Q2 2022 Artisan Partners Asset Management Inc Earnings Call
Invest in new investment teams, new capabilities and new resources.
As with past draw Downs, we level set our business commitments with our resources and people to capture long term growth, while scrutinizing expenses to adhere to our financial model.
As an investment oriented firm, we can reinvest in talented investors with strategies designed for long term asset allocation.
As opposed to engineered investment products for the market environment.
Thus, we mitigate the need to pull back on investments projects or people as aggressively as others.
Consider emerging markets debt.
In the first half of 2022 and bond funds experienced 50 billion of redemptions, the worst outflows in more than a decade.
The dollar denominated EM debt index declined nearly 20%.
Recent headlines in the financial times referred to a perfect storm and.
And stampede for the exits.
What do we see opportunity money in motion poor absolute and relative returns from established players a market ripe for wealth and alpha generation going forward.
With that mindset, we have stayed on schedule with our new emerging markets debt team the M sites capital group.
Aligning talent opportunity set resources economics, and long term demand.
Managing for short term outcomes.
But for the long term investment performance franchise development and sustainable growth.
Over the last four months, we have launched three strategies and four vehicles managed by the M sites group.
Blended currency artisan emerging markets debt opportunities local currency artisans emerging markets local opportunities.
And the highest degrees of freedom artisan global unconstrained.
The team's early performance has been gratifying more importantly, they're establishing the foundation for long term success.
This is not the first time, we have launched an investment team or strategy in a difficult environment.
We launched the global value strategy in the second half of 2007 in front of what turned out to be the great financial crisis.
The strategy declined 13% over its first three years of operations, but outperformed its benchmark by more than 15 percentage points during that time period today. The global value strategy has a 15 year track record 289 basis points of average annual outperformance since inception.
<unk> and approximately 22 billion in AUM.
The global value strategy was instrumental in expanding our reach to clients outside the United States and around the world.
In 2007, we had approximately four relationships outside of the United States.
Today that number is 229.
We began high value added credit investing eight years ago with the launch of the high income strategy.
We are methodically building out the capabilities and offerings of the artisan credit team led by Brian crude.
And the launch of the M sites capital group strategies is a significant investment in building out differentiated credit offerings.
We believe both fixed income teams can and will become multifaceted investment franchises generating wealth and alpha across an array of strategies.
And managing significant amounts of capital.
Our proven success with talented investment teams uniquely resource by our centralized operations and delivering investment strategies designed for long term asset allocation provide confidence to operate through short term shocks and noise.
With each investment team and strategy, we expand our capabilities and the breadth of our platform.
Each market disruption creates opportunities to deepen the moat around our existing business with investment alpha and to thoughtfully grow our business along multiple dimensions.
Slide four shows the hypothetical performance of a portfolio consisting of $1 million invested in each artisan strategy at inception compared to a portfolio consisting of the same dollars invested on the same days in the corresponding benchmarks.
The alpha we generate translates into much more well it takes time.
There are setbacks periods of absolute decline in underperformance.
But over a long time horizons, our teams have been able to compound capital in excess of benchmarks and generate much more wells for clients.
Our business model and philosophy are designed to buy time absorb shocks and provide stability.
For our people our clients and our shareholders.
We manage time horizons durations and careers to by the time needed to realize the benefits of a disciplined investment philosophy and process.
Our financial model and business management team absorb shocks like the ones we have seen so far this year.
And insulate our teams from short term noise.
And follow the herd pressure.
Our investment teams are genuinely autonomous we believe in the alpha generating capability of each of them we.
We give them the time tools and intellectual freedom to stick to their process through volatility and uncertainty.
We have managed revenue declines due to market shocks expense increases due to long term investments.
And profitability fluctuations, resulting from both revenue declines and expense increases.
Sometimes at the same time.
This is nothing new for us.
We have been here before.
We will remain disciplined and confident and the outcomes that result from talented people operating in a stable long term environment.
I will now turn it over to C J to discuss business and financial outcomes.
Thanks, Eric I'll begin with a U M on page seven.
During the quarter sharp market declines negatively impacted our U N global equity market indices declined approximately 15% for the quarter and approximately 20% for the year.
Hovering near bear market territory as of the end of the quarter.
Market declines were driven by among other factors. The continued conflict in Ukraine, a spike in inflation and sharp increases in interest rates, which drove heightened fears of a pending recession.
As a result, AUM declined to $130 5 billion down, 18% compared to last quarter and down 26% compared to the June quarter of 2021.
In response, some clients took defensive actions turning away from riskier growth equities and emerging markets.
Net client outflows were $4 2 billion in the quarter and were primarily from our growth strategies in particular, those within our global equity and growth teams.
Small number of clients drove the majority of the increase in outflows, mostly as a result of reallocations away from risk.
