Q1 2021 Artisan Partners Asset Management Inc Earnings Call
Hello, and thank you for standing by my name is Jason and I'll be your conference operator for today.
At this time all participants are in a listen only mode. After the prepared remarks management will conduct a question and answer session and conference participants will be given instructions at that time.
As a reminder of this conference call is being recorded at this time I will turn the call over to Micaela Tap Horn director Investor Relations for artisan partners asset management.
Thank you welcome to the artisan partners asset management business update and earnings call. Today's call will include remarks from Eric Colson, Chairman and CEO and C. J Daley CFO.
Our latest results from the Investor presentation are available on the Investor Relations section of our website.
Following these remarks, we will open the line for questions.
And before we begin I'd like to remind you that comments made on today's call, including responses to your questions may deal with forward looking statements.
These are subject to risks and uncertainties.
And are presented in the earnings release and detailed in our filings with the SEC.
We are not required to update or revise any of these statements following the call.
In addition, some of our remarks made today will include references to non-GAAP financial measures you can find reconciliations of those measures to the most comparable GAAP measures in our earnings release.
And I will now turn the call over to Eric Colson.
Thank you Kayla and thank you everyone for joining the call of reading the transcript I.
I will start on slide one of the same slide I always start with.
We constantly remind ourselves who we are.
Artisan partners is of high value added investment firm designed for talent to thrive in a thoughtful growth environment.
We manage active strategies with increasing degrees of freedom.
We play of defined role within our clients' asset allocation structure.
Our purpose is to generate alpha and compound wealth over the long term.
To do so.
We focus relentlessly on investments and our investments first culture.
As you can see on slide two over long time periods, our investment strategies have added significant value and compounded wealth.
At attractive absolute rates.
11 of our strategies have beaten their indexes by more than 300 basis points per year since inception after fees.
For the trailing 12 months.
Of our strategies beat their indexes by more than 400 basis points after fees.
And seven strategies beat their benchmarks by more than 1000 basis points after fees.
High value added active management at artisan works.
Why because of our business is built for high value added investments.
Our culture prioritizes investments.
We bring together the right talent, the right environment and the right clients.
We provide each of our investment teams with the autonomy and resources to capitalize on investment ideas.
<unk> dislocations and.
And other opportunities some of them broad some of them narrower.
We regularly add degrees of freedom to increase the instruments tools and methods of our investment teams can use the generate alpha.
And we are extremely patient.
We give our teams the time to let the philosophies and processes play out we are long term partners.
Turning to slide three.
Our newest strategy, China post venture exemplifies the ingredients, we bring together.
Tiffany Shao and U N U N G a wealth of talent experience and ambition.
I also have remarkable network and a clear vision for putting capital to work in greater China.
As you can see on the slide China offers an expansive opportunity set for small and mid cap investing.
And despite the attention China receives.
We believe that many investors are under allocated to the opportunity set we show on the slide and that demand for dedicated China strategies as a long term secular trend in.
In addition to investing in public securities.
The China post venture strategy, we'll invest in private companies, allowing the team to further capitalize on their extensive network and further differentiate the strategy.
The China post venture strategy launched in March and currently manages over $100 million.
We are giving Tiffany and U N U N the autonomy and tools to do something different.
We will also give them time to execute we are extremely excited to watch what they do.
Patients is a key feature of our culture.
There is tremendous value in remaining disciplined over long time periods, it's not easy.
There are many forces pushing people to react and change course.
The daily scoreboard in our industry headlines tweets and means quarterly.
Quarterly reporting periods.
Given the pervasive short term pressures, we work hard to maintain a patient mindset.
And an organizational structure that extends time horizons.
We embrace and leaned into proven philosophies and processes.
Even if they are currently out of favor.
Our value oriented franchises are a great example.
The value investing has had a tough run since 2008 Nonetheless.
Nonetheless, artisan partners value oriented teams have remained disciplined and true to who they are as investors.
Our four value strategies with track records of 10 years or more of all outperform their style index since inception.
The performance as value investors.
Has allowed them to stay in the game when.
When the long awaited value rotation of arrived.
They generated exceptional results as the one year numbers on this slide show.
The discipline was rewarded.
The clients Trust was rewarded.
Our patients have the firm was rewarded.
We have not only stuck with value we have reinvested in value and.
In 2020, we launched two new value oriented strategies the.
The select equity strategy managed by our global value team.
And the international small cap value strategy managed by our international value team.
