WESTWOOD HOLDINGS GROUP, INC. 2026 Q2 Earnings Call

Thank you. 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 30th, 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 measure 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. 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. 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. 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 the 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 midcap 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, midcap, 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 12% or better peer rankings for trailing three- and five-year periods, and in the top 1% for seven- and 10-year periods. Our Income Opportunity strategy ranked in the top third among peers over multiple periods. Our MLP focus 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. 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.

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. 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. These were primarily related to a single client consolidating its small- and mid-cap allocations into a combined SMID cap mandate.

As a result, assets were redeemed from small cap value in June. Our client has already funded a significantly larger allocation into our SMID cap 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 SMID cap for defined contribution plans driven by the largest national consultants. 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. We expect our platform availability to increase as assets grow. Finally, our broad market 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 model continues 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. 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, and 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 edition, 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 edition of the series, the Westwood Salient Enhanced Power & Infrastructure ETF, or PWRX, Power X, 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 fund.