Artisan Partners Asset Management Inc (APAM) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management's first-quarter 2014 earnings conference call. My name is Gary and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the 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 Makela Taphorn with Artisan Partners. Please go ahead.

Thank you. Good morning, everyone. Before we begin, I would like to remind you that our first-quarter earnings release and the related presentation materials are available on the Investor Relations section of the website. I would also like to remind you that comments made on today's call and some responses to your questions may deal with forward-looking statements that 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 morning may 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 with that, I'll now turn it over to our Chief Executive Officer, Eric Colson.

Thanks, Makela. Good morning. Welcome to Artisan Partners Asset Management business update and quarterly earnings call. I'm Eric Colson, CEO; and I'm joined today by C.J. Daley, CFO. Thank you for your time today, and I hope you find this discussion useful.

As with past calls, I want to reinforce our business model relative to the quarter, and go deeper into our business philosophy and approach that drives our results over longer and more meaningful periods. This quarter, I will spend time on the evolution of our high value-added investment strategies towards increased degrees of investment freedom. More specifically, I want to explain that evolution as it relates to two secular market trends -- globalization and investment policy evolution towards passive and alternative investing. Once I'm done, C.J. will take the lead and walk you through our financials.

On the first page, I would highlight two points for the quarter. First, our overall AUM has increased to over $107 billion, owing to positive net flows and market appreciation. Second, although the sliver of the pie is small, our credit team is live with its first strategy, Artisan Partners High Income. We expect the team to represent a small percentage of firm assets for a while, as we allow Bryan and his team to focus on investing. We are discussing the strategy with early adopters that are familiar with our firm and interested in Bryan's strategy. I will elaborate on the credit team and the High Income strategy later in the call.

The next two slides provide a current view of our long-term investment results. As a reminder, we analyze performance around several key points -- faithfulness to a stated investment process, solid absolute performance, and performance compared to peers and the Index. All of our strategies continue to execute their distinct investment processes with integrity.

As of March 31, eight of our 11 investment strategies that have a five-year track record have added value relative to their broad performance benchmarks over the trailing five years and since each strategy's inception. All seven of our investment strategies with a 10-year track record have added value over the period relative to their broad performance benchmarks. Over the trailing five years, from an historic market bottom in 2009, USC markets, pending style and market capitalization, have rallied 200% to 300%. Our U.S. Mid-Cap Value and U.S. Small-Cap Value have participated strongly in the extraordinary rally. They each trail this benchmark.

We expect these strategies to participate in upmarkets and to protect in downmarkets relative to the Index. The global market rally impacting the relative strength of our Emerging Markets strategy has also been extremely strong.

Slide 4 further reinforces the impact of our performance philosophy across our asset base, and illustrates the lumpiness that stems from process consistency over a variety of market environments. The impact of those factors can be seen in the one-year returns. But over longer periods that normalize cycles, we have compounded well for clients and outperformed the indices across our asset base.

Before leaving this page, I think this quarter results provide a great opportunity for perspective around two items. The first is the fact that overreliance on a single factor can drive misinformed outcomes. We believe we are in a judgment business. The results of our non-US growth strategy provide a great example. It underperformed its Index by a single basis point for the trailing one-year period, taking our percentage outperformance for the period from 78% to 55%.

The second is that quarter-to-quarter and year-to-year measurement periods are extremely short periods for truly active or high-value-added portfolios. To create value, you have to be different, and different can mean being wrong at times. Howard Marks at Oaktree articulated this very well in his quarterly letter, "Dare to be great too." I'm paraphrasing, but in short, he says that superior investment results require unconventional behavior coupled with superior judgment. Following the herd leads to middling results. But standing out from the herd requires the courage of your convictions. You need to be open to being different than the Index and peers, and willing to look wrong over short periods. If you're not, the high-value-added outcome is not feasible.

Slide 5 illustrates the outcomes of our business discipline around asset diversification. Our broker-dealer channel continues to be a solid source of flows for the Firm, with five straight quarters as a distribution channel with the highest net inflows. Our institutional channel has been experiencing outflows driven by asset allocation, policy decisions, our commitment to fee discipline, and performance.

The largest outflow in the channel occurred at the end of March. Our client, a pension fund, communicated that the termination was a result of their decision to consolidate assets with a smaller number of managers and reduce their overall cost structure. It is evidence of the lumpiness that we expect in our fee discipline, which is one of our cornerstones of our financial model.

