Business Overview and History

Westwood Holdings Group, Inc. (NYSE:WHG) is a diversified investment management boutique and wealth management firm that has been navigating the evolving financial services industry with agility and foresight. Founded in 1983 and headquartered in Dallas, Texas, Westwood has established a strong reputation for delivering competitive, risk-adjusted returns for its institutional, wealth management, and mutual fund clients.

Westwood Holdings Group, Inc. was incorporated under the laws of the State of Delaware on December 12, 2001. The company manages investment assets and provides services for its clients through its wholly-owned subsidiaries, Westwood Management Corp., Westwood Advisors, L.L.C. and Salient Advisors, L.P. (referred to together as Westwood Management), and Westwood Trust. Westwood Management provides investment advisory services to institutional clients, a family of mutual funds called the Westwood Funds, other mutual funds, individual investors and clients of Westwood Trust. Westwood Trust provides trust and custodial services and participation in self-sponsored common trust funds to institutions and high net worth individuals.

The company’s revenues are largely dependent on the total value and composition of assets under management. In 2022, Westwood completed the acquisition of Salient Partners, L.P., which included the acquisition of a 48% interest in Broadmark Asset Management LLC. In January 2023, Westwood acquired an additional 32% interest in Broadmark, increasing its ownership to approximately 80%. This represented a controlling interest for financial statement consolidation purposes.

Over the years, Westwood has faced various challenges, including navigating the competitive investment management industry, managing risks at the macro, sector, industry and company levels, and dealing with fluctuations in financial markets and the composition of its assets under management. The company has worked to maintain its track record of delivering competitive, risk-adjusted returns for its clients through its value investment style and experienced investment teams.

Today, Westwood operates through two main segments: Advisory and Trust. The Advisory segment provides investment management services to institutional investors, mutual funds, and high-net-worth individuals, while the Trust segment offers trust and custodial services to institutions and individuals.

Westwood’s investment approach is rooted in a disciplined, value-oriented philosophy that seeks to identify high-quality companies with strong free cash flow, improving returns on equity, and underappreciated potential. This focus on fundamental analysis and risk management has enabled the company to deliver solid long-term performance across a range of market environments.

Financial Strength and Solvency

Westwood’s financial position remains robust, with a debt-free balance sheet and ample liquidity. As of September 30, 2024, the company reported total assets of $151.5 million and stockholders’ equity of $118.4 million. Westwood’s current ratio, a measure of short-term liquidity, stood at a healthy 4.24, while its debt-to-equity ratio was a low 0.01, indicating a strong solvency position.

The company’s operating cash flow for the nine months ended September 30, 2024, was $12.2 million, with free cash flow reaching $12.1 million. These solid cash flow metrics have enabled Westwood to fund its operations, make strategic investments, and return capital to shareholders through quarterly dividends.

For the most recent fiscal year (2023), Westwood reported revenue of $89.78 million and net income of $10.57 million. However, the company experienced negative operating cash flow of $1.19 million and negative free cash flow of $1.33 million for that year. In contrast, the most recent quarter (Q3 2024) showed significant improvement, with revenue of $23.72 million, net income of $159,000, operating cash flow of $11.96 million, and free cash flow of $13.45 million.

The company’s year-over-year revenue growth for Q3 2024 was 8%, primarily due to higher average assets under management. As of Q3 2024, Westwood held $48.3 million in cash and short-term investments, further strengthening its liquidity position. The company’s quick ratio of 4.28 also indicates a strong ability to meet short-term obligations.

Diversified Asset Management Capabilities

Westwood’s investment capabilities span a range of asset classes and investment strategies, allowing the company to cater to the diverse needs of its client base. The firm’s product lineup includes traditional equity and fixed income strategies, as well as alternative investments such as private equity, real estate, and energy-focused funds.

One of Westwood’s key strengths is its expertise in value-oriented investing, which has helped the firm’s U.S. equity strategies outperform their benchmarks over the long term. The company’s small-cap, mid-cap, and large-cap value strategies have all delivered strong risk-adjusted returns, with several ranking in the top quartile of their respective Morningstar peer groups.

In addition to its traditional investment offerings, Westwood has made strategic moves to expand its presence in the rapidly growing exchange-traded fund (ETF) market. In 2024, the company launched two new energy-focused ETFs, the Westwood Salient Enhanced Midstream Income ETF (MDST) and the Westwood Salient Enhanced Energy Income ETF (WEEI), which have been well-received by investors.

Westwood has also forged a strategic partnership with ETF industry veteran Ben Fulton to develop and scale its ETF platform. This collaboration, known as Westwood Engineered Beta (WEBs), aims to bring innovative, risk-managed ETF strategies to the market, further diversifying Westwood’s product suite and expanding its reach.

Institutional and Wealth Management Channels

Westwood’s client base is well-diversified, with a balanced mix of institutional and wealth management assets. As of September 30, 2024, the company’s total assets under management (AUM) and assets under advisement (AUA) stood at $17.7 billion, comprised of $16.8 billion in AUM and $1.0 billion in AUA.

The institutional channel, which accounts for 51% of total AUM, has been a strong driver of growth, with net inflows of $197 million in the third quarter of 2024. Westwood’s institutional clients include corporate pension and profit-sharing plans, public employee retirement funds, endowments, and foundations, among others. The company’s track record of delivering competitive, risk-adjusted returns has helped it attract and retain a diversified base of institutional clients.

