Artisan Partners Asset Management Inc (APAM) 2013 Q3 法說會逐字稿

Welcome to the Artisan Partners Asset Management's third quarter 2013 earnings conference call. My name is Jamie. I will be your conference operator today.

(Operator Instructions)

As a reminder, this conference call is being recorded. At this time, I would like to turn the conference call over to [Makela Taphorn] with Artisan Partners.

Good afternoon, everyone. Before we begin, I would like to remind you that our third 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 that 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. 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 and the most comparable GAAP measures in the earnings release and exhibits. Earlier today, we launched a registered public offering of 4.8 million shares of our Class A common stock. Because we are currently marketing this offering, we will not be discussing or taking questions on the pending transaction on this call. So please, refer to the documents on file with the SEC, if you would like further information. With that, I will now turn the call over to our Chief Executive Officer, Eric Colson.

Thanks, Makela. Good afternoon. Welcome to the Artisan Partners Asset Management business update and quarterly earnings call. I'm Eric Colson, CEO. 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 through a current presentation of our operational and financial statistics. Additionally, as I mentioned last quarter, I want to take some time to review our management approach. Last quarter, I focused on our talent driven business model. This quarter, I'm going to spend some time highlighting how we view growth. We are very committed to managing our business for growth. We think it is critical to talent acquisition and retention. But we don't believe in growth for growth's sake. We believe growth needs to be thoughtful and grounded in a long-term view of success. Once I'm done, CJ will take the lead, walking through our financials.

Since our last reporting period, the only real change of note on Slide 2 is our AUM, which increased to nearly $97 billion during the quarter, through a combination of organic growth, market appreciation and alpha generation from our investment teams. Since quarter-end, we have surpassed the $100 billion level. While reaching this milestone is noteworthy and worth recognizing as an achievement for our hard work and great client support, the $100 billion is just another number and states nothing about the quality of our business or thoughtfulness in our growth to achieve this milestone. I will elaborate on our approach to growth later on this call.

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. So when we analyze investment performance, we answer three questions. Have we been faithful to a strategy stated investment philosophy and process? Has the strategy produced good absolute performance? How does the strategy's performance compare to the performance of its peers, competitors and the index?

As of September 30, 10 of our 12 investment strategies added value relative to their broad market performance benchmarks over the trailing 5-year and 10-year periods and since each strategy's inception. All 12 strategies have good absolute performance and followed their objectives with integrity. We expect our 13th strategy, global small-cap growth, to be highly differentiated from its benchmark and relatively focused in nature. We will report on the strategy more closely after it has at least a year of results to discuss. Even then, we will emphasize a three to five-year perspective if not longer. In establishing new strategies, we are not attempting to time the market. More importantly, the first few quarters or any short time periods, for that matter, are not appropriate gauges of long-term success for any of our strategies.

Our global value strategy had a slow first six-months. Now, how has a very attractive long-term record. We want strategies based on long-term investment opportunities and alignment with secular asset allocation change. The processed discipline of our investment teams will result in periods of relative weakness. That is okay. We value long-term value creation over short-term success. We have confidence in the process and execution of our managers to be successful over long periods.

Slide 4, further reinforces the impact of our performance philosophy across our asset base. Our teams are on active portfolios with high degrees of investment freedom. Each also added here is 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 the one-year returns. But over longer periods that normalize cycles or trends, we have compounded wealth for clients and outperformed the indices, as indicated by the 90% to 100% of assets outdistancing the benchmarks over the 5-year, 10-year and since inception timeframes. Our mutual fund peer ratings, which are highlighted at the bottom of the page, are a great illustration of how our results translate to peer ratings.

Slide 5 is a quick review of the three core principles that define who we are. This slide is the anchor to our beliefs. Summed up in one sentence, we are a high value-added investment firm designed for investment talent to thrive in a thoughtful growth environment. We believe strongly in the philosophy and approach that define who we are. We believe it should be well-articulated. This quarter, it is my goal to articulate our thoughtful approach to growth.

For those on our past calls, I will address asset diversification later and within the context of our thoughtful approach to growth. It is probably not necessary to have Slide 6 to make this point. But we want to emphasize the point. We are a high value-added investment firm. Growth should extend from who we are. It should reflect the process and development of our investment teams. It should prioritize the client experience. It should emphasize long-term business discipline over short-term results. It should not be driven by quarterly expectations or arbitrary business development targets.

