Q1 2023 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 conference participants will be given instructions at that time.
As a reminder, this conference is being recorded.
At this time I will turn the call over to artisan partners asset management. Please go ahead.
What kind of to the artisan partners asset management.
<unk> earnings call.
Today's call will include remarks from Eric Colson, CEO and C. J Daley CFO .
Following these remarks, well open the line for questions.
Our latest yourself and Investor presentation are available on the Investor Relations section of our website.
Before we begin I would like to remind you that comments made on today's call including responses to questions may include forward looking statements.
These are subject to risks and uncertainties and are presented in the earnings release and detailed in our S. E C filings.
We are not required to update or revise any of these statements following the call.
In addition, our remarks today will include references to non-GAAP financial measures.
You can find reconciliation of those measures to the most comparable GAAP measures in the earnings release.
I will now turn the call over to our CEO Eric Colson.
Thank you all for joining the call or reading the transcript.
Artisan partners is a high value added investment firm designed for talent to thrive in a thoughtful growth environment.
High value added investing has been core to who we are since our firm was founded in 1994.
We have always managed investment strategies designed to be differentiated with the potential to outperform indexes and peers.
As asset allocations and capital markets have evolved we have expanded the high value added investing we do at artisan partners.
Our financial and business outcomes are downstream of the high value added outcomes, we generate for our clients.
If we generate differentiated value added outcomes for clients as we have historically, we believe successful financial and business outcomes will follow.
Compounding assets under management.
Revenues and profits.
Attractive margins.
Successful careers for our people.
And compelling returns for our shareholders.
These outcomes take time and.
And we are patient.
We recently marked the 10th anniversary of our March 2013 IPO.
Becoming a public company did not change our business philosophy operating model or investment activities.
We have stayed true to who we are.
The long term outcomes have validated our approach to running a business centered on high value added investing.
Yeah.
Slide two outlines what high value added investing means to us.
We identify and recruit exceptional investment talent.
Give that talent the autonomy degrees of freedom and resources needed to execute our unique and differentiated investment program.
We minimize distractions and maximize time spent investing.
We create economic alignment between our investment talent.
Outcomes and business growth.
And we get great investors the time, it takes to execute their process through market cycles and differentiate from others.
Okay.
The combination of these inputs plus time yields high value added results.
Net of fee returns over extended periods to meet clients' goals.
Alpha over passive indexes.
Our performance relative to peers.
Folios and returns that are differentiated and difficult to replicate with exposure products.
We have been bringing together these elements and generating high value added results for over 25 years.
We originally focused on style box and non U S strategies attractive to institutional allocators and intermediaries in the United States.
We then launched a series of global strategies, beginning in 2006 that were attractive outside of the U S.
Beginning almost 10 years ago, we expanded into fixed income and emphasize greater degrees of investment freedom across existing and new strategies.
As we have evolved expanded and diversified our business, we have demonstrated that our philosophy and approach to high value added investing works across generations and asset classes. This.
This gives us leverage to continue to thoughtfully grow our business over time.
High value added investing can have a tremendous impact on client portfolios and wealth.
On slide three we show the outcome of a hypothetical portfolio consisting of $1 million invested at the inception of each of the 28 strategies, we have launched over our history.
The $28 million original investment would have grown to approximately $117 million.
At March 31st 2023 after fees.
That is approximately $44 million or 59, 5% more than a portfolio consisting of the same amounts invested on the same date in each of the strategies corresponding benchmarks.
Yeah.
On slide four we show the performance since inception of our 10 strategies with track records of more than 10 years.
Nine of those strategies have outperformed their benchmark index since inception after fees.
The average annual Alpha of those ninth strategies is 274 basis points after fees.
We estimate that since inception. These strategies have generated approximately 26 billion of excess returns for clients.
That is 26 billion of additional resources that our clients have to fulfill their mission and achieve their goals.
High value added outcomes for our clients drive our long term business and financial outcomes.
We constantly repeat that we are focused on long term results for our clients our people and our shareholders.
As I mentioned earlier this quarter marked the 10th anniversary of our initial public offering.
A decade is a sensible time period over which to assess our business philosophy and our execution of it.
Over the last 10 years, we have generated approximately $16 7 billion in excess returns for clients.
Thrown a U M from 83 billion to 138 billion.
From a quarterly revenue from $148 million to $235 million.
Maintained average annual adjusted operating margins of 39, 2%.
Distributed nearly 3 billion to our owners, resulting in total dividends per share of $32.37 more than our IPO price of $30 per share.
Generated a total annualized shareholder return of 9.81 with dividends reinvested.
