Artisan Partners Asset Management - Earnings Call - Q1 2015

Transcript

Speaker 0

Hello, ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management's First Quarter twenty fifteen Earnings Conference Call. My name is Gary, and I will be your conference operator today. As a reminder, this conference call is being recorded.

At this time, I will turn the call over to Mikaela Taphorn with Artisan Partners.

Speaker 1

Good afternoon, everyone. Before we begin, I'd like to remind you that our first quarter earnings release and related presentation materials are available on the Investor Relations section of our website. I would also like to remind you that comments made on today's call and some of our responses to your questions may deal with forward looking statements and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are presented in the earnings release and are detailed in our filings with the SEC and we undertake no obligation to revise these statements following the date of this call. In addition, some of our remarks made today include references to our non GAAP financial measures.

You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release. And with that, I will now turn the call over to our CEO, Eric Colson.

Speaker 2

Thanks, Mikayla. Welcome to the Artisan Partners Asset Management business update and quarterly earnings call. I'm Eric Colson, CEO and I'm joined by C. J. Daley, CFO.

Time is a valuable asset. We hope to use this time wisely. As usual, I want to discuss the quarter in relation to our long term strategy and continue to reinforce the business philosophy that will drive our results over longer and more meaningful periods. This quarter, I want to explain how our strategy of increasing degrees of investment freedom meets the demand of clients who are evolving their investment policies and asset allocations. Our focus on differentiated high value added strategies designed to meet the long term demand of sophisticated clients is fundamental to our business model.

Given that focus and our patience in executing our strategy, we do not expect linear outcomes from quarter to quarter or year to year. Once I'm done with the business update, C. J. Will take the lead and discuss our financials. On slide two, I would highlight that our total AUM increased to over $108,000,000,000 due to market appreciation.

Our average AUM has steadily grown over the past three years leveling out over the past twelve months. Our asset diversification by investment teams and distribution channels remain solid. As noted in the bullets, we now have seven autonomous investment teams. Our new developing world team is led by Louis Kaufman. We have hired two investment professionals to join Louis on the team.

We plan to launch the team's first strategy in the next few months. I will further discuss the Developing World team later in the call. Adding new investment talent is an important part of our thoughtful growth strategy. While growth is necessary, patience and stability are equally important. We are extremely patient and searching for new talent.

We wait for all the right characteristics to align before bringing on new talent. Patience and stability help us avoid mistakes allowing us to succeed by not losing. Before turning to our long term results slide, I want to spend a few minutes on slide three, which is new. As I've said on prior calls, we are in the midst of an exceptional bull market that is generating some interesting outcomes. The scatter plots on the left side of the page show one of the anomalies, the linear relationship that investors typically expect between volatility risk and investment return has not held across certain broad asset classes.

Over the last five years, the large cap Russell one thousand Index has generated greater average annual returns with meaningfully less volatility than the small cap Russell two thousand Index. Similarly, the All World Index has outperformed the more volatile EFI and emerging market indices. The ten year chart on the bottom left of the page shows the linear relationship that investors typically expect and which underlies much of modern investment theory and practice. The recent risk return results are one of the factors prompting sophisticated investors to rethink asset allocation and manager selection, which impacts how we think about new strategies. I also want to note the information in the tables on the right side of the page.

We've included the gross returns of the median active managers for the five and ten year periods within the eVestment categories corresponding to the indices shown in the scatter plots. For example, the performance of global equity managers is typically gauged against the All Country World Index. As you can see the median active managers have added value during both periods. For investors who have invested with managers better than median even more value has been added. Slide four provides a current view of our long term investment results.

We analyze performance around several key points faithfulness to a stated investment process, solid absolute performance and performance compared to peers and the index. As of March 31, eight of our 12 investment strategies that have a five year track record have added value relative to their broad performance benchmarks over the trailing five years. Six of our seven strategies with a 10 track record have added value over the trailing ten year period. And on an absolute basis, 10 of our 12 strategies with a five year track record have produced greater than 10% average annualized returns over the last five years. All of our strategies continue to execute their distinct investment processes with integrity.

Regarding process consistency, we believe that each of our investment teams possesses the kind of talent and investment process necessary to deliver strong performance over the long term. Our clients invest in our strategies because they believe in both the talent and the investment process. We can't risk surprising our clients. Similar to the way in which the unexpected risk return outcomes discussed on the previous slide are pushing investors to change asset allocation, if the outcomes we generate surprise investors, they will seek alternatives. Thus for us real business risk is doing something unexpected that surprises our clients.

