Acadian Asset Management Inc. Q1 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the First Quarter 2024. Operator instructions: Please note that this call is being recorded today, Thursday, May 2, 2024 at 11:00 a.m. Eastern Time. I would now like to turn the meeting over to Melody Huang, SVP, Director of Finance and Investor Relations. Please go ahead, Melody.

Good morning, and welcome to BrightSphere's conference call to discuss our results for the first quarter ended March 31, 2024. 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 and our 2023 Form 10-K. 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 slide deck we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or a 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.

Thank you, Melody. Good morning, everyone, and thanks for joining us today. As usual, I'll cover some of the main highlights on Slide 5 of the deck in my initial remarks, and then we can jump to Q&A. For the first quarter of 2024, we reported ENI per share of $0.44 compared to $0.28 in the first quarter of 2023 and $0.77 in the fourth quarter of 2023. The 57% increase in ENI per share compared to the year-ago quarter was primarily driven by increasing management fee revenue due to higher AUM from the market appreciation that we saw over the last 12 months. Our AUM is now $110 billion, 6.5% higher than what we had at the end of 2023. Our EPS also benefited from the share buyback that we started in December 2023, and we have now bought back approximately 10% of our outstanding shares. Our ENI increase versus the year-ago quarter was 48% compared to the 57% increase in EPS that I mentioned earlier. Compared to the fourth quarter of 2023, the ENI and EPS are lower, and that decline was driven by seasonality and timing of performance fees as the majority of our performance fee is typically earned in the fourth quarter. Acadian's investment performance remained strong. As of March 31, 2024, 83%, 91% and 93% of Acadian's strategies by revenue outperformed the respective benchmarks across 3-, 5- and 10-year periods. Net client cash flows for the quarter were $0.4 billion as outflows from managed volatility and some other strategies were offset by inflows in other areas. Our growth initiatives are continuing to progress on plan. Acadian's Equity Alternatives Platform seeded in Q4 of 2022 continues to build a strong track record of outperformance. Acadian's Systematic Credit platform's first strategy, the U.S. High Yield strategy that was seeded in November 2023, has also started building a good track record. And in April of 2024, we also seeded the credit platform's second strategy, the Global High Yield strategy with another $15 million of seed capital, and that strategy will now start to build a track record. Turning to capital management. We repurchased 3.5 million shares, approximately 9% of our outstanding shares in the first quarter of 2024, or approximately $74 million. We had a cash balance of $102 million as of March 31, 2024. During the first quarter of 2024, Acadian drew down on the revolving credit facility and ended the quarter with an outstanding amount of $73 million on the facility. As we have discussed in prior years, this revolving facility is at the Acadian operating level, and is repaid from cash from operations at Acadian, not from our corporate cash balance. Acadian draws on the facility at the beginning of the year for first-quarter seasonal needs mainly to pay prior year's annual bonuses, and the facility is then paid down fully by year-end from the cash generated from the operations. We expect this year to be no different. I'd like to close my initial remarks by reiterating that we remain focused on maximizing shareholder value, and we'll continue using our free cash flow to support organic growth and to buy back our shares. I'll now turn the call back to the operator, and I'm happy to answer questions at this point.

Operator instructions: Your first question comes from the line of Glenn Schorr from Evercore.

Operator, perhaps if we could move to the next question and we could circle back with Glenn later.

Your next question comes from the line of Michael Cyprys.

Just curious, any additional color you can give on cash usage and how we should think about it in the year ahead? What's the minimum level of cash that you feel like you can run with? And also, how should we think about use of excess capital?

Yes. Thank you. Again, as we said, we have a little more than $100 million as of the end of March, and we are almost through the $100 million authorization we had previously. We have about $15 million left on the authorization. If you break down the $100 million, we think about $25 million of operating cash that we'd like to keep at a minimum. There's $15 million left on the buybacks, and about $40 million — I mentioned earlier that we seeded $15 million for our second strategy on the credit platform for the Global High Yield strategy. So that's another $15 million, bringing that portion to $55 million. So we believe we're left with about $40 million or so from a use perspective. We'll look to buybacks and also to seed some more products on the Systematic Credit Platform. We would target the fourth quarter to seed our investment-grade strategies, both U.S. and global strategies, but we will also generate more cash in the interim. And we try to recycle some existing seed as well. So in general, those are the round numbers: we will add more cash and it will be used for buybacks and seeding purposes.

