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spk01: Good day and welcome to the Pizina Investment Management Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Jessica Doran, Chief Financial Officer. Please go ahead, ma'am.
spk03: Thank you, Operator. Good morning, and thank you for joining us on the Pazina Investment Management Second Quarter 2021 Earnings Call. I'm Jessica Doran, Chief Financial Officer. With me today is our Chief Executive Officer and Co-Chief Investment Officer, Rich Pazina. Our earnings press release contains the financial tables for the periods we will be discussing. If you do not have a copy, it can be obtained in the Investor Relations section on our website at www.fazina.com. Replays of this call will be available for the next two weeks on our website. Before we start, we need to remind you that today's call may contain forward-looking statements and projections. We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from today's comments. Please note that we do not undertake to update such information to reflect the impact of circumstances or events going forward. In addition, please be advised that due to prohibitions on selective disclosures, we do not, as a matter of policy, disclose material that is not public information on our conference call. Now let me turn the call over to Rich, who will discuss our current view of the investing environment.
spk02: Thanks, Jessica. I've been a value investor my entire life. Someone asked me recently how I came to believe in value, and I explained that it really all happened at my parents' kitchen table. Price matters, my mom and dad would remind me. But still the question gets asked, how does the value of an asset get determined? I think the answer is pretty straightforward. It's the earnings you can expect to be generated by the asset compared to the price you pay. On the one hand, this simple homespun version of value investing can cause a person to believe that value is just a factor. But wait, the factor in this case depends on the earnings power of the asset, and that is where real research and real judgment come into play. That's why I keep repeating on these calls and in most of my meetings with clients and consultants that value isn't a factor. Value is a philosophy. One other point I'd like to emphasize, value investing wins in the long run. We don't get to win every month, every quarter, every year, or even every five years. But serious, research-driven, classic value investing as we practice the art is a strategy that generates attractive long-term returns. This past quarter, as growth stock investing seems to have regained favor, has people asking, whether the prior two quarters were the end of a very short value rally. As economic growth reached a crescendo this spring from the combined impact of recovery and stimulus, the value skeptics reemerged. This is how it always feels as a value investor. Almost no one believes value will work until it already has. But let me offer some perspective on the opportunity set we are presented with today. companies with attractive earnings growth rates, selling at low multiples with very clean balance sheets, managements that adeptly navigated the challenges of COVID-19, and a cynical marketplace ignoring the shifting cycle. Further, our value portfolios are finding diverse exposure, including selected utilities and healthcare names, areas where value has been scarce for a while. Last but not least, the cheapest quintile of stocks offer an earnings yield of 10% on a current basis based on first call estimates, while the most expensive stocks offer less than a 2% yield, and the 10-year Treasury offers just above 1%. The arithmetic on this difference is compelling enough to make my entire point. Before I turn the call back to Jessica, Let me briefly report on the state of our business. We had $2.2 billion in positive net flows for the quarter, the second best in our history, matching the pace of the post-internet bubble period. Our strategy of partnering with some of the strongest and most sophisticated financial advisors in the world is paying off handsomely. Our pipeline remains robust with some relatively large searches nearing their final stages. Thank you for listening, and I look forward to your questions. But first, let me turn it back to Jessica to discuss our financial results.