Relative to 10.23% for the S&P 500.
6.79% for the Russell 2000.
And 5.49% for the Dow Jones asset managers index.
While generating those financial outcomes, we have evolved our firm to align with secular shifts in asset allocation capital markets as sources of demand for high value added investments.
Since 2013, we have grown from five investment teams to 10.
12 investment strategies to 'twenty, five and from a single asset class to multiple asset classes, including high yield credit long short equity long short credit.
Emerging market debt.
Public private hybrid and global macro.
We have gone from no fixed income to two credit oriented teams and six credit oriented strategies.
We have significantly expanded our international emerging markets and China oriented investment activities.
Launching the developing world Global discovery non U S small mid growth.
International explore.
In China post venture strategies.
Across our entire platform, we have expanded the opportunity set for our investment teams from primarily global public equities to include private equity.
Corporate credit and sovereign credit loans, and a host of derivative instruments.
Today, we have more embedded growth potential than ever before.
Fox 15 investment strategies and their foundational growth phase with track records of less than 10 years.
The total addressable market for high value added investing affords tremendous opportunity.
We have the ability to extend our success and duration and public equities.
And we expect to have similar success across fixed income alternatives and other regions of the world such as China.
It will take time.
But over appropriate time horizons are approach has consistently generated successful client outcomes.
This growth high margins and attractive total returns.
I will now turn it to C J to discuss our more recent financial results.
Thanks, Eric.
First quarter results reflect strong market returns and investment outperformance, which drove our AUM up by 8% to $138 5 billion at March 31.
While revenues improved nicely this quarter compared to the December 2022 quarter, our profitability remained flat as seasonal expenses increased in the first quarter.
An overview of our results begins on slide seven.
Global equity markets rose during the quarter and gross of fees our strategies in the aggregate generated returns of approximately 240 basis points above their respective benchmarks.
As a result, our AUM increased to $138 5 billion at quarter end up 8% compared to the last quarter, but down 13% from the March 2022 quarter.
Investment returns contributed 11 $9 billion to the increase which partially was offset by $1 2 billion of net client cash outflows.
Average AUM was $135 4 billion for the quarter up 6% sequentially and down 17% compared to the prior year March quarter.
There were no material changes in the weighted average management fee AUM.
Mixed by vehicles.
Slide eight presents our AUM by asset class, which is new this quarter and replaces the AUM by generation Slide we have provided in the past.
We believe this presentation provides a better view into our AUR mix as our fixed income and alternative products become a larger portion of our business as we execute on our long term growth strategy.
Okay.
Financial results are presented on slide nine.
Our complete GAAP and adjusted results are presented in our earnings release.
Revenues in the quarter increased 4% compared to the previous quarter on higher average AUM pars.
Partially offset by two fewer days in the quarter.
Compared to the first quarter of 2022 revenues were down 17% on lower average AUM.
Performance fee revenues were negligible for all periods.
Adjusted operating expenses for the quarter increased 6% sequentially due to an increase in certain compensation related costs.
Including those that are impacted by seasonality.
The seasonal expenses are always highest in the first quarter of each year.
In the March 2023 quarter.
<unk> is impacted by seasonality were $6 7 million higher than last quarter.
Compensation expense also increased in line with higher revenues.
Yeah.
During the quarter, we continued to invest in our talent through annual grants of franchise capital when restricted stock Awards.
Over 85% of the awards were granted two investment professionals to align our key talent with clients and shareholders.
On an adjusted basis, which eliminates the mark to market on franchise capital Awards long term incentive compensation expense was $14 3 million in the March 2023 quarter.
Adjusted operating income declined 1% sequentially and 34% compared to last year's first quarter.
Likewise, adjusted net income for adjusted share declined 2% compared to last quarter and declined 35% compared to the first quarter of 2022.
Yeah.
Full year expense projections remain consistent with the guidance I provided on last quarter's earnings call.
Our balance sheet remains strong and continues to support our capital management needs and cash dividend payout policy, our $100 million revolving credit facility remains unused.
Slide 11 highlights our seed investment portfolio.
With the addition of our newest investment team M sites capital use of our cash to seed future growth and new strategies has increased substantially.
Our seed investment book is now $130 million, which includes $18 million of gains on amounts initially invested.
Using cash to seed new products is an important component of our growth strategy.
We are disciplined in our approach to seed investments, particularly with respect to the amount of and duration of seed capital invested in each product.
We are patient and allow products to grow thoughtfully before recycling cash into new investment strategies and vehicles.
And our seed capital needs may continue to grow as we invest in future growth.