Moving to slide five, the lumpiness that can stem from process discipline is reflected in our trailing one, three and five year numbers. As of March 31, over 80% of our assets under management were in strategies outperforming the respective benchmarks over the five year period, while 98% of our assets under management outperformed over the trailing ten year period and since each strategy's inception. Our mutual fund peer ratings which are highlighted at the bottom of the page show how our results translate into industry wide rankings by Morningstar and Lipper. Our firm wide asset weighted Morningstar rating remains outstanding at 4.1 stars. While on the topic of rankings, our global value team recently received two twenty fifteen Lipper U.

S. Fund awards. The Artisan Global Value Fund received awards for being the number one fund in both the three year and the five year category within Lipper's global multi cap core funds universe. This is the third year in a row that the team has been recognized by Lipper's U. S.

Funds awards. The earlier slide on broad market performance showed the remarkable returns of U. S. Stock indices over the last five years. Those returns have driven up the valuations of stocks in the universities within which our U.

S. Mid cap and small cap value strategies operate. That's why as we've said before, we're not surprised that those strategies have underperformed their benchmark indices during the bull market. Keep in mind that the average annual returns of the benchmarks for those strategies over the last five years are around 1615% respectively. Moving on slide six illustrates the current outcomes of our long term asset diversification strategy.

As I said earlier, we don't expect our outcomes or growth to be linear. Despite strong performance, we experienced net outflows during the quarter in four of our six investment teams and all three distribution channels. Given our firm wide long term performance, we believe that we are well positioned to continue to grow over more meaningful time periods. The growth and diversification of our AUM are the results of deliberate long term decision making. We expect that expanding investment degrees of freedom within existing investment teams and with new teams will result in further long term growth.

On the next slide, we've illustrated two other successful growth stories. On slide seven, the first chart shows the growth of assets in our intermediary distribution channel over the last five years. We began a concerted effort in the broker dealer and financial advisor channels in 2002 with the addition of an individual to focus on those areas. While we experienced net outflows in the channel during the last quarter, our three year and five year annualized organic growth rates in the channel have been very strong. We now have over $34,000,000,000 of AUM sourced through our intermediary channel.

The second chart shows the growth of our non U. S. AUM. We began to focus on global distribution in 2009 and the efforts are paying off with three and five year annualized organic growth rates of over 2057%. We now have 13,800,000,000 sourced from clients domiciled outside of The United States.

These growth stories are similar to a period during the late 1990s and early 2000s when we experienced strong growth in defined contribution assets. We identified the DC Channel as a potential source of considerable organic growth. We developed a plan to focus on that channel and we experienced tremendous success. These examples illustrate our track record of delivering organic growth over time. While we have experienced net outflows over the last twelve months, we remain very optimistic about continuing to grow our business over the long term.

As C. J. Will discuss, our open strategies have seen solid organic growth over recent periods. We're also confident that our global distribution efforts will continue to pay dividends. However, given our business discipline, we don't expect a smooth pattern on a year to year basis.

On slide eight, you can see the three core principles that define who we are. We are a high value added investment firm designed for investment talent to thrive in a growth oriented culture. We manage our business with a mindset similar to that of our investment teams in managing their strategies. We operate for the long term and execute with a commitment to our business philosophy. On recent quarterly calls, I've explained our talent driven business model and thoughtful approach to growth.

With the next few slides, I will discuss how our commitment to high value added investment strategies aligns with the long term trends in institutional investing. Let's move to slide nine. Institutional investment policies are shifting away and towards risk based and outcome oriented approaches. Instead of focusing on allocating assets across categories like U. S, non U.

S. Or large cap, small cap, these approaches focus on how particular strategies regardless of traditional asset classes will contribute to a larger portfolio's expected return and risk. Within these allocation frameworks, institutions are not hiring managers to add value across the entire portfolio. If an index can provide a desired exposure or outcome, investors will use the low cost passive product. But there remains a very important and large role for active management.

