Artisan Partners Asset Management - Earnings Call - Q4 2015

Transcript

Speaker 0

Hello, thank you for standing by. Welcome to Artisan Partners Asset Management's Fourth Quarter Earnings Conference Call. My name is Laura, 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 Tafforn with Artisan Partners.

Please go ahead.

Speaker 1

Thanks for joining us today. Before Eric begins, I would like to remind you that our fourth quarter 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 include references to non GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release. And I will now turn the call over to Eric Colson.

Speaker 2

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

On this call, I want to discuss the performance of our investment strategies, asset allocation trends and our positioning for future growth. After I'm done, CJ will discuss our fourth quarter and full year twenty fifteen financial results. Let me begin by taking a minute to discuss the market volatility we have seen so far in 2016. As we reported yesterday during January, our total AUM declined by eight percent from $99,800,000,000 to $92,000,000,000 primarily as a result of declines in equity markets. As I've discussed before, our firm was consciously designed with market volatility in mind.

Our flexible expense structure is a key part of our business model. Majority of our expenses fluctuate automatically with changes in AUM and revenues. As AUM and revenues decline, our investment team bonus pools also decline. This has two important benefits. First, our investment professionals understand in advance how market volatility affect their compensation.

They know what to expect when markets drive down AUM and we don't have to renegotiate compensation or set new expectations. This predictability creates a more stable environment in which our investment professionals can do their best work. Second, because the majority of our expenses automatically adjust, we can continue to focus on our long term business objectives. We are not forced to revisit or depart from our business plan. In fact, we believe market volatility generates long term opportunities for our business as well as for our investment team.

Over the past fifteen years, we've experienced 18 monthly periods in which assets declined by 5% or more. We don't know whether last month's market decline will prove to be the beginning of a prolonged market downturn or just an isolated event. Either way, it won't change the way we manage our business. Slide two outlines who we are as a firm. We're a high value added investment firm designed for talent to thrive in a growth oriented culture.

We always return to who we are because our business is predicated on trust. Our credibility with clients, employees and investors relies on the consistent application of our business and investment principles and the outcomes generated by execution of those principles. Regularly coming back to the definition of who we are grounds our decision making and minimizes surprises. Slide three shows the performance of our 15 investment strategy. Our goal is to deliver solid, absolute and relative returns in portfolios that are consistent with the stated investment philosophy of each strategy.

That's what we do as an investment management firm for our client. Our ability to generate alpha is why clients hire us in the first place. If we generate alpha as we have historically, our clients benefit and we benefit with more satisfied clients, greater AUM and a better brand with which to market future products. Investment returns not net sales have been and will continue to be the most important driver of our long term growth. Focusing on long term returns, you can see the eight of Artisan's 12 strategies with a five year track record beat their benchmarks over that period.

Six of those eight strategies outperformed by over four fifty basis points on an annualized basis during the period. Of our eight strategies with ten year track records, six have beaten their benchmarks over the last ten years. This outperformance reflects the high value added active management style of our investment team. Our teams develop unique portfolios that are highly differentiated from indices, portfolios that reflect the hard work, experience, insights and judgment of our investment talent. The differentiated investing that generates Alpha can also result in significant and sustained underperformance.

That's what we've seen in the strategies managed by our U. S. Value team over the last couple of years. As I've discussed before, the prolonged bull market that persisted through 2014 was a difficult environment for the team's investment philosophy. While 2015 saw domestic equity indices level off, The U.

S. Value Team's performance did not improve as momentum and growth stocks continued to outperform the rest of market, which worked against the team. The three U. S. Value team strategies experienced $6,500,000,000 of net outflows during 2015, which was more than 100% of our firm wide net outflows during the year.

During the fourth quarter, those three strategies experienced $1,600,000,000 of our $2,000,000,000 of total net outflows. We expect that the team's strategies will continue to experience outflows in 2016, but we're confident several of our other strategies are well positioned for continued growth. Moving to slide four, I want to explain why we are more excited than ever about active management. True active management thrives with a philosophically sound strategy, the judgment of talented professionals, flexibility for that talent to implement its philosophy and exercise its judgment and market volatility uncertainty that allow for differentiated returns from an expensive alternative. From the early 90s through the two thousand and eight financial crisis, we saw the lion's share of actively managed assets were amassed into constrained strategies that provided exposures limited by the index universe and investors' appetite for tracking error.

Standardized constraints allowed investors to easily bucket managers and strategies by style and categories. This is what clients and investors demanded and what traditional active managers supplied. As dollars continue to flow into these constrained exposure oriented strategies, supply eventually overshot long term demand. We've illustrated the excess with the blue historical curve on this page. Over the past few years, the blue curve has flattened.

