Artisan Partners Asset Management Inc (APAM) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management first quarter 2013 earnings conference call. My name is Francis and I will be your conference operator today.(Operator Instructions). At this time, I will turn the call over to Makela Taphorn, Artisan's Director of Investor Relations. Please go ahead.

Good afternoon and thank you for joining our conference call to review Artisan Partners Asset Management's results for the first quarter of 2013. Hosting the call today are Eric Colson, our President and Chief Executive Officer and C. J. Daley our Executive Vice President, Chief Financial Officer, and Treasurer.

Before Eric begins, I would like to remind you that our first-quarter earnings release and related supplemental presentation materials are available on the investor relations section of our website at www.artisanpartners.com.

I would also like to remind you that the comments made on today's call and some of the responses to your questions may deal with forward-looking statements related to Artisan Partners and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are listed under the caption, Forward Looking Statements, 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, except as required by law.

In addition, some of the Company's remarks this morning 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 exhibits which are posted on the investor relations section of our website.

With that, I will now turn the call over to our President and Chief Executive Officer, Eric Colson.

Thank you, Makela. Good afternoon, everybody. Welcome to the Artisan Partners Asset Management business update and quarterly earnings call. I'm Eric Colson, CEO and I'm joined today by C. J. Daley, our CFO.

As we stated on our road show, we are in a talent business. Our people are the essence of who we are and they define our business strategy so we know that time is a precious asset. We value time very highly so I thank you for your time today and hope you find this discussion useful.

I want to spend the first couple of minutes today reviewing the foundation of our business and who we are, mainly because it will set the tone for our communications. Then I'll review our long-term business strategy and approach, using the quarter as a backdrop. We have a business philosophy and framework for how we approach the investment management business and we want this review to reflect that. Once I'm done, C.J. will take the lead on walking through our financials and our transition to a public company.

Flipping to slide 2, we have a basic set of business facts. The foundation to our business was set in 1994 by our founders, Andy and Carlene Ziegler. At the time, two secular trends that were taking hold in the market shaped our growth strategy; free agency or talent movement and open architecture or choice. When we started the Company, we had one team and a vision shaped by these trends.

In the eighteen years since our founding the attraction of our business has allowed us to selectively leverage talent movement. We now have five autonomous investment teams, highlighted on the lower left of the slide.

Open architecture provided investors with choice and, through our distribution network, we have grown to over $80 billion under management, across multiple channels, highlighted on the bottom-right pie chart.

The firm is managed by a dedicated business leadership team. Our business leadership team protects our investment culture and focus by managing time in the best interest of our investment teams. Everything we do is consciously designed to create an investment culture that allows our talent to thrive.

On page 3 of our presentation, you can see the three core principles that define who we are. We are a high-value-added investment firm designed for investment talent to thrive in a growth-oriented culture. Our principles have evolved over time but they have been consistent since the firm was founded. As we discuss them, you will note a strong connection among the three and that's important because any one of these principles can shape a view of our firm. Over the years, we have been known for our strategies, our people, and our culture. However, in our minds, we are intersection of all three principles.

The real importance of knowing and communicating who you are is the ability to set expectations and deliver on those expectations consistently. For example, when our investors look at our portfolio strategies, they want to understand the process and team to develop performance expectations. If the results don't match expectations, our clients lose trust in the process and people. In a people business like ours, you need to manage expectations and deliver a consistent business model because, if you change the game, you will create instability. We have all seen it happen.

We manage our business with a similar mindset to our portfolio strategies. We believe strongly in the philosophy and approach that define who we are. We believe it should be well-articulated and we manage to these principles consistently. In the end, our goal is to build a stable environment for everybody to thrive.

On slide 4, I'd like to take the discussion from our principles to a more specific discussion of how we approach business management at Artisan Partners and, ultimately, how that drives our current strategy. The four guideposts noted on the page help drive our tactics back to a long-term approach. I'm going to hit on each of these in the context of the quarter but let me quickly summarize.

