Artisan Partners Asset Management Inc (APAM) 2014 Q2 法說會逐字稿

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Hello, ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management's second-quarter 2014 earnings conference call. My name is Keith and I will be your conference operator today. (Operator Instructions) As a reminder, this conference call is being recorded.

At this time I will turn the call over to Makela Taphorn, with Artisan Partners.

Hello, 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 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 morning include references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release. And with that, I will now turn the call over to our Chief Executive Officer, Eric Colson.

Thanks, Makela. Welcome to the Artisan Partners Asset Management business update and quarterly earnings call. I am Eric Colson, CEO, and I am 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 time periods. This quarter I will spend time discussing the environment we have developed to support success for our talent.

I will dive deep into the elements that are crucial to creating this environment: autonomy, alignment, growth, and stability. Individually, each carries value. We believe that the benefits of having them all work together, with the right talent in place, produces great synergy over the long term for our business.

Once I am done, C.J. will take the lead and walk through our financials.

On the Firm's tax page, page 2 of the presentation, I have two quick points to make. First, our overall AUM has increased to $112 billion from $107 billion last quarter. The growth in those numbers reflects market appreciation as well as positive client cash flows.

Second, we have seen strong demand for our Global Equity team and its non-US growth strategy. Over the years, our Global Equity team has built a robust franchise, and the development of a broad group of decision-makers has produced solid results and meaningful interest from a number of distribution channels and four strategies with realizable growth.

We have also seen solid early interest in our High Income Strategy, as it closed the quarter with over $300 million in assets under management. Bryan Krug and his team are coming together well. He has settled in his permanent office space and has established a strong team around him.

Slide 3 is somewhat of a departure from our normal opening to quarterly calls, but we felt it was worthwhile to provide some market perspective in the context of what we do. First, if you look at the long-term trend-line in interest rates, there are arguably much better points in the credit cycle to launch a High Income Strategy.

That isn't our goal, though. We are not a product manufacturer; we are a talent firm. We want to find the best talent that fits our business model and culture.

Second, trends towards passive strategies, ETF solutions, and alternatives are dominating asset allocation discussions. Given the dominance of these trends, the competition among seeders, platforms, private equity, multi-boutiques, and large integrated firms -- or basically everybody -- for top talent is fierce. Fortunately, the increasing regulation and back-office capabilities requires top talent to seek a good home. We will continue to look for talent in the alternatives space, but only move forward if the odds are in our favor for success.

Finally, the current market rally that began in early 2009 seems to be continuing. For example, the Russell 2000 Index closed up for the eighth consecutive quarter this June. Previously, the longest streak of up quarters in the Index, which started in 1980, was six consecutive quarters.

We aren't in the business of predicting market turns, but the length of the rally and the characteristics of businesses that are performing well, such as relative strength and price momentum, are generally inconsistent with fundamental investing -- our strength.

A lot of times a 3- to 5-year period can give you insight into a manager's ability to perform over a market cycle. We think the directionally lopsided nature of the most recent 3 to 5 time frame is making the traditional performance analysis less useful.

The next two slides provide a current view of our long-term investment results. On page 4, you can see the points that drive our performance analysis: faithfulness to a stated investment process, solid absolute performance, and performance compared to peers and the Index.

As of June 30, seven of our 11 investment strategies that have a 5-year track record have added value relative to their broad performance benchmarks over the trailing 5 years and since each strategy's inception. All seven of our investment strategies with a 10-year track record have added value over the trailing 10-year period.

During this bull market the valuation discipline of our teams has impacted relative results of our Value Equity, U.S. Mid-Cap Value, U.S. Small-Cap Value, and Emerging Markets Strategies, each of which has trailed its benchmark for the 5-year period.

Most importantly, all of our strategies continue to execute their distinct investment processes with integrity. This has been particularly important in the recent period.

Lopsided cycles can make it tempting to abandon a discipline in pursuit of relative, near-term success. Our teams continue to stay focused on their long-term goals.

Slide 5 illustrates the lumpiness that stems from process discipline. As of June 30, more than three-quarters of our assets under management were in strategies outperforming their respective benchmarks over the trailing 3- and 5-year periods, while 99% of assets under management outperformed over the trailing 10-year and since each strategy's inception.