We think that the green curve is a better representation of investors' allocations going forward. This has created obvious opportunities at the tails. On the left, passive and factor based investing have increased in popularity. On the right, the popularity of alternative assets including hedge funds, real assets and private equity has increased. The evolving allocation dynamic has also created new, if less obvious opportunities for traditional active managers like Artisan.

The emerging opportunity set for us is represented by the shaded area, which identifies the growing demand for high value added active strategies that bridge the gap between traditional strategies and alternative strategies. In this space, sophisticated long investors are giving managers the flexibility to act on philosophy and judgment to further differentiate their portfolios from the indices. These newer strategies have broader investment universes and allow for more tools to manage risk and outcomes. This is an exciting long term development for high value added investment managers. Clients that were formerly most comfortable in traditional strategies with the associated constraints are increasingly giving managers more flexibility.

That freedom in turn allows managers to further differentiate their portfolios and add value in ways not possible with asset class, regional and security constraints. We believe that this trend is creating opportunity for investment talent and investment firms that are willing and able to embrace it. We have already seen and experienced this new and emerging demand with our global strategies. And our two newest strategies, Artisan High Income and Artisan Developing World also fit within this theme. I expect our future strategies and new teams will also fit within this theme as we focus our efforts on long term sustainable demand.

Slide five features our three global strategies with five year track record. The prior slide highlighted how these strategies are positioned within the larger asset allocation trend. This slide illustrates the success we've had with global and our positioning going forward. The strong absolute and relative performance shown on the bottom of the page has translated into outstanding peer group positioning. The chart show peer quartile performance for each of the strategies against their relevant eVestment peer universe.

Over the three year and five year time period, all three strategies are in the top quartile of performance and the strategies outperformed the benchmark over all time periods shown. The strategies absolute and relative performance position them well for future growth. The Global Opportunities strategy had over $2,000,000,000 in net flows last year. It finished the year with $7,600,000,000 in AUM and it has realizable capacity. The global equity strategy passed the five year mark in 2015 adding an impressive five year figure to its performance statistics.

We expect these performance numbers and increased marketing efforts outside The U. S. To support a pickup in assets for the strategy. As I said on a call last year, after the Global Opportunities Strategy's first five years, it had only $357,000,000 in assets. The Global Equity strategy has almost twice the assets after its first five years.

I am confident that it is positioned for growth. The largest of the strategies Global Value was closed to most new investors and client relationships until the 2015 when we reopened the strategy to investors in pooled vehicles. We believe that the combination of the strategy's impressive track record and the team's reputation will allow the strategy to grow in a relatively smooth and structured manner, but we will continue to be thoughtful about that growth. Importantly, the global strategies have proven to be attractive to clients and investors both within and outside of The United States. The non U.

S. Clients and investors assets in these strategies constitute the vast majority of our total non U. S. Business. We have in large part built our non U.

S. Marketing capabilities through the distribution of these strategies, which has increased considerably the geographic diversification of our overall business. The investment and business success of these global strategies is a testament to the skill of our investment talent and to our business philosophy. A decade ago, we began to contemplate and design these strategies. We saw an emerging long term demand for global products.

The global mandates was interesting to our talent and provided a natural next step for their growth. Today, these strategies are thriving and represent the core of our realizable capacity. Slide six shows our latest generation strategies, the High Income and Developing World strategy. As I've discussed before, the High Income strategy has the flexibility to invest in a variety of credit instrument, including corporate bonds, bank loans, revolving loans and credit default swaps. This expands the universe of fixed income investments available to our credit team, which gives the team more opportunities generate returns and build a differentiated portfolio.

This is active, flexible, high value added investing. While the strategy has only a short term track record, you can see that during that time period, it has differentiated itself from the index. At the January, the strategy had over $1,000,000,000 in assets. Perhaps our most notable 2015 business development was the establishment of the Developing World team and the launch of the Artisan Developing World strategy in June. Unlike most traditional emerging market strategies, the Developing World strategy has a flexibility to and does invest significantly in companies that are domiciled in developed markets, but are economically tied to developing world.

The resulting portfolio offers differentiated exposures to an emerging market. While the performance track record for Developing World strategy is short and reflects the recent negative returns in emerging markets, the strategy is off to a great start relative to the emerging market benchmark. With these strategies, we have continued to expand degrees of freedom and provide the teams the tools and flexibility to manage risk and outcomes. This is the next generation or rebirth of active management defined by value added or active share, not categories and indices. Slide seven shows the diversification of our AUM by investment team, distribution channel, client domicile and investment vehicles.

Slide seven shows the diversification of our AUM by investment team, distribution channel, client domicile and investment vehicle. Over the years, our diversification by team, channel and client domicile have all increased as a result of conscious and thoughtful efforts to launch new teams and develop existing talent to execute our levered intermediary distribution strategy and to methodically build out our non U. S. Marketing effort. As we continue to execute our long term business plan, I expect these pie charts to continue to evolve.

