Q2 2023 Artisan Partners Asset Management Inc Earnings Call

Hello, and thank you for standing by my name is Jason and I will be your 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.

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 artisan partners asset management welcome to the artisan partners asset management business.

Today's call will include remarks from Eric Colson CEO .

Yes.

Following these remarks.

Good question.

Our latest results and investor presentation are available.

Our relations section.

Before we begin I would like to remind you that comments made on today's call.

In responses to questions may include.

Forward looking statements.

These are subject to risks and uncertainties.

Her name is.

It really does help.

D C.

We're not required to update or revise any of these.

Pilot.

In addition, some of.

My remarks today.

References to non-GAAP financial measures.

You'll find reconciliation.

Sure.

The comparable GAAP measures.

I will now turn the call over to Charles Yeah.

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.

Since our founding in 1994, we have methodically delivered quality outcomes for clients.

The business grow and quality returns for our shareholders.

The power of compounding underlies each of these outcomes.

Counting client capital in excess of benchmarks and peers extend client duration and grows our AUM.

Compounding business outcomes with each successful investment team strategy and asset class increases our future opportunity set.

As well as the quality and probability of those opportunities.

Success begets success.

As we compound client capital and business outcomes.

Our shareholders are the residual beneficiaries.

Compounding requires time.

In time requires trust.

Trust is established by communicating who we are and what we plan to do.

Trust is maintained by staying true to our word and by sticking to our philosophy and process.

We strive to do this day in and day out over and over again.

The development of our fixed income capabilities shows how do we compound our business.

The performance of our sixth credit oriented strategies as shown on slide two.

This performance is net of fees.

We launched the credit team 10 years ago in 2013 on the basis of our foundational success in equities.

We partnered with portfolio manager, Brian crew to methodically build a premier credit franchise and.

In turn the credit team has methodically generated high value added returns for clients.

<unk> nine plus years, the artisan high income strategy has generated average annual alpha of 186 basis points after fees.

That is on average a return of 50% more per year than the strategy has been smart index.

The high income strategy has also outpaced peers since inception, the artisan high income fund is ranked number five out of 330 funds and the Lipper high yield category.

On the foundation of our credit team success, we recruited Mike So Rami, Sarah, Oregon, and Mike O'brien, So artisan partners.

'twenty, one and establish the M sites capital group.

With M sites, we launched our second credit oriented team and further expanded our investment platform and it's a sovereign credit FX and greater use of derivatives.

Each of the three <unk> strategies has passed its first anniversary.

The team's early performance and reputation in the marketplace are translating into a healthy level of early interest.

On July one they received their first large institutional mandate.

$425 million investment in the artisan emerging markets local opportunities strategy.

We are making significant progress towards similar foundational investments and the team's endo and global unconstrained strategies.

Slide three shows the year to date AUM growth of our credit oriented strategies.

As of July 15 between the credit team and <unk> capital Group, we have raised a net $1 1 billion from clients and investors.

The pipeline for both the credit team and <unk> capital group is strong and.

And we expect strong business development throughout the remainder of 2023 and beyond for both teams.

It's also worth noting that these investment teams are winning business, that's differentiated alpha generators, not as providers of benchmark hugging exposure.

Dot asset classes.

On mutual fund data year to date high.

High yield bonds bank loan emerging market debt and non traditional bond funds were all in net outflow.

That's in contrast to that headline generating inflows into money market and investment grade bond funds.

This is consistent with who we are.

We are investing with great talent.

This is where they can differentiate and compound capital to deliver absolute return over extended periods of time.

We believe that demographic change and expanding credit opportunity sets bode very well for both the credit and insights team.

In short we believe we are in the early innings with both these investment team with considerable opportunity in front of us.

Yeah.

One year ago, we showed the information on slide four during our second quarter earnings call.

Since our founding in 1994, there have been 12 calendar quarters in which the indexes, which are strategies are compared.

Declined by more than 10%.

On average.

10% quarterly drawdown occurs about every two years they are not evenly distributed over time.

On the way down assets tend to sell off across the board.

Become highly correlated making it more difficult to generate differentiated outcomes in the short term.

Higher correlation on the way down so great opportunity for active managers with extended time horizons here.

Historically, our investment teams have taken advantage of that dynamic.

A year ago, we observe that our firm wide asset weighted performance had exceeded benchmark performance in eight of 11 and 12 month periods following a greater than 10% quarterly drawdown.

We can now update that two nine of 12.

Markets have rebounded from a year ago and in the aggregate we have outperformed.

Looking at three year periods, following a greater than 10% quarterly drawdown, we have outperformed in eight of 10 periods with the outperformance averaging 308 basis points.