Great. And maybe as a follow-up, just curious your thoughts on pursuing something more programmatic in terms of buybacks rather than opportunistic.

Yes, currently we are leaning in favor of opportunistic buybacks. The reason being that gives us more flexibility in the timing of seeding as well as the ability to benefit from movements in the market. It's not a large amount now that would necessitate anything programmatic, so we feel comfortable with the opportunistic approach for now.

Your next question comes from the line of John Dunn from Evercore.

Could you maybe talk about some of the other strategic areas that are inflowing that are blunting the outflows from managed vol? And then separately, what type of environment do we need to get to where we could see less of a drag from managed vol?

Yes. Thanks, John. We are seeing good sales across most of our strategies outside of managed volatility. There's a little bit of slowdown in emerging markets strategy as well, given that those markets and the index itself haven't done very well in recent years compared to the U.S. market. But we saw good sales in our Global Equity strategy, in Equity Non-U.S. strategies, and different types of niche strategies, such as small-cap strategies. We're also seeing demand for our variants of strategies, such as extension strategies where we go a bit long and short, 130-30 strategies. We have enhanced versions where they stay close to the benchmark with a smaller tracking error, and there's some ESG demand as well. So it's a pretty good cross-section of strategies where we see sales and where we see pipeline building up. And then we are seeing the outflows from managed vol and a little slowdown in emerging markets. Regarding the environment, managed volatility does well when beta is not running up too much — when there's more of a fair risk-return environment. Over longer periods, academic studies and statistics will tell you that low-beta securities do just as well as high-beta securities, if not better, over 10- to 15-year periods. That generally holds true. But in the interim, whenever there's a risk-on environment, beta gets rewarded. So more of a risk-off environment or a more normalized environment over a longer period is favorable for those strategies. We haven't had that in a while over the last several years; it's been a beta-rewarding market, which has not been ideal for managed vol.

Got it. And then could you give us a characterization of the institutional pipeline — where things are in it as far as early or late? And then anything chunky on the institutional side you have line of sight on that might be redeeming in the next couple of quarters?

Yes, the pipeline is good and matches what I described: a good cross-section across different types of strategies, with managed vol notably absent and emerging markets less than where we would like. The investment performance in emerging markets is stellar, but client interest is a bit lower because the emerging market index has lagged the U.S. and developed markets in recent years. Otherwise, it's a pretty good cross-section across stages as well — early-stage, mid-stage and late-stage strategies that are yet to be funded. On the outflow side, we have pressure from managed volatility, and there are always episodic reallocations where clients move to other opportunities. One trend we've seen in the high-rate environment is derisking, particularly by pension plans, where interest rates are high enough that they can derisk from equities and allocate more to fixed income. Those allocation decisions happen from time to time. So when we look at all of that, we expect to be probably flattish over the next few quarters. But any given quarter may see episodic shifts that could produce some variability. These are the trends, and that's specifically why we're excited about our fixed-income, the systematic credit initiative — because we can also be a beneficiary of the derisking trend that we see.

Operator instructions: The next question comes from the line of Kenneth Lee of RBC Capital Markets.

I wonder if you could share some thoughts around potential EBITDA generation going forward and perhaps provide any color around your expense outlook? And whether you could see some benefit from operating leverage as markets potentially continue to appreciate?

Yes, that's a good question. If you look at this quarter versus the year-ago quarter, we saw the benefit of operating leverage as the market appreciated. AUM is up by about 12%, and as a result the management fee was up by about that much — call it 13%. At the ENI level, ENI is up 48% versus a year ago. We used some of that to fund buybacks, so EPS is up 57%. That's primarily because of the benefit of operating leverage and continued expense discipline. Going forward, if markets appreciate, we should see that benefit with revenue moving up, and we're generally trying to maintain discipline on expenses. Over the last few years, we've invested to make our infrastructure more scalable. We had initiatives on outsourcing that provide more scalability without adding a lot more to costs. We dealt with pressures from inflation, particularly on data and IT costs, that should be abating now. We've built up these new initiatives that are more or less at full run rate. So we expect much less increase in operating expenses going forward given those scalability investments. If markets go up, we should see the benefit of operating leverage.

Yes, it sure does.

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

Thank you, operator. Thank you, everyone, for joining us this morning. We look forward to engaging with you in the coming months and quarters.