We expect to add more investment teams and strategies over time. And I expect that the types of teams and strategies that we add will be consistent with the high value added active and flexible themes I discussed earlier. Moving to the distribution chart, I expect our intermediary business, which encompasses broker dealers, financial advisors and private banks will continue to grow as a percentage of our total business for several reasons. First, four zero one assets will continue to roll over into IRAs, which will put more assets into the hands of these types of advisors. Second, we continue to see wealth management firms centralize the investment decision making process which fits well with our levered marketing approach that focuses on home office decision makers.

Third, the popularity of fee based programs and the expansion of the application of the fiduciary standard should bode well for independent investment firms with best in breed products like Artisan. Our institutional business will also continue to evolve. Right now, the defined contribution space is difficult for us. In the short term, the opening up and reconfiguration of DC plans has worked against us because over time, some of our strategies have grown to the point where any comprehensive reallocation cuts against us. New DC business has also been slow because custom target date funds have developed slowly due to the complexity of structure, vehicles, fees and the potential for litigation.

However, looking ahead over the next three to five years, I think we'll start to see plan sponsors open up their target date solutions and include best in breed managers and global mandates, which should work in our favor. While it may take time, open architecture and freedom of choice should prevail as we have experienced in the past with institutional assets. Moving to the client domicile chart, I expect our assets from non U. S. Opportunities to continue to grow.

As I remarked earlier, the growth of our global strategies has been fed significantly by the assets from non U. S. Clients and investors. I expect that trend to continue as we further build out our non U. S.

Marketing efforts. In 2015, we made significant but calculated additions to our marketing efforts in EMEA, Australia and Canada. Non U. S. Markets remain a very significant opportunity for us.

We're pursuing them in a thoughtful way consistent with who we are. Lastly, the vehicle chart. For these presentations, we break down client assets by separate accounts, Artisan Funds and Artisan Global Funds to use it. Within the separate account category, we include a variety of traditional separate account relationships as well as mutual funds, non U. S.

Funds and and collective investment trust that we sub advised. As I look forward, I expect existing pooled vehicles to grow as a percentage of our total business and for us to launch additional pooled vehicles. With increasingly global and flexible investment mandates, pooled vehicles are operationally more efficient and oftentimes more convenient for clients, even for large clients that have the operational wherewithal to maintain a separate account. In addition, CITs continue to grow in popularity in the defined contribution space. We currently sub advise Artisan branded CITs in our Non U.

S. Growth, global equity, global opportunities and value equity strategies and anticipate that our footprint in this space will continue to grow. I hope that my remarks have helped you understand why I'm excited about our business and the future. I will now turn it over to CJ.

Speaker 3

Thanks, Eric. I'll start with a reminder of our financial philosophies which are on slide eight. These philosophical principles guide our actions in all market conditions. And while recently markets have acted with uncertainty and volatility driving our AUM down and ultimately lowering our revenues and profits, our actions have and will continue to be consistent, transparent and guided by these philosophical principles. Slide nine begins the review of our results for the quarter calendar year ended December 3135.

For the quarter, AUM rose 3% to $99,800,000,000 primarily through market appreciation, half of which was offset by net client cash outflows of $2,000,000,000 For the year, AUM decreased 7% due to net client cash outflows of 5,800,000,000 and market depreciation of $2,200,000,000 As Eric mentioned, in both the quarter and full year, we continue to experience net outflows in our U. S. Value strategies as a result of extended underperformance. We also experienced net outflows in several other strategies as a result of institutional asset allocation decisions away from active equities and to solution based products, particularly in the DC space. On the plus side, absent the outflows in our value team, demand for our global products, particularly from clients outside The U.

S. Resulted in positive net client cash flows for the rest of the firm. We expect to continue to see demand for these products in 2016. Average AUM shown on page 10 decreased 3% to $101,400,000,000 for the current quarter when compared to the previous quarter and five percent when compared to the December 2014. Revenues, which are the product of average AUM and fee rates, decreased 3% to $192,000,000 from last quarter and in line with the decrease in average AUM.

When compared to the same quarter a year ago, revenues decreased 7% reflecting both a decrease in average AUM and a slightly lower average effective fee rate earned on assets. For the year, average AUM decreased 1% to $106,500,000,000 Corresponding revenues decreased 3% to $805,500,000 reflecting both a decrease in average AUM and a slightly lower average effective fee rate. Lower effective fee rate in 2015 stems from a shift in the mix of AUM between our strategies and vehicles, primarily a reduction in the proportion of our AUM managed through Artisan funds. Expenses are on slide 11. During the quarter, overall expenses excluding pre IPO related compensation were down 1%.