As you can see, the impact of the current bull market is reflected in the 1-, 3-, and 5-year numbers. Over longer periods that normalize cycles, we have compounded well for clients and outperformed the indices across our asset base.

Our mutual fund peer ratings, which are highlighted at the bottom of the page, are a great snapshot of how our results translate into industry-wide rankings.

Slide 6 illustrates the outcomes of our business discipline around asset diversification. There is always a lot of detail behind these visuals, so let me hit on a few notable items.

Our broker dealer channel continues to be a solid source of flows for the Firm, with six straight quarters as the distribution channel with the highest net inflows. Looking at the top left, our business continues to be dominated by two main groups of clients, institutional and intermediaries. Generally speaking, our DC business is aligned with the institutional and our FA and BD businesses are the groups I am referencing when discussing intermediary.

The institutional channel continues to be lumpy and impacted by profit-taking and shifting tactical allocations. Flows from intermediaries remain robust and continue to influence our mix of co-mingled to separate account vehicle mix.

On the bottom right, you will notice the Firm's assets from outside of the US ticked up slightly this quarter. Although this is a relatively small shift in the asset mix, it is an indication of the outsized growth we are experiencing overseas relative to the US in the institutional channel. This quarter, EMEA was solid, but positive trends are developing in Australia and New Zealand, all positive developments as we look to further diversify our business.

Page 7 is a review of 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.

Let's talk about talent further this quarter. Slide 8 is always a great place to start quarterly discussions because, like the prior Who We Are page, it anchors the conversation.

Similar to all asset managers, our talent is critical to our success. However, we are not all things to all investors. Our model is not good for all talent; and all types of talent are not good for us.

Some individuals want to manage their business and run portfolios. Others want to construct portfolios utilizing Firm views and centralized research. Our long-term success requires us to be patient for the right talent.

Then, the hard part begins. The business model, management team, and most importantly the investment team must come together. We believe we can bring talent to a higher level through the execution of a number of additional business elements.

On page 9, we note the first: autonomy. Autonomy is a key part of our culture at Artisan Partners. Having an autonomous structure provides time for our teams to focus on their process without distractions, in a culture that is unique to their franchise. The uniqueness of each team produces the creative perspectives that lead to value creation.

Finally, autonomy establishes a peer environment where ideas can be developed, vetted, and second-guessed by a peer with the same goals and interests. This purity of process and perspective is crucial to the discipline that is necessary to successfully manage portfolios through all market environments, ultimately increasing the alpha potential of the team.

On page 10 I have listed philosophy first, on purpose. Alignment is most commonly associated with economics. Economic alignment is definitely critical.

Equity ownership and transparent compensation systems are necessary to build long-term relationships and retain and attracting talent. We also believe in time-horizon alignment around return expectation and business development. Inconsistency in either can lead to unintended outcomes.

Finally, we think that having philosophical alignment around priorities sets a tone that leads to the most desirable outcomes. At Artisan, we instill and look for talent that naturally has a client-first, then-Firm, then-individual mindset.

For years, this was a problem in the hedge fund industry. Funds would launch and close based on compensation arrangements.

Being a fiduciary was prioritized lower than our standards. While still not perfect, the industry is evolving, which is why our interest is as well.

Slide 11 is about growth. Growth is necessary to talent development, but not at all costs. It has to be thoughtful and done the right way.

Growth that is too fast or poorly managed can be destabilizing to a firm and quickly put at risk long-term goals and the business as a whole. Growth must be investment minded. As a business grows, alpha becomes a larger input to organic growth than sales.

Of all the elements being brought up, stability is perhaps the one that overlaps most with all of the other concepts presented today. Knowing the game is going to stay the same, with no new rules or misunderstood changes, is incredibly important to talent, and instability can surface in many ways.

More than a year ago, we completed our IPO. That could have been distracting to our talent, but we have a distinct business management team in place ensuring the autonomy and focus of our team. That team oversees a robust operations group and client [circuit] effort that is in place to make sure our talent maximizes the time spent on investment decisions.

