Artisan Partners Asset Management - Earnings Call - Q1 2017

Transcript

Speaker 0

Hello and thank you for standing by. My name is Nicole 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 call is being recorded.

At this time, I will turn the call over to Mikayla Taphorn, Director of Management Reporting at Artisan Partners.

Speaker 1

Thank you. Welcome to the Artisan Partners Asset Management business update and earnings call. I'm joined today by Eric Holson, Chairman and CEO and C. J. Daley, CFO.

Before Eric begins, I would like to remind you our earnings release and the related presentation materials are available on the Investor Relations section of our website. Also, the comments made on today's call and some of our responses to your questions may deal with forward looking statements, which 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. We undertake no obligation to revise these statements following the date of this conference call. In addition, some of our remarks made 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. I will now turn the call over to Eric Colson.

Speaker 2

Thank you, Mikaela, and thank

Speaker 3

you to everyone for joining the call. This is our seventeenth quarterly update call since our IPO in March 2013. On the prior 16 calls, I've said high value added 63 times, and I've said degrees of freedom 74 times. If I follow my script, you will hear those words at least another 15 times on this call. We emphasize high value added investing because it is fundamental to who we are as a firm.

Since our founding in 1994, Artisan Partners has been committed to partnering with talented investment professionals to launch and manage investment strategies that add significant value for clients and investors. As part of that commitment, we work to provide our investment teams with degrees of freedom they need to add value, manage risk and differentiate themselves from others. Over time, we have evolved the investment guidelines of our existing strategies to create greater flexibility with respect to geography, market capitalization, concentration and cash holdings. Between 02/2010, we launched our three global strategies, which have provided our growth, global value and global equity teams with broad flexibility to invest across the world and market capitalization spectrum. And over the last three years since our IPO, we have added three new investment teams, each of which use greater degrees of freedom to generate alpha and manage risk.

On today's call, I will review the new teams and the progress they have made. Notwithstanding all the headlines about assets switching from active to passive, we believe there is considerable client and investor demand for differentiated high value added investment strategies. Many of the active products that are being replaced were not designed to depart too much from an index, and they have not evolved to allow for greater differentiation. Investors continue to shift out of these constrained active strategies in favor of index products that provide asset classes and style exposures at a lower price. At Artisan, by providing our investment teams with degrees of freedom, we allow them to differentiate themselves from and add value relative to less expensive index products.

We believe that sophisticated investors will continue to allocate assets to these types of strategies and that offering these strategies within our firm's culture and environment will remain compelling to the clients and investors that we serve. Slide two summarizes our newest team, the Artisan thematic team. Portfolio Manager Chris Smith joined Artisan Partners in October from Kingdon Capital. Over the last six months, we have worked with Chris to build a thematic team and prepare the launch of the team's first strategy. Both Nitin Gupta and Matt Plotkin previously worked with Chris and joined Artisan shortly after him.

Believing in his investment philosophy and process and believing in Artisan's investment culture. For the remaining analysts, we met with more than 50 people for each position. We were focused on finding differentiated thinkers who would be a good fit for Chris' investment philosophy, and that's exactly what we found in Noel Colehong and Mike Abrams. Matt Plotkin's role in risk management is also a differentiator. He is charged with maintaining the discipline of portfolio construction, ensuring the position sizes are risk adjusted based on valuation and earnings differentiation.

He is also responsible for understanding and managing correlations and factor risks within the portfolio to ensure that the risks the team takes are those they intend to take. This is a systematic approach to risk management embedded directly within the investment team. Jason Gottlieb, our new COO of Investments, has been instrumental in helping Chris and the Thematic team with people, process, resources and early marketing. As with all of our teams, we will hire a distribution professional who will be dedicated to the thematic team, limiting the amount of time the team spends on marketing and allowing them to focus primarily on investing. We are currently interviewing candidates for this role.

Early this week, the Thematic team launched the Artisan Thematic strategy. The strategy provides the Thematic team with broad flexibility to concentrate capital behind names exposed to multiyear trends, invest across market capitalization and geographies and use multiple instruments to generate returns and manage risk. We expect the team will also launch a long short equity fund in the not too distant future. Turning to Slide three, we established the Artisan Credit team with the addition of portfolio manager Brian Krug in 2013. In March, the team's first investment strategy high income passed its three year mark.

