Acadian Asset Management Inc. Q2 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Second Quarter 2023. Please note that this call is being recorded today, Thursday, August 3, 2023, at 11 a.m. Eastern Time. I would now like to turn the meeting over to Melody Huang, SVP Director of Finance, Investor Relations. Please go ahead.

Good morning, and welcome to BrightSphere's conference call to discuss our results for the second quarter ended June 30, 2023. 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 2022 Form 10-K and our Form 10-Q for the first quarter of 2023. 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 here shall be deemed to be an offer of 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.

Thanks, Melody. Good morning, everyone, and thank you for joining us today. As usual, I'll start off with the main highlights on Slide five of the deck, and then we can jump into Q&A. For Q2 2023, we reported EPS per share of $0.28 compared to $0.41 in the second quarter of 2022, and compared to $0.28 in the first quarter of 2023. The drop in earnings compared to a year ago was primarily driven by higher operating expenses due to the impact of foreign exchange changes, inflation and our ongoing investment in growth initiatives and operational infrastructure. Acadian's investment performance continues to be strong as of June 30, 2023: 81%, 81% and 90% of strategies by revenue beat their benchmarks over the prior three-, five- and ten-year periods, respectively. We reported modestly positive net flows with $0.1 billion of net inflows, and it was our fourth straight quarter of positive net flows. At the same time, our sales pipeline remains strong. We continue to be on track to execute on our growth initiatives. Acadian's equity alternatives platform is off to a promising start. The investment track record is building well after we seeded the platform a couple of quarters ago. On systematic credits, the team continues to build out the model and infrastructure. We expect to start investing seed capital in that strategy in the fourth quarter of this year. Turning to capital management, we had a cash balance of $141 million as of June 30, 2023. Acadian has continued to pay down its revolving facility and ended the quarter with an outstanding balance of $38 million compared to $87 million at the end of the last quarter. Like in prior years, we expect the facility to be paid down fully by year-end. 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 stock whenever opportunities come up. Our long-term strategy remains the same. We will continue to invest in our core capabilities and leverage our unique quant platform to grow and expand into new areas. We will continue using our free cash flow to support organic growth and to buy back stock, and we remain focused on maximizing shareholder value. Now let me turn the call back to the operator. I'm happy to answer questions at this point.

Your first question comes from Michael Cyprys from Morgan Stanley. Please go ahead. Your line is open.

Hi, sir, and good morning. Thanks for taking the question. Maybe just kicking off on buybacks. I don't think I saw any in the quarter. So just hoping you could update us on your latest thoughts there and how you're thinking about opportunities to repurchase shares. Is there any sort of limitation in place right now around available windows that may have prohibited you in the quarter? And when do you think you might have a window begin to open up again as you look out?

Hi, Mike. Yes, we did not repurchase shares in the last quarter. We do have cash on our balance sheet, as you've noticed, and our priorities remain the same. Uses are to support our organic growth, which we've already outlined with near-term plans, and the remainder is available for buybacks when windows are available. There is no change in our approach. We do not yet know when those windows will open, and we're probably looking out at least a couple of quarters before we can consider any buybacks.

Great. And then just maybe a follow-up on the institutional pipeline. Could you update us and elaborate a bit on how that looks today versus last quarter? And maybe give us a little bit of flavor for the types of strategies that you're seeing in the pipeline as well?

Yes, thanks. The pipeline continues to be strong and healthy as we reported last quarter. There were some delays of a couple of weeks or three weeks as we approached summer, but generally things are moving through the pipeline. July was good. Last quarter we were modestly positive, and we had a good July, so hopefully that momentum continues. There is a variety of strategies in the pipeline. As you know, the firm overall has a large number of strategies, so we're pretty diversified and that reflects in the pipeline. It's across a variety of strategies, including small-cap international. There is interest in long-short as well, and enhanced versions of various strategies. We have sales from global equity, including all-country ex-U.S. So hopefully that gives you a flavor.

Our next question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.

Hi, good morning and thank you. I had a question about the fee rate maybe in the back half of the year. With emerging markets down so far in the quarter and U.S. up a little bit, what do you think the trajectory of the fee rate might look like?

Our fee rate is affected heavily by mix, so it's hard to be precise. My best estimate is that we will remain around 38 basis points in the near term where we are today. Emerging markets generally have a higher fee rate. As you know, U.S. markets, at least in the last couple of quarters, have outperformed emerging market indices, but there are other factors as well. We're getting some higher-fee inflows and losing some lower-fee outflows. The result is 38 basis points now compared to 37 basis points a year ago. So I would say we probably stay near this level. Longer term, our initiatives, for example higher-fee strategies, would hopefully pull that fee rate higher, but in the near term my best guess is we stay around here.

Got you. And then just on G&A in the second half: I think generally the expense ratios probably go down from here. But in terms of dollars, where do you see fixed comp and G&A going over the next two quarters?

I expect spending to stay more or less at this level in dollar terms. Over the last few quarters, as I mentioned earlier, we have invested in our operational infrastructure and in new initiatives. We've added headcount and data, and we've built some scale as we have done that. Some of the operating expense increase is due to inflation, including higher data costs and compensation increases to help folks with inflation. There have also been some temporary items like the foreign exchange impact: last year we had a benefit from FX and this year it went the other way, so some of that should normalize. But in terms of dollars, I would say we probably stay around this level more or less.

Your next question comes from Kenneth Lee from RBC. Please go ahead. Your line is open.

Hi, good morning. More broadly, could you talk about what you're seeing in terms of client sentiment or positioning? And perhaps some indication of what that could imply for organic growth over the near term?

Thanks, Ken. We're primarily an institutional business, so our clients and the consultants tend to have longer-term views with sales cycles often running nine to 12 months. That doesn't change much quarter-to-quarter. As I said earlier, the pipeline is good and we've seen interest across a number of strategies. Clients do not seem to be exiting any particular groups of strategies broadly, which is encouraging. One exception is that a good part of the outflows we experienced were from the managed volatility group of strategies; some clients took a view during a trending market to reduce exposure to managed volatility. Longer term, of course, our clients believe that managed volatility strategies can offer attractive risk-adjusted returns. Other than that, clients want to invest, they're taking meetings, and the pipeline is good. So we're cautiously optimistic.

This concludes our question-and-answer session. I'd like to turn the conference call back over to Suren Rana.

Thank you. I'd like to thank everyone for taking the time. Look forward to chatting next quarter.