The new strategies are managed with the value oriented investment philosophy and disciplined.
The Dan O'keefe and David Samra have applied at artisan partners for nearly 20 years.
Both strategies have performed well since inception.
As the China post venture.
We are extremely excited to watch how the strategies perform compound well and grow over time.
Moving to slide five and the artisan credit team.
The flexibility and ability to allocate capital in distressed markets are important parts of active management.
The slide five shows dislocation of events happened more than you might think.
Each of these creates the opportunity for the right manager with the right autonomy flexibility on tools.
Brian Kruger and the artisan credit team have taken full advantage of these events.
Over the last 12 months, the artisan high income and credit opportunity strategies generated returns of 31, 5% and 58, 5% respectively.
Of those returns significantly exceeded the benchmark return of 23, 3% and the average high yield Bond fund return of 21, 3%.
As an investment firm, we're constantly looking for ways to help our investment teams further capitalized on opportunities to generate alpha and compound wealth.
We see the serial dislocation and high yield markets and we see the of credit team skill at capitalizing on those dislocations.
We are currently exploring a strategy that would give bryan in the credit team further flexibility to take advantage of dislocation allocate capital into stress and compound returns for clients.
This is what we do is of high value added investment firm.
Day relentlessly focused on investments.
Really add degrees of freedom.
Find the right clients on the right terms.
The remain extremely patient.
Slide six shows our long term outcome.
Since 2008, we have grown our AUM from $30 6 billion to.
Two of $162 9 billion.
The market returns of contributed 105 billion.
Returns in excess of benchmarks have contributed approximately 25 billion.
And net flows have contributed $2 7 billion.
Our growth results from generating investment returns for clients flows are important.
Provide our investment talent with capital to compound.
This is the business.
We need and want clients perf.
Performing for them is our highest priority.
But we do not expect to grow through sales, we expect to grow through investment excellence.
For the periods shown on the slide our excess returns of alone or more than nine times, our cumulative net flows.
We are fulfilling our purpose as an investment firm.
We're generating outcomes for stakeholders that compound over time and enhance individual lives and communities.
You can expect us to remain relentlessly focused on investments maintaining our investment first culture, adding degrees of freedom.
The new ways to capitalize on investment opportunities.
And the remaining extremely patient.
I will now turn it over to C J to discuss our financial results.
Thank you Eric our earnings release includes both GAAP and adjusted financial results. My comments today will focus primarily on adjusted results.
Our strong first quarter results reflect the impact of continued strength in the global equity markets and net client cash inflows, which led to higher average assets under management and revenues.
Our AUM at the end of the first quarter was $162 9 billion up $5 1 billion or 3% compared to December 2020.
Investment returns contributed meaningfully to AUM growth and net client cash inflows for the quarter were $1 4 billion, representing a 4% annualized organic growth rate.
14 of our strategies had net client cash inflows during the quarter.
The majority of net client cash flows were through our U S intermediary channel.
Over the last 12 months.
AUM grew $67 7 billion or 71% due to strong investment performance, including excess returns above benchmarks and $9 billion in net client cash inflows.
Average AUM for the March quarter increased 12% sequentially and 43% year over year.
When looking at changes in our AUM by generation, our AUM increased across all three generations over the quarter.
Investment returns drove our growth in our first and second generation strategies and $2 4 billion of net client cash flows drove our third generation strategies to AUM of over 30 billion, 19% of our total AUM.
Turning to our financial results for the quarter revenues grew 11% sequentially and 43% year over year, principally due to higher average AUM and higher performance fees in the first quarter of 2021.
Operating expenses increased $21 3 million or 14% sequentially, primarily due to higher variable incentive compensation expense, which increased with revenue of.
$6 1 million of seasonal expenses, which will taper off beginning in Q2.
And 2 million of higher long term incentive compensation expense.
Variable expenses represented 62% of our total expenses in the first quarter of this year.
Operating expenses increased $37 1 million or 28% year over year due to higher variable incentive compensation and third party distribution expense on higher revenues as well as higher salary and benefits costs.
As a result, our adjusted first quarter operating income increased $8 3 million or 7% sequentially.
$58 million or 73% year over year.
Our operating margin was 41, 9% for the first quarter of 2021 down from 43, 5% in the fourth quarter of 2020, due primarily to seasonal expenses are.
The operating margin improved 690 basis points from a year ago.
Adjusted net income per adjusted share grew 7% sequentially and 71% year over year two of $1 13.
