Q1 2023 Westwood Holdings Group Inc Earnings Call

Participants

Brian O'Connor Casey; CEO & Director; Westwood Holdings Group, Inc.

Jill Meyer; Senior VP & Director of Fiduciary Services; Westwood Holdings Group, Inc.

Murray Forbes; Senior VP, CFO & Treasurer; Westwood Holdings Group, Inc.

Macrae Sykes; Research Analyst; Gabelli Funds, LLC

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Westwood Holdings Group First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand conference over to your speaker today, Jill Meyer, SVP, Director of Fiduciary Services, Legal and Comp. You may begin.

Jill Meyer

Thank you, and welcome to our first 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-Q for the quarter ended March 31, 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 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 Chief Executive Officer; and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey.

Brian O'Connor Casey

Good afternoon, and thanks for listening to our quarterly earnings call. April 1 marked Westwood's 40th anniversary, which we celebrated with our founder, Susan Byrne, many of our employees and long-term clients. Westwood was founded 4 decades ago with a bedrock of disciplined investing principles designed to generate alpha without taking excessive risk. This approach has consistently allowed our clients to withstand the vagaries of market cycles as we help them achieve their long-term financial goals.
Our principles have withstood the test of time and have proven their value year after year. We're very proud to have enabled clients to navigate some of the most challenging markets in history and we stand ready to help them confront and overcome market obstacles in these uncertain times. We completed the acquisition of Salient Partners last November, and this is the very first full quarter for our combined business including Salient's energy infrastructure, tactical absolute return, real estate and private investment capabilities.
Salient also brought great people and synergistic distribution to Westwood. Included in our first quarter results were expenses of $280,000, representing the remaining Salient transaction costs. As part of the Salient transaction, we acquired a 47% ownership stake in Broadmark Asset Management. Those taxable absolute return strategies were key to the acquisition.
We really like Broadmark's track record, solid client base and growth potential. We're pleased to report that during the quarter, we purchased a majority interest in Broadmark and now own nearly 80%. We're excited to partner with management to grow the business together over the next several years. U.S. equities rallied early in the quarter, but the market soon ran into difficulties, choppy corporate earnings, mixed economic data and a banking crisis slowed market momentum.
Sticky inflation and a tight labor market kept the Fed on the path of additional interest rate increases, but despite all this turmoil, domestic equity markets ended the quarter in positive territory. Against the backdrop of market volatility and uncertainty, 80% of our U.S. value strategies outperformed their respective benchmarks and added to their solid long-term track records.
For trailing 1-, 5- and 10-year periods, those U.S. value strategies with track records extending into those periods, all came out ahead. Among our Morningstar peers, 60% of our U.S. value funds are top quartile for 1 year and one of our newest mutual funds, Westwood Quality AllCap landed in the ninth percentile for 1 year, while Quality SmallCap ranked eighth percentile.
Within the multi-asset team, our strategy spot through equity market volatility, fluctuating fixed income rates and large gaps in credit spreads. Multi-assets defensive posture led to underperformance relative to blended benchmarks, but our track record remains solid over the long term. For products with 3-year records, 3 of our 4 mutual funds, including our largest strategy, income opportunity, ranked in the top 20% in the Morningstar peer categories and are rated 4 or 5 stars.
In addition, our high income fund, both 6 percentile Morningstar peer performance for trailing 3 years and was just named as one of 2023's best U.S. taxable bond mutual funds by Investor's Business Daily. Our multi-asset teams investment approach applies top-down and bottom-up analytical tools with a focus on downside protection and its strategic and tactical allocation decisions have produced solid long-term results. Given the potential for dispersion of returns around asset classes, our suite of multi-asset products is well positioned to thrive in the current market environment and deliver attractive risk-adjusted absolute returns.
Our new Salient MLP and energy infrastructure, global real estate and select income strategies added to their solid performance records, but were not immune to this quarter's volatility. Our midstream energy portfolios had to endure more than a 15% swing from peak to trough for crude oil prices during the quarter and a 50% drop in natural gas prices.
Yields and returns remain attractive across the asset class and provide a competitive alternative, particularly as supplies normalize and higher prices likely follow. We were pleased with the performance of Global Real Estate and select income. After declining in 2022, REIT common stocks and REIT preferreds rebounded early but gave back most of their positive performance by quarter end.
Our Select Income products seeks attractive income with cumulative preferred characteristics, higher absolute yields relative to the 10-year U.S. treasury and historically low correlation to interest rates. We believe that these strategies can provide investors with alternative sources of income, real assets with inflation protection, low correlations to traditional asset classes and the ability to mitigate market volatility.
