Artisan Partners Asset Management Inc (APAM) 2013 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management second quarter 2013 earnings conference call. My name is Mike and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, management from Artisan Partners Asset Management will conduct a question and answer session, and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. At this time I will turn the call over to Ms. Makela Taphorn with Artisan Partners.

Thank you. Good afternoon, everyone.

Before we begin, I would like to remind you that our second quarter earnings release, and the related presentation materials are available on the investor relations section of our website. I would also like to remind you comments made on today's call, and some of the responses to your questions, may deal with forward-looking statements and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are presented in the earnings release, and are detailed in our filings with the SEC, and we undertake no obligation to revise these statements following the date of this conference call.

In addition, some of the remarks this afternoon 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. And with that I will now turn the call over to our Chief Executive Officer, Eric Colson.

Thanks Makela. Good afternoon. And welcome to the Artisan Partners Asset Management business update and quarterly earnings call. I'm Eric Colson, CEO, and I'm joined today by CJ Daley, CFO.

Thank you for your time today. I hope you find this discussion useful. During this time, I want to make sure to reinforce our long-term business strategy and approach through a current presentation of our operational and financial statistics. But more importantly, I want to begin a pattern of diving a little deeper into one of our primary beliefs. This quarter, the deep dive will focus on talent management. We are very committed to managing our business for passionate investors to deliver performance results for our clients. Once I'm done, CJ will take the lead on walking through our financials.

Beginning with slide 2, we have a basic set of business facts. This is the first of several slides that will hope fully become familiar to all of our call participants. Markets can fluctuate a fair amount point to point particularly over short time frames such as quarterly reporting periods. Our view of our business and how we measure and think about progress does not. I will make sure to highlight changes that we believe are important to discuss as I page through the presentation.

Since our last reporting period, the change of note on this page are the change in assets under management and the number of development strategies we offer. In a relatively flat period for global equity markets our assets under management grew past $85 billion through a combination of organic growth and output generation from our investment teams. At the end of the quarter we launched our thirteenth investment strategy and first since 2010, Artisan Global Small-Cap Growth. This strategy is managed by our Global Equity Team. It is a natural extension of the mix of strategies currently managed by the team and a great opportunity to leverage the broad decision making capability on the team.

The next two slides provide a current view of our long term investment results. As a reminder, it is our goal to produce superior investment returns on an absolute and relative basis with integrity over a full market cycle.

When we look at investment performance, we answer three questions -- Have we been faithful to our strategy stated investment philosophy and process? Has the strategy produced good absolute performance? And how does the strategy's performance compare to performance of its peers, competitors, and the index?

As of June 30, ten of our 12 investment strategies added value relative to their broad performance bench marks over the trailing five- and ten-year period and since each strategy's inception. All 12 strategies have good absolute performance and follow their objectives with integrity.

Slide four further reinforces the impact of our performance philosophy across our asset base. Our teams run act active portfolios with 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 time frames, therefore the return patterns of all of our teams will be lumpy. That is evident in the one-year returns. But each has proven to compound wealth for clients with 90% to 100% of assets outdistancing the benchmarks over the five, ten and since inception time frames.

Our mutual fund peer ratings, which are highlighted at the bottom of the page, are a great illustration of how the results translate to peer ratings.

On slide five, I want to highlight our asset diversification. Our distribution strategy is focused on sophisticated investors with a long-term horizon to manage a consistent asset base. We have a deliberate capacity realization strategy. Ideally, we want to see strong asset diversification by team, distribution channel, investment vehicle, and geography. And we have a disciplined approach to fees because it is critical to talent retention. Managed well together, these contribute to stability in our business mix and investment teams.

During the second quarter, the majority of our strategies experienced positive net cash flows as did four out of five distribution channels. Four of our five investment teams also experienced positive cash flows, led by continued high demand for our global value team.

I would also highlight that our global distribution strategy continues to yield organic growth at a faster rate than the growth rate of the US. Our asset base is skewed towards the US, given our history so we expect the strength of our growth outside the US will eventually begin to expand the pie of non-US assets as a percentage of our overall business.

