Q3 2023 Artisan Partners Asset Management Inc Earnings Call

Hello, and thank you for standing by my name is Jason and that will be your conference operator today.

This time all participants are in a listen only mode. After the prepared remarks management will conduct a question and answer session and conference participants will be given instructions at that time.

As a reminder, this conference call is being recorded at this time I will turn the call over to artisan partners asset management.

Welcome to the artisan partners asset management business update and earnings call.

Before we begin today I would like to remind you that comments made during today's call including responses to questions may include forward looking statements.

These are subject to known and unknown risks.

And uncertainties, including but not limited to the factors set forth in our earnings release and detailed in our SEC filings.

These risks and uncertainties may cause actual results to differ materially from those discussed in the statements and we assume no obligation to update or revise any of these statements following the presentation.

During today's call, we will be discussing our investor day, which took place on September 27th in New York and online.

Materials from the Investor day, and a replay of the presentation are available on our Investor Relations website.

Investor Day presentation also included forward looking statements that were current as of the time. They were made but have not been updated to reflect any changes in circumstances.

In addition, some of our remarks today will include references to non-GAAP financial measures you can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, and the supplemental materials, which can be found on our investor Relations website.

Also please note that nothing on this call constitutes an offer or solicitation to purchase or so an interest in any artisan investment product or a recommendation for any investment service.

I will now turn it over to Eric Colson, our CEO.

Thank you for joining the call or reading the transcript.

September 27th we held our first Investor day.

After more than 10 years as a public company. We wanted to review of who we are as an investment firm.

Describe how we have evolved our business and compounded wealth for clients and highlight the team and platform we have in place for future growth.

Middle of the Investor day was the power of quality compounding.

Wanted to reinforce the power of compounding the eighth wonder if the world.

And reinforced the power and potential of artisan partners. It firm designed and operated the compound wealth careers and outcomes over a long periods of time.

As an illustration a hypothetical portfolio of 1 million invested at the inception of each of artisan 28 strategies wants to clients would have grown to nearly $117 million net of fees as of September 32023.

This amount is nearly $43 million or 58% more than if the same amounts had been invested in the passive benchmarks, most often used to assess our strategies performance.

That's a good example of the power of compounding and our long term performance of artisan partners.

Another goal of our Investor day was to introduce more members are of our business management team.

We have a group of senior leaders, who know the investment industry and are aligned with who we are as a high value added investment firm.

This group gives us the breadth and depth to continue our repeatable franchise development process.

Further expand our investment and business capabilities.

And keep the compounding process going long into the future.

At the Investor Day, Jason Gottlieb, our president, let a detailed discussion of our franchise development process, the positioning and potential of our existing investment strategies in areas, where we may expand in the future.

Hey, Jason is joining CJ and me and I have asked him to update you on the status of our credit oriented business as well as opportunities we see in emerging markets.

Thank you Eric our expansion into credit as a case study in a repeatable franchise development process.

Slide two should look familiar it shows the spaces, we are focus on and our methodical build out in these areas.

As we discussed at the Investor day, we pursue asset classes, where we see the overlap of exceptional talent large investment opportunity sets for differentiation and alpha generation large addressable markets with long term allocators.

Good fit with our strategic expansion of our business model and operating platform.

10 years ago, we did not have any of these capabilities shown on this slide.

We have an investment offering in each of these areas except private credit.

Earlier this week, we completed the first close of the artisan dislocation opportunities fund.

The fund is a closed end drawdown vehicle managed by Brian crude and the credit team.

Throughout his career, Brian has exploited opportunities in dislocated markets.

Dislocation opportunities fund is designed to provide clients with targeted access to this core competency of the team.

When I think about the lineup on this slide what is most notable to me is that we have demonstrated that our philosophy and process works for our clients and talent beyond public equities.

In short these strategies have performed.

Since inception, and after fees. The high income strategy has delivered 193 basis points of average annual alpha.

Credit opportunities 751 basis points.

Floating rate 50 basis points.

Global Unconstrained 603 basis points.

Emerging market debt opportunities 939 basis points and emerging market local opportunities 255 basis points.

During the third quarter, we continued to capitalize on this success and grow these businesses.

We on boarded a $425 million institutional account in emerging market local opportunities.

We on boarded a $250 million institutional account in global unconstrained.

And the high income strategy had another strong quarter of flows bringing year to date net inflows to over $1 billion for that strategy.

Looking ahead at the near term, we are particularly focused on credit opportunities and global unconstrained strategies, both have outstanding track records with differentiated portfolios.

We will also continue to round out and further diversify the high income business and execute on early opportunities for the M sites capital group.

While we have made significant progress in expanding our credit capabilities.

We are still in the early innings.

Have a tremendous opportunity with our two existing teams.

And there is great potential to leverage our operational platform with additional fixed income talent.

As we move forward, we expect to do more in high value added credit, but we will remain patient for the right opportunities that are consistent with our repeatable process.

Turning to slide three with the addition of the M sites Capital Group. We are now offer five emerging markets investment strategies.

We refocused on equities and two focused on credit.

We don't quote global unconstrained as an E M strategy, given its broad mandate to seek return and manage risk across developed and developing markets.

It is no secret that emerging markets investing has been rough.

Over the last decade, the MSCI EM equity index has returned 2.07% annually.

Impaired to 755% for the equity index and 11.91 for the S&P 500.

Well it was haven't been good either.

In 2020 to 90 billion flowed out of the EM debt strategies, and 4 billion float out of the EM equity strategies.

