Westwood Holdings Group Inc

Ladies and gentlemen, thank you for standing by, and welcome to the Westwood Holdings Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a 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 is being recorded. And now I'd like to introduce your host for today's program, Julie Guerin, General Counsel and Compliance Officer. Please go ahead.

Thank you and welcome to our fourth quarter 2020 earnings conference call. The following discussion will include forward-looking statements that 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-K for the year ended December 31, 2020, that is 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 the SEC rules concerning non-GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP 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. I've spoken in previous calls about the ongoing disruption in the asset management industry and the need for asset management firms to evolve to meet the challenges head on. We feel like we've made significant progress in the evolution of Westwood by taking steps that will allow us to thrive and grow in the years ahead. Some of the highlights from the fourth quarter include the expansion of our dedicated multi-asset investment team with the addition of Scott Bernard to the Income Opportunity Fund and Seth Gold to the Alternative Income Fund. The transition of our global convertible investment team to Aviva Investors, resulting in cost savings of personnel, and the elimination of the lease and overhead expense of our Boston office, received the Best Places to Work Award for the seventh year in a row, raised the overall star rating and Morningstar for the WHG funds family, and experienced significant gains with our investment in InvestCloud. These accomplishments come on top of several actions taken in 2020 to reduce costs and increase competitiveness, namely, the outsourcing of our institutional trading desk to Northern Trust, which saves us over $1 million per year, the closing of Westwood International Advisors in Toronto, a repositioning across our multi-asset lineup to broaden appeal and increase attractiveness, a repricing of our entire book to become more price competitive and attractive in new product screens, the introduction of several new strategies, including High Alpha, credit opportunities, systematic large cap growth, and systematic small cap growth that we initially launched for our wealth clients and plan to launch in intermediary and retail channels as they build longer performance records. Turning now to performance, I'll start with our U.S. value strategies. The year 2020 ended the longest bull market in history. Even with its correction in March, we still ended the year with a strong absolute return. There were three distinct parts of the year, downturn, recovery, and a vaccine-induced rally, which started in November, each of which brought different challenges along with extreme rotations in style. In fact, according to Bank of America Merrill Lynch, there were 25 outsized style rotations of greater than four standard deviations in 2020, which is more than twice any other year in their database. The volatility resulted in mixed performances from our various strategies. Our all-cap strategy kept pace while our large, mid, and small strategies were more challenged. Large-cap value lagged in the fourth quarter, but beat its benchmark Russell 1000 value index for the year 2020 and provided solid, absolute returns for our investors. Flows out of the large-cap strategy were amongst the largest contributors to firm outflows in the quarter, including some large client rebalances. However, we are encouraged as one large, long-term client elected to add to their account in the fourth quarter, and a second did the same in early 2021. We continue to see the potential for SMA wins, and our mutual fund, WHGLX, is now a four-star rated fund. Mid-cap value underperformed in the quarter, but with its downside outperformance earlier in the year, it was able to finish the year ahead of the benchmark Russell 2500 value index. MID continues to be one of the best-performing U.S. value strategies this year, finishing over 200 basis points ahead. Interest remains high for this strategy institutionally, as its peer ranking in the e-vestment database is in the top quartile over the last three years, and we are excited about its prospects going forward, especially with the introduction of our Ultra Share class late last year. However, despite improved performance and portfolio manager stability, SMID lost a large sub-advisory mandate this quarter. On the positive side, SMID had other clients contribute assets, and a new institutional client began funding a defined contribution mandate in our new Ultra Share class last quarter. Our small cap strategy was behind the Russell Small Cap Value Index during the fourth quarter and for the year. The dispersion between high and low quality stocks widened further, and our style was out of favor. We saw improved results in December and we're optimistic to see a reversion of this trend in favor of the quality value style that has served our clients well for 17 years. Overall in 2020, small cap was a popular strategy for us and it saw net positive flows for the quarter and year. Small cap won several new institutional mandates in the fourth quarter that funded approximately 45 million in new assets and we have additional wins of another 190 million that we'll fund in 2021, and we continue to see new search flow from institutional consultants. To close with a comment on our U.S. value product set, we believe that as the junk rally fades, a broader opportunity set of high-quality companies will emerge. This is fertile ground for bottom-up fundamental research to drive differentiated portfolios over passive investment and ultimately deliver differentiated performance. We believe our approach will be appreciated as transitory, low-quality headwinds fade and our durable process delivers alpha, as it has over our 37-year history. In our multi-asset group, rising prices were not just confined to equities. Credit markets saw tightening of credit spreads on improved business prospects and yields on the 10-year Treasury bond rose in the quarter off their lows. Our