Artisan Partners Asset Management Q1 2023 Earnings Call Transcript

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May 3, 2023

There are 9 speakers on the call.

Operator

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 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 is being recorded.

Operator

At this time, I will turn the call over to Artisan Partners Asset Management. Please go ahead.

Speaker 1

Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Eric Colson, CEO And CJ Daley, CFO. Following these remarks, we'll open the line for questions. Our latest results 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.

Speaker 1

These are subject to risks and uncertainties and are presented in the earnings release and detailed in our SEC filings. We are not required to update or revise any of these statements following the call. In addition, some of our remarks today We'll include references to non GAAP financial measures. You can find reconciliation of those measures to the most comparable GAAP measures I will now turn the call over to our CEO, Eric Colson.

Speaker 2

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 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 clients.

Speaker 2

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, growing revenues and profits, Attractive margins, successful careers for our people and compelling returns for our shareholders. These outcomes take time 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 Business centered on high value added investing.

Speaker 2

Slide 2 outlines what high value added investing means to us. We identify and recruit exceptional investment talent. We give that talent the autonomy, degrees of freedom And resources needed to execute a unique and differentiated investment program. We minimize distractions and maximize time spent investing. We create economic alignment between our investment talent, client outcomes and business growth.

Speaker 2

We give great investors the time it takes to execute their process through market cycles and differentiate from others. The combination of these inputs plus time yields high value added results. Net fee returns over extended periods to meet client goals, alpha over passive indexes, outperformance relative to peers, Portfolios 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 Stylebox Non U.

Speaker 2

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 emphasized 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.

Speaker 2

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 3, We show the outcome of a hypothetical portfolio consisting of $1,000,000 invested at the inception of each of the 28 strategies We have launched over our history. The $28,000,000 original investment would have grown to approximately $117,000,000 At March 31, 2023, after fees, that is approximately $44,000,000 Or 59.5 percent more than a portfolio consisting of the same amounts invested on the same dates in each of the strategy's Corresponding benchmarks. On Slide 4, we show the performance since inception Of our 10 strategies with track records of more than 10 years, 9 of those strategies have outperformed their benchmark Index since inception after fees.

Speaker 2

The average annual alpha of those nine strategies is 2 74 basis points $26,000,000,000 of excess returns for clients. That is $26,000,000,000 of additional resources that our clients have to fulfill their missions and achieve their goals. High value added outcomes for our clients drive our long term business and financial 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.

Speaker 2

Over the last 10 years, we have generated approximately $16,700,000,000 in excess returns for clients, grown AUM from $83,000,000,000 to $138,000,000,000 From quarterly revenue from $148,000,000 to $235,000,000 maintained average annual adjusted operating margins Of 39.2 percent, distributed nearly $3,000,000,000 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 $9,800,000 with dividends reinvested Relative to 10.23 percent for the S and P 500, 6.79% for the Russell 2,000 And 5.49 percent for the Dow Jones Asset Managers Index. While generating those financial outcomes, we have evolved our firm to align with secular shifts in asset allocations, Capital markets and sources of demand for high value added investments. Since 2013, We have grown from 5 investment teams to 10, from 12 investment strategies to 25 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 2 credit oriented teams and 6 credit oriented strategies. We have significantly expanded our international, emerging markets and China oriented investment activities, Launching the Developing World, Global Discovery, Non U.

Speaker 2

S. Small Mid Growth, International Explorer And 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, Sovereign credit, loans and a host of derivative instruments. Today, we have more embedded growth potential than ever before. We have 15 investment strategies in their foundational growth phase with track records of less than 10 years.

Speaker 2

The total addressable market for high value added investing affords tremendous opportunity. We have the ability to extend our success and duration in 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, Our approach has consistently generated successful client outcomes, business growth, high margins and attractive total returns. I will now turn it to CJ to discuss our more recent financial results.

Speaker 3

Thanks, Eric. Our first quarter results reflect strong market returns and investment outperformance, which drove our AUM up by 8% $138,500,000,000 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 Q1. An overview of our results begins on Slide 7. Global Equity markets rose during the quarter and gross of fees, our strategies in the aggregate generated returns of approximately 2 40 basis points above their respective benchmarks.

