Q1 2022 Artisan Partners Asset Management Inc Earnings Call
Hello, and thank you for standing by my name is Rocco and I will be your conference operator today.
At this time all participants are in a listen only mode.
After their prepared remarks management will conduct a question and answer session and how all this works it's a bit so we give them instructions at that time.
As a reminder, this conference call is being recorded.
At this time I would like to turn the call over somebody can't Winthrop Board director of Investor Relations for Artisan partners asset management. Please go ahead. Thank you welcome to the artisan partners asset management.
Mhm.
Today's call will include remarks from our coffee and tea.
Yeah.
<unk> resolved investor presentation are available on the Investor Relations section.
And following these remarks, we'll open up the line for questions.
Before we begin I'd like to remind you that haven't seen unsafe com, including responses to questions may downward.
These are subject to risks and uncertainties.
Rate relief.
In your filing.
Great.
We are not required to update or revise any of these statements.
In addition, some of our remarks made today will reference non-GAAP financial measures you can find reconciliations of those measures.
Measures in that region.
With that I'll now turn the call a breakthrough.
Thank you Mikael.
And thank you everyone for joining the call or reading the transcript. We appreciate you taking the time.
Artisan partners is a high value added investment firm designed for investment talent to thrive in a thoughtful growth environment.
We know who we are and constantly remind ourselves and others.
We have remained disciplined in our philosophy and business model, while also expanding our investment platform and capabilities today.
Today, we offer investment talent, the same entrepreneurial opportunity and investment autonomy.
<unk> offered since $19 95.
But we have significantly expanded investment degrees of freedom.
Operational support.
And multichannel global distribution.
The consistency and repeatability of who we are and what we do has steadily grown our business value over time.
Our ability to generate alpha for clients are.
Our ability to generate successful careers for people.
And our ability to generate long term return for shareholders.
We recently.
We launched the artisan global unconstrained and artisan emerging markets debt opportunities strategies.
These launches and all of the work behind them exemplify, how we execute and build business value.
Slide two you can see the team we have built with Mike's Rami micro Brian and Sir it worth it.
Since they joined <unk> last September .
We have built a diverse team of 11 investment professionals.
Okay. The team inside their own four walls in Boston, where they wanted to be.
We have built.
<unk> research management tools stood up new order management and trade execution and technology.
Established local market access in over 100 developed emerging and frontier countries at initial wash.
We see that the team's first two strategies.
And we recruited and hired a proven distribution leader with deep experience building in EM debt business.
Today after a little more than six months at artisan partners. The team is running money and open for business.
Emerging markets that brings together a number of attractive investment and business characteristics.
A large and growing investment opportunity set to differentiate from the index and peers.
A large addressable market of sophisticated investors and allocators to build a long duration client base with attractive fees.
And a limited supply of investment talent with experience resources and degrees of freedom possessed by the artisan M sites capital group.
On slide three is our repeatable process for franchise development.
This is how we drive business value.
We take the time to find and recruit the right investment leadership.
Unique investment leaders, who are passionate about what they do.
Want to own the outcome are willing to take risks and bet on themselves.
Around that leadership, we bring together additional talent and resources, including proven distribution leadership.
We provide infrastructure and customize technology.
We provide autonomy and space to execute a process and develop a culture.
And we are patient.
Focusing on establishing a strong foundation and a compelling investment track record.
We have successfully executed this process across time and asset classes and through market cycles.
While each franchise takes its own path.
We have a stated set of franchise characteristics, we seek to achieve.
And we have a disciplined process for achieving and maintaining those characteristics through time.
This is what our management team does.
We maintain an investment first culture.
We are bringing to bear the entire resources of our firm to support our investment teams.
We minimize the investment team distractions.
We maintain economic and risk alignment.
We insulate our firm from short term pressures and noise.
We focus on building long term business value.
Today, we see opportunity all around us industry consolidation is focused on scale solutions and distribution not on creating great homes for investment talent.
Creative investors are increasingly risk manage diluted and disintermediation from end clients at artisan partners. We are staying true to who we are emphasizing creative talent economists investing broad opportunity sets and a patient long term mindset.