Our balance sheet remains healthy as modest borrowings are supported by strong cash generation.
And we declared a quarterly dividend of 88 per share with respect to the March 2021 quarter, which represents approximately 80% of the cash generated after reserving for our long term incentive plan.
In closing our financial model continues to serve us well and provides predictability and sustainability to weather ever changing global market conditions.
That concludes my remarks, and I will now turn the call back to our operator for Q&A.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please limit yourself to one question and one follow up.
To allow time for other questions at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question is from Michael carrier from Bank of America. Please go ahead.
Great. Thanks for taking the question.
Is maybe just on the the China and even of the private market strategies.
When you look at where how.
You guys are positioned currently and you kind of look at that long term opportunity whether it's over the next 10 years or so.
And how much of that do you feel like you're positioned for any of them versus how much you're still in you'll see R&D in terms of you're still developing knows you and his team the strategies.
Sure you know that the potential opportunity that you see.
Hi, Michael it's Eric.
I think we're in a really really early innings I mean, there of spin.
Yeah, a lot of time spent over the years around China and that's the reason it's become the second largest economy in the world.
But the larger financial institutions have been there for quite some time and I would say neve.
Consumer oriented asset management firms have been in place there and we finally.
<unk>, how we operate and the talent, we see in the strategies.
The opportunity for artists and the start entering in the space and I would say, it's early phases of both on the.
The number of our franchises and teams to the number of strategies and then more importantly, as we are.
Have those strategies in place that we start leaning in to our presence with the client base. There and you can play that out and go back in time and look at how we operated with our global equity strategies in emerging markets of generation, two where we built out the global strategies, we put up.
The performance than we operated with vehicles.
And then put a.
And distribution presence in Europe, and built out a non U S exposure over time, primarily in Europe.
I'd say we are.
C of similar.
Trend in mindset for the firm as we look at Asia, and we look at China more specifically.
Okay, Great and then just as a follow up.
Maybe two small items on like the U M. Just was there anything in the quarter on the separate accounts side that was elevated it seems like maybe like the redemptions of outflows were a little bit higher there and then the third generation like the.
Turns and other you know kind of line item it looks like that was negative but I didn't know if there was anything you know again unusual interest in the quarter.
Yes.
The I don't think Theres anything unusual.
There's been talk of value growth. There has been talk of U S. Non U S rotation a lot of that is happening and exposure oriented strategies, which would include indexes.
Yeah, we've seen some separate accounts look at their equity exposure and rebalance and we've seen some.
Institutional clients move some money into active value.
But I wouldnt it didn't jump out at us as anything extraordinary in the quarter.
Yeah.
Okay, alright, thanks, a lot.
The next question is from Alex <unk> from Goldman Sachs. Please go ahead.
Hey, guys. Thanks I'm good.
Thanks for the question just a question around capacity, obviously, you announced the closing of the credit find a week or two ago, you talked about on the call as well.
Can you help us just contextualize how much of the flows over the last 12 to 24 months.
Come from existing clients versus new clients in that business as we kind of try to think about the ultimate impact on the organic growth from from sort of closing of that product and then just bigger picture of anything else that you see on the horizon death.
There might be some clubs due to capacity.
Yes, certainly out of its Eric.
The soft close us out of the process. It's a it's not a definitive point in time, where.
You would do of hard close and shut down all activities. So we are soft closing of our mutual funds to most new investors.
The mutual fund is a daily price.
Daily liquidity.
And as we look at that vehicle.
We always look at the total capacity, we look at the mix when we look at the velocity of dollars.
And with regards to the mix.
We've made the decision to make a soft close on the mutual funds.
And as we look at the overall strategy it is open.
Two.
Separate account and other vehicles to encourage a more diverse mix of clients.
And with regards to your question on flows of existing or.
New clients is really missing the point.
The primary point is.
The statement, we made in the call around the performance.
I don't think anybody was looking back and saying we're going to produce a of 31% return and you know it's.
It's the compounding of the dollars that has the greater impact in flows and the credit opportunities produced of $58 five we.
We saw.
No.
Really stellar returns and the credit strategies.
And we are looking at the mix, we're looking at the degrees of freedom.
And we're looking at ways to continue taking the opportunities with dislocation.
So it's a fairly complex.
Positioning of the franchise and again it goes back to just our long term view versus the short term view.
We think that the long term value of this franchise is broadening out the client base broadening out the number of strategies and delivering alpha over a long period.
