Acadian Asset Management Inc. Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group earnings conference call and webcast for the third quarter 2022. (Operator instructions.) Please note, this call is being recorded today, November 3, 2022, at 11 Eastern Time. I would now like to turn the meeting over to Elie Sugarman, Head of Strategy and Corporate Development. Please go ahead, Elie.

Good morning, and welcome to BrightSphere's conference call to discuss our results for the third quarter ended September 30, 2022. Before we get started, please note that we may make forward-looking statements about our business and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding these risks and uncertainties appears in our SEC filings, including the Form 8-K filed today containing the earnings release, our 2021 Form 10-K and our Form 10-Qs for the first and second quarters of 2022. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. We may also reference certain non-GAAP financial measures. Information about any non-GAAP measures referenced, including a reconciliation of those measures to GAAP measures, can be found on our website along with the slides that we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or solicitation to buy any investment products. Suren Rana, our President and Chief Executive Officer, will lead the call. And now I'm pleased to turn the call over to Suren. Suren?

Thanks, Elie. Good morning, everyone, and thank you for joining us today. As usual, let me start off with the financial highlights on Slide 5 of the deck. We reported ENI per share of $0.30 for the third quarter of this year, 7% higher compared to $0.28 that we reported for the third quarter of 2021 as our sizable share buyback in Q4 of '21 and Q1 of this year more than offset the decline in our earnings caused by the impact on our AUM from the significant equity market decline this year and a stronger U.S. dollar. We're pleased, however, that through this volatile market environment, our investment performance continues to be strong. As of September 30, 96%, 87%, 86% and 90% of strategies by revenue beat their benchmarks over the prior 1-, 3-, 5- and 10-year periods, respectively. Next, our net client cash flows turned positive in the quarter, with $0.6 billion of net inflows, as we saw flat to modestly positive growth pretty much across all of our major strategies. And we are encouraged that our sales pipeline remains healthy. From a longer-term perspective, we continue to build out our efforts in systematic credit and equity alternatives that we announced on our last earnings call. During the quarter, we added more people to these teams and are adding to the data and technology infrastructure. We will be kick-starting the equity alternatives platform with $15 million of seed capital this month. We also continue to make progress on our ongoing growth efforts, like systematic macro. Together, these initiatives will tap into the secular growing demand for uncorrelated returns, and we expect them to help generate long-term organic growth for our business. Turning to capital management. We had a cash balance of $101 million as of September 30, '22. As our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and to buy back shares whenever opportunities come up. Turning to some operating highlights for Acadian on Slide 7. Acadian generated $30.5 million of adjusted EBITDA in the third quarter of this year compared to $49.1 million in the third quarter of 2021. The drop in EBITDA compared to 3Q of '21 was mainly driven by the approximately 27% decline in AUM over the last 12 months due to equity market decline globally and a stronger U.S. dollar, given a substantial portion of our AUM is invested outside the U.S. The EBITDA in the prior sequential quarter, second quarter of this year, was $38.8 million. The drop in EBITDA for the third quarter compared to the second quarter of '22 was also mainly driven by continued market declines. And also, performance fee in the third quarter was even lower at $1 million versus $2 million in the second quarter. As a reminder, majority of our performance fee generally comes through in the fourth quarter. Now let me turn to Slide 11 for a minute as it provides a good snapshot of the expansive capabilities of Acadian's franchise and the future potential of the platform. Most of our AUM today resides in the top 2 rows: Equity, where we seek to consistently produce alpha for our clients across various equity strategies; and managed volatility, where we seek to produce alpha in equity strategies with reduced volatility. However, we are positive that our platform will prove to be equally good in generating alpha outside equities. We discussed on the last call how credit is a very large market. We have started our systematic quant effort in credit with building the team, and we will start with high-yield and investment-grade areas. We previously launched our systematic macro strategies, like multi-asset absolute return, which continue to move along and now have $2 billion of AUM. I touched on seeding our equity alternatives platform with $15 million of seed capital this month to provide investors uncorrelated returns. And our ESG capabilities date back to more than 20-plus years and are integrated in our investment process throughout our strategies. We continue to see demand from investors for alpha from ESG factors to mitigate ESG risk and to customize portfolios for their ESG values. So in summary, each of these pockets of demand are very large and continue to grow, and our unique quant capabilities will allow us to effectively serve this demand. To conclude on Slide 15. Our long-term strategy remains the same. We will continue to invest in our core capabilities and leverage our unique quant platform to expand into new areas. We'll continue using our free cash flow to support organic growth and for share repurchases whenever opportunities are available. And we remain focused on maximizing shareholder value. Now let me turn the call back to the operator, and we're happy to answer questions at this point.

(Operator instructions.) Our first question is from Kenneth Lee with RBC Capital Markets.

Wondering if you could comment on any recent discussions you may have had around potential value-enhancing transactions.

Ken, as we've said, we remain focused on maximizing shareholder value, and as such, are always open to any shareholder value-enhancing partnerships or transactions. I can't specifically comment on anything in particular, but suffice to say, we remain open. And whenever any such opportunities come up, we do engage to see whether something is shareholder value maximizing, where possible.

Got you. And one follow-up, if I may, just in terms of excess capital allocation. You mentioned that you could support organic growth or repurchase stock as opportunities allow. Just wanted to clarify, further expand what that means in terms of opportunities allowing that.