Our talent focus is the lifeblood of our business. As a result, we spend a lot of time on the development of our people assets, both externally and internally. Investment results are obviously one of the primary measuring tools for our business success but our evaluation of success looks as much to the execution of the investment process as it does the raw numbers. We obviously look at numbers but when we do we look at them from a variety of perspectives. Asset diversification is related to how we grow and this is immensely important to us. We think that managing our asset mix in a diversified way and with strict financial discipline is critical to long-term business health. We understand we operate in a highly-fluid industry but those guideposts provide strong context to our business strategy.

I'm going to come back to each of them on the coming slides but I want to finish this page off by hitting on the trends driving our strategy. Our business strategy doesn't pivot off of short-term details. They can be distracting. We use the details to identify broad, sometimes obvious trends, to drive strategy. Globalization, investment policy evolution, and open architecture solutions are three such trends.

Since the mid-2000's, our business and investment strategies have been impacted by globalization. From an investment standpoint, this trend has driven more degrees of freedom into our investment strategies by allowing our teams to loosen geographical constraints. On the business side, it has pushed us to leverage our distribution with intermediaries and consultants around the world.

Client investment policy statements have tended to evolve over time and to incorporate more diverse asset classes and risk inputs, driven by events like the TMT bubble and the global credit crisis. With the acceptance of broader categories and new strategies within investment policy statements, we're seeing clients increasingly alter their asset allocation methodology away from the traditional mean-variance model using traditional asset classes, to risk-based asset allocation using categories such as company-specific risk, liquidity, inflation, interest rate, and other risk categories. This trend is extremely important to Artisan because the newer categories are long-term, global, and supportive of increased investment freedom create an opportunity in which we're happy to compete.

Finally, open architecture platforms have influenced the design of Artisan since day one. Fundamentally, investors and market participants prefer choice to allow a level playing field. To play and compete in this industry, the key is investment results. Our firm is designed to create an environment in which investment talent have the opportunity to deliver performance results. Today, solution-based providers including target-date funds, discretionary consultant models, and implemented broker-dealer solutions primarily use proprietary products. Similar to the evolution of the defined-contribution marketplace in the late 90's and early 2000's we anticipate these solution-based models will evolve to an open architecture environment giving us, again, an environment in which we're happy to compete.

Having cleared those pages, I want to use our guideposts as an outline for how developments in the quarter intersected with our current strategy, beginning with our talent focus. Our process evaluates individual characteristics, fit with our business model, long-term demand within the institutional framework, and fit with our culture. Similar to our investment teams, we evaluate information and data based on philosophical beliefs and process to provide consistent judgment and insights.

One of our portfolio managers reminded us this quarter that data is information not insights or knowledge. This quarter, our IPO provided us an enormous amount of data. We conducted approximately 50 one-on-one meetings and numerous group meetings that expanded our investment professional network by hundreds of individuals. 250-plus firms invested in our firm at the IPO. Post-IPO, we were amazed by the amount of information and data that we gathered about investment professionals and investment firms.

This information has expanded our network immensely. Over time, we plan to convert that data into insights to manage our firm towards our key priorities. Two of our key priorities are investment degrees of freedom and human capital.

With respect to human capital, we promoted two individuals this quarter within the Global Equity team to Portfolio Manager. Andrew Euretig and Charles Hamker were promoted to Portfolio Manager on the Global Equities strategy. We also began planning for equity awards to recognize value creation within the firm and to align our interests for the long term. We believe that economic alignment for value creation is critical to our business model and expect to grant equity each year.

With regards to degrees of freedom, our business continues to globalize in operations and distribution as well as our client base. Artisan Partners have been investing globally since 1995, with the launch of our first International Equity strategy with Portfolio Manager, Mark Yockey. Today, globalization is making the line between U.S. and non-U. S. investing disappear. As I mentioned earlier, with the evolution of investment policy statements supporting diverse categories, we are interested in strategies with greater degrees of investment freedom and growth in emerging markets.