Yeah.
We're investing in growth not only by increasing our seed capital and new products, but also by using our P&L to make further investments in talent and operational infrastructure.
While these investments and a short term drag on margins, we remain committed to our dividend policy, which returned capital to shareholders on a consistent and predictable basis through quarterly cash dividend payments and a year end special dividend.
Consistent with our dividend policy, our board of directors declared a quarterly dividend of <unk> 50 per share with respect to the March 2023 quarter, which represents approximately 80% of the cash generated in the quarter.
As Eric emphasized in his prepared remarks, we believe we have more embedded growth potential today than ever before we will continue to strategically invest in our business to support further growth or remain committed to returning a substantial portion of our cash generated to shareholders in the form of cash dividends.
Concludes my prepared remarks, and I will turn the call back to the operator.
Thank you we will now begin the question and answer session.
To ask a question. Please press star one on your telephone keypad.
So from Hughes. Please press Star then two.
We do ask you limit yourself to two questions to allow for more questions.
We'll pause momentarily to assemble our roster.
Today's first question comes from Mike Rahm, Okay. BW. Please go ahead.
Okay, great. Thank you for taking my questions.
Eric and CJ I was hoping to maybe get a little bit more color on.
The trends that Youre seeing on the separate account side of the business where were the outflows.
Do you need to persist.
The conversations have evolved with clients here and how does the sales pipeline books.
Yeah, Hi, Mike It's Eric.
Yes. This quarter, we thought was another noisy corner makes it really difficult to extrapolate the future.
As you saw in the.
Update we had a negative 1.2 billion of net flow for the quarter.
We also had when we when we broke this down we had eight clients with about 1.2 billion that hired US and then terminated us with less than a three year performance records across seven different investment strategies.
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Yeah Yeah.
Yeah, well I think market volatility provides us a great opportunity as an active manager to differentiate or.
Some reasonable time period.
But the more uncertainty that we've experienced in the inflation with the Russia, Ukraine War to the policies in China.
Coupled with everybody's short term orientation lately, it's kind of caused havoc on allocators decision, making process and providing those reasonable timeframe. So.
Looking at that the most recent quarter that.
We just continue to think that noise is it's hard to predict going forward.
With regards to activity on a look forward.
We oh.
Are coming off of a.
2022 year that saw outflows across most equity and fixed income and even the 60 40.
Portfolios and.
Clearly emerging market debt and high yield categories on the debt side saw.
Elevated outflows and we're starting to see interest back in the fixed income for.
For our client base, primarily institutional that process is anywhere from six to 12 months and we have a very.
Very strong dialogue in the institutional.
Marketplace and some of the gatekeepers in an intermediary in the credit space. So we're optimistic there.
Yeah.
Okay, great. Thanks for the color there.
My follow up you know first of congrats on 10 years ago.
Comprehensive a great achievement and just wanted to kick it.
Well, it's kind of a high level question queue here so.
When you guys look back at your.
Last 10 years, what do you think is kind of the most impactful changes you've implemented it at any time and then as you look forward for the next 10 years.
Could the evolution of the company differ from the Paas and where are you. Most excited about what are your kind of key priorities as you look at that longer term horizon.
Yeah, Mike I guess I would tell you take it the other way I think the area that I look at that we're the most proud of is the ability.
To go from a private to a public company and stay true to who we are because honestly, that's what got US the first 15 plus years.
To be successful and to be able to replicate that as a public company and to continue to attract.
World Class talent.
And be able to resource them in position that with the most sophisticated.
Clients that conduct.
Hours and hours of due diligence to make those decisions, we're extremely proud of and that consistency and that consistency creates enormous predictability for our shareholders to continue forward and I think that's an enormous achievement going from private to public and maintaining that stability and consistency for you.
Our employees, our clients and for our shareholders I look forward and say artisans are highly predictable organization and can these 10 years to be replicated and I believe the answer is yes.
Okay, well said, thank you for taking my question.
Thank you and our next question today comes from John Dunn with Evercore ISI. Please go ahead.
Thank you.
The international value strategy flipped to units.
You are quite positive quarter I mean.
Can you talk about what spurred that in and where maybe the flows were sourced from.
Yes, certainly yeah, you know the international value strategy, we've had some exchange of kicks over the last few years of growth and value.
We saw quite a few of our existing clients and international value want to reallocate to the value category. So the bulk of those flows were existing.
Clients increasing allocations.
As well as some consultants that have known us for quite some time and in this strategy.
Yeah, rebalancing, then putting that into international values. So.