The decline in expenses was driven primarily by lower incentive compensation and third party distribution costs, which are tied to levels of AUM. The decrease in these expenses was offset in part by higher compensation costs related to our newest investment team and higher technology costs. For the year, expenses excluding pre IPO equity based compensation rose 5% despite a decrease in revenue, mostly due to our continued investments in existing talent through annual equity grants and the formation of our seventh investment team. Equity based compensation expense rose $13,000,000 year over year as a result of the equity grants in 2014 and 2015. In 2015, we incurred approximately $12,000,000 in expenses from onboarding our newest team and launching their first strategy, which over a short period now has approximately $400,000,000 of AUM.

In addition, we made investments in talent, technology and infrastructure to support our current and future AUM through increased full time employee headcount and technology projects related to information security and our distribution capabilities. The largest component of our expenses is compensation and benefits, which makes up approximately 80% of our total expenses. Slide 12 shows the details of this expense. Our compensation ratio has settled in around 46% as a result of the increase in equity based compensation expense, which adds about 500 basis points to the ratio as well as reduced levels of revenues. As a reminder, for next quarter, our compensation ratio runs higher in the March of each year due to increased equity based compensation expense from January equity grants and seasonal compensation costs.

We expect the January 2016 equity grant to increase equity based compensation expense by $1,100,000 in the March. In addition, seasonal expenses have added approximately 3,000,000 to $4,000,000 to our first quarter expenses of each calendar year. Moving on to margin and earnings. For the quarter, the adjusted operating margin declined to 39.7% compared to 40.9% last quarter and 43.9% in the December. The decline was primarily the impact of lower revenues.

The resulting adjusted net income for the current quarter was $46,200,000 or $0.63 per adjusted share. For the year, the adjusted operating margin decreased four sixty basis points reflecting lower revenues, increased equity based compensation expense and investments in our newest team. Adjusted net income declined to $197,300,000 or $2.69 per adjusted share, down from $228,900,000 or $3.17 per adjusted share in 2014. Slide 14 provides a summary of our public company dividend history. On January 2636, our Board of Directors approved a quarterly dividend of $0.60 per share and a special annual dividend of $0.40 per share.

We calculate and pay our dividends in arrears based on earnings from the prior quarter or year and the amount of cash we want to retain. The four quarterly dividends declared from April 2015 through this January together with the special annual dividend also declared this January represent a total of $2.8 per share. The $2.8 is a yield of over 9% based on our current share price and represents a return of our 2015 adjusted earnings per share plus a portion of the cash earned above our adjusted earnings measure. We calculate the amount of cash earned above adjusted earnings primarily by subtracting capitalized expenditures from cash generated from non cash expenses that reduce reported earnings. The additional cash we retained from 2015 earnings is above and beyond the normal excess cash levels we retain and should allow us the flexibility to maintain our current $0.60 quarterly dividend while we allow time to determine if the January market decline represents a longer term level for markets.

In other words, if our AUM levels remain at current levels or decline, it will be necessary for us to reduce our quarterly dividend at some point. Once again this quarter, in order to help our shareholders, we have disclosed to them that we expect a portion of their 2016 dividend payments will represent a return of capital. We make the disclosure because we expect the amount of cash we distribute to shareholders in 2016 will exceed the sum of our 2016 taxable and previously undistributed earnings and profits. That was the case in both 2014 and 2015. The portion of cash that may be treated as a return of capital does not represent a diminishment of our cash liquidity.

As discussed, we maintain cash levels in excess of our ordinary operating needs and have on balance sheet in excess of $100,000,000 of cash and continue to have an unused line of credit of $100,000,000 If we are required to reduce our quarterly dividend, a decrease to our quarterly dividend rate will not affect our practice of targeting a payout of a majority of our adjusted earnings and net excess cash generated during this year, nor will it affect the $100,000,000 of excess cash we target to remain on the balance sheet. With that in mind, slide 15 shows our balance sheet highlights. Our balance sheet remains strong with a healthy cash balance and modest leverage. Borrowings of $200,000,000 are supported by strong earnings and cash flows and our leverage metrics remain very strong. Slide 16 summarizes our financial outcomes over the past five years.

We have always said that in our business growth is lumpy, but over longer periods of time our model has and should continue to produce attractive opportunities for shareholders who have the patience to earn a healthy cash return while waiting for the long term growth in AUM and revenues that we expect will follow from our disciplined adherence to our principles. Proof in point is the growth we have experienced over the five years illustrated on slide 16. Since 2010, AUM growth has compounded at a 12% rate, revenues at a 16% rate and adjusted operating earnings at a 15% rate. Looking at longer periods of time such as this five year timeframe helps you the bigger picture despite lumpiness and short term market swing. Looking forward to 2016, we are cautious given the market declines experienced in January, but we continue to remain focused on growing in a responsible and thoughtful manner that prioritizes our investment talent and their investment processes.