Continuing on slides 6 and 7, I want to talk about our investment results. As I mentioned earlier, we measure investment success over a generally defined full-market cycle. We focus on longer periods because, ultimately, our teams invest in businesses and business owners think about where they want to be in three, five, or ten years. Owners don't run a business three months at a time so when we think about the performance success of our managers we operate very similarly. Performance data over a very short time period often will reflect liquidity, noise, and market preferences. We think longer periods tend to be a better weighing mechanism to determine success however end-point dependency must be taken into consideration.

Our goal is to produce superior investment returns on an absolute and on a relative basis, with integrity. So, when we look at investment performance we answer three questions. Have we been faithful to a strategy's stated investment philosophy and process? TO us, that's investing with integrity. Has the process produced good absolute performance? And third, how does the strategy's performance compare to the performance of its peers, competitors and benchmarks?

As of March 31, 11 of our 12 investment strategies had added value relative to their broad performance benchmarks over the trailing five-year and ten-year periods and since each strategy's inception. All 12 strategies have good absolute performance and follow their objectives with integrity.

Slide 7 further reinforces the impact of our performance philosophy across our asset base. Our teams run active portfolios with fairly high degrees of investment freedom. Each also adheres to a time-tested investment process. None have a process or incentives that place much value on very short timeframes. Therefore, the return patterns of all of our teams will be lumpy. That is evident in our one-year returns. But, each has proven to compound wealth for clients and outperform the indices long term, as indicated by nearly 100% of the assets outdistancing the benchmarks over the five-year, ten-year, and since inception timeframes. This obviously translates well to peer ratings which are highlighted at the bottom of the page.

My last slide, before turning it over to C.J., is really just a summary of our distribution strategy. We focus on sophisticated investors with a long-term horizon which makes for a more consistent asset base. We're as deliberate about allocating capacity to particular distribution channels to provide diversification in our asset base. We have a disciplined approach to fees because it is critical to talent retention.

Managed well together, we think these characteristics contribute to stability in our business mix and investment teams. In our view, the combination also creates a more consistent cash-flow stream which yields a higher and more predictable present value.

At the end of the first quarter, our assets under management exceeded $80 billion, due to a strong combination of organic growth and market appreciation. Importantly, we had positive net client cash flow in 10 of our 12 strategies, 4 of our 5 investment teams, and 4 of our 5 distribution channels, generated by clients domiciled in the U.S. and abroad. We think that these are the kind of short-term data points that will push us towards our long-term business goals; asset diversification by team, distribution channel, investment vehicle, and geography.

With that, I'll turn it over to C.J.

Thanks, Eric. Good afternoon, everyone. Slide 9 starts the review of our first quarter results. As of March 31, 2013 our company's assets under management were $83.2 billion, a 12% increase over AUM at December 31, 2012 and a 25% increase over AUM at March 31 of 2012.

The increase during the first quarter was achieved as a result of $2.2 billion of net client cash inflows, which equates to a 3% organic growth rate for the quarter and a 12% annualized growth rate, as well as 9% of market appreciation. The increase in AUM over the last 12 months was achieved as a result of $6.6 billion of net client cash inflows, a 10% annual organic growth rate, and 15% of market appreciation.

Average AUM for the first quarter was $79.2 billion so our ending assets under management were 5% higher than average AUM on which we recorded our revenues for the quarter.

March 31 was the end of our first, but partial, quarter as a public company and included numerous transactions related to our initial public offering. Our GAAP results include significant charges related to the reorganization including mark-to-market expense of our pre-IPO partners' equity and other compensation-related charges incurred as a result of the IPO, totaling $476 million. The quarter also included a mark-to-market gain of $25 million on our contingent value-right liability and the previously disclosed charge for severance and cash retention awards that end in 2013.

