Pzena Investment Management, Inc.
Q2 2021 Earnings Call Transcript

Published: 21 Jul 2021

[Operator:]

Good day, and welcome to the Pzena Investment Management Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Please note today's event is being recorded. I'd now like to turn the conference over to Jessica Doran, Chief Financial Officer. Please go ahead, Ma'am.

[Jessica Doran:]

Thank you, operator. Good morning, and thank you for joining us on the Pzena Investment Management's second quarter 2021 earnings call. I am Jessica Doran, Chief Financial Officer. With me today is our Chief Executive Officer and Co-Chief Investment Officer, Rich Pzena. Our earnings press release contains the financial tables for the periods we will be discussing. If you do not have a copy, it can be obtained in the Investor Relations section on our website at www.pzena.com. A replay for this call will be available for the next two weeks on our website.

[Rich Pzena:]

Thanks Jessica. I've been a value investor my entire life. Someone asked me recently, how I came to believe in value and I explained that it really all happened at my parent's kitchen table. Price matters. My mom and dad would remind me, but still the question gets asked, how does the value of an asset get determined? I think the answer is pretty straightforward. It's the earnings you can expect to be generated by the asset compared to the price you pick. On the one hand this simple homespun version of value investing can cause a person to believe that value is just a factor, but wait. The factor in this case depends on the earnings power of the asset and that is where real research and real judgment come into play. That's why I keep repeating on these calls and in most of my meetings with clients and consultants that value isn't a factor. Value is a philosophy. One other point I'd like to emphasize, value investing wins in the long run. We don't get to win every month, every quarter, every year or even every five years, but serious research-driven classic value investing as we practice the art is a strategy that generates attractive long-term returns. This past quarter as growth start investing seems to have regained favor has people asking whether the prior two quarters were the end of a very short value rally? As economic growth reached a crescendo this spring from the combined impact of recovery and stimulus, the value skeptics reemerged. This is how it always feels as a value investor. Almost no one believes value will work until it already has, but let me offer some perspective on the opportunities that we are presented with today. Companies with attractive earnings growth rates selling at low multiples very clean balance sheets, managements that adeptly navigated the challenges of COVID19 and a cynical marketplace ignoring the shifting cycle.

[Jessica Doran:]

Thank you, Rich. We reported diluted earnings of $0.25 per share for the second quarter compared to $0.24 last quarter and $0.13 per share for the second quarter of last year. Revenues were $50.9 million for the quarter and operating income was $27.9 million. Our operating margin was 54.9% this quarter increasing from 50.2% last quarter and from 36.4% in the second quarter of last year. Taking a closer look at our assets under management, we ended the quarter at $53.1 billion up 7.9% from last quarter and which ended at $49.2 billion and up 68.6% from the second quarter of last year which ended at $31.5 billion. The increase in assets under management from last quarter as Rich mentioned was driven by net inflows of $2.2 billion and market appreciation including the impact of foreign exchange of $1.7 billion. The increase from the second quarter of last year reflects $18.8 million in market appreciation including the impact of foreign exchange and net inflows of $2.8 billion. At June 30, our assets under management consisted of $20 million in separately managed accounts, $30.2 million in sub-advised accounts and $2.9 billion in our Pzena fund. Compared to last quarter, overall asset management increased, with separately managed account assets reflecting $0.6 billion in market appreciation and foreign exchange impact. Sub-advised account assets, reflecting $2.2 billion in net inflows and $1.1 billion in market appreciation and foreign exchange impact and assets in Pzenafunds remaining flat during the quarter.

[Operator:]

And ladies and gentlemen today's first question comes from Sam Sheldon at Punch & Associates. Please go ahead.

[Sam Sheldon:]

Great to see the strong positive net flows. Could you talk about the sentiment and interest that you're seeing from institutions towards value right now? I guess there is a level of interest change, your institution is probably thinking the value of performance earlier was a head baker. Are you kind of gaining traction with a wider group there?

[Rich Pzena:]

Sam it's very mixed. I'd tell you that the vast majority are not paying attention and may remain focused on growth. The fact that growth has had its little bit of rebound in recent weeks or months or whatever extension months kind of has reinforced that. So I would tell you it's all over the map. It goes from the people that are being proactive and anticipating a longer cycle to the people who have engaged in conversations to be ready for when they want to pull the trigger, but we're not -- it's not floodgates and it's early in the cycle. So this is what has happened in all of the cycles. The first year the gap the floodgates you get the floodgates when half the opportunity is already gone. We don't think we're near the point where half the opportunity is gone. We have to realize that maybe they're missing it. So it's all over the map answer but I will say that those that embraced us on the early side have seen -- we've seen a lot of positive flows into those accounts and that's what you've seen in the second quarter. It was more money coming into existing accounts than it was a lot of new accounts although there was some new relations.

[Sam Sheldon:]

How are the characteristics of the ongoing value searches that you talked about in the prepared remarks compared to prior years, search changing the size of the opportunities or maybe the mix between sub-advised and SMA's or a change in fee sensitivity or anything like that?

[Rich Pzena:]

The obvious answer to that question is that more of it -- I don't even think this is a change because this has been, what we've seen for the last five or six years, is that it's been focused on our non-US strategy with global and international and emerging markets being the primary source of interest.

[Sam Sheldon:]

Okay. And with this momentum, are you doing anything differently from a marketing or sales perspective?

[Rich Pzena:]

Yeah, we're increasing our -- the size of our staff. So we've been reinvesting in both direct sales and distribution. We've beefed up our marketing department. We're beefing up our RFP departments. We're adding more content. We're starting to get more sophisticated on social media and packaging our content differently. We're opening an office in Dublin and hopefully and in early January, that's our target, so that we can have a formal presence in the EU, which we had originally planned on having through our London office, but that became impossible post Brexit. We think that will help with a view of permanence in the European market. So we are trying to continue to capitalize on what we think will be a multi-year opportunity set and expand our reach.

[Sam Sheldon:]

Okay, great. My last question, the board increased the buyback authorization by $40 million before completing the old remaining authorization. Has there been a change in the philosophy around the buyback going forward?

[Rich Pzena:]

No, there hasn't. The reality is when we think you could get close to using up what the authorization is at some point in the next couple of quarters, really based on the unlikely case that we buy the maximum that we're allowed to buy. We proactively ask the board to expand it before we run out, but we're not changing the philosophy at all.

[Sam Sheldon:]

Okay. All right. Thank you, guys.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

[Jessica Doran:]

Thank you, everyone for joining us on today's call. And we look forward to speaking with you again soon. Take care.

[Operator:]

Thank you, Ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.