spk03: Thank you, Rich. We reported diluted earnings of 25 cents per share for the second quarter, compared to 24 cents last quarter and 13 cents per share for the second quarter of last year. Revenues were $50.9 million for the quarter, and operating income was $27.9 million. Our operating margin was 54.9% this quarter, increasing from 50.2% last quarter and from 36.4% in the second quarter of last year. Taking a closer look at our assets under management, we ended the quarter at $53.1 billion, up 7.9% from last quarter, which ended at $49.2 billion, and up 68.6% from the second quarter of last year, which ended at $31.5 billion. The increase in assets under management from last quarter, as Rich mentioned, was driven by net inflows of $2.2 billion and market appreciation, including the impact of foreign exchange, of $1.7 billion. The increase from the second quarter of last year reflects $18.8 billion in market appreciation, including the impact of foreign exchange and net inflows of $2.8 billion. At June 30th, our assets under management consisted of $20 billion in separately managed accounts, $30.2 billion in subadvised accounts, and $2.9 billion in our PISINA funds. Compared to last quarter, overall assets under management increased, with separately managed account assets reflecting $0.6 billion in market appreciation and foreign exchange impact. sub-advised account assets reflecting $2.2 billion in net inflows and $1.1 billion in market appreciation and foreign exchange impact, and assets in PAZINA funds remaining flat during the quarter. Average assets under management for the second quarter of 2021 were $51.5 billion, an increase of 13% from last quarter and 72.8% from the second quarter of last year. Revenues increased 10.9% from last quarter and 68.9% from the second quarter of last year. The increase from last quarter and the second quarter of last year reflects the increase in average assets under management. Our weighted average fee rate was 39.5 basis points for the quarter. Compared to 40.4 basis points last quarter and 40.4 basis points for the second quarter of last year, Asset mix across our strategies and distribution channels, as well as performance-based fees, are generally the primary contributors to changes in our overall weighted average fee rate. However, changes in asset levels may also impact our fee rate, as the majority of our separately managed accounts pass management fees pursuant to a schedule in which the rate we earn on the AUM declines as the amount of AUM increases. Our weighted average fee rate for separately managed accounts was 53.3 basis points for the quarter compared to 54.5 basis points last quarter and 55.2 basis points for the second quarter of last year. The decrease from the first quarter of 2021 primarily reflects the shift in assets to certain strategies that typically carry lower fee rates, while the decrease from the second quarter of 2020 primarily reflects an increase in assets due to market appreciation. Our weighted average fee rate for subadvised accounts was 27 basis points for the second and first quarters of 2021 compared to 26 basis points for the second quarter of last year. Certain accounts related to one client relationship have fulcrum fee arrangements. These fee arrangements require a reduction in the base fee if the investment strategy underperforms its relevant benchmark or allow for a performance fee if the strategy outperforms its benchmark. During each of the second and first quarters of 2021 and the second quarter of 2020, we recognized $1 million reductions in base fees related to these accounts. These fees are calculated quarterly and compare relative performance over a three-year measurement period. To the extent that three-year performance record of these accounts fluctuate relative to their relevant benchmark, the amount of base fees recognized may vary. Our weighted average fee rate for PISINA funds was 68.1 basis points for the quarter, remaining flat from last quarter and increasing from 65.9 basis points for the second quarter of last year. The increase from the second quarter of 2020 primarily reflects a reduction in fund expense cap reimbursements. Looking at operating expenses, our compensation and benefits expense was $19 million for the quarter, compared to $19.1 million last quarter and increasing from $15.6 million for the second quarter of last year. The change in compensation and benefits expense from the first quarter of 2021 primarily reflects an increase in compensation during the second quarter, which was offset by expenses recognized in the first quarter associated with tax payments and the company's employee profit sharing and savings plan, which generally do not recur during the year. The increase in compensation and benefits expense from the second quarter of 2020 was driven by an increase in compensation and in the market performance of strategies tied to the company's deferred compensation obligations. DNA expenses were $3.9 million for the second quarter of 2021 compared to $3.7 million last quarter and $3.6 million for the second quarter of last year. The increase from the first quarter primarily reflects an increase in travel and entertainment, and professional fees. The increase from the second quarter of last year primarily reflects an increase in professional fees and data and systems expenses. Other income was $1.7 million for the quarter, driven primarily by the performance of our investments. Turning to taxes, the effective rate for our unincorporated and other business taxes was 3.6% this quarter, compared to 3.2% last quarter, and 4.1% in the second quarter of last year. We expect the effective rate associated with the unincorporated and other business taxes of our operating company to be between 3 and 5% on an ongoing basis. Our effective tax rate for our corporate income taxes, ex-UVT, and other business taxes was 24.8% this quarter, compared to our effective tax rate of 26.4% last quarter, and 26.6% for the second quarter of last year. The fluctuation in these effective rates also reflects certain permanently non-deductible expenses. We expect this rate, excluding these items, to be between 24 and 26% on an ongoing basis. The allocation to the non-public members of our operating company was approximately 78.4% of the operating company's net income for the first and second quarters of 2021. compared to 77.7% in the second quarter of last year. The variance in these percentages is the result of changes in our ownership interest in the operating company. During the quarter, through our stock buyback program, we repurchased and retired approximately 100,000 shares of Class A common stock and Class B units for $1.1 million. At June 30th, there was approximately $7 million remaining in the repurchase program. Yesterday, we announced that our Board of Directors has approved a $40 million increase in the aggregate amount authorized under the current program to repurchase the company's outstanding Class A common stock and Class B units. We plan to use available cash on hand to support our objective of minimizing dilution from our compensatory stock and unit-related issuances over the next several years. At quarter end, our financial position remains strong, with $53.5 million in cash and cash equivalents, as well as $7.3 million in short-term investments. We declared a $0.03 per share quarterly dividend last night, Thank you for joining us. We'd now be happy to take any questions.