2023 has seen a continuation of these trends in the EM debt with E M equity you're seeing modest inflows.

We take a long term approach.

Emerging markets accounts for over 40% of global GDP, and even greater share of global growth.

Emerging markets offer us a large and growing investment opportunity set.

There is ample opportunity for differentiation and alpha and clients want and need active risk management.

Yes, allocators of dialing down M allocations, right now, especially to China.

But long term, we believe that emerging markets will be an important source of return and diversification for a sophisticated allocators.

While others are retrenching from emerging markets, we continue to move forward carefully and with discipline.

We have long experience in emerging markets, we launched the artisan sustainable emerging market strategy, and 2006 and artisan developing world strategy in 2015.

More recently in addition to launching the M sites capital group.

We have built out of our China post venture team with seven individuals' operating out of our Hong Kong office.

Our developing world team now has talent in Hong Kong as well and we recently obtained regulatory approval to execute trades from Hong Kong and placed our first trades from there in October.

We have no illusions about the challenges presented by geopolitics and China in particular.

These take judgment and patients to navigate.

But we.

We have never tried to time markets or short term demand.

We look for the overlap of talent opportunity and business fit when we find it we can before we build and we remain patient.

Over the long term, we continue to believe that emerging markets will present opportunities that allocators want and need to access we have today and will have in the future a compelling lineup of talent and strategies to fit those needs.

Thank you Jason.

Slide four summarizes our gross since 1995.

Our growth has been a function of compounding wealth for existing clients, adding new capabilities and assets overtime and patients.

As we've added investment capabilities and assets, we've invested in the distribution capabilities that support them.

At the Investor day listeners heard from our head of global distribution, Chris crime.

Our distribution model was a hybrid approach.

Additionally, our investment team specific business leaders have marketed and serviced institutional clients and consultants.

While our centralized sales teams have marketed and serviced their own channels or geographies.

We have hired excellent people.

Provided compelling incentives and sold and serviced across multiple channels and geographies with modest head count and total spend.

Overtime.

The number and complexity of our investment strategies has grown considerably.

And historical distribution channels are converging, making distinctions like institutional and intermediary less relevant.

But it takes to sell and service as a sophisticated asset allocator is increasingly similar.

Whether it's a pension fund institutional consultant broker dealer research department or family office.

We are involving to increase intentionality and focus.

By improving the alignment between our distribution professionals content and marketing and data.

We will continue to have high caliber talent and compelling incentives.

We are creating more structure and coordination more clearly delineating sales and service responsibilities we.

We are clarifying sales priorities.

We are producing more investment content and better coordinating that content with sales and service efforts.

And we are collecting generating and using more data to improve the effectiveness and efficiency of our sales and service groups.

Let me give you two examples to illustrate this evolution.

First we recently hired our first individual to focus exclusively on marketing our alternative strategies.

As near term focus is on marketing and the credit opportunity strategy as well as related co investment style opportunities that are a derivative, but what the credit team does such as dislocation opportunities.

Second we are identifying specific strategies, where we have compelling near and medium term opportunities and aligning people resources content and data to increase our focus and improve our feedback loops.

These more structured marketing efforts increased the probability of near and medium term success and serve as a model for the future.

All of this evolution is consistent with who we are and how we have historically evolved we have always sought to align people resources incentives and opportunities.

At the Investor Day. We also described why we are confident we will continue to compound wealth for clients scale, our newer strategies add additional capabilities and continue to generate high quality outcomes for our clients employees and shareholders.

We have expanded across more investment teams asset classes and geographies.

We have a repeatable process for identifying recruiting on boarding and partnering with investment talent.

Jason: 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.

Our operational platform has more capabilities than ever we're evolving our distribution model and we have in place a business management team with deep industry and artisan specific experience that is extremely well positioned to move us forward.

Jason: After the prepared remarks, management will conduct a question and answer session and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded.

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

Unknown Executive: At this time, I will turn the call over to Artisan Partners Asset Management. Welcome to the Artisan Partners Asset Management business update and earnings call. Before we begin today, I would like to remind you that comments made during today's call, including responses to questions may include forward looking statements. These are subject to known and unknown risks and uncertainties, including but not limited to the factors set forth in our earnings release and detailed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements and we assume no obligation to update or revise any of these statements following the presentation.

Thanks, Eric.

The decline in equity markets during the quarter drove our assets under management down to $136 5 billion as of September 30th.

That's a 5% decrease from the June 30th a U N.

And 7% higher they're a U M at the start of 2023.

Declines in global market indices contributed meaningfully to the decline in our a O N.

Net client outflows, primarily in global equity mandates also contributed to the AUR declines.

Yeah.

Average AUM was $142 2 billion for the quarter up 2% compared to last quarter and up 7% compared to the prior year September quarter.

Year to date average AUM was 139 billion down 5% from last year.

Unknown Executive: During today's call, we will be discussing our investor day, which took place on September 27 in New York and online. Materials from the investor day and a replay of the presentation are available on our investor relations website. The investor day presentation also included four looking statements that were current as of the time they were made but have not been updated to reflect any changes in circumstances. In addition, some of our remarks today will include references to non-gap financial measures. You can find reconciliation of those measures to the most comparable gap measures in the earnings release and the supplemental materials which could be found on our investor relations website.

Our complete GAAP and adjusted results are presented in our earnings release.

Revenues in the quarter increased 2% compared to last quarter on higher average AUM.

Compared to the third quarter of 2022 revenues were up 6% on higher average AUR.