Finally, career stability comes from the franchise development we emphasize. Franchise development drives broader decision-making opportunities and new product opportunities, which in turn leads to longevity and more certain career outcomes.

Slide 3 (sic - see slide 13) brings the whole concept together. Synergy is the idea that the interaction between certain elements can lead to a total effect greater than the contribution of the individual elements.

To date, I feel like we have a lot of proof statements to support our beliefs. Execution is the hard part, but we think our experience gives us a natural edge with our existing teams and new opportunities.

Slide 14 is a quick summary of our 2014 equity grant approved at our last Board meeting. Our equity grants vary based upon value creation by individuals, teams, and the Firm. Our equity grants improve our alignment of interest and retention of talent.

We allocated approximately 1.4 million shares primarily to our investment talent. Our equity grants reward talent for career achievements, not annual compensation.

Historically, our liquidity rules required proper notification and tenure with the Firm. This year, we have two vesting schedules that we are putting in place.

The standard vesting is a 5-year schedule. The career vesting is similar to our historical rules and includes provisions around qualifying retirement.

We think this enhances our stability and the ability to retain our key people. C.J. will discuss this in a little bit more detail. With that, I will turn it over to C.J.

Thanks, Eric. I will begin the review of our second-quarter financial results on slide 15. In summary, for the quarter AUM increased to $112 billion and net client cash inflows were $558 million. This was our 11th consecutive quarter of positive client cash flows and represents a 2.1% annualized organic growth rate for the quarter, and year-to-date organic growth rate of 3.8%.

Revenues for the June quarter were $208.5 million, up 3% over revenues in the preceding March 2014 quarter, and up 29% over the corresponding June 2013 quarter. Our adjusted operating margin rose to 46.5%, up from 45.1%, and reflects operating leverage in our financial model.

Net income per share on an adjusted basis was $0.84 per share, compared to $0.78 per share in the March 2014 quarter. On July 15, our Board of Directors declared a regular quarterly dividend of $0.55 per share.

On a GAAP basis, we recorded net income per share of $0.42 for the current June quarter. And on an adjusted basis, as mentioned, we reported earnings of $0.84 per share.

Our adjusted earnings measures remove the accounting impact of certain transactions related to our IPO and the complexities of our equity structure. These non-GAAP measures provide investors with the same financial metrics that we as management use to manage the Company.

Slide 16 is a review of our AUM for the quarter. Ending assets under management of $112 billion were up 4% from assets of $107.4 billion at March 31, 2014, and up 31% from our ending assets a year ago.

Average assets for the June quarter were $108.2 billion, up 2% from average assets in the March 2014 quarter. The increase in AUM during the June quarter was due to $3.9 billion or 3.7% in market appreciation and $558 million of net client cash inflows.

Net client cash inflows for the quarter equated to 2.1% of annualized organic growth rate and 3.8% for the year. Excluded from client cash flows for the June quarter was an inflow from a client reinvestment of $141 million, which was withdrawn from another strategy within the same team in the March quarter. We have broken out that client transfer separately in our earnings release table.

Second-quarter client cash flows were mixed. As we expected, we saw a pullback in investor activity this quarter.

As we have communicated previously, in our experience net inflows are typically higher during the first quarter when compared to the second. The June 2014 quarter included strong net client cash inflows into our Non-U.S. Growth, Global Opportunities, and High Income Strategies, with over $800 million of net client cash inflows sourced from clients outside the United States.

We continue to see strong growth in our Non-U.S. Growth Strategy, particularly from the broker dealer channel, where centralized decision-makers at broker dealers were reweighting their allocations more heavily to international mandates. However, we are beginning to see a slowing of this reallocation trend.

These net client cash inflows were offset primarily by net client cash outflows in our U.S. Mid-Cap Value, U.S. Small-Cap Value, and U.S. Mid-Cap Growth Strategies, which we think reflected institutional clients' asset allocation decisions, the need for cash for benefit payments, and in certain cases short-term performance challenges.

On slide 17 you will see that our Non-U.S. client AUM grew to $13.5 billion, up 13% from $11.9 billion last quarter, and up 38% from a year ago. Progress in the last year has been encouraging.