Average AUM was $143 9 billion for the quarter down, 11% sequentially and 16% compared to the June quarter of 2021 year.
Year to date average AUM has declined 8% compared to the first six months of 2021.
Across all generations AUM was impacted by declining global markets during the quarter and year to date periods.
There were no material changes in the weighted average management fee or AUM mix by generations.
Financial results.
<unk> are presented on the next two pages, our complete GAAP and adjusted results are presented in our earnings release My comments will focus on our adjusted results.
Quarterly revenues declined 11% compared to the previous quarter and 18% compared to the second quarter of 2021 on lower average AUM.
Year to date revenues were also down 11% from 2021 and lower average num.
Performance fee revenues were negligible in 2022 compared to $4 1 million in the second quarter of 2021, and $10 8 million in the year to date period in 2021.
Adjusted operating expenses decreased 6% sequentially due to the decline in incentive compensation expense as a result of lower revenues and seasonal expenses.
The decreases were partially offset by an increase in travel expenses, which have trended back to pre COVID-19 levels.
Year to date, adjusted operating expenses increased 1% compared to the six month period ended June 2021.
The increases reflects our continued commitment to manage through periods of market disruption and continue to invest in our business to support future growth.
Over the last year, we've invested in new and existing talent technology and office space, including the Onboarding of the M sites capital group and the launch of the team's three new investment strategies as well as two additional strategies and existing teams.
In addition, we have expanded our distribution capabilities to support the additional capacity created by the new teams and strategies and expanded our operational capabilities in fixed income and credit with new technologies and specialized talent.
These investments were mostly offset by a decline in incentive compensation expense as a result of lower revenues.
Adjusted operating income declined 18% sequentially and 26% compared to the 2021 year to date period.
Adjusted net income for adjusted share declined 19% compared to the first quarter and declined 27% compared to 2021 year to date period.
Yeah.
Our financial model was built to flex with fluctuations in global markets.
Market declines were sharp quarter over quarter, our financial model allowed us to continue to focus on the long term rather than react to short term market swings. We are confident that the investments we've made for future growth. During these disruptive periods will be rewarded and will outweigh any negative impact of short term results.
<unk>.
Our balance sheet continues to remain strong and supports our capital management practices and our variable cash dividend payout model.
Over the past year, we have leaned into new strategy launches, putting approximately $60 million of seed investments into new products.
Investing in new strategies is an important component of our future growth.
Accordingly, we currently plan to retain a portion of the 2023 special dividend to fund future seed investments.
Even with the retention of some cash to fund future seed products, we expect our payout ratio will approximate 95% of cash generated.
Consistent with our capital management policy.
Board of directors declared a quarterly dividend of <unk> 60 per share with respect to the June 2022 quarter, which represents approximately 80% of the cash generated.
That concludes my prepared remarks, and I will turn the call back to the operator.
And 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 piece.
To withdraw your question. Please press Star then two and then in the interest of time, we please ask that you limit yourself to two questions and our.
First question today will come from Kenneth Lee with RBC capital markets. Please go ahead.
Hi.
Good afternoon, and thanks for taking my question.
First one is just around the investment capacity just given the current market volatility and all the various dynamics. How do you think about investment capacity across all your various teams and strategies at this point.
Yeah, Hi, Kenneth it's Eric.
Yeah with the you know the current drawdown.
That we've seen in the marketplace.
Uh huh.
Obviously increased capacity in some of our strategies with the drawdown.
The strategies that still remain in high demand, we're going to carefully manage flows.
Always believes that there's been three major drivers of capacity control.
One are really around just the the pure.
Right and speed of which flows come in and sometimes you see our strategy get a high demand in a short period and you have to manage that flow. So it's not disruptive to the integrity of the strategy.
Second you look at channels and regions and so that.
You want to protect against a concentrated flow that comes in.
Likewise, if you look at just the aggregate capacity of our strategy. So those principles still hold there is a few strategies that we have that.
We're in the demand category, but the bulk of their strategies are.
<unk>, some outflow as well as draw down and performance, creating capacity as we look across the entire platform. What we've with the addition of new teams and strategy, we have more capacity than we've ever seen in the history of the firm.
Gotcha.
And then one about the the prepared remarks, you talked about.
Retention of some of the special dividends poor for seed investments.
I'm wondering if you could just.
You know help quantify that amount and perhaps talk a little bit more about the details the presumably this is.
Going for either newer credit strategies or are there any other strategies that you are looking to see in particular thanks.
Yeah, Ken with respect to our.
Future dividends, our quarterly dividend policy at 80% of the cash generated remains the same.
In past years, we have held back.
A small amount of cash to few to to fund.
You know strategies as well as be defensive.