Before I discuss the strategy's performance, I want to highlight how the credit team uses degrees of freedom within the high yield universe to generate differentiated returns. Like all of our investment teams, the credit team has a grounded investment philosophy and process. The team's fundamental credit research focuses on business quality, fundamental strength and flexibility, downside analysis and value identification. While process driven, the team also injects significant judgment into its decision making, both at the level of individual credits and at the portfolio construction level. As you see on the left side of the page, the team's high income portfolio consists of three categories.

Core investments are those the team views as lower risk and a source of liquidity. Spread tightening investments consist of credits the team believes will improve or are misrated by the credit rating agencies. Often, spread tightening investments reflect the credit team taking an out of consensus view. Lastly, opportunistic investments include opportunities presented by market dislocations or potential catalyst driven returns. As you can see by the range on the page, the credit team has broad flexibility to position the high income portfolio across three categories depending on the team's conviction, valuation and supply of opportunities.

In addition, the team has the freedom to use multiple instruments to express their views and position the portfolio, including bonds, loans, revolvers, derivatives and equities. On the right side of the page, you can see the team's investments in loans over time. The credit team's ability to apply judgment within their process, take a differentiated view through portfolio construction and express an investment thesis with multiple instruments is exactly what we mean when we talk about degrees of freedom. On Slide four, you can see the success the credit team has had so far. In March, the high income strategy passed its three year mark.

Since inception, the strategy has generated average annual returns of almost 7% net of fees compared to 4.62% for the strategy's benchmark index. On the third anniversary, Darsen High Income Fund received a five star overall rating from Morningstar and was ranked in the first percentile of its Morningstar peer group. The strategy finished the first quarter with $2,100,000,000 in AUM, the most AUM of any of our team's initial strategies at the three year mark. To date, most of the high income strategies AUM has been sourced through our intermediary distribution channel. With a three year track record, we believe there is a good opportunity to broaden the asset base with institutional clients.

The credit team is also working on the development of a second investment strategy, which will further expand the team's degree of freedom. The credit team's early success is primarily a product of the team's talent and effort. The success is also demonstrates the strength and flexibility of our business model and the people at Artisan Partners. When Brian joined the firm, we were able to efficiently and effectively build out fixed income operations, and we have leveraged our brand and intermediary distribution channel to raise assets for the team at a record pace. We have demonstrated that we continue to evolve as a firm and that our platform works beyond long only equity investing.

Slide five highlights our Developing World team, which portfolio manager Louis Kaufman founded about two years ago in the 2015. The Developing World team takes a differentiated approach to emerging markets investing. The team believes in the long term growth opportunities in the developing world, but does not limit itself to companies domiciled in emerging market countries. Instead, the team asks whether a company has the opportunity to benefit from rising demand in emerging markets. If a company does, then it's in the team's investable universe.

Examples of these types of companies are Facebook and Visa in The U. S. And Unilever in The U. K. Including these types of companies within the team's investable universe increases degrees of freedom and thereby increases the team's ability to generate outcomes that are differentiated from peers and the index.

Like the high income strategy, the developing world strategy is very difficult to replicate with market cap or factor weighted indexes. Over the last year, the Artisan Developing World strategy has participated in the emerging markets rally and returned over 19% net of fees compared to about 17 for the Emerging Markets Index. Prior to the Emerging Markets rally, the Developing World strategy provided solid downside protection, returning about negative 8% net of fees between the strategy's inception and March 3136 compared to about negative 12% for the Emerging Markets Index. The Developing World team is also growing its business at a nice pace. At the end of the first quarter, the Developing World strategy had $1,300,000,000 in AUM.

The chart on Slide six provides some perspective and places our newest strategies within Artisan's historical context. While I've just highlighted the early success of our credit and developing world teams, we know that growing a high value added business takes time and is lumpy. The right talent for Artisan is a very scarce resource, so we've added teams at a measured rate. Once we find the right talent, we are thoughtful about launching investment strategies and managing capacity. We don't launch a bunch of strategies in order to find out what will work.

To launch it, we believe in it. You can see that it took the firm roughly ten years to grow assets north of $50,000,000,000 At that time, we were diversified across mainly three teams. Over the next ten years, despite the big correction in 02/2008, we've grown to over $100,000,000,000 in assets with significant AUM in four different investment teams. We have highlighted the start dates of our three global strategies and their growth is represented by the shaded areas on the graph. When we were developing and launching these strategies, we probably used the word global as often as we now use degrees of freedom.

