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Text: If you do not have a copy, it can be obtained in the Investor Relations section on our website at www.
Please note that we do not undertake to update such information to reflect the impact of circumstances or events going forward.
In addition, please be advised that due to prohibitions on selective disclosures, we do not, as a matter of policy, disclose material that is not public information on our conference calls.
That's always been obvious investment strategy favored at the end of every cycle.
These are really just select the few dominant technology masters of the universe that everyone loves, sit back and enjoy the multiple expansion.
Meantime, valuation spreads between cheap and expensive have reached all-time highs all over the world.
Further, the volume of questions about whether value will ever work again or whether there is a new definition of value have been -- have become commonplace.
This is reminiscent of the late 1990s Internet bubble, when Michael Lewis' 1999 book, The New New Thing, described it all you needed to know.
Investors then like investors today, were mesmerized.
But values day is coming, paying less than the present value of future cash flows remains a winning strategy for long-term investment success, and the environment today makes this path even more attractive than normal.
We would argue that the seeds for unwinding today's extremes are right in front of us, especially as our COVID dominated world has led us into a recession, that history shows it's the key marker for the shift.
Considering the following four possible catalysts that could already be signaling that a shift is upon us.
First, the recession is in place and the path toward economic recovery is becoming clear.
We examined recessions in the U.S. over the last 100 years and in Japan over the last 45 years, and the evidence is compelling.
The U.S. experienced 14 recessions during the past century.
I'm looking at the five year returns, measuring from the beginning of the recession, the value outperformed the broad market by an average of 5% per year.
Second, interest rates stop falling, bringing multiple expansion from growth stocks to an end.
Interest rates have been in structural decline for the past 40 years.
The trend has led us to a world where you can buy value stocks at PEs of 10 just like at any time in the past 70 years, while average growth stock multiples have doubled from 30 times to 60 times earnings.
Even if rates don't rise, the tailwind enjoyed by growth stocks should dissipate.
Exuberant growth expectations for the technology masters of the universe revert to normal.
Consider the math using Microsoft as an example.
Microsoft's stock price is up ten-fold during the past 10 years.
That's 25% per year, helped by strong growth in cloud technology replacing on-premises hardware demand.
This has led to 8% annual growth in operating income.
To get an 8% annual stock price appreciation going forward given Microsoft's high multiple would now require 20 years of 10% operating income growth.
But considering that, market analysts estimate that public cloud penetration of data needs has reached 30% to 35%, and that the possible maximum penetration for the public cloud would be approximately 70%.
We're about halfway to saturation.
So where will 20 years of growth come from?
We have yet to see.
And finally, the conventional wisdom that technological change comes entirely at the detriment of the existing franchises proves to be mistaken.
Let's consider the case of electric cars and Tesla versus VW.
Conventional wisdom and stock price suggest that the answer is obvious, Tesla will win.
But even if Tesla grows, does it make sense that VW has to shrink?
Tesla's stock is one of the darlings rising over ten-fold during the past five years.
VW's stock on the other hand has barely changed in the same period.
But there are ultimately only two ways to win an auto manufacturing.
One, charge higher prices.
In other words, maintain a brand premium or two, manufacture at lower costs.
It seems inevitable, but these truths will apply to electric vehicles and that VW will succeed importing their brands strengths, think Porsche and Audi and scale advantages into the electric vehicle competition.
In fact, VW leads all competitors in the number of new electric vehicles that will be introduced over the next several years.
Turning to the business front, we finished the quarter with approximately $1.1 billion in net inflows.
For the previous 12 months, we had net positive flows of approximately $2.1 billion.
In fact, we have had positive net flows for each of the last three calendar years and six of the last eight years.
No small feat in a world questioning the efficacy of value investing.
We reported diluted earnings of $0.16 per share for the third quarter compared to $0.13 last quarter and $0.19 per share for the third quarter of last year.
Revenues were $33.9 million for the quarter and operating income of $15 million.
Our operating margin was 44.1% this quarter, increasing from 36.4% last quarter and decreasing from 46.3% in the third quarter of last year.
Taking a closer look at our assets under management, we ended the quarter at $33.3 billion, up 5.7% from last quarter, which ended at $31.5 billion and down 7% from the third quarter of last year, which ended at $35.8 billion.