We are extremely disappointed about losing a long-term-oriented client. However, consultants and clients evolve their strategy and allocation policy. Change is inevitable. If we evolve with every consultant and client change, our business would explode with complexity, including custom outcomes, lower fees, and much more distraction for our investment talent. We have a talent-driven business model. In such a model, a commitment to fee discipline is required to protect strategy integrity and retain talent.

If an investment team generates more revenue on fewer assets to compensate its investment professionals, portfolio integrity is more likely with greater odds of above-average performance. If fee discipline is lost, strategies typically make up the revenue by gathering what relatively more assets, which puts the strategy's integrity at risk and increases the likelihood of talent turnover. It is a vicious cycle with a lot of complexity, which requires consistency.

And this is true in all of our business development. Over the past couple of years, non-US clients have remained a stable part of our asset base. We are experiencing growth from clients outside the US, but the complexity of the market requires consistency and thoughtfulness. The recent reports show that there are nearly 100,000 share classes available in Europe. 2013 alone saw more than 15,000 new share classes issued. Despite that, we are making nice strides developing relationship with clients that we align well with, and we are meaningfully growing our client lists. C.J. will elaborate further in his comments.

On page 6 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. We manage our business with a mindset similar to that of our investment team in managing their strategies. We operate for the long-term, and execute with a commitment to our business philosophy. Last year, I took the time to explain in detail our talent-driven business model and thoughtful approach to growth. Today, I will emphasize our high-value-added focus. Let's move to slide 7.

Our business strategy evolves based on broad, sometimes obvious trends that we believe will impact our business model. We don't pivot because of fads or short-term outcomes. They can be distracting, and the part of the investment world where we operate just doesn't change that fast. The trends that matter to us, those that impact how we think, last a long time. This is where we focus.

Since the mid-2000's, our business and investment strategies have been impacted by globalization. From an investment standpoint, this trend has driven us to create more degrees of freedom in our investment strategies, allowing our teams to invest with looser geographical constraints. On the business side, that's pushed us to leverage our distribution with intermediaries and consultants around the world. Client investment policy statements have also evolved over time to incorporate more diverse asset classes and risk inputs, driven by events like the TMP bubble and global credit prices.

We are seeing clients increasingly alter their asset allocation methodologies away from a traditional mean variance model to risk-based asset allocation, using categories that are more geared towards market exposure or data on the one hand, and value-added or alpha on the other. With the next few slides, I will take a closer look at those trends, and then discuss how we have evolved our investment strategies in response to those trends.

The concept shown on slide 8 is probably familiar to many, but maybe not all. It is one we like to highlight because it presents, in a very simple way, the inconsistencies between asset allocation and investment decision-making. On the left, we have two highly recognized indices and their geographic exposure based on company domicile. On the right, you have the revenue exposure of the companies in those same indices.

Index construction by design requires rules, but reality doesn't reflect those same rules. As a result, as businesses have globalized, investment decisions have consistently diverged from asset allocation decisions based on company domicile. Investors want to understand the revenue and cost structure of a business. And if done thoughtfully, they will manage portfolio economic risk and exposure through that analysis.

On slide 9, you can see the evolution of investment policies. Globalization has definitely been a contributing factor, but so has the shift from traditional means variance allocation to risk and outcome-driven allocations. We show two public plans here to illustrate the point. During the 1990s and certainly at the inception of Artisan Partners, investment policy statements, asset allocation and manager structure, were fairly homogenous, except for a few endowments and foundations.

Today, due to technology, information, security innovation, market events, and liability dependence, client portfolios are more customized, but also more flexible in terms of investment options. As illustrated in McAllister's example, equity-specific allocation, such as US equities, non-US equities and emerging market equities, historically each had independent return, risk, and correlation forecast, have been collapsed into one global equity allocation. To us, this clearly provides the path for increased demand for global equity strategies. At the same time, it does not mean the elimination of US and non-US allocations.

The Alaska Permanent Fund example shows another aspect of investment policy evolution. Risk and outcome needs have changed the model altogether, while creating a growing interest in strategies and solutions that are needs-based. Over the long-term, we think this means more customization and client-specific demands than pure category demand. So we expect less herd outcomes in the institutional marketplace relative to the 1990s, and those trends have driven changes in institutional strategy demand.

On slide 10, we show the meaningful growth in demand for passive, unconstrained alpha and alternatives relative to traditional equity strategies. Traditional equity strategies have over $13 trillion and over 20,000 products. However, passive strategies are approaching 6000 products and nearly $8 trillion. And alternative strategies now have over $2 trillion. And with the growth in product launches, we expect those numbers to grow higher.

