Westwood Holdings Group Inc

Ladies and gentlemen, thank you for standing by and welcome to the Westwood Holdings Group's third quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Julie Curran, General Counsel and Chief Compliance Officer. Please go ahead.

Thank you and good afternoon. Welcome to our third quarter earnings conference call. The following discussion will include forward-looking statements which are subject to known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today. As well as in our Form 10-Q for the quarter ended September 30, 2020, filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. You are cautioned not to place undue reliance on forward-looking statements. In addition, in accordance with SEC rules concerning non-GAAP financial measures, The reconciliation of our economic earnings and economic earnings per share to the most comparable gap measures is included at the end of our press release issued earlier today. On the call today, we have Brian Casey, our President and Chief Executive Officer, and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey.

Good afternoon. Thank you for taking the time to listen to our quarterly earnings call today. Thank you for joining us. Thank you for joining us. and accordingly, search activity is robust. Westwood has the operational expertise to manage emerging markets equities with a new team and we continue to research available opportunities. Despite September's market drop, equity markets climbed again even as we head into the final stages of the presidential election. The divergence in performance between the indices remains wide. Megacaps are dominating the large caps, which are outperforming small caps, and growth is outperforming value across all market caps. While the small cap space remains challenged and is down for the year, the larger cap-dominated S&P 500 is in positive territory year-to-date after posting its best quarter since 2010. For sure, the path forward is uncertain, and volatility has begun to pick up in tandem with the election rhetoric we're hearing from both sides of the aisle. Incidences of COVID are proving equally volatile, with some parts of the country experiencing declines, while others are seeing spikes. Overall, recovery and reopening efforts continue to progress, and along with them, earnings estimates are rising from their troughs. Our U.S. equity value products once again turned in a mixed performance. Our SMIC cap strategy kept pace with the market's move higher, while our large cap and large cap select products were more challenged by the rotation of as lower quality stocks rallied along with growth during the third quarter. These stiff headwinds caused some weaker relative performance, but our year-to-date performance remained strong thanks to our downside risk focus, which helped shelter our clients from the full brunt of the March sell-off. Despite falling behind in an up quarter, large-cap value remains ahead of the benchmark Russell 1000 value index on a year-to-date basis and over most trailing year periods. Amongst its e-vestment database institutional peers, large cap value remains in the top quartile for the trailing three and seven year time periods. Large cap select fell behind in the quarter but is ahead year to date and overall trailing time period since inception in 2014. Large cap select commands a top quartile ranking in the e-vestment large cap value manager universe over the trailing three year time period and boasts a top decile ranking since inception in 2014. Our SMITCAP strategy strongly outperformed the Russell 2500 Value Index, and our portfolio managers continue to build a terrific record with solid stock selection. SMITCAP is one of our best performing strategies year-to-date, at over 500 basis points ahead of the index, which puts it in the 29th percentile among small and mid-cap value managers in the eVestment database, and in the 23rd percentile over trailing three years. Our small cap strategy underperformed the Russell 2000 value index by less than 100 basis points as non-earning, low-quality securities rallied, but it remains ahead year-to-date and over multiple trailing time periods. Among its institutional peers, small cap is in the top half year-to-date and ranks in the top quartile over trailing five years and top decile over the last 10 years. The curious headwind of companies rallying, despite being non-earning, may begin to fade as levels of financial stress have risen and as the economic stimulus measures introduced earlier this year begin to phase out. This scenario is likely to create additional headwinds for these companies and once again the market should recognize the higher quality nature of our portfolio. Let's turn now to our multi-asset group which manages an array of strategies across the risk and return spectrum. Our suite of multi-asset products remains uniquely positioned to benefit from the cross-currents affecting asset classes while taking advantage of market inefficiencies by finding mid-price securities. With heightened volatility, not just for equities, but within credit asset classes too, having more targeted ownership of securities within a multi-asset vehicle can help clients preserve their return potential while lowering volatility and limiting exposure to key macro risks. We're convinced that dispersion and returns as asset classes, industries, and companies react to unfolding economic, social, and political developments will provide ample investment opportunities for our skilled investment teams in the period ahead. Our largest multi-asset strategy, Income Opportunity, outperformed its benchmark by 61 basis points of 40% S&P 500, 60% Bloomberg Barclays Aggregate Index this quarter. Thank you for joining us. and the top 20% over trailing 3, 5 and 10 year time periods and it places it in the top 30% amongst its institutional peers year to date. Our other multi-asset products similarly added to their solid track records with strong absolute and relative results. Liquidity in the convertibles market has improved over the last couple of quarters and returns have improved substantially from their lows last March. In this environment, our global convertibles and alternative income strategies have performed exceptionally well. Our mutual fund, WMNIX, finished the quarter in the 25th percentile year-to-date in the Morningstar Market Neutral Group, its top quartile for the trailing one-year period and 27th percentile for the trailing five-year period. Total return outperformed its benchmark, 60% S&P 500, 40% Bloomberg Barclays Government Corporate Aggregate Index, by nearly 200 basis points this quarter. High Income also outperformed its benchmark, 20% S&P 500, 80% Bloomberg Barclays Government Corporate Aggregate Index by over 300 basis points. Our newest strategy, Credit Opportunities, is posting strong returns as the team identifies mispricings in various asset classes and leverages Westwood's strong fundamental research. A washout event may well occur as some businesses fail to weather the consumer storm This often leads to periods of dislocation and illiquidity, which our investment team can profitably mine to discover mid-price quality candidates to add to the fund's portfolio. Shifting to wealth management, our teams in Dallas and Houston continue to actively engage with clients to assist them through the market's uncertainties. I'm constantly impressed by the ability of our distribution team to conduct virtual and physical meetings despite the constraints of COVID-19. Our new colleagues are integrating well, and last quarter's launch of our online portal has expanded beyond the initial beta test group with a new release planned for rollout over the next several weeks. A stronger