Performance fee revenue has been insignificant since 'twenty 'twenty. One we are on track to earn some performance fees in the fourth quarter. Although the amounts remains relatively small it was only 3% of our U M have performance fee billing arrangements.

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

Adjusted operating income increased 4% in comparison to the previous quarter and increased 5% compared to last year's third quarter.

Unknown Executive: Also, please note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any artisan investment product or recommendation for any investment service.

On a year to date basis revenues were down 5% compared to 2022 or lower average AUM.

Adjusted operating expenses were generally flat compared to the 2022 nine month period.

Eric Colson: I will now turn it over to Eric Colson or CEO.

The decrease in incentive compensation expenses on lower revenues was offset by an increase in fixed compensation costs related to annual merit increases and a 6% increase in our number of employees compared to September 2022.

Eric Colson: Thank you for joining the call or reading the transcript. On September 27, we held our first investor day. After more than 10 years as a public company, we wanted to review who we are as an investment firm. Describe how we have evolved our business and compounded wealth for clients and highlight the team and platform we have in place for future growth. The title of the investor day was the power of quality compounding.

Our head count increases continue to be in line with our strategic growth plans and we're primarily targeted to investment distribution and marketing teams to support our growth initiatives.

Travel expenses remain around 35% higher than last year, driven by increased travel related to our global investment strategies and client activity and firm events such as the Investor Day, we held in late September.

Eric Colson: We wanted to reinforce the power of compounding, the eighth wonder of the world. And reinforce the power and potential of artisan partners. It firm designed and operated the compound wealth, careers and outcomes over a long period of time. As an illustration, a hypothetical portfolio of 1 million invested as inception of each of artisan 28 strategies launched to clients would have grown to nearly 117 million. Netaphees as of September 30, 2023. This amount is nearly 43 million or 58 percent more than if the same amounts had been invested in the path of benchmarks most often used to assess our strategy's performance. That's a good example of the power of compounding and the long-term performance of Artisan Partners.

As a result of lower revenues year to date adjusted operating income and adjusted net income per adjusted share were both down 15% compared to the 2022 year to date period.

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

Turning to slide 10, our balance sheet continues to support our operations and seed capital needs and provides a healthy cash dividend.

Currently have approximately $140 million of seed capital invested in sponsored investment products with significant amounts of realizable capacity.

Eric Colson: Another goal of our investor day was to introduce more members of our business management team. We have a group of senior leaders who know the investment industry and are aligned with who we are as a high-value added investment firm. This group gives us the breadth and depth to continue our repeatable franchise development process, further expand our investment in business capabilities, and keep the compounding process going long into the future.

The ability to support all of these objectives is only possible because of the strong cash flows generated by our business.

In addition, the $100 million revolving credit facility remains unused.

Given the rise in interest rates, our excess working capital cash contributed an additional $3 5 million of interest income in 2023 compared to the 2022 year to date period.

Consistent with our dividend policy, our board of directors declared a quarterly dividend of <unk> 65 per share with respect to the September 2023 quarter, which represents approximately 80% of the cash generated in the quarter and an 8% annual dividend yield based on our recent stock price.

Jason Gottlieb: At the investor day, Jason Gottlieb, our president, led a detailed discussion of our franchise development process, the positioning and potential of our existing investment strategies, and areas where we may expand in the future.

Jason Gottlieb: Today, Jason is joining CJ and me and I have asked him to update you on the status of our credit-oriented business, as well as opportunities we see in emerging markets. Thank you, Eric. Our expansion into credit is a case study in our repeatable franchise development process. Slide 2 should look familiar. It shows the spaces we are focused on and our methodical build-out in these areas. As we discussed at the investor day, we pursue asset classes where we see the overlap of exceptional talent, large investment opportunities sets for differentiation and alpha generation, large addressable markets with long-term allocators, and good fit-with or strategic expansion of our business model and operating platform.

Before factoring in the special annual dividend, we intend to declare in January.

Our board will consider the declaration of an annual special dividend at our January 2024 Board meeting.

We expect we will retain some cash from the special dividend as we have in the past several years to support our growth initiatives.

In the fourth quarter, we expect the artisan funds to complete their annual income and capital gains distributions based on our current estimates and assumptions, we expect fourth quarter distributions to result in approximately $400 million of net client cash outflows from investors, who choose not to reinvest their distribution.

Okay.

Jason Gottlieb: Ten years ago, we did not have any of these capabilities shown on this slide. Today, we have an investment offering in each of these areas except private credit. Earlier this week, we completed the first close of the Artisan Dislocation Opportunities Fund. The fund is a closed-end, draw-down vehicle managed by Brian Krug and the credit team. Throughout his career, Brian has exploited opportunities in dislocated markets. This location opportunities fund is designed to provide clients with targeted access to this core competency of the team.

As highlighted in our recent Investor day growth is not linear and it takes time and patience and we continue to demonstrate the patience and discipline to grow our business over time to produce durable and high quality results.

Slide 12 illustrates the results of our business model and philosophy.

We have delivered quality outcomes for our shareholders since our IPO 10 years ago.

We are confident that our commitment to investing in our business will drive future growth.

And we remain focused on returning capital to shareholders to generate quality outcomes over long time periods.

Jason Gottlieb: When I think about the lineup on this slide, what is most notable to me is that we have demonstrated that our philosophy and process works for clients and talent beyond public equities. In short, these strategies have performed. Since inception and after fees, the high-income strategy has delivered 193 basis points of average annual alpha, credit opportunities, 751 basis points, floating rate, 50 basis points, global unconstrained, 603 basis points, emerging market debt opportunities, 939 basis points, and emerging market local opportunities, 255 basis points.

