Westwood Holdings Group, Inc. (WHG) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the Second Quarter 2026 Westwood Holdings Group Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, John Ehinger, Managing Director, Head of Legal and Compliance.

Thank you and welcome to our second quarter 2026 earnings conference call. The following discussion will include forward-looking statements that are subject to known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today, as well as in our Form 10-Q for the quarter ended June 30, 2026, that will be filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. You are cautioned not to place undue reliance on forward-looking statements. In addition, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press release issued earlier today. On the call today, we have Brian Casey, our Chief Executive Officer, and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey.

Good afternoon and thanks for joining us for Westwood's second quarter 2026 earnings call. I'm very pleased to share our results and key developments from the past quarter as well as our outlook for the remainder of the year. Before we dive into the details, I'd like to highlight several key points from the quarter. Our ETF platform surpassed $400 million in assets in July. We closed $147 million in new private capital commitments. The multi-asset and wealth team strategies posted strong long-term rankings, and we're celebrating our 24th anniversary as a public company. After a shaky start, equity markets rebounded sharply in the second quarter, with the S&P 500 gaining more than 15%, its second strongest quarterly advance since 2020, and the Russell 2000 rose more than 21%. Mega-cap technology and AI infrastructure stocks led much of the advance in April and May, though market leadership broadened out later on to include industrials, healthcare, and financials. A remarkably resilient economy with a 2.1% GDP growth and historically low unemployment rate bolstered investor sentiment, even as inflation, driven largely by rising energy prices tied to the Middle East conflict, reemerged as a key concern and pushed bond yields higher. Turning to long-term performance, our results over the three-year and longer periods are mixed across strategies, with some notable bright spots. Within our U.S. Value strategies, results have been mixed over longer periods and softer over recent periods. However, our SMidCap strategy ranked in the top third over three- and five-year periods among institutional peers. Our since inception performance and peer rankings remain intact for Large-cap, SMidCap, and Small-cap. Our multi-asset strategies have delivered strong long-term results, with more than half of them ranking in the top third or better against peers over three-year and longer periods. Multi-Asset Income scores top 12% or better peer rankings for trailing three- and five-year periods, and in the top 1% for 7- and 10-year periods. And our income opportunity strategy ranked in the top third among peers over multiple periods. MLP-focused strategies have done particularly well, with MLP SMA and MLP and Energy Infrastructure achieving top half or better peer rankings over longer-term periods, including a top decile ranking since inception for MLP SMA. Wealth team strategies have also performed well long-term, with enhanced balance ranking in the top third over multiple periods, and thematic innovation and growth has achieved a top 13% ranking since inception. Despite U.S. Value's recent short-term underperformance, we believe in the durability of our investment approach, regardless of the macro backdrop. Valuations have risen from levels seen earlier in the year, but equity leadership continues to broaden beyond Mega-cap technology into more defensive, quality-oriented sectors such as industrials, healthcare, and financials. Whether corporate earnings and economic growth surprise to the upside or inflation concerns and geopolitical developments cause investors to reassess their appetite for risk, we believe our disciplined focus on high-quality businesses, those with strong free cash flow, recurring earnings, low leverage, and attractive valuations, positions us well to deliver strong long-term results. This is particularly true within the Small-cap space where limited sell-side coverage continues to reward fundamental bottom-up stock selection. Westwood experienced net outflows this quarter, notably from U.S. Value institutional clients. However, these were anticipated as core equity allocations continued to evolve toward lower fee passive options such as ETFs. To take advantage of this shift in investor preference, we have been strategically positioning the firm for a number of years by investing in three growth areas: ETFs, alternatives, and managed investment solutions. And I'm very pleased to report that we're seeing meaningful pipeline growth across all three of these areas. Our institutional channel, which includes our private capital business, generated $382 million in gross sales during the quarter, with net outflows of $1.3 billion. Outflows were concentrated in our legacy Large-cap value business, which has been impacted by performance challenges and industry dynamics as investors increasingly shift to passive ETFs. Small-cap value also experienced outflows. However, these were primarily related to a single client consolidating its Small- and Mid-cap allocations into a combined Mid-cap mandate. As a result, assets were redeemed from Small-cap value in June, and our client has already funded a significantly larger allocation into our SMidCap strategy in July. Managed Investment Solutions clients funded new accounts during the quarter, which brings year-to-date flows to $350 million. Our institutional pipeline remains robust across value and energy strategies, with a significant increase in Managed Investment Solutions, where four new opportunities were added in the second quarter alone. Private Capital completed a very successful co-investment fundraising effort of nearly $147 million for the quarter. Our private markets platform is attracting substantial interest across RIAs, family offices, and independent advisors, building on the brand recognition established through previous successful fundraisers. Looking ahead, our private capital platform is well positioned to attract institutional investors following recent enhancements