We present adjusted earnings on adjusted shares, which represents our earnings adjusted primarily for pre-IPO compensation expenses. So, on an adjusted basis, earnings were $33.2 million or $0.47 per share for the quarter. Keep in mind that this figure includes a $0.09 reduction for the cash retention expenses and a first-quarter severance charge. As a result of these items, our adjusted operating margin of 37% was negatively impacted by 630 basis points in the March quarter. The reconciliation of GAAP to non-GAAP results is on slide 16.

The remainder of my comments will reflect our non-GAAP adjusted earnings on adjusted-share results. We believe our adjusted results are a better representation of our results and it's what we, as management, use to assess business performance.

We exclude the impact of pre-IPO income and expense and eliminate the large non-controlling interest by assuming that all limited partner interests in the partnership have been exchanged for shares of the public company. So, adjusted net income per adjusted share represents our results as if the partnership was 100% owned by the public company.

Moving on to slide 10; AUM at March 31, 2013 was $83.2 billion. That's up 12% from December 31, 2012 and 5% higher than average AUM of $79.2 billion for the first quarter. AUM increased in the March quarter primarily as a result of market appreciation of $6.7 billion and net client inflows of $2.2 billion.

Our inflows this quarter reflect increased client activity which is typical for the first quarter of each year as investors update investment allocations and resume 401K contributions. We benefitted from that increased activity, as 10 of our 12 strategies and 4 of our 5 distribution channels saw positive flow activity generated by clients in the U.S. and abroad.

We are pleased with the diversification of our growth this quarter. On slide 11 you can see that we are continuing to build our non-U. S. client base with assets from non-U. S. clients growing $1.3 billion in the quarter to $9.2 billion or 11% of total AUM. Non-U. S. client inflows this quarter accounted for 30% of our net flows.

Slide 12 shows our financial results for the first quarter compared to both our preceding December quarter and the first quarter of 2012. For the March 2013 quarter, revenues were $148 billion on average AUM of $79.2 billion. That's an increase in revenues of 8% over the December 2012 quarter and 24% over the March 2012 quarter.

The average management fee across all strategies and products was 76 basis points, flat from both the preceding and prior year's quarters.

Adjusted operating income for the quarter, which excludes IPO-related compensation charges, was $54.9 million. That translates to a 37% adjusted operating margin. Our adjusted margin this quarter is lower when compared to the December and the March 2012 quarters, due to increased cash retention and severance expenses in this year's March quarter. The impact of this increase to the current quarter margin was approximately 420 basis points when compared to the fourth quarter and first quarter of 2012.

Adjusted net income was $33.2 million for the current quarter compared to $34.0 million in the December 2012 quarter. Our higher first-quarter revenues were offset by higher operating expenses due to the increase in cash retention and severance expenses in the first quarter of 2013, as we previously mentioned.

Overall, the increase in cash retention and severance expenses in the current quarter negatively impacted net income by $4.1 million, after taxes, or $0.06 per adjusted share when compared to the December 201 quarter.

On slide 13 I'd like to spend some time explaining how we view our compensation ratio and our largest expense, compensation and benefits. As a result of the IPO-related compensation, our compensation ratio was significantly elevated compared to prior quarters. However, on a quarter expense basis, adjusting for the IPO-related compensation, severance, cash retention, and seasonal effects, our compensation ratio has consistently been in the 41% to 42% range.

When looking at run-rate compensation expense for future quarters and years, there are a few items to keep in mind. First, the cash retention award amortization that is in this quarter will end at the end of the year. This is roughly $3 million or 2% of revenues this quarter that will go away at the end of 2013.

Second, seasonal benefits expenses will be higher in the first quarter of each year. The impact to this quarter was $2.3 million or 1.6% of revenues.

Last, we expect to issue equity grants in the future. Over the next several years, as we layer in post-IPO equity awards which we will expect will be in the 2% range on average, we expect our compensation ratio will grow to the mid-40% range. Of course, the size of the equity grants each year and related expenses will vary based on the rate of sustainable growth actually achieved and our stock value which impacts the amount of expense we will amortize over the five-year vesting period.