Today, the three global strategies account for $30,000,000,000 of AUM across three different teams. The growth of these strategies took time. We expect to see our latest generation of strategies grow in a similar way. It will take time and patience. Slide seven is my final slide.

It shows the diversity of our business across investment teams, distribution channels, client domicile and investment vehicles. The diversity of our business provides stability. As I've been discussing, our investment teams take differentiated approaches, which means sometimes they will experience periods of prolonged underperformance. The diversity of our business allows for that. Our diversity across distribution channels also limits our exposure to trends in client and investor preference.

For example, the headwinds we face in the defined contribution portion of our business today are significant and important. But the defined contribution channel is just one of the ways we access clients and investors. Another phrase we often use is alignment of interest. With the development of new teams and strategies, We're also developing and modifying our distribution strategy to align with investment strategies. Coming back to the degrees of freedom, we expect that private funds will be the optimal vehicle for some of our future strategies.

So over time, I expect you'll see private funds show up and grow on the vehicle chart, just like the percentage of non U. S. Clients has grown with the development of our global strategies. That will just be another indicator of the steps we're taking to evolve our business to continue to provide clients and investors with high value added investment strategies. I will now turn it over to CJ to discuss our recent financial results.

Speaker 4

Thanks, Eric. Our earnings release and the financial presentation disclose both GAAP and adjusted financial results, but I will focus my comments on the adjusted results, which we use to evaluate our business operations. Our adjusted results exclude the impact of pre IPO equity based compensation and include the impact of post IPO equity based compensation, which is a non cash expense. Our adjusted results reflect an increase in average assets under management during the current quarter, which led to increased revenues compared to last quarter. Higher revenues were offset by increased seasonal expenses that are incurred in the first quarter of each calendar year and an increase in post IPO equity based compensation expense related to our January grant.

Adjusted earnings per share was $0.52 down a penny compared to $0.53 last quarter. Taking closer look at the drivers of our results starting with AUM on slide nine. We ended the quarter with $103,800,000,000 of assets under management, which was up approximately $7,000,000,000 or 7% compared to both last quarter and last year. The increase in the current quarter reflects market appreciation of $7,200,000,000 partially offset by net client cash outflows of $272,000,000 The increase in AUM compared to the same quarter last year reflects $10,500,000,000 of market appreciation, partially offset by $3,800,000,000 of net client cash outflows. Our two newest teams, the Credit and Developing World teams had net client cash inflows in the quarter of $216,000,000 and $186,000,000 respectively.

The U. S. Value, Global Value and Emerging Markets teams each had modest net cash inflows in the quarter. The global equity team had $490,000,000 of net cash outflows primarily in its non U. S.

Growth strategy. And finally, the growth team had net client cash outflows of $320,000,000 primarily due to $620,000,000 in net client cash outflows in the MidCap Growth Strategy, which were offset by $399,000,000 in net client cash inflows in the Global Opportunity Strategy during the quarter. The Global Opportunity Strategy continues to see strong demand from clients outside The U. S. And the Mid Cap Growth Strategy continues to face DC market headwinds.

Moving on to our financial results on Page 10. Compared to the previous quarter, revenues were up 1% reflecting a 4% increase in average AUM, partially offset by two fewer billing days in the quarter. Compared to the prior year quarter, average AUM was up 9% and revenues were up 6%. We experienced a two basis point decline in our effective fee rate, primarily the result of greater redemptions in pooled vehicles compared to longer duration institutional separate account clients. We believe that the longer duration of institutional separate account clients offsets the lower fee rates, yielding a better return over the long term.

In addition, we had one less billing day this quarter compared to the same quarter last year. Operating expenses excluding pre operating related compensation expense increased 3% in the quarter, primarily due to increased compensation costs, which I'll explain on the next slide and seasonal directors fees, which are included in G and A expense. Operating expenses excluding pre offering related compensation expense increased 7% year over year, mostly due to increased compensation costs, technology and G and A expenses. These increases were partially offset by a decrease in third party distribution expense as a result of a shift in our AUM away from revenue share paying mutual fund share classes. On slide 11, we've broken out our compensation and benefits expenses, which comprise close to 80% of our total operating expenses.