So I think last year, we paid 90, 596% of the cash generated in.
With a little bit of a hold back and we're continuing our work.
We're on track to pay about the same percentage.
Our trailing 12 month dividend yields about 11%.
And.
Even with the whole bag.
We will still have an extremely healthy dividend.
And so you know, we're not talking a whole lot of dollars.
Somewhere in that $10 million to $15 million range.
Got you very helpful. Thanks again.
Yeah.
And our next question will come from Dan Fannon with Jefferies. Please go ahead.
Thanks.
Eric I was hoping you could expand upon.
Some of the comments you made obviously your historical performance has been quite strong curious about the conversations with asset allocators today and how they way.
As longer term track records in periods of alpha generation versus kind of where things sit today.
Yes, Dan Thanks for the question, we did highlight on page three of the deck just.
Our performance strange.
Very short periods of a 12 month period, and then later in the deck of the longer term.
With regards to the shorter period, we used.
A 12 month period.
We looked at three year and five year, but a clouded.
These unique periods.
And looking at the draw down.
And these 11 periods, we highlighted it does produce an opportunity on the back end of that drawdown that we highlighted on our prepared remarks I would also highlight the the three periods, where we didn't produce as a firm a excess re.
Turn to the index were.
Back in <unk>, nine where the index was up 60% a great outcome for clients and we lagged behind at 59% return in 'twenty, two and 2002 index up 30 and were up 23 and 98. It was 32% we were up 30.
Those are pretty sharp V shape recoveries and the client makes out very well in that absolute recovery and likewise, we deal with are a U M. Moving up are with regards to allocators I think with each of these crisis people, who have moved away from a static as Alex.
Patient two than a strategic and I think today, we're seeing a little bit more tactical asset allocation and it's fueled by better services and tools and data and today product to actually execute on those shorter term exposures and.
We've always.
Move to our business towards the strategic allocation and looked for a longer duration clients and haven't managed in that tactical exposure. So we haven't created what we called engineered products, whether it's in an asset class, that's new like crypto or in a factor base that you see the E T.
It's like a momentum based factor ETF exposure or even in our new found like yeah, I'll say innovation energy fund.
That is maybe a hot theme in there.
It allows us to see through it.
Engineered products, you would have to pullback quicker.
Because it's a market timing and distribution.
We can invest through these periods because our strategies are built for the long run.
Got it.
It doesn't surprise us that we have maybe a little bit.
Pause on our inflow, we had about the same.
Gross outflow that we've seen in other quarters. It was really a gross inflow that clients made tactical shifts this quarter and that makes sense to us.
I guess thats, our view and perspective on clients shorter term allocation in our product mix.
Okay.
Great. That's very helpful and I guess just to follow up on your comment around continuing to invest.
Thinking about <unk> kind of levels for non comp expenses is it fair or reasonable for the back half of the year and then also if you could expand upon.
You mentioned distribution and some investments there if theres anything you could highlight in terms of what you're specifically doing that would be helpful. Thank you.
Yeah sure.
Yeah, we're on target with sort of the guidance we gave.
On the January call.
They were primarily around compensation.
Occupancy and technology.
We're right on target with the compensation targets that we set out which was.
About $15 million.
Increase on the fixed side of the comp and benefits.
And then on occupancy intact Tech we gave.
Those areas to be up $5 million to $7 million this year and I'd say, we're on the lower end of that.
What are the top one target from a quarterly basis, you know the one area, where we did see a little bit of an uptick this quarter was which travel travel came back pretty robustly this quarter.
Back to.
Pre COVID-19 levels, we see we see that being close to where we were in the next two quarters, but maybe a little bit lighter in the third quarter, which is typical.
So.
So we feel good with the guidance we have given.
And and we are on track.
To achieve those targets.
With respect to distribution.
It's really been around.
The majority of its been around a new investment teams and strategies.
The new.
The new team and strategies that we've that we've on boarded this year.
As well as sort of accelerating sales in the intermediary space with a with some dedicated.
Internal <unk>.
Resources to target.
To target prospective clients as well as on the digital enablement.
So.
So those you know we're in the early innings of those investments but.
But we've made them this year.
Great. Thank you.
And our next question will come from Eric <unk> with Goldman Sachs. Please go ahead.
Hey, good afternoon. Thanks for the question, Eric I was hoping you could spend a couple of minutes on the opportunity to bring in new teams and new talent in a more volatile environment is that a.
Net positive net negative how are you guys thinking about it today.
[noise] usually of whats with volatility in the marketplace and then more importantly, I think we've continued to see a pretty robust.
M&A activity.
No.
With our M&A activity and with the volatility.
Oh, it's natural for many.
Many people to think about their long term home.
Of where they want to build an investment franchise and where they want to.