Turning to Slide 7, our growth strategy, like everything else, extends from our four management guide posts. Firm evolution requires thoughtful growth. A lack of growth or growth for growth's sake can make a business unattractive to investment talent. We are always looking for ways to maximize long-term career opportunities for our existing investment professionals and make our business attractive to prospective investment talent. We also want to make sure we never prioritize growth ahead of the investment process. We need to make sure we are grounded in a long-term view that prioritizes our clients. If we stay focused on those three things, we believe growth will follow naturally.

Perhaps the most important consideration in our growth strategy is team development, internally and externally. Our hybrid model and execution of results have created a unique brand for Artisan in the marketplace. To make our model continue over the long-term, talent networking, sourcing new talent and internal talent development must be a core competency and define who we are. Our process evaluates individual characteristics, fit with Artisan and long-term demand within the institutional framework.

We don't try to capitalize on short-term trends or niche strategies nor do we attempt to guess if a person or strategy will work in the next year or two. To the best of our abilities, we look for no-brainers, that will work within our model and fit within the long-term asset allocation of institutional clients. This allows us to be patient and nurture the right outcome, after we started a new strategy or brought in a new team. The right talent for Artisan is a scarce resource and should not be forced somewhere through the institutional decision making process, our talent development and recruitment process is a gradual one.

Like investing, one very bad decision can more than offset multiple good decisions. So we meet with a lot of teams and only move forward when we are fully confident. Finding the investment talent to begin our evolved teams has been a key part of our growth story, evolving our existing teams has been an even bigger part of our growth story. The way we develop teams internally is just as rigorous as the way we evaluate external talent. We want recognized decisionmakers with strong beliefs systems. The development of talent within each of our teams should be as unique as the teams themselves. There is no formula for developing talent within a team.

Moving on to Slide 9, all of our five investment teams at Artisan today begin with a rigorous and [external] talent search. Each one started with a talented decisionmaker, a tight team, usually one analyst and a commitment to developing each team in a way that fits their unique investment beliefs. There is no roadmap. But our goal is the same. We want to build multi-generational franchises. We want don't want a single product built around one star. We want true franchises with [broad] decision making defined by distinct investment culture that has natural succession options.

You can see the outcomes on the slide. All but our newest team has multiple decisionmakers and each team has evolved the research in a way that is distinct to their investment culture. This development created greater capacity for growth and ultimately new products. For example, Andy Stephens joined in 1997, with a passion for growth investing. He believes in the untapped mid-cap segment of the marketplace. Jim Hamel was his first analyst. In 2001, Jim was promoted to Associate Portfolio Manager and ultimately Portfolio Manager in 2006. Over the years, Andy and Jim have sought out the best people, trained them in their philosophy and process and evolved a structure to ensure clients would benefit from the expertise of the team as it developed.

The team now has an incredibly deep research capability that has produced additional decisionmakers in Matt Kamm and Jason White. It has created the capacity for the team to launch the global opportunities strategy and integrate Craig Cepukenas in the US small-cap growth strategy. Today, Andy Stephens leads our growth franchise, while Jim Hamel leads the global opportunities portfolio. Matt Kamm leads the mid-cap growth portfolio and Craig Cepukenas leads the small-cap growth portfolio. All of our teams have similar growth outcomes, despite taking very different paths. Emerging markets is early in the development process. We expect it will eventually evolve in a similar fashion.

On Slide 10, we illustrate our capacity management life cycle. As we create capacity for growth on our teams, we have to ensure we are managing the capacity appropriately. We are an investment firm, first and foremost. That means that as we grow, we need to protected the alpha potential of our teams. Growth can easily stagnate or reverse course if results falter. So we manage capacity proactively for each of our investment strategies. In the first few years, we ask our teams to focus solely on investing.

