Pzena Investment Management, Inc. ( PZN)

Q3 2010 Earnings Call

October 28, 2010; 10:00 am ET

Management

Greg Martin -- Chief Financial Officer

Rich Pzena -- Chief Executive Officer & Co-Chief Investment Officer

Analysts

Alex Blostein – Goldman Sachs

Larry Hedden – KBW

Ken Worthington – JPMorgan

Presentation

Operator

Good morning. My name is Ginger and I will be your conference operator today. At this time, I would like to welcome everyone to the Pzena third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Greg Martin, Chief Financial Officer. Sir, you may begin your conference.

Greg Martin

Ginger, thank you very much. Good morning, I’m Greg Martin, Chief Financial Officer of Pzena Investment Management. And I’d like to take this opportunity to welcome you all and thank you for joining us on our third quarter 2010 earnings conference call. With me on the call is our Chief Executive Officer and Co-Chief Investment Officer, Rich Pzena.

Our earnings press release contains the financial tables for the periods to be discussed. If you don’t have a copy, it can be obtained in our website at www.pzena.com in the Investor Relations section. Replay of this call will be available for the next week on our website.

Before we begin, I would like to reference the standard legal disclaimer. Statements made in the presentation today may contain forward-looking information about management plans, projections, expectations, strategic objectives, business prospects, anticipated financial results and other similar matters. A variety of factors, many of which are beyond the company’s control affect the operations, performance, business strategy and results of the company and can cause actual results and experiences to differ materially from the expectations or objectives expressed in these statements.

These factors include but are not limited to the factors described in the company’s reports filed with the SEC, which are available on our website and on the SECs website www.sec.gov. Investors are cautioned not to place undue reliance on forward-looking statements, which speaks only as the date on which these statements are made. The company does not undertake to update such statements to reflect the impact of circumstances or events that arise after the date these statements were made. Investors should, however, consult any further disclosures the company may make in the reports filed with the SEC.

In addition, please be advised that because of the prohibitions on selective disclosure, the company, as a matter of policy, does not disclose material that is not public information on their conference calls. If one of your questions requires the disclosure of material non-public information, we will not be able to respond to it.

Thank you. For the third quarter of 2010, we reported revenues of $18.5 million, operating income of $9.3 million, non-GAAP diluted net income of $5.2 million and non-GAAP diluted net income per share of $0.08. We also declared a quarterly dividend of$0.03 per share. At quarter end, our total cash was 26.8 million and we are debt free.

I’ll review our financial results in greater detail in a few minutes. First, I’d like to turn the call over to Rich Pzena, who will discuss our view of the investing environment and how we’re positioned relative to it.

Rich Pzena

Thanks, Greg. We experienced an entire year in the third quarter as sentiments swung wildly from peer of a double-dip recession to cautious optimism propelling markets to double digit gains. The MSCI world index was up 13.8% in the quarter with most of that earned in September. Despite the gains, we are still finding good values in high quality companies in a range of industries.

I will touch on our investment outlook a bit more in a minute, but first I want to update you on our business. I am very happy to report that as of today the trailing three-year returns for many of our investment strategies are now in positive territory relative to their respective benchmarks and the others are rapidly approaching parity. We are hopeful that as the significant underperformance we experienced in the fourth quarter of 2007 rolls off by year end, these records will look even better.

The business implications of this improvement are clear. Managers trailing three-year relative returns are weighed heavily by consultants in their manager selection process along with the managers’ long-term track record. Although, our long-term track record has been excellent, our US value and small cap value products have nearly 15 years of history and have generated 270 and 450 basis points of extra return for annum since inception.

We have been living with the challenged three-year record due to the underperformance we experienced during the financial crisis in the last half of 2007 and the first half of 2008. We are already beginning to see signs that the passage of time has begun to heal some of the wounds in that underperformance. Search activity which bottomed in the middle of 2009 and had shown signs of improvement early this year until the mid year market collection cooled things off had begun to tick back up again.

Our trailing 12-month new search activity is at the highest level since 2008, albeit, significantly below the peak level of prior years. We attribute the improvement to one, our improving performance; two, a flicker of institutional interest in equities and three, relatively strong demand for global and emerging market strategies. Searches entered into over the last six to 12 months are now bearing fruit. Gross institutional inflows during the quarter were $628 million up from the prior two quarters.

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