Compared to the prior quarter, compensation and benefits expense excluding pre offering related compensation expense increased $2,600,000 As a reminder, 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 contributed additional $2,700,000 of expense in the current quarter compared to the prior quarter. Incentive compensation in the current quarter decreased $1,500,000 due to the roll off of employee and boarding expenses incurred in the December 2016 quarter. This decrease was partially offset by an increase in incentive compensation due to higher revenues. In addition, equity based comp expense increased approximately $1,400,000 as a result of our January 2017 annual equity grant.

The $1,400,000 increase represents expense for a partial quarter. We expect the full quarterly expense related to this award to be $1,700,000 in the remaining quarters of this calendar year. Year over year comp and benefits expenses excluding pre offering related compensation expense increased $5,800,000 or 7%. Salary benefits and payroll tax expenses increased $1,600,000 due to the addition of new employees and annual merit based increases. Incentive compensation increased $2,800,000 in line with revenues.

And equity based compensation was higher as we layered in the expense for the equity granted in 2017. Moving on to Slide 12, in the current quarter, adjusted operating margin was 35%, down from 35.8% last quarter, primarily due to higher seasonal expenses and an increase in equity based compensation, partially offset by higher revenues. Compared to the same quarter last year, adjusted operating margin in the current quarter was down primarily due to increased equity based comp expense, increased compensation related to our newest team and increased technology and G and A expenses partially offset by higher revenues. Adjusted net income in the quarter was $38,800,000 or $0.52 per adjusted share. Slide 13 shows our quarterly dividend history.

Earlier this week, we announced that our Board of Directors declared a quarterly dividend of $0.60 per share payable May 31 to shareholders of record on May 17. After taking into account non cash expenses, we generated cash in excess of our $0.60 quarterly dividend during the quarter. Our calculation of the quarterly cash generation estimate principally includes the zero five two dollars per share of adjusted earnings plus the non cash post IPO equity based comp expense. Slide 14 is our balance sheet highlights. Our balance sheet remains strong with a healthy cash balance and modest leverage at 0.6 times.

We have $200,000,000 of debt on our balance sheet. In August, dollars 60,000,000 of this debt matures. Given the continued favorable interest rate environment and our ability to access the credit markets, we intend to refinance the $60,000,000 when it matures. Before I conclude, I would like to spend some time reviewing how our equity ownership has evolved since our IPO. First, I'll start by saying that we believe offering active investment management requires a commitment to attracting and retaining experienced investment talent.

As a result, we design and manage our business model to create an investment culture in which our talent can thrive and the interests of our employees align with those of our clients and shareholders. To that end, our investment professionals have always been equity owners in our firm. While quarterly revenue share has always been our primary form of compensating investment talent, equity grants provide an additional tool to reward and incentivize performance, growth and franchise development and equity ownership further aligns the long term economic interests of our talent with those of our clients and shareholders. The firm's IPO was one of several strategies we have executed over the years to allow us to manage our business according to our foundational principles. The IPO established a structured path to liquidity for pre IPO equity and created a mechanism for multi generational ownership that could be shared more broadly among value producing employees across the firm.

At its core, our IPO was about an ongoing alignment of interests. Since our IPO, some of our employee partners and other partners have taken the opportunity to reduce their ownership after many years without the ability to do so. We believe this is a healthy and expected outcome of becoming a public company. The amount of pre IPO equity that employee partners can sell each year is generally limited to 15% of their ownership interest. In addition, the opportunity to exchange pre IPO equity for Class A common shares that can be then sold generally occurs only once per quarter.

These restrictions allow us to manage the sale of our partners pre IPO equity in an efficient way with minimal disruption to the market. The coordinated offering of 5,600,000.0 shares during the first quarter is an example of how we provide a measure of liquidity to many of our partners in an organized manner. Today, employees, former employees and original partners remain significant owners of the company. At the same time, public ownership has increased from 18% at our IPO to 59% today, providing increased liquidity to shareholders and a stable environment for our clients, shareholders and investment talent. That concludes my prepared remarks.

We look forward to your questions. I will now turn the call back to the operator.

Speaker 0

Thank you. We will now begin the question and answer session. Our first question comes from Michael Carrier of Bank of America Merrill Lynch. Please go ahead.

