Executive Summary / Key Takeaways

• Strategic Transformation Underway: Westwood Holdings Group (WHG) is actively diversifying beyond traditional value equity, with significant investments in its ETF platform, private equity, and Managed Investment Solutions (MIS), aiming to capture growth in evolving market segments.
• Strong Q3 2025 Financial Performance: The company reported robust Q3 2025 results, with total revenues up 2% year-over-year to $24.3 million and net income soaring to $3.7 million, or $0.41 per share, driven by higher average assets under management (AUM) and an unrealized gain on a private investment.
• ETF Platform Gaining Traction: Innovative ETF offerings like the Westwood Salient Enhanced Midstream Income ETF (MDST) and the WEBs Defined Volatility suite are demonstrating strong asset growth and performance, with MDST surpassing $150 million in AUM and the WEBs DVSP and DVQQ ETFs outperforming their benchmarks in Q3 2025.
• AUM Growth Amidst Targeted Outflows: While overall AUM increased to $17.3 billion by Q3 2025, driven by market appreciation, the company experienced net outflows concentrated in its lower-fee LargeCap Value strategy, highlighting the ongoing shift in client preferences.
• Cautiously Optimistic Outlook: Management anticipates continued market volatility but believes its focus on quality, value-oriented investments, coupled with expanding distribution channels and new product development, positions WHG for long-term margin expansion and sustained value delivery to clients and shareholders.

The Evolving Landscape of Asset Management: Westwood's Strategic Pivot

Westwood Holdings Group, Inc. (WHG) operates as a focused investment management boutique and wealth management firm, providing advisory, trust, and custodial services to a diverse client base including institutional investors, high-net-worth individuals, and mutual funds. Founded in 1983, Westwood has cultivated a value investment style, emphasizing companies with strong free cash flow, improving returns on equity, and robust balance sheets. This approach is designed to deliver superior long-term, risk-adjusted returns and limit downside during unfavorable market periods.

The broader financial services industry is currently characterized by significant market volatility, a sustained enthusiasm for artificial intelligence driving large-cap gains, and a shifting interest rate environment. The U.S. stock market experienced record highs in early 2025, followed by sharp declines, with large-cap stocks generally outperforming small-caps and growth outperforming value across market capitalizations in the first half of the year. However, a long-awaited rotation of leadership from large-cap giants to smaller companies began to emerge, and a September interest rate cut by the Federal Reserve led to lower treasury yields. This dynamic backdrop underscores the need for diversified and adaptable investment strategies, a challenge WHG is actively addressing through strategic initiatives and technological differentiation.

WHG's competitive landscape is populated by a mix of large, diversified asset managers and more specialized boutiques. Larger players like BlackRock (BLK), State Street Corporation (STT), Invesco Ltd. (IVZ), and Franklin Resources, Inc. (BEN) leverage their scale, extensive product ranges, and often superior technological infrastructure to command significant market share. BlackRock, for instance, is known for its global reach and technology-driven solutions, while State Street excels in custody and asset servicing for institutional clients. Invesco and Franklin Templeton offer broad arrays of mutual funds and ETFs, with Invesco focusing on active management and product innovation. In comparison, WHG occupies a more niche position, emphasizing personalized client relationships and specialized advisory and trust services. While this focus fosters strong client loyalty and potentially higher margins in specific segments, WHG's smaller scale can lead to higher operational costs and slower innovation speed compared to its larger, more technologically advanced rivals. For example, WHG's TTM Operating Profit Margin of 5.58% and Net Profit Margin of 7.57% are likely less robust than those of its larger, more diversified competitors.

Technological Differentiation and Innovation

Westwood's strategic response to this competitive environment and evolving market dynamics is heavily centered on expanding its product offerings and leveraging innovative technologies, particularly within its burgeoning ETF platform. This represents a significant technological differentiator and a core growth pathway for the firm.