Slide six is a quick review of the three core principles that define who we are. This page is an important transition to a deeper look into our beliefs about talent management. Summed up in one sentence, we are a high value added investment firm designed for investment talent to thrive in a growth-oriented culture. As I said last quarter, the real importance of knowing and communicating who you are is the ability to set expectations and deliver on those expectations consistently. We believe strongly in the philosophy and approach that define who we are and we believe it should be well articulated.

I have four slides prepared to elaborate on talent management. They touch on theory, our talent management structure, implementation and the results of our approach.

First, turning to page seven, there are enormous amounts of literature on the topic of talent management. I have personally consumed a number of books on the topic. All having interesting insight, but if I have learned anything from all of them, it is talent management has to reflect your business and culture. In this slide, I'm going to relate to one of the most popular books, Good to Great by Jim Collins.

I'm sure most of you are familiar with business author Jim Collins. He has written a number of books that analyze the traits that make companies endure, grow and become great. In that book, Collins presents the hedgehog concept. It is designed to keep your focus simple with the right people. The concept is the intersection of a few circles. First, what are you deeply passionate about? Then, what can you be the best at in the world? And finally, what drives your economic engine?

Our motto can be illustrated fairly well using this concept. Truly great investment talent has deeply passionate beliefs about their investment philosophy. They want to be the best investors in the world and they are driven by economics to align their long-term goals with the goals of their clients. We structured our team autonomously to retain the purity of investment process our talent is so passionate about. We protect the time of our investment professionals to maximize the hours they devote to investment decisions to help them become the best investors in the world. We align the interest of our investment professionals with clients because we don't ever want what drives their economic engines to conflict with clients, and we pursue thoughtful growth because we want to retain our investment talent and attract new talent to our firm.

Slide eight frames the structure and discussion on talent within our four management guide posts presented last quarter. We spend a lot of time on talent development because we are in a people business. Our assets walk in the door and ride up the elevator every morning. We want this to be the most attractive place in the industry to work for the type of investment talent that fits our culture. If we lose focus, if we emphasize the wrong things, or we create the wrong incentives, we will create the potential for our business to become unattractive to investment talent, both internally and externally. As a result, everything we do is designed to create an investment culture that will allow our talent to thrive.

Our business management team focuses on the day to day work environment to deliver more time to invest, more freedom, or autonomy to think creatively, thoughtful growth to build long-term value, not short-term revenue, and more economic alignment to build a sustainable franchise. If we stay focused on all these things, we believe we can be a great place for investment talent.

Our measurement for a great place is a stable environment. This is environment that is predictable and meets expectations. Big or dramatic changes from past practices over a short period create instability with people, then clients, and then eventually shareholders. A great place provides stability and emphasizes long-term success versus quarterly data points.

Another characteristic of a great place is a commitment to evolving teams into multigenerational franchises. Teams are based on a single decision maker and a single product. For a franchise to develop, an environment must exist to foster multiple decision markets and multiple products within a single philosophy.

The implementation of our talent development strategy which emphasizes degrees of investment freedom and human capital is summarized on page nine. These two strategies are critical to reinforce our business model and culture. By providing degrees of freedom, we encourage people to think differently and pursue the creative perspectives that drive value-added decision making.

As I mentioned, we launched our thirteenth investment strategy, Global Small-Cap Growth, at the end of the quarter, which has provided the Global Equity team with additional freedom to put investable ideas to work. We also continued to network for investment talent using the expanded networks we established through our IPO process. We have not made any commitments, but we have found a few investors that lead strategies viable for the institutional market place. We are in the middle of our assessment process, which also looks for certain individual characteristics, business model, and cultural fit.

On the human capital side, during the last quarter, we began our annual equity grant process to recognize value creation within the firm and align our interests for the long term. We believe that economic alignment for value creation is critical to our business model. Our historical and future success is dependent on stability of talent and multigenerational teams. We manage a highly merit-based compensation structure, and equity ownership has always been a key part of our compensation strategy. Last week our Board of Directors approved our first equity grant as a public company.