Speaker 5

Hi, thanks guys. Eric, maybe first question just on some of the newer strategies and some of the fund structure that you mentioned. Just wanted to get your sense, I mean you guys have when we look at the long term track record on the legacy products and then obviously the new products are doing well. You have like the performance there. And we see a lot of headlines on like fee pressure and pricing and stuff like that.

But just wanted to get your sense when you're talking to the client base, like how much kind of protection do you have when you have that performance versus maybe the average out there in the industry that's under a little bit more pressure on fees?

Speaker 3

Hi, Michael. It's Eric. Clearly, client is going to ask about fees. It's a pretty common question that comes up and it's been coming up for quite some time. We have been maintaining our fee schedule pretty consistently across all of our strategies.

I think the one thing you do see is the uptick in some larger separate accounts has been the primary asset growth and the outflows have been primary out of the fine contribution, mutual fund flows, which you're swapping lower fees for higher fees because of mix. But when I look at our newer strategies and our current strategies, we've been maintaining our fee schedule fairly consistent.

Speaker 5

Okay. And then C. J, just on some of the expenses, I think you mentioned on the G and A that was just seasonal. I just wanted to make sure just in terms of the kind of the normalized level going forward. And I think that's it just on expense, but I just wanted to clarify that.

Speaker 4

Yes, I mean, this quarter G and A was up a bit because we have our annual grant of compensation to our directors for their annual retainer and that was the driver of the spike this quarter.

Speaker 5

Okay, all right. Thanks a lot.

Speaker 0

Our next question comes from Bill Katz of Citigroup. Please go ahead.

Speaker 6

Okay. Thank you very much for taking the questions. I got a couple to sit here if that's okay. It's been coming up on some of the last couple of calls and sort of thinking about particularly given your very strong performance but inability to sort of gather assets just given some of these headwinds you've been talking about guys. What's your thoughts on shifting to a variable pricing model particularly given your degrees of freedom thought process and concentrated investment strategy?

And if you were to do something like that, what would be some of the pros and cons you can see from a business management perspective?

Speaker 3

So you're thinking of bill of performance based fees?

Speaker 6

Right, exactly. Certainly. In a mutual fund structure or separate account structure? Sorry, interrupted you.

Speaker 3

That's okay. The separate account structure, it's something that we're open to and we entertain and discuss with clients. Some of the more recent accounts that taken on have been performance based fees. So there's a slight uptick there, but I wouldn't say it's an overwhelming request. Once we get into a dialogue and go back and forth with the client on, here's our current asset base fee and here's our performance base fee.

And we probably have more recently half of the larger accounts starting to move towards a performance base fee on new opportunities. And we haven't contemplated moving to a performance based fee inside of the mutual funds.

Speaker 6

Okay. And then second question is, maybe just refresh on your exposure to defined contribution And then maybe what is the headwind? Is it pricing? Is it performance? I'm just trying to get a better sense of some of the incremental pressure points.

Speaker 3

Yes, if you break down our institutional business, it's about 15% of the total assets in defined contribution. The real headwind is in the DOL, Pension Protection Act rule, they created a QDI or a default option, which is primarily proprietary target date funds. Our view was that was going to open up and be more open architecture, customized solutions that would include more outside asset managers such as Artisan. Unfortunately, the litigations have increased, think the perceived diversification of a all indexed oriented target date funds and fee pressure has spurred more and more assets going to the proprietary target date funds, especially if it's 100% passive. That has lowered our expectations in the short run of the DC assets turning around.

We still think over the next couple of years, you'll see more and more customized solutions. But for right now, it just seems the passive solution is the safe approach right now.

Speaker 6

Okay, understood. Then just two more. Thanks for taking the questions today. It's a busy day for everybody. On the distribution side, looks like your non U.

S. Business, which has been a nice driver, still a little more sluggish lately. You mentioned you're focused on sort of global generally speaking. Can you talk a little bit about what you're doing there trying to amplify some of the volume? And then my other question somewhat unrelated is, can you sort of walk us through seed capital dynamics to help maybe springboard the opportunity for the thematics team?

Speaker 3

Yes, we agree with you. The non U. S. Distribution has been strong. As we stated in the call, the launch of the three global strategies and getting up to 19% of our AUM outside The U.

S. Now. With regards to continued efforts outside of The U. S, we are spending more time into the intermediary channel and broadening out our distribution, especially in Europe. We think that's been going well, putting our usage on a few platforms and just going a little bit deeper into that channel.