team, which manages an array of strategies across the risk and return spectrum, has been very active in the last quarter. Late in the fourth quarter, we announced adjustments to the team as we continue to expand our multi-asset continuum. Adrian Helfrich joined Westwood in January 2019 for Mamundi Asset Management and has overseen the build-out of the team that manages our income opportunity, total return, high income, alternative income, credit opportunities, and other dedicated fixed income strategies. The team now includes newly added portfolio managers, research analysts, and a quantitative analyst. Scott Bernard, who worked with Adrian for 12 years at Amundi, joined Income Opportunity, and Seth Gold, who has been at Westwood since 2015, was added to the Alternative Income Fund. We have also added Mr. Bernard and Hussein Adatia to Westwood High Income. The multi-asset team received support from our U.S. value research platform, and we expect to strengthen the multi-asset team over time with additional hires that broaden the team's capabilities. Income opportunity, which remains the largest strategy managed by the multi-asset team, finished with strong absolute returns that were ahead of its benchmark, 40% S&P 500, 60% Bloomberg Barclays Aggregate Bond Index, for the fourth quarter. Relative rankings for Westwood Income Opportunity Fund, WHGIX, were also strong as it finished 2020 as a five-star fund in the top one-third of the 30% to 50% equity universe in Morningstar, which places WHGIX in the top quartile over three to five years and top decile over longer-term periods. This strategy exits the year with strong momentum with its rotation towards a more value orientation along with an equity overweight, paying off as the fourth quarter rally unfolded. Intermediary distribution is seeing growth in sales in this strategy, and we're optimistic going forward. Our other multi-asset products similarly added to their solid track records with strong absolute and relative results. Westwood Total Return Fund, WLVIX, finished the quarter over 300 basis points ahead of the 60% S&P 500, 40% Bloomberg Barclays Aggregate Index, and over 1,100 basis points ahead for the full year. It finished the year as a five-star fund, and we're excited to bring this to market given the strong return profile here and across our multi-asset continuum of strategies. High Income Fund, WHGHX, outperformed by over 500 basis points in the quarter and finished the year over 400 basis points ahead of its benchmark, 20% S&P 500, 80% Bloomberg Barclays Government Corporate Aggregate Index. The improvement in liquidity that came after the first quarter meltdown for global convertible securities came with a strong rebound in performance. Our alternative income fund, WNIX, finished the quarter up over 400 basis points and up over 1,000 basis points for the year. In the top third for trailing one in three years in the investment universe, and had positive net flows. We hope to increase assets in the fund with this strong four-year track record and flexible fee structure. Our newest multi-asset strategies introduced in 2020 are credit opportunities, systematic large-cap growth, and systematic small-cap growth. These new strategies added excellent quarters to their track records and we're excited about their potential. The credit opportunity strategies, which we launched during the pandemic, had solid returns for the year, a testament to the multi-asset team's strong alpha generation across asset classes during the year. We have shown that our size and ability to move quickly is a benefit to clients, and there remains strong potential for continued financial distress in the economy, even with a vaccine, as the recovery proceeds unevenly. This provides opportunities for the credit opportunities team to find securities that are mispriced by the markets, and to leverage our differentiated views on securities and asset classes. Last, as part of our strategic realignment of the multi-asset team to focus on core strengths, Westwood announced in the fourth quarter that we will no longer offer strategies solely focused on convertible securities. Therefore, members of Westwood's global convertible securities team that exclusively managed standalone convertible strategies transitioned back to Aviva Investors. the firm from which they joined Westwood in 2014. Westwood is operationally supporting the strategies during the transition, and we expect to fully transition all responsibilities and assets to Aviva by the end of this quarter. We have worked to establish a consistent and repeatable alpha generation process underlying our multi-asset platform. The reach for yield, even with higher rates, comes with risks that can be better managed. the need for stability and returns can be achieved using multiple asset classes with greater diversification, lower correlations, and better outcomes. Our suite of multi-asset products is uniquely positioned to take advantage of cross-currents across asset classes, and we're well positioned to capitalize commercially, as all four funds are rated four or five star by Morningstar. Shifting to institutional and intermediary distribution, Our teams are executing on our growth strategy with new sales continuing to increase and outflows declining. Our recent mutual fund restructuring added new share classes supporting both wins and new opportunities in the sub-50 million institutional and defined contribution spaces. Fourth quarter inflows and intermediary were driven by strength from our small cap and income opportunity mutual fund. Institutional had inflows of over 435 million for the quarter the highest level we saw in 2020. Inflows were offset by $605 million in outflows, driven primarily by the loss of the large subadvised SMID mandate previously mentioned. For 2020, institutional sales reached $1.25 billion, offset by over $3 billion in outflows. Eighty percent of those outflows were attributed to the closing of strategies, including the emerging markets, strategic convertibles, and MLP strategies. Our intermediary team saw a strong recovery from the earlier COVID-induced lows. Inflows over the quarter for intermediary were 103 million, offset by 113 million in outflows. For the year, intermediary sales