Over the last year we have added over 30 net new Non-U.S. client and investor relationships. Our 1-year Non-U.S. organic growth rate is at 13%, and the 3-year organic growth rate is 25%.

During the June quarter, we began managing assets in our Global Opportunities Strategy for our first Australian superannuation fund client. With Australia's mandatory employer contribution requirements, we see this first client to be a strong foundation in this appealing market and recognition of our efforts in Australia over the last couple of years.

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 be encouraged by interest in our Non-U.S. Growth, Global Equity, and Global Opportunities Strategies.

Our financial results begin on slide 18. For the June 2014 quarter, revenues were $208.5 million on average AUM of $108.2 billion. That is an increase in revenues of 3% over the preceding March quarter and a 29% increase from the corresponding June quarter in 2013.

For the 6-month period ended June 30, 2014, revenues were $410.3 million on average AUM of $107.2 billion. That is up 32% from revenues of $310.2 million in the 6-month period ended in June 2013.

Our weighted average management fee for the current quarter and for the 6 months ended June 30 was 77 basis points.

Our adjusted operating margin, which excludes pre-offering share-based compensation expense, was 46.5% for the current June quarter, compared to 45.1% in March 2014 and 44.6% in the corresponding second quarter of 2013. Our adjusted operating margin benefited from the increasing revenues, offset by a minimal increase in total operating expenses.

During the quarter, we experienced higher technology and distribution expenses as we ramped up our technology projects for the year. These higher expenses were offset by slightly lower compensation and benefits expenses, which were seasonally higher in the March quarter.

We have launched a new advisory share class of our High Income fund and anticipate launching the class for certain of our other US mutual funds in response to demands from the intermediary marketplace. As intermediaries transition their clients to this new share class over the next year or so, we expect our payments to intermediaries for distribution and administrative services to decrease.

Offsetting this reduction in expense, beginning in the September 2014 quarter we expect to incur approximately $1 million to $1.5 million of additional expenses per quarter related to a reallocation of a portion of certain payments to intermediaries from our US mutual funds to us, as the advisor. Over the next year or so, we expect the margin impact of these two developments to be minimal.

Adjusted net income for the June 2014 quarter was $60 million or $0.84 per adjusted share. That is a 7% increase in adjusted net income over the preceding March quarter and a 35% increase over the prior June 2013 quarter.

For the 6 months ended June 30, 2014, our adjusted operating margin was 45.8%, up considerably from 41.0% for the 6 months ended June 30, 2013. Adjusted earnings per adjusted share was $1.62, up 46% from $1.11 for the 6 months ended June 30, 2013. Compared to the prior year 6-month period, the increase in margin is primarily attributable to higher revenues and lower compensation expenses, related to the investment team cash retention award that concluded at the end of 2013, and severance expenses in 2013.

Slide 20 highlights our compensation ratio. As you know, our compensation expense in the current June quarter continues to include the amortization of pre-IPO equity-based compensation, which we adjust out of expenses when calculating our adjusted operating margin and adjusted earnings per share. Our compensation expense for the June quarter also includes the amortization of the July 2013 equity grant of restricted shares that vest over 5 years.

Last week, our Board of Directors made the second grant of post-IPO equity-based compensation. As with grants over the history of our Firm, equity grants are used to reward value creation and long-term, sustainable growth. Over our history, approximately 85% to 90% of equity grants have gone to key members of our investment teams, reflecting our value-added investment culture.

This year, our Board granted approximately 1.4 million shares, which included a portion of the awards in a new form of grant that we call career shares. Like our standard restricted share awards, career shares have a 5-year time vesting component, but importantly also require the recipients leave Artisan through a qualifying retirement process.

In summary, this means the key investment talent and our executive officers must have at least 10 years of service and provide a 3-year retirement notice before they leave in order for their shares to vest. This concept further reinforces our commitment to creating long-term, sustainable growth.

The additional quarterly expense related to this year's grant will be approximately $3.5 million a quarter, which is approximately 170 basis points of our current revenue levels. This will equate to approximately $3 million for the September 2014 quarter, given the expense we recognize for a partial quarter.