The milestones we've passed with the M sites capital group, our milestones we passed many times before we know we have a lot more to do we also know the potential outcome. If we execute as we have in the past.
Business value that compounds, and diversifies and ultimately yield economic value on.
On slide four you can see the AUM outcome of recent launches underlining the AUR outcome is tremendous business value creation.
Investment leisure sits surrounded by additional talent and resource well established investment process and emerging investment team cultures.
Compelling early investment track records, and foundational business development on which to build broader investment platforms.
It takes time.
But if we remain patient and focused on the things we can control we expect successful outcomes will follow.
On slide five we have expanded the view across time and across the firm.
On the top part of the page we have summarized the investments we have made in our business over the last 10 years.
By following the repeatable process I described earlier, we have doubled the investment teams from five to 10 and doubled investment strategies from 12 to 24.
Expanding investment degrees of freedom, we have added multiple new asset classes and significantly increased the markets and instruments available to our investment teams.
And we have built out our distribution capabilities across geographies and channels, nearly tripling relationships greater than $200 million and increasing our number of non U S investors and client relationships more than sixfold.
Our disciplined approach repeatable process improvement success strengthens our brand and reputation and increases our probability of successful outcomes going forward.
Similar to the power of compounding revenue growth.
Excess full franchise development as a compounding effect on future business value for example in 2013, when Brian crude joined artisan to launch our credit team we were unproven in fixed income.
Well, we have built with Brian wasn't important data point, when Mike's Rami <unk> micro Brian decided to join <unk> and last year. They saw firm that could support fixed income.
Build new operations to support emerging markets debt.
And be a successful home for a differentiated fixed income team.
We lean into franchise development by identifying the right talent for us staffing resources, but the odds in our favor.
Our approach differs from firms that refer to investments as manufacturing or engineering products for mass distribution.
They play the odds and time horizon differently.
In the long run we believe that we produce sustainable growth outcomes with lower risk for all stakeholders.
On these calls and in other forums I spent almost all of my time on investments and how we are driving business value.
As opposed to reading off recent numbers.
We focused on what we can control and seek to build business value over the long term, so quarterly or even annually economic outcomes are not terribly relevant to what we are trying to do in managing the business, but over a longer periods. We do expect economic outcomes to reflect the growth of our business.
Value.
Over the last 10 years, that's approximately the time, we launched the credit team and began focusing in earnest on degrees of freedom, we have more than doubled our AUM from $74 billion to 160 billion more.
More than doubled our annual revenue from $506 million to $1 2 billion.
Maintained an adjusted operating margin in the 40% range.
And inclusive of our upcoming dividend.
Distribute at $30 31 per share to our shareholders more than our IPO price of $30 per share in 2013.
Looking forward, we will continue to focus on building business value.
Investing in our existing franchises recruiting new talent and launching new franchises launching new strategies with broad opportunity sets in large addressable markets.
Expanding our operating platform and fixed income private investing in greater China and.
And further investing in digital marketing accessing the wealth channel and other global distribution capabilities.
We are confident we can grow a business value as we have in the past.
And eventually we expect economic value to reflect business value creation.
I will now turn it over to C. J to discuss our more recent results.
Thank you Eric.
Following our comments on our long term results I'll provide some commentary on our financial results for the first quarter of 2022.
Our earnings release includes both GAAP and adjusted financial results My comments will focus primarily on adjusted results.
After advancing most of 2021 global markets fell considerably in the first quarter of 2022 due to brought uncertainty regarding the you're worrying Ukraine inflation rising interest rates and the continued cloud of the pandemic.
Given the lower markets, our AUM in revenues declined as well.
AUM at the end of March 2022 was $159 6 billion down $15 2 billion or 9% compared to the prior quarter.
AUM declined 2% compared to the first quarter of 2021.
Despite negative markets net client cash flows for the quarter were positive at $700 million, representing a 2% annualized organic growth rate.
We launched two new strategies during the quarter the value income strategy managed by the U S value team and the global Unconstrained strategy. The first strategy launched by the M sites capital group.
The second strategy managed by the team emerging markets debt opportunities was launched on April seven.