The last slide on capital management highlights the strengthening of our balance sheet as a result of our IPO and the application of the IPO proceeds. Cash ended the quarter at $199 million, debt was reduced to $200 million, and total equity is slightly positive at $6 million. That substantially improved from negative equity of $673 million at December 31, 2012. Our debt-to-leverage ratio is at 0.9 times leverage.

In closing, the March quarter was a productive quarter from a business and capital management perspective. We completed a successful initial offering of our stock which closed on March 12; enjoyed increasing levels of AUM in the quarter; healthy net client cash inflows which annualized at an organic growth rate of 12%; and continued strong performance in most of our strategies. These factors give us confidence that we are well-positioned for the remainder of 2013.

Thanks, C.J. In closing, we are proud of our business model and investment results and we appreciate our success in the IPO and the confidence you have shown in us by becoming shareholders. We will communicate to you about our business in the way that we think about it and we'll provide information for your insights and knowledge. We appreciate your time and your interest. We will now open the call for questions.

Thank you. (Operator Instructions). Bill Katz, Citigroup.

Okay. Thanks so much. I actually have one quick mild question and a couple bigger-picture questions. C.J., in terms of your comp guidance -- I apologize. I was taking notes but I can't read my own handwriting -- when you said you're at mid-40's on the comp ratio, is that before or after the equity grants?

That's after the equity grants. As we grow and issue more equity and the equity starts to amortize on a fully-loaded basis, in five years we'll have a full quarter's worth of amortization and then growth on the upside.

Okay. Alright, thank you. Eric, you mentioned this unconstrained model, if you will, and asset allocation go anywhere. How constrained, if at all, are you by having sort of an equity-centricity? How does that shift your thinking in terms of free cash-flow usage from a team perspective? Maybe you could triangulate to what you're seeing outside the United States, given a 30% annualized growth rate in new business there.

Obviously we've seen the equity flows have been fairly positive here. I think it hasn't changed of what we look at for new investment teams or how we look to invest in the business. Outside the U.S. has been fairly strong for us on the flows coming in. A little weaker than the U.S. but when we look at our pipeline it looks quite strong, about 50% coming in from outside the U.S. and 50% from the U.S. Does that answer your question, Bill, or is --

Part of it. I guess the question is, in terms of the asset allocation. You talked about asset allocation being an important point of differentiation for your franchise and, when you look at some of your other competitors, they have a bit more diversification across that asset allocation including alternatives in fixed income, if you will. Obviously you're doing very well in the equity side. I'm just wondering where you are in the evolution of your thinking in terms of other teams at this point in time. Or, is there just enough momentum in the core business now that's still more of a selective approach?

Certainly. My reference to the asset allocation was really addressing the seasonality effect that's occurring in the marketplace right now. We've seen, in our view, more investors be disciplined within asset allocation this year using their targets and reallocating and rebalancing back to equity. That asset allocation effect has been beneficial for us, as opposed to us trying to diversify across other classes. If we find a good asset allocation team or macro team or a team that can play the asset allocation spectrum, we're open to that, in adding them. But, my comment in the opening remarks was really around the seasonality effect and the increase in equity assets.

Okay. Just one last one for me. Thanks for taking my questions. If you add back the severance charge of $9.3 million to your adjusted operating income, you get an adjusted margin of about 43%. I'm curious, as you think about go-forward, is that a reasonable run rate to reinvest back in the business? I think during the road show you had mentioned that you think you can get it to mid-40's but you'd govern that just given the need to reinvest. The question is, do we get there fast forward and we're stopping from here or is there more upside from here?

Bill, I think it's a combination of offsetting that growth. The growth will take the margin up but we have to start layering in the equity comp. I think this quarter with the strong growth in both the markets and organic growth, you saw that spike but we'll be layering in some equity compensation expense over the next coming quarters as we do our first public equity grant. So, our thinking really hasn't changed around that; mid-40's over the next couple years.

