Westwood Holdings Group, Inc. (NYSE:WHG) Q4 2023 Earnings Conference Call February 14, 2024 4:30 PM ET
Company Participants
Jill Meyer – SVP and Director, Fiduciary Services
Brian Casey – CEO
Terry Forbes – SVP, CFO and Treasurer
Conference Call Participants
Mac Sykes – GAMCO
Operator
Good day and welcome to the Westwood Holdings Group Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Jill Meyer, Senior Vice President, Legal and Compliance. Please go ahead.
Jill Meyer
Thank you and welcome to our fourth quarter 2023 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 31st, 2023, that will be 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 those comparable GAAP measures is included at the end of our press release issued earlier today.
On the call today, we have Brian Casey, our Chief Executive Officer, and Terry Forbes, our Chief Financial Officer.
I will now turn the call over to Brian Casey.
Brian Casey
Good afternoon and thanks for listening to our fourth quarter earnings call. First, I’ll start with some highlights for the quarter. Several multi-asset strategies, income opportunity, total return, high income, and alternative income delivered strong Morningstar peer rankings in the top quartile for the fourth quarter. US Value products were mixed with strong performance in SmallCap value, while our other products struggled to keep up with the surging indices.
As we celebrate the 1-year anniversary of our Salient acquisition, one of the standouts has been the Westwood Salient Select Income Fund, which finished in the top decile for the quarter and well into the top quartile for the year. The fund has benefited from good security selection and a shifting market preference to real estate preferred securities versus bank preferreds.
We announced two significant new initiatives last quarter to grow and diversify our offerings. First, we recruited a talented team to establish a new product offering known as Managed Investment Solutions.
Based in Chicago, the team has worked together at two previous employers for more than a decade. They had great success creating an actively designed portfolio of creative solutions for clients in the wealth management, factor base, thematic, index alpha, and quantitatively managed sectors. We are hard at work building the analytical and operational support systems needed for this business and excited for the possibilities.
Second, we launched our first in-house managed private investment fund, the Westwood Energy Secondaries Fund. We raised over $34 million to invest in 12 energy funds. We’ve called 75% of the capital and expect to have the remaining capital invested in the first half of this year. We’re excited to establish what we hope is a strong first fund to build on for future fund offerings.
Markets rallied from late October onwards for a surprisingly positive end to 2023. Reversals in treasury yields and an about face and Fed speak on rate cuts, fueled a rally that ran for nine consecutive weeks, pushing the S&P 500 to within shouting distance of its record high.
The so-called Powell Pivot also fueled a bond rally as treasury rates having peaked in mid-October, fell through year-end, which allowed the sector to avoid a third consecutive year of negative returns.
Our US value strategies outperformed during market pullbacks, but struggled to keep up in market rallies. 60% of our US value strategies outperformed their benchmarks for the full year, 75% beat their benchmarks over trailing three years, and 100% did this over five-year period.
Our quality SmallCap fund, WHGSX, finished the quarter in the top 15% of its Morningstar small-blend and institutional peer groups. SmallCap also ranks in the top 20% of its Morningstar small-blend peers for the trailing three years through December.
As mentioned at the top, the relative performance of our primary multi-asset strategies was top quartile for the quarter. In addition, they were in the top quartile for the five-year period through December.
Our institutional MLP SMA strategies finished the year ahead of the Alerian Midstream Energy Index by more than 400 basis points. Global real estate finished modestly behind for the quarter, but was ahead for the full year, scoring in the top 24% of Morningstar peers.
As 2023 came to a close, the hoped for concept of a soft landing or even no recession at all, began to gain traction. The year-end rally provided solid proof that investor sentiment was shifting into positive territory as many stocks and not just the Megacap Magnificent 7, posted new highs.
The US economy’s surprising resilience underpin this shift in attitude but confidence in the Fed’s next interest rate moves could challenge market sentiment. Our portfolio managers continue to invest prudently, while keeping the Fed’s machinations in mind. And accordingly, we expect to benefit from high-quality equity market rallies, while protecting capital in times of uncertainty.
Turning to our wealth management business. We were gratified by the solid performance of our proprietary wealth strategies, which make investments consistent with the objectives of our high net worth clients. All these strategies outperformed their benchmarks for the quarter. For the full year, our more conservative strategies lagged as the market rewarded highly speculative or mega growth stocks.
On the brighter side, our most aggressive strategy outperformed the benchmark and returned just under 46% for the year as a whole. This strategy known as High Alpha, is in the first percentile of peers and has now completed a three-year record. Enhanced Balanced, one of our oldest wealth strategies launched in 1993 and is a diversified portfolio, providing exposure to a broad range of asset classes and geographies. Through the end of last year, Enhanced Balanced provided positive excess returns for most of the trailing time periods since inception.
Our wealth management division had strong client retention and its best year of new business in many years with over $450 million of new and existing client assets. Flows for the year were still negative, but much of this was due to tax payments, pension fund payments, and client rebalancing.