15 of our strategies had net client cash inflows during the quarter. The international value strategy was the largest contributor to net client cash inflows with inflows from one of our diverse set of clients.
AUM by generation is on slide eight.
Generation declined and as a result of the market declines.
<unk> experienced net inflows and drove the firm's overall net flows for the quarter.
Percentage mix of AUM by generation fee rates and other metrics remain largely unchanged from the prior quarter.
Quarterly results on the next slide.
Revenues in the first quarter declined $33 million, 11% sequentially in line with the 8% decline in average AUM along with two fewer days in the quarter.
Year over year quarterly revenues declined 3% principally due to the absence of performance fees in the current quarter compared to the 2021 quarter.
Adjusted operating expenses in the first quarter declined $1 7 million compared to the fourth quarter of 2021.
A decline in operating expenses reflects lower variable operating expenses, primarily incentive compensation.
Partially offset by higher first quarter seasonal expenses.
Won't merit increases and higher long term incentive compensation expense.
Yeah.
Adjusted operating expenses increased $6 6 million year over year, reflecting the addition of the insights investment team annual Merit increases and an increased number of full time employees consistent with our talent driven business model.
We also continue to invest in our talent through annual grants are franchised capital on restricted stock awards to align our T T talent with clients and shareholders.
And in technology and data through the expansion of the breath of our operating and distribution capabilities within active management to support new teams and strategy launches.
Adjusted operating income for the March 2022 quarter was $106 million, which is an adjusted operating margin of 37, 7%.
The decline in our operating margin from the December 2021 quarter was principally due to lower revenues as a result of market declines and higher seasonal expenses.
Adjusted net income per share with 98 for the March 2022 quarter.
Our balance sheet remains healthy as modest borrowings are supported by strong cash generation.
And as we have throughout our history, we remain committed to distributing the majority of the cash we generate every year.
This quarter, our board of directors declared a quarterly dividend of <unk> 76 per share.
Including this dividend, we have declared dividends of $4 58 over the last 12 months.
<unk> and a 12% dividend yield using the share price at the end of March.
In closing our financial model and in particular, the variability of approximately 60% of our expenses.
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 their Touchtone phone.
The speaker phone, we ask that you. Please pickup your handset before pressing the keys.
So withdraw your question. Please press Star then two.
We do ask you please limit yourself to one question and a single follow up to allow time for all questions.
Today's first question comes from Dan Fannon at Jefferies <unk> Company. Please go ahead.
Thanks.
Good morning, So just thinking about the <unk> opportunity is there anything structurally different about this strategy that might make it scale faster and then also just thinking about versus I guess other strategies that you've launched and grown and maybe where you are the channels for which you think you will initially be targeting.
AUM from and then also the opportunity given all the global.
<unk> that's out there for this kind of strategy is this something where there is the demand is high if you could talk about that as well.
Yeah, Hi, Dan it's Eric.
Yeah, I don't know how much I can talk to the speed or how fast we can scale.
As we've said that we've we've created these franchises.
And then I've done it in a high quality way that has duration to it as opposed to trying to short circuit, just getting them to market for the sake of it.
In my mind, that's really just engineering to hit a timing of uncertainty and I don't think we've been great at timing, but I think we've been really good at finding the right talent and building those resources around that team, which we discussed on the call the.
The opportunity is very sizable.
If you look at the emerging markets fixed income its about 30% of all global fixed income.
Approximately about 30 trillion dollars out there since 2004 <unk> gone from roughly.
<unk> three trillion to <unk> 24 trillion in just the local which makes up 80% of the.
Emerging market opportunity.
Within that there is quite a bit of inefficiency. So active management tends to thrive much better than passive the passive substitutes, we believe are fairly weak.
Costly so we.
We think that the.
A great opportunity for active management.
And are growing.
Universe of securities, both sovereign and corporate and loans.
Then we look at the marketplace of emerging market debt.
Yeah, it's very similar to what we saw in the high yield market and the high yield market. There is a roughly 160 strategies out there in traditional high yield in the U S backed by 120 firms.
The top five range from 40 billion to 100 plus billion in all of high yield and you translate that to emerging market debt and you have.
