Q2 2021 Artisan Partners Asset Management Inc Earnings Call
Hello, and thank you for standing by my name is Rocco and I will be the conference operator 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, this conference call is being recorded.
At this time I will turn the call over to the camera top Horn director of Investor Relations for artisan partners asset management.
Thank you and welcome to the artisan partners asset management.
800, Inc. Com today's call will include remarks from Eric Smith, co CEO and CFO.
Yeah.
Ladies rest of the Investor presentation available on the Investor Relations section of our home sales.
These remarks, we will open the line for questions.
We began the bunch of St. Jude how much the M C.
Oh, including responses to questions may deal with Florida.
Right.
These are subject to risks and uncertainties and your percentage of the earnings release and detailed in our filings with the FCC.
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.
You can find reconciliations of those measures the most comparable GAAP measures and that means for them.
I will now turn the call over to Eric Colson.
Thank you Mikael.
And thank you everyone for taking the time to listen or read the transcript.
We appreciate and value of your time.
We know that we cover the same topics and themes over and over.
It is important that our stakeholders understand who we are and the fundamental principles that guide our decision making.
So we think its worth the time to go back over these points.
High value added investing talent and thoughtful growth.
These are the most important things that's why we talk about them all the time.
Our flywheel simple.
Track and partner with Great investment talent.
Provide the talent with the resources of autonomy and time to generate and compound wealth for clients.
Long term growth for talent the firm and shareholders follows.
Executing is more complicated.
Especially because we operate at the intersection of people and markets both of which are constantly changing.
All of the more reason to have an articulate approach and process that keeps us grounded and guides our actions.
Slide 2 outlines a repeatable process for partnering with investment leaders to develop the successful sustainable investment franchises.
And the investment team with the franchise traits listed on this slide is a powerful engine of value creation for clients talent and shareholders.
Over our 25 years, we have developed this process and successfully executed with multiple investment leaders across numerous variables, including inception date asset class style geography resource model and culture.
It starts with finding the right talent for artisan.
We seek unique investment leaders, who are passionate about their investment philosophy, and who want to operate with an ownership mentality.
We are extremely patient in both identifying prospective new talent and the courtship process.
The opportunity cost of moving forward with someone is high we only move forward. When we believe there is a high probability of long term success.
Once we bring on new investment leaders, we develop and resource team.
Which includes people research data technology space and guidance.
We focus on building a strong foundation, a cohesive team of repeatable investment process and early results.
We find the right business leader to find the right clients on the right terms.
Generally after team spent several years developing the foundation of.
The period of accelerated asset growth will follow.
We seek to build businesses diversified by client type of vehicle and geography.
We focus on high quality long duration clients.
Eventually organic growth moderates and the lion's share of future growth comes from compounding wealth for clients.
The team has broadened out their investment capabilities and add greater depth of talent.
Distinctive and recognizable brands emerge this is not a linear process. It plays out differently for each team, but we always stack the deck in our favor.
The design path with high probabilities of long term success.
Via our model and culture, we by the time is duration extends so too does probability of success.
Some of investment teams and strategies take more time due to a change in market environment client preference for something specific to the team our strategy.
Before leaving this slide I want to emphasize that the growth portion of the curve does not mean organic growth or net flows.
It means much more than that.
It means drawing as investors growing as the team and further developing each of the franchise traits.
It may mean, AUM growth, but that growth will often be in the form of wealth creation for existing clients. We.
We don't engineer products to feed a large sales force see what hits or smoothed flows.
We are targeted in our approach based on who we are we operate outside of the influence of short term ism expect lumpy outcomes and compound long term results for clients associates and shareholders.
The next slide summarizes 2 of our newest strategies international small cap value and China post venture.
In September 2020, pennies out and on non vast the Gary joined artisan international value franchise.
So supported by founding portfolio manager, David Samra Banyan on non launched the artisan international small cap value strategy in October 2020.
The strategy applies the value oriented philosophy that David has been refining that artisan for nearly 20 years to the large and inefficient international small cap space.