Yeah.

The important point is that artisan partners is built for the uncertainty and volatility of financial markets.

In the midst of last year's drawdown, we continue to methodically invest in our investment platform in particular, the build out of the <unk> capital group.

We were patient and play the long game.

We have come out the other side with a healthy diversified business and multiple vectors for future growth.

Slide five shows the since inception performance of our 10 strategies with more than 10 years of performance.

As you go from one year to three year to 10 years and beyond <unk>.

Our record of investment success becomes stronger and stronger.

This is not a surprise high value added investment results required talent plus degrees of freedom plus time.

We attract and retain exceptional investment talent by designing and operating our firm as an ideal long term home for investment talent.

We provide talented investors with a broad and growing opportunity set of asset classes markets and instruments, increasing the available levers for generating return and managing risk for our clients.

And we extend duration by clearly and repeatedly articulating our long term horizon to all of our stakeholders and.

And by putting our money, where our mouth is supporting investment teams through market cycles.

This slide is a good summary of the quality of our investment business. It shows the breadth of performance across teams category and time.

And the repeat ability of our business philosophy and process.

What gets US, particularly excited is that we are applying the same business philosophy and process to the <unk>.

15, artisan strategies not shown on this slide.

Strategies that have yet to reach the 10 year Mark.

We expect our newer teams asset classes and strategies.

Compound client capital with similar success.

And we expect high quality client outcome, we will continue to translate into a high quality outcomes for our business and our shareholders.

I will now turn it over to C. J to discuss our recent financial results.

Yeah.

Thanks, Eric.

<unk> in the first half of the year have been strong driven by higher assets under management, which ended the quarter at 143 billion up 12% from beginning of 2023.

These results reflect the quality of our client and investment centric business model.

So far this year, our investment teams have generated over $3 billion of excess returns for clients about 250 basis points above the weighted average benchmark returns.

How many client assets as markets Rose I think over $14 billion of well to our clients' portfolios and returned $2 3 billion of capital back to investors.

During the second quarter of 2023 global equity and debt markets increased contributing $5 7 billion.

Compared to last quarter.

These investment returns were partially offset by $1 1 billion of net client cash outflows, primarily reflecting outflows separate account global mandate.

Average AUM was 139 3 billion for the quarter up three.

3% compared to last quarter and down 3% compared to the prior year June quarter Yeah.

Year to date average AUM.

AUM was 137 4 billion down 10% from last year.

As indicated on slide eight there were no material changes there a weighted average management fee or AUM mix by asset class or vehicle.

Financial results are presented on slides nine and 10, our complete GAAP and adjusted results are presented in our earnings release.

Revenues in the quarter increased 4% compared to last quarter on higher average AUR and one more day in the quarter.

Compared to the second quarter of 2022 revenues were down 3% on lower average AUR.

Performance fee revenues were negligible for all periods.

Adjusted operating expense for the quarter increased 1% sequentially due to an increase in incentive compensation expense in line with higher revenues.

Partially offset by a decrease in certain compensation related costs that are seasonal in nature.

Seasonal expenses are always highest in the first quarter of each year.

Adjusted operating income and adjusted net income per adjusted share.

With the increased 11% in comparison to the previous quarter.

And declined 10% compared to last year's second quarter.

Year to date revenues were down 10% compared to 2022 on lower average AUM.

Adjusted operating expenses decreased 3%.

2022, six month year to date period.

Due to a decrease in incentive compensation expenses lower revenues.

Partially offset by an increase in fixed compensation costs related to a 6% increase their number of employees compared to June 2022.

The increase in employees has been in line with our strategic growth plans.

Travel expenses continue to increase during the quarter driven by client activity and the hosting of our annual investment Forum, which attracted approximately 300 clients to interact with our investment teams discuss investment perspective.

As a result of lower revenues year to date adjusted operating income and adjusted net income per adjusted share were down 23% compared to the 2022 year to date period.

Full year expense projections remain consistent with the guidance I provided on the February earnings call.

We remain committed to our dividend policy, which returns of capital to shareholders on a consistent and predictable basis through quarterly cash variable dividend payments a year end special dividend.

System with our dividend policy, our board of directors declared a quarterly dividend of 61 per share with respect to the June 2023 quarter, which represents approximately 80% cash generated in the quarter.

During the quarter S&P announced the addition of artisan partners. The S&P Smallcap 600 index effective June 19th.

Do you now see in addition to the index drove a noticeable increase in the trading volume of our stock and along with strong equity markets in June contributed to the 23% share price return experienced in the quarter.