With regards to the seed dollars, we always put a few million dollars into the seed equity strategies. And so we seeded the thematic fund with $3,000,000

Speaker 6

Okay. Thank you so much.

Speaker 0

Our next question comes from Eric Gosch of Credit Suisse. Please go ahead.

Speaker 7

Hey, good afternoon guys. My first one is for Eric. Really appreciate your commentary on the industry and your letters to the shareholders. And I was hoping that you could expand a bit on your comments around the evolution of your distribution technology capabilities. And specifically on technology, do you foresee additional spend in 2017 as you build out resources for the thematic strategy?

Thanks.

Speaker 3

Sorry, Ari, I missed it. The evolution of

Speaker 7

sorry guys, I just dropped off. Can you hear me?

Speaker 3

Yes. Can you repeat the question?

Speaker 7

You got it. You got it. I was just hoping you could provide some comments around just a little more color around the comments that you provided in your letter around the evolution of your distribution capabilities, how that's changing maybe the partnership with your distributors as that's evolved over the past few years? And then technology in particular, as you grow out and build out the thematic strat, you looking at incremental costs associated with that on the technology side for 2017?

Speaker 3

Sure. I think you've seen the evolution of the distribution efforts outside The U. S. Has been one of our biggest efforts. We just completed two additional hires in our London office to go deeper into that channel.

We also have been evolving how we think about the wealth management section. It's a cross sectional across quite a few channels. You could look at the lower end of the institutional and the higher end of the advisory channel. And we've been looking as we develop our strategies that are more differentiated and higher degrees of freedom, where is the natural and most interesting spot for us to focus on. And it's going to be the institutional channel as well as the wealth management channel.

So those are the areas that we're evolving.

Speaker 7

Got it. And then just as a follow-up, your global equity flows, they improved a bit this quarter and it looks like it was driven by the international growth strat.

Speaker 5

Were

Speaker 7

there any sort of lumpy institutional inflows into the strat this quarter? Just trying to think about a run rate moving forward.

Speaker 3

No, I can't think of any large flows that would make that lumpy. The international equity strategy inside of the global equity team had a difficult 2016. But the 2017, they clawed back some of that. We still need to improve on that performance, but nothing's jumping out at me on any big flows.

Speaker 7

Got it. Thank you.

Speaker 0

Our next question comes from Chris Shutler of William Blair. Please go ahead.

Speaker 2

Hey, guys. Good morning. I guess, first on the high income team, can you give us some sense of what kind of I know it's little early, but what kind of institutional demand you're seeing build in the pipeline? And I guess, ultimately, Eric, how do you plan to manage those assets by channel? Do you see it ultimately being fairly balanced retail versus institutional?

Or is it going to tilt more retail?

Speaker 3

Hi, Chris. The pipeline that we have for our high income, we're just starting to build out. We have a few recommendations with regards to buy ratings with institutional consultants. We're spending more and more time this year to build out the number of consultants that we can get a buy rating with. So we expect that to be a the next year or two to build out that broader consultant coverage and timing of assets you can never really predict.

But if you put up the numbers and you get the buy ratings and the odds are on your side. And so that's the strategy for the remainder of the year. I would expect with this strategy of high income that it would have a higher SKU to the intermediary or advisor channels than some of our other strategies.

Speaker 2

Okay, makes sense. And then on the non U. S. Growth strategy, just wanted to touch on that. The institutional flows there, I think, have been

Are you seeing any changes in consultant recommendations or discussions with clients that indicate any greater risk on the institutional side?

Speaker 3

No, we haven't been notified with any changes by a consultant rating. If you look out, it's a fairly mature client base. If you look out past three years and look into the five and seven and ten years, you have strong performance. And we've delivered for quite a good large number of that client base given that the majority of the asset base is well past five years.

Speaker 2

Okay, got it. And then kind of similar question on same strategy, non U. S. Growth on the retail side. Is there any reason we should believe flows are going to get any better or any worse from what you're seeing right now?

Speaker 3

No, it's a small percentage. I don't think I could lean into that and answer with any direction.

Speaker 2

Okay. And then lastly, C. J, on G and A, I just wanted to clarify the comment. So Q1 is a little higher. Are you expecting G and A to then subside a little bit over the course of the year or remain at these levels?