Since inception, the strategy has returned 45, 9% after fees.
Its benchmark index by more than 900 basis points.
Also in 2020, Tiffany Shao and yet UN U N G joined artisan to build a new investment group within our global equity franchise.
We have worked with Tiffany and you anywhere in the build a team of 5 professionals.
Opened a new office in Hong Kong.
The custom investment technology access the China, a share market and execute on early private transactions.
As of the end of the quarter since inception, the strategy had returned 11, 2% after fees.
Its benchmark index by more than 500 basis points.
While each of these new groups fits within an established investment franchise. Each is building the strong foundation I described on the prior slide.
These strategies also represent the high value added space, where we expect to continue to find opportunities for thoughtful growth consistent with who we are.
Emerging and other less efficient international markets and private asset classes, especially those that can be paired with public assets, where we have a proven track record of success.
Turning on to slide 4.
On July 1 of our sustainable emerging markets franchise, Mark its 15th anniversary at artisan partners.
Including time at the prior firm for more than 20 years Maria and her team have employed of consistent investment philosophy of identifying companies with sustainable competitive advantages and unique access to growth.
Assessing the sustainability has been part of the teams process since inception.
Take a differentiated approach to the concept.
They look for companies committed to profit and progress they acknowledge the realities of emerging markets and evaluate companies individually what they focus on the long term direction and degree of change.
Dig deeper into ESG by assessing the company's ability and commitment to bring continuity the shareholders employees customers and communities.
What they call the capacity to endure.
They don't use negative screens for exclusion lists which over look positive change in forward looking management.
As the quantity.
And quality of ESG information has improved the team has evolved the sustainability assessment. They now combined quantitative internet base reporting with their own qualitative assessment based on interviews site visits company files and other ESG sources.
The team's commitment to its core principle and dedication to continued improvement has paid off for clients and the firm.
Over the trailing 5 years.
The team has generated average annual returns of 14, 8% after fees, beating the benchmark index by more than the 175 basis points per year.
The team is strong and the process is proven the artisan sustainable of emerging markets franchise is poised for future growth.
Our aggregate growth outcome is on slide 5.
Building and maintaining sustainable investment franchises result in long term growth.
Nearly all of the growth shown on this slide is the resulted from investment returns generated for clients. That's what we expect.
Attract and retain great talent develop investment franchises that compound wealth for clients.
Long term growth for the firm and shareholders will follow.
Our purpose is to generate and compound wealth for our clients over the long term.
Our clients use the dollars we compound on their behalf to achieve their objectives and goals.
Over the nearly 25 years, our U S. Mid cap growth strategy has compounded client assets at a rate of over 15% per year after fees generating nearly 5% per year of alpha over the index.
Those results over that time period and of daily liquidity strategy stack up well against any investment strategy of or asset class.
Most importantly, it has worked for clients since inception net of contributions clients have taken over $10 billion out of the strategy.
That gets recorded as cumulative net outflows of over 10 billion.
But in fact, it rents represents considerable success in fulfilling our goal as an organization.
Today, the mid cap growth strategy has approximately $18 billion AUM with.
With a strong track record of stable investment team and a proven investment process. This.
This is of high quality outcome for our clients our people and our firm and in if measured solely by net flows a different conclusion may be made.
Our outcomes are not linear.
They can't be engineered on a quarterly basis.
But we have a repeatable process for developing investment franchises compounding wealth for clients and generating successful outcome for shareholders.
We will continue to apply that process with both our existing investment franchises and new talent and teams we add over time.
I will now turn it over to C. J to discuss our recent business and financial results.
Thank you Eric I'll begin on page 7 with the U N, which ended the quarter at $175.2 billion up 8% compared to last quarter and up 45% compared to the June quarter of 2020.
The change in AUM over the quarter reflected of $11 billion of the investment returns and $1 billion of net client cash inflows, representing a 3% annualized organic growth rate.
For the first 6 months of the year strong investment returns contributed 15 billion to AUM.
