Feb 8, 2017
Executives
Julie Gerron - SVP and General Counsel Brian Casey - President and CEO Tiffany Kice - CFO
Analysts
Mac Sykes - Gabelli
Operator
Good day ladies and gentlemen, and welcome to the Westwood Holdings Group Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference call is being recorded.
I would now like to introduce your host for today's conference over to Julie Gerron, Senior Vice President and General Counsel. Please go ahead.
Julie Gerron
Thank you and good afternoon. 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, 2016, 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 shares to the most comparable GAAP measures is included at the end of today's press release. On the 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 Julie, and thanks to all of you for taking the time to listen to our earnings call today. I will begin with comments from our three distinct investment teams, discuss our sales and service efforts, our notable business results and update you on some of the strategic initiatives we've accomplished last year.
It was a year of dramatic outperformance of value over growth and small caps over large caps. Our small cap product rose nearly 30% and remains a top-rated strategy over multi-year periods.
Large cap kept pace with the S&P 500, but lagged the Russell 1000 as our quality value focus was less preferred over deep value names. We were excited to reach a three-year anniversary of our large Cap concentrated product, which outperformed the Russell 1000 value over the three-year period by over 250 basis point and solidly in the top quartile versus our peers.
Our SMidCap performance improved during the fourth quarter, but we realized there's more work to do there. While active versus passive, continues to be a focal point for the industry, the current environment appears even more favorable for active management as we note the correlations decline in the year-end.
Our multi-asset strategy, income opportunity, generated output from both stock selection and asset allocation in 2016, while posting positive low volatility returns each quarter. Our worldwide income opportunity strategy a non-dollar-based version of the same process and designed to generate the same return profile, celebrated its second anniversary and we remain excited about its prospects.
Finally, our MLP strategy saw strong absolute gains in the commodity complex including oil recovered from the lows put in place during the first quarter of 2016. Looking forward in 2017, Westwood strategies remain well-positioned in the areas of the market where active management can deliver excess return and specific outcomes for clients.
Our focus remains as it has for 30-plus years on downside protection and absolute risk. Our suite of high active share strategies designed to accommodate varying level of volatility exposure for our client.
Our global and emerging markets equity team delivered both attractive, absolute performance and outperformance relative to their benchmarks. Among the five strategies, emerging market SMidCap, which recently completed its three-year track record in September 2016, meet its benchmark in the fourth quarter and provided the best relative performance from all of our strategies with over 700 basis points of outperformance for 2016.
Our emerging markets and emerging market plus strategies also finished the year strongly with relative outperformance and top quartile peer rankings. Our global team travel is always active with numerous trips completed in the fourth quarter for research around North America, Europe and Asia, specifically India.
They attended conferences as well as industry-specific events covering sectors such as energy, consumer staples, real estate, and fintech. In addition of the research travel, we traveled to Australia and the U.K.
to visit clients and prospects. Looking forward in 2017, the team expects a procyclical orientation to be generally favored by markets and our focus will continue to be on high quality companies with talented management team’s intent on executing their strategic growth plans around the world.
Finally, our global convertibles team notes that convertible issuance continue to be robust in the fourth quarter, with 2016 reaching levels just shy of 2015. Convertible valuations remain attractive of a whole, but have rebounded from the low level of early 2016.
Our long-only global convertible strategy outperformed for the quarter and the year and is ranked above median in its peer group in all time periods since inception. The team's liquid alternative strategy market-neutral income has also performed well this year with nearly top quartile rankings among its peers.
As mentioned in previous quarterly reports, it is the least sensitive of all Westwood's offerings and this was again evidenced with good performance during equity market pullbacks. Looking forward to the balance of 2017, our convertible products are well-positioned relative to our European peer group and we are excited about the prospect of earning more clients in the year ahead.
On the sales and service front, we saw institutional net outflows during the quarter as investors rebalance their value portfolios and one of our multi-asset strategy clients sold out ahead of the election. Their account remains open and we hope to see them return during 2017.
Our pipeline of potential searches is building on the back of excellent performance from EM small cap, income opportunity, global converts and MLPs. We hired a third-party marketing firm to carry the bag in Europe and we have already had a good set of meetings with our global convertible team.