spk01: Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star then 1. If your question has already been addressed and you'd like to withdraw yourself from queue, please press star then 2. We will pause momentarily to assemble our roster. And ladies and gentlemen, today's first question comes from Sam Sheldon at Punching Associates. Please go ahead.
spk00: Good morning, Rich and Jessica. Great to see the strong positive net flows. Could you talk about the sentiment and interest that you're seeing from institutions towards value right now? I guess has the level of interest changed, or are institutions broadly thinking the value outperformance earlier was a head fake, or are you kind of gaining traction with the wider group today?
spk02: Sam, it's very mixed. I would tell you that the vast majority are not paying attention and they remain focused on growth. The fact that growth has had this little bit of rebound in recent weeks or month or whatever it's been, a few months, kind of has reinforced that, so I would tell you there It's all over the map. It goes from the people that are being proactive and anticipating a longer cycle to the people who have sort of engaged in conversations to be ready for when they want to pull the trigger. But it's not floodgates, and it's early in the cycle. So this is... what has happened in all of the cycles. The first year, you don't get the floodgates. You get the floodgates when half the opportunity is already gone. We don't think we're near the point where half the opportunity is gone. They have to realize that maybe they're missing it. It's an all-over-the-map answer, but I will say that those that embraced us on the early side, we've seen a lot of positive flows into those accounts. And that's what you've seen in the second quarter. It was more money coming into existing accounts than it was a lot of new accounts, although there were some new relationships.
spk00: Okay. How have the characteristics of the ongoing value searches that you talked about in the prepared remarks compared to prior years? Is there a change in the size of the opportunities or maybe the mix between subadvised and SMAs or change in fee sensitivity or anything like that?
spk02: Yeah, the obvious answer to that question is that more of it is I don't even think this is a change because this has been what we've seen for the last five or six years is that it's been focused on our non-US strategies with global and international and emerging markets being the primary source of interest. This quarter, we saw a little more flow into our flagship US-focused value product through the relationship that we have with John Hancock. But the nature of what we're seeing isn't that different, but we do find ourselves qualifying for searches that five years ago or more we wouldn't be in the running for. So these are things that are multi-billion dollar searches. With one win, you can really move the needle. Now, obviously, those are long, long processes where we're competing against... you know, substantial players. So you don't know that you're going to win those, but we're in them. And I think we're probably at the scale now where we qualify for almost any size search that anybody is contemplating in the world.
spk00: Okay. And, and with this momentum, are you doing anything differently from a marketing or sales perspective?
spk02: Yeah, we're increasing the size of our staff. So we've been reinvesting in both direct sales and distribution. We've beefed up our marketing department. We're beefing up our RFP department. We're adding more content. We're starting to get more sophisticated on social media and packaging our content differently. We're opening an office in Dublin and hopefully in early January. That's our target so that we can have a formal presence in the EU, which we had originally planned on having through our London office, but that became impossible post-Brexit. We think that will help with a view of permanence in the European market. So we are trying to continue to capitalize on what we think will be a multi-year opportunity set and expand our reach.
spk00: Okay, great. My last question, the board increased the buyback authorization by $40 million before completing the old remaining authorization. Has there been a change in the philosophy around the buyback going forward?
spk02: No, there hasn't. The reality is when we think you could get close to using up what the authorization is at some point in the next couple of quarters, really based on the unlikely case that we buy the maximum that we're allowed to buy, we proactively ask the board to expand it before we run out. but we're not changing the philosophy at all.
spk00: Okay. All right. Thank you, guys. Sure.
spk01: And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
spk03: Thank you, everyone, for joining us on today's call. We look forward to speaking with you again soon. Take care.
spk01: Thank you, ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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