I have a few important details to share on page ten. First, we believe that equity awards are important to talent acquisition, retention and motivation, interest alignment with clients and shareholders, and ultimately risk management. We are successful at properly aligning interests. We can reinforce our employees' commitment to the principles of who we are, and increase our chances of creating more predictable outcomes and meeting the expectations of our clients and shareholders.

Prior to IPO, we granted equity ownership in the form of partnership interests. The interests were a valuable currency, but one that limited our ability to grant equity broadly across the firm and became increasingly complex over time. With the completion of our IPO we now have new, more traditional types of equity currency, public company equity, that we can add to an employee's total compensation structure. This new currency allows us to broaden equity ownership within the firm.

The size of this year's grant reflects our reinvestment in talent, our private to public transition, and the strong growth of our business and value creation for our clients and shareholders. Like any business that seeks to grow and thrive, a certain level of reinvestment in core assets is necessary. Our core assets are our people, and one of the ways we reinvest in that talent is through rewarding and incentivizing it with equity.

In determining the proper level of this year 's equity reinvestment, we were mindful that we were still transitioning from our practices as a private company, and as we have always, as we always do, we considered individual value creation. In the transition from private to public, we created a process to convert everybody from our partnership equity to public equity. As we have stated, change in a people business should occur gradually to eliminate surprises. Our decision to allocate restricted stock was influenced by multiple factors, but heavily predicated on a concept of gradual evolution.

We are likely to use different types of equity in the future, not just restricted stock, but our Compensation Committee is still in the process of thinking about how equity should be distributed in the future, and you should expect to see evolution in the process.

CJ will elaborate on the financial notes related to the equity awards in his part of the update.

Thanks Eric. Good afternoon everyone.

Slide 11 begins the review of our second quarter June 2013 results. In summary, it was a strong quarter for our firm. It marked the first full quarter for our firm as a public company. AUM increased to $85.8 billion. Net client cash flows were $1.4 billion and translated into a 9% increase in revenue over the preceding first quarter ended March 31, 2013.

Our adjusted operating margin improved meaningfully to 44.6%, but does not yet include the impact of post-IPO equity-based compensation expense. Net income per share on an adjusted basis was $0.64 per share. On July 17, our board of directors declared a dividend of $0.43 per class A common share to shareholders of record on August 12. I will talk more about each of these metrics on the following pages.

Moving to slide 12, ending assets under management was $85.5 billion up 3% from assets of $83.2 billion in March 31, 2013, and up 34% from assets a year ago. Average assets for the second quarter were $85.3 billion, up 8% from average assets in the first quarter of this calendar year. The increase in AUM during the second quarter was due to $1.4 billion of net client cash inflows which equates to a 1.7% organic growth rate for the quarter and 7% annualized rate as well as 1.4% of market appreciation. Over 90% of the market appreciation the first quarter was the result of our strategies in aggregate outperforming their broad-based benchmarks. For the 6 months ended June 30, 2013, net client cash inflows were 3.6 billion dollars. That's a 10% annualized organic growth rate.

While second quarter net inflows were strong, as we expected, we saw a pullback in investor activity this quarter. As we have discussed previously, in our experience, net inflows are typically higher during the first quarter when compared to the second. Year to date despite this, ten of our top 12 strategies, and four of our five distribution channels had positive net flow activity that was generated by clients in the US and abroad.

On slide 13 you will see that our non-US client AUM ended the second quarter at $9.8 billion, up $600 million from last quarter, and up 71%, from $5.7 billion a year ago. Flows from US investors into primarily our US mutual funds continued to dominate our flow activity this year, but we continue to make progress on increasing our non-US AUM as we generated $400 million of net inflow in the quarter and year to date $1 billion of non-US net inflows. Our non-US organic growth, on a percentage basis, annualizes at 14% based on the current quarter and 24% based on the six-month period.