Yes. Thanks, Ken. As we've said, the business generates strong cash flow, even in these markets when AUM is cyclically low. We use that excess cash flow mainly for two things: seeding new strategies and share repurchases. On seeding, the recent opportunities were in systematic credit and equity alternatives, which we find very compelling. As we outlined, we'd likely deploy about $75 million to $80 million over the next three years for those two opportunities, roughly $20 million to $25 million per year. Regarding repurchases, we repurchase shares whenever attractive opportunities arise, though occasionally we are restricted, for example by an earnings-related blackout window or when we're engaged in a strategic conversation.

Got you. And to clarify, was there any repurchases in the most recent quarter? And do you expect to resume share repurchases, given where share prices are currently?

There were not any repurchases in the most recent quarter, but we always remain open. Whenever we have the right opportunity and an open window, that's clearly one of the key uses.

The next question is from Michael Cyprys with Morgan Stanley.

Maybe just continuing with the buybacks theme. So I hear you that there weren't any repurchases in the quarter, but I was hoping you might be able to elaborate on why that was. And does it have anything to do with any sort of restrictions that I think you were alluding to potentially in the prior answer? That could happen from time to time, and we've seen that in the past?

Mike. Yes, that's right. For repurchases, of course, we monitor the market and when it's the most attractive to buy back. But also, the other factor is whether we have an open window. So it's a combination of those things. But I'll reiterate that whenever the markets are attractive and we have an open window, repurchase is clearly the desired use. I already touched on, in terms of seeding, we have our 2 key opportunities identified is about $20 million to $25 million a year. So rest of the capital is for repurchases whenever we can.

Did you have an open window in the third quarter?

I can't comment specifically on that. But we did not do any repurchases in the third quarter.

Okay. Fair enough. And then maybe just changing topics over to organic growth and flows. I was hoping you might be able to elaborate a bit on which strategies contributed to the flow strength in the quarter. And then which of any strategies had outflows or maybe a bit softer.

Yes, generally we saw flat to modestly positive flows across all strategies, which is very encouraging given the market backdrop. There aren't any particular areas of pressure in terms of at-risk assets, and we see a healthy sales pipeline across strategies. Including newer strategies like multi-asset class, we are seeing good traction from consultants and buy ratings coming in. So that's all encouraging. I wouldn't say any particular strategy contributed most of it. We did of course get some impact from U.K. pension funds' LDI, so it's encouraging that despite that we ended up in a good place; without that impact the numbers would have been even better. I would say there is good, expansive support across strategies.

Great. And just final question for me, just on the expense guidance. It looks like you largely kept your prior guidance for this year, except I think the variable expense, variable comp guidance moved a little bit. So I was hoping you might be able to elaborate on what's driving that. And then maybe it's a little early for '23. But just as we think about your guidance for '22, is that a good sort of starting point for thinking about '23? Or why might that look any sort of different into '23?

Yes. On the expense guidance, on OpEx, it's basically, sort of relatively, I think the dollar amount is fixed. So as the management fee level goes down, the ratio goes up. So there isn't much change there, except that we have started to invest in new initiatives and started building the teams for structured credit and equity alternatives. We're growing those teams in both initiatives and adding new sources of data and technology modules that we need. That's one area where expenses are starting to build and will build more next year. But at the same time, we're bringing expenses down on the center and corporate overhead side, so that will offset some of that.

Sorry, just on the variable expenses and the affiliate distribution guidance as well, the moving pieces there. And then views on '23.

Yes. Variable expenses are, of course, variable. A large part is simply a fixed ratio of the pre-variable comp earnings, so it moves up and down with those earnings. There is also a portion of variable compensation that is amortization from prior periods, which slightly skews that ratio. As we build the new initiatives, we are bringing on people with compensation guidance and expectations that do not move, and since those initiatives have not yet generated revenue, that also skews the variable comp ratio a bit. Otherwise, it should generally move in line with the pre-variable comp earnings.

The next question is from John Dunn with Evercore ISI.

You talked about the sales pipeline. Could you try to size it a little for us? And regarding the mix, you mentioned multi-asset; could you provide more color on that? Has the composition changed over the past several months, year to date, let's say?

John, yes, we generally haven't provided sizing on our pipeline. But in terms of relative levels, it's a very good sales pipeline, as robust as we've had, which is encouraging. In this environment, we have a good pipeline in various stages of searches — late stage, early and medium — and it's spread across various strategies like global equity, emerging markets, international, and specific regions such as Australia. A lot of it also has ESG angles where clients have specific sustainable goals, so it's a diverse, healthy sales pipeline. With the newer multi-asset initiatives, we are seeing good interest from early adopter clients and positive feedback from the consultant community, which are always good leading indicators. We're encouraged to see all that. Does that answer your question, John?

Yes, it does. Yes. And then a follow-up on the direction of the fee rate over time. Just thinking about what's inflowing now and the newer stuff you guys are rolling out, just how those different fee rates compare to one another, and the direction over time.

Yes. The fee rates vary a fair bit. Some of the absolute return strategies have higher fees. For example, on the structured credit side we will initially focus on high-yield, where fees are higher. So it depends on which products pick up first and how fast. We also offer simpler strategies with fees below our current average; these are straightforward solutions for clients looking to increase exposure to a value or growth factor. Those are easier to implement and therefore lower fee. It’s hard to pin down precisely, but we have multiple irons in the fire and are encouraged by all of them. I would say there is a bias toward the upside over time in our fee rate, since we have a number of absolute-return, uncorrelated offerings that command higher fees, yet we are also getting good traction on some simpler, lower-fee mandates.

(Operator instructions.) It appears that we have no further questions. And this will conclude our question-and-answer session. I'd like to turn the conference call back over to Suren Rana.

Great. Thank you, operator. Thanks, everyone, for joining us today. Appreciate it.