In the wealth management segment, which makes up 26% of total AUM, Westwood provides trust and custodial services, as well as investment advisory services, to high-net-worth individuals and families. While this channel experienced net outflows of $44 million in the third quarter, Westwood remains focused on enhancing its wealth management offerings and expanding its client relationships.

The company’s mutual fund business, which accounts for 23% of total AUM, has also shown signs of resilience, with several of its strategies, such as the Westwood Income Opportunity Fund and the Westwood Real Estate Income Fund, ranking in the top third of their respective Morningstar peer groups over the last three years.

Navigating Market Challenges and Opportunities

Westwood’s leadership team has demonstrated the ability to navigate the evolving investment landscape, capitalizing on emerging trends and addressing industry challenges. The company’s strategic initiatives, such as the expansion into ETFs and the acquisition of Salient Partners, have positioned Westwood to compete more effectively in the rapidly changing asset management industry.

One of the key areas of focus for Westwood has been the growing demand for alternative investment strategies and income-generating solutions. The company’s alternative income and multi-asset income strategies have gained traction, with several ranking in the top quartile of their respective peer groups over the past three years.

Additionally, Westwood has identified the energy sector as a potential growth opportunity, launching its energy-focused ETFs and private investment funds to cater to investors seeking exposure to this dynamic market segment. The company’s full suite of energy-related products, including mutual funds, ETFs, and private funds, positions Westwood to capture market share as the energy industry navigates its own transformative changes.

Looking ahead, Westwood remains committed to innovation and diversification, with a focus on delivering differentiated investment solutions to its clients. The company’s partnership with Ben Fulton and the launch of the WEBs platform underscore Westwood’s dedication to developing cutting-edge ETF strategies that can provide investors with a more stable investment experience and better risk-adjusted returns.

Segment Performance

Westwood’s Advisory segment, which includes Westwood Management and Salient Advisors, provides investment advisory services to a variety of clients, including corporate pension and profit sharing plans, public employee retirement funds, Taft-Hartley plans, endowments, foundations, individuals, and sub-advisory relationships. For the three months ended September 30, 2024, the Advisory segment reported net fee revenues from external sources of $17.77 million, up 5% from the prior year period. This increase was driven by higher average assets under management (AUM) compared to the third quarter of 2023.

Institutional AUM, which makes up the largest portion of the Advisory segment, grew to $8.45 billion as of September 30, 2024, up 26% from $6.70 billion a year earlier, due to $805 million in net market appreciation and $234 million in net client inflows. Wealth Management AUM also increased 16% year-over-year to $4.39 billion, reflecting $202 million in net market appreciation and $44 million in net client inflows.

For the nine months ended September 30, 2024, the Advisory segment generated $57.75 million in total revenues, up from $56.25 million in the prior year period. The increase was attributable to the segment’s growing AUM, which reached $16.75 billion as of September 30, 2024, a 16% increase from $14.41 billion a year earlier.

The Trust segment, which provides trust and custodial services as well as participation in common trust funds to institutions and high net worth individuals, reported net fee revenues from external sources of $5.45 million for the three months ended September 30, 2024, an 8% increase compared to the third quarter of 2023. This growth was primarily attributable to higher asset balances, as the Trust segment’s AUM increased 16% year-over-year to $4.39 billion as of September 30, 2024.

Over the nine-month period ended September 30, 2024, the Trust segment generated $15.79 million in net fee revenues, up 4% from the prior year period. The segment’s AUM reached $4.39 billion as of September 30, 2024, reflecting a 16% increase from $3.79 billion a year earlier, driven by $428 million in net market appreciation and $182 million in net client inflows.

Geographic Performance and Future Outlook

Westwood’s client base is primarily located in the United States, with a small portion in Canada. There is no significant variation in performance by geographic market. The company expects continued uncertainty driven by political concerns, both domestically and abroad. However, Westwood believes its focus on high-quality businesses positions it well for the future.

The company is particularly eager to see growth in its new ETFs as it appeals to a different audience and builds awareness efficiently via digital marketing efforts. Westwood believes it is well-positioned to ride the likelihood of a multiyear tailwind in the energy space with its full suite of energy product offerings via mutual funds, ETFs, private funds, and separate account strategies.

Furthermore, Westwood aims to secure its first Managed Investment Solutions (MIS) client in the coming months, as it has received overwhelmingly positive reception from prospects. This initiative represents a new avenue for growth and diversification of the company’s client base.

Conclusion

Westwood Holdings Group (NYSE:WHG) has demonstrated its ability to navigate the evolving investment landscape, leveraging its core strengths in value-oriented investing and alternative asset management to deliver competitive returns for its diverse client base. The company’s strategic initiatives, such as the expansion into ETFs and the acquisition of Salient Partners, have positioned Westwood for continued growth and success. As the asset management industry continues to evolve, Westwood’s focus on innovation, diversification, and risk management is expected to serve the company well in the years to come. With a strong financial position, growing AUM across its segments, and a clear strategy for future growth, Westwood appears well-equipped to face the challenges and opportunities that lie ahead in the dynamic investment management landscape.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.