to our personnel and organizational structure. We anticipate receiving continued mandates in SMidCap for defined contribution plans, driven by the largest national consultants, and we continue to have constructive conversations regarding our managed investment solutions capability with consultants and prospective investors. Our mutual fund and ETF flows for the quarter included $168 million in gross sales and net outflows of $165 million. Our Enhanced Midstream, MDST, and Enhanced Energy Income, WEEI ETFs, exceed $370 million in combined assets and continue to win approvals from major national platforms, while our Enhanced Income Opportunity ETF, YLDW, is approaching $35 million in assets and is also beginning to gain platform approvals. Midstream Income also posted a strong Morningstar peer ranking of 20th percentile for the period. Energy and real asset strategies actually led the firm in both gross and net sales during the quarter. Our ETF suite continues to gain momentum, and we expect our platform availability to increase as assets grow. Finally, our Broadmark strategies are also gaining momentum as investors refocus on risk mitigation amid increased market volatility. Our wealth management team continues to build momentum as we strengthen our multifamily office platform. Client engagement remained elevated through the first half of this year, especially over the summer months, which reflects ongoing market uncertainty and continued demand for proactive planning and thoughtful portfolio oversight. Our advisors have maintained a disciplined, long-term approach to asset allocation, which has helped reinforce client confidence during periods of volatility, while conversations with clients increasingly focus on holistic planning, including tax positioning, liquidity management, and coordination with trust structures, areas where our integrated models are more efficient and continue to resonate. Operationally, we made further progress on process standardization and cross-functional alignment across our advisory, client service, and trust teams, improving scalability while enhancing the overall client experience. We're also evaluating our technology to ensure that we have a solid foundation going forward. Business activity remains steady, and we continue to prioritize high-quality relationships with long-term potential. Looking ahead, we're focused on refining internal processes, enhancing reporting and communication, and strengthening collaboration to support sustainable growth. We've just entered into a strategic partnership with ETF Capital Markets Advisors, led by Nicholas Phillips, to provide dedicated capital markets consulting in support of our growing ETF platform. Nicholas has more than 25 years of ETF market making and capital markets experience and will advise on trading, execution, and market structure across our ETF lineup, including our Enhanced Income Series and WEBS-defined volatility ETFs with the goal of enhancing liquidity, pricing, and execution quality for our investors. We are very pleased with our success with our Enhanced Income Series ETFs. They have received tremendous interest from advisors and investors. We are naturally very excited that our ETF platform has just crossed $400 million in assets under management. Our ETFs offer investors attractive income, combining dividend yield and options premiums from covered calls, while also offering the potential for asset appreciation. Our latest addition, the Enhanced Income Opportunity ETF, YLDW, which we launched at the end of 2025, offers investors current income and capital appreciation from a variety of asset classes and has gotten off to a great start. We currently have three ETFs in the Enhanced Income Series. The next addition to the series, the Westwood Salient Enhanced Power and Infrastructure ETF, or PWRX, will be truly historic in that it will be the first new ETF to list on the Texas Stock Exchange in mid-September. We believe that the TXSE, located right in our own backyard in Dallas, Texas, is the ideal exchange to list our funds. Texas is widely regarded as the energy capital of the world, and our PWRX investment team located in Houston has decades of combined experience in managing investments along the energy value chain and deep relationships with key players in the energy space. Texas is on track to be one of the largest data center hubs in the United States due to its vast land availability, favorable tax incentives, and robust energy infrastructure. We have a front row seat to witness the convergence of the explosive growth in AI data center capacity and the resulting tailwinds for power demand. Westwood has deep roots in Texas, and many of the PWRX ETF holdings will be companies we know well and in which we have invested in for years. The opportunity to bring the PWRX ETF to market with our partners at TXSE was a logical choice. TXSE has built its exchange from the ground up, and they've developed an industry-leading lead market maker program offering significant incentives that will lead to excellent market quality, liquidity, and better execution outcomes for investors in PWRX. Our private capital business has closed $147 million in new commitments across our energy secondaries co-investment platform. We've added four new members to our Energy Secondaries investment team and three members to our Private Capital Operations team, and we continue to build out our private capital infrastructure, including new vendor and technology relationships. Finally, this quarter marks Westwood's 24th anniversary as a publicly traded company. We're very grateful to our shareholders, many of whom have supported us for years, for their continued confidence and partnership as we build for the future. To summarize, Westwood continued to execute against our long-term strategy, growing our ETF and private capital platforms, while our multi-asset and wealth team strategies posted strong results. While we saw outflows in select institutional value strategies, our pipeline across managed investment solutions, energy, and selected value strategies remains robust. As we mark our 24th anniversary as a public company, we remain confident that we have positioned Westwood well to deliver long-term value for our clients and shareholders. Thank you for your continued support and confidence in Westwood. I'll now turn the call over to our CFO, Terry Forbes.