Institutional investors are looking to active managers to deliver return and risk profiles and outcomes that are differentiated from the index returns. Active managers can deliver these types of strategies by loosening investment constraints that investment teams can use more judgment and flexibility to deliver the differentiated benchmark agnostic outcomes. Slide 10, which I've shared with you before is a very simplistic representation of the investment continuum from passive beta on the left to high value added active alpha on the right. Today in building their customized risk and outcome based portfolios institutional investors are increasingly using passive, unconstrained alpha and alternative investments. This is much different than the 1990s when constrained style box strategies were growing assets.

At Artisan, we have been evolving our investment strategies in light of these larger trends. Turning to slide 11. Our evolution in response to the trends discussed on the prior slides began in earnest with the launch of our Global Opportunities and Global Value strategies in 02/2007. In 2010, we added our global equity strategy. Prior to the launch of these strategies, our teams had focused their efforts in the constrained alpha category.

They were constrained by requirements as to market capitalization, geography and security instruments. Within the global products, we removed the traditional U. S. Versus non U. S.

Allocation constraints and excluded or reduced many standard portfolio construction limitations. This provides our teams with greater freedom to add value wherever they find it, which the teams want and which aligns with the trends I've been discussing. These global products also appeal to investors using more traditional asset allocation methods or hybrid approaches. The value added performance numbers and five star overall Morningstar ratings speak to the success we have achieved so far with these strategies. Together with our global distribution strategy, these strategies provide us with a great opportunity to further grow and diversify our business.

With the market evolving towards even higher degrees of freedom, our new strategy development continues along this path. Slide 12 outlines our new strategy development. As you know, we seek to add new strategies within our existing teams and by bringing on new talent from outside Artisan. In either case, our development of new strategies will reflect the following. First, the interest and experience of our current and future investment professionals will drive the new strategies we offer.

We believe that strategies start and end with investment talent. Second, we will design strategies that fit well within traditional outcome and risk based allocation strategies. While we have discussed the evolutionary trend away from traditional asset allocation, we believe that the bulk of asset allocators still utilize a traditional approach producing stability and opportunity for our more mature strategies. Going forward many allocators will utilize a hybrid model. Third, our new strategies will reflect increasing degrees of investment freedom, which will further allow our investment teams to manage investment risk and outcomes.

This approach will help us within many models including a hybrid approach. Lastly, these new strategies will be difficult to replicate with passive products. Our launch of the Artisan high income strategy in 2014 and our current development of the Artesyn Developing World team are consistent with those objectives. The high income strategy is and the Developing World strategy will be high value added and relatively unconstrained. We don't believe that the risk return profile of either strategy could be easily replicated through indices.

Turning to slide 13, I want to return to our new developing world team. As you know in February, we hired Louis Kaufman as the founding portfolio manager of the Artisan Developing World team. We have also hired two investment professionals with whom Louis has worked closely in the past. We are in the process of setting the team up in its own office in San Francisco. The team's first mutual fund is currently in registration with the SEC.

We hope to launch the fund in the next few months. We are excited about the team's potential and its place in our growth oriented culture. There are tremendous opportunities in emerging markets. Sophisticated clients are comfortable with the asset class and want the diversification and opportunity it provides. It also is a great place for active managers to differentiate themselves and offer investors a unique high value added strategy.

I'll now turn it over to CJ results.

Speaker 3

Thanks, Eric. Hello, everyone. A summary of our March 2015 financial results is on slide 14. For the quarter, ending AUM increased 1% to $108,700,000,000 The increase was driven by market appreciation substantially offset by net client cash outflows of $2,200,000,000 Average AUM also increased 1% quarter over quarter, but revenues declined 1% because of two less calendar days in the March. Our adjusted operating margin for the March was 38.4% and was impacted by several unique items in this first quarter.

The most significant item was the start up costs associated with the onboarding of our seventh investment team, the Developing World team. Those costs reduced operating margin by three twenty basis points and reduced adjusted net income by $06 per share. In addition, in the first quarter each year, we incur seasonal compensation costs and we also began to recognize expense from our January 2015 equity grant. The seasonal cost decreased operating margin by 160 basis points or $03 per share and the grant of equity decreased adjusted operating margin by 40 basis points or $01 per adjusted share. Adjusted net income per adjusted share was $0.65 Our Board of Directors approved a regular quarterly dividend of $0.60 per share.

The dividend will be paid May 29 to shareholders of record on May 15. Slide 15 details our AUM and client cash flows. Ending assets under management of $108,700,000,000 for the March was up 1% from the December 2014 quarter, primarily due to strong equity market in the first quarter. Client cash flows were below our expectations as we experienced net outflows of $2,200,000,000 for the quarter. These net outflows were primarily the result performance driven client redemptions in two of our U.