Our wealth management strategy has delivered mixed performance. Our newer high alpha product rebounded strongly, but our older, more defensive select equity strategies did not keep pace with the market driven higher mainly by the S&P 500 top 10 stocks. Widespread expectations for a volatile 2023 underscore the need to implement good risk management and our wealth strategies are positioned to preserve capital with strong downside capture and a flight to safety characteristics.
Shifting to distribution. Institutional flows were relatively flat with a net outflow of $18 million. The outflow was largely the result of a client rebalancing in large cap. As we assess the outlook for client retention, the relative lack of terminations, coupled with strong product performance indicates that we're well positioned to capture flows in a better environment for equities. Our performance in SmallCap and SMidCap gets us into consultant searches and our pipeline continues to build, including defined contribution plan wins, thanks to consultant approvals and the introduction a few years ago of well-priced collective funds designed specifically to accommodate DC plans. SmallCap and SMidCap both enjoyed positive flows this past quarter.
In 2023, we'll continue to leverage our technology investments and relationships to increase direct sales opportunities and expand outsourced CIO relationships. In addition to growing our core U.S. value franchise and our multi-asset suite, we're eager to broaden our footprint with our new Salient energy and real asset capabilities as well as Broadmark's tactical strategies. Intermediary channel gross inflows of $178 million were fully offset, resulting in net outflows of $171 million.
Industry-wide flows and risk assets across most investment categories were down, and our funds experienced similar trends. In fact, redemptions in the top 10 funds across the industry were all equity-focused funds while 18 of the top 20 best-selling funds were fixed income funds. Looking forward, we installed processes to position our distribution professionals to take advantage of rebounds in investor interest and to generate positive asset flows.
We strongly believe that the new broader lineup affected by the Salient transaction will be a meaningful addition to our distribution efforts. Our intermediary team is becoming fully integrated and is cross-training on Westwood, Salient and Broadmark strategies, while sharing each other's sales successes and best practices. We are actively working to raise awareness of our broader product set within established channels, and this typically takes some time. We have seeded and are incubating several products to extend our energy and infrastructure expertise.
The strategy is focused on energy infrastructure income, global lift in infrastructure and sustainable energy. The markets are highly uncertain, but our engagement with financial advisers and consultants is high and accelerating. Our intermediary distribution team completed over 660 unique meetings and most importantly, executed about half a dozen national adviser calls, representing interactions with literally thousands of financial advisers.
Our significant investments in technology ensure that our distribution effort is focused and efficient, while maximizing impact with financial advisers and helping investors build better portfolios to achieve their financial goals. We are laying groundwork to capitalize on sales opportunities across our suite of products when the current risk adverse environment eases.
Our wealth management business started the year slowly posting negative overall flows but client retention was strong here, too. Westwood Trust faced headwinds as high net worth investors delayed decisions, pending clear signals regarding the health of the economy. Many clients and prospective clients are entrepreneurs who intend to sell their firms and the combination of higher interest rates and a challenging financing environment has slowed down many transactions.
Despite these roadblocks, our high net worth pipeline remains healthy with more than 1/3 rated as late-stage opportunities. I'm pleased to report that we've initiated a new relationship with Vista Bank, which recently acquired Charis Bank, our partner at Westwood Private Bank. Vista Bank enjoys a solid reputation as an entrepreneur's bank and serves North, Central and West Texas through its 14 banking locations.
Vista Bank has a 111-year history and we look forward to building a strategic partnership in maintaining our shareholder relationship with them. In the spirit of our innovative culture as we hunt for ways to add value to clients during periods of market distress or dislocation. We have launched a regional bank strategy for our high net worth clients. Our strong fundamental research capabilities enabled us to launch the strategy very quickly given that many strong regional banks suddenly began trading at very sharp discounts to their intrinsic values.
Before the collapse of Silicon Valley Bank, our investment strategies were well underway in the banking sector, but as stock prices went through an immediate dramatic correction. Our investment team started purchasing shares of banks we believe will be long-term winners. This new strategy provides clients with concentrated way for our clients to take advantage of this opportunity.
In summary, despite last year's difficult market spilling into this year, Westwood remains laser-focused on execution. Solid investment performance, excellent client service and rapidly integrating the Salient acquisition are fundamental to our plan. Our investment teams continue their disciplined investment processes. Our distribution and client service folks are focused on retaining and adding clients and our entire business is hard at work integrating Salient Partners.
It remains to be seen what the markets deliver over the coming year. We expect volatility to continue, and we believe our disciplined processes focused on quality put us in a great position to attract new clients as the economy improves. We're looking forward to our newly expanded suite of products serving us well this year and appreciate your support.