reached nearly 400 million, which were offset by approximately 485 million in outflows. In evaluating our growth strategy, both distribution teams executed and grew new sales compared to 2019. New sales and searches for SmidCap and SmallCap increased substantially in the second half of the year, and our one but not yet funded mandate pipeline for 2021 stands at more than $250 million. SmallCap, SmidCap, and Income Opportunity are competitive strategies, and we hope for continued sales going forward, driven by key consultant approvals won in 2020. Institutional and intermediary channels are poised to see improved net flows in 2021 with event-driven outflows expected to end and positive mutual fund flows continuing. Small cap is especially promising with a good pipeline of search activity. We have competed recently in some very large finals presentations and awaiting decisions in the months ahead. Income opportunity sales potential is improving every quarter with the work our teams have put into improving the process to drive strong performance. We could see new sales growth later in 2021 and into 2022. As I mentioned earlier, all our multi-asset funds are four- and five-star rated by Morningstar, resulting in an attractive suite of products across the asset class spectrum. Both institutional and intermediary are off to strong sales starts in 2021, with net positive flows for the month of January. Turning to wealth management, our teams in Dallas and Houston continue to be active in prospecting for new clients while finding new ways to engage and serve our current clients. Our wealth team is now managing approximately $4.5 billion in assets, and our Houston office exceeded $2 billion in assets for the first time in its history. Strong client retention of over 96% last year was driven by our great financial advisors. who've been adding value for clients by creating, reviewing, and advising on over 200 financial plans. We expanded our digital presence with the rollout of our online client portal, which extends the connection from our advisors to our clients in a seamless way. Our Apple app has launched, and we will be sharing it with clients soon, placing increased flexibility at their fingertips as they will be able to access their account information, connect with their advisor, and eventually, complete transactions on most devices. Digital capabilities boost efficiency and offer considerable value to clients in our increasingly cyber world. Our wealth team has worked hard to update and expand our wealth management ecosystem. In addition to our digital efforts, we have also expanded our service offerings for clients with the introduction of alternative investment solutions and the availability of banking services offered through Westwood Private Bank. Westwood's investment in the private bank has been successful with faster than expected loan growth and well ahead of plan. Our select equity strategies, which are designed to achieve high quality, low turnover, and tax efficient outcomes for our high net worth individuals, both posted strong double digit returns in the quarter. For the year, they posted downside capture in the mid 80% range. Over the past three years, Both of the select equity strategies have achieved very attractive downside capture stats at 82% and 88%, respectively, versus the Russell 3000 Index. Dividend Select and High Alpha, the new strategies we created for high net worth clients to benefit from market dislocations, have each performed very well. They are both picking up assets and help diversify our investment offerings. Dividend Select posted strong double-digit returns for the quarter. High Alpha, which we created for clients during the pandemic downturn last March, posted a fourth-quarter return, 300 basis points ahead of the index, and since its inception in the first quarter of 2020, has returned over 90% versus 66% for the Russell 3000 Index. In 2020, we had a large focus on managing the expense side of our business, We first reported to you that our institutional trading had been outsourced to Northern Trust over the summer. We are pleased that this continues to progress well. Our clients are getting good execution, lower costs, and we're seeing savings for the firm. Feedback from clients and consultants has been positive. While we continue to build out our multi-asset strategies, we completed the closing of Westwood International Advisors and the transition of the strategies focused solely on convertible securities to Aviva Investors. The remaining convertible assets will transition to Aviva at the end of this quarter. There are several key areas which we're excited about as we look ahead. Our new online portal for our wealth management clients expands our digital presence, increases efficiency, and strengthens our connection to our clients. The average Morningstar rating for our fund family increased with our WHGLX and WLVIX seeing increases to four and five stars. We've introduced new, exciting products that are performing well and already gathering new assets. Finally, I want to update you on some great news regarding our InvestCloud investment. Last week, InvestCloud announced a recapitalization at a valuation of $1 billion. Along with InvestCloud founders, Westwood has tendered 75% of our ownership stake and has received $9.3 million in cash. we will roll our remaining 25% stake, approximately $4.5 million, into the newly capitalized company that includes two additional businesses that collectively form a global wealth solutions platform with over $4 trillion in assets. Our original investment in InvestCloud of $5.4 million was in mid-2018, and in about two and a half years, it grew two and a half times its original value. We are excited to remain an investor in InvestCloud and further strengthen our strategic relationship and continue to partner on new initiatives together. As confirmation of all we're doing to provide career opportunity and support for our employees, we are pleased to announce that we received the Best Places to Work Award for the seventh year in a row. We remain committed to supporting our employees and clients as they navigate the challenges presented by the spread of the COVID-19 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.