During their early years of a new strategy, the tendency can be to use the portfolio managers heavily in the marketing process, to establish an early client base and quickly push product profitability. We don't believe that is wise. We hire a dedicated business leader to cautiously market the new strategy. We seek out early adopters, but we focus on long-term investors versus hot money. As the strategy matures over the first three to five years, if we have done a good job letting the team focus on investing and protecting alpha, institutional consultants and advisors begin recommending and allocating assets. In many cases, this is the hockey stick with asset growth.

Once the strategy has hit its growth phase and begins to move to maturity, we actively manage asset diversification to, again, protect the time of our portfolio managers and knowing that transparency and communication are necessary to establish trust and long-term relationship with clients. For these reasons, just prior to our IPO earlier this year, we closed our global value strategy to most new separate account relationships. Its asset mix is heavily biased toward separate accounts. We are now actively managing capacity to balance the mix with flows through other channels.

Finally, as a strategy hits maturity, we protect alpha by closing thoughtfully to preserve portfolio flexibility. At this phase, we think growth is more appropriately measured by value-added versus new money to the strategy. In the third quarter, we closed our US small-cap growth strategy, as thea level of assets and the pace of cash flows reached a level that our growth team wanted to manage to ensure process consistency.

The next two slides illustrate the outcomes of our business discipline around team development and alpha protection. The diversification of assets by team varies because timing, demand and opportunity line up in different ways. But overall, we believe we have balanced across channels, minimized concentration risk and averaged fees that support our high value-added business model. Turning to the next slide, you can see how this translates for our -- for us, as a business. We think we have attractive diversification by team, channel, client and ever more each day by geography.

As I wrap-up this discussion of thoughtful growth, I believe it is appropriate to touch on expectations for growth on Slide 13. We manage our business as an investment firm. We manage our Firm like business owners. What this means, inherently, is that our time horizon for growth aligns with our expectations to grow the Firm's value over the long-term. It does not align with just the September 30 quarter, or just fiscal 2013, or any other arbitrary timeframe. We understand that profit cycle, that value is realized in unpredictable ways and that in order to achieve the most sustainable outcome, we must accept short-term lumpiness.

We view ourselves as a growth firm. We are committed to growth over the long-term. But as you have heard me say repeatedly, our commitment is to thoughtful growth. Linear business outcomes requires compromising culture and process, which we don't believe is productive. We understand and accept that our results will be lumpy. We don't think lumpiness prohibits long-term growth. In fact, we believe that a lumpy growth pattern reflects thoughtful growth, based upon our culture and discipline. Now, CJ will provide our third quarter financial highlights.

Thanks Eric. Good afternoon, everyone. Slide 14 begins the review of our third quarter September 2013 results. In summary, it was another very strong quarter for our Firm. AUM increased to $96.9 billion. Net client cash inflows were $2.1 billion. Revenues were $178 million, up 10% over revenues in the preceding quarter ended June 30, 2013. Our adjusted operating margin declined slightly to 43.3% and was negatively impact by 191 basis points, as a result of the expense related to our first public company employee equity grant in July of this year. Net income per share on an adjusted basis was $0.67 per share, compared to $0.64 per share in the June 2013 quarter. On October 22, our Board of Directors declared a dividend of $0.43 per Class A common share.

Moving on to Slide 15, in the assets under management was $96.9 billion, up 13% from assets of $85.8 billion at June 30, and up 39% from assets a year ago. Average assets for the September quarter were $92.4 billion, up 8% from average assets in the June quarter. The increase in AUM during the September quarter was due to $2.1 billion of net client cash inflows, which equates for a 2.4% organic growth rate for the quarter and a 10% annualized rate, as well as 10.5% of market appreciation, which includes alpha generation.

In the nine-months ended September 30, 2013, net client cash inflows were $5.7 billion, a 10% annualized organic growth rate. Market appreciation, including alpha generation, added another 23% of AUM growth. While we were pleased with the strength of third quarter net inflows, we were equally pleased with the diversification of our growth. Growth occurred from clients both in the US and abroad, with all vehicles, teams and distribution channels experiencing positive growth for the quarter.

On Slide 16, you'll see that our non-US client AUM ended the third quarter at $10.9 billion, up $1.1 billion from last quarter and up 63% from $6.7 billion a year ago. We continue to increase our non-US client AUM as we generated $300 million of net inflow during the quarter and for the year, $1.3 billion. Our non-US organic growth on a percentage basis annualizes at 13% based on current quarter and 21% based on the nine-month period.