While the severe market declines we experienced in January will have a negative impact on our revenues and earnings in the first quarter this year, we will continue to be true to our philosophies that have served us well over our twenty year history. Before I finish up, couple of points on employee partner liquidity. Our employee partners are restricted from selling more than 15% of their pre IPO equity in any one year period. That one year period will reset in March, at which time the employee partners will have the right to sell in aggregate approximately 3,200,000 Class A common shares. They are not required to sell any shares and we don't know how many shares they will choose to sell.

But given market conditions, it is unlikely we will be facilitating a coordinated share offering on behalf of employees. They will however have the right to sell on their own. Thank you. We look forward to your questions. And I will now turn the call back to the operator.

Speaker 0

Thank you. We will now begin the question and answer session. And our first question will come from Michael Kim of Sandler O'Neill.

Speaker 4

Hey, guys. Good afternoon. First, Eric, I know you highlighted your commitment to differentiated active management. But just given the ongoing market share gains for ETFs more broadly, can you just update us on your thoughts as it relates to actively managed ETFs and some of the different options that are available out there or might become available down the road?

Speaker 2

Yes. Sure, Michael. Obviously, that vehicle has been extremely popular in the marketplace for passive strategies. And you're starting to see in the marketplace some interest on active, managed ETFs. We're still in the camp of waiting for clients and demand to come to us as opposed to the build it and hope they come model.

And if our clients and prospects start coming to us and wanting that packaged in a different form outside of a separate account or a mutual fund or a collective investment trust or a use it, we're open to creating a vehicle if demand is there. But right now in the active management space, given the current rules of disclosure, we have not seen that interest.

Speaker 4

Got it. That's helpful. And then maybe for CJ, I know roughly 60% of the expense base is variable. But just given sort of the reset in AUM and revenues, has the thinking shifted at all as it relates to investment spending? Are there areas that you might be able to sort of dial back on or delay to some extent just to support profitability in the near term?

Speaker 3

Yes. I mean, as you know, you mentioned 60% low 60% of our expenses are variable, so they adjust automatically. But there are other levers. We have been investing in technology, distribution efforts and equity based comp for future growth. And right now, we're not going to react to one month or one months point of AUM declines, but we will keep an eye on it.

And there are some minor levers that we can pull, but the majority of the levers are already built into our P and L, which is nice because we don't have to take action.

Speaker 4

Okay. And then just one modeling quick question. You mentioned 3,000,000 to $4,000,000 seasonal step up in the first quarter. Just want to make sure that is specific to the comp line. Is that correct?

Speaker 3

Yes, it is. It's basically FICA reset, four zero one matching contribution reset and we fund our health savings accounts a portion of that in the first quarter. So yes, that's all in the comp line.

Speaker 4

Got it. Okay. Thanks for taking my questions.

Speaker 0

And the next question comes from Bill Katz of Citi.

Speaker 5

Okay. Thanks very much. Appreciate taking the questions and the color. Very helpful. Just could we start on that last question?

Just from a modeling perspective, sorry, be so fine tuned first question. Is that sequential increase or is there first the mechanism of the AUM are lower therefore your base compensation will be a little bit lower, but then offset by the seasonal pickup?

Speaker 3

Yes. It's the latter, Bill. It's incentive comp will adjust down with lower AUMs and then that would be offset by the higher seasonal.

Speaker 5

Okay. Thanks. So on the dividend policy, thanks for addressing that. Could you talk a little bit about, I hear you answer the special and the balance sheet liquidity. Could you talk a little bit about type of payout you may be targeting, if you were to address the dividend?

Speaker 3

Yeah. I mean, I don't think we've discussed what we would target yet. But obviously, with the market declines, as you guys have all modeled out and projected, our earnings will be down. So as I mentioned, we do have some excess cash on the balance sheet that will allow us a couple of quarters to ensure that these levels are or to see if these levels are where we'll remain before we have to take action. So we haven't really discussed that yet and we'll wait and see and we'll have to see where we are in the next quarter or two.

Speaker 5

Okay. And then maybe just big picture, Eric, perhaps for yourself. As you talked about sort of repositioning the franchise for I see this sort of shift in end demand. Where do you think you are in terms of leveraging the high yield portfolio, which has tremendous Could that grow at sort of a faster clip than maybe historically been the case just given the turmoil that's been happening within the asset class and the outperformance of the fund? And the second question is, can you sort of go back to that so that diagram, the conceptual diagram and talk about are you a net winner in that dynamic because there's some pros and cons as sort of think through that bell curve?

Thanks.

Speaker 2

Sure, Bill. Certainly on the high yield category, we've seen a lot of disruption in that space. I feel like we're very well positioned with our strategy. We've seen it in the flows over the last year. I think our current positioning of the portfolio and its performance puts us in a very attractive position.