Net client cash inflows for 2.5 billion also representing a 3% annualized organic growth rate.
We believe investment returns, including returns in excess of benchmarks will continue to be the driver of growth in our business as demonstrated this quarter and for the 6 month period as well.
Average AUM was 175 billion for the quarter up 5% sequentially and 56 per cent compared to the June quarter of 2020.
Year to date average AUM was up 49% compared to the first 6 months of 2020.
Changes in AUM by generation of our own page 8.
Our third generation strategies continued to achieve impressive growth for the quarter, a U N and third generation strategies grew 14% as of <unk>.
Result of investment returns and $1.9 billion of net client cash inflows.
For the 6 month period.
And our third generation strategies grew primarily through net client cash inflows of $4.3 billion.
Representing a 31% annualized organic growth rate.
And despite the measures we've taken to manage capacity and 2 of these strategies. We believe we will continue to see growth in our third generation strategies.
And our first and second generation strategies grew through strong investment returns over the quarter and year to date periods.
Which more than offset modest net client cash outflows across both periods.
Net client cash outflows were significantly driven by client rebalancing after several strong years of investment returns.
Financial results for the quarter and year to date periods are presented on the next 2 pages.
Our complete GAAP and adjusted results are presented in our earnings release, My comments will focus on our adjusted results.
Starting with the quarterly results revenues grew 5% compared to the previous quarter on higher average AUM.
And 1 additional calendar day in the quarter.
Revenues were up 50% compared to the second quarter of 2020 also primarily due to higher average AUM.
Adjusted operating expenses decreased 1% sequentially as lower seasonal expenses in the second quarter more than offset the increase in variable compensation and distribution related expenses due to revenue growth.
Year over year quarterly adjusted operating expense increased 32% is variable costs increased with higher revenue.
And fixed compensation costs grew as a result of a higher number of full time employees.
Our adjusted operating income grew 13% sequentially and 80% year over year and our adjusted operating margin improved to 45, 3% this quarter.
Adjusted net income per adjusted share also grew 13% compared to the first quarter and 80% compared to the June of 2020 quarter.
Year to date financial results reflect the same themes is the quarterly results I just highlighted.
Year to date revenues increased 47% compared to 2020, primarily due to an increase in average AUM.
Year to date adjusted operating expenses increased 30% in 2021 as variable costs increased with higher revenues and compensation cost increased as a result of an increase from the number of employees.
Our adjusted income grew 76% and our adjusted operating margin for the 6 months period was 43, 6%.
Our balance sheet continues to remain strong in support of our capital management practices. We.
We maintain approximately $100 million of excess cash to fund operations seed new products and make continued investments in new teams operational capabilities and technology.
In addition, our $100 million of line of credit remains Undrawn.
Dividends are presented on slide 12, our board of directors declared a quarterly dividend of $1 per share with respect to the June 2021 quarter, which represents approximately 80% of the cash generated.
That concludes my prepared remarks, and I will now turn of the call back to Eric for some additional commentary.
Hi, This is Eric again.
For C J and I take questions I want to take a minute to discuss the changes, we recently announced to our board of directors.
The Demarco, who joined our board in 2013 in conjunction with our IPO will become chairperson of the board.
<unk> will join our board, bringing the total number of directors to 8.7 of whom will be independent of management.
Our board and corporate governance have evolved since our IPO over time, we have added new and diverse perspectives individuals who broadened the board's experience skill set an ability as a governing body.
We have also retained strong representation from individuals who experience with artisan dates back to the founding of the firm 25 years ago individuals who are deeply enmeshed in our history and culture as an investment firm deeply committed to our talent driven patient approach and have seen firsthand.
The power of our model and the results that can generate over extended time periods.
Independent governance and transparency as a public company makes us stronger and distinguishes us from many of our peers at the same time, we were able to maintain the long term mindset and a willingness to be different.
More often associated with private firms.
These earning calls are a good example of both of our transparency and our commitment to long term of them and remaining disciplined to who we are as a firm whether private or public.
