Participants

Jill Meyer; Fiduciary Service Director; Westwood Holdings Group Inc

Brian Casey; Chief Executive Officer, Director; Westwood Holdings Group Inc

Terry Forbes; Chief Financial Officer, Senior Vice President, Treasurer; Westwood Holdings Group Inc

Presentation

Operator

Hello and thank you for standing by. At this time, I would like to welcome you to the third-quarter, 2024 Westwood Holdings Group Inc. earnings conference call. All lines are in place on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again, I would now like to turn the call over to Jill Meyer. (Operator Instructions) Please go ahead.

Jill Meyer

Thank you and welcome to our third quarter, 2024 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 September 30, 2024 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-GAPP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measure 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 joining us for Westwood's third-quarter, 2024 earnings call. I'm very pleased to share our results and key developments from the past quarter as well as share our outlook for the rest of the year before we dive into the details. Just a few key highlights from the quarter.
Total assets under management reached $17.7 billion up 5% from the prior quarter. Marking our highest level in 6 years, we continue to execute our share repurchase program returning approximately $273,000 to shareholders by buying back 21,879 shares.
Our sales teams achieve strong institutional growth flows over a billion dollars year-to-date and our current pipeline has increased to nearly $2 billion successful launch and growth of two energy ETFs. With MDST crossing 50 million in AUM passing a critical trading volume threshold.
We formed a joint venture partnership, Westwood Engineered Beta or WEBs to expand our platform with innovative defined volatility ETFs.
We have lots of exciting news to share. So let me start off by highlighting our long-term performance, the Fed cut its benchmark rate by half a point on September 18, citing progress on fighting inflation and noting slowing job gains, this led to a significant drop in yields. With the 10-Year Treasury yield falling from 4.4% to 3.78%. While the 2-Year Treasury dropped from 4.75% to 3.64%.
After being inverted for 2 years, the Treasury yield curve has now returned to its typical upward slope. Investment grade corporate credit outperformed high yield while government bonds and municipal issues trailed. The US stock market continued on its upward trend in the third-quarter. With domestic equity indices reaching new all-time highs. The market broadened out with small and mid-cap stocks, outperforming large caps and value stocks outperforming growth.
The shift in market dynamics aligns well, with our investment approach which focuses on high quality companies across market capitalizations and asset classes.
Most of our us value strategies have outperformed their benchmarks over the longer term. And our small cap and SMID cap strategies are firmly placed in the top third among peers in their Morningstar peer categories over trailing three year periods.
Our multi asset strategies are also delivering solid results. Our alternative income and multi-asset income strategies ranked in the top third in their Morningstar peer categories for the last three years and credit opportunities finished in the top decile of its investment category for the same 3-year period. In the income alternative space, our global real estate and real estate income strategies, each boast strong 3-year track records and both are top decile performers in their respective investment categories.
Looking ahead, we expect continued uncertainty driven by political concerns both domestically and abroad. However, we believe that our focus on high quality businesses with strong free cash flows, high returns on invested capital and the ability to deliver strong returns to shareholders positions us well, for the future, we remain vigilant in monitoring risks at the macro level within sectors and industries and at the company level. Turning now to our distribution channels, our institutional channel delivered net inflows of 197 million. We are particularly excited about several new mandates, including a $200 million mandate for SMID CIT and $100 million mandate for a SMID SMA. Institutional gross sales are over $1 billion a year-to-date through September. Our pipeline remains robust and currently tops out at nearly 2 billion.
We see encouraging developments for small cap prospects and there's traction in our SMID CIT vehicle whose AUM is up tenfold this year, we are also finding increased interest in our managed investment solutions or MIS capability from large institutions which is really encouraging.
We have completed phase one of the managed investment solutions technology build and are conducting lots of discovery meetings with plan sponsors as we work to bring in our first client.
Right now, we are in discussions with potential investors, and we aim to secure our first client in the coming months.