Around the financial crisis, there was an effort towards meaningful consolidation in the industry, as decision-makers rationalized their product lineup. Product proliferation is on the upswing again, and clearly, the industry has adopted increased degrees of freedom paired with market exposure.

Slide 11 is a very simplistic representation of where managers can compete, given the secular trends I have discussed in strategy demand. The highly constrained alpha and constrained alpha portions of the spectrum are generally where the largest amount of assets reside. There are strategies typically confined to style boxes or those that are aligned with benchmarks. As I just noted, the growth is generally becoming more prevalent in passive or beta and unconstrained alpha areas of the market -- unconstrained strategies being broadly defined as go-anywhere strategies.

The primary reason for this is that highly constrained strategy, index huggers and exposure-oriented products, and even many constrained alpha managers, have not distinguished themselves from index product, based upon net of fee performance. As a result, assets formerly in those strategies have supplied the flows into passive, unconstrained alpha, and alternative strategies. For investment managers to grow over time, they will need to evolve accordingly.

Historically, we generally had a focus in the constrained alpha category. We constrained ourselves based on market capitalization, geography, and security instruments. With the market evolving towards higher degrees of freedom, we continue to evolve our existing strategies and develop new strategies with a heavy bias towards unconstrained strategies.

The investment trends towards increasing degrees of freedom and unconstrained alpha-generating portfolios has impacted both our first-generation and second generation of investment products, which we have illustrated in a timeline on slide 12. For simplicity, we consider our strategies launched prior to 2004 as our first-generation products, and strategies launched after that as second-generation.

When we developed our first-generation of products, the investment industry was still focused on US allocations versus non-US allocations. The trend towards globalization within investment allocations was just in its infancy. As markets have evolved, and we launched our second-generation products, we have excluded or reduced many standard portfolio construction limitations from inception. The strategies remain aligned with their definitions, but we have provided our experienced investment teams with more flexibility to add value in that space.

We have constructed our second-generation of products to provide our teams with greater freedom to add value, which the teams want and which aligns with the trends I've been discussing. New strategy development continues along that path.

Last month, we launched the credit team's first strategy and the Firm's first fixed-income strategy. Slide 13 provides an overview. The team's portfolio manager, Bryan Krug, came to us with exceptional experience in the high-yield space. As we do with all of our portfolio management teams, we gave Bryan the opportunity to develop an autonomous investment team, providing him with the freedom and resources to do that in the way he feels best suits his investment process.

The High Income strategy represents a natural extension of our high-value-added investment lineup. It is a strategy that relies on fundamental research and the talent of the team to generate results. In addition, we have structured that strategy to allow Bryan's team to invest in a broad universe of high-yield bonds and loans, with relatively few restrictions on the construction of the portfolio. Bryan invests primarily in the high-yield debt that has the flexibility to invest across a company's debt structure and without limitations on region.

The development of his team is an exciting evolution that has diversified our business and enhanced our operational capability for existing strategies, new strategies, and new investment talent. Just as important is a natural extension of our high-value-added philosophy here at Artisan, and a great indication of our intention to continue to expand degrees of investing freedom for existing teams and new investment teams.

Let me now turn it over to C.J. to discuss our financials.

Thanks, Eric. Good morning, everyone. I'll begin a review of our first-quarter March 31, 2014 financial results on slide 14.

In summary, for the quarter, AUM increased to $107.4 billion, and net client cash inflows for $1.4 billion. This was our 10th consecutive quarter of positive client cash flows, and represents a 5.4% annualized organic growth rate. Revenues for the March quarter were $201.8 million, up 2% over revenues in the preceding December quarter of 2013, and up 36% over the corresponding March 2013 quarter. Our adjusted operating margin rose to 45.1% as the result of higher revenues with lower operating expenses.

Net income per share on an adjusted basis was $0.78 per share compared to $0.77 per share in the December quarter. Our Board of Directors declared a regular quarterly dividend of $0.55 per share. On a GAAP basis, we recorded a loss of $2.29 for the current March quarter. The GAAP loss per share was a result of the market price per share of the common stock sold in our March follow-on offering exceeding the per-share carrying value of the convertible preferred equity we repurchased with a portion of the operating proceeds.

On an adjusted basis, we reported earnings per share of $0.78 for the current quarter. Our earnings measures remove the accounting impact of certain transactions related to our IPO and the March follow-on offering. These non-GAAP measures provide investors with the same financial metrics that we, as management, use to manage the Company.

