Oct 23, 2014
Executives
Sylvia Fry - Chief Compliance Officer Brian Casey - President and CEO Tiffany Kice - CFO
Analysts
Mac Sykes - Gabelli
Operator
Thank you all for holding and welcome to the Westwood Holdings Group Third Quarter 2014 Earnings Conference Call. Today’s call will begin with a presentation followed by a question-and-answer session.
Instructions on that feature will begin later in the program. I would now like to turn the call over to your host for today’s conference; Sylvia Fry, Senior Vice President and Chief Compliance Officer.
Ms. Fry, your line is now open.
Sylvia Fry
Good afternoon and thank you. Thank you for calling into our third quarter 2014 conference call.
I’d like to start by reading our forward-looking statements disclaimer. The following discussion will include forward-looking statements.
These forward-looking statements 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 Annual Report on Form 10-K for the year ended December 31, 2013 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 our call today we will have Brian Casey, our President and Chief Executive Officer; and Tiffany Kice, our Chief Financial Officer.
I will now turn the call over to Brian Casey, our CEO.
Brian Casey
Thanks Sylvia and thank everyone for joining our call today. It was a strong quarter during which Westwood experienced growth in key areas.
As a result we again raised our dividend for the 12th consecutive year. For those who have been shareholders from the beginning we want to thank you again for your support for these so many years.
Historically dividends have comprised half of the return to the stock market going back to 1926. And a healthy growing dividend ahead of our peers was an aspiration we had at the onset of Westwood becoming a public company.
It’s fun to look back at our first dividend in 2002 of $0.02 per share per quarter and now you see it being raised to $2 per share per year. We’re very busy in the third quarter and particularly pleased to welcome a new global converts team to Westwood.
The team started at Westwood on October 1st with over 500 million of sub-advised assets. We’ll soon be opening an office in Boston and initially we’ll have two strategies along only a convertible bond fund and a global absolute return fund.
We will offer both a mutual fund and a UCITS fund for each strategy and have already begun running the long only strategy as a commingled fund at Westwood Trust. While this is a niche asset class we believe we have nearly 5 billion in capacity for the long only product and a billion of remaining capacity for the global absolute return strategy.
The addition of the global converts team broadens our skillset and allows another platform from which to grow. Longer term we believe we have an opportunity to create new products and to draw from an extensive talent of pool in the Boston area.
Performance for the third quarter was mixed with investors reacting positively to improving economic data and a better than expected corporate earnings season only to have sentiment negatively impacted by events in the Middle East, the Ukraine and federal reserve timing its monetary policy sooner than anyone expected. As we noted in our last earnings call in addition to volatility returning to, I mean more normal level, we believe fundamentals and security selection will be key drivers of returns going forward as part of the slow transition from the unprecedented liquidity driven environment for the past five years.
Within Westwood’s U.S. value strategies our small-cap value product outperformed its benchmark by over 300 basis points in the third quarter ranking in the top 20% of its peer group and building on a solid long-term performance, the strategy also ranks in the top quintile three, five and ten year basis.
In a quarter during which performance was marked by a cyclical sell off in July a small cap growth rally in August and a safety trade to end the quarter our Smith Cap and Smith Cap Plus product achieved what we would expect. The products each out performed in a down market and largely kept pace in the up markets.
Historically the combination of protecting in down markets and maintaining position in up markets has led the positive long-term asset generation for all Westwood products. Large capital is slightly ahead of its benchmark and continues to make slow but measured progress in the short and longer-term performance periods.
Within our specialized strategies income opportunity performed well, ranking in the top decile of its peer group on a year-to-date basis. Our MLP strategy added to its strong absolute first-half performance with a gain 1.5% in the third quarter and continues to outperform the Alerian Index for the year.
Even with the recent sell off the MLP strategies have produced strong double-digit returns year-to-date. On the global front our Toronto-based global and emerging markets team Westwood International Advisors conducted on the ground research in the Europe, Middle East and African regions of the world.
The WIA team also continued to engage with clients and prospects from around the world including Europe and Australia through conference calls and onsite meetings. The [inaudible] extend their year-to-date outperformance relative to the benchmark as company fundamentals continue to support the portfolio’s quality bias and performance.
The global equity and global dividend funds saw strong results from holding across the portfolios but were dampened by currency weakness from both the Euro and the Pound relative to an unexpected short-term rally in the U.S. dollar.