The rebalancing coupled with the extremely favorable performance results and our strategy relative to the index and peers.
<unk> created.
That's the flow number four.
Really last year and continuing into the first quarter.
Got you and then just more broadly on the funds side got better quarter over quarter can you talk a little bit about the shifts that hadn't been between the two quarters and then looking forward what kind of.
The funds.
Intermediary side.
Our mindset is.
As we go into the second quarter.
Yeah.
Yes, certainly I think when you break down the separate account and the mutual fund break down and I think you're probably highlighting that that category and more specifically in the broker dealer had positive flow versus the other categories.
I think we have a strong allocation of clients in the broker dealer of high value and high income and those two strategy and asset base.
Saw the flows in that that's reflective of their client base.
And do you think that that might continue.
Demand for those strategies.
I think quarter over quarter.
It tends to be very consistent.
And.
It's hard to predict the future, but using changes in looking through quarter over quarter changes. They don't happen overnight. So I would say that that would probably have a positive lean both on those those strategies as well as that category.
But you are coming off of.
The first quarter, where there is some asset allocation shifts.
That might dampen it going into second quarter and third quarter.
Makes sense. Thank you very much.
Thank you and our next question today comes from Bill Katz of Credit Suisse. Please go ahead.
Excellent. Thank you very much and happy anniversary, Indeed, I feel old all of a sudden so just on slide eight and thank you for recasting. It. This way, it's one of the ways, we track it as well.
When you think about growing the fixed income and all its buckets. There both small so I think they both offer pretty good organic growth potential or just growth potential.
Do you need to amplify the opportunity.
To maybe a more acquisitive approach or a faster ramp of teams or product.
So the other side at least speak to some of the pure play alternative managers. They do speak to the fact that L. PS wanted generally consolidate with fewer larger G piece and I'm just wondering how you sort of.
Reached the opportunity here, just given the size versus the Tim. Thank you.
Yeah. Thanks, Bill for the question I we.
We do believe in the Tam that you just highlighted.
I think as you know in our history. We don't we don't believe you can short circuit success by.
Identifying the category and hoping that some of the available at that moment in time and marry that Tam with whatever is available and think it's going to fit in to your organization.
We do believe that the Tam will be there for quite some time and if you look at our seed book, which I think as generated extraordinary returns both on an absolute and on a relative basis.
Hum.
Yes, we've always looked at that as a driver of growth and we protect we resource and nurture. These early strategies. So that we compete on a three and five year record, which is what most allocators use.
Whether youre building it or acquiring it or is that time of settlement, we like the idea of.
Taking that three year approach versus trying to acquire and convince people that it fit and over the one and two year and by just trying to get the three you you have <unk>.
Growth potential, but if you just look at our current seed bulk the bulk of the dollars there and what's on page 11 66 million is in our fixed income strategies. The bulk of that say $50 million is N. R. M sites M Doe and M low strategies.
We've turned $50 million and the 55.
With after one year returns of 11, eight and 10 seven Theyre very strong results and I think we're.
Getting the activity that we want and by the time, we get to that three and four year number we're going to we're going be able to capture that Tam likewise on the Alt space, we have 44 million N.
The bulk of that money is in credit ops as well as global unconstrained and again, they have strong performance of roughly 8% and 10% and 7% 800 bps of alpha over their indexes.
I think we're well positioned than you know the timeframe we look at.
We're going to be able to back up that breakdown of.
Assets by.
Equity fixed income and alternatives and the fact that we're willing to do that I think is a very strong signal of our confidence in our ability to grow.
Okay, well, one more big picture for you only only because you put the slide in the in the presentation, but just to play Devil's advocate for a moment on the stock return toward touring slide.
Your relative performance to the S&P is a push and so I think they've been sort of two areas of headwinds more conversation with clients. One is just the sustained ability to grow organically or desire to grow organically and secondly, the capital policy capital return policy as you think about the next 10 years.
Is there any thought here of letting organic growth run a little bit more durably is that an opportunity and then any alteration to the capital return policy. Thank you.
I think the organic growth is always going to be a fallout of the capacity of our strategies on the alpha and the ability to generate alpha.
As you've known over the years, we would and the exchange of kicks, we'd rather drive.
Both of the firm through alpha than just pure flows so that'll that'll naturally ebb and flow based off of the strategies and teams that we bring in and there's no set target just to create flows for the sake of flows.
With regards to the capital policy.
Do believe that as we get into credit and into alternatives there'll be a higher demand.
On reinvesting in these opportunities whether it's in the strategies themselves or even co investing.
And idiosyncratic or unique opportunities that are.
