Earnings Call Transcript - AAMI Q4 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Fourth Quarter 2023. Please note that this call is being recorded today, Thursday, February 1, 2024, at 11 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.

Melody Huang, SVP, Director of Finance and Investor Relations

Good morning, and welcome to BrightSphere's conference call to discuss our results for the fourth quarter ended December 31, 2023. Before we get started, please note that we 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 each of the first, second and third quarters 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 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 Rana, President and Chief Executive Officer

Thank you, Melody. Good morning, everyone, and thanks for joining us today. I'll start off with some of the main highlights on Slide 5 of the deck, and then I can answer questions. For the fourth quarter of 2023, we reported record ENI per share of $0.77 compared to $0.67 in the fourth quarter of 2022 and $0.45 in the third quarter of 2023. The 15% increase in ENI per share compared to the year-ago quarter was primarily driven by management fee revenue being 10% higher than the year-ago quarter due to higher AUM from market appreciation that we saw in 2023. Acadian's investment performance remained great and strengthened further in the fourth quarter. As of December 31, 2023, more than 90% of strategies by revenue outperformed their respective benchmarks across 3-, 5- and 10-year periods. Net client cash flows for the quarter were negative $2 billion, as we saw some additional outflows in the quarter related to our managed volatility strategies and a select large reallocation. Our growth initiatives continue to be on track. Acadian's Equity Alternatives platform, seeded about a year ago in the fourth quarter of 2022, continues to show good investment outperformance. Acadian's Systematic Credit initiatives were seeded in November 2023, with $15 million of seed capital in the high-yield strategy, and that has now started to build its track record. Turning to capital management: in the fourth quarter of 2023, the company's Board provided a new authorization for share buybacks of up to $100 million. Starting in December 2023, and to date so far in 2024, we repurchased approximately $43 million of shares, or 2.1 million shares, which was about 5.2% of our outstanding shares. Regarding our balance sheet, we had a cash balance of $147 million as of December 31, 2023. Acadian fully paid down its revolver at the end of Q4 compared to the $13 million that was outstanding at the end of Q3. I'd like to end by reiterating that from a longer-term perspective, 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 any questions at this point.

Operator, Operator

Your first question comes from the line of Kenneth Lee from RBC Capital Markets.

Kenneth Lee, Analyst

Just one on potential — what's the outlook for cash usage this year? How much are you expecting to allocate in terms of seed capital? And ultimately, what's the best way to think about potential for excess cash on the balance sheet?

Suren Rana, President and Chief Executive Officer

Yes. The way we size it is we have a $147 million cash balance, as I said, at the end of the year. Of that, we'll probably do $20 million of seed in the first quarter of 2024. We generally keep $20 million to $25 million for operating cash, so that's approximately $45 million of that $147 million, leaving $100 million for buybacks. That's how we sized it. Of that $100 million, as I said, we've used $43 million so far through yesterday, and we hope to use the rest in the coming weeks and months. As we continue to execute this year and the cash from operations builds up, that will create additional capacity for buybacks or to seed more organic growth. As we've said, those are the two uses.

Kenneth Lee, Analyst

Got you. Very helpful there. And just one follow-up. In terms of the share repurchase, would it be fair to say it would be mainly opportunistic? Or is there any other piece there that we should think about?

Suren Rana, President and Chief Executive Officer

We'll generally keep all factors in mind. Yes, I think opportunistic is a fair way to say it.

Operator, Operator

Your next question comes from the line of Michael Cyprys from Morgan Stanley.

Michael Cyprys, Analyst

I was hoping you could elaborate a bit on flows in the quarter, the $2 billion or so of outflows, and also on the gross sales that we saw in the quarter. It looks like there are some areas of strength on the gross sales. Maybe you can unpack where you're seeing some of the areas of strength? And maybe you could comment a bit on the institutional pipeline, how that's shaping up so far in 2024?