I am pleased to report that our first Energy Secondaries Private Fund which launched in November of 2023 has already begun making distributions to investors. The fund was 100% invested as of June 30 and has delivered positive metrics in terms of net multiple on invested capital, MOIC internal rate of return IRR and distributed to paid in capital DPI.
Current estimates are that we will return 25% or more of committed capital in the first 12 months of the fund's life, which is well above original expectations.
We continue to observe opportunities in the market, and we are considering the timing for future initiatives. In our intermediary channel, we had quarterly net outflows of 325 million.
There were a few bright spots particularly for our MLP strategies where our mutual fund recorded 10 million in positive net flows. Our MDST ETF has crossed the $50 million AUM threshold and is averaging over 10,000 shares in daily trading volume, both critical thresholds for platform inclusion with many broker dealers.
We are seeing continued growth in our multi asset and real estate funds, especially for our income opportunity, real estate income and energy ETFs, which offer attractive options for yield conscious buyers.
We are also experiencing increased interest in our small cap and SMID cap strategies. As many broker dealers appreciate their attractive valuations relative to other equities.
It's worth noting that while we face continued challenges with outflows in areas tactical growth. The magnitude of those outflows has decreased compared to the previous quarter. We believe Westwood is well positioned to ride the likelihood of a multi-year tailwind in the energy space with our full suite of energy product offerings via mutual funds, ETFs, private funds and separate account strategies. We are convinced at the right place at the right time with the right solutions to solve our clients' needs and maximize our ability to capture market share. In our wealth management division, we had net outflows of 44 million. However, on a positive note, we onboarded a new $10 million plus relationship and our new business pipeline continues to grow.
I would like to take a moment to address a leadership change in our wealth management business. Leah Bennett will be stepping down as President of Westwood Wealth Management at the end of this year, and we thank her for her contributions over the past eight years. I will reassume executive level responsibility for this division. Leveraging my direct experiences in managing Westwood Wealth from 1,996 to 2013. We have implemented appropriate internal changes to ensure a smooth transition and continued excellent service for our clients.
Looking at significant events. We're really excited about the upcoming launch of managed investment solutions. We have conducted many meetings with prospects including discussions with premier national consultants.
The reception has been overwhelmingly positive, and we aim to secure our first MIS client in the coming months.
We took the first steps towards building out our ETF platform during the second-quarter with the rollout of 2 energy ETFs. Westwood salient enhanced midstream income ETF on the NYFC tickers symbol MDST and Westwood salient enhanced energy income ETF on the NASDAQ ticker symbol WEEI both have been well received and continue to gain traction.
Our MDSC ETF has crossed 50 million in AUM and its average volume has been solid. Most recently, averaging over 10,000 shares traded on a daily basis which are considered critical thresholds for platform inclusion with many broker dealers. We expect this momentum to continue propelling AUM higher over the coming quarters.
Another our new initiative is an expanded relationship with Ben Fulton. A pioneer the ETF industry, invest the power shares from 200 million in AUM to over 80 billion between 2005 and 2013.
Ben consulted with us on our first ETFs and recently approached us with an innovative product idea. As a result, we formed a joint venture partnership, Westwood Engineered Beta or WEBs, which will expand our platform with two new innovative defined volatility, ETFs. Chris Duran, our recently hired head of ETF Distribution and National Accounts and a longtime partner of Ben's will lead the sales initiative.
We are very excited about the potential for this experienced team putting it all together. We see significant opportunities ahead. Our traditional strategies are performing well, our pipeline is primed and we are really excited about our new investment offerings. Many of them well positioned for investors looking to invest cash that has been on the sidelines. We're particularly eager to see our new ETFs grow as we appeal to a different audience and build awareness efficiently via digital marketing efforts. We believe that our diverse range of strategies, our expanding product lineup and our commitment to delivering value to our clients position us well for the future. We are also looking forward to riding the potential multiyear tailwind in the energy space where we have a full suite of product offerings across vehicles.
Thank you for your time today and for your continued interest in Westwood. I'll now turn the call over to Terry Forbes, our Chief Financial Officer.