Speaker 4

Mean, and A is a category that can fluctuate. It's not going to fluctuate in large dollar amounts, but you have professional fees and travel and entertainment in there, which are hard to predict. I mean, the second quarter is usually a higher travel period. And so the fact that the director fee expense will drop off, I wouldn't necessarily read into that G and A would drop, but that 7 ish range is probably a good one.

Speaker 2

All right. Thanks, guys.

Speaker 0

Our next question comes from Robert Lee of KBW. Please go ahead.

Speaker 8

Thanks. Thanks for taking my question today. A bunch of them were asked. So I'm just kind of curious, could you with MiFID coming into place next year and non U. S.

Clients and I know you have some operations over there. Could you kind of update us on your current thinking as on how you guys plan on dealing with MiFID expense heading next year?

Speaker 3

Sure, Rob. Today, our business is managed out of The U. S. And we just don't feel that we're going to be directly subject to MiFID II requirements. And we think it's a bit early to figure out how that's going to really impact us.

And at the end of the day, we have a fairly small operations in London. And so right now, we're just taking a wait and see approach.

Speaker 8

Okay. That's actually my only question. Thank you.

Speaker 0

Our next question comes from Alex Blassein of Goldman Sachs. Please go ahead.

Speaker 9

Hey, Good afternoon. Question around capacity. You guys have been very vocal and thoughtful around managing capacity around different strategies. So taking a step back, I guess, among the strategies, the newer ones that you've highlighted, given very good performance, maybe just give a refresher on how you guys think about capacity in high income developing world and ultimately what could come out of Global Thematic over time? And I guess on the other end of the spectrum, just a quick reminder, Global Value I think was closing or is about to close.

Can you just remind us how much kind of room there is still left?

Speaker 3

Sure. The global value and the global opportunity strategies are both closed to separate accounts. So we're managing capacity primarily into the pooled vehicles. And we're right now just keeping an eye on any surge in flows. If there's a high surge, we'll be mindful to manage that flow and slow it down, if not close the pooled vehicle.

If we can manage a more steady state, then those will remain open for global value and global opportunities. The three new teams are quite small in the high income. We stated on the call past $2,000,000,000 in AUM. Brian Krug and his previous employer managed a significant amount more dollars than the $2,000,000,000 So there's obviously quite a bit of capacity and room there for increased flows. Likewise, Lewis Kaufman had a similar history of managing more than the 1.3.

We think there again, that capacity could be multiples over what we're doing now. The Thematic team, obviously, just launching it's a fairly concentrated portfolio of 20 probably about 25, 26 securities today, ranging I think 20 to 35 over the history or on a go forward basis in fairly liquid securities. So that strategy could handle the upper single digits on the billions of dollars under management. It's really going to play heavily into when we launch the long short strategy and what we think the capacity of the aggregate will be. So I don't have exact numbers on what the exact capacity is not it really is the total capacity number.

It's the liquidity and availability of that marketplace that we're operating in. As you move degrees of freedom into those products, it sometimes open up some more capacity. And it's also it's the frequency of dollars moving around that also disrupts the total number. So that's not an exact science.

Speaker 9

Got it. No, that's helpful. Obviously, it sounds like playing around with there. Just a clarification. On the global ops, when did that close?

Maybe I missed it, but I think it's news. And ultimately, reminder, I guess, in terms of just total dollars, how much do you guys you think you can go up to in global ops as a strategy on both the separate account and pool vehicles?

Speaker 3

Yes, we haven't stated the total amount of what we're going to go up to. We just recently informed consultants and prospects that we'll be closing the separate account. So you might see a separate account come in the short run here, but we're definitely gliding to a managed asset base there. And it's getting and approaching to where global value is, which will really be opened in the pooled vehicle side. So we're in that glide phase to closing.

So we just recently have been discussing the separate account closure.

Speaker 9

Got it. Sorry, one more, guess, that related topic. I think in the past global ops and global equity in a way would almost kind of face off one another. Do you guys think that potentially could accelerate some of the institutional money coming in into global equities or into global equity strategy? Or is this just kind of completely different process?

Speaker 3

They're completely different. All of our teams stand on their own. I mean, we've always said that we're bought not sold and the institutional buyer and sophisticated buyer analyzes the strategies they're looking for and then approaches us as opposed to us selling the artisan global array of strategies. So it's a separate decision.

Speaker 9

Got you. Great. All right. Well, thanks so much.

Speaker 0

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