Okay. Thanks a lot, guys.

Michael Kim, Sandler O'Neill.

Hey guys, good afternoon. First, can you just talk about RFP activity in the pipeline in the institutional channel, in terms of some of the moving parts that you may be seeing across the various teams? Then, related to that, what's the feedback you're getting from consultants as it relates to rebalancing a replacement activity?

Hi, Michael. It's Eric. The institutional client base and even the intermediary channel was very disciplined this year in our minds. We've seen past years where groups were more tactical or they would maintain their fixed-income allocations despite their asset allocation stating they should rebalance back to equities or other asset classes. This year we've seen more discipline in rebalancing. We saw quite a bit of activity in the intermediary channel and that's also helped our pipeline in RFP activity and we look year-over-year we've improved on the activity with more search opportunities, more RFP's, and a broader allocation across our strategies.

Okay. Then maybe a question for C.J. just to kind of follow up on the margin discussion. It does seem like there could be some pressure on fee rates as maybe the mix shifts towards separate accounts and newer strategies and then also a fair amount of your expenses are variable. So, just wondering where you see the incremental leverage in the model beyond compensation. Are there further efficiencies in G&A or occupancy that you can move the needle, if you will?

There are just efficiencies built in our model. Approximately 65% of our expenses are variable. That leaves 35% that there is leverage just by the nature of our business. Our assets can grow to some point without us having to add additional infrastructure. There is natural leverage in our model and as we look out the next couple years we see, as we continue to grow, we see our margin increasing but being offset by the layering in of the equity compensation expense.

Got it. Just one clarification, the cash retention expense going forward, did you say you expect an incremental $3 million of related costs in the second quarter? What's the outlook beyond that? Is there any further costs in the second half of the year? Thank you.

That was a retention award that was issued in 2011, as we were thinking about our initial transition from a partnership to a public company. That amortization, in the $2 million to $3 million range, ends in December of 2013. So, you'll see $2 million to $3 million of expense each of the next three quarters and then that will cease to exist.

Got it. Thanks for taking my questions.

Thanks.

Marc Irizarry, Goldman Sachs.

Great, thanks. First question, just on the fee rate, I think you said 76 basis points, flattish. What impact, if any, did the day count have on that? Did that pressure it? Also you said 30%, your client inflows are coming from non-U. S. clients. I'm just curious, as you grow that business, what sort of fee compression, if any, should we expect to see from that?

Hey, Marc. How are you? I think what we saw this year was, at least in this quarter, we had a fair amount of activity in our pooled vehicles whereas, in last year, we saw a fair amount of growth in our separate accounts. The major impact to our fee rate is going to be which channel we add assets. This year we're seeing a trend toward the pooled vehicles which has helped our fee rate but, as we've discussed, we see over the next several years, as we continue to build our assets overseas which are more through separate accounts, we'll see that start to trend down a couple basis points as we grow.

Eric, any update on talent acquisitions? Maybe this gets back to the business mix in terms of your assets. You said you've had a lot of conversations throughout the road show process. How should we be thinking about talent acquisitions in terms of timing in bringing new teams on?

Certainly, Marc. There's no set timing that we can pinpoint and say that we're going to do one or two teams every year. The comments earlier were around the amount of information and data that's coming through. The public process provided us more exposure into the marketplace so our network's expanded. We will continue to comb through those networks and we'll continue to work with individuals and teams to see if they're a fit with our organization. But, as of today, we have a few teams that we're looking at and talking to but no specifics on any onboarding.

In terms of flows, can you give us some color on flows by strategy, I guess? And also particularly for strategies like Global Equity that just hit their three-year number, are you starting to see a pick up there? Maybe just a little bit more color on maybe capacity by strategy and also Global Equity now.