Our financial results begin on slide 14. For the first quarter revenues were $162 million on average AUM of $83.5 billion. That's an increase in revenues of 9% over the first quarter 2013 and 34% above the second quarter of 2012. For the six-month period ended June 30, 2013, revenues were $310.2 million on average AUM of $82.3 billion. That's up 29% from revenues of $240.5 million in the six-month period ended June 2012. The weighted average management fee for the current quarter remained at 76 basis points.

Second quarter adjusted operating income which excludes pre-offering equity-based compensation expense, was $72.2 million resulting in a 44.6% adjusted operating margin. Our adjusted operating margin this quarter benefited from higher revenues, lower compensation costs as the March quarter included a severance charge as well as flat non-compensation costs. However, when thinking about future quarters, you need to factor in post-IPO equity-based compensation expense. We expect the equity grant we made this month will add approximately $3.4 million to expense in the September 2013 quarter. In addition, we expect our technology costs to uptick slightly for the remaining two quarters of the calendar year.

Finally, next quarter we will begin to recognize costs related to obtaining the necessary client approvals in connection with the change of control for purposes of the Investment Company Act and the Investment Advisors Act that we will expect will occur in the March 2014 quarter. We intend to exclude the expenses from our non-GAAP adjusted earnings per adjusted share measure.

Adjusted net income for the second quarter was $44.5 million or $0.64 per adjusted share. The equity-based compensation charged in the next quarter is expected to reduce adjusted earnings per adjusted share by approximately $0.05 per share. For the six months ended June 30, 2013, our adjusted operating margin was 41%, up slightly from 40.6% for the six months ended June 30, 2012 and adjusted earnings per share was $1.11. The margin in this six-month period was negatively impacted by approximately 370 basis points as a result of the cash retention and severance charges.

Slide 16 highlights our compensation ratio. As we discussed on the last quarter's call, our compensation expense includes a fair bit of noise related to pre-IPO related compensation and a first quarter severance charge. We have broken out those components so you can see the ongoing expense and a compensation ratio more in the 41% to 43% range. Of course this does not yet include the amortization of post-IPO equity-based compensation, for which we have added a line in the schedule to remind you that this will begin to be a cost that we incur in the next quarter.

The equity grant we made earlier this month consisted entirely of restricted shares of our class A common stock, vesting pro rata over the next five years. The grant represented 2.25% of our outstanding common and preferred stock. We expect future grants to consist of a mix of restricted shares and options and to represent around 2% of our outstanding capital stock each year.

The size of this year year's grant was on the upper end of our expected range at 2.25% and reflects reinvestment in our talent, strong growth of our business, and value creation for our clients and shareholders and, as Eric outlined, the transition from our prior year's practice as a private company. The ultimate charge resulting from this year's grant, which would be amortized over five years, will be larger than originally anticipated given the increase in our share price.

We continue to expect that on a fully loaded basis, our compensation ratio will grow to the mid-40s over time as a result of the annual equity grants. Conversely, that increase in the compensation ratio will be partially offset by scale as we grow our business and the rolloff of the expense from the investment team cash retention awards. Of course, future equity-based compensation expense is largely dependent upon the size of future grants and our stock price at the time of the grant.

The last slide on the financial highlights -- our balance sheet which continues to improve, and supports our dividend policy, including the $0.43 dividend declared on July 17, payable on August 26.

We continue to target the distribution of the majority of our annual adjusted earnings. We expect to accomplish this by maintaining a schedule of consistent quarterly dividends and considering an additional special dividend each year. We continue to build cash on the balance sheet, but keep in mind that our cash balance at June 30 includes the cash we use for working capital needs, primarily accrued compensation. If you adjust our June 30 cash balance for the working capital needs, our cash balance is approximately $160 million.

We have previously stated we intend to remain conservative and plan to target a $100 million of excess cash. The amounts above $100 million will be available for special dividends, debt repayment, and expenses for new team lift-outs. Our long-term borrowings are $200 million, so on a GAAP basis, our gross leverage is 0.8 times, and on a net basis less than zero. Our equity is now positive even after eliminating the equity from noncontrolling interests.