In the merchant market that blend market you do have about 100 strategies, so a little bit less than high yield.
Fewer firms that you also have the top five managing 40 to 75 billion.
So very sizeable growing we.
We think the opportunity over the long haul is.
Under represented in traditional asset allocation and I agree with you on the current uncertainty that may yield a good opportunity over the long run and you look at the team you looked at the ability for active management. If you look at the total market.
This clearly fits how we think about getting into an asset class then layer on top the fees and then more importantly, which we spent some time on is the operational barriers to get into this strategy.
This is not the easiest strategy.
Bring the market, especially for an entrepreneurial environments.
There's very few opportunities out there for a team to go and process up so.
I think the opportunity is quite scalable for us clearly, we're not trying to be the top five but it shows the direction of scale and we will do this in the highest quality of managers so that manner. So that we have the duration to go with it.
Thank you that's helpful and then just as a follow up.
C. J just thinking about the <unk> expense levels and as you look through the rest of the year you had some funds that started the teams been on on the new team that we just chatted about it has been on for some time, but how should we think about the progression of some of the fixed cost. If there was any onetime things in this quarter associated with those fund launches or.
Kind of normalization of other expenses would be helpful.
No.
Dan.
So I think we are on target with the guidance, we gave you last quarter.
And we brought on the new team.
In September of last year. So there was a fair amount of.
Run rate expense built in last quarters of quarter over quarter I think we're at a pretty good run rate they will be moving into some permanent space in Boston eventually.
So youll see occupancy tick up just a slight bit.
But the rest of the.
The rest of the expenses really should be should be fully baked in.
Great. Thank you.
Ladies and gentlemen, our next question today comes from Bill Katz of Citigroup. Please go ahead.
Okay. Thank you so much for the update and taking our questions. This afternoon. This morning.
So just picking up on that last line of questioning can you sort of just reframe for US where you are in terms of the overall head count build I think you were talking last quarter about you know sort of across the board. So we're roughly a 10% increase in head count.
Are you in that and then sort of what a concomitant increase in expenses that might be associated with that.
Yeah Bill.
We're on target.
We've had pretty robust recruiting in last year into this year. So.
We are both on target in terms of of head count and the expense guidance I gave on those fixed compensation costs.
Okay. Thank you for that and then just.
In terms of the rest of the business actually not all are we saying that.
Eric You had mentioned that it's a good backdrop here for.
Other teams could you speak a little bit about a as the market activity recent volatility having any kind of an effect one way or the other and then where are these sort of incremental areas of growth is it sort of continue to build out the credit side of the platform or is it a little more eclectic than that thank you.
Yes.
Yes.
We've seen quite a bit of activity in the alternative space.
<unk>.
And our view many of these hedge fund platforms have become quite sizable I think we can look back over the last few years.
The bulk of the assets have gone to hedge fund platforms. So there is some scalable.
Teams that reside in those franchises.
And that range is the gamut from.
Credit to other <unk>.
Our liquid alt strategies that may fit the artisan model.
And we also see.
The M&A activity has been quite active in.
As we've seen in our past that type of activity has yielded.
A favorable outcome for our model of teams, becoming available or interested in finding an entrepreneurial home.
So.
The catalysts that are still out there.
And the.
Market uncertainty.
<unk> is growing and our history of launching teams and sticking with those teams.
As we've said in the past it seems we have today are the same teams we've had since inception.
And seeing through those teams through build a great brand and we continue to have a very active dialogue in the marketplace.
More in the alternative space.
And many of the areas that we've listed out some of the themes around Asia and China specifically.
Around credit.
And continuing to think about that.
The public private hybrid product mix.
Those are all areas of interest for Us Bill.
Okay. Thank you okay. Thank you C J.
Ladies and gentlemen, our next question today comes from Alex <unk> with Goldman Sachs. Please go ahead.
Hey, good afternoon.
Thanks, Eric TJ as well.
Building on that line of question from Bill.
The last point you guys made so I guess.