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

The last slide is our balance sheet highlights. Our balance sheet remains strong.

Our cash balance is healthy , ending the June quarter at $204 million, down 4% from $212 million at December 31. During 2014, we returned capital of $63.1 million to our shareholders in the form of cash dividends. We plan to continue our practice returning the majority, if not all, of our annual earnings to our shareholders.

On July 15, our Board of Directors declared our quarterly dividend of $0.55 per share of Class A common stock payable on August 29, 2014, to shareholders of record on August 15. At June 30, our stockholders equity was $124 million, down slightly compared to December 2013, as a result of the quarterly and special annual dividend paid in February and the quarterly dividend paid in May, offset in part by the equity added in the March follow-on offering and current-year earnings.

Our debt remained at $200 million and our leverage ratio further reduced to 0.5 times EBITDA. In June 2014, Hellman & Friedman disposed of the remaining investment it had in Artisan Partners since 2006. The sale of 1.8 million shares increased the percentage of common stock held by the public to 44%.

As a result of that transaction, we recorded $64 million of additional deferred tax assets and $54 million of amounts payable related to the tax receivable agreement with selling partners.

In addition, following this final disposition of Hellman & Friedman's investment in Artisan, Allen Thorpe, who was H&F's representative on our Board of Directors, has resigned. Eric and I would like to thank Allan for his support over the last 8 years as a stakeholder and a partner of Artisan.

To wrap up, this quarter's financial results were strong. We generated strong cash flows from operations, returned meaningful capital back to our investors, and continued to expand our public ownership, all important components of a healthy and growing business. I look forward to your questions and will now turn it back to Eric.

Thank you, C.J. C.J. and I appreciate your time, including our shareholders, clients, and employees, to understand our business better I will now open the call for questions.

(Operator Instructions) Mike Kim, Sandler O'Neill.

First, a fair amount of your strategies remain closed to some extent, so just wondering how you are thinking about flow prospects going forward. I know you've got a lot of capacity across your Non-U.S. and Global Strategies. But just assuming investor risk appetites remain somewhat uneven, just be curious to get your take on the flow profile in that sort of environment.

Certainly, Michael; it's Eric. I will lead off and maybe C.J. might chime in here. I think we have all seen the aggregate fund flows go from roughly $50 billion in the first quarter down to $9 billion in active equity strategies; and if you look at from a year to date, it's been roughly $90 billion to I think closer to $60 billion there.

So the overall environment in the institutional -- in the fund market has gone down a bit, along with the continued institutional rebalancing that we are seeing. Both have been slight headwinds this quarter.

But overall, we have seen a nice uptick in our Non-U.S. Growth Strategy. You can see for year-to-date we are roughly $2.8 billion in net flows, which really took the place of where our Global Value team was the last few years. The growth team is positioned quite nicely, especially with the Global Opportunities.

So those two teams are showing great promise for picking up net flow in the next few quarters, even the next year. And we have seen a good movement in the High Income Strategy now at $300 million overall.

So I think we feel we are very well positioned. Our open strategies are picking up nice flow.

And we always have coached people that it will be lumpy, and that we are not a smooth asset gatherer, as we are more institutional and a lumpy flow. So I think that's -- from a product perspective, the broker dealer channel and the overall intermediary seems to be fairly strong. I think wealth management overall has been growing, and we are picking up good market share in the overall intermediary channel.

We had also a nice uptick overseas internationally with some good wins, as C.J. mentioned, in Australia. And the pipeline out overseas institutionally still remains strong.

So I think the environment has affected us a bit in the past. We have grown strongly in poor environments, and we have grown slowly in great environments. Really our goal is to remain disciplined to our business model; and really can't control the flow or human behavior of when dollars actually come. I don't know if, C.J., you have anything to add.

Yes, the only thing I would add is on the inflow side I think we're where we expected to be, with -- what we saw this quarter was just investors pulling back and rebalancing out of some growth areas, when we saw growth and momentum stocks pull back in the March into April periods. So I think that has been the one area that was a bit of a surprise to us this quarter.