Certainly. We had a good quarter. The Global Value team continued to do well. The Global Value strategy was a very diverse asset mix coming from both separate account and pooled vehicles. There were more assets coming in the pooled vehicles than the separate accounts and had a good mix of clients coming outside the U.S. That strategy will slow down or that team will slow down its assets. As you know, we have a soft close on our International Value strategy and we've closed the separate accounts on Global Value.

The other teams, clearly the Global Equity team has done well with the International Equity strategy and, as you mentioned, the Global Equity has hit its three-year track record and has been rated a five stars by Morningstar. You see the pipeline building nicely in the Global Equity team for the International Growth strategy and Global Equity. So, we think that will balance out our flows more in line over in the next year.

Currently we're seeing quite a bit of demand and continued demand for our Growth team with the Global Opportunities strategy. The team, overall, had nice flows and it has quite a bit of capacity with Global Opportunity and some capacity left in Small-Cap Growth.

Our U.S. Value team has performed quite well in the Mid-Cap Value the last couple of quarters. Small-Cap Value has been off the mark a bit. Value Equity is starting to show a nice pipeline for us.

We've had, obviously, a lot of wind at our back with regards to the Emerging Markets Asset class. The Emerging Markets performance long term has been 100 or so basis points behind the index since inception. We lost a significant piece of business there but we also gained a large account, around $200 million, in Emerging Markets. So, there is still quite a bit of opportunity in EM and we continue to look for opportunities there.

Okay. Then, just quickly on EM, in the pipeline, any redemptions that you see coming from EM or did you sort of stem the tide there?

We have some clients that we're watching but there are no clients that have indicated to us that we see assets leaving. I mean, we've seen a very healthy pipeline there and we're in a nice diversifier to many of the assets and assets allocated into ETF's. If you look at the Emerging Markets ETF, it's one of the largest funds in the marketplace and I think the March quarter was the first time you saw some ETF flows go negative and it was in the bottom five, versus December and January had extraordinary flows into the ETF. Those flows that are leaving are looking for products that will diversify against that large market cap orientation. We continue to see quite a bit of opportunity there. But, we are cautious on the clients, given the performance lag.

Okay, great. Thanks.

(Operator Instructions). Robert Lee, KBW

Thanks and good afternoon. Congratulations on your first earnings call.

Thank you, Robert.

A couple quick questions. Most of mine have been asked. You clearly have a strategy of, from time to time, opening and closing products as flows and what not ebb and flow. Can you maybe update us, are there any products right now where maybe you're seeing pretty strong flows where you're thinking there may be need for, at least, a temporary closure? Or, conversely, any products that may be are closed, even if they're still getting flows, you're thinking you have capacity now to open them more broadly?

What we do is spend quite a bit of time on the mix of assets. We think it's extremely important to manage the fee rate and the diversification. At times, you see strategies go out of favor or performance slide and we've opened for a limited capacity. At this point, we don't have any strategies that we're opening for capacity on a growth or just velocity of assets and to manage our mix.

The area that we continue to focus on is the Global Value team and we are closed in the International Value strategy and we have closed the separate accounts in Global Value but maintain an open position in our pooled vehicles. We saw a nice flow in both our mutual fund and our UCIT for Global value that outpaced our separate accounts. So, I think the management of that mix is going well. That's the only strategies that we're watching the mix.

Maybe looking at new business pipeline, Eric you did mention that you're seeing pretty good activity, feel good about your pipelines. Is it at all possible in any way to maybe put some kind of quantification or color around that? I don't know if there is a dollar amount of one, but not funded mandates out there or some color maybe on RFP activities, up 10% year-over-year. Anything that we can kind of put our arms around a little bit.

I did mention that the overall activity is up year-over-year. We would clearly have seen more assets and a number of searches when we look over the same time period as last year. I don't have a specific number on that. It's up at least 10%, if not greater, on that number. From an unfunded wins, we've been tracking that and, for the second quarter and it looks like, currently in the second quarter, we're approximately around $1 billion of unfunded wins.