We recently expanded our third-party distribution in Canada and look to see more opportunity for our emerging market strategies this year. We are particularly excited to find an audience for our emerging market SMid product as that category expands and gains traction with planned sponsors.
We found out last week that we want a sizable small cap client that should fund in the second quarter and we have more searches in the pipeline. Income opportunity continues to attract search activity as high quality, low volatility and competitive yield remains high on investor's wish list.
We're in the third year of the global version of income opportunity, worldwide income, and we hope to bring in a strong three year record to position ourselves for a successful institutional launch in 2018. We've had numerous on-site visits and consultant rating upgrade, especially in emerging market and SmallCap areas.
We now do business with nearly 60 different institutional consulting firms, many of whom are becoming more positive towards active management. In the trust area, all three of our trust offices were very active and experienced positive net flows for the quarter.
We held client and prospect meetings with pre-and postelection with great success. Our pipeline is active in all three offices and we're excited to talk to our clients about our recently launched tax efficient investment strategy.
The product select equity is designed to offer high net worth of investors the high quality, low turnover, tax efficient experience. We secured approximately $10 million of new money to get the strategy launched at year-end and we're in the process of transitioning a number of clients into the new strategy.
The message of a well-researched, high conviction, best ideas portfolio, resonates well with highly successful private wealth investors and we're excited to introduce this to the marketplace. In the mutual fund area, our 10-year streak of positive net inflows came to an end with slight net outflows of $24 million for the quarter and $149 million for the entire year.
However, we see some positive signs. Our redemption rate improved year-over-year that is 2016 was better than 2015.
SmallCap had an exceptional performance here and we're optimistic that this performance will attract sales. As mentioned in previous calls we hired a third-party mutual fund sales firm in late November to promote the SmallCap fund to six broker-dealer firms.
While they're just getting started, we are encouraged with their activity thus far. Our emerging markets fund WWEMX was up 12.5% versus the Morningstar category performance of 8.5%, ranking the fund in the 20th percentile.
Net flows to WWEMX in 2016 were $43.5 million on the positive side. Despite a tough year for many of our sub-advisory clients and the pressures on their business, we were able to retain 100% of our sub advisory client base.
From an institutional and private wealth service standpoint, our client retention ratio remained very high relative to the industry. We achieved 94% institutional client retention and 95% retention of our Westwood Trust client.
This is a testament to more than three decades of high-quality, attentive service to our customers. Turning now to business results, we were pleased to see that our stock performed well last year.
We finish the year second in our peer group with over a 20% return. We increased the dividend for the 14th consecutive year and maintained a competitive current yield for our shareholders.
We completed a number of strategic initiatives during the year. On the technology front, we migrated our infrastructure to the cloud on the Microsoft Azure platform and Office 365.
We converted our trade order management system to Bloomberg, so that we now support a true multi-asset and multicurrency platform. We established the foundation of our data architecture strategy and modernized our information security platforms with new firewall and network switches, while improving desktop and mobile security.
Our human capital department completed a best practice compensation program, implemented a performance management system and continue to work on ways to attract, retain and motivate A level talent. Our marketing department focused on building a new marketing foundation for the firm, including the rebranding of existing materials and developing innovative, strategic marketing content for our newer strategies.
We completed a project outline for rebranding the corporate website later this year. We will continue to diligently pursue and evaluate opportunities to expand our company through the acquisition of private wealth companies in strong geographic markets.
We feel that we're an ideal partner for a strong and growing business. We know the business inside and out.
We have a publicly traded stock to incent long-term employees. We have scale in our overall business and robust suite of investment products to offer clients.
We're disciplined with our use of shareholder capital for expanding our business through acquisitions and will only spend corporate capital on the best opportunities that we discover and evaluate to reduce our risk and ensure a strong and profitable company in the future as we've done in the past. In the constantly changing investment marketplace, there are more investment options than ever for high net worth investors to choose from.
We continue to believe that having a strong long tenured firm and an advisor in your corner is still a valuable service and that it will be long into the future. With that I would like to thank you for your continued interest in Westwood and turn the call over to Tiffany Kice, our CFO.
Tiffany Kice
Thanks Brian and good afternoon, everyone. Today we reported total revenues of $31.1 million for the fourth quarter of 2016, compared to $31.6 million in the prior year's fourth quarter.