S. Value strategies and asset allocation decisions across a number of our other strategies. Overall, outflows were generally consistent with what we experienced last quarter and reflective of the headwinds we expected to face in early twenty fifteen. Despite overall net outflows for the quarter, we are encouraged by healthy growth this quarter in our strategies with realizable capacity, our non U. S.

Growth, global equity, global opportunities and high income strategies. Those strategies brought in a total of $1,200,000,000 in net client cash inflows in the current March, which represents a 14% organic growth rate. Slide 16 highlights our non U. S. Client AUM, which remained just under 14,000,000,000 or 13% of total AUM at the March consistent with the December.

We experienced slight net outflows in our non U. S. Client base this quarter as a result of a client rebalancing decision in our global value strategy. Our financial results begin on slide 17. For the March, revenues were $203,600,000 on average AUM of $108,400,000,000 Despite higher average AUM, the 1% decline in revenues quarter over quarter was driven by two less billing days in the current March when compared to the December.

Our weighted average management fee for the March was 76 basis points consistent with the December. Our adjusted operating margin, which excludes pre offering share based compensation and other GAAP expenses was 38.4% for the current March compared to 43.9% in the December and 45.1% in the 2014. Our adjusted operating margin for the March was down five fifty basis points from December and in line with expectations when factoring in the onboarding of our Developing World team, which negatively impacted margin by three twenty basis points seasonal first quarter expenses, which reduced adjusted margin by 160 basis points and the January equity grant, which also reduced margin by 40 basis points. We expect the ongoing cost per quarter of Developing Royal Team to be approximately $1,500,000 per quarter or about $01 per share. Adjusted net income per adjusted share was $0.65 down from $0.76 in the December, primarily due to the items I previously mentioned that impacted our margin.

Our annualized adjusted effective tax rate rose from 36.5% to 37% in the current March due to the apportionment of more income to states with higher tax rates, primarily New York. We include slide 18 to highlight the components of our compensation expense. In the first quarter of each year, we incur seasonal benefits and payroll tax expenses caused by the reset of the new calendar year. Those costs attributed an additional $2,600,000 of expense in the March compared to December. In addition, the Developing World team added $7,100,000 of compensation in the salary and incentives line of which $6,000,000 is unique to the March.

The remaining $500,000 of start up costs related to Developing World team is included in general and administrative expense. Finally, our Board approved an equity grant to employees in January 2015, which increased our run rate equity based compensation expense to $8,500,000 Slide 19 shows our balance sheet highlights. Our balance sheet remains strong. Our cash balance remains healthy ending the March at $215,000,000 which was up 18% from $182,000,000 at December 3134. The last slide summarizes the dividends we've paid since our IPO in March 2013.

For the 2015, our Board of Directors has declared a regularly quarterly dividend of $0.60 per share. This is consistent with our previous quarterly dividend. Our dividend policy targets distribution of the majority of adjusted earnings after considering business conditions the amount of cash we want to retain at the time. Over the last four quarters, we have returned cash of $3.2 per share to our shareholders, which is slightly in excess of our adjusted earnings per share for 2014. And based on a share price of $45 represents a yield of approximately 7%.

We continue to remain focused on growing in a responsible and thoughtful manner that prioritizes our investment talent and their investment processes. In the first quarter, we continued to make investments in our talent and infrastructure to build realizable capacity for the future. Our investments over the last several years have provided us the opportunity for continued growth, particularly in our international and global strategies and from our new investment teams. Although, we expect to continue to face headwinds stemming from institutional reallocation decisions and relative performance challenges, which will occur at times in certain of our strategies. Over time, which may be several quarters or years, we believe our measured approach to running a talent business will be rewarded by long term growth in AUM and revenues.

Our model has been designed for long term success and it enables us to continue to produce predictable earnings, meaningful returns of shareholder capital and a healthy balance sheet, all of which reinforces our commitment to our investment teams, clients and shareholders. Gary, I'll turn it back to you for questions.

Speaker 0

We will now begin the question and answer session. And our first question comes from Michael Kim with Sandler O'Neill. Please go ahead.