The increase in assets under management from last quarter was driven by net inflows of $1.1 billion, as I've just mentioned, and market appreciation including the impact of foreign exchange of $0.7 billion.
A decrease from the third quarter of last year reflects $4.8 billion in market depreciation, including the impact of foreign exchange, partially offset by net inflows of $2.1 billion.
September 30, 2020, our assets under management consisted of $13.3 billion and separately managed accounts, $18 billion in sub-advised accounts and $2 billion in our Pzena funds.
Compared to last quarter, separately managed account assets increased, reflecting $0.4 billion in market appreciation and foreign exchange impact, partially offset by $0.1 billion in net outflows.
Sub-advised account assets increased, reflecting $1.3 billion in net inflows and $0.3 billion in market appreciation and foreign exchange impact, and assets in Pzena funds decreased slightly to $0.1 billion in net outflows.
Average assets under management for the third quarter of 2020 were $33.1 billion, an increase of 11.1% from last quarter and a decrease of 8.1% from the third quarter of last year.
Revenues increased 12.7% from the last quarter and decreased 8.4% from the third quarter of last year.
The fluctuation in revenues primarily reflects severance [Phonetic] and average assets under management over the period as well as the impact to performance fees and fulcrum fees recognized.
During the quarter we did not recognize any performance fees similar to last quarter when compared to $0.3 million recognized in the third quarter of last year.
The third quarter also reflects a reduction in the base fees of certain accounts related to the fulcrum fee arrangements of one client relationship.
These fee arrangements require a reduction in the base fee if the investment strategy underperforms its relevant benchmark or allows our performance fee if the strategy outperforms its benchmark.
During the third and second quarters of 2020, we recognized $1 million reductions in base fees related to these accounts compared to $0.5 million reduction in base fees during the third quarter of 2019.
These fees are calculated quarterly and compare relative performance over a three year measurement period.
To the extent that three year performance record at this account fluctuate relative to its relevant benchmark, the amount of base fees recognized may vary.
Our weighted average fee rate was 41 basis points for the quarter compared to 40.4 basis points last quarter and 41.2 basis points for the third quarter of last year.
Asset mix and the impact of swings in performance fees and fulcrum fees are all contributors to changes in our overall weighted average fee rate.
Looking at operating expenses, our compensation and benefits expense was $15.8 million for the quarter compared to $15.6 million last quarter and $16 million for the third quarter of last year.
G&A expenses were $3.2 million for the third quarter of 2020 compared to $3.6 million last quarter and $3.9 million for the third quarter of last year.
The decrease from last quarter and the third quarter of last year, primarily reflects a reduction in travel costs and professional fees.
Other income was $0.5 million for the quarter, driven primarily by the performance of our investments.
Looking at taxes, the effective tax rate for our unincorporated and other business taxes was negative 6.8% this quarter compared to a positive 4.1% last quarter and negative 5.1% in the third quarter of last year.
The negative effective tax rate this quarter and in the third quarter of last year reflects the benefit associated with the reversal of uncertain tax position liabilities and interests due to the expiration of the statute of limitations.
We expect the effective rate associated with the unincorporated and other business taxes of our operating company to be between 3% and 5% on an ongoing basis.
Our effective tax rate for our corporate income taxes, ex-UBT and other business taxes, was 26.5% this quarter compared to our effective tax rate of 26.6% last quarter and 24.4% for the third quarter of last year.
The fluctuation in these effective rates reflects certain permanently non-deductible expenses.
We expect this rate excluding these items to be between 23% and 25% on an ongoing basis.
The allocation to the non-public members of our operating company was approximately 78% of the operating company's net income for the third quarter of 2020 compared to 77.7% in the last quarter and 74.5% in the third quarter of last year.
The variance in these percentages is a result of changes in our ownership interest in the operating company.
During the quarter through our stock buyback program, we repurchased and retired approximately 102,000 shares of Class A common stock for $0.5 million.
At September 30, there was approximately $10.7 million remaining in the repurchase program.
At quarter end, our financial position remained strong with $49.2 million in cash and cash equivalents as well as $70.3 million in short-term investments.
We declared a $0.03 per share quarterly dividend last night.
We'd now be happy to take any questions.

user
compname reports q3 earnings per share of $0.16.
q3 gaap earnings per share $0.16.
q3 revenue fell 8 percent to $33.9 million.

assistant