Ultimately what matters is not a company's legal structure, but who we are and aligning our governance operation and transparency to support our purpose as an investment firm and increase the sustainability and duration of what we do for our clients our people and our owners.
I will now turn it over to the operator to take questions.
Thank you we will now begin the question and answer session.
I'd like to ask the question. Please press Star then 1 of you touched on some of your.
We're using the speaker phone, we ask that you. Please pickup your handset before pressing the keys.
The majority of the question. Please press Star then 2.
Today's first question comes from Alex <unk> with Goldman Sachs. Please go ahead.
Yeah.
Great. Good morning, everybody. Thanks for good afternoon, Thanks for taking the question.
I wanted to start maybe with a couple of questions around your approach to capital management in light of.
What obviously, you've been a fairly challenging share price for the loss.
6 to 9 months or so I guess when you think about some of the drivers of leasing in the public markets of value organic growth definitely comes up as 1 of the more important ones and I know Eric you guys don't target of flows specifically.
But artisan does have a positive organic growth backdrop pretty clean balance sheet.
Obviously, good long term track record yet the stock obviously has been sort of challenge here. So given the free cash flow yield is in the kind of high single digits now any room to pivot to a more aggressive share repurchase as you think about long term value for shareholders.
Yeah, Alex as the C J.
You know I don't I don't think there isn't the I know there isn't any change in our mindset of the board's mindset around our capital management policy, we've been pretty consistent transparent and we'd like the predictability of of our current policy. So I would not expect.
Any changes specifically I think you were referring to whether we do stock buybacks or not.
So I would not anticipate that you should expect that.
Okay.
And then I guess when you think about building out some of the new strategies I was hoping you could expand what you guys are doing on the private market side of things.
Both in terms of product development, and how you think about distribution of the product down the road.
Yes, certainly out of this is Eric.
Obviously with the launch of the China post venture.
Which specifically.
Ads, it's the investment degrees of freedom to include both public and private.
You know the the mindset with the.
That strategy in some of our other strategies is to leverage the investment degrees of freedom and broaden the use of private securities where appropriate.
So we see this as a continuing trend in the industry and we see the continuing theme inside of artisan.
And.
We expect to build out more.
The infrastructure in support of around.
This effort as well as incorporate.
More private securities across the other investment teams and it also heavily influences how we look at future of teams and our team's ability to broaden the universe.
The.
Very obvious in the U S. On the number of securities of going from over 8000 to under 4000 of publicly traded U.
You've seen the growth of private.
The.
The private company universe as companies have stayed longer private.
And.
Of especially the late stage private companies have a lot of characteristics that you see in the O. The early stage public.
Public companies.
So that that blending is occurring.
We.
Always take it as an investment first approach so the support of our model of round privates is very important and it is it needs to be acknowledged that is different than the public markets and the resources to creating the network, providing access to management and being able to.
Compete to put capital to the work and companies that fit our philosophy and approach for strategy.
We will require time.
It's a multiyear investment.
And focus to get to those to access those markets and as we build that out we are looking at how to marry that with the right vehicle and REIT distribution model, which we're spending more time on today.
We are very optimistic given the early success, we've had with China post venture.
Great. Thank you.
And our next question today comes from Bill Katz of Citigroup. Please go ahead.
Okay. Thank you very much for taking the questions. This afternoon.
In terms of just sort of building off that last question could you maybe step back and say where are you in terms of pipeline of discussions with other teams.
The priority of that versus maybe the opportunity to enhance the the product set on the private side across maybe your existing footprint.
And then when you say.
A couple of years to build this out.
Is that sort of even with the existing teams or is that sort of as you add teams on sorry for the mystic question. Thank you.
Yes, obviously.
Right now we view, there's a quite of bit of opportunity in the marketplace for artisan with regards to our existing teams as well as the.
A new teams in the marketplace.
Now with the breadth of strategies, we have today in house.
We are spending quite a bit of time of how to build out.
Existing teams.
The resources and functionality to.