Speaker 4

Hey, guys. Good afternoon. First, just in terms of expanding sort of the investment degrees of freedom. Can you just go into a little more color in terms of how you're planning on implementing that nuance if you will across your existing strategies? And then any follow through as it relates to maybe being able to better recruit investment talent down the road?

Speaker 2

Sure Mike. It's Eric Colson. Yeah, we've been talking about the expanding degrees of investment freedom for a couple of years. And in fact, I had to go all the way to the launch of our global strategies of opening up the mandate. And we're starting to see clients give us degrees of freedom into other asset classes.

So some of our teams have been able to add more cash or include fixed income securities if they so choose. Likewise, we've seen a little bit more hedging occur in our strategies on a currency basis. And as we look out going forward and looking at asset allocations models allowing active managers to short securities or create a risk reward outcome or an outcome such as an emerging markets outcome with developing world. We're going to allow our teams to broaden the use of securities or hedging strategies for either future strategies or existing. And we've been modifying guidelines over the last few years to take advantage of that.

We do this in an evolutionary manner because you do have to get approval from a broad array of clients, especially the separate account clients to modify those guidelines. And we continue to see those trends reinforce with our client base. And I think you can see the outcome with our two new strategies with New World or Developing World and the high income strategy.

Speaker 4

Got it. That's helpful. And then maybe just following up on sort of demand for more concentrated high active share strategies that you just mentioned. Just wondering how you think you may be able to capitalize on that trend

Speaker 5

in light of sort of

Speaker 4

the team's investment approaches, but also in the context of some of the recent performance trends and maybe more limited capacity broadly speaking?

Speaker 2

I think from an active share standpoint, we already have fairly high active share across the majority of our strategies and we will be rewarded that for that active share over time. I think the higher use of passive strategies will continue for a little bit of time and the use of high active share or high value added managers will get a little bit more concentrated and they'll separate exposure oriented strategies with true active strategies. Lately that's been measured by active share ratio where historically there were many advisors and consultants were looking at tracking there to an index. I think that will continue. It will benefit our current strategy whether it's the global small cap which is a fairly new strategy as a concentrated portfolio.

Our large cap value is also concentrated with I believe right now it's 32, 33 secondurities. So we're already in that space right now on the concentrated high active share. We think the next step is really degrees of freedom with the use of newer securities that we haven't used in the past.

Speaker 4

Got it. And then just final question. Now that the high income strategy has reached its one year track record, just wondering if you expect to see a step up in demand? Or are the three year numbers still more important? And just from a scale perspective, does the fund still need to maybe get to a certain asset level in order for investors to be able to allocate bigger amounts into strategy?

Speaker 2

We still believe that for true realizable capacity which is a term we've used in past years that a three year track record with a certain level of assets and more predictability of the strategy with underneath the Artisan umbrella is required for true large asset growth. I think we'll have a positive lean going forward. We could be surprised in the short run just given the one year performance, The team that we've assembled so far Brian's past record and we have just hired a dedicated relationship manager to focus on the institutional channel and she'll start next quarter. So we are getting ready for anticipated interest, but we truly think the asset the true asset movement will occur more in line with the three year mark.

Speaker 4

Got it. Okay. Thanks for taking my questions.

Speaker 3

Sure.

Speaker 0

The next question comes from Bill Katz with Citi. Please go ahead.

Speaker 6

Thanks so much. So just starting on that last question. As you think about the new world team you brought on and the fact that they're to launch a fund over the next couple of months, is it the similar type of growth curve, Eric, you think in terms of just a couple of years to get the track record up and going? Or do you think similarly given the strong performance track record of that team that it might accelerate the opportunity?

Speaker 2

Bill, our baseline assumption is always that new strategies always take some time. And given the great track record that we saw on the high income side with Brian Krug, Brian produced a similar alpha in his asset class. Lewis certainly has created a great track record and has a strong reputation in the marketplace. I think the real question is around demand for emerging markets at large. Over the last seven years, the emerging markets index has produced I think a 0.6% return.

People think there's going be some reversion to the mean towards a higher return and there's greater interest that could help us out in the short run just as much as the last couple of years in high income or high yield. The overall flows have been muted versus previous years.

Speaker 6

Okay. So I appreciate you calling out some of the newer initiatives that are working high yield I think international global. When you look at your array of the $109,000,000,000 or so of AUM that you have, I know a bunch of this is closed. But how much of that you think is style box centric that could be at risk to the structural change you talked about? And I guess the question is how quickly can you make this migration toward the solutions and outcome oriented portfolio, which I think you're on the way to doing versus just the general attrition or the commoditization of that core business?