Slide 15 is a review of our AUM for the current quarter. Ending assets under management of $107.4 billion were up 2% from assets of $105.5 billion at December 31, and up 29% from assets a year ago. Average assets for the March quarter were $106.2 billion, up 5% from average assets in the December 2013 quarter. The increase in AUM during the March quarter was due to $1.4 billion of net client cash inflows, which equates to a 1.3% organic growth rate for the quarter and 5.4% annualized rate, as well as 1.1% of market appreciation.

Excluded from client cash flows for the March quarter was a client redemption of $141 million in late March, which was reinvested into other products within the same team on April 1. We've broken out that client transfer separately. In addition, as Eric mentioned, the March 2014 month and quarter included outflows of $722 million, resulting from a single client termination in our value equity strategy.

The pension fund client communicated the termination was a result of its decision to consolidate assets with a smaller number of managers, including us, at an overall lower fee structure. After evaluating the opportunity, we chose not to continue our relationship at a lower fee, which resulted in our termination. This termination is an example of the lumpy nature of institutional flows in general, and we also reflect our commitment to be disciplined on our fee rates, which is one of the cornerstones of our financial model. Over the long-term, our financial model has been critical to our ability to attract and retain investment talent, deliver strong financial results, and produce a stable and diverse business, able to weather various market environments.

We previously announced the closing of our Global Value team strategies to most new investors. The team strategies have been a significant source of our growth over the past few years. We expect flows in the strategies will continue to slow in future quarters as a result of the additional closings. In the March quarter, we saw strong growth in the assets managed by our Global Equity team, particularly from the broker-dealer channel where centralized decision-makers at broker-dealers are re-weighting their allocation more heavily to international mandates, such as our non-US growth strategy.

Throughout our history, our growth has been lumpy, and has come from certain strategies and teams during distinct pockets of time. Looking ahead, we continue to see encouraging interest in pipeline in our non-US growth, global equity, and global opportunity strategies.

On slide 16, you'll see that our non-US client AUM remained at $11.9 billion, up 29% from $9.2 billion a year ago. While non-US growth was flat this quarter, we continue to see strong demand overseas. Progress in the last year has been encouraging, with our one-year non-US organic growth rate at 8%, and the three-year rate of 23%. The number of non-US client and investor relationships has increased 75% since this time last year, and our pipeline continues to be robust across Europe and Australia.

As a proof point, a large client of our Global Value team since 2010 announced last week the addition of our Global Opportunity strategy to its Global Managed and Global Fund's mandate. The addition of Global Opportunities will allow the client to continue to add assets managed by Artisan while enabling our Global Value team to continue to manage the funds currently it manages.

Our financial results begin on slide 17. For the March 2014 quarter, revenues were $201.8 million on an average AUM of $106.2 billion. That's an increase in revenues of 2% for the preceding December quarter, and a 36% increase from the corresponding March quarter of 2013. The December 2013 quarter included $2.5 million of annual performance fees earned and recorded in December. The weighted average management fee for the current quarter is 77 basis points.

Our adjusted operating margin, which excludes pre-offering share-based compensation expense, was 45.1% for the current March quarter, compared to 42.9% in December 2013, and 37.0% in the corresponding first quarter of 2013. In addition to higher revenues, our adjusted operating margin benefited from the fall-off of expenses related to the pre-IPO investment team retention awards that we have highlighted over the past several quarters, and from a reduction in recruitment costs related to our new Fixed Income team.

The impact of these lower expenses was partially offset by seasonally higher first-quarter benefits and payroll tax expenses. The March 2013 quarter included severance costs, which reduced the margin in that quarter by approximately 400 basis points.

Our technology expenses have begun to pick up as projected, and we expect that trend to continue and settle in around a run rate of $5 million a quarter. While excluded from our non-GAAP earnings last quarter, we completed the process of obtaining the necessary client approvals in connection with the change of control for purposes of the Investment Company and Investment Advisors Act that occurred in March 2014. And we incurred an additional $100,000 of cost in the March quarter. That process is now complete.

Adjusted net income for the March 2014 quarter was $56.0 million or $0.78 per adjusted share. That's a 2% increase in adjusted net income over the preceding December quarter and a 69% increase over the prior March 2013 quarter.

Slide 18 highlights our compensation ratio. As you know, our compensation expense in the current March quarter continues to include the amortization pre-IPO equity compensation, and you can see the elimination of costs associated with the cash retention award we granted three years ago and indicated would end at December 31, 2013. As we layer in the full effects of post-IPO equity-based compensation awards, which will generally invest over five years, and excluding the pre-IPO expenses, our compensation ratio should settle in the mid-40s.

We expect the next firmwide equity grant will occur in July 2014, so our September 2014 quarter will include additional costs related to equity-based compensation. As you know, our compensation ratio can and will fluctuate, and will be impacted by our rate of growth and the cost of future equity-based awards, which is largely dependent upon the size of future grants and our stock price at the time of the grant.