Capture of invest.
Investing in private markets or in other areas of.
The broadened out the degrees of freedom.
With.
That is typically our highest priority and consumes the most amount of resources as of.
Supporting the the known versus the unknown.
And that has paid.
Paid off for us over the years and you've seen that with the highlighting of 2 teams that are embedded in 2 mature teams.
Highlighted on the call today.
We are fielding quite of few teams that we're meeting with.
Some would go into the privates, others would be in other asset classes.
That would be.
Yeah.
A lower percentage of time versus our existing teams and.
I would say the.
The 1 to 2 year comment Bill is more around our existing teams as you transit transition from public to incorporating privates.
Yeah.
The requires resources of networks that need to be built out with regards to the new teams.
You may have that skill set embedded with the people that you bring in.
For example, the China post venture.
Tiffany Shao and her team brought a very strong network and the ability to interact and move forward in private.
And we launched day, 1 with that strategy incorporating privates.
So hopefully that answers your question.
Very helpful Second question.
Just sort of staying on your sort of the discussion between the inner play of sort of AUM growth of flows of you've been pretty transparent in terms of some of the building capacity issues can you sort of step back and give us a sense of of where you think you always look across the platform in terms of related capacity constraints and then on those.
Mandates, where you've actually made some announcements can you talk a little bit about like the residual capacity in the.
The in the separately managed account or separate accounts segment.
Yes, certainly I mean, we've made some announcement around soft closing a various strategies and I guess just to be clear of soft closing in my mind is the glide path to managing long term capacity.
It's really of an investor it takes a longer time horizon and really understands our business model there.
This should be viewed as increasing the probability of long term growth.
We illustrated on slide 5 I mean, it really highlighting our sources of growth.
We find this has the highest probability of.
Projecting growth out in the long term.
And in our view pain really looking at short term growth over the next 1 to 2 years is highly unpredictable. There are many factors that go into.
The pipeline and how decisions are made of.
And when the timing of those dollars occur.
And we just don't view the.
The the soft close or the announcement as an on off switch.
Given that we are in a relationship business and really the prospects the look at our strategies take months and years to analyze.
You have to manage those relationships and communicate.
Over time of.
Where capacities at and so these announcements signal that we're managing capacity and each strategy is slightly different in some cases, we might manage the separate account business and the other cases, we might manage the pooled vehicle.
So that we maintain a diverse asset base and the outcome of soft closing could be.
An influx of dollars coming in in a shorter time period. It also could mean just a grandfather list of clients that have set dollars over a certain time periods that may take years to come in.
Regardless.
The impact on the short term, it's really hard to predict but over the long term.
Really compounded growth quite well.
<unk>.
And so.
You'd have to go to the strategy by strategy of Bill on separate account or pooled vehicle for each of these.
Okay, and if I could just slip 1 more in thanks for the goodwill taken all the questions day. They wanted the C J as.
It's just sort of contemplate hours of lot of moving parts of this as you contemplate maybe the glide path around expense outlook for the second half of the year can you give us a sense of maybe the exit pacing, particularly for some of the non comp segments.
What do you mean by the exit pacing.
Well, just where what you how you sort of see the second half stacking up sort of the economy reopens and maybe travel entertainment and sort of other sort of discuss everything that may have been a little depressed given COVID-19.
Yeah, Yeah, Yeah, I mean, you're really seeing.
The impact of Covid.
Covid in that G&A line.
Currently realizing about 2.5% of $3 million of quarterly.
Expense reductions as a result of not being in the office of not traveling and.
It's hard to tell I mean, we would have expected that after labor day that.
Things would have slowly started back to normal but that.
Seems to be delayed now with the.
The Delta Varian and so.
Hard to predict when that would come back, but we would expect that.
When it does come back in for the debt.
2 and half the $3 million per quarter will will make its way back into where our expense base.
Terrific. Thank you guys.
And our next question today comes from Dan Fannon with Jefferies. Please go ahead.
Good morning. Thanks.