Speaker 5

Yes.

Speaker 2

Those evolution in asset allocation, it moves slowly. If you are currently adhering to a traditional asset allocation model, someone doesn't wake up that day and say, well, let's terminate all those managers and move to this new outcome or risk based. You have some really strong managers in there that you may just want to leave in place for a while and you're willing to tolerate a hybrid approach because you have a good strong manager in place. So I don't think that our traditional or more mature strategies are going to go anywhere. And as time moves on those strategies will get more degrees of freedom, but we have that balancing act.

We can't go too far where we take the strategy outside of what was intended for within a client portfolio. So I think these trends move really slow and you have time to modify and adjust. You just you have to do it at the right pace and not surprise anybody. And I think we've successfully done that over the years.

Speaker 6

Okay. Just one more maybe for C. J. I'm sort of curious if even adding back all the adjustments that you highlighted in terms of the temporary pressure on the margin in Q1 and looking over the last several quarters against the market where the equity is generally higher over last year. So the margin has been trending lower.

So how are you thinking about the trade off between growth versus margins on a go forward basis?

Speaker 3

Yes, Bill. Think what we saw was we had some periods in the last several years of some significant growth and our margins trended up higher and faster than we would have originally anticipated. So I see I think some of the pullback you're seeing is reflective of just having gotten to where we thought we would get so quickly. And we continue to believe that over time our margins will settle in the low to mid-40s and our comp ratio will settle in the mid-40s. And our view hasn't changed, although you guys can do the math and the modeling to understand what 10% growth in revenues would do to that.

And I think that's what we saw over the past couple of years, is why we're trending down now.

Speaker 6

Okay. All right. Thanks for taking my questions.

Speaker 0

The next question comes from Robert Lee with KBW. Please go ahead.

Speaker 5

Thanks. Morning or afternoon guys. My question is just shifting a little bit to capital management and the dividend. And the first couple of years you'll pay out 100% of earnings pretty predictable in that sense. But with the stock having come back some and maybe some new teams coming on and thinking about evolving portfolios, what juncture particularly since liquidity on the stock has gotten better?

At what time or juncture number one, you does share repurchase start coming into the mix from a capital management perspective? And secondly, do you envision as the business evolves having to devote incrementally more capital to a seed at this point?

Speaker 3

Yes. I'll start with sort of the last point. Our use of cash hasn't our thoughts around that really haven't changed. We don't see any sort of major capital commitments in regards to the business or seed capital that would prevent us from returning that our capital and our earnings to our shareholders. Now the form of that, at least for the short term the next year, I don't see any change in our lean towards paying out a cash dividend versus stock repurchase.

I would never say never, but I clearly think that you should expect cash dividend versus stock repurchase over the next twelve months. And at some point, I do think that stock repurchase will be part of the discussion, but it currently is much more in favor of cash dividend and a 7% yield which is currently about where we're running.

Speaker 5

Okay, great. And then just curious, I mean understanding that non U. S. Is a long term opportunity for the firm and with about I guess it's about $14,000,000,000 ish or maybe just under in terms of assets at this point. But if you look at the exhibit and I lost the page that's on it, I mean the organic growth at least last four or five quarters from that channel has been pretty muted.

So considering that global at least my perception is that global strategies in general have been in demand and notwithstanding having one of those key strategies closed. Can you maybe talk a little bit about why you think that organic growth has been more muted from that kind of key distribution channel the last since the 2014? Is there something about what you think those clients are looking for? Or is it just not been really as much of a distribution focus in the short term? Because maybe one focus on funds.

Just trying to get a feel for that.

Speaker 2

Sure, Rob. It's Eric. The global equity space is fairly competitive. And given the number of strategies that tend to be on buy rated lists for many of the consultants or various platforms. It requires a little bit more time and enough dollars for it to be realizable.

So certainly if you have an emerging market strategy with a couple of 100,000,000 in a three year track record given the scarcity of that availability of that strategy, it lowers the hurdles there for realizable. With regards to the global strategies, our global equity team just hit the five year track record. It has I think the size now to be put on to many of the consultant lists as well as platforms and that five year tracker just hit this last quarter as of March 31. The global opportunity strategy is in a similar state. The first couple of years we operated that strategy as what we called an opportunistic growth strategy and it had a U.