Thanks, Brian, and good afternoon, everyone. Today we reported total revenues of $25.3 million for the second quarter of 2026 compared to $25 million in the first quarter and $23.1 million in the prior year's second quarter. Second quarter revenues were consistent with the first quarter. Second quarter revenues were higher than last year's second quarter due to continued growth in our business, particularly from our ETFs and private energy secondaries funds. Our second quarter income of $1.5 million or $0.17 per share compared with $0.8 million or $0.09 per share in the first quarter on lower compensation expenses offset by higher income taxes and first quarter recognition of gains from our investment in a private bank. Non-GAAP economic earnings were $3 million or $0.33 per share in the current quarter versus $2.8 million or $0.31 per share in the first quarter. Our second quarter income of $1.5 million, or $0.17 per share, compared favorably to last year's second quarter of $1 million, or $0.12 per share, due to higher revenues partially offset by higher compensation and professional services expenses and higher income taxes. Economic earnings for the quarter were $3 million, or $0.33 per share, compared with $2.8 million or $0.32 per share in the second quarter of 2025. Firm-wide assets under management and advisement totaled $17.9 billion at quarter end, consisting of assets under management of $17 billion and assets under advisement of $1 billion. Assets under management consisted of institutional assets of $8.3 billion, or 49% of the total, wealth management assets of $4.5 billion, or 26% of the total, and mutual fund and ETF assets of $4.2 billion, or 25% of the total. Over the quarter, our assets under management experienced net outflows of $1.6 billion and market appreciation of $1.2 billion. And our assets under advisement experienced market appreciation of $53 million and net outflows of $4 million. At quarter end, we had cash and investments totaling $56.5 million. Happy to announce that our Board of Directors approved a regular cash dividend of $0.15 per common share, payable on October 1, 2026, to stockholders of record on September 1, 2026. That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website, reflecting quarterly highlights, as well as discussion of our business, product development, and longer-term trends in revenues and earnings. We thank you for your interest in our company, and we'll open the line to questions.

[Operator Instructions] Our first question is from Mac Sykes of Gabelli Funds.

Congrats on the product innovation. I guess I'd like to get your thoughts a little bit more on the trend in your average fee rate for the firm. I mean, AUM is essentially flat, but you seem to be adding nicely to the ETF bucket, the private capital. So within that mix, it does seem to be additive to the overall fee rate. I was sort of curious as to where you could see that going and the lift there as the mix gets more beneficial. And then if you could just, for my second question, if you could just remind us, is there embedded carry or performance fees in the secondaries business, and is there loss associated with that in 4Q, or is that kind of on a rolling basis?

Great. Well, first of all, on the fees, we have traditionally had asset-based fees over the course of 41 years. And over the last couple of years, we have added both ETFs and private capital to the mix. And ETFs, in fact, carry a little bit higher fee. But when you're building those businesses and building those ETFs, they have to get to a point of scale where you begin to realize that full fee. In the early years, you'll have some fee waivers in order to keep the expense ratio down. So I expect as we grow the ETF assets, that average fee will grow as well. As far as the private capital, we could not be more excited about where we are today. We are over $0.5 billion in commitments now to our private capital funds. And those carry an annual management fee of at least 1% and as high as 1.5%. But more importantly, down the road, we hope to achieve carry, and the carry is 10% over an 8% pref or 15% over an 8% pref. And so far, the investments that we have made in our funds have performed exceptionally well. You have to remember that what we are buying in a lot of these funds are energy secondaries where we are trying to buy 70% LP interest and 30% GP-led and co-investments at on average $0.70 on the dollar. So we're taking fresh capital and putting into something that is already at a nice discount. We have an energy team in Houston that has been managing energy assets for two decades. So they're able to evaluate quickly the opportunities that are presented to us, and we have had some great success in the investments that we've chosen thus far, and we're very much excited about the upcoming years in terms of carry.