Terry Forbes

Thanks, Brain. Good afternoon, everyone. Today we reported total revenues of $23.7 million for the third-quarter of 2024 compared to $22.7 million in the second quarter and $21.9 million in the prior year. Third-quarter revenues increased from both periods principally due to higher average assets under management.
Our third-quarter, comprehensive income of $0.1 million or $0.01 per share paired with a loss of $2.2 million or $0.27 per share in the second-quarter on higher revenues and changes in the fair value of contingent consideration offset by higher income taxes.
Non-GAAP economic earnings were $1.1 million or $0.13 per share in the current quarter versus losses of $0.5 million or $0.06 per share in the second-quarter.
Our third-quarter, comprehensive income of $0.1 million or $0.01 per share compared with last year's third-quarter of $3.4 million or $0.41 per share. Due to higher revenues and changes in the fair value of contingent consideration offset by higher employee compensation and benefits expense. And the receipt of life insurance proceeds in 2023 economic earnings for the quarter were $1.1 million or $0.13 per share compared with $6.5 million or $0.8 per share in the third quarter of 2023.
Firm wide assets under management and advisement totaled 17.7 billion at quarter end consisting of assets under management of $16.8 billion and assets under advisement of $1 billion assets under management consisted of institutional assets of $8.5 billion or 51% of the total wealth management assets of $4.4 billion or 26% of the total and mutual fund assets of 3.9 billion or 23% of the total.
Over the quarter, our assets under management experienced market appreciation of $1.1 billion and net outflows of $1.1 billion. And our assets under advisement experienced market appreciation of $39 million and net outflows of $66 million.
Our financial position continues to be very solid with cash and short-term investments at quarter end totaling $48.3 million and a debt free balance sheet.
I'm happy to announce that our board of directors approved a regular cash dividend of 1$0.05 per common share payable on January 3, 2025, to stockholders of record on December 2, 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 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. We will now begin the question and answer session. If you dial in or if you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. (Operator Instructions)
Our first question comes from the line macro sites, Gamco.
Your line is now open.

Good afternoon, gentlemen. Thanks for taking my question. I was wondering if you could just unpack the organic pipeline a little bit, you know, you have a number of moving pieces there, whether MIS, the new ETF initiative on the $2 billion pipeline. If you could just give us a little more color on, you know, maybe over the next 6 months, how you see some of those elements materializing in terms of the organic flows, what number would be kind of good for your expectations in terms of some of those things you have in place now to grow.

Brian Casey

I am back. Thanks for your question. You know, I would say that primarily the pipeline consists of us value opportunities in the SMID and small cap space.
And while I would love to guess as to what levels of that will come in, I think that is pretty tough to do. I would just say that the marketplace has really embraced the CIPs that we created a few years ago, they have embraced a separate account and we have a lot of good opportunities in the pipeline. We have been top rated by one of the consulting firms recently that we have been trying to get in for a long time. So that is great news. And then we're on the preferred list of a couples of other consultants. We continue to see a really good pipeline of opportunities from a number of the top tier consultants.

Great just one follow up. You have about $50 million on your balance sheet and you obviously see the value of growing your ETF franchise in terms of having enough assets in there to reach certain levels. I was just curious as you know, with this new initiative, this Fulton is that going to require some more substantive seating capital and do you feel like you have enough to manage that?

Brian Casey

We have we are in touch with a lot of good opportunities for seed capital from some of the people that Ben has worked with for a long time. At this point, it is not a concern.
Anything else back?

Oh, that is it.

Brian Casey

Okay. Thanks for your question.

Operator

If you would like to ask a question, please press star one to join the queue. (Operator Instructions)
There are no further questions at this time, Brian Casey, I tried to call back over to you.

Brian Casey

Thank you. I'm just saying in closing, we're excited about the pipeline and our traditional business, which is, as I said, nearly $2 billion in size and our us value SMID and small cap products are in high demand and we are seeing robust search activity. We believe we have a good shot at closing a high percentage of this pipeline and we have made commitments to two of the highest growth segments within asset management. One is custom index solutions, which is one of the fastest growers in the industry our team is fully staffed in Chicago and we are working hard to get our first client. And then secondly, the ETF Universe recently hit $10 trillion in size in the US. And we've just partnered with one of the founders of the ETF industry, Ben Fulton. We are excited to work with Ben and to have his colleague of 10 years, Chris Duran leading our ETF and national Account sales efforts. So we are very excited about where we are. We appreciate your interest in Westwood. Please contact me or Terry directly or check our website westwoodgroup dotcom for all of our filings or, or to learn more about us. Thanks for your time.

Operator

This concludes this conference call. You may now disconnect.