Our holistic wealth management services and ability to react nimbly to client needs is resonating well, particularly with younger, entrepreneurial, and family clients with assets between $10 million and $100 million.
We were very pleased to welcome several multimillion-dollar relationships from these groups last year and our 2024 pipeline looks promising with many similar multimillion dollar opportunities.
Moving to our institutional and intermediary distribution activities. Our institutional channel had net quarterly outflows of $122 million, mostly due to client rebalancing in our US value strategies and selected MLP redemptions. We had a single client loss last quarter as a result of a shift in strategy from active to passive.
While last year’s market environment was challenging for gathering new flows, we noticed a positive shift away from recent trends. December was the first month producing net positive flows for MLP SMA since we closed the Salient transaction in November of 2022.
Our institutional pipeline expanded significantly in the second half of last year, and we had several institutional wins in the fourth quarter and again in January. We are looking forward to these new accounts being funded over the next several months.
Most of these new institutional clients were one in our SMidCap strategy. We promoted an experienced portfolio manager internally to join the SMidCap strategy and the team is functioning exceptionally well and winning new business.
In addition, we’ve seen a growing interest in energy and last quarter, we received our first inbound RFP inquiry for the MLP strategy. This is a notable development given that for the last five years have seen outflows within the MLP and midstream energy asset class.
Intermediary continues to be impacted by a buyer strike created by the double-edged sword of economic uncertainty and higher cash yields, offering a safe haven for risk-averse investors.
Our intermediary channel had net outflows of $168 million for the quarter, driven by outflows in tactical growth and income opportunity. US value flows with the exception of SmallCap value were relatively flat, while alternative income experienced net positive flows. Overall, redemptions appear to be stabilizing for most of our strategies.
We firmly believe that our strategies are poised for success this year and beyond. We are creating campaigns and building roadshows to highlight our strategies and plan to capitalize on the opportunities we develop as a result.
Our team sees significant potential in both the intermediary and InstaMediary channels. For those not familiar with the term InstaMediary, it is a term that refers to the multibillion-dollar RIAs who have more of an institutional mindset with respect to research and asset allocation.
Our income opportunity in real estate income funds are both attractive options for this market and for yield-oriented buyers in the traditional intermediary channel. We’ll continue to build on our SmallCap team’s strong performance and the new business momentum in SMidCap.
The combination of strong performance and solid peer rankings, coupled with a positive view from prospects, should translate into continued interest in these strategies.
Summing up, last year’s market environment of impending recession fears and competitive risk-free rate caused investors to pause, and overall industry activity slowed down. In fact, it was the second worst year for active equity mutual fund flows since they began keeping records.
We believe that the fourth quarter points to changing investor attitudes, which should lead to new asset flows. Westwood’s focus will remain on executing our investment disciplines and providing excellent client service. This has been a great time to expand our relationships by having a variety of new offerings to talk about.
As we see it, 2024 looks like an exciting year for Westwood. Our legacy strategies are built on strong long-term records and we expect to benefit from investors’ growing willingness to invest sideline cash. This trend is showing results in our healthy pipeline.
We continue to diversify our offerings with a new energy private fund and our managed investment solutions capability and look forward to reporting on our progress as we move through the year.
As always, thanks for your time today and for your continued interest in Westwood as we execute our growth plans this year. I’ll now turn the call over to Terry Forbes, our CFO.
Terry Forbes
Thanks Brian and good afternoon everyone. Today, we reported total revenues of $23.2 million for the fourth quarter of 2023 compared to $21.9 million in the third quarter and $20.5 million in the prior year’s fourth quarter.
The increase from the prior year was principally due to higher average assets under management following the acquisition of Salient Partners Asset Management business in November 2022 and the acquisition of Broadmark Asset Management in early 2023. The increase from the prior quarter was a result of higher performance fees.
For fiscal 2023, total revenues of $89.8 million compared to $68.7 million, also driven by additional assets under management from our recent acquisitions. Our fourth quarter comprehensive income of $2.6 million or $0.32 per share compared to the third quarter’s $3.4 million or $0.41 per share, reflecting receipt of life insurance proceeds in the third quarter and higher income taxes in the fourth quarter, partially offset by higher revenues.
Non-GAAP economic earnings were $5.2 million or $0.63 per share in the current quarter versus $6.3 million or $0.77 per share in the third quarter.
Our fourth quarter comprehensive income of $2.6 million or $0.32 per share compared to the prior year’s fourth quarter net loss of $3.1 million or $0.40 per share due to higher revenues and lower acquisition expenses, partially offset by higher employee expenses and income taxes.
Economic earnings were $5.2 million or $0.63 per share compared with economic losses of $0.7 million or $0.09 per share in the fourth quarter of 2022.
Our 2023 comprehensive income of $9.5 million compared to 2022’s loss of $4.6 million on higher revenues, insurance proceeds, lower acquisition expenses, and changes in the fair market value of contingent consideration, partially offset by higher costs for employee compensation, information technology, and general and administrative activities, following the acquisition of Salient Partners Asset Management business in late 2022.