Made available through our existing teams.
So on a go forward I think the capital policy will require more seed and more investment.
But that would build over time, we don't see a dramatic change in that year over year, it's going to be a natural evolution as we evolve into credit and into alternatives.
C J you would add.
Obviously, you can see our seed book has increased.
Significantly over the past 18 months as we've gone into these areas, which.
Which is I think just a proof point of of what Eric has said, but we're committed to.
Our capital policy, we would expect our payout ratio to remain very high it's been 90% to 95%. The past two years previously it was 100%. So we've demonstrated our willingness to use the balance sheet for future growth.
Thank you.
Thank you and our next question today comes from Alex Blaustein with Goldman Sachs. Please go ahead.
Hey, guys. This is Luke on behalf of Alex I. Appreciate the time for the question. So real quick performance has been strong start the ear, both absolute and on a relative basis have you noticed this influencing conversations to start the year and are there particular.
Particular strategies, where performance has been a bigger driver than others or is everything more of a macro driver right now.
Yes, Luca Zurich.
I think we're still in the the macro drivers as we've talked about the.
The flows around the noise.
In the short term nature of people trying to find their footing.
I think really it's waiting for the macro drivers to settle a bit clients and allocators they get their footing and the strong results are just an embedded growth option for us.
Once clients get to the spot of allocating we see quite a bit of due diligence work and interest.
Looking forward.
But nothing.
Tangible to stay stayed on this call.
Okay.
No that makes sense. Thanks.
And you know I appreciate the additional disclosures you guys have given based on some of the changes you've made to the slides this quarter. It seems like there's a little bit more of a focus on presenting fixed income and alternatives separately I guess big picture are there any longer term plans you guys have for building out. These two segments and then how are you thinking about them longer term.
Thanks.
And does the main main.
Two points here is.
One that the.
Fact that that the.
The firm has now.
Two.
Fixed income teams in fixed strategies.
And the.
Trend of investment degrees of freedom running through the organization.
That depth and breadth has given us the confidence to break out the assets in this manner.
And then secondly, as we see the industry trends are we look at the early stage performance and in our strategies in these categories and our history of being able to deliver.
We're confident we can back up growth in these.
Categories on a go forward basis, but.
We're not signaling any activity that we're going to short circuit with the with an acquisition, we're going to do it in the manner.
That's made us successful in the past.
Which requires time and we're happy to operate under that time horizon.
Makes sense. Thank you.
Thank you and our next question today comes from Kenneth Lee RBC capital markets. Please go ahead.
Hi, Thanks for taking my question just a follow up on the seed capital and their remarks upon the the growth there.
Wonder if you can just further expand upon.
Any outlook in terms of further growth within seed capital and is the expectation that there could be more meaningful growth within the fixed income and alternative sides and you know could you just talk about how would you quantify any potential seed capital needs over the near term. Thanks.
Yeah.
Currently we feel very comfortable with the amount of seed capital, we have and how it's deployed.
We think the allocation of seed.
And.
The early stage results.
Or are both promising for the for our future growth.
At this current stage, we don't need any additional seed assets.
We have.
Probably.
10, 10 to 12 strategies in the seed book.
And.
The emerging market that is created.
A lot of reinvestment in the operations and in our distribution.
The things that you have to do to continue to bring in investment talent.
Be successful with the current seed book.
The more we can demonstrate that we can grow.
Income strategies as well of alternative strategies, we're going to get greater and greater interest of talented.
Fixed income and alternative managers that are outside the firm.
So our approach right now is to stay committed to this the seed book see through on delivering growth.
Across these strategies and remain patient for new talent to join the firm with.
A directional interest and credit and alternatives as well as potential regional investment teams are in Asia.
Yeah.
Got you very helpful. There and just one one quick one.
Regarding the ongoing efforts to expand the fixed income and in the alternatives I think a while back.
You had made some investments in terms of the investment platform. The analytics I'm just wondering at this point is there a pretty good base at this point or could there be potentially further needs for it for investments on the technology side with the platform side too.
Accommodate for for newer strategies over time thanks.
Yeah, Ken I'll take that one.
We looked at that processes is sort of evergreen ongoing I will continue to.
To reinvest back into the business I think you're likely answering you're asking that question from an expense outlook and we're still committed to the guidance. We gave last quarter on expense levels for 2023, So there's no change.
You know in the expense outlook, but you know and are all the plans that we have to reinvest in the infrastructure of this year are baked into to what we've guided.
Got you very helpful. Thanks again.
Thank you and ladies and gentlemen. This concludes today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Yeah.