The company's foray into the Exchange Traded Fund (ETF) market began in 2024, building a "world-class ETF ecosystem." Key offerings include:

• Westwood Salient Enhanced Midstream Income ETF (MDST): Launched on April 8, 2024, MDST focuses on midstream energy companies, combining dividend yield and options premiums from covered calls to target monthly income distributions. This actively managed fund has demonstrated significant growth, surpassing $100 million in AUM in Q2 2025 and reaching over $150 million in AUM by September 30, 2025. In September 2025, MDST was the second best-selling fund among peer midstream funds, capturing approximately 30% of midstream product ETF flows. It has consistently delivered on its objective, maintaining an annualized indicated dividend yield exceeding 10%.
• Westwood Salient Enhanced Energy Income ETF (WEEI): Launched on April 30, 2024, WEEI provides broad exposure to the energy sector, also utilizing dividends and covered call options for monthly income. As of September 29, 2025, WEEI had $28 million in net assets and an indicated dividend yield of over 13%.
• WEBs Defined Volatility ETFs: Through a partnership with ETF pioneer Ben Fulton, Westwood Engineered Beta (WEBs) launched its first two ETFs, DVSP and DVQQ, in late 2024. These funds implement a rules-based strategy of volatility-adjusted exposure, increasing market exposure when volatility is low and reducing it when high. In Q3 2025, as market volatility calmed, DVSP outperformed its underlying ETF (SPY (SPY)) by 636 basis points, and DVQQ outperformed QQQ (QQQ) by 726 basis points, demonstrating the effectiveness of their volatility management approach. In Q3 2025, WEBs further expanded this suite with 11 new sector ETFs, applying the defined volatility strategy to individual sectors within the S&P 500, offering investors more precise control over risk and sector exposure.
• Westwood LBRTY Global Equity ETF (BFRE): Launched in late March 2025, BFRE offers a distinctive, data-driven approach to global equity investing by seeking to limit exposure to authoritarian regimes while maintaining broad market exposure. This strategy aligns with investors prioritizing risk management and the long-term economic benefits of investing in countries with strong institutions.

These technological advancements and product expansions are critical to WHG's competitive moat. They allow the company to offer innovative, outcome-oriented solutions that address specific investor needs, such as income generation and volatility management, which are increasingly sought after in today's market. The success of MDST in attracting significant AUM and market share demonstrates the tangible benefits of these offerings, contributing to higher average fees and diversifying revenue streams beyond traditional asset-based advisory fees. The expansion of the ETF platform, including gaining approvals on major broker-dealer platforms and being "very close to gaining access to one of the largest wirehouse platforms in the world," signals potential for exponential growth and enhanced market positioning.

Financial Performance and Operational Details

Westwood's financial performance in 2025 reflects a period of strategic transition and growth, albeit with some persistent challenges. For the three months ended September 30, 2025, total revenues increased by 2% to $24.3 million compared to $23.7 million in the prior year's third quarter. This growth was primarily driven by higher average assets under management. Net income for Q3 2025 saw a significant improvement, reaching $3.7 million, or $0.41 per diluted share, a substantial increase from $0.1 million, or $0.01 per diluted share, in Q3 2024. This favorable comparison was largely due to higher revenues, an unrealized gain of approximately $2 million on the investment in TXSE Group Inc. following observable price changes, and changes in the fair value of contingent consideration in 2024. Non-GAAP economic earnings for Q3 2025 were $5.7 million, or $0.64 per share, up from $1.1 million, or $0.13 per share, in Q3 2024.

Looking at the nine months ended September 30, 2025, total revenues were $70.7 million, up from $69.1 million in the same period of 2024. Net income for the nine-month period was $5.2 million, or $0.59 per diluted share, a significant increase from $0.1 million, or $0.02 per diluted share, in the prior year. The effective income tax rate for both the three and nine months ended September 30, 2025, approximated the 21% statutory rate.

Firm-wide assets under management and advisement (AUM/AUA) totaled $18.3 billion at September 30, 2025, comprising $17.3 billion in AUM and $1 billion in AUA. This represents a $0.5 billion increase in AUM from $16.8 billion at September 30, 2024. The average AUM for Q3 2025 was $17.3 billion, up from $16.3 billion in Q3 2024. However, the change in AUM for Q3 2025 was a result of $0.7 billion in market appreciation offset by $0.7 billion in net outflows, primarily from the LargeCap Value strategy. For the nine months ended September 30, 2025, the $0.7 billion AUM increase was due to $1 billion in market appreciation, partially offset by $0.3 billion in net outflows, also predominantly from the LargeCap Value strategy. Management acknowledged these outflows as "disappointing, but fortunately concentrated in our large cap area, which is our lowest fee product."

Operational expenses saw some increases. Information technology costs rose in both the three and nine months ended September 30, 2025, due to additional software subscription fees and investment resource tools. Similarly, Westwood fund expenses increased, driven by higher administration and distribution costs related to the growing ETF assets.