The last slide is our balance sheet highlights. Our balance sheet remains strong. Our cash balance is healthy, ending the March quarter at $208 million, down slightly from $212 million at December 31. During the quarter, we returned capital of $140 million to our shareholders in the form of a quarterly and special annual cash dividend. We plan to continue our practice of returning the majority, if not all, of our earnings to our shareholders.

On April 22, our Board of Directors declared a quarterly dividend of $0.55 per share of Class A common stock payable on May 30 to shareholders of record on May 16. As a result of the sale of 9.3 million shares of Class A common stock to the public in the March follow-on offering, the Class A common stock outstanding now represents 41% of the combined number of outstanding shares of common stock and convertible preferred stock. As a result of that offering, we recorded $287 million of additional deferred tax assets and $244 million of amounts payable related to the tax receivable agreement with selling partners.

Their stockholders equity is $121 million at March 31, down slightly as a result of the quarterly and special annual dividend paid in February, offset in part by the equity added in the March follow-on offering. Our debt remained at $200 million, and our leverage ratio further reduced to 0.6 times EBITDA.

Overall, we are very pleased with this quarter's results. We returned meaningful capital back to our investors, expanded our public ownership with quality investors in the second follow-on offering, produced healthy organic growth in a volatile market environment, and continued a trend of strong earnings and healthy margins.

I look forward to your questions, and will now turn it back to Eric.

Thanks, C.J. And now we'll open the call up for questions.

(Operator Instructions). Bill Katz, Citigroup.

Appreciate you taking the questions. First question -- just coming back to the dynamic between sort of the unique alpha generation that you saw through your seven degrees of separation, if you will, versus this sort of more structural movement to lower-cost beta exposure. Is there further pressure on any of the parts of the business that we should be concerned about, in terms of other lumpy mandates that may be coming out? Maybe the converse is, are you seeing an increasing traction for your value alpha generation?

Hey, Bill, it's Eric. We haven't been on notice or given any indications from current clients that fees are an issue right now. Those things pop up from time to time, as we mentioned in the call, as people start reevaluating. And as people want to increase their beta exposure, and then also barbell that and go into more degrees of freedom, there's some -- sometimes we'll get caught in the middle there.

And with regards to our current products and new products, we've been seeing that trend, the just increasing freedom. So, whether it's one of our Mid-Cap products, where we're just increasing the ability to use non-US exposure, or our Global International Fixed -- Global International Value being able to use more fixed income within their portfolio, we've been taking those strides to increase the freedom to distinguish our products. And that's been working quite nicely. And the majority of our clients, if not all of them, are adjusting their investment policy statement to allow us to use that freedom.

Okay. So this is a bit of a one-off for now, the way to think about it that way?

Yes.

Second question is, and I appreciate the details in some of the other line items, but as I look at into the second and third quarters, it does seem to be a few more moving parts on the comp line. So when you look into the second quarter, C.J., I'm sort of curious -- any sense of where the absolute number may settle out here a little bit? Because I think you had maybe a fuller impact from buildout of the High Yield team, or perhaps maybe it's already embedded in the first quarter. So, any thoughts on how we should be thinking about that? Because, obviously, Q1 was a pretty good quarter.

Yes. I mean, I think in the second quarter, you're largely going to see the comp ratio very similar to the first quarter here. We've built in most of the costs of our new Fixed Income team. There will be a little bit more, but nothing material. Where you'll see the change will be in the September quarter when we layer in the next grant of equity in July. So I think next quarter would largely be consistent with the first quarter and react, as you would expect, with increases or decreases in AUM levels.

Okay. And just one last one from me. Thanks for taking all the questions. You highlighted the opportunity for outside the United States, but if you look back, the absolute dollars have still been relatively small in terms of that net new business. Do you sort of size the potential that that distribution channel might be? And then maybe as the second part of the question, what is your institutional pipeline today maybe versus where it was six months -- three months ago or a year ago?

The pipelines are tough to measure there. The pipelines we feel right now give us quite a bit of opportunity. And as C.J. said on the call, a much more robust outside the US in Europe and Australia is where we are seeing quite a bit of activity. And despite the asset being flat year-over-year with 11% of our total assets in non-US, we've had 28 new clients year-over-year join us there.

So some of those clients we'll seed with a smaller amount, and then we'll build assets over time. So we are seeing quite a bit of activity outside the US, despite the flat percentage there year-over-year with 11%.