I would say that's also true for Developing World and Emerging Markets. The Developing World was also launched in a fairly noisy year with the Emerging markets index down 15%. So I think both strategies have quite a bit of advantages built in their short records here. And when we get to that realizable phase, which we deem as true realizable capacity is when you get to those hurdles that many of the institutional buyers and consultants put on you of a certain asset level, a certain length of record, once the team is really stabilized and built out, then you start getting those hockey sticks, especially in capacity oriented strategies like high income and developing world. I think we've talked in past calls that global strategies take a little bit longer given the massive supply out there in those strategies.

So I feel confident that high income is in a good spot. It looks good for next year for this year of 2016 given the build out of the team and the current performance since inception. With regards to diagram there of the flattening of the distribution curve of strategies, I think we're a net winner in the category. That top part of the curve of the historical distribution of exposure oriented products, a good chunk of those assets are going to passive or factor based strategies, but we were never up in that frothy group there of just giving exposure. So we have a little bit of loss possibly in our more constrained category strategies of mid cap and small cap that's really constrained style boxing.

But there's a large part of the world that's going to maintain that type of structure and it will be very slow to move. And then there will be a more adopted group and category that would pick up the strategies that we're building with higher degrees of freedom. So I think the outflows that we're seeing in the value strategy is masking this trend. If you take out those strategies off of the last couple of years of performance, see good solid performance of the strategies that have flexibility and you see flows going to those strategies. So as we think we're a net gainer.

Speaker 5

Okay. Thanks very much.

Speaker 0

And the next question will come from Michael Carrier of Bank of America Merrill Lynch.

Speaker 6

Thanks guys. C. J, maybe just on the expenses, you hit on the comp, just on the non comp, particularly given some of the investments that you guys have made with whether it's on distribution or on the team side. Anything from a leveling off on maybe the non comp side in this environment? And maybe that's where some of the levers are.

But just wanted to get some indication of what the outlook is for this year.

Speaker 3

Good question. I mean, I think the lever in the non comp is really in that communication and technology. See we've ramped up spending there over the last year around security initiatives as well as distribution related projects and capabilities. And so there's project spend in there that we can pull back if we need to. But as it currently stands, I would expect that this quarter's level of occupancy communications and the G and A are probably decent run rates to think about for the next few quarters, absent us deciding to

Speaker 2

pull back.

Speaker 6

Okay. Got it. And then Eric, maybe just in terms of the outlook, given some of the newer strategies, what you mentioned in terms of the demand for the global strategies. When you look at kind of the product set, where you're seeing some of the challenges because of institutional allocations and maybe separating out the area of underperformance on The US value side. Are you starting to see, I guess, the uptake of either the global or the new strategies start to offset some of the challenges in terms of the reallocations among institutions?

I'm just trying to get a sense of where you're seeing the momentum versus maybe the negative momentum that the whole industry is facing.

Speaker 2

Yes. If I think if you look at the positioning of our strategies in aggregate, we are starting to see some good asset flow and some good opportunities excluding the one team that we have performance challenges with. Maybe it's a good time here to look at January in isolation. And really despite my views on short term performance and flows, I understand that many shareholders are heavily influenced by these shorter term numbers. But given the timing of this call and our January AUM release and just the volatility, I want to clarify our January net flows given the available data that's out in the marketplace.

Our net flows in January is approximately $500,000,000 in net inflows. And you're starting to see some netting effect going on and of positive trends happening with the strategies that we highlighted in the call of global and higher degree of freedom strategies. And given the value team's performance in January, which was quite strong, I mean in January, the small cap value was up about six fifty bps over its index and mid cap value up 300 bps and the value was up 200 bps really in that anti momentum trade. I think you might have an exchange of kicks going on this year. It's early to tell given off of one month, which I absolutely try to ignore, but given that we get asked quite a bit, I thought it'd be helpful to respond to just the month of January.

Speaker 6

Okay. That's helpful. And then CJ, just real quick on the dividend. I just want to make sure I understand your comments. When you look at what happened in January, just the pressure from the markets, you're seeing at this AUM level or lower, you'll have to review just the payout just given the pressure on the business.

But if we had a rebound and you're at this AUM level back to say where you ended 2016 or sorry, '15, then you would be fairly comfortable in terms of where things are at all else being equal?

Speaker 3

Yes. I mean, think that's right. I mean, our methodology is really, as you know, is to pay out all of our adjusted earnings and then any of the non cash expenses less capital expenditures through the quarterly dividend and the special. And we want the quarterly to be at a level where we have some cushion so that there is some leftover for a special. And so any adjustment would really just be semantics of adjusting it because at the end of the day, we're going to continue to pay it all out.

It's just whether it comes in quarterly or the special.

Speaker 6

Got it. Okay. Thanks a lot.

Speaker 0

And the next question comes from Surinder Thind of Jefferies.