As opposed to trying to capture as much short term flow as we can which we don't think has as high of of present value to the franchise.
And that drove our thinking of.
Saving capacity in and smoothing time periods because of.
The strong results and velocity of money can.
Can do a lot of damage to a franchise that we're not willing to take and we've done that over the years and that's who we are so.
It shouldnt be any surprise on on how we think and how we operate.
Yeah that was the primary thinking around.
The soft closing of high income.
Right, Yeah, I know you've been very consistent when it comes to that anything else.
You're kind of looking across the franchise that you feel might start to bump up against capacity of where you might have to do some of them tomorrow.
Right now there is a few things we are monitoring it and it is it's hard to predict given.
The performance. So if you see some strategy is producing.
Historically from some good performance and more recently with the value rally.
You're starting to see some other strategies cash people's attention and when you have those results.
It's very nice of you attract a lot of attention to the franchise and hopefully that benefits all strategies in each of these franchises. So theres a couple of that we're monitoring and it really is going to be.
Keeping an eye on the.
The absolute performance and how we're compounding money.
Okay.
Great Alright, thanks for that.
The next question comes from Kenneth Lee from RBC Capital markets. Please go ahead.
Thanks for taking my question and this is in regards to the recently introduced strategies.
The China posted venture funds.
When you look at these recently introduced strategies I Wonder if you could share with us of how you think about potential contribution to organic growth over the near term and would you expect sort of like a similar AUM ramp up for these kind of.
Strategies as you would've seen for newly introduced strategies in the past thanks.
Each of the strategies and teams.
You have their own.
The growth pattern early on pending where youre at in the cycle of pending the history of the individuals and the linkage of track Records.
Bringing in individuals that have seven year track records.
Running billions of dollars has a different early phase of growth pattern than strategies that.
Don't have a track record that you can point to that matches of exactly what the team is doing today, so with regards to the.
You know the China post venture.
There is a track record the look at but it's not exactly of.
What we're doing likewise in the international.
Small cap value strategy.
The history, but not a track record you can point to specifically.
And the same with the select equity strategy under either of the global value team. These.
We would expect a little bit slower growth versus what we've experienced in.
Some of the other strategies that are that were brought on I guess more specifically of probably the international small mid.
<unk> had had different trades than that than the trade side Im speaking to into the newer strategies. So.
We have of.
A slower growth mindset for those.
So some of that really strategies, we have right now.
Got you that's very helpful and just want one follow up if I may.
Wondering if I could just get your latest thoughts around the the potential.
To add any new investment teams.
In the near term or if theres any other particular, a white space of investment opportunities debt that you see now are out of the horizon. Thanks.
And we have now.
Nothing new to announce the around teams we continue to see.
Pretty active dialogue in the marketplace.
And.
Over the last year.
Of the health pandemic, it really hasn't slowed our our dialogue and interaction with teams.
In fact, we.
Brought on new people over that period and launch new strategies.
The the dialogues healthy.
And we think there is a quite a bit of white space. When you look at.
The the number of asset classes that are developing.
No.
More specifically the you know the <unk>.
Hi, Brad or of crossover funds that are aligned to what we did with the China post venture.
As well as some of the.
The teams that could be based in other jurisdictions.
Jurisdictions around the world of.
So we think there's quite a bit of white space for our model.
And.
The the dialogue remains quite active.
Got you very helpful. Thank you very much.
The next question is from Bill Katz from Citigroup. Please go ahead.
Okay. Thank you very much for taking the questions. This afternoon.
Just coming back to.
The China opportunity I think Eric in your prepared comments. You mentioned you are now at $100 million I think that's a bit higher than what I think you disclosed in the March monthly.
Whereas the volume coming from and how do you sort of.
Maybe triangulate that with your commentary that was sort of the very very early stage and in the long tailed to sort of build this at the end of the day and would you expect more measurable growth near term or you need a couple of years of sort of track record to start to leverage that a little bit fees for new growth.
Yeah, Bill, it's a little higher than what we disclosed on the March 31st.
The number.
And we.
I have been saying they are an interesting clientele.
<unk>.
I would describe it a little bit outside of our current client tell of the institutional and <unk>.
Some of the.
Typical advisors debt.
We've marketed and built relationships within the past so we've opened up some.
New opportunities in the wealth channel with family offices.
Opened up some dialog and in regions of the world that we were a bit surprised to hear from.
Outside of our current footprint.
And.
The.
The mindset is still of that.
It's relatively.