Okay. All right. Thank you for taking my questions.

Marc Irizarry, Goldman Sachs.

So just a question in terms of the buildout of the -- if you look at the investment strategy spectrum and maybe some of the more alternative-based product, what should we be thinking in terms of adding additional teams and product there? And when you think about just the barbelling between low-cost beta and high-value alpha, I guess the pricing on the alternative side in terms of fees, I mean, when you think about the teams that you're adding, should we be thinking about more of the alternative mix here growing over time?

Hi, Marc. It's Eric. Yes, certainly through the graph we showed in the presentation, Artisan has definitely a directional to increase those degrees of freedoms and get into the alternative space. So the strategies that we think could come online down the road may not have as much capacity with regards to assets, but they will have a higher fee rate. And so, we will see new strategies that would come on would give us an uptick in fee. But as you get to know the capacity that an alternative strategy that has quite a bit of degrees of flexibility, will be limited.

Okay. And then just I might have missed this in terms of capacity -- how much of your flows went into product that was soft closed in the quarter? And maybe you can give us an update just on existing on sort of trends as you see them today in retail maybe through April?

We'll let C.J. take a look at the capacity numbers there, but with regards to the trends in retail, we haven't given our small percentage in retail. We haven't been analyzing what flows have occurred in what buckets over the first quarter. Our retail business is relatively small and we don't stack a lot of assets towards that. We have seen in the intermediary channel quite a bit of activity. I think that's where the bulk of the activity is in the intermediary space for us, with high demand in non-US equity, as C.J. said. And so, we saw good growth rates in our non-US growth strategy.

Yes, Marc. So the majority of our flows this quarter were in strategies that were open, led by international growth and opportunities strategy that we talked about where we've had capacity and we've had interest. So, certainly, a tilt towards open strategies.

Were there flows in closed strategies?

Yes, absolutely. When we close our strategies, we consider them soft closed. We -- some strategies we push harder than others to limit flows, but there's always opportunities for existing clients in open platforms to add dollars. And that always happens.

Okay. And then just one follow-on, if I can. We are hearing some pensions talk about maybe the funding status is improving and moving into more LDI strategies. Is that something out there that you think is -- you expect to see that on the comm? Or you hear -- is that not as much of a concern for you on the equity side?

I think it's been a concern over the years. We've seen quite a few pension plans move into an LDI. We haven't heard or seen our client base talk about that as much these days as in probably, say, three to five years ago.

Okay, great. Thanks.

Robert Lee, KBW.

I guess my first question is, I guess, it's probably a little technical in nature, but with the deferred tax asset in the TRA, so for you guys, what's kind of the ongoing kind of incremental kind of cash tax benefit you expect to get, kind of maybe on an annual basis? Is it -- I guess I'm coming up with something kind of $5 million, $6 million, $7 million or so. Does that seem right?

Yes. I mean, it's initially very small because we have to amortize that tax deduction over 15 years. And it's measured at the time of the exchange, and that's why we book that whole entire tax deduction in the balance sheet, the asset as well as the amount payable to the selling shareholder. And then, as you know, we retain 15%. So, roughly, you can look at 15% of that deferred tax asset. And over a 15-year period, that would be the amount that we would eventually realize.

Okay. And Eric, I'm just curious -- you've kind of talked a little bit in the past about the DC business kind of being -- well, you have -- several years ago, you had a good growth business. Now it's been probably more mature for you guys. You know, is there any signs you see that, as you talked about changes in the institutional landscape more unconstrained, any signs that you're seeing any kind of shift in the DC landscape that could mean more opportunities for you guys or --? I guess that's the question.

Yes. We are starting to see a bit of activity in the middle market for the -- excluding some of the really large DC plans there. And we saw a positive growth rate in the DC channel for us this quarter. And the large plan market, where we would see more opportunity in customized target-based funds is still moving slowly. We've seen a few consultants build out customized funds and moving away from the proprietary target-based funds. But that's going to be a slow process. It's always been a little bit more of a investment and an administrative sale as opposed to the straight DD business. So, we continue the slow movement but no tipping point, Rob.

And maybe just one last follow-up, if I could. I'm just curious, I mean, as you continue to look to grow your non-US business and relationships there, has becoming a public company at all helped some of those conversations? Does it have no impact? Or I mean, how does that tend to be received outside the US?

Most of our business comes from the consultant channel and intermediary channel outside the US; that's our major leverage point. From that standpoint, being public has been -- has not been an issue there or a benefit. When it gets to the end clients, being public has actually helped out, because they've heard of our name or our name has been out more often. So we have a slight positive there. And obviously, it's helped out with regards to new teams as well as more investors become aware of Artisan. So it gives us more opportunities outside the US to find investment teams. So I would say that outside the US being public has given us a slight positive overall.