Liquidity and Capital Resources

Westwood maintains a solid financial position with a debt-free balance sheet. As of September 30, 2025, cash and liquid investments totaled $39.2 million. Westwood Trust, a subsidiary, held approximately $13.6 million in excess of its minimum restricted capital requirement of $4 million as of September 30, 2025. The company believes its current cash and short-term investments, combined with operating cash flow, will be sufficient to meet operational and capital requirements for at least the next twelve months.

Cash flow provided by operating activities for the nine months ended September 30, 2025, was $10.9 million, which included net sales of trading securities of $7 million and a $4.4 million reduction in contingent consideration following the final payment for a revenue retention earn-out. Cash flows used in investing activities were primarily for the purchase of investments and internally developed software, while financing activities reflected dividend payments and restricted stock transactions. The Board of Directors declared a quarterly cash dividend of $0.15 per share on October 30, 2025, payable in January 2026, demonstrating a consistent commitment to shareholder returns.

Strategic Initiatives and Outlook

Westwood's strategic initiatives are designed to capitalize on evolving market opportunities and mitigate challenges. The institutional channel, despite some recent rebalancing outflows, maintains a robust pipeline of $1.6 billion, including a nearly $450 million unfunded mandate in its SMidCap product. Management anticipates securing more SMidCap mandates for defined contribution plans and sees continued interest in energy offerings. The intermediary channel is experiencing strong momentum, with private fundraising exceeding its 2025 annual goal by 1.5 times through September 30, 2025, and energy and real asset strategies leading in sales. The company is actively pursuing approvals for its ETFs on major national platforms, including a large wirehouse platform, which could lead to "exponential growth."

The wealth management business is undergoing a significant transformation, evolving into a multi-family office model to serve the complex needs of ultra-high-net-worth families in Texas. This shift is expected to drive long-term margin expansion, supported by ongoing cost reductions and technology investments, including a new CRM system and client portal that enhance efficiency and service delivery. The Managed Investment Solutions (MIS) platform, having funded its first client account in infrastructure and real assets, is also a key growth area, with initial funding anticipated in 2025 from a growing prospect list.

Westwood's investment in the Texas Stock Exchange (TXSE), whose Form One application was publicly released by the SEC in April 2025, positions the company to potentially benefit from this new venture. The company was also added to the Russell 2000 Index in Q2 2025, which is expected to enhance trading volume and broaden its institutional investor base.

Management maintains a "cautiously optimistic outlook," acknowledging persistent market volatility, sticky inflation, and elevated valuations concentrated in mega-cap tech stocks. However, they believe that as market leadership broadens and fundamentals regain importance, their focus on high-quality businesses with attractive relative valuations will position them favorably.

Risks and Challenges

Despite the strategic advancements, Westwood faces several risks. The company's revenues remain highly dependent on the total value and composition of AUM and AUA, making it susceptible to financial market fluctuations. While recent AUM growth has been supported by market appreciation, persistent net outflows in core segments, particularly the LargeCap Value strategy, indicate a need for sustained organic growth. An external analyst view suggests that WHG's valuation, at 23x EV/NOPAT, is high and "requiring substantial AUM growth to justify current pricing, which remains speculative."

The competitive landscape remains intense, with larger firms possessing greater scale and resources for technological investment and market reach. While WHG's specialized expertise and client relationships are strengths, its smaller scale could limit its ability to compete effectively on cost or broad innovation against industry giants. Market volatility, uncertain trade policies, and regulatory changes also pose ongoing risks that could impact financial performance.

Conclusion

Westwood Holdings Group is in a period of dynamic transformation, strategically pivoting to diversify its offerings and capture growth in new market segments. The company's robust Q3 2025 financial performance, marked by increased revenues and net income, underscores the initial success of these initiatives. The burgeoning ETF platform, particularly the strong asset growth and performance of MDST and the innovative WEBs Defined Volatility suite, represents a significant technological differentiator and a key driver for future expansion. This, coupled with the strategic evolution of its wealth management business and the development of its Managed Investment Solutions, positions Westwood to capitalize on the anticipated shift towards quality and value-oriented investments in a maturing market cycle.

While challenges such as net outflows in traditional segments and intense competition persist, Westwood's debt-free balance sheet, consistent dividend payments, and a strong pipeline for new business provide a solid foundation. The company's commitment to innovation and its ability to adapt to changing client demands, particularly through its specialized expertise and expanding product suite, are critical to its long-term investment thesis. Investors should monitor the continued traction of its ETF offerings, the success of its wealth management transformation, and its ability to convert its robust pipeline into funded mandates, as these will be key indicators of Westwood's sustained growth and profitability in a competitive and evolving financial landscape.