S. Emphasis and then we evolved it to global. And in reality it just hit its true five year record. And both those strategies I think are right in the sweet spot for realizable assets global opportunities being a little bit ahead of it just on the maturity and the size right now. And if you couple that with our distribution efforts in Europe as well as in Australia that we think the flows are a timing issue.

You're going to have some outflows and inflows. And as you go after institutional accounts, we've always said it's going to be lumpy. And given specifically those two global strategies which we listed all three there on slide 11 and you couple that with our distribution efforts outside The U. S, we're fairly optimistic about the outcome over the next few years here as people realize our strategy. And you did bring up the distribution a bit.

We do think our strategies are bought not sold and we work on those sophisticated buyers as well as intermediaries to put us on those lists. So it makes it even ier.

Speaker 5

Okay, great. Just maybe one follow-up and this goes back to kind of the your comments Eric around kind of the evolving asset management industry and focusing on adding degrees of freedom to strategies. I just want to make sure I understand it correctly. If I the focus is taking with existing strategies kind of migrating how those portfolios are run where you can to I don't know whether it's using other you mentioned securities or somehow putting more flexibility or freedom into those portfolios. But you also touched on why that's a touchy thing.

It depends on the timing over time and you want to make sure you deliver what clients expect. So to what degree does it make sense to just start brand new strategies to just have those degrees of freedom from day one, get them started, get them feed them and build the track record that way. You're is that maybe you're doing some of that, but would that why not go through that approach if versus just trying to morph a little bit what you already have?

Speaker 2

Rob, we do think about that exact trade off. In fact, we looked years ago when we were looking at launching global opportunities that can we do this in our mid cap growth strategy? Can we add degrees of freedom or if we're so convicted about growing degrees of freedom shouldn't we just evolve the mid cap into a pure global strategy? And then you look at your client base and that strategy is over half the assets or institutional if not DC oriented assets. And we play a very specific role there.

And so pending that client base and asset base, we'll make a decision on the evolution or a brand new strategy. Back then we made the decision to launch a brand new strategy with higher degrees of freedom. Now over the years we also made simple evolutionary steps in mid cap growth, where we had an ability to go 5% ADRs ten years ago. Now we then made a step of 5% ADRs in non U. S.

And then we moved to 10% non U. S. So in areas where the strategy fits a very specific mandate in a structured allocation, we'll be more mindful of that not to disrupt the flows and we'll have to go slowly on the evolution. And other cases we'll launch brand new strategies. That is something we discuss with each of our investment teams as they ask for degrees of freedom or want to evolve.

Speaker 5

Great. Thanks for taking my questions, Ben.

Speaker 0

The next question comes from Michael Carrier with Bank of America Merrill Lynch. Please go ahead.

Speaker 7

Thanks, guys. CJ, just on the expenses in terms of the outlook. So I think I get the moving pieces particularly on the comp line. When I think about you going into second quarter, third quarter and the rest of the year, are there any additional cost on the grant side? Or is that fully in the run rate at this point?

Speaker 3

Yes. On the grant side, it's pretty much fully baked. We had a stub period in the first quarter for the January grant, but it was a partial grant. So that guidance we gave you is going to be within a couple of $100,000. We do we did last quarter sort of indicate that we were going to uptick our technology spend and we got off to a slow start this year.

So that will uptick a bit. But otherwise, we're going to be pretty consistent trending because of those seasonal expenses and obviously the absence of those unique costs to the Developing World team in the first quarter on onboarding them.

Speaker 7

Okay. Got it. And then Eric just and you've hit on some of this, but I just want to understand when I think about the growth outlook over the next couple of years, it seems like on some of the core products based on the flow trends you've got a little bit of a headwind on the performance side and then some on the allocation side. And then you've got a lot of new opportunities whether it's on the new teams or the distribution front to offset some of those. On the areas where it's performance or it's allocation based, is there anything you guys can do on the distribution side or with those clients, particularly I would say on the performance aspect of it that given the strategy, it's part of that cycle so clients kind of understand that versus seeing the level of redemptions?

Or is it just part of the cycle that you deal with and then at some point that will start to shift?

Speaker 2

When we look at the array of strategies that we have, two areas where we've seen some difficulty is the U. S. Value team in emerging markets. And outside of that the teams have been producing fairly strong results and are positioned quite well. And some of the noise in asset flow we think is exactly that noise.