<unk> is around newer teams and it sounds like the conversations are picking up and narrow because you sounded mostly on the more so on the old side, but given the capabilities you guys have build out internally to support. These teams should we be thinking about resources that are already largely in place and therefore sort of incremental margins on bringing in new team.
<unk> should yield better results than what we've seen over the last let's say couple of launches just given the fact, you've been adding more capabilities and more infrastructure to support those teams.
Yes.
Certainly we.
They've made a.
Sizable invested in an emerging market debt.
We also made a sizable asset back when we first launched credit.
With Brian crude in 2014, and as I stated on the call. We think that there is a lot of leverage built in.
The onboarding of new teams and new asset classes that as you expand your capabilities in credits.
You have really.
Some of that cost into the business and the incremental cost of a new team in credit will be much lower.
Given the two teams we have today.
I will add though that while the activity is quite <unk>.
Active in the Alt space.
We have a lot of existing team growth in franchise growth, which we've highlighted.
Over past calls so.
While activity is high on looking at new talent, our core focus right now is delivering on what we brought in and seeing that through.
So my expectations are fairly low on new teams.
Looking at the next few quarters. These quarters, it will be really looking and broadening our network.
The focus of the business on these next quarters and year is to deliver on what we brought in at the highest quality.
So I don't want to.
That people walk away from this call that that activity is going to yield a short term outcome.
The broad networking.
As you know.
A opportunity to broaden out the business over the medium term.
Typically it takes.
A year to two.
CT ship in <unk>.
Bringing in teams so.
My mindset is on the current teams right now, but the activity remains high on networking.
Got it great Thats helpful. Mike.
And my second question is around some of the capital return dynamics and Eric you mentioned on this call and on prior calls as well.
There is still.
Quite substantial disconnect between the value of the business and the economic value I guess that you guys are sort of seeing so with that in mind any updated thoughts around pivoting to capital return strategy and introducing more sizable buyback.
I'll take that one Alex.
Our model is not really lends itself very well to buybacks since the IPO as Eric mentioned and we've mentioned before we've paid out close to 100% of the cash flow generated.
With a pretty healthy dividend yield so we really have limited cash available for buybacks, we do invest in the business.
Through seed capital and launching new products, which.
<unk> generates economic value.
But we continue to prefer the predictability.
The dividend policy.
No reason to change that.
At this point.
Alright makes sense just checking thanks.
Okay.
Ladies and gentlemen, our next question today comes from Robert Lee.
Please go ahead.
Great. Thanks, Good morning, good afternoon.
Jay Mccanless.
And I apologize that you may have covered some of this in your prepared remarks, but I think in the current environment.
Obviously, you did talk about it being attractive for active strategies such as.
The.
Inside the insights, but can you talk a little bit more about some of the more traditional strategies. If you think back two years when we had.
The initial close coastal markets.
Markets are down a lot and you saw more kind of a surge of demand.
The immediate quarters subsequent to that sharp selloff so.
The weakness we've had year to date is starting to create similar types of opportunities for us.
There's a lot of your long long time, maybe not as a long term.
Clients start to rethink and so cool.
Yes.
Take more time to look at allocating towards your strategies strategies or liquid.
Equities active equities in general.
Yes.
We've come off of really the 2020.
Pandemic.
<unk>.
Where and.
When a crisis like that occurs and we've obviously seen it again with Russia and Ukraine.
Correlations.
Go closer to one in.
Everybody's behave in the same and I think what you are saying Rob is after that initial March 2020.
You saw the active management thrive there and more in that period, you saw growth drive as many of the technology health care coming off of the pandemic landed itself for.
Work at home or.
Yes.
Many people operating differently.
Yes.
The Russia, Ukraine crisis, obviously caused another.
Period, where everything started behaving in a similar fashion and now as that.
Start settling down and we clearly aren't anywhere near.
Coming out of that conflict.
We're still haven't oriented.
But <unk> seen a rotation occur there and some of the value managers have done better with.
Obviously energy.
Industrials utility.
Sure.
Pushing that forward you see.
Our traditional strategies in some cases driving there.
And you see it most.
Acutely with the international value team.
First generation strategy.
<unk>.
And many people do look at these generations and say our generation, one and attrition and it's just all about generation three.