In closing, we are pleased with the success we continue to enjoy. Our results have been supported by continued strong performance across our strategies which creates alpha and AUM growth above and beyond benchmark results. We have also had consistent debt flow activity and have benefited from rising equity markets. While we enjoy these periods, we caution that our client flow activity can and will be choppy. Our clients are for the most part institutionally-minded and those flows are often unpredictable.

I will now turn it back to Eric.

Thanks CJ. CJ and I thank you for your interest today. We will communicate our business as we think about it and provide information for your insights and knowledge. We will open the call for questions now.

(Operator instructions). The first question we have comes from Bill Katz of Citigroup. Please go ahead.

Thanks very much. Thanks for that update on the philosophy for talent management, very helpful. The question, maybe for CJ just to start off with in terms of your margin discussion -- when you think about the scale opportunity to offset some of the investment spend you highlighted with restricted stock grants, when you think about that margin improvement, is that from second quarter levels historical third quarter levels net of the initial charge hitting?

I would say we were talking from second quarter levels, so you know we think there is still a couple hundred basis point improvement in the margin after adding in the equity expense. So this quarter's margin at 44.6% is actually inflated because we don't have the equity expense. So if you roll back, the 250 or so basis points next quarter that the layering in of that equity comp expense, we think we can continue to grow from there.

Okay that's my question. Okay, it's helpful. Just Eric, you mentioned that you are sort of talking to a few people or teams if you will in terms of the pipeline. I'm just trying to triangulate between that and CJ's comments about priorities for cash flows, if you will. So when we think about the pipeline, do you have a -- in your thought process, time we should be thinking about we might hear something and maybe the potential size of the investment that might be out there?

Bill, you are speaking of pipeline of new teams?

Yes.

I think we want to leave some flexibility with cash. Some of the teams we are looking at are in different locations than we operate today. They operate different asset classes in the alternative space. I don't think we have anything specifically set aside for any one team. But in the initial setup, if it requires us to set up an office or set up different upfront costs, we have some availability there of use of cash. And we are continuing to look at those teams. There's nothing that we want to announce today, but clearly we have some good discussions going on.

Okay. And then my final question, thanks for taking all my questions is you think about the flow dynamics and, I am appreciative of the seasonality of the second quarter versus Q1 for instance, if you look at the alternative line items, and they are all lumpy in nature -- any sense to frame out the pipeline as you are looking into the third quarter, whether it be RFP activity or wins not yet funded or any other metric you might be looking at, just to help us gauge momentum into the second half of the year?

Bill, it's Eric. It looks fairly consistent. We looked at our pipeline going back a year ago to match it quarter to quarter. We looked quarter over quarter, and we see a very consistent pipeline right now of RFP activity, semifinals, finals. Our pipeline is pretty well split between the US and non-US. So I, with regards to the institutional businesses, we believe a pretty steady rate in the pipeline. Now, the pipeline's no more than 50% of our total firm given the mix of our asset base. So it's not indicative of the entire story but we feel comfortable with the pipeline that should continue to keep the positive movement in cash flow.

Okay. Thanks for taking all my questions.

The next question we have comes from Robert Lee of KBW.

Hi, good afternoon everyone.

Hi Rob.

Hey, maybe just go back to the equity-based comp. I guess I want to make sure I understand a couple of things correctly. I think CJ, you mentioned the cost of $3.4 million -- now was that the annual cost or was that just the cost in the third quarter? I'm kind of -- given just some of the parameters you had set out, it kind of struck me that that would be the annual cost of the initial grant. I want to make sure I understand it correctly.

No, that's the next quarter's cost. And when we started, we were on the road and we started talking about 2% grants, we were looking at stock price, around $30, and our actual grant was just above $50. So as you know, the way this works we value for accounting purposes, the P&L charge at the date of grant. So it was a bit larger than we originally had anticipated.

Okay. We can go over some of the details offline afterward.