With that I will turn the call back to the operator.

Thank you we will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

If you're using a speaker phone 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 to allow time for other questions. At this time, we'll pause momentarily to assemble our roster.

Okay.

And our first question comes from John Dunn from Evercore ISI. Please go ahead.

Jason Gottlieb: During the third quarter, we continued to capitalize on this success and grow these businesses. We onboarded a $425 million institutional account and emerging market local opportunities. We onboarded a $250 million institutional account in global unconstrained, and the high-income strategy had another strong quarter of flows bringing year-to-date net inflows to over $1 billion for that strategy. Looking ahead at the near term, we are particularly focused on credit opportunities and global unconstrained strategies, both have outstanding track records with differentiated portfolios.

Thank you.

Maybe you spend a little time, just kind of framing for us the puts and takes of the institutional side of the business.

You know everybody at this moment and then maybe just a flavor of the kind of consulting and institutional mindset and how conversations are going right now.

Yes, sure John It's Eric.

The.

I was just backing away even above the institutional marketplace and we've come off of a pretty big draw down in 'twenty two.

And then a lot of uncertainty here in 'twenty three so we've seen.

Jason Gottlieb: We will also continue to round out and further diversify the high-income business and execute on early opportunities for the M-Sites capover group. While we have made significant progress in expanding our credit capabilities, we are still in the early innings. We have a tremendous opportunity with our two existing teams, and there is great potential to leverage our operational platform with additional fixed income talent. As we move forward, we expect to do more in high-value added credit, but we will remain patient for the right opportunities that are consistent with our repeatable process.

In general muted flows compared to 20 want to 2020 one.

So the.

The bigger flows that are happening in the institutional side are sticking out a little bit more primarily they've been non U S.

Clients in our larger global equity strategies.

That had been rebalancing or de risking or.

Acknowledging that there's been regulatory change, which has occurred more in Australia.

So you've seen more activity there and as we.

Look at the.

Jason Gottlieb: Turning to slide three, with the addition of the M-Sites capover group, we are now offering five emerging markets investment strategies, refocused on equities and two focused on credit. We don't include global unconstrained as an EM strategy, given its broad mandate to seek return and manage risk across developed and developing markets.

So put it in the take the the flipside is looking forward and there there's quite a bit of cash buildup that we've seen in money market funds, we're starting to see more people look at their targeted asset allocation and where to put that to work. So one of the areas. We're looking at on a go forward as people rebalancing back to them.

Jason Gottlieb: There is no secret that emerging markets investing has been rough. Over the last decade, the MSEI EM equity index has returned 2.07 percent annually, compared to 7.55 percent for the AQUI index and 11.91 for the S&P 500. Both have been been good either. In 2022, 90 billion float out of the EM debt strategies and 4 billion float out of the EM equity strategies. 2023 has seen a continuation of these trends in EM debt, with EM equity seeing modest inflows.

<unk> markets and rebalancing into areas of interest, which is a fixed income and alternatives and more recently you've seen a pickup in the dispersion of.

And.

Individual securities within indexes, showing and interest are leaning towards active management.

So I think the muted year so far.

With an expectation of a money getting put to work next year back to targeted asset allocation.

Jason Gottlieb: We take a long-term approach. Emerging markets accounts for over 40 percent of global GDP and even greater share of global growth. Emerging markets offers a large and growing investment opportunities set. There is ample opportunity for differentiation and alpha and clients want and need active risk management. Yes, allocators are dialing down EM allocations right now, especially to China.

Got you and then maybe just on the three new mandates are there you got recently.

Maybe just because it seems like they came together pretty quickly like could you give us a flavor of how those.

It came to be and then also is there more.

We expect some more activity in those three.

Three areas in the medium term.

Yes, certainly we are as everybody is aware we brought on the M sites capital group and focused on the E M dead as well as the global unconstrained.

Jason Gottlieb: A long-term, we believe that emerging markets will be an important source of return and diversification for a sophisticated allocator. While others are retrenching from emerging markets, we continue to move forward carefully and with discipline. We have long experience in emerging markets. We launched the Artisan Sustainable Emerging Market Strategy in 2006 and Artisan Developing World Strategy in 2015. More recently, in addition to launching the MCI's capital group, we have built out our China Post Venture team with seven individuals operating out for our Hong Kong office. Our developing world team now has talent in Hong Kong as well. We recently obtained regulatory approval to execute trades from Hong Kong and placed our first trades from there in October.

Uh huh.

The type of investments and out and emerging market debt.

Either requires a larger scale separate account or a pooled vehicle.

The earlier.

Investments have been in the larger separately mandated.

We.

Have a good interest in the institutional marketplace around these mandates and we're starting to build a nice track record in the pooled vehicles and expect that we would have a a forward lean in a smaller allocations into the pooled vehicle.

It is our expectation there. So we we think it's a.

Jason Gottlieb: We have no illusions about the challenges presented by geopolitics and China in particular. These take judgment and patience to navigate. But we have never tried to time markets or short-term demands. We look for the overlap of talent, opportunity, and business fit. When we find it, we move forward, we build, and we remain patient. Over the long term, we continue to believe that emerging markets will present opportunities that allocators want and need to access. We have today and will have in the future a compelling lineup of talent and strategies to fit those needs.

The <unk> team is going as expected we spent.

The early months building out the foundation, bringing into the team and allowing the team to.