When it comes to the U. S. Value team, one of the statements we like to reemphasize is that we are bought not sold. And the clients that buy us look for the stability of our talent, the integrity of our process and the expectations. And the one thing that we do is we have a dedicated business leader for each one of our teams and those business leaders' sole job is that one franchise.

So in really strong performance periods, they're there to help amplify the asset And likewise, when a strategy is out of favor like our U. S. Value team who tend to be a little bit more absolute value have difficulty buying high PE stocks and certainly are somewhat of an anti momentum strategy. You lean on these client service professionals to educate the client base.

And given that their sole job is this one investment team, I think that commitment and dedication helps extend the duration of that asset through these difficult performance periods.

Speaker 7

Okay. That's helpful. And then just last one. When you look at the teams that you have added and then you look at the shift that you're talking about in terms of expanding the degrees of freedom, Do you still see quite a few like opportunities or gaps that you don't have on the platform until over the next three to five years continue to be looking for those opportunities? Or is it more from the products that you have building those out and maybe tweaking some of the strategies?

Speaker 2

It will be a combination of both. I mean we'll always be out in the marketplace looking for great talent that has a strategy that we think fits well in long term asset allocation as well as our organization as well as the existing teams we have right now have an ability to launch new strategies. So it will clearly be a combination of both going forward.

Speaker 0

Okay. Thanks. The next question comes from Eric Berg with RBC Capital. Please go ahead.

Speaker 3

Thanks very much. Eric, while

Speaker 8

I understand the your answer to the immediately preceding question that the marketing people really need to so to speak lean into the pitch at this point in order to communicate the approach and discipline of The U. S. Value Team. You're a very experienced person in the area not only of managing your company, but of being a former consultant. What's your sense of whether the audience will even listen to this given the extent of the both at the retail brokerage level and at the institutional consultant level given the extent of the underperformance?

Will they even care is what I'm asking?

Speaker 2

They certainly will care. I mean there's always an array of clients on their willingness to tolerate underperformance and what's their time horizon. And a lot of factors come into play. Inception date, so not all of the clients have the returns over one, three, five, seven and are not endpoint dependent on these exact numbers that we see in the book. Many of our clients have been with us for a long period of time that have strong absolute returns.

And if you look at the certainly the three and the five year returns and you're looking at returns of mid teens well above their return hurdles they're looking for. So it depends on the client's inception date, their view of absolute returns in this space and they're understanding of our strategy and conviction to our strategy. And we think the way we position a strategy and work with the consultant community as well as the broker dealer who have built very strong internal research departments that think of the stability of the people and the process and the portfolio results. The best thing we can do is reinforce the people, the process and let them understand help them understand why we're underperforming. And we think if we have a heavily skewed institutional client base, which if you look at the value team and we look more specifically at the mid cap value, the mid cap value is around 60% institutional with the remainder being in broker dealer and financial advisors that we think have done strong due diligence on our process.

We think that SKU will give us greater time than most, but there always is time horizon that's unique for each client.

Speaker 0

The next question comes from Chris Shutler with William Blair. Please go ahead.

Speaker 2

Hey, guys. Good afternoon. Just a couple of real quick ones. First, just wondering out how April is shaping up from a flow perspective? And second, C.

J, could you just review the comments again on the Developed World team and the expenses there? I think I got $7,100,000 in Q1, 6,000,000 of which was one time, 1,500,000.0 per quarter from there. I just want to make sure that's right and what the breakout by line item is? Thanks.

Speaker 3

Sure. So on the start up costs for Developing World this quarter were about $7600000.06500000.0 of that was unique to the first quarter. And so the guidance of ongoing is going to ramp up to about $1,500,000 a quarter. We have yet to move them into permanent office space. So that's going to occur over time.

So hopefully that's helpful. On the flows, we said we're going be lumpy. I mean April has generally been better than the last several months up to now. But we tend to look out over things over longer periods of time and try not to get overreact or underreact any one quarter or several quarter periods. So that's about as much as I can say on that.

Speaker 2

Yes, makes sense. Thanks a lot.

Speaker 0

This concludes our question and answer session. I'd like to turn the conference back over to Eric Colson for any closing remarks.

Speaker 2

Thank you everybody for chiming into the call today. And we look forward to our call next quarter.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.