermediary and institutional team. Gross client outflows of approximately $750 million represented the lowest level of quarterly outflows that we have reported in the last several years, with $300 million of gross outflows from our wealth management relationships and $450 million from our intermediary and institutional team. Our separate account retention rate during the quarter was approximately 96%. Before leaving AUM, I'll provide some additional background on our model delivery business. Our most popular core and quantitative strategies have been available through model delivery providers for access by individual investors for the last several years. Model business has been an increasingly important part of the intermediary distribution strategy and in particular with smaller accounts that may not meet our separate account minimums. This trend accelerated during 2020 given the strong performance run with our model delivery assets increasing from approximately 200 million at the start of the year to more than $400 million by the end of 2020. While this business is lower fee than our traditional separate accounts, it is an important part of our intermediary growth strategy and we are optimistic about growth prospects for both 2021 and beyond. Turning to our first quarter P&L, we reported revenue of $34.2 million for the quarter, an increase of 2% from last quarter and 10% from the first quarter of last year. Revenue margins during the quarter were 68 basis points, consistent with what we've reported in prior periods. Operating expenses were $27.9 million in the quarter, a sequential decrease of $1 million, and $1.2 million decrease compared to the first quarter of 2020. Compensation-related costs decreased by approximately $275,000 since last quarter. The decrease for the quarter is predominantly driven by reductions in our 2021 research bonus estimates compared to what was incurred in 2020 based on the very strong performance that we achieved. As you may remember, our research bonus is based on absolute and relative performance metrics for the trailing one and three year time periods, meaning that the bonus expense recognized in 2021 will be reflective of both current and prior period performance. Our first quarter results also include the impacts of our deferred compensation plan that was implemented at the start of the year, whereby a fraction of incentive compensation for our most highly paid employees is deferred, invested into our mutual funds, invested over a multi-year period. Compensation related costs as a percentage of revenue improved to 55% for the quarter, down from 57% in the fourth quarter of 2020, and our overall headcount stands at 275 employees as of March 31st. Other operating costs was the other contributor to expense reductions, as $6.7 million of expense represented a $675,000 decrease from last quarter. The 9% decrease was driven by a number of factors, including seasonality and timing of certain expenses, and a reduction in expenses stemming from the target date fund merger that was completed during the third quarter of 2020. For the quarter, other operating expenses represented 20% of revenue. However, as we look ahead to the remainder of 2021, we expect that other operating expenses will more than likely settle in the 22 to 24% of revenue range as we continue to incur costs to support our digital transformation and expect travel costs to increase as restrictions are eased. Operating income improved to $6.2 million in the quarter, an increase of nearly 40% from the fourth quarter, with operating margins of 18%. On prior calls, we have stated our commitment to achieving operating profits of $20 million or more and operating margins of 20% or better over an investable timeframe. We continue to make progress towards achieving these goals while also acknowledging that we have plenty of hard work in front of us to bring our margins more in line with our industry peers. Non-operating income for the quarter was $460,000 a reduction from the $1.1 million of non-operating income that we reported last quarter, which included income stemming from changes in our tax receivable agreement liability as well as investment returns on our marketable securities. As a result, on a GAAP basis, we reported pre-tax income for the quarter of $6.7 million compared to $5.7 million last quarter. After accounting for approximately $900,000 of strategic restructuring costs, we reported economic income of $7.6 million. Our non-GAAP effective tax rate for the quarter was approximately 12%, resulting in economic net income of $6.7 million, or 29 cents per adjusted share. Similar to last quarter, the reduced effective tax rate is again a reflection of discrete tax benefits recognized from option exercises during the quarter. We believe that the non-GAAP effective tax rate of 30% is more representative of what we expect in future quarters, but this rate may vary based on activities during a quarter, as well as based on any future tax law changes. If we were to apply the normalized 30% tax rate to our first quarter results, our earnings per adjusted share would have been 23 cents. Looking at the balance sheet as of March 31st, we reported approximately $70 million of cash and investments down from $81 million at year-end with no debt. Year-end incentive payments were the primary driver of the reduction in cash. Additionally, we repurchased 412,000 shares of Class A common stock for approximately $3 million following the announcement of our $10 million share repurchase program in February. The repurchased shares will be reported as Treasury shares on our March 31st balance sheet and will remain in Treasury until they are retired or reissued. We expect to have additional updates on our share repurchase program in future quarters. Since the start of the year, our adjusted share count has increased by approximately 1 million adjusted shares to 23.7 million adjusted shares as of March 31st. The majority of the increase is attributable to awards issued under our long-term incentive plan that will vest over five years. The adjusted share count was reduced by the aforementioned share repurchases However, those repurchases were generally offset by option exercises. As of March 31st, our adjusted share count now includes approximately 17 million Class A shares outstanding, 2 million private units held by legacy shareholders, 700,000 vested stock options, and approximately 4 million unvested stock awards issued under our long-term incentive plan. As of March 31st, our employees and directors now own approximately 37 percent of the adjusted shares outstanding, up from approximately 33 percent at the end of the year. In closing, the first quarter marked another period of meaningful traction on our strategic initiatives, coupled with further stabilization of AUM and improved financial results. Like Mark mentioned earlier, this progress has been achieved in large part due to the hard work and resolve of our people, who have stepped up to embrace every challenge that we have been faced with over the past 14 months. We are thankful to our people for their excellent work and dedication and look forward to celebrating future successes with our team, our clients, and our shareholders. That concludes today's call. If you have any questions on the topics addressed today, please contact us using the inquiries portal on our investor relations website and we'll properly address your inquiry. Thank you for listening and for your interest in Manning and Appear, and I'll now turn the call back over to Angela to wrap up. Thank you.
spk01: This does conclude today's conference call. Please disconnect your line at this time and have a wonderful day.
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