Great, that was it. Thanks for taking my questions.

Cynthia Mayer, Bank of America Merrill Lynch.

A question on industry trends. I guess, given the move toward barbelling, which you were talking about between active and passive, are you seeing any more competition among traditional managers who want to introduce a lot of unconstrained products? And is that leading to any more pressure on fees? Any more fee competition? Or should we just view the pension redemption as kind of a one-off? Thanks.

Hi, Cynthia. It's Eric. We view our -- the one client we lost, as a one-off there. We do see quite a few competitors creating strategies that have more and more degrees of freedom. They can be -- they are named quite a few things as we've seen, with go anywhere's, alternatives; I mean, calling something a hedge fund today is a very broad term.

So, we clearly are going to see more competition there. We are going to see more product come out into the marketplace. We haven't seen much movement on fees, though, in that space. As you added degrees of freedom, as you create strategies that are differentiated from indexes, fees have been holding tight there.

Great. And just on the emerging markets strategy, it looks like the outflows there picked up in the quarter. And the assets left in there are getting smaller. Are the outflows at this point creating further pressure on the performance in the remaining assets? And is there any way you could stabilize those?

So the -- we did have a bit of outflow there at the Q1 for Emerging Markets. The performance we saw uptick with January and February, and then rolled off a bit in March. And so, we continued to hold tight with the strategy, but the strategy, to really stabilize, will have to start producing performance above the Index. But at this point, we haven't seen the outflows put any pressure on performance, though.

Okay, great. Thanks a lot.

Eric Berg, RBC Capital Markets.

I still want to home in on this large outflow in March institutionally. The client said he wanted to save money by consolidating his money managers. But it seems to me people are more interested in saving money when they don't think the product -- and I don't care whether it's money management, TV sets, cars, what-have-you -- is delivering the value. How do you know that when the client says it's a price issue, it really wasn't about the performance?

And it's still unclear to me -- this is of the two-part question. How do you know this wasn't about performance? After all, it was in the -- with the team that has been struggling, at least over the one-year period? And why are you expressing optimism that this is a one-off?

First, hey, Eric. It's Eric Colson here. The strategy was producing alpha over that period, so the strategy, we felt, was well-positioned. The client told us it was well-positioned. But they were reducing their number of managers there and then increasing the allocation of those dollars to the existing managers. And with that increase in assets and consolidation, they expected a significant fee discount for higher assets.

And the significance of that fee discount was, in our minds, fairly extreme, so we opted to not participate. It was very clearly to us a cost-cutting measure. Every manager was given the same discussion. So -- and it was a fairly long conversation that occurred over a month. So -- and there are times, though, I'll agree with you, that you'll get a reason for being terminated, and you're not really quite sure if that was the exact reason or is it just a polite reason to move you along. I would -- in this case, in this example we have, we had a good dialogue. And it was a good long-term client that we didn't want to lose, but we had to move on.

And so, if I could just follow-up -- you mentioned that this was in the Value team's effort, right?

Yes.

Okay. My only remaining question is this. Your answer was very responsive and very helpful. Exhibit 6 shows -- in your materials -- shows that over the last one year, all three of the strategies have been pretty -- have not been creating alpha. So when you say that the strategy was creating alpha, what are you referencing?

I had to look back at that exact client, their inception date. I mean, inception date is a very important component to every account. And that team's alpha (inaudible), the Large-Cap value, the one-year period of underperformance. The year-to-date we have is -- I'm sorry, Eric. I was looking at the year-to-date of a positive [108] versus just the one year over -- year-over-year. But for that client, I'll have to go back to the inception date to really get specific numbers on it to see where they were at. But it wasn't a performance issue with that client.

All right, thank you.

Michael Kim, Sandler O'Neill.

First, just a follow-up on the non-US opportunity. Just based on some anecdotal evidence, it does sound like investors outside of the US seem to be re-risking portfolios maybe a bit quicker relative to individuals here in the US. I know it varies by region, but just curious how that dynamic could potentially set up for your growth prospects, particularly in the context of where you may have the most capacity as you look across your investment teams?

Hey, Michael, this is Eric. I'm not sure if we've had direct dialogue around clients specifically saying we're re-risking. I do think that our global strategies are performing quite well versus the Index and the peers, and we're clearly getting good opportunities. And as people look at equities outside the US, the interest is in active or high-value-added global strategies that tends to be a little bit more concentrated and are distinguished from the index. And our strategies have shown up quite nicely in the peer groups and we're getting some good opportunities overseas.