I guess my next question would just be and actually going back to the full year payout, where you would consider a kind of fourth quarter true-up, I guess I would call it, I guess we should expect that to the extent you do one this year, you would only be looking at the cash generated from the second quarter on or should we really just be thinking of it in terms of the cash on the balance sheet that's in excess of $100 million could be available?

Yes, I would say it's the latter, Rob, that we do have some excess cash on the balance sheet, the Board will consider that as part of the special dividend. But on an ongoing basis, assuming there wasn't anything above the $100 million, you would think about it as sort of the cash generated for the year.

Okay. Great. And just one or two more, and I appreciate your patience. I think you mentioned that the spending on the proxy solicitation, is that expected to begin in the fourth quarter but you are going to exclude that from adjusted, is that correct?

Yes, I think it will actually start in the third quarter, and we will exclude it as a non-GAAP measure and exclude that from, you know, from adjusted earnings per adjusted share.

And that will probably continue for two or three quarters, I guess those things can take a while.

Yes, they can.

And lastly, again I appreciate your indulgence here, just trying to get some sense of, even though it's early on in the quarter, just, any kind of early read on, you know, how the progression of new business trends are you seeing, investor engagement pickup after maybe a lull in June or there hasn't really been an interruption? I'm just trying to get a sense for your current take on various investors' appetite for committing capital.

Rob it's Eric. It's been fairly consistent from the last quarter to this quarter. I don't think we have seen any movement in either direction, so I would say it's fairly consistent following on from last quarter.

All right. Great. Thanks for taking my questions.

The next question we have come from Michael Kim of Sandler O'Neill.

Hi guys, good afternoon. First just curious to get your take on sort of the fund flow trends that we've seen across the industry, particularly as it relates to the step-up in bond fund outflows. And more broadly, where you see that money going. Is this the catalyst that might drive a more meaningful rotation into equities and how is that playing out as you kind of look across your funds?

That's a tough one right now. You see money departing out of the fixed income certainly in June, and people talk about an equity rotation that you don't see across the industry otherwise you would see everybody's equity flows going up in aggregate. We are looking at those flows and I think there's maybe a timing mismatch of them departing and where they are ending up.

Certainly some flows are going into the alternative space. We see the flows still occurring in alternatives and there is a positive trend there. And there's a positive trend towards high-value added strategies such as ours that really distinguish themselves versus the index.

So really what we can talk about is that we still see quite a bit of demand by the institutional type buyer for truly active high-value added strategies. And if you can articulate your process and your portfolio construction, and differentiate yourself from the index and peers, we have demonstrated that this is still a good opportunity out in the market place. If an equity rotation or the flows start coming across the industry at large, again that's just an extra wind at our back.

Okay. That's helpful. And then maybe just to follow up on the institutional business. I know you had a sizeable client termination in the first quarter but were there any lumpy redemptions in the separate accounts channel that hit during the second quarter?

No, no large redemption there. What we did see was quite a bit of rebalancing. I think you see in the institutional market place clients you know rebalancing back to their asset allocation, back to their limits on specific managers. So we have experienced a good positive experience with the clients and the performance has been good. With that you sometimes hit those upper barriers per each client's investment policy statements limits. So we have seen some rebalancing, and you probably have seen that across the industry too though for the more active oriented managers.

Okay and then just finally, any change in thinking as it relates to kind of capacity constraints as you look across the different teams and strategies particularly given the ongoing growth in AUM?

We have not announced any other capacity constraints with regards to the five teams of any material matter. In the global value we have been closed in small, in the separate accounts for global value, which we knew going into the last quarter we are seeing some, tightening around some of our small cap growth strategy where we have seen some good flow. But there hasn't been any material impact there on our total capacity.

Okay. Thanks for taking my questions.

(Operator instructions). The next question we have comes from Cynthia Mayer, Bank of America Merrill Lynch. Please go ahead.

