Pzena Investment Management's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Pzena Investment Management, Inc. (PZN)

Q1 2012 Earnings Call

April 25, 2012 10:00 AM ET


Rich Pzena – Chairman, Chief Executive Officer & Co-Chief Investment Officer

Greg Martin – Chief Financial Officer & Treasurer


Ken Worthington – JP Morgan



Good day, ladies and gentlemen, and welcome to the first quarter Pzena Investment Management earnings conference call. My name is Ann, and I will be your coordinator for today’s call. At this time, all participants are in listen-only mode. (Operator instructions)

We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Greg Martin. Please proceed sir.

Gregory Martin

Thank you very much, Ann. Good morning and thank you for joining us on the Pzena Investment Management first quarter 2012 earnings call. I’m Greg Martin, 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 don’t have a copy, it can be obtained in the Investor Relations section on our website at www.pzena.com. Replays of this call will be available for the next two week on our website.

As always, we need to reference the standard legal disclaimer before we begin. Statements made in the presentation today may contain forward-looking information about management’s 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 SEC’s website www.sec.gov.

Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of 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 selected 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.

As always I’ll turn the call over to Rich, but first I’d like to review some of our financial highlights. We reported non-GAAP diluted EPS of $0.09 per share and $5.6 million in non-GAAP diluted net income. Revenues were $19.8 million for the quarter and our non-GAAP operating income was $9.9 million.

I’ll discuss our financial results in greater depth in a few minutes. Let me now turn the call over to Rich, who will discuss our view of the investing environment.

Rich Pzena

Thanks Greg. The year started out well on the performance side of the ledger, both for global markets and for our portfolios. The MSCI all country world index was up 11.9% in US dollar terms during the quarter, and has advanced almost 20% since last October. This is the flipside of the risk of behavior that dominated the April to September period last year.

During those six months, stable earnings and high dividend paying stocks were the big winners, as the fears of a euro zone meltdown caused a flight to safety among investors. This in turn drove down the valuation of economically sensitive sectors, with financials paying the highest price. As fears started to lift, we experienced a strong rebound in those sectors, with financials, housing related businesses, tack [ph], and other cyclicals posting the largest gains.

This helped our portfolios outperform their benchmarks by approximately 300 to 500 basis points during the first quarter of 2012, and to generate returns of 20% to 30% over the last six months. But despite this recovery, the five-year track record for most of our portfolios, and for deep value, in general, still lags benchmarks and the broad market. As we discussed with you last quarter, this fits in with the history of value investing.

During the last four value cycles spanning a 40 year period on average, five years after a prior value cycle peak, a naïve deep value benchmark worse still almost 12 percentage points behind the S&P 500, yet ended up posting a 500 basis point per annum advantage over the S&P 500 over the entire length of the cycles, which lasted an average of 10 years.

This included in average almost seven years of value out performance during these cycles. Today, we’re exactly 5 years past the peak of the last value cycle, and not surprisingly deep value is 12% behind the S&P 500, completely consistent with the last four value cycles. We have been actively engaging our clients in this discussion, emphasizing the length and power of value cycles.

Although there seems to be a growing recognition that equity markets are an attractive investment option, investors are having a tough time pulling the trigger to take advantage of them. For every conversation about adding incremental risk to the portfolio, there is another one about reducing volatility and derisking. We see this in our institutional asset flows, where despite being flat on a net basis over the last three years; quarterly flows have been chunky and erratic.

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