That concludes my prepared remarks, I will turn the call back to the operator.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

In the interest of time, please limit yourself to two questions at this time, we'll pause momentarily to assemble our roster.

Yeah.

Our first question comes from Alex <unk> from Goldman Sachs. Please go ahead.

Okay.

Hey, good afternoon. Thanks for thanks for taking the question.

First I was wondering if you could comment a little bit more around these <unk> pipeline that you guys are seeing especially across some of the newest strategies kind of third generation products that you launched over the last couple of years, and then specifically T. J to the mandate that you guys wanted to $475 million or so any way to frame the fee rate around that thanks.

Great Alex this is Eric.

We've been having a little bit of technical issues can you hear us.

Yes, I hear you guys right.

Perfect. Thank you.

Yeah.

Across the board on the newer strategies.

You know primarily the M sites.

Given the.

Credit orientation in the current.

Outlook on credit when you bought I think we all seen the news around the credit cycle or.

Discussions with clients and consultants around capital market forecasts to asset allocation decisions to manage our structure have all been positive.

So we've been pleased with the.

Dialog and activity, especially around the M sites team and.

As well as the credit team with Brian Kruger as we stated.

The M sites.

Off of a.

Pretty good outflow into the emerging market debt category last year I think it was the largest outflow in the history of emerging market debt.

<unk>, saying, we're starting to see that creep back in which is a nice timing for us.

And we announced a 425 million dollar allocation we have.

A few other fundings that we believe are on track that will.

Helped launch the emerging markets local only as well as the global unconstrained strategies and we continue have a very active dialogue around our credit opportunities.

With continued flow into.

The high income strategy.

<unk>.

Beyond.

The M sites the earlier strategies.

Hasn't been as.

Uniforms, and homogenous says as you see in the credit.

So it's been a lot of.

Give them takes than we see lumpy results around that primarily.

With some of the regulatory changes out there some of the customization.

And it seems that you know the performance or the day rate or the tenure of that client.

It doesn't matter as much as.

Some of the non investment related and we think those are always short term issues.

Structurally if you get the investment right you get the long term comp.

Compounding correct. So we're pleased about where we're at on our performance, especially after the rebound of the draw down a year ago.

And we think across the board.

The newer strategies are well on track.

Anybody else have any other 425 funding.

What was it a good funding for.

The envelope strategy. So I think we hit both of your questions there.

I got you and sorry, if I missed but the fee rate on that one and you know I don't I don't know if any comments around like the fee rate being relatively consistent with the institutional business kind of higher lower on the 425 one.

Yes. They are if it's a large separate account mandate.

So does the fee rate is lower than.

Our expectation on an average fee rate given the size and the initial funding it.

It doesn't change our outlook on how were.

Modeling that and looking at forward.

Yeah.

Sometimes you fund strategies that come through.

The intermediary strategy and come through a pooled vehicle and sometimes you launch with a large separate account. So there's a large separate account and it.

Is below what we would expect.

Okay.

I got you great. Thank you guys.

The next question comes from John Dunn from Evercore. Please go ahead.

Thank you maybe just a little more on the institutional channel can you talk a little bit more about particularly outside of credit just kind of a temperature of consultants and temperature of clients and where they might be looking outside of credit and kind of willingness to.

No to commit two strategies.

Yeah. The yes, the institutional channel we've seen this year to date a bit more of an outflow a little bit more on the separate accounts are especially some large separate accounts and Australia, where.

Are you seeing a.

A bit more regulation.

Round the superannuation, we've seen some.

Outflow and Europe around some customization then.

The.

The importance of ESG.

And in some cases, some asset allocation away from active equity, but I think that's been muted a bit.

So outside of the pure performance.

<unk> institutional.

Separate account is balance.

Balancing our regulatory environment, a customization ESG.

We think in the exchange of kicks that's more on the short term side and at the end of the day, if you deliver quality performance and what we mean by quality is a investment team was stable leadership.

A process with integrity that leverages the investment degrees of freedom to create a differentiated portfolio you have a very.

Secure position in the overall asset allocation long term.

But the current.

Short term, it's still battling non investment.

Oh inputs.

On the institutional side.

Gotcha.

And then maybe could you update us on capacity has there been any changes you know more more or less oh very different strategy.

Yeah.

No we haven't had a whole lot of change on.

Any capacity discussions.

No problem.

The last quarter or year to date.

Great. Thank you.

The next question comes from Kenneth Lee from RBC Capital markets. Please go ahead.

Hi, good afternoon, and thanks for taking my question I'm, just wondering if you could provide any.

Any update outlook in terms of seed capital needs over the near term.