Hi, thanks a lot. I guess in terms of the sales overseas, what products are primarily picking up, and what channel is that? And then you mentioned it also I think that four out of five channels were positive, so I 'm wondering which one is not.

Certainly Cynthia. Overseas it's really in our global strategies. We have our Global Value, our Global Opportunities and Global Equity, the performance has been strong across all three strategies. So we have been seeing quite a bit of activity with those three strategies in Europe. And we have seen continued interest in our US value as well in Europe. We have seen a desire to increase their North America or US exposure there.

So those have been the primary strategies overseas, specifically more in the European region. We have had some small interest in Asia, but I would say that's down the road.

With regards to the channels, for this quarter, our defined contribution channel was slightly negative for the quarter and the institutional broker/dealer, financial adviser, and the retail were all in positive territory.

And why do you think the defined contribution would be negative in the second quarter?

We continue to see some challenges there of working with the target date funds and where net new dollars are going. We had a, we still have positive flows for the year to date in defined contribution. I'd just chalk it up for the quarter of dollars going into broader asset allocation products versus specific strategies such as ours.

Okay.

It's been a flat area for the last couple of years though. Which we talked about in the road show and we talked about in the last quarter. We are still waiting for that open architecture to really hit in the defined contribution channel. You are starting to see some of that effect occur in the press recently, and we still see quite a bit of interest from consultants around target dates.

Right. Okay. And then in terms of bringing in new teams, you mentioned you are looking at teams that specialize in strategies which are viable in the institutional market place. So I guess how important is that to you? Is that sort of a requirement for any new team at this point?

Certainly we want new teams to fit the institutional mind-set and their asset allocation. For us, we look for strategies that will have a long duration in the market place, and the longest duration you can go to is that institutional mind-set. So we certainly don't want to find certain strategies that may be a fad or a niche today and you invest an enormous amount of time into it and it no longer fits a client's asset allocation or a manager's structure. The institutional mind-set is very important to us for new teams and there needs to be that fit.

Okay. And last question is just a follow-up on you mentioned that you are going to have some higher IT expenses or tech expenses 3Q and 4Q. Anything special there? I don't know how significant that is and also is it just sort of a step up that will continue?

Yes, I would just say it's nothing specific. It's just more the timing of projects. So across non-comp expenses we are running a little lighter the first two quarters than we had anticipated. And we expect to pick some of that up in the second two quarters. But I would say we are talking a magnitude to of $1 million to $1.5 million across sort of the non-comp, yes, the non-comp categories.

Okay. Great. Thanks a lot.

The next question we have comes from Chris Shutler of William Blair.

Hey guys, good afternoon.

Hey Chris.

In the Global Opportunities and Global Equity strategies, obviously both feel pretty small today relative to your total AUM, and I certainly recognize in Global Equity you had the PM change earlier this year, but any sense in those two strategies given that the strong performance held how the pipeline is building?

Yes, certainly the Global Opportunities is a very robust pipeline right now, has a longer track record, and we see quite a bit of interest both the US and non-US for that strategy. The Global Equity, however, given its performance and the team 's performance across all the strategies for international equity, non-US small cap and the new Global Small-Cap strategy, have all been doing quite well. So that is picking up steam and both strategies make up quite a bit of the pipeline right now.

Okay. And then the only other question I had is just on the distribution front. Any new developments to note in the I guess the build out of your global distribution effort, new geographies, anything like that you could update us on?

No. There's no buildout, anything new. We've continued to operate quite well out of our London office. The UCITS experience good solid growth. Those across the $1 billion mark in assets in the UCITS. As I mentioned on the call, they have a faster growth rate than what we are seeing here in the US. So we are very pleased with that outcome. And we haven't added any new resources around it.

Okay. Thank you.

At this time we are showing no further questions. We will go ahead and conclude our question and answer session. I would now like to turn the conference back to Mr. Eric Colson for closing remarks. Sir.

Thank you. I just want to thank everybody for their time and appreciate everybody's questions. Thank you.

And we thank you sir, and to the rest of management for your time. The conference call is now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you, and take care, everyone.