Economic earnings for the year were $20.7 million or $2.55 per share compared with $3.6 million or $0.45 per share in 2022. Firm-wide assets under management and advisement totaled $16.6 billion at quarter end and consisted of assets under management of $15.5 billion and assets under advisement of $1.1 billion.
Assets under management consisted of institutional assets of $7.2 billion or 47% of the total, wealth management assets of $4.1 billion or 27% of the total, and mutual fund assets of $4.1 billion or 27% of the total.
Over the year, our assets under management experienced net outflows of $1.3 billion and market appreciation of $2 billion and our assets under advisement experienced net outflows of $240 million and market appreciation of $64 million. Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $53.1 million and a debt-free balance sheet.
I’m happy to announce that our Board of Directors approved a regular cash dividend of $0.15 per common share payable on April 3rd, 2024, to stockholders of record on March 1st, 2024.
That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website, reflecting quarterly highlights as well as a discussion of our business, product development, and longer term trends in revenues and earnings.
We thank you for your interest in our company, and we’ll open the line to questions.
Question-and-Answer Session
Operator
Thank you. At this time, we’ll conduct a question-and-answer session. [Operator Instructions]
Our first question comes from Mac Sykes with GAMCO. Your line is open.
Mac Sykes
Good afternoon everyone.
Brian Casey
Hello Mac.
Terry Forbes
Hi Mac.
Mac Sykes
You’ve been around the business for a long time and certainly a lot of things were going on last year in terms of the intermediated channel, et cetera. I just wanted to know that you’ve set up the firm with the corporates to Salient as well, you have a number of kind of marketing strategies in place.
Do you think from 30,000 fee how are you thinking about the evolution of sort of really starting to focus on resources at the firm to enhance the marketing and flows, different products, et cetera?
I mean, it’s just more of a high level, where you see the firm really focusing going forward in terms of the different channels and the opportunity set for Westwood at this point?
Brian Casey
Sure. Thanks for your question, Mac. So, one of the things that we’ve employed after the acquisition of Salient is a lot of technology in the sales area. We were very fortunate that Salient had spent a lot of money to build a sales force-enabled distribution network that allows us to see activity, we can see where our intermediary salespeople are, who they’re seeing. It allows us to see our flows when money is coming in, when it’s going out. That’s all pretty basic stuff, but it’s very expensive for a firm our size to build. So, that has been a huge lift for us.
And then we’ve added a number of other different technologies to try to enhance the sales effort. We use Dakota Marketplace to help us make better use of our time to understand when we have portfolio managers traveling to make sure that we’re calling on everybody in that particular area, making really good use of their time.
We use a system by Tiffin [ph] called AMP, where we can actually download our prospects into their AI-enabled machine that allows us to really cultivate prospects. We use another system that tells us who’s reading our information and when and how long they spend on it so that when we’re reaching out to prospects, we have a much better handle on who’s actually interested and the various strategies that we have.
So, we continue to use technology to our advantage. We’ve been able to cut out a little bit of expense on some of the legacy stuff that we’ve had with the addition of the new Salient tool. So, it’s pretty exciting.
Mac Sykes
And on the energy fund, will that come through the institutional channel in terms of the performance fees and the asset designation or is that through the wealth? How is that being put on your financial?
Brian Casey
Yes. So, we have — we do have institutional business in the energy area. And we actually got our first inbound institutional energy inquiry in the fourth quarter for the first time in probably five years. So, we’re excited about that.
We also have the energy products available through mutual fund as well as SMAs. And the SMAs are in a number of the very large wire houses. So, we have good penetration there and so it’s widely available across the channels.
Mac Sykes
Great. Thank you.
Operator
Thank you. That concludes the question-and-answer session. At this time, I would like to turn the call back to Brian Casey for closing remarks.
Brian Casey
Okay. Well, thanks everybody. We appreciate you listening today. We’re sure excited about our progress and as I mentioned in the call, we’ve got a number of wins in our SMidCap product, actually five new clients that will be close to $400 million in new assets that will fund in the next 30 to 60 days. And in addition to that, we had a nice SmallCap win of $33 million.
The pipeline remains strong and we have another pending SMid final decision in the next 30 days for a very large Fortune 100 company. All of these products carry a fee of 50 basis points or more.
In addition to that, we’ve got about three RFPs in process. And most importantly, our meeting activity is really increasing across the country. Adrian Helfert, who’s Head of our Multi-Asset business; and David Friedman, who works in our Intermediary Group, they did 44 meetings last week in four days in New York City, which is, I think, an all-time record. So, meetings are picking up, RFPs have picked up, pipeline is good, and we’re finally able to report some good wins to start the year.
So, thanks again, everybody, for listening to the call today and happy Valentine’s. Please look at westwoodgroup.com if you have any questions or reach out to Terry or myself. Have a great afternoon.
Operator
Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