Murray Forbes

Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $22.7 million for the first quarter of 2023 compared to $20.5 million in the fourth quarter and $17.2 million in the prior year's first quarter. Revenues were higher than the fourth quarter and last year's first quarter, reflecting higher average assets under management, following our 2022 acquisition of Salient Partners asset management business.
First quarter net income of $0.7 million or $0.09 per share compared favorably with a net loss of $3.1 million or $0.40 per share in the fourth quarter due to higher revenues and lower expenses, primarily related to our 2022 acquisition of Salient Partners asset management business, including approximately $5.3 million of acquisition-related expenses in the prior year quarter.
Non-GAAP economic earnings were $3.6 million or $0.45 per share in the current quarter versus a loss of $0.7 million or $0.09 per share in the fourth quarter. First quarter net income of $0.7 million or $0.09 per share compared favorably with last year's first quarter net income of $0.1 million or $0.01 per share, primarily on higher revenues, partially offset by higher expenses, primarily employee compensation and benefits expenses following our 2022 acquisition of Salient Partners asset Management business. Economic earnings for the quarter were $3.6 million or $0.45 per share compared with $1.9 million or $0.24 per share in the first quarter of 2022.
Firm-wide assets under management and advisement totaled $16.2 billion at quarter end, consisting of assets under management of $15 billion and assets under advisement of $1.2 billion. Assets under management consisted of institutional assets of $7 billion or 47% of the total, wealth management assets of $3.8 billion or 25% of the total and mutual fund assets of $4.1 billion or 28% of the total.
Over the quarter, we experienced market appreciation of $0.3 billion and net outflows of $145 million. Assets under advisement remained relatively flat at $1.2 billion quarter-over-quarter. Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $32.3 million and a debt-free balance sheet.
(technical difficulty) pleased to announce that our Board of Directors approved a quarterly cash dividend of $0.15 per share payable on July 3, 2023, to stockholders of record on June 2, 2023. 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

(Operator Instructions) Our first question comes from Mac Sykes with Gabelli.

Macrae Sykes

I just -- if I were to think about the progression of margins this year, could you maybe talk about it from perhaps if AUM just stays flat for the rest of the year? And then that's one scenario and then maybe perhaps another scenario, organic growth and the markets are a little more favorable. How do you see the margins progressing kind of a better top line environment?

Murray Forbes

Yes. So Mac, I would say with AUM staying where it is, I would expect that we would see some margin expansion as we focus on costs especially in the compensation and benefits line item. And organic growth, again, I would expect to see some margin expansion as we're able to take advantage of the scale that our platform offers in addition to what we acquired with Salient, which was, again, expected to leverage off of our existing platform.

Brian O'Connor Casey

And I would just follow on with that, Mac, and point out that in the first quarter, we had nearly $1 million of nonrecurring items that impacted our earnings, namely the aforementioned $280,000 of deal cost, legal expenses of $421,000, a headcount reduction and force expense of $205,000 and then a small loss on a seed money investment of $91,000.
I'd also like to report that we held our Annual Shareholders Meeting today and all items were approved. I would like to thank our loyal long-term shareholders for your support and we'll endeavor to deliver results for you in the year ahead.
And finally, I want to close with a few comments on performance, sales and sales technology. Performance for our U.S. value has been excellent. They've really delivered especially in the growth areas of SmallCap and SMidCap. Not only did both of these products have great quarters, but their trailing 1-year performance is over 1,100 basis points ahead for SmallCap and over 600 basis points ahead for SMidCap.
So this sets us up really well for increased search activity in both products, and we do hope to see more flows from the OCIO channel for our SMid product. And with respect to sales, most CIOs and strategists out there are calling for a recession and lower equity market levels from here and buyers of equities have retreated from buying equities in favor of brokered CDs, high-yield cash management, fixed income.
And most of our products are equity-oriented, so sales have been slower in this equity risk off environment. But our internal work suggests a shallow recession, and our sales team is outlaying the great groundwork for when flows and buyer preferences shift back towards equities. So our prospect and adviser engagement is higher than it's ever been. And our sales technology has improved remarkably with the integration of Salient. Salient literally spent millions implementing a sales force-driven system. And it allows us to see, number one, all our flows from mutual funds to SMA, UMA, private funds, separate accounts, all in one place. It allows us to see focused rep lifts and meeting tags to improve our efficiency and our tracking sales lead generation tools like Dakota, Magnifi and [AMP] and a dashboard for activity by region and by rep in real time every day.
So this improved data set has allowed us to be more collaborative in attacking institutional intermediary in a new category, which we call InstaMediary, which is really the large RIAs or asset owners who behave more like institutional allocators than one-off product sales. And we've installed a firm-wide travel calendar now to help our sales and client service teams maximize their meeting opportunities by making more efficient use of our portfolio managers travel time away from the office.
And what we have ended up with together now is an opportunity set that's more diversified than it's ever been split between wirehouse, broker-dealer, RIA, clearing firms, TAMP and institutions. And we have the largest sales force in our history. We're excited to see how this unfolds in the years ahead. April has been a better institutional flow month. We're now positive year-to-date on institutional flows. And we've recently uncovered some new search opportunities. So we appreciate your time. I don't know if there's any other questions, operator?

Operator

No more in the queue for questions.

Brian O'Connor Casey

Okay. Very good. Well, thank you all for your time. And please call myself or Terry, if you have any further questions or visit westwoodgroup.com. Thank you.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.