Suren Rana, President and Chief Executive Officer

Mike, on the managed volatility strategies, we've seen pressure for almost two years now in this market that has rewarded beta. Those are low-beta strategies and they have underperformed the average beta market. Those strategies have actually outperformed their betas, but they've underperformed the core indices. We're seeing clients from time to time either trim their positions or move to something else. We saw some of that in this quarter as well. Additionally, as we mentioned before, in some quarters we see clients making reallocations, particularly at year-end, and we had a larger reallocation from a client that contributed to the larger net outflows in the quarter. Regarding sales, it could have been better. The pipeline remains healthy; it hasn't worsened and probably has gotten a little bit better, but things are taking a little longer than they used to. We're seeing good pipeline across a variety of strategies — all-country strategies outside the U.S. (equity ex-U.S.), a lot of interest in small-cap strategies both international and U.S., some pipeline in emerging markets, and pipeline in different enhanced versions of these strategies. So there's really good pipeline and we hope more of it converts. We do expect continued pressure on managed volatility strategies and there may still be episodic reallocations by clients.

Michael Cyprys, Analyst

Great. And then just a follow-up question on the systematic credit as well as the Equity Alternatives platform. Maybe you can give us a bit more of an update on the progress there? What would success look like for you in some of the metrics you're tracking, and how are conversations progressing with clients?

Suren Rana, President and Chief Executive Officer

We're satisfied and reasonably happy with how things are progressing; they're on track on both initiatives. Equity Alternatives is a little older — we started it about a year ago in Q4 of 2022 — and it is tracking a nice record of outperformance. We have a reasonable-size client in that strategy and we're hoping to get more in this year. Traditionally, in our business, people have looked for three-year, five-year and ten-year track records, but Equity Alternatives and Systematic Credit are different enough that we are having good conversations with clients who are eager to get in earlier. We do have a client in Equity Alternatives and their track record is good. Systematic Credit was seeded in November, so it's been only a bit more than a month. So far so good; it's progressing well on the performance side, but it is too early to draw conclusions. Client conversations were already happening before we seeded it as we were preparing the infrastructure and the models, and there's a good amount of interest. We hope to add some clients early in 2024 even though traditionally people have looked for three-year track records.

Operator, Operator

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

John Dunn, Analyst

Just to extend the institutional pipeline question a little bit: do you have line of sight to anything chunky in or out over the next quarter or so? And I understand things are taking longer, but what's a decent assumption for time to fund going through the pipeline?

Suren Rana, President and Chief Executive Officer

Outside of the managed volatility strategy that I touched on, we do expect more outflows there, particularly in light of the environment: if there is a soft landing and markets do well, that makes it a less ideal environment for defensive strategies. Managed volatility has historically delivered the same or better returns than the market with lower risk over long periods, but this is not the ideal environment for it. Outside of that, there's nothing specific that we know of that's large and chunky in terms of potential outflows. The pipeline is good and pretty diversified across strategies. How it converts varies: some opportunities are in late stages, some in middle stages, some very early. Time to convert ebbs and flows; some moves quickly and some slower. It's hard to provide fixed rules or guideposts, but we are satisfied with the pipeline. The team is actively engaging with clients, and we do have some mandates that have been won and are expected to fund, spanning different stages.

John Dunn, Analyst

Got it. You talked about some of the puts and takes of the managed volatility institutional pipeline and it being diversified. Can you just go through the puts and takes for the fee rate for the next stretch?

Suren Rana, President and Chief Executive Officer

We would expect the fee rate to be pretty stable around this level — about 38 basis points — for the next few quarters. What would change it over the longer term is execution on our Equity Alternatives and Systematic Credit strategies, which are higher-fee. As we start to get larger flows in those two strategies, particularly Equity Alternatives because that has much higher fees, and Systematic Credit starting with high yield, which is higher-fee, the mix will shift toward higher fees. Additionally, the outflows have been coming from managed volatility, which has traditionally been low-fee, while inflows have come from higher-fee strategies such as equity ex-U.S. and small-cap. So for the next few quarters, 38 basis points is a good baseline, and longer term we would expect it to gradually increase.

Operator, Operator

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

Suren Rana, President and Chief Executive Officer

Thank you, operator. Thanks, everyone, for joining us today. We appreciate it.