The decrease is primarily related to lower quarter-over-quarter performance advisories of $0.5 million. Net income was $7.6 million or $0.92 per share, compared to $4.7 million or $0.58 per share in the prior year fourth quarter, which included a $1 million net noncash charge for acceleration and stock-based compensation expense for a particular graph and $0.8 million tax charge for uncertain tax acquisitions related to prior years.
Economic earnings and non-GAAP metrics was $12 million or $1.45 per share compared to $10.4 million or $1.28 per share in the prior year fourth quarter. For fiscal 2016, total revenues, total revenues were $123 million compared to $130.9 million for 2015.
The decrease primarily related to a $7.8 million decrease in assed-based advisory fees requesting lower average AUM, coupled with a $2.1 million decrease in performance-based advisory fees. These decreases were partially offset by a $1.5 million increase in trust fees due to a full year revenue reported by Woodway Net income was $22.6 million or $2.77 per share compared to $27.1 million or $3.33 per share for 2015.
The decrease was primarily driven by the decrease in total revenues and economic earnings was $41.1 million or $5.03 per share compared to $46.5 million or $5.71 per share for 2015. Firm-wide assets under management totaled $21.2 billion at year end and consisted of institutional assets of $11.9 billion or 56% of the total, private wealth assets of $5.5 billion or 26% of the total and mutual fund assets of $3.8 billion or 18% of the total.
We experienced net outflows of $289 million for the quarter, partially offset by market appreciation of $257 million. For fiscal 2016, we experienced appreciation of $2 billion, partially offset by net outflows of $1.5 billion.
Our financial position continues to be very solid with cash and investments at yearend totaling $90.2 million and a debt-free balance sheet. We are pleased to announce that our Board of Directors approved a quarterly cash dividend of $0.62 per share.
The dividend will be payable on April 3, 2017, to stockholders of record on March 10, 2017. This represents an annualized dividend yield of 4.5% at yesterday's closing price.
That brings our prepared comments to a close. We encourage you to review our Investor Presentation we posted on our website reflecting fourth quarter and fiscal year 2016 highlights as well as the discussion of our business, product development, and longer term trends in revenues, earnings and dividends.
We thank you for your interest in our company and we'll open the line for questions now.
Operator
[Operator instructions] And our first question comes from the line of Mac Sykes with Gabelli. Your line is now open.
Mac Sykes
Good afternoon, everyone. Thanks for taking my questions.
Can you just remind us how much AUM in your products currently and how that compares year-over-year?
Brian Casey
I am sorry, your question was how much AUM?
Tiffany Kice
EM products is about $4 million -- $4 billion sorry altogether.
Mac Sykes
I am sorry.
Tiffany Kice
The EM products altogether at about $4 billion.
Mac Sykes
And so, can you expand on your comments about the EM products to start the year in terms of -- just given your strong '16 performance and maybe the remarkable returns already in January. Just curious as to whether we should expect the sort of an uptick you think going into the first half of the year?
Brian Casey
Yeah, well I would say that as I noted in the call, that we've had a number of positive meetings with consultants. We've had a number of consultant upgrades and I don't think the story has changed at all that EM remained an asset class, but is in demand and the consultant thank a lot of our team.
So, I'm very optimistic about our ability to generate loads the EM complex and look forward to see what happens for the rest of the year.
Mac Sykes
And then one for Tiffany, on tax sensitivity, we've been focusing on corporate tax rates and potential changes with the Trump administration, if your tax rate or the corporate tax rate would drop to 20%, how much would that affect WHG in terms of impact to EPS?
Tiffany Kice
My best guess on impact EPS would probably be somewhere between $0.30 and $0.40 and that would really be looking at the run rate, that's not knowing a whole lot of specifics, but you also have to think about the deferred tax assets that would reverse out. So, there would be some adjustments to happen at the beginning.
Mac Sykes
Great. Thank you very much.
Brian Casey
Thanks for your question Mac.
Operator
Thank you. [Operator instructions] I am not showing any further questions at this time.
I would now like to turn the call back to Brian Casey, CEO for any closing remarks.
Brian Casey
Thank you and we appreciate you taking the time to listen to our call today. If you have any further questions please feel free to call myself or call Tiffany or visit our website @westwoodgroup.com and look under the Investor Relations tab for all of our filings including our updated IR Presentation, which we just posted today.
Thanks again.
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.