Our financial results begin on Slide 17. For the September 2013 quarter, revenues were $178 million, on average AUM of $92.4 billion. That is an increase in revenues of 10% over the June quarter and a 39% increase from the corresponding September quarter of 2012. For the nine-month period, September 2013, revenues were $488.2 million on average AUM of $85.7 billion. That's up 33% from revenues of $368.5 million in the nine-month period ended September 2012. The weighted average management fee for the current quarter remained at 76 basis points.

On Slide 18, we highlighted our adjusted operating margin and adjusted net results. Third quarter adjusted operating income of $77.1 million, excludes pre-offering share based compensation expense, but includes $3.4 million of expense related to our first public company employee equity grant, this past July. Our adjusted operating margin of 43.3% this quarter was negatively impacted by 191 basis points from the additional equity-based compensation expense, but it benefited from higher revenue levels. The equity-based compensation expense recognized in the September quarter represents a partial quarter. Future quarterly expense from this year's award will be approximately $3.9 million.

As mentioned previously, we began 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 Investment Advisors Act that we expect will occur in March 2014. Those expenses were minimal this quarter, approximately $250,000. As discussed, we've excluded those expenses from our non-GAAP adjusted earnings per adjusted share measure.

In addition, thinking ahead to next quarter, we want to remind you that we expect to recognize $2 million to $4 million of unrecognized gain on investment securities that we purchased in connection with the cash retention bonus arrangement. That unrecognized gain is currently accounted for in other comprehensive income. Our obligation under the cash retention arrangement was tied to the value of the investment securities, which we funded at the inception of the award.

With the expiration of the arrangement at the end of this year, we expect to sell the underlying investment securities and realize the non-operating gain. Adjusted net income for the September quarter was $47.6 million or $0.67 per adjusted share. That is a 7% increase in adjusted net income over the prior June quarter and a 64% increase over the prior September quarter. For the nine-months ended September 30, 2013, our adjusted operating margin was 41.8%, an increase from 40.0% for the prior nine-month period ended September 30 and then adjusted earnings per share was $1.77.

Slide 19 highlights our compensation ratio. As we discussed on last quarter's call, our compensation expense continues to include noise related to pre-IPO related compensation and the cash retention award we granted three years ago. The expense for the cash retention award ends after next quarter. We've broken out those components, so that you can see the ongoing expense with equity-based compensation layered in and excluding the pre-IPO and retention costs. We continue to believe that as we layer in the full effects of post-IPO equity-based comp, which generally vests over five years and excluding the pre-IPO expenses, our compensation ratio will settle in the mid-40%s.

Of course, our compensation ratio can fluctuate. It's impacted by our rate of growth and the cost of future equity-based awards, which are largely dependent upon the size of future grants and our stock price at the time of grant. Finally, the last slide on financial, highlights our balance sheet, which remains strong and supports our dividend policy, including the $0.43 dividend declared on October 22. We continue to target the distribution of the majority of our annual adjusted earnings.

We expect to accomplish this by maintaining a schedule of constant quarterly dividends and will consider an additional special dividend each year. We continue to build cash on the balance sheet. So keep in mind that our cash balance at September 30, includes the cash we use for working capital needs, primarily accrued compensation. If you adjust our September 30 cash balance for working capital, tax needs and the recently announced quarterly dividend, our cash balance is approximately $170 million.

That $170 million is available to be used for our annual special dividend, as well as other strategic corporate needs, which we have indicated are typically minimal. We intend to target a cash balance of $100 million on the balance sheet after our annual special dividend. Subject to the approval of our Board, we expect to declare the special dividend at the January 2014 Board meeting. Finally, our long-term borrowings of $200 million. On a GAAP basis, our gross leverage is 0.7 times.

In closing, we are pleased with the success we continue to enjoy. Our results had been supported by continued strong performance across most of our strategies, which creates alpha and AUM growth above and beyond benchmark results. We have also consistently had net flow activity and have benefited from positive equity markets. We caution that our client flow activity can and will be choppy; therefore, our results will vary accordingly. I look forward to your questions. Okay, I'll turn it back to Eric.