Speaker 7

Hi, guys. I'll start with the international fund. So with that fund kind of soft close, has there been any change in the conversation or the interest around the global equity strategy at this point? Or is it just too early to tell?

Speaker 2

Hi, Surinder, it's Eric. I think there hasn't been any related movement in flows from the closing of one, which as you said is a soft close to the global equity strategy. In general, we see quite a bit of demand for global equity outside of The U. S. With demand from institutional clients in The U.

S. That have switched to a global categorization where we still see pretty good demand in international strategies, especially in the intermediary channel that still use that type of asset allocation and manage structure that focuses on international strategies.

Speaker 7

And then maybe just around kind of international distribution or demand trends. You kind of mentioned three areas, EMEA, Canada and Australia. Australia. Any geographic differences in kind of aggregate demand there or different trends that you're seeing just kind of given the macro backdrop at this point?

Speaker 2

No, can't say there's any specifics that I can add to that. I mean, it's the areas that we've focused on. So those are the areas that we are getting good feedback in the marketplace. There's always some interest that comes in and out of Asia, which is an area that we haven't been that proactive in. But we're mainly highlighting where we're putting resources towards.

Speaker 7

I see. And then one kind of final question. One of the things you've kind of talked about in the past is just making sure you spend a lot of time making sure that interests are aligned amongst the different teams and kind of within the teams. If we were to just kind of focus on the U. S.

Value team, which has kind of been facing these headwinds and they're probably the only team not to have like I would call it true global product, like I understand the value product I think can invest upwards of maybe like 25% in outside The U. S. Are there any thoughts of that team maybe adding a new product at this point? Or do they feel disadvantaged versus the other teams at this point? Or how should we think about the way the team is the future positioning of that team at this point?

Speaker 2

As you guys know, each of our teams are autonomous and they each have their stated philosophy and passion of what they invest in. And for this team, obviously, it's their views, as they would say is a better, safer, cheaper portfolio and they like to stack the deck in their favor. And so when you think about their belief system, I would expect interest out of this team more in how to create a newer strategy around those core beliefs. And some teams are more inclined to have a global nature and others are going to use their degrees of freedom in a different manner. And we work with each team to create that outcome.

So just because the other teams went and created global strategies, it's not going to be the path for every team.

Speaker 7

I see. Thank you. That's it for me.

Speaker 0

And next we have a question from Eric Berg of RBC Capital Markets.

Speaker 8

Thanks very much. Good afternoon. C. J, the bottom of Page 14, getting back to the dividend and the payout ratio, shows makes very clear that you didn't earn your payout in 2015, at least that the earnings 2015 did fall short by whatever it is $0.11 from the fourth quarter dividends that you paid plus the special. But that was true in 2014 as well.

You're currently earning your dividend, the $0.60 I think you earned on an adjusted basis $0.63 in the quarter. So what is the arithmetic? Is the point here that is it just because of is it uniquely because of what happened in the month of January that the dividend is now may now be I need to understand better than I do the arithmetic of why the dividend is now being is now a question mark?

Speaker 3

Yes. Because in our adjusted net income per share, there are non cash expenses, primarily equity based comp that increase our cash, but decrease our earnings on an adjusted earnings basis. So there's more cash earnings. And as you know, earnings is not a metric that we disclose or use. So the math is really adjusted earnings plus non cash expenses less capital expenditures is the amount of cash that we've generated during the year.

Speaker 8

Well, if it is still materially in excess, if you take your two sixty nine and you add back the items that you said that are non cash, it leaves you with a cash being generated still in excess of the $280,000,000 So is it just the uncertainty that's leading you to consider a reduction in the quarterly payout? Or because you would seem to have the cash to do it is what I'm saying.

Speaker 3

Yes. Well, we want to leave we don't want to set the quarterly dividend rate. We want to set it at a rate that allows us some flexibility for market fluctuation. And we also have capital expenditures, which obviously you don't have the benefit of seeing for infrastructure, etcetera. So you don't have all the data to get that perfectly.

But the point being that if we're earning lower levels, we've lost some or most of our cushion for market fluctuations.

Speaker 2

Hey, Eric. It's Eric. I don't think any of the math has changed, so to speak, at your high level where there's no mathematical change. So I think you've had it right. I think there's been some confusion in the marketplace a bit of just how that all comes together.

And we just want to make sure that we're transparent and just clarifying how we think about the dividend.

Speaker 8

If I could also ask Eric one question of you. Your growth team largely domestic in its orientation and your global value team also have very, very good performance relative to their respective benchmarks. Yet they too in 2015, separate outflows. Again, I'm calling I'm talking now about the growth team and the global value team for the full year. Were they experienced outflows.

Maybe you've already touched on this. I just need I would like to sharpen my understanding perhaps of why that is in your judgment in the face of strong performance, more money is coming out and coming out than it's coming in.