Speaker 3

As a result, our AUM increased to $138,500,000,000 atquarterend, Up 8% compared to the last quarter, but down 13% from the March 2022 quarter. Investment returns contributed $11,900,000,000 to which partially was offset by $1,200,000,000 of net client cash outflows. Average AUM was $135,400,000,000 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 or AUM mix by vehicle. Slide 8 presents our AUM by asset class, which is new this quarter and replaces the AUM by generation slide we have provided in the past.

Speaker 3

We believe this presentation provides a better view into our AUM mix as our fixed income and alternative products Financial results are presented on Slide 9. 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, Partially offset by 2 fewer days in the quarter. Compared to the Q1 of 2022, revenues were down 17% On lower average AUM. Performance fee revenues were negligible for all periods.

Speaker 3

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 Q1 of each year. In the March 2023 quarter, Expenses impacted by seasonality were $6,700,000 higher than last quarter. Intensive compensation expense also increased in line with higher revenues. During the quarter, we continued to invest in our talent through annual grants of franchise capital and restricted stock awards.

Speaker 3

Over 85% of the awards were granted to investment professionals to align our key talent with clients and shareholders. On an adjusted basis, which eliminates the mark to market when franchise capital awards, long term incentive compensation expense It was $14,300,000 in the March 2023 quarter. Adjusted operating income declined 1% sequentially 34% compared to last year's Q1. Likewise, adjusted net income per adjusted share declined 2% Compared to last quarter and declined 35% compared to the Q1 of 2022. Full year expense projections remain consistent with the guidance I provided on last quarter's earnings call.

Speaker 3

Our balance sheet remains strong And continues to support our capital management needs and cash dividend payout policy. Our $100,000,000 revolving credit facility remains unused. Slide 11 highlights our seed investment portfolio. With the addition of our newest investment team, M sites Capital, The use of our cash to seed future growth and new strategies has increased substantially. Our seed investment book is now 130,000,000 Which includes $18,000,000 of gains on amounts initially invested.

Speaker 3

Using cash to seed new products 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. We're investing in growth not only by increasing our seed capital in new products, but also by using our P and L to make further investments in talent and operational infrastructure.

Speaker 3

While these investments in the short term drag on margins, we remain committed to our dividend policy, Which returns 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 $0.50 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 I'll remain committed to returning a substantial portion of our cash generated to shareholders in the form of cash dividends. That concludes my prepared remarks.

Speaker 3

I will turn the call back to the operator.

Operator

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

Speaker 4

Hey, great. Thank you for taking my questions. Eric and C. J, I was hoping to maybe get a little bit more color on The trends that you're seeing on the separate account side of the business where the outflows continue to persist, How have the conversations evolved with clients here? And how does the sales pipeline look?

Speaker 2

Yes. Hi, Mike. It's Eric. Yes, this quarter we thought was another noisy quarter, making it really difficult To extrapolate the future, as you saw in the update, we had a negative 1.2 $1,000,000,000 of net flow for the quarter. We also had when we broke this down, we had 8 clients with About $1,200,000,000 that hired us and then terminated us with less than a 3 year performance record Across 7 different investment strategies.

Speaker 2

I think market volatility provides us a great opportunity as an Tuni, as an active manager, to differentiate over some reasonable time periods, the more uncertainty that we've experienced in the 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 timeframes. So, looking at that the most recent quarter that We just continue to think that noise is hard to predict going forward. With regards to activity on a look Forward, we are coming off a 2022 year that saw outflows across most equity and fixed income and even the sixty-forty 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 our client base, primarily institutional. That process is anywhere from 6 to 12 months, and we Have very strong dialogue in the institutional marketplace and some of the gatekeepers in the intermediary in the credit Space, so we're optimistic there.

Speaker 4

Okay, great. Thanks for the color there. And just for My follow-up, first, congrats on 10 years as a public company. It's a great achievement. And just wanted to And I'd pose kind of a high level question to you here.