Put the proper foundation to build a strong track record. The track record is looking as we expected which was.

High value added emerging market debt global unconstrained strategies and now we're out in the marketplace.

Seeking early investors, which we found in the separate accounts and now continuing to.

Eric Colson: Thank you, Jason. Slide four summarizes our growth since 1995. Our growth has been a function of compounding wealth for existing clients, adding new capabilities and assets over time and patience. As we've added investment capabilities and assets, we've invested in the distribution capabilities that support them. At the investor day, listeners heard from our head of global distribution, Chris Crine.

Cell with the pooled vehicles.

Thank you.

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

Hey, good afternoon. Thanks for the question I was hoping we could build on the discussion around emerging markets, both in equities and dead and the point you made around allocators pulling back.

Eric Colson: Our distribution model is a hybrid approach. Traditionally, our investment team-specific business leaders have marketed and serviced institutional compliance and consultants. While our centralized sales teams have marketed and serviced their own channels or geographies. We have hired excellent people, provided compelling incentives, and sold and serviced across multiple channels and geographies, with modest headcount and total spend. Over time, though, the number and complexity of our investment strategies has grown considerably. And historical distribution channels are converging, making distinctions like institutional and intermediary less relevant.

From emerging markets in the last year shows I guess, perhaps not too surprising, but when you talk to consultants and institutional allocators and distribution platforms. What do you see as the catalyst to perhaps reignite some of the interest in the asset class and how are you positioning artisan to ultimately capitalize if that trend reverses.

Hey, Alex it's Eric.

Yeah.

What would really interest us in this discussion is that that change is going to occur here.

There are people are going to pull back from emerging markets and reduce their allocation.

There or they're going to look at their target allocation and have to re up to that target and put money to work.

Eric Colson: But it takes to sell and service as a sophisticated asset allocator, is increasingly similar, whether it's a pension fund, institutional consultant, broker-dealer research department, or family office. We are involving to increase intentionality and focus by improving alignment between our distribution professionals, content and marketing and data. We will continue to have high-calibre talent and compelling incentives. But we are creating more structure and coordination, more clearly delineating sales and service responsibilities. We are clarifying sales priorities, and we are producing more investment content, and better coordinating that content with sales and service efforts. And we are collecting, generating, and using more data to improve the effectiveness and efficiency of our sales and service groups.

So there in our mind, there's going to be money in motion and when there's money in motion. It gives us an incredible opportunity given the array of strategies. We have so we're not sure if theres going to be an uptick or a downtick.

But we definitely know people are going to have to rethink about their emerging market allocation look at how they are structuring it using equity debt active passive and.

Eric Colson: Let me give you two examples to illustrate this evolution.

The marketplace is going through that right now and it's a great time for us to get out and showcase the breadth of emerging market strategies, we built inside the firm and on top of that if they do reduce their emerging markets theyre going to go to higher value added international or global strategies that have a higher allocation to emerging markets.

The pick up that exposure, which you wouldnt see that in a passive strategy. So again, it actually benefits active international or global equity mandates, which we are very well positioned for so we're just excited.

Eric Colson: First, we recently hired our first individual to focus exclusively on marketing or alternative strategies. His near-term focus is on marketing the credit opportunities strategy, as well as related co-investment style opportunities that are a derivative of what the credit team does, such as dislocation opportunities. Second, we are identifying specific strategies where we have compelling near- and medium-term opportunities, and aligning people, resources, content, and data to increase our focus and improve our feedback loops.

About that.

Topic is coming to market and we're starting to see that topic come out with institutional clients and consultants.

Interesting alright, thanks for that.

Question for you may be just around margins and expenses.

Bit of a two parter, but I guess one.

I know you guys are probably going through the budgeting processes, but any early thoughts on 2024 expense outlook, particularly around the non variable portion of the expense base.

But also bigger picture at the Investor Day, and I think in the slides today, you sort of alluded to the idea that over time the margin as the business was much higher than what you guys have currently kind of in the mid thirties versus low <unk> right now.

Eric Colson: These more structured marketing efforts increase the probability of near- and medium-term success, and serve as a model for the future. All of this evolution is consistent with who we are and how we have historically evolved. We have always sought to align people, resources, incentives, and opportunities. At the investor day, we also described why we are confident we will continue to compound wealth for clients, scale our newer strategies, add additional capabilities, and continue to generate high-quality outcomes for our clients, employees, and shareholders.

You know in the last decade, we've been all been operating in a much more favorable market backdrop with probably higher market beta maybe than what's on the come but how do you think about our ability to get back to that mid 30% margin.

If market tail winds are less robust than what we've seen in the past. Thanks.

Yeah sure Alex.

So first off we've invested pretty heavily in sort of our new capabilities over the last couple of years. So I think we've seen.

Eric Colson: We have expanded across more investment teams, asset classes, and geographies. We have a repeatable process for identifying, recruiting, onboarding, and partnering with investment talent. Our operational platform has more capabilities than ever. We are evolving our distribution model, and we have in place a business management team with deep industry and artisan specific experience that is extremely well positioned to move us forward.

A good amount of of expense investment, which has obviously impacted.

Impacted our margin.

And we shouldn't underscore the effects of inflation as well and just the increased cost of doing business, where you know.

Employee costs are higher as a result of inflation many of our vendors, including you know mostly data.

Technology vendors are are increasing prices to offset those inflationary pressures they have.