Thanks, CJ. We will open the call for questions.

(Operator Instructions)

William Katz, Citi.

Thanks so much. Appreciate the run down. Just -- Eric, sort of curious. A number of those reporting earnings already in third quarter have been struggling for unit growth. By contrast, you're putting up some pretty diversified and solid growth. Any sense you're getting -- I know some of this is third-party money, but any sense you're getting, in terms of the reasons, why Artisan's been so successful? Is it replacement from others? Is it just an asset classification? Just sort of curious what you're seeing there on those dynamics?

Yes. Bill, I don't have a great answer for you on any trend line. We don't see it as replacement in the institutional business. You can see some modest growth there in the institutional side. On the broker/dealer side, you're seeing an uptick there in allocation to Artisan. I wouldn't want to state that it's due to a rotation out of fixed income at this point, or any major trend. I think we have been generating some solid performance results and are being recognized for those results.

Okay. That is helpful. Second question, maybe for CJ, just sort of curious, in terms of your -- you mentioned that the comp ratio, all in was sort of settling into that mid-40%s. But if you stripped away the non-cash comp awards, if you looked only at the base comp, if you will, and sort of stripped out the cash retention package as well, which I guess ends this quarter -- upcoming. I think that number was about 40% ish, 40.5% or so in the third quarter. What is your sense for that dynamic as you look out into both the fourth quarter and into 2014? Is there cognizant of the big move in asset both in the third quarter and again into this quarter?

Yes. I think the major driver of that ratio is going to be twofold. One, it is growth in AUM; therefore, leverage of holding that ratio down as we grow and the fixed costs are more stagnant than the growth. Offsetting that is sort of the equity-based compensation expense, which we said is going to be the major driver of that ratio going up. We plan to grant equity once a year. So our guidance of $3.9 million per quarter will hold true for the next several quarters, until the next grant in July of 2014.

Robert Lee, KBW.

I just had a question, Eric -- this is actually kind of referring to Slide 9. I guess we go through the teams and team development. Understanding that they have expanded the teams since then -- each ones start. But I guess when I just kind of glance at the two value teams, understanding each is unique, it does seem like there is maybe not quite as broad an analyst in the PM base as maybe some of the other teams. I guess what my question is, I mean, are any of the teams currently looking to expand their staff to any degree with searches? Do you feel like maybe the value teams or one or both of them are -- could use a little bit more kind of build up underneath the senior guys?

Each of the five teams have their own culture and own way of designing their research. So, the value teams tend to build research analysts in a generalist framework as opposed to industry or sector or region expertise. We have found that the value teams have tended to have a smaller team and a more focused decision making than the growth teams that have been broken out by industry or by sector and tend to demand a little bit more information flow to know how earnings are driving price versus the value teams looking for a discount.

So there is going to be natural differences based off philosophy and process across our teams. I think the teams right now across all five teams are very well-resourced. With that said, we are always looking for good talent to join any of the teams. We tend to in most cases, develop talent in the research associate or analyst level and groom that talent within the philosophy and process of the each group to create decisionmakers. We are always looking at the junior to the research associate level to build. I wouldn't say there was a need for any team right now to fill a hole.

All right. Great. That was my only question. Thank you.

Michael Kim, Sandler O'Neill.

Just a couple of questions. So first, in terms of the flow outlet going forward, a number of your strategies remain closed to new investors, but at the same time, you are still generating pretty strong organic growth across teams. So just wondering if you could maybe give us some incremental color in terms of the mix of the underlying inflows? Because, I assume, a number of the strategies that are closed are still generating inflows from existing clients or from channels that are still available.

Yes, certainly. It's been fairly broad-based, especially this quarter here. All five teams experienced positive flows. The flows were pretty well dispersed across the growth in the value teams there, with global value having a little bit higher flow than the other teams. From a channel perspective, we are still seeing quite a bit come from the broker/dealer side of the equation. On a go forward basis, the closed strategies, as we have said in the past, are soft closed.

So we still see existing flows come in from the defined contribution or broker/dealer or existing institutional clients. So we'll see a decent amount of flow, even though the product is closed. But the pipeline and the growth for open capacity, we are seeing more and more in the global equity space, whether it is global opportunities, global equity and our global value. In the global value, we are trying to control the mix there. As I said on the call, it is at a more mature stage. We are looking to balance the assets more than we are looking for growth.