Speaker 4

So when you guys look back at your Last 10 years, what do you think is kind of the most impactful change that you've implemented at ATAM? And then as you look forward for the next 10 years, How could the evolution of the company differ from the past and where are you kind of most excited about and what are your kind of key priorities as you look at that longer term horizon?

Speaker 2

Yes, Mike, I guess I would 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 say 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 to be able to resource them and position that with the most sophisticated clients that conduct Hours and hours of due diligence, to make those decisions. We're extremely proud of 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 public and maintaining that stability and consistency for our employees, our clients and for our shareholders to look forward and say Artisan is a highly predictable organization and can these tenures be replicated?

Speaker 2

And I believe the answer is yes.

Speaker 4

Okay. Well said. Thank you for taking my question.

Operator

Thank you. And our next question today comes from John Dunn with Evercore ISI.

Speaker 5

Thank you. The international value strategy flipped to a quite positive quarter. I mean, Can you talk about what spurred that and where maybe the flows were sourced from?

Speaker 2

Yes, certainly. Yes. 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 in international value, want to reallocate to the value categories. So the bulk of those Flows were, existing clients increasing allocations, as well as some consultants That have known us for quite some time in this strategy, rebalancing and Putting that into international value.

Speaker 2

So the rebalancing coupled with the extremely Favorable performance results in the strategy relative to the index and peers created [SPEAKER HENRY A. FERNANDEZ MSCI, INC.:] Fernandez MSCI, Inc.:] The flow number for really last year and

Speaker 5

continuing into the Q1.

Speaker 4

Got

Speaker 5

you. And then just more broadly, the fund side got a lot better quarter over quarter. Can you Talk a little bit about the shift that happened between the two quarters and then looking forward what kind of the funds the intermediary side Mindset is as we go into the Q2? [SPEAKER DOUG MURPHY

Speaker 2

CHUTORIAN:] Yes, certainly. I think when you break down the separate account and the mutual fund breakdown, and I think you're probably highlighting 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 2 strategy and asset base, saw the flows and that's reflective of their client base.

Speaker 5

And do you think that might continue demand for those strategies?

Speaker 2

I think quarter over quarter, it tends to be very consistent. And It's hard to predict the future, but using changes and looking through quarter over quarter changes, They don't happen overnight. So I would say that, that would probably have a positive lean both in those strategies as well as that category. But you are coming off of The Q1 where there is some asset allocation shifts, and that might dampen it, going into Q2 and Q3.

Speaker 5

Makes sense. Thank you very much.

Operator

Thank you. And our next question today comes from Bill Katz of Credit Suisse. Please go ahead.

Speaker 6

Excellent. Thank you very much and happy anniversary indeed. I feel old all of a sudden. So just On Slide 8, and thank you for recasting it this way. It's one of the ways we track it as well.

Speaker 6

When you think about growing the fixed income and the alts bucket, they're both Small, so I think they both offer pretty good organic growth potential or just growth potential. Do you need to amplify the opportunity Through maybe a more acquisitive approach or faster ramp of teams or products. Because on the other side, when you speak to some of the pure play alternative managers, They do speak to the fact that LPs want to generally consolidate with fewer larger GPs. I'm just wondering how you sort of Reached the opportunity here just given the size versus the TAM. Thank you.

Speaker 2

Yes. Thanks, Bill, for the question. I we do believe in the TAM that you just highlighted. I think as you know, in our history, we don't believe Short circuit success by identifying the category and hoping that something's available at that moment in time and Mary, the 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 has generated extraordinary returns both on an absolute and a relative basis.

Speaker 2

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 the 3 5 year record, which is what most allocators use, whether You're building it or acquiring it. There's that time of settlement. We like the idea of Taking that 3 year approach versus trying to acquire and convince people that it's fit in over the 1 year and by the time you get the 3, You have growth potential. But if you just look at our current seed book, the bulk of the dollars there was on Page 11, $66,000,000 is in fixed income strategies. The bulk of that, say, dollars 50,000,000 is in Our M sites, M Do and M Lo strategies, we've turned $50,000,000 into $55,000,000 with After 1 year returns of 11.8 and 10.7, they're very strong results.