online portal will allow us to enhance our digital client engagements even more by supplementing our traditional hands-on advice and support. Despite current uncertainties, our clients trust us to remain focused on a goals-based approach to achieve their long-term goals. Deploying an increasingly holistic approach to interacting with our clients, assets have remained sticky and client retention is stable. This past quarter, our teams brought in new business of about $88 million offset by client withdrawals to make delayed tax payments. We also experienced some outflows from closed strategies and pension distributions. Client referrals are on the rise and we've seen a definite uptick since Labor Day with a particular focus from folks wanting estate planning advice. Client conversations like these typically take several months to result in fund conversion, and we're looking forward to new business inflows later this year and into early 2021. Our select equity strategies, with over $700 million in assets, posted strong returns for the quarter. The select equity strategy posted an absolute return of nearly 9%. Downside capture at below 80%, measured on a daily returns basis for both strategies, The new strategies we created for our high net worth clients to exploit market dislocations, dividend select, and high alpha have each performed very well in picking up assets. There have certainly been challenges to meeting clients and prospects in this environment, but we continue to find new and better ways to connect. We recently held an online event to discuss the upcoming election with more than 150 participants, and we are pushing that recording via YouTube to over 2,300 clients, prospects, and third-party advisors. We're excited about the future of our wealth business and the prospects for growth in the years ahead. In institutional and intermediary sales, we had inflows of approximately $326 million and about $847 million in outflows. which are mostly the result of closing our emerging markets and MLP strategies along with client rebalancing and global converts in large cap. Small cap was our most successful strategy for the quarter and year to date. Large cap, while negative for the quarter, has positive inflows from selected clients and income opportunities stabilized with net outflows below $5 million for the quarter. Income opportunity flows appear to have stabilized and are gaining momentum across the RIA channel. Intermediary sales improved after suffering industry-wide from the pandemic, and sales for the third quarter rose versus the second quarter and are now running ahead of 2019 and pre-pandemic levels. We're pleased to see our mutual funds moved into net positive territory, with strength coming from our small cap and income opportunity strategies. We discussed key new platform approval for small cap on last quarter's call, and details have now been finalized and we are on track to launch as a focus manager with the platform advisors next month. As we look forward, we believe that continued strong performance in our U.S. value and multi-asset strategies should lead to an increase in consultant searches and additional wins in the mutual fund and model delivery space. Our pipeline is growing with attractive opportunities in our small caps, mid cap and income opportunity strategies. Our investment teams have remained disciplined in their process and execution which has allowed our distribution teams to focus their talents on presenting our strategies to the marketplace. We are focused on managing the expense side of our business and we're pleased to report that our first full quarter of outsource trading was very successful. Our clients are getting better execution and more competitive transaction costs while our portfolio managers have access to a bigger trading desk to obtain market data and more frequent updates. We have initiated many internal efficiencies in our front and middle office areas which are expected to generate over a million dollars a year in reduced expenses. Well before the pandemic upended the status quo, the asset management industry was undergoing significant disruptions and its impact is exerting even more pressure on companies to evolve to meet the challenge. These extraordinary circumstances have tested organizations and ours is no exception and they will result in lasting change We truly believe that the steps we started taking well before the pandemic have placed us in a strong position not just to survive, but to thrive and grow. Success in the asset management industry requires a well-thought-out plan, followed by focused execution in four key areas. Number one, alpha generation is critical to all buyers, institutional and retail. Westwood value strategies have delivered excess return in every one of our strategies over multiple time periods. Our multi-asset strategies have developed the outcomes our clients want, and our flagship fund, Income Opportunity, has recently been upgraded to Morningstar's highest category of five stars. Number two, distribution is a team sport. Gone are the days of salespeople randomly knocking on doors and sending newsletters to stale contact lists. Sales Alpha is delivered via a combination of excellence in brand awareness, thought leadership, Digital Engagement, and Product Management delivered by experienced sales professionals using technology to optimize productivity. We now have the largest, most experienced distribution team in our history. Number three, wealth management has evolved from simply being about products to comprehensive solutions. For decades, all that was required was a competitive financial product A client meeting once or twice a year and a paper statement in the mail at the end of the month. While many firms still operate this way, winners are pivoting to a solutions-based model delivered digitally. Westwood has been working for several years to build a broader platform of solutions. We have grown our financial planning resources, added depth in estate planning, built tax-sensitive investment strategies, and added private equity and private banking to our array of solutions. These services are quickly moving to table stakes for wealth management, and in our view, firms that haven't made the shift will not survive. Number four, financial technology will accelerate growth for firms that embrace its transformative powers. We are using technology to improve our efficiency in screening investment ideas, building company models, and populating our sales team with data to help them better target potential buyers. We are rolling out our enhanced digital portal to wealth clients and we're building additional platforms with InvestCloud that will be announced in the coming months. Industry disruptions have been building for some time and the added shock of the pandemic presents a perfect storm of challenges. Fortunately, Westwood has been making major investments in technology to reduce costs, gain efficiencies, and prepare for industry disruptions. We have been careful to nurture a strong balance sheet which allows us the flexibility to pursue an array of future growth initiatives. Frankly, the disruptions confronting our industry will present rewarding opportunities for firms like ours that have kept their powder dry. In the months and years ahead, we're planning to capitalize on the infrastructure we've been building to support a much larger business. We remain committed to supporting our employees and clients as they navigate the challenges presented by the spread of the virus. Our team members continue to make extraordinary efforts each and every day, and I'm very grateful for all they do on behalf of our clients. I'll now turn the call over to Terry Forbes, our CFO.