CJ: We will now turn it over to CJ to discuss our recent financial results. Thanks, Eric. The decline in equity markets during the quarter drove our assets undermanagement down to $136.5 billion as of September 30th. That is a 5% decrease from the June 30th AUM, and is 7% higher than our AUM at the start of 2023. The clients in global market indices contributed, meaningfully, to the decline in our AUM. Net client outflows, primarily in global equity mandates, also contributed to the AUM declines. Average AUM was 142.2 billion for the quarter, up to 2% compared to last quarter, and up to 7% compared to the prior year September quarter. Year-to-date average AUM was 139 billion down 5% from last year.

Our our fee rates remained stable.

And so the offset then as margin.

We do we are early in the budgeting process I would expect us to continue to invest and.

Distribution and marketing.

I think a fair amount of the lift has been done but there will be some more.

And I can give you better clarity in January but.

I would assume normal.

Inflationary plus a percent or two.

Our expectations for cost increases next year, and then getting back to the margin we are.

We're built to to handle.

A much larger amount of AUM.

Then we have the capacity and the products to do it the performances there and now it's just about you know, giving ourselves the time and being patient.

CJ: Our complete gap in adjusted results are presented in our earnings release. Revenues in the quarter increased 2% compared to last quarter on higher average AUM. Compared to the third quarter of 2022, revenues were up 6% on higher average AUM. Performance fee revenue has been insignificant since 2021. We are on track to earn some performance fees in the fourth quarter, although the amounts remains relatively small as only 3% of our AUM have performance fee billing arrangement.

To capture capture that growth opportunity and if we do.

Margins will will respond accordingly.

Okay. Thanks, so much.

Okay.

And as a reminder, if you have a question. Please press Star then one.

And our next question comes from Michael Brown from K B W. Please go ahead.

Okay great.

Thanks for taking my question. So I was just looking at slide two and I guess, the private credit bubble that's up at the top right. There just it stands out it's obviously, a very hot asset class today, and an asset management land.

CJ: Adjusted operating expenses for the quarter increased 1%, sequentially due to an increase in incentive compensation expenses in line with higher revenues. Adjusted operating income increased 4% in comparison to the previous quarter, and increased 5% compared to last year's third quarter. On a year-to-date basis, revenues were down 5% compared to 2022 on lower average AUM. Adjusted operating expenses were generally flat compared to the 2022 9 month period. The decrease in incentive compensation expenses on lower revenues was offset by an increased and fixed compensation cost related to annual merit increases and a 6% increase in our number of employees compared to September 2022.

So I just wanted to expand on maybe where you can lean in more it sounds like you are.

Certainly leaning in with Brian crude and the credit team.

And I wanted to just hear a little bit more about what that opportunity looks like and how that could grow and maybe if you could size. It a little bit for me and then is there any desire to be larger there would you consider bringing on a team to have.

More true.

Bigger capability in the private credit space and what kind of goes into that decision today given it is of course, a pretty hot asset class.

Yes, certainly it's Derek.

You know the private credit space is built up substantially over the last few years in our minds, it's clearly solidified a a space and long term asset allocation.

CJ: Our headcount increases continue to be in line with our strategic growth plans and were primarily targeted to investment, distribution, and marketing teams to support our growth initiatives. Travel expenses remain around 35% higher than last year driven by increased travel related to our global investment strategies and client activity, and firm events such as the investor day we held in late September. As a result of lower revenues, year-to-date adjusted operating income and adjusted net income per adjusted chair were both down 15% compared to the 2022 year-to-date period.

So it's it then becomes an area of interest for us.

And so with that category, we'll keep an eye on it and patiently wait for an opportunity to think about.

Our existing teams or new teams.

To provide strategies and.

Opportunities to invest with regards to the chasing a hot asset class and space.

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

We have certainly not been a well positioned to chase hot asset classes.

CJ: Turning to flight 10, our balance sheet continues to support our operations and seed capital needs and provides a healthy cash dividend. We currently have approximately $140 million of seed capital invested in sponsored investment products with significant amounts of realizable capacity. The ability to support all of these objectives is only possible because of the strong cash flows generated by our business. In addition, the $100 million revolving credit facility remains unused. Given the rise in interest rates, our excess work in capital cash contributed an additional $3.5 million of interest income in 2023 compared to the 2022 year-to-date period.

Typically it's very hard to find talent during this.

You know peak.

Peak excitement and you have to have a strong.

Hmm.

Almost retail distribution to tap that in a very short term period.

So it.

With regards to something happen in the near term around private credit it would it would happen in our existing team as a one off investments that and the high degree of freedom oriented.

Oriented strategies, where we would see opportunities com and we've been broadening out with Brian crude that you mentioned.

We have a fairly broad and robust credit platform the <unk>.

CJ: Consistent with our dividend policy, our Board of Directors declared a quarterly dividend of $0.65 per share with respect to the September 2023 quarter, which represents approximately 80% of the cash generated in the quarter and an 8% annual dividend yield based on our special annual dividend we intended to declare in January. Our Board will consider the declaration of an annual special dividend at our January 2024 Board meeting. We expect we will retain some cash from the special dividend as we have in the past several years to support our growth initiatives.

Credit opportunities and now the dislocation fund.

Both of those are really taken advantage of.

Of the smaller public.

Markets that I guess had been somewhat forgotten and ignored and.

And capturing a illiquid premium and that which we think is an incredible opportunity.

We also are expanding out with the M sites and the global unconstrained, which is a a macro aware of go anywhere strategy that is.

Long short and and design.

So those are the areas that we're leaning into the alternative credit I think we just lift the private credit to keep an eye.