Our marketing department has been busy telling the Westwood story as our focus on protecting downside risk resonates well in periods of market volatility. During the third quarter we released a thought leadership piece on the U.S.
media industry and produced a video on our income opportunity strategy. Westwood professionals also made several appearances on CNBC in the third quarter and continued to be quoted often in national business publications.
In addition, the marketing team is in the process of upgrading the firm’s Investor Relations site as well creating materials for several new strategies we will be launching over the next three to six months. For the remainder of the year and into 2015 the marketing team is focused on enhancing the overall investment messaging of Westwood’s U.S.
value team products and the branding and look of all of our marketing material. Within our institutional sales team income opportunity and emerging market strategies remain the areas of most interest to investors.
Investors are attracted to the risk reward profile and the yield that the income opportunity strategy has generated over both the short and long-term. Our ability to gain assets has also been helped by our willingness to offer the strategy in different vehicles, whether it be separate accounts, mutual funds or commingled fronts to help the needs of our clients.
Within our suite of emerging market strategies, a well-known Canadian institution invested close to $500 million in a separate new account in our core EM strategy. Search activity continues to be quite high in emerging markets and our pipeline today is as robust as we have seen at any time this year.
As evidenced of the continued globalization of our business the interest in our EM strategies comes from investors in North America, Europe, the Middle East, Asia and Australia. We expect this globalization to continue in part due to the addition of our new global convertible securities team as the team’s client base at their previous firm was predominantly outside the U.S.
As we discussed last quarter we would like to see more meaningful search activity in the small cap value and MLP spaces. Our small cap product produced very strong risk adjusted returns in the most recent downturn and we’re confident that we’ll participate in a meaningful way once small cap search activity picks up.
Last year we started a new MLP commingled fund which has become a go-to option for small municipal pension plans in Florida and Texas. While the allocations have been small it allows us to continue to build assets in our MLP strategies and puts us in a stronger position when we see larger institutional investors increase or initiate their MLP exposure.
The third quarter continued on an already strong 2014 for the Westwood Funds. With a $165 million of net inflows for the quarter and nearly $450 million of net inflows year-to-date we are tracking at a slightly better than 20% annualized organic growth rate.
Our most popular funds continue to be the income opportunity fund and a short duration high yield fund. Income opportunity has been an attractive option for clients given the strategies used at MLPs and it’s been interesting that in recent market declines we see increased flows as investors are reminded of the strategy’s outperformance on the downside.
The UCITS Umbrella structure that we build for the emerging market strategy is enabling us to quickly launch sub funds for our recently added global convertible securities team, likely providing at least a nine months’ time to market advantage. We have filed for two additional sub-funds subject to Central Bank of Ireland review and approval that will be managed by our new global convertibles team.
Westwood Trust continues to benefit from the expanding economies and demographics of Texas and Omaha. With so many businesses flocking to both Texas and Omaha in recent years we’ve never been in a better position to benefit from the wealth that’s come into these areas that we call home.
The recent market declines have heightened investor anxiety and will eventually lead to investors seeking new wealth management options. The great challenge we have today is to help our clients properly understand how to make wise investments and to stay the course and above the market.
With the growth of the Dallas market the Dallas team is excited to announce the addition of two new members and with lenders from both Omaha and Dallas offices Westwood Trust flows were positive for the third quarter. Our teams remained very active in meeting with current clients to help frame expectations as well as continuing to prospect for additional sources of new business.
The corporate development team continues to actively evaluate opportunities to expand Westwood Trust brand through the acquisition of companies in attractive and high growth private wealth markets. We maintain the highest standards for those companies we consider.
Our priorities are on finding established private wealth firms with strong reputations and client basis who would expand our reach into geographies where we currently do not have a presence. The acquisition marketplace is a competitive one, but we feel that we are the ideal partner for business owners who want to continue to grow their business while partnering with a company with a trusted reputation, a long history of customer satisfaction and a liquid publicly traded stock.
Attractive private wealth firm acquisitions require long lead time in order to developing the opportunities. We continue to look for ways to improve and grow our private wealth management business as we remain convinced of its value and profitability for our overall company.
We will remain patient and thoughtful in locating opportunities to grow our company and just tell our shareholders we will always use our corporate capital in a shareholder friendly way. We have recently had very positive discussions with two firms that we’ve known for many years and hope to continue to advance those discussions in the year ahead.
We’re excited about the future as we continue to grow globally while maintaining firmly planted here in the heart of Texas and Omaha and some of the most strategic areas in the country. Thanks for taking the time for join our call.