New and two.
The strategy mix of artisan.
And the opportunity should grow at a slower pace than we've seen other.
The more recent strategies with the.
The the trades I described earlier.
The the unknown is the other.
The demand side of the curve, which is we brought up in the dialogue of the call which is.
A lot of.
Pools of money looking at their allocation to the space, whether it's a china specific or of the crossover of the public private and so we've seen a lot of interest in the makeup of the strategy and the positioning of the strategy that.
But it puts a lot of interest in the and optimism around the growth rate.
Okay. That's super helpful. And then just maybe a two part of if I could sneak it in.
You mentioned that the to protect capacity on the on the credit side. But then you also mentioned distress I was wondering if you could talk a little bit about how you might differentiate.
The current team versus some of the more seasoned competitors out there at a bigger scale and how would the economics of something like that work is that a management fee plus carry type fund or any kind of granularity on that would be helpful. Thank you.
Yeah.
Specifically in the high income space.
And we call it high income for a very specific reason so that it has the flexibility to use other instruments and to the flexible to.
To take advantage of stress in the marketplace and I think both of the flexibility of security type than the asset allocation.
The allocation process and the portfolio has given Brian and team the degrees of freedom to produce the results versus the peers.
You know he's also.
Taking that skill set of looking across credit opportunities as well as being able to enter.
The enhanced security selection with credit opportunities and that got us into more of the private vehicle and all the credit alternatives space and we want to be able to save the room for enhancing those skill sets and we expect to continue into the private funds and we.
Would expect to see more performance based or carry.
Interest in our strategies of the future.
And as we look at our credit franchise, we see more breadth and.
The number of strategies in the space the credit team would go versus just the pure high yield strategy that tend to be very narrow and can take more dollars, but it also happens at a lower fee rate we prefer the.
The ability.
To manage capacity to deliver alpha managed our fee rate and be able to expand in the new strategies and in aggregate. We believe the present value of that opportunity is much greater than playing into a bulge.
The strategy in a very narrow space that have fee pressure and it ends up being of competition for scale.
<unk>.
The lowest fee rate.
Alright, Thank you very much.
The next question is from Dan Fannon from Jefferies. Please go ahead.
Thanks, just a question on kind of the outlook for spend the normalization of the activity of travel and other discretionary items as you think about this year and how maybe your budgeting.
Day C J for the remainder of the year of what we should think about out of the line item level.
Yeah Dan.
You know I think we've mentioned this before you know we largely believe that.
Spending will return.
For the most part back to normal third there will be some.
You know minimal efficiencies I do think there will be some less travel, but nothing meaningful in certain areas of margin it will be back end.
I think we're going to ease into that over the year.
And so I would expect we'd have some some savings through the rest of this year, but as you know this this whole situation with the pandemic is very dynamic and ever changing and so I hesitate to.
So really trying to nail down any specifics other than.
We do have a.
The savings in the P&L now, which are continuing and we would expect them to continue into next quarter.
And then he's back into them and whether that takes three six or nine months of remains to be seen.
Okay, and then just one more on capacity just given the context, you gave us last quarter.
When asked about it you mentioned a couple of funds that were not in the credit bucket and obviously returns have been quite solid as you've said I just want to make sure. There's nothing else I don't know team wise resource wise. The other things that resulted in the the shift of the soft close announced in April for that versus what was discussed are highly.
The last just a few weeks a few months ago.
Yeah.
Yeah, Dan Theres nothing.
We're ready to announce but I do think there's an array of strategies that we keep a mindful eye on with regards to the mix the velocity of flows the.
The performance of the opportunity set within.
So each teams.
Yes.
Product mix.
So there are.
Some of some stellar results that came out of last year and there is.
A good number of strategies that we are looking at so.
As we have active dialogue with the investment teams and we discuss about discuss capacity and we discussed the performance outlook and how various investment operating play through it's a dynamic discussion.
And so we fully.
Understand the need for.
Where we're at on capacity, but we also are mindful of that.
The theres a lot into the equation.
So.
Yeah.
Certainly some strategy of two should could come up with regards to managing that either through a soft close of of fund or how we manage the separate accounts.
But there will be an active dialogue and that's the history of the firm. So I would expect and continue to expect.
Capacity of management that leans towards protecting the ability to deliver alpha.
Understood. Thank you.
There are no more questions in the queue. This concludes the question and answer session and the conference has now concluded thank.
Thank you for attending today's presentation you may now disconnect.
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