It's sort of like the outlook for any sorts of our new product development are down the pipeline. Thanks.

Yeah with regards to new product development and the demand for seed capital.

Over the last few years, probably launched more strategies than we've done in past years.

We highlighted that we have 15 strategies below the 10 year, Mark and if you look at strategies with less than three years.

We're putting quite a bit of emphasis on the current strategies are aligning resources, we've done a bit of hiring on the.

Our current investment teams if you look at the uptick in head count it's primarily been on.

Our existing it.

Investment teams as opposed to going out and finding new teams. We think there is.

A bit of opportunities out in the marketplace, but the bar is quite high right now.

With.

Our mindset on delivering on what we've created.

So I don't see any.

Real short term movement around.

New teams or seed capital for new teams. However, there are some interesting investment opportunities that are falling out of that.

The current teams we have today and.

The strategies that we've launched and we certainly need some funding around some investment opportunities over the next year.

Based on ideas generated out of our new our current teams.

Hey, Ken you know from a balance sheet perspective, we have capacity to do more from the existing balance sheet. We are we've always said the special dividend is a year end decision last year, we held back $20 million from the special too.

Hercules increase our capacity to seed new products and.

You know we've.

Likely we'll we'll do similar amount then if by capacity or need for seed.

You know exceeds that.

Quite a bit of room left in the special too.

To invest for future growth, which.

Excites us about the ability to put more of our balance sheet to use.

To grow the business in the future.

Gotcha very helpful. There.

And just one one follow up.

If I may.

Just on Antero Pete.

Were there any particular drivers.

For the net outflows that you saw over the last you know call it two quarters or so or or is it you know it's related to the sentiment and market. Thanks.

Yeah, I wouldn't say, there's anything specific on the team as much as the.

Yeah that the concentration in the U S equity markets over the last quarter.

Yeah, I think so.

<unk> been coined a name with the magnificent seven so.

You coined a name and Theres concentration and an index.

Yes.

The competitive landscape over the last quarter.

As it's probably the main driver there.

Got you very helpful. Thanks again.

The next question comes from Michael Brown from <unk>. Please go ahead.

Okay, great. Thanks for taking my questions.

Just a question on the margins here I guess.

First is there any other major investment required around the onsite team or is that mostly done at this point and then your longer term question. There. How do you think about the ability to improve the margins from the current levels over time and when you look forward can that margin get back to that mid to high 30% over time.

I'll take that one yes, certainly we've.

We invested in future growth grows.

Across the.

The <unk> team as well as <unk>.

New strategies.

We've seen our margin declined during that period, there is absolutely the.

The ability to grow the margin given the amount of capacity that exists in the system.

And largely you.

You know from an investment perspective side we've.

<unk> done the heavy lifting on the investments we've got more spend on the distribution side.

I don't think that will I.

I don't think you'll see you know a huge.

Noticeable chunk of spend that will stand out, but we'll continue to invest in distribution and we saw what can happen to our margin you know when our assets spike during the Covid and we went from you know mid.

Mid Thirty's up to 44 just from.

The market action and.

That certainly could happen again, but given the fair amount of capacity that's left in the system. If we if we're able to capitalize on that capacity, we could you definitely should see the margins.

Back in the high Thirty's.

Great. Thank you.

Yes.

You know AI is of course, one of the hot topics and.

The financials landscape these days and certainly sounds like asset managers.

Trying to figure out how to kind of use that generate an AI and more in the process.

How do you guys think about your data data management and the potential for AI and <unk>.

Your processes and how the teams may want to use it is that something that has already been implemented and or is it something that could be a potential opportunity for you guys.

Yes, I think there's opportunity in how we run the business, how we run distribution.

And certainly with regards to some of the investment teams.

You know with the 10 autonomous investment teams and how they incorporate data quantitative tools.

And eventually.

More AI will really be.

Based on each investment teams leadership in their process and their value they see from.

Leveraging AI with regards to the the business and distribution and we were.

Clearly.

And there's pockets from.

No.

<unk> within programming Theres pockets in writing as Parkinson leveraging.

More data into the distribution and.

<unk>.

I think there's great efficiency that can be brought across the business and have to get back to the margin.

I don't think Youll see.

Uh huh.

Our big savings on like our head count in the near term, but the ability of individuals to do more given the data and tools available will be highly productive for the organization.

And then tier investment teams that really wants to leverage and.

Moving to higher use of data and incorporating AI, we will through our.

And investment.

Services group in the middle bring those services to bear to optimize the investment teams.

The hot topic, it's in the early innings, and we're looking at it and probably three different ways.

Okay very interesting thank you.

This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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