I’d like to welcome Tiffany Kice to her first WHG earnings call. While she’s only been here for few months, she’s already making a positive impact on our business and more importantly is a great cultural fit within our firm.
I look forward to introducing her in person to our shareholders and we’ll now turn the call over to her to review the financials.
Tiffany Kice
Thanks Brian and good afternoon everyone. For the third quarter of 2014 we’re pleased to report strong financial results with total revenues of $28.1 million, net income of $7.1 million and diluted earnings per share of $0.92.
Economic earnings, a non-GAAP measure was $10.9 million or $1.41 per share, assets under management were $19.8 billion at quarter end with positive inflows during the quarter. Total revenues were up 22% or $5.1 million from the same period in 2013 with advisory fees up 27% or $4.9 million and trust fees up 13% or $0.6 million.
Diluted earnings per share of $0.92 and economic earnings per share of $1.41 were up 61% and 45% from the prior year respectively demonstrating strong operating leverage due to increasing revenue. Firm wide assets under management of $19.8 billion consisted of institutional assets of $12.3 billion or 62% of the total.
Private wealth assets of $4.0 billion or 20% of the total and mutual fund assets of $3.4 billion or 18% of the total. Included in these amounts are Westwood International strategies which now comprise approximately 17% of our total AUM.
Net inflows for the quarter were concentrated principally in our emerging markets and income opportunity strategies while large cap continued to experience outflows. Our balance sheet continues to be very solid allowing us opportunities to continue to invest in our business provide attractive yields to our shareholders through our dividend program.
Cash investments at quarter end were $9 million, up 14% from fiscal year end 2013 and we continue to maintain a debt free balance sheet. Our Board of Directors approved a quarterly cash dividend of $0.50 per share, an increase of 14% payable on January 2, 2015 to stockholders of record on December 15, 2014.
This represents an annualized dividend yield of 3.4% at yesterday’s closing price. We encourage you to review the presentation we posted on our website reflecting third quarter highlights as well as longer-term trends in the growth of our assets under management, revenues, earnings and dividends.
I will now turn the call back over to Brian to conclude. Brian Casey: Thanks Tiffany, great job.
If anybody has any questions…
Operator
(Operator Instructions). And our first question comes from of Mac Sykes of Gabelli.
Your line is now open.
Mac Sykes - Gabelli
Good afternoon gentlemen and ladies. Two quick questions on the accounting item, I guess what prompted the discovery on this?
I know it wasn’t material but just curious a little more background on it and whether the auditors should have found it as well and then a follow-up. Thank you.
Tiffany Kice
Sure, we discovered an understatement of non-cash stock based compensation expense for our restricted awards that had performance metrics attached to them. The error went back to fiscal 2006.
Therefore we had to re-cash the expense and re-determine that the mistake was not material to any of our prior period financial statements. In accordance with the guidance we basically revised our prior period financial statements in the Q, that we will be filing and in the press release [inaudible] the same.
So it was found during our review of certain things in the accounting and that’s what kind of [inaudible].
Mac Sykes - Gabelli
Okay, great and congratulations on the Boston team. I imagine it will be very interesting group [inaudible] for the Cowboys for the patriots.
What I want to know maybe you can give us a little background on the list out, just how they teamed together what was the process around, was this opportunistic maybe what was the timing and should we expect anything in the future on this level?
Brian Casey
Sure, we are actively looking for ways to grow our business at all times and you know we had heard these guys and heard they were looking for a home and we thought what they did and what they do bring a completely new set of skills to Westwood and there is, as I said in my formal remarks it is a niche asset class but it’s also one to us that’s very interesting. It offers you know low correlation to other asset classes, the intellectual challenge of managing global converts is one that we find fun to both think about and to offer to our existing clients.
So we are excited about it, it’s four people. So it’s a small team.
We will open our office in Boston after first of the year. They will be officing here in Dallas until then and yeah we think we have a pretty good shot of growing those assets over the next few years and we are excited about it.
Mac Sykes - Gabelli
Great, thank you very much. I appreciate the time.
Brian Casey
Thanks Mac.
Operator
(Operator Instructions).
Brian Casey
Do you have any questions?
Operator
I am showing no questions at this time.
Brian Casey
Okay. Well thank you all for taking the time to listen to our call today and if you have any further questions please follow-up with either myself or Tiffany and we look forward to seeing you again soon.
Thank you.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect.
Everyone have a great day.