Okay. That is helpful. Then can you just maybe give us an update in terms of your plans as it relates to further building out non-US distribution capabilities? How you are thinking about maybe potential incremental costs related to that as you build out the infrastructure?

Right now, we have a few individuals in London. We have a relationship in Australia. Those act as our hubs into non-US distribution. Those hubs are utilized primarily by our business leaders that represent our five teams here in the United States. Those business leaders do quite a bit of travel, working with the group out of London and out of Australia, to gather assets through consultants and other advisors. We think we are fairly well staffed there for the opportunities that we see in the marketplace. We potentially could see a person or two next year, but I wouldn't load much of an expense there into our non-US distribution efforts. We believe it is working quite well.

Okay. Thanks for taking my questions.

Marc Irizarry, Goldman Sachs.

Just on the emerging market strategy, I was just curious, it looks like flow has turned the corner a little bit there. Any perspective on -- number one, how allocations are shaping up from institutions in that space, given some of the recent volatility in the markets there? Maybe just a view -- maybe more of what you're seeing specifically for that strategy, but just broadly, Eric, in terms of allocations?

Certainly emerging markets is continuing to gather assets. I think we saw it more so in the first half of the year. But emerging markets continues to get flows across the industry. You have seen a fairly concentrated group of managers gathering that flow. They tend to be the larger cap growth oriented that have had a nice tailwind behind them. Our strategy is an active strategy. It is distinguished against some of the larger emerging market players. We think we are fairly well-positioned to diversify in emerging markets portfolio. We also feel that the performance this last quarter, hopefully, is a signal there of turning the corner.

Okay. Then could you just talk a little bit about the retirement announcement from Scott Satterwhite in the US value team. Obviously, you have the three-year notice period. I'm curious, how have the discussions with the consultants gone? Can you just give some perspective on sort of the benefits the structure provides, in terms of managing through a key-man risk?

Yes. Certainly. Obviously, our large-cap value, small-cap and mid-cap value strategy was launched by Scott Satterwhite and Jim Kieffer. They have built, I think, a nice team in Atlanta with now four decisionmakers. The announcement with a three-year heads up, I think, provides an enormous amount of transparency into how we manage key-man risk, is that we clearly like to build a depth inside of the investment teams and also work through that transition in the marketplace by communicating to our clients. We find that the consultants and our clients find it helpful to know how the team is evolving and what their expectations should be on a go forward basis.

We have said in a couple of different meetings that, the biggest risk we see out there is not a statistical risk of trying to measure it to an index or any type of traditional statistics out there. But the real risk is surprising your client. If you set expectations on the philosophy, the process, the people and you follow-through with an outcome to hit client and consultant expectations. We are setting expectations that we are evolving the team. We are going to deliver on that. We believe that dilutes risk for the future. So it's being well-received in the marketplace. I think people are appreciative of the thoughtful nature of how we are growing and evolving the team.

Okay great. Thanks.

Cynthia Mayer, Bank of America Merrill Lynch.

Just to clarify some of the ways in which you shape the flows, I guess you said global values closed the separate accounts to encourage flows from other channels. Which channels are those? How is that going? Is that mostly overseas? Is that in the US? Then if you look at Slide -- I guess it is 11, the channels aren't that diversified for global value, but also not that diversified for emerging markets. So would you do something like that with emerging markets, as well as the flows recover? Thanks.

Certainly Cynthia. The global value, as we said, were close to separate account. The asset base there on Slide 11 is clearly showing an institutional bias in that team. We are seeing more flows in the broker/dealer and financial advisor and global value versus our other strategies. We are also seeing more non-US flows out of any of the teams -- the global value is receiving the highest amount of flow overseas, either -- primarily through the use that we have for global value. So we believe by closing the separate account and focusing on the pooled vehicles for those other distribution channels, that it will diversify that team asset base quite a bit. The emerging market strategy is interesting. In 2006, when we launched the strategy, it is kind of back to that life cycle that we talked about.