Speaker 2

Yes. Mean those are two teams with really strong performance in the marketplace right now. And I think it really gets down to the nature of the mix of assets and the level of closing. And there's a level of closing that happens even in the definition of soft close. And the mix having a little bit more institutional and getting some rebalancing, you can get some outflows.

And to highlight that, I think The U. S. Mid cap growth is a good example. The mix is heavily skewed towards a defined contribution client. And in that segment of the marketplace, we saw some outflows as 401s were reconstructed and there were some rebalancing that went on.

And over the years, our strong performance built up a good asset base. And I think you saw some rebalancing occur in the last couple of years in that space. Likewise on the global value and international value, we've been closed in those strategies and we've reopened into pooled vehicles for global value. We will manage with those moves and with the outflows, we'll manage that balance over time. It just won't be quarter to quarter or year to year.

And your greatest asset is your alpha. And we have alpha in those teams and we're going to manage them I think in the most prudent way possible to continue alpha and position them for positive flows.

Speaker 8

Thank you. Very helpful. Thank you.

Speaker 0

And the next question comes from Robert Lee of KBW.

Speaker 9

Great, thanks and good afternoon, everyone. Just curious, I mean, going sticking and sorry to beat a dead horse a little bit, but to stick with kind of the capital management theme, given the decline in the rerating of the stock, you and many of your most of your all your peers the past year, Why not why isn't this a good time to maybe think about adding share repurchase to the capital management mix? I mean, you feel pretty upbeat about the long term prospects. At this point, maybe repurchasing stock is a good long term use of cash. Liquidity on the stock has improved over the last couple of years as more has come public.

So just trying to get a sense of why not or maybe you are starting to think about including that within the capital management in the year ahead?

Speaker 2

Hi, Rob. It's Eric. It's that balancing act of consistency and stability of presenting our model in a people business. We think that's highly valuable to be consistent, stable and transparent. And we believe in the long term of our business model and delivering.

And we're still evaluating as we grow into our maturity as a public company, how we want to use all the levers from a capital management. And we're definitely much more focused on our business integrity and our consistency than trying to financially engineer or manage the outcome. But as our history grows and we look at all the various levers, we'll take that into consideration, which we've said in past calls. We're obviously not making a decision today to move towards a buyback.

Speaker 9

Just curious on the new developing markets strategy, I mean, I understand that your expectations are pretty modest until you kind of build up the record of the team within your shop over the next couple of years. But just kind of curious given their record in their prior shop, which I know isn't necessarily transportable, but what are your thoughts around their ability just kind of generally to not have to wait for that three years in order to really start seeing some reasonable demand for their strategy? Do you think there's a chance next markets permitting next eighteen months or so we could see some decent uptake?

Speaker 2

I think in the first three years of any strategy, you can see some early adopters and you can see either a big uptake or a slow build. We manage over the slow build process so that we're managing the foundation and the team appropriately. Obviously, are times there that strategies and asset classes get more interest and can have a backdrop of which more flows could come in. They're very hard to predict. Why we've always said, let's not look at this quarter to quarter or year to year.

The one thing I feel really confident is our ability to manage the integrity of our strategies, our ability to find and maintain strong investment talent. And I feel like we have a really good ability to position ourselves for long term growth inside of asset allocation and sophisticated demand. What we feel really inadequate at is understanding what is the behavioral trends in the short run where asset flows go. So it's very hard for me to respond to what do you think over the next twelve or twenty four months in the short run. So I'd say it's in the realm, Rob, but we're not managing towards that.

Speaker 9

Thanks for taking my question.

Speaker 0

And we have time for one more question. That question will come from Chris Scholter of William Blair.

Speaker 4

Hey, guys. Good afternoon. Eric, I know that your teams very much manage money over the cycle and you're less concerned about short term performance. So I guess with that as context, are you concerned at all that the DOL fiduciary rule is going to encourage greater adviser emphasis on shorter time horizons?

Speaker 2

I think our view which I stated on the call and I in talking to our intermediary distribution team and we just feel the higher fiduciary standard and the standards that are being put in by the DOL heavily favors firms like Artisan. If there is higher hurdles and standards to get into centralized buy list or in consultant ratings, we just think that the odds heavily skewed towards us. I mean, we've built our firm day one with that institutional buyer in mind. And if there's a higher standard, we just feel that we're well positioned for that. So I guess I don't see that short term emphasis coming into play.

You see a heavier fee discussion, what you see right now, but I don't know if you see that the real short term performance emphasis.

Speaker 4

Okay. Thanks

Speaker 0

concludes our question and answer session. I would like to turn the conference back over to Eric Folsom for any closing remarks.

Speaker 2

I just want to thank all you guys for your time today. I know everybody is busy and appreciate your time. Thanks.

Speaker 0

The conference is now concluded. Thank you for attending today's