Ladies and gentlemen, thank you for standing by. Welcome to the BrightSphere Investment Group Earnings Conference Call and Webcast for the Fourth Quarter 2023. [Operator Instructions] 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..

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..

Thank you, Melody. Good morning, everyone, and thanks for joining us today. Well, I'll start off with some of the main highlights on Slide 5 of the deck, and then I can answer questions. So for the fourth quarter of '23, 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. And 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 select large reallocation.

Our growth initiatives continue to be on track. Acadian's Equity Alternatives platform, seeded about a year ago in Q4 of '22, continues to show good investment outperformance.

And Acadian's Systematic Credit initiatives was just seeded in November '23, 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 4Q '23, the company's Board provided a new authorization for share buybacks of up to $100 million.

Starting in December of '23, and to date so far in '24, 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, '23.

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

Just 1 on potential for -- 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 balance sheet?.

So yes, the way we size it is we have $147 million of cash balance, as I said, at the end of the year.

And of that, we'll probably do $20 million of seed in the fourth -- in the first quarter of '24, call it, $20 million to $25 million we generally keep for operating cash, so that's $45-ish million out of that $147 million, so that leaves $100 million for buybacks. So that's how we sized it.

Of that $100 million, as I said, we've used $43 million so far till yesterday, and we hope to use the rest in the coming weeks and months, hopefully. So that's the plan. Now as we continue to execute this year and the cash from operations builds up, that will build additional capacity for buybacks or to seed more organic growth.

As we've said, those are the 2 uses..

Got you. Very helpful there. And just 1 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?.

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

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

I was just hoping you could maybe 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 look like there're some areas of strength on the gross sales there.

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 here so far in '24?.

Mike, yes, we're seeing -- as we've said, we -- on the managed volatility strategies, we've seen pressure for almost 2 years now in this good beta-rewarding market. 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.

So we're seeing clients -- a number of clients from time to time either trim their positions or move to something else. So we saw some of that in this quarter as well. And then as we said from time to time, in some quarters, we see clients doing some reallocations particularly at year-end that, that has happened.

So we saw that from a larger 1 from a client. So that was sort of responsible for the larger net outflows from -- in the quarter. So that was really driven by the outflows. The sales, it could be better. We still have, as I mentioned, I guess, a few times in the past that -- in the past year, the pipeline is still healthy. It's strong.

That hasn't worsened. Maybe it's -- probably it's only gotten a little bit better, but things are taking a little bit 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., as we call it, a lot of interest in small cap strategies, both international emerging markets as well as U.S. There're some pipeline in emerging markets as well and there's pipeline in different enhanced versions of these strategies.

So really good pipeline there and hopefully more and more of it converts. But we are -- probably we do expect to see continued pressure on managed volatility strategy and there may be still the episodic things that happen with client reallocations..

Great. And then just a follow-up question on the systematic credit as well as the Equity Alts platform.

Just 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?.

Yes. We’re pretty satisfied and reasonably happy with how things are progressing. They’re on track on both of those initiatives. Equity Alts is a little bit older, so that – we started it about a year ago in Q4 of ‘22. So that’s tracking up a nice track record of outperformance. We do have a reasonable size client in there.

We’re hoping to get more in this year. I mean, generally, traditionally, in our business, people have looked for 3-year, 5-year and 10-year track records, but this 1 as well as Systematic Credit are different enough that we are having good conversations with clients, hoping to get them in early on.

And we do have a client in Equity Alts and their track record is good. So client conversations are progressing, and we’re hopeful to add at least some more clients in that strategy before it gets to a 3-year track record. Systematic Credit just seeded. That’s only been maybe a little bit more than a month.

It was seeded in November, so I guess a little more than a month. So far so good. It’s progressing well on the performance side. Of course, it’s too early to say, but it’s moving along as we expected. But the client conversations are – were happening already even before we seeded it as we were preparing the infrastructure and the models.

And clients are eager to see how this plays out, and there’s a good amount of interest. And we hope to get some clients again early in ‘24, even though, traditionally, people have looked for 3-year track records, generally..

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

Just to extend the institutional pipeline question a little bit.

Anything -- 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 how -- like time to fund going through the pipeline?.

Yes. Thanks, John.

I guess, outside of managed volatility strategy that I touched on, we do probably expect more outflows there particularly in light of the environment as there is a soft landing and markets do well then that maybe is more of a defensive strategy that's played out over long periods as it has promised to do and deliver the same or better returns as market with lower risk.

But this is not the ideal environment for it. So we probably expect more outflows from that strategy. But outside of that, there's nothing specific that we know of that's large and chunky in terms of what we see add risk. But in terms of other strategies, we are -- it's a good pipeline, pretty diversified across different strategies.

And how it converts is really just depends on -- it's very -- it's hard to have some rules or guidepost because it's pretty diversified by stage as well. Some are in late stages, some are in middle stages, some are very early, but it's -- and this is also in terms of time to convert is just, it just ebb and flows, some move quickly, some move slower.

So it's not that anything structurally, that things are just taking longer structurally, it's just like those things also change. So it's really hard to say. But what we are pretty satisfied and happy with the pipeline that we have. And yes, the team is really on it and connecting with clients and serving them and hoping to get some of these wins.

We do have some mandates that have been won that we're expecting to fund. So they're really across different stages..

Got it. And then you talked about some of the puts and takes of managed volatility institutional pipeline, but it being diversified.

Can you just go through kind of the puts and takes for the fee rate for the next stretch?.

Yes, we would expect it to be pretty stable around this level, 38 bps, for the next few quarters. What would really change it going forward, I guess, from a longer-term perspective would be as we execute more on our Equity Alts and our Systematic Credit strategies, those are higher fee.

So as we start to get larger flows in those 2 strategies, particularly Equity Alts because that has much higher fee, and Systematic Credit, we are starting with High Yield, which is higher fee as well. So that will start to change the mix toward higher fee.

And as you may have noticed generally also, the outflows are coming out from managed volatility strategy, which has been low fee traditionally, and the inflows have been coming from these other strategy equity ex-U.S. and small cap and those are higher fee. So I would say, for the next few quarters probably, 38 bps is a good baseline.

And longer than that, we would expect it to start to go up a little bit gradually..

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

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