Okay. And then maybe just one for C.J. I know a big part of your expense base is variable, but just curious to get your take on sort of the outlook for margins, just given equity comp is stepping up, and you talked about maybe a bit of a pickup in IT spending going forward versus ongoing revenue growth, and obviously, your focus on fee discipline.

Yes. I think you saw in this quarter what the leverage that we have in our model as we ticked up a couple-hundred basis points in our margin as a result of higher average AUM and the rolloff of some of those expenses that we had highlighted. So, our expense base right now from a fixed cost expense, other than that technology, which you know is guiding $0.5 million higher or so, is largely -- the fixed base is largely where we expect it to be until we make that next equity grant.

So, I think, formulaically, you could see our P&L react as you would expect in the second quarter. And then based on the size of the equity grant and the stock price at the time, we could see up to a couple-hundred basis points degradation in the margin as we layer in that. But over time, as we've guided, we think, as we layer in all those effects with our growth assumptions, that we'll still settle back in the mid-40s on the margin, which is approximately where we were this quarter.

Okay. Thanks for taking my questions.

Surinder Thind, Jefferies.

Just a follow-up on the redemption. So in light of that, can you provide some color maybe around how many other large accounts you may have within the SMA segment? Or maybe perhaps some color just around, like, average size and range? I mean, I think in the 10-K, you guys talk about, like, a minimum investment is roughly $20 million to $50 million, and there's roughly 140 client relationships with maybe like 200 accounts.

Surinder, this is Eric. That does sound about right for the numbers. I mean, the minimums range from $20 million to $30 million up to $50 million-plus, depending on the strategy. But otherwise, your numbers sound approximately right there with regard to the number of accounts and average size there.

Okay. And so I guess just related to that, are there other -- do you have a few other clients in there that are maybe, let's say, $500 million or more in assets? Or I guess that's kind of what I was trying to ask -- if there's other large concentrations of clients?

Yes, we certainly have a handful of clients above the $500 million mark that would be in that mix.

Okay. And then one other quick question. I think you guys were mentioning you guys were beginning to see some good traction in your Global Equity strategy, especially within the broker-dealer channel. I think if you take a step back, I think there was a PM change a little over a year ago. Kind of given that it's got a terrific three-year track record now, and that it's been more than a year with the new PM there, is that enough kind of for the consultant community? Or has there been additional dialogues there? Or can you maybe elaborate on that?

Yes, certainly. If you went back a year ago, we had a co-portfolio manager structure, and we did lose one of those portfolio managers who was leading the Global Equity strategy. The team -- of the Global Equity team was supporting that Global Equity product, though, from research. So with the co-manager, the addition of two other individuals as portfolio managers on the strategies to replace the individual on the consistency of the performance, and the product integrity consultants and clients look at those factors.

Clearly, the single portfolio manager loss will be brought up in discussions. But I do think now with a year time-frame, and the consistency and the outperformance will help the strategy move forward to build its pipeline and opportunities.

Okay, thanks. That's it for me.

Chris Shutler, William Blair.

So, the Global Ops strategy, I know that's beginning to get some traction, particularly overseas. Can you talk about where you're at right now with consultants on that one? Are you -- do you feel like you're where you need to be? Or is there still a good bit of work to educate the consultant community?

We feel like we're in a good spot with the global opportunities. We are in searches. We are listed as a finalist. And so, that's clearly given us signs that consultants are putting us as a buy rating or putting us into opportunities. And so, we see that pipeline moving forward quite nicely. The strategy is definitely distinguished versus many strategies that we go up against, given its concentration and its growth orientation. So, we feel it's still very well-positioned.

All right, great. And then the last question for me. So, Eric, I know you said, historically, the growing number of strategies that Artisan is going to be both a balance between both new teams and existing teams rolling out new products. So, really just curious on the latter, where you see opportunities right now with the existing teams?

Right now, we're focusing on the Credit team. And as we mentioned in the call, just broadening out our operations with Fixed Income. I think some of the other existing teams may look at that as an opportunity to use those instruments and securities that broaden our strategy. But at this point, we have no new strategies that will be launched in the near-term off of an existing team.

We are in constant dialogue with our groups to see what strategies we would want to incubate and roll out. And we also think that's a great way to help build out new decision-makers over time to build out succession. So it's a constant dialogue, but we have nothing on the docket right now to announce.

Got you. All right, thanks a lot.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Colson for any closing remarks.

Good. Thank you for your time today, and we appreciate your participation.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.