Looking at the third generation funds in the kind of the vehicles, it's broken out on slide 8 the variance of the divergence between the third generation of the second generation and just curious if theres anything <unk>.
Actually why the SMA vehicles wouldn't be a bigger component of that.
<unk> of products matures over time.
Yes.
The third generation with leans, a little bit more and degrees of freedom.
And when you look at.
Emerging markets or the use of privates.
The.
The 2 have a broader array of separate accounts that have the country openings or the ability to operate in more illiquid segments.
10 tend to bias our asset raise in the pooled vehicles with the more uniform.
Investment policy statement around it versus individual I amaze and reliance on the client to be able to handle the breath of securities or regions that were going to operate and so as you up degrees of freedom.
And here.
You see that and maybe even the hedge fond of the private equity space you see of higher use of of pooled vehicle, whether it's a private fund or.
The use it or of CIT.
So it's really a reflective of reflection on the breadth of those strategies.
Okay. That's helpful. And then 1 more just on capacity given the strength in beta Gary of your revenue growth.
You look at the frontline of the day of or their funds or strategies that are on watch that maybe are closer than others.
You look out over the next 6 to 12 months potentially that could be part of that soft close a component of that you've done more recently.
I think we've talked about the small cap growth is 1 of those that we've been managing.
The capacity and keeping an eye on the net flows.
It's probably 1 strategies that are.
It was not formally stated.
Otherwise.
Everything else is in the open market there.
Yeah.
Great. Thank you.
And ladies and gentlemen, as a reminder, if you'd like to ask the question. Please press Star then 1 of our next question today comes from Kenneth Lee with RBC capital markets. Please go ahead.
Alright, Thanks for taking my question.
Wondering if you could just share with you.
Share with us your latest thoughts around the potential of any potential to expand distribution partnerships over time. Thanks.
We've.
So we've made 1.
Partnerships and Australia to go deeper into.
The high net worth financial advisory.
We built the very strong institutional presence in Australia and we've.
Got a bit deeper into that marketplace.
With China post venture.
We've.
Broadened.
Our distribution into the high net worth marketplace in a more meaningful way.
And then prior to China post central coming at the just sparked.
Interest from from clients that we haven't normally interacted with with regards to that segment will.
We'll build that distribution capability in house and as we bring on more alternative oriented strategies like China post venture, we will resource in house that that distribution.
Similar to how we attack.
The intermediary market when the broker dealer market was growing years ago or when the defined contribution was growing we brought in some individuals' the.
The focus on D. C and then it got incorporated into our broader distribution and as we up the number of alternative oriented strategies will.
Build that capability in house more than relying on pure partnerships.
And.
We continue to expand out on some of the the high net worth then.
The financial service companies outside the U S.
To get leverage of our global products.
But no no specific distribution partners to call out today.
Got you very helpful.
And just 1 follow up.
If I may and this is just all the.
For the previous question.
Are there any particular white space investment strategies.
Outside of the private asset.
You could highlight the potential areas of that that artisan could explore.
The the privates are pretty broad trends.
I mean when you.
Look at the ability today of leveraging.
A really strong.
Public.
Oriented investment background.
Hey, Tim.
Tiffany's.
History, and the ability to now extend into.
A certain percentage of private so you can really look across credit real estate and infrastructure for I guess any real asset and the blend of public private provides a of a.
Really strong the opportunity for for artisan, that's that's navigated in the high value added public.
Strategy of Arena, and then being able to extend.
The percentage of of each of those strategies.
The into private said.
It allows us to look at an array of asset classes that may have been more traditional in the private space now with the blending it opens up our opportunity and the ability to onboard Tiffany in the China post venture.
To transact on.
Private companies now in that strategy and to raise dollars to match that.
As a.
Great signal to the marketplace that we can operate in this broad white space of.
Of the blending of public and privates across multiple asset classes.
Great that's very helpful. Thanks again.
And ladies and gentlemen. This concludes today's question and answer session and today's conference call. Thank you.
You all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Okay.