We launched in institutional share class, we did not open it up to the retail investor. At the time, we felt that we were in a volatile period for emerging markets. We felt that if we raised some hot money in the first year, due to good performance and if you had a boom bust cycle in the following year, was a poor performance. We had redemptions, then forced selling. You are putting the early track record in harm's way there for various asset flows. So we controlled the asset flow and had a clear bias toward the institutional marketplace. As we get into a point where we feel the strategy is well-positioned for growth, we will certainly think about how to balance that out.

Great. Thank you.

(Operator Instructions)

Chris Shutler, William Blair.

As we look at the global value team, can you help us think about the magnitude of remaining capacity there? So is it more than $5 billion? $10 billion? Any more color there would be helpful.

It would be closer to the $5 billion. We have to see how growth occurs and at what rate. So we'll be cautious on how we layer that capacity in. Eventually, long-term, it could grow larger. But we'll err on a smaller number over time, to protect alpha generation. So we don't have the exact number at this point.

Sure.

But out of your numbers there, I would lean towards the smaller number. So we have always looked at the velocity of assets. We have always looked at total capacity and mix. We have protected the velocity to some degree. We are working on the mix. As we narrow a capacity number to protect alpha, we'll make that decision as we get closer.

Okay. Makes sense. Then just one quick one on the P&L. So the G&A expense on the quarter was flat sequentially and a little bit lower than what we'd expected. So just wondering how we should look at G&A going forward? Should it just gradually increase over time? Or is there something that would cause that expense to jump up?

There isn't really any one thing in particular, other than the changing control costs that we have told you about. That should be in the $2 million to $3 million range over the next couple quarters. But just sort of ongoing expenses around G&A and communications and technology, we would expect to -- communications and technology to more slightly uptick than G&A on an ongoing basis.

All right. Thanks a lot.

Surinder Thind, Jefferies.

I was hoping to just maybe get a little bit of color around non-organic growth and your thoughts around perhaps either adding some new strategies or -- and how that would go about? Would it be, perhaps lifting on a team? Or maybe just bringing on a smaller individual or capabilities and then building that out?

From looking at new teams, we would look at a lift out situation to bring on a new team and new strategy. We clearly have seen quite a bit of activity in the marketplace. We have a good pipeline of groups out there that we are looking at. But the intersection of the group, the type of strategy, the fit within Artisan, is a fairly limited set that becomes a scarce resource for us to really find. But we are vetting quite a few teams out there. If an opportunity arises, we would develop non-organic growth through a new team. Or one of our existing teams having an additional strategy to add to the mix that we currently have.

Related to that, as you mentioned, it is challenging to find the perfect fit out there. But is there kind of a timeframe that we maybe can think about? Or is it more like a year timeframe out there that you can probably potentially pull the trigger on, given the amount of activity that you are seeing? Or is it just kind of a wait-and-see that when the right fit does manifest itself, that's when you guys will pull the trigger?

I would lean towards a wait-and-see. Having any artificial timeframe of saying, we have to fill this type of strategy over this certain timeframe, we found is just a forced event that doesn't have the right outcome. So, when we find that opportunity and we feel it is a great fit and a no-brainer, we'll make that decision.

Okay. Then just one quick follow-up. I may have missed this earlier, but I think last quarter your flows were relatively balanced between the US and international. How did they fare this last quarter in 3Q?

Slightly down, but slightly from last quarter. You look at the growth in number of the clients, we have had a good growth in number of clients. Pending on the asset level of each client, it will create a lumpy outcome. So we had a similar growth, number of clients, quarter-over-quarter. Looking at year-over-year, I think we are about on track for the same number of non-US clients. Sometimes you get some larger pools and sometimes you get some smaller pools. That is the lumpy nature of the institutional business. We feel that our non-US pipeline is healthy. It is a balance of US and non-US opportunities. With that opportunity set, we feel that will uptick our non-US assets. We'll have a higher growth rate in non-US assets, given the low asset base we have currently and the opportunities that we see.

Okay. Thank you very much gentlemen, that is it on my part.

Ladies and gentlemen, at this time, we will conclude our question-and-answer session. I would like to turn the conference call back over to Mr Eric Colson, for any closing remarks.

Thank you, everybody for your time today. We'll see you next quarter.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.