Speaker 2

And I think we're Getting the activity that we want and by the time we get to that 3 4 year number, we're going to be able to capture that TAM. Likewise, on the alt space, we have $44,000,000 in. The bulk of that money is in credit ops as well as Global Unconstrained. And again, they have strong performance of roughly 8% 10% and 7 800 bps of alpha over their indexes. [SPEAKER

Speaker 1

THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry

Speaker 2

Global Group, Inc.:] I think we're well positioned. And 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.

Speaker 6

Okay. One more big picture for you only because you put Slide in the presentation, but just to play devil's advocate for a moment on the stock return, the total return slide. Your relative performance to the S and P is a push. And so I think there have been sort of 2 areas of headwinds from our conversation clients, one is just the sustainability 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?

Speaker 6

Is that an opportunity? And then any alteration to the capital return policy? Thank you.

Speaker 2

I think the organic growth is always going to be a fallout of the capacity of our strategies and the ability to generate alpha. As you've known over the years, we would in the exchange of kicks, we'd rather drive growth of the firm through alpha than just pure Flows, so 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, I 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 [SPEAKER DOUG MURPHY CHUTORIAN:] And idiosyncratic are 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.

Speaker 2

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 Intel alternatives. I don't know if CJ, you would add.

Speaker 3

No, I think, obviously, you can see our seat book has increased Significantly over the past 18 months as we've gone into these areas, which is I think just a proof point 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 92%, 95% the past 2 years. Previously, it was 100%. So we've demonstrated our willingness to use the balance sheet for future growth.

Speaker 4

Thank you.

Operator

Thank you. And our next question today comes from Alex Blostein with Goldman Sachs. Please go ahead.

Speaker 7

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 year both absolute and on a relative basis. Have you noticed this influencing conversations to start the year?

Speaker 7

And are there particular strategies where performance has been a bigger driver than others? Or is everything more of a macro driver right now? Thanks.

Speaker 2

Yes, Luke, it's Eric. I think we're still in the macro drivers as we've talked about The flows around the noise, and the short term nature of people trying to define their footing, I think really it's waiting for the macro drivers to settle a bit, clients and allocators to 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 state on this call.

Speaker 7

No, that makes sense. Thanks. And I appreciate the additional disclosures you guys have given. Based on some of the You've made to the slide 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?

Speaker 7

And how are you thinking about them longer term? Thanks.

Speaker 2

Ingo, the main two points here is, one that the fact that The firm has now 2 fixed income teams and 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, we look at the early stage performance 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 it 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.

Speaker 7

Makes sense. Thank you.

Operator

Thank you. And our next question today comes from Kenneth Lee at RBC Capital Markets. Please go ahead.

Speaker 8

Hi, thanks for taking my question. Just a follow-up on the seed capital And the remarks upon the growth there, wonder if you could 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 Could you just talk about how would you quantify any potential seed capital needs over the near term? Thanks.

Speaker 2

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 Are both promising for our future growth. At this current stage, we don't need Any additional seed assets? We have probably 10 to 12 strategies in the seed book. And The emerging market debt has created a lot of reinvestment in the operations and in our distribution.

Speaker 2

And the things that you have to do to continue to bring in investment talent is be successful with the current Seed book, the more we can demonstrate that we can grow fixed income strategies as well as 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 Directional interest in credit and alternatives as well as potential regional Investment teams in Asia.

Speaker 8

Got you. Very helpful there. And just one quick one. Regarding the ongoing efforts to expand the fixed income and the alternatives, I think a while back, You had made some investments in terms of the investment platform, the analytics. Just wondering at this point, Is there a pretty good base at this point?

Speaker 8

Or could there be potentially further needs for investments on the technology side or the platform side To accommodate for a newer strategy over time? Thanks.

Speaker 3

Yes. Ken, I'll take that one. Look, That process is sort of evergreen ongoing. We'll continue 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 In the expense outlook, but and all the plans that we have to reinvest in the infrastructure this year are baked into We've guided.

Speaker 8

Got you. Very helpful there. Thanks again.

Operator

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.

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Artisan Partners Asset Management Q1 2023
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