We built an enormous amount of diversification and we're continuing to build that now with.
Our new franchise, but the power of some of our traditional franchises are shining through with some of these these periods and you saw that with the growth franchise in 2020, and now you're starting to see it with international value in some of our other value franchises in 2021.
It does bring back I think the power of traditional asset management.
But it's a great asset to have and it will continue to debate.
Okay.
And as.
Things normalize and provide the time period for both styles. The Schein you see the three and five year numbers, which are very strong across the mix of.
<unk> strategies.
Great. Thanks for that answer.
Maybe my follow up question.
If I look on page five of your handout.
You provide some color on.
Distributional relationships have developed over the past decade.
I was wondering if we could maybe.
Take a little bit of a different slice of that and just curious if you look at.
Distribution footprint today, and if you think of the various distribution channels, whether it's D C.
Hey.
Additional institutional wire houses I mean is it.
Also panel.
Maybe in some way kind of rank order, where you're seeing the most.
Momentum restrained from or where do you feel like there is the most.
Opportunity for greater penetration that where you are currently maybe.
No.
Rose.
Yeah on a go forward basis.
Yes.
The intermediary channel.
And.
Subset of the institutional and those are converging, let's take the Endowment Foundation family office coupled with.
The financial adviser.
Hey.
That group.
Of clients.
There have been more active for us.
<unk>.
Traditional institutional has been a very strong client base and has been sticky as well as the the non U S.
Institutional but on a future basis.
Using.
More.
Digital.
Resources.
And.
Broadening out or our distribution efforts within our dedicated franchise is to focus on the financial adviser RIAA family office.
And download foundation, if you put that grouping together.
We see a push in that space.
Great. Thanks for taking my questions.
Got it.
Okay.
Ladies and gentlemen, our next question today comes from John Dunn Evercore ISI. Please go ahead.
Hi.
I was wondering.
Can you maybe talk about how much the market moves so far this year may have changed.
Fund closing kind of picture.
Yes, certainly it's.
Obviously, we looked at a variety of factors.
When we think about managing capacity clearly the overall.
Total capacity it comes into play with regards to.
The liquidity of the portfolios.
We also look at the.
The volume of dollars coming in.
<unk>.
Velocity of dollars if something is running one way and then we also look at the mix of assets, if it's coming from a very narrow and concentrated asset base.
These all give us signals that we need to manage capacity and certainly the pullback.
Provides a little bit of opportunity.
Markets do ebb and flow so we're cautious we've seen.
I was trying to manage capacity in markets run up 20, or 30% and markets run down as we've seen given a little bit more availability in.
It is.
Allowed us to take some of the soft closings and talk to clients and there we've always left room for working with existing clients to manage capacity. So in our soft closing we've done that with.
With international value for sure and we will certainly with some of our other strategies.
Work with existing clients to rebalance and managed capacity. So it does give us a little bit more leeway.
But we're always cautious of.
Of markets running the other way and then your.
And then in a position where the integrity of the strategy wanes.
And clients and consultants pick up on that.
That's very difficult to recover after you go over that line.
<unk>.
Short answer it does give us room to take on a bit more.
Got you and then.
Just where we are in 'twenty, two probably it's puts and put a pause on how fast the China.
Posted venture effort can go could you maybe talk about how you think about that playing out more over the medium term once we maybe get to a better place than we are now.
Yes, I think you can say that for privates too.
That.
Theres been a little bit of a pause in the.
The private markets as well.
And that's the whole point of why we don't manufacturer engineer products and try to manage for the short run.
Because it's there.
Very easy to then get disheartened by that and unwind that and we really look at the the.
The medium to long term there that.
It's the second largest economy, we think that most funds are under weighted to China in the long run.
The opportunity in the breath of securities in China, we remain quite wide with the ability for active management.
And as.
We see.
Some of the volatility dampen.
And.
And the next.
Mid term.
I am very clearly that the short term still challenged that China remains a very attractive opportunity for us.
Thanks very much.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.
We will pause momentarily to assemble our roster.
And ladies and gentlemen. This concludes today's question and answer session and today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines, Rob a wonderful day.