Actually reside for their career and so we continue do they have a fairly active dialogue in the marketplace.
<unk>.
Also we're going to be.
Putting a extremely high barred in bar and that dialogue given the amount of capacity, we built in the strategy and the firm and the and the teams that we've brought on.
We've always had a mindset that we <unk>.
Purposely invest in strategies with clear intent that they fit for the long run and we see those through as opposed to designing strategies and throwing them against the wall and hoping they work.
And given the amount of capacity in a number of strategies. We've invested in we're gonna focus are.
Investment operation time on those strategies and.
Being highly selective on new teams that we're looking at right now but the.
The activity is still there and and quite interesting in the marketplace.
Key for us to stay disciplined.
I Gotcha, and then heard you guys on the sort of the commitment to private markets that you've obviously talked to a couple of quarters now so it doesn't sound like anything changing there, but I guess from the balance sheet perspective.
T J I heard you talk about.
Retaining a little bit extra cash nothing too material, but a little bit more than you've done in the past.
<unk> co investor sheet products.
<unk> is the right amount of capital that you guys need to have on the balance sheet.
Just sort of support the growth.
Especially including some of the newer initiatives you have in the marketplace.
Is it Eric and I will jump in and then lets see Jay jump in.
I would add onto the.
So the response.
Really the uptick in seed capital is really driven by asset class, we've been quite fortunate to launch an array of public.
Equity oriented strategies and.
To launch a strategy.
And that asset class a it takes a much smaller amount of seed and we also did it primarily in the U S.
Today, we are operating with investments and array of credit strategies and on top of that.
The demand and interest in the more recent.
The launch of M sites capital group as global demand.
So we've not only increase the amount due to the asset class. We have also increased the amount due to.
The distribution footprint of the firm being.
Outside the U S. As we highlighted the the number of <unk>.
Non U S clients are the emerging market debt global unconstrained is attracting clients and prospects are.
For both of you said that a mutual funds so.
It's hard to normalize that if we move into another asset class or we go back to launching.
Some equity oriented strategies, but the current uptick is really around asset class.
Yeah. The only thing I would add is as you know we have a disciplined approach to seed capital.
They obviously in.
<unk> capital investments to invest in growth support our investment teams and then on the back end.
Our primary objective is to recycle.
At the appropriate time.
So that we can can reinvest in other strategies and that process continues.
Cool thanks, so much.
And our next question will come from John Dunn with Evercore ISI. Please go ahead.
Hi, you guys took the talked about a small amount of clients reallocating in kind of driving the outflows maybe could you talk about a little more about the <unk>.
Different demand dynamics on both the fun side and then the separate account side.
Yes, there's certainly.
Yeah.
Most of the clients that we look to.
To invest in artists and tend to have long term horizons and.
Really the fun side.
Attracts a lot of institutional clients, whether it's in the mutual fund or a use it or a C. T. So we really don't see much of a difference based on vehicles.
We have.
More recently seen.
Really clients thinking about their risk of exposure and so much of the flow that we've seen this last quarter.
Oh, it was due to either a time horizon or risk perspective.
Two clients drove a significant amount of the outflow one was a a sovereign wealth client that was invested with us for less than three years.
And had a shift in allocation I am.
In my view that is not a statement about our strategy given it was only a two and a half year relationship. There was clearly an asset allocation decision there to re weight the portfolio and that client wanted to increase their private asset allocation.
The other larger client was a superannuation that was with us for over seven years.
We outperformed the index over that seven plus year relationship and the client wanted to Derisk.
So that the trend really in our mind is oh.
And evaluation of their overall risk exposure, our strategies across the board it'll lead to high value added strategies to take advantage of risk opportunities and there's an array of clients that want to derisk that and that's what we saw this quarter.
Which is it's fairly natural in a.
Yeah, a draw down like this and at the same time, there was a pause on inflows, which created the imbalance there and.
The logic around.
The outflow, but.
The two clients that extrapolate hopefully it gives a good example of people evaluating time horizon and risk exposure.
Yeah definitely it does thank you.
And then there's probably there's already three strategies.
Is that sufficient for the time being or might we expect some more launches over the next couple of years.
No I that's over the next few years, that's a very sufficient number of strategies. In fact, that's the most we've ever launched with a single team day. One. This this team has as manage these strategies for years and.
At their previous Ah Ah firm and.
Uh huh.
We would expect to see these three through and build some scale into the strategy clear.
Clearly our mindset would be to develop more around the team given their broad capabilities.
But I would expect for the next few years, we're going to really be focused on the three launches.
We are that we put together over the last couple of months.
Got you thanks very much.
And this will conclude our question and answer session also concluding today's conference we'd like to thank you for attending today's presentation and at this time you may now disconnect your lines.
Yes.
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