Great. That's very helpful. One last question for C.J. and I apologize. This has been a long day for all of us so this is probably obvious but when I look at your comp and I know the $9 million of severance and retention, understanding that the retention's going to continue through the rest of the year, but when you talk about the $0.06 from the severance and retention, you're not talking about that's how much earnings this quarter were reduced by. That's just the relative to the Q4? It should be obvious but it's been a long day.

Yes. That's the delta between this quarter and the prior quarters. In total, the impact just to this quarter would have been $0.09.

Great. Alright, I just wanted to confirm. Thanks for taking my questions, guys.

You're welcome.

Cynthia Mayer, Bank of America Merrill Lynch

Hi, thanks a lot. I guess since you mention rebalancing, do see any seasonality in the first-quarter flows? Is there anything in there that you think might not repeat?

Hi, Cynthia. It's Eric. I do see quite a bit of seasonality. If you back out we ask ourselves; did we see any change in people's investment policy statements or asset allocation where they've upticked allocation to public equities? We certainly haven't seen changes in the policies or asset allocation. I think we've seen, as I mentioned, people be more disciplined and strategic in their asset allocation through rebalancing as opposed to tactical asset allocation. That tactical asset allocation went against public equities a year ago. I think that probably muted the seasonality last year in 2012 and 2011 and people were more disciplined back to their strategic asset allocation.

I think we also saw, from a manager structure standpoint, which is the mix of how people allocate within an asset class. For example equities, you manage the mix between passive and active; you manage the mix by style box or by geography. We see more people looking at active strategies in balancing the mix. Given the explosion in passive assets, I think you've seen a little bit more balancing there.

When you add that all together, it's hard to add that up and say that there's a real sustainable mindset that people are just upping their public equity allocations. It seemed more seasonal and more disciplined than years past.

When you've seen that pattern in the past, would you expect that to persist a little bit into the second quarter, just in terms of people making decisions, but then maybe putting the assets in later or taking longer to make the decisions? I'm just trying to gauge. Looking at the flows, they're pretty good. Is there anything that we should assume doesn't continue into the second quarter simply because this is more of a first-quarter activity?

I would state that the amount of activity is clearly a first-quarter activity and it should decrease over the next couple of quarters. You see a little bit of uptick back in the fourth quarter. We'll see more of our institutional-oriented clients rebalance over time but the assets that came in in the first quarter was primarily through the intermediary channels and more seasonal. I wouldn't extend those to second quarter.

Okay. I guess just to clarify something on the equity awards; those will layer in over five years, right? So, those are expensed as a fixed amount, right? Not variable.

Yes, that's correct. We plan to grant our annual equity in July of each year and they'll have five-year vesting periods. Typically what happens is, for accounting rules, you price them at the date of grant and amortize those pro rata over the five year.

Right. So, if, for instance, the market were to sell off those would still be expensed at the higher amount because they're just based on the price of the stock at the time?

Right.

Okay.

Correct. Yes.

Okay. Maybe last one, can you give us a little color on the process of a searching for teams and evaluating them? Who internally -- is there anybody focused on that full time? Who's most involved in evaluating them? Are the founders still involved in that?

Hi, Cynthia. It's Eric on that question. It primarily comes to my desk but we obviously have our analysts and our portfolio managers out talking to individuals and, in many cases, they give me names of people that impress them. Our founder, Andy Ziegler, is a strong sounding board for ideas and if a name does come across he would certainly pass it along to myself about that new team. But, new idea generation out of Andy is limited. It's now more of a sounding board. Really the ideas come from a network. There's a strong group of headhunters to bankers to peers that we collect ideas and bring to my desk and then we have a group that evaluates the opportunity.

Great. Alright, thanks a lot.

Okay, Cynthia.

At this time, we have no other questions. I'd like to turn the call back over to Mr. Eric Colson for your final remarks.

Great. Thank you very much. We know it was a long day for all of you and truly appreciate your time. We're very pleased with the IPO and the results and want to thank you for your time today.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.