CJ: In the fourth quarter, we expect the Artisan Funds to complete their annual income and capital gains distributions. Based on our current estimates and assumptions, we expect fourth quarter distributions to result in approximately 400 million of net client cash outflows from investors who choose not to reinvest their distribution.

Over the long term and which is no different than how we looked at emerging markets over the last 10 years and it took us quite a while to find the right team and we brought the <unk> team and so.

CJ: As highlighted in our recent investor day, growth is not linear and takes time in patience. And we continue to demonstrate the patience and discipline to grow our business over time to produce durable and high quality results. By 12, it illustrates the results of our business model and philosophy. We have delivered quality outcomes for our shareholders since our IPO 10 years ago. We are confident that our commitment to investing in our business will drive future growth. And we remain focused on returning capital to shareholders to generate quality outcomes over long time periods.

Yes.

That's our thought on the upper end of the credit spectrum.

Okay, great Thanks for that Eric.

You've been making some shifts in your distribution capability and making investments that you referenced the recent hire dedicated to the Alt space I guess, what's next in terms of investing in that distribution channel, where would you be kind of focused either by channel region or asset class.

Yes. They are I think the important thing is we we we believe we have a very strong distribution team. That's focused on who we are and the highlights are less about.

Unknown Executive: With that, I will turn the call back to the operator. Thank you.

Jason: We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys.

Increasing expenses to get more scale and broaden out and more about prioritizing.

Jason: To withdraw your question, please press star then two. In the interest of time, please limit yourself to two questions to allow time for other questions.

And aligning resources to who we are today and given the number of strategies and the complexity of those strategies, it's very hard for channels or geographies to sell and service.

Jason: At this time, we'll pause momentarily to symbol our roster.

So most of the change were talking about is how we're managing the business to align to who we are today.

John Dunn: Our first question comes from John Dunn from Evercore ISI.

So there is there a shift going on to get that focus.

Eric Colson: Please go ahead. Thank you. Could maybe spend a little time just kind of framing for us to put in takes to the institutional side of the business, you know, right at this moment, and then maybe just a flavor like the kind of consultant and institutional mindset and how conversations are going right now.

Create more accountability into our sales effort in our service effort.

And that's the big change that we're talking about.

Okay, great. Thank you for taking my questions.

There are no more questions in the queue. This concludes our question and answer session and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Eric Colson: Yes, sure, John, Eric. The just back and away even above the institutional marketplace. We've come off of a pretty big drawdown in 22 and then a lot of uncertainty here in 23. So we've seen in general muted flows compared to 21 to 20 and 21. So the, you know, the bigger flows that are happening in the institutional side are sticking out a little bit more. Primarily they've been non-US clients in our larger global equity strategies that have been rebalancing or de-risking or acknowledging that there's been regulatory change which has occurred more in Australia.

Yeah.

Yeah.

[music].

Eric Colson: So you've seen more activity there and as we look at the put in the take, the flip side is looking forward. And there there's quite a bit of cash build up that we've seen in money market funds. We're starting to see more people look at their targeted asset allocation and where to put that to work. So one of the areas we're looking at on the go forward is people rebalancing back to emerging markets and rebalancing into areas of interest which is fixed income and alternatives.

Eric Colson: And more recently you've seen a pickup in the dispersion of individual securities within indexes showing an interest leaning towards active management. So I think the muted year so far with the expectation of money getting put to work next year back to targeted asset allocation. Gotcha.

Unknown Executive: And then maybe just on the three new mandates that you got recently maybe just, you know, because it seems like they came together pretty quickly.

Eric Colson: Could you give us a flavor of how those, you know, came to be and then also is there more, might we expect some more activity in those, you know, three areas in the medium term? Yes, certainly we as everybody's aware we brought on the M sites capital group and focused on the EM debt as well as the global unconstrained the type of investments in emerging market debt either requires a larger scale separate account or a pooled vehicle.

Eric Colson: The earlier investments have been in the larger separately mandated. We have a good interest in the institutional marketplace around these mandates and we're starting to build a nice track record in the pooled vehicles and expect that we would have a forward lean and smaller allocations into the pooled vehicle, is our expectation there. So we think the MCI team is going as expected. We spent the early months building out the foundation bringing in the team and allowing the team to put the proper foundation to build a strong track record.

Eric Colson: The track record is looking as we expected, which was a high value added emerging market debt and global and constrained strategies. And now we're out in the marketplace seeking early investors, which we found in the separate accounts and now continuing to sell with the pool vehicles.

Unknown Executive: Thank you.

Alexander Blostein: Our next question comes from Alex Blostein from Goldman Sachs. Please go ahead. Hi, good afternoon. Thanks for the question. I was hoping we could build on the discussion around emerging markets, both inequities and debt. And the point you made around allocators pulling back from emerging markets in the last year or so. I guess perhaps not too surprising.

Eric Colson: But when you talk to consultants and institutional allocators and distribution platforms, what do you see as the catalyst to perhaps reignite some of the interest in the asset class? And how are you positioned, Artisan, to ultimately capitalize if that trend reverses. Thanks.

Eric Colson: Hi, Alex Derek. What would really interest us in this discussion is that change is going to occur here. Either people are going to pull back from emerging markets and reduce their allocation. Or they're going to look at their target allocation and have to re up to that target and put money to work. So in our mind, there's going to be money in motion. And when there's money in motion, it gives us an incredible opportunity given the array of strategies we have.

Eric Colson: So we're not sure if there's going to be an uptick or a downtick. But we definitely know people are going to have to rethink about their emerging market allocation. Look at how they're structuring it using equity debt active passive and the market place is going through that right now. And it's a great time for us to get out and showcase the breadth of emerging market strategies we built inside the firm. And on top of that, if they do reduce emerging markets, they're going to go to higher value added international or global strategies that have a higher allocation to emerging markets to pick up that exposure, which you wouldn't see in a passive strategy.

Eric Colson: So again, it actually benefits active international or global equity mandates, which we are very well positioned for. So we're just excited about that the topic is coming to market and we're starting to see that topic come out with institutional clients and consultants.

Unknown Executive: Interesting. All right. Thanks for that.

CJ: Question for you maybe just around margins and expenses a bit of a two-parter, but I guess one. I know it's, you know, you guys have probably gone through the budgeting processes, but any early thoughts on 2024 expense outlook, particularly around the non-variable portion of the expense base. But also a big picture of the investor day and I think in the slides today, you sort of alluded to the idea that over time the margins of business was much higher than what you guys have currently kind of in the mid 30s versus low 30s right now.

CJ: You know, in the last decade, we've all been operating in a much more favorable market backdrop with probably higher market beta maybe than what's on the come. But how do you think about ability to get back to that mid 30s percent margin if market tailings are less sort of robust than what we've seen in the past. Yeah, sure, Alex. The first off, you know, we've invested pretty heavily in sort of our new capabilities over the last couple of years, so I think we've seen, you know, a good amount of expense investment, which is obviously, you know, impacted our margin.

CJ: And we shouldn't, you know, underscore the effects of inflation as well, and just the increase of costs of doing business where, you know, you know, employee costs are higher as a result of inflation. Many of our vendors, including, you know, mostly data technology vendors are increasing prices to offset those inflationary pressures they have, you know, our fee rates, you know, remains stable. And so, you know, the offset then is margin. We do, we are early in the budgeting process.

CJ: I would expect us to continue to invest in distribution and marketing. I think, you know, a fair amount of the lift has been done, but there will be some more. And I can give you better clarity in January, but you know, I would, I would assume normal, you know, inflationary plus, you know, a percent or two. Expectations for cost increases next year. And then getting back to the margin, you know, we are, we're built to handle, you know, a much larger amount of AUM.

CJ: And we have the capacity and the products to do it. The performance is there. And now it's just about, you know, giving ourselves the time and being patient to capture that growth opportunity. And if we do, you know, our margins will respond accordingly.

Unknown Executive: Okay. Thanks so much.

Jason: And as a reminder, if you have a question, please press star then one.

Michael Brown: And our next question comes from Michael Brown from KBW. Please go ahead. Okay. Great. Thanks for taking my question. So I was looking at slide two. And I guess the private credit bubble that's up at the top right there just stands out. It's obviously a very hot asset class today and in the national management land. So I just wanted to expand on maybe where you can lean in more. It sounds like you are certainly leaning in with Brian Kruegan and the credit team.

Michael Brown: And it wasn't just here a little bit more about what that opportunity looks like and how that could grow. And maybe if you could size it a little bit for me. And then is there any desire to be larger there?

Eric Colson: Would you consider bringing on a team to have, you know, a more true bigger capability in the private credit space? And what kind of goes into that decision today, given it is, of course, a pretty hot asset class. Yeah, certainly it's there. And the private credit space is built up substantially over the last few years in our minds. It's clearly solidified a space in long term asset allocation. So it's then become an area of interest for us.

Eric Colson: And so with that category will keep an eye on it and patiently wait for an opportunity to think about our existing teams or new teams to provide strategies, opportunities to invest with regards to chasing a hot asset class and space. We have certainly not been well positioned to chase hot asset classes. Typically it's very hard to find talent during this peak excitement, and you have to have a strong, almost retail distribution to tap that in a very short-term period.

Eric Colson: So with regards to something happening in the near-term around-private credit, it would happen in our existing team as one-off investments in the high degree of freedom-oriented strategies where we would see opportunities come. And we've been broadening now with Brian Krug that you mentioned. We have a fairly broad and robust credit platform, the credit opportunities, and now the dislocation fund. Both of those are really taking advantage of the smaller public credit markets that I guess have been somewhat forgotten and ignored in capturing a illiquid premium in that, which we think is an incredible opportunity.

Eric Colson: We also are expanding out with the M-Sites and the Global One Constraint, which is a macro-aware, going-aware strategy that is long short in design. So those are the areas that we're leaning into the alternative credit. I think we just list the private credit to keep an eye over the long-term, which is no different than how we looked at emerging markets over the last 10 years, and it took us quite a while to find the right team, and we brought the M-Sites team in. So that's our thought on the upper end of the credit spectrum.

Eric Colson: Okay, great. Thanks, Peter. You've been making some shifts in your distribution capability and making investments there. You referenced the recent higher dedicated to the alt space. I guess what's next in terms of investing in that distribution channel, where would you be focused either by channel, region, or asset class? I think the important thing is we believe we have a very strong distribution team that's focused on who we are, and the highlights are less about increasing expenses to get more scale and broad now and more about prioritizing and aligning resources to who we are today, and given the number of strategies and the complexity of those strategies, it's very hard for channels or geographies to sell and service.

Eric Colson: So most of the change we're talking about is how we're managing the business to align to who we are today. So there's shift going on to get that focus and create more accountability into our sales effort and our service effort, and that's the big change that we're talking about. Thank you for taking my questions. There are no more questions in the queue.

Unknown Executive: This concludes our question at answer session and the conference has now concluded. Thank you for