Okay. That's helpful. Then second, I know it is still a relatively small part of your overall AUM base, but the longer-term track records for the emerging markets team are still a bit challenged. So any incremental insights into the drivers behind the underperformance?

Then at some point do you start to think about maybe taking more a proactive stance with that team?

The numbers are continuing to trail the Index a bit. The bulk of the underperformance for that team occurred in 2011. Since then, we have been moderately behind.

And the primary driver there, around an asset class and asset flows really chasing the Index returns. And again we saw an enormous amount of dollars go back into ETFs and the Index and really reinforce that relative strength and price momentum that occurs by buying stocks in the Index.

Our portfolio tends to have a high active share ratio. We tend to be out of the Index quite a bit in a number of names; and when you're out of the Index, you're not getting that asset flow support. We continue to trail.

We also saw that same issue occur into the value team. So the value team is again fairly concentrated in a number of names and outside the Index. And the flows that we saw in the last year and 2 years into the Mid-Cap Value Index was extremely high versus past years; and then that penalized us quite a bit.

We analyzed our stocks that were inside the Index and outside the Index, and there was an extreme difference in return between the two, driven by the continued push in dollars towards EPS. So that has been a technical factor that continues to push.

The emerging markets team has been very consistent to their process and producing a strong fundamental portfolio. Once we start seeing some inconsistency in process and inconsistency in the talent there, then we start to waiver more; but we have always looked at having integrity in the people first, process, and then the performance follows that. And right now from what we see from a performance standpoint, we are just fighting a technical factor.

Okay. That's helpful. Thanks for taking my questions.

Marc Irizarry, Goldman Sachs.

Great, thanks. Eric, can you just give maybe some historical performance across some strategies in terms of -- obviously it sounds like you'll continue to stick to your knitting, in terms of not having in terms of not having style drift in the strategies. But have you seen periods where there has been some near-term underperformance? How long do those extend for? And do you think your clients and the consultants understand that?

Yes, Marc. Each of the strategies, since their inception has had anywhere from a year to 3 years of underperformance versus their Index and the peers. And you go through each of the strategies, whether it was Mid-Cap Growth or international growth -- the first couple of years of the international value strategy had some fairly lumpy results. If you looked at 2002, 2003, 2004, 2005, it was really 2 good years, 2 tough years, and there was moments there were the 3-year numbers were difficult as well.

And we spent an awful lot of time with our business leaders. The business leaders are dedicated to each investment teams to focus on client service. And so we spent a lot of time educating our clients about our process, what to expect.

And there is only so much time, right, that people are willing to stick with you. And I think as long as we can point to the consistency and an understanding of why we are underperforming and show proof statements to that, our clients tend to stick with us quite well.

Now, there is a lot of other reasons in the marketplace right now that we see institutional and even some of the intermediary clients rebalancing and derisking and taking money off the table. Off-line I could pull some data for you and show you various cycles there, where each team has done that.

And it's a little bit more prolonged in the emerging markets right now. But we have never really seen this much momentum around ETFs and Index flows into a segment such as -- whether it is a China ETF or an emerging markets ETF.

Great, that's helpful. Just, C.J., for you on the comp expense, could you give us some perspective on just how much flexibility there is in terms of comp, just maybe given the 1-year numbers? I think there is more of a maybe fixed component to the comp, if you will; but I would imagine that there is some variability there.

Then maybe specifically, when you think about the mid 40% comp ratio, what is the timeline to get there?

Yes. In the comp area, I would -- approximately 70% of our expenses in the comp line is variable, so there is quite a bit of variability there that will fluctuate with increases and decreases in revenues. But as you saw in this quarter, there is also leverage when we grow quarter to quarter to pick up some margin expansion, because of that fixed component.

So the mid 40%s, it will take us -- on slide 20, we break out the comp ratio. You will see that we are currently in the low 40%s; but given moderate growth as we have seen over the last 3 to 5 years, as well as layering on the equity-based comp expense, I think it will take us 3 to 4 years given those assumptions to get to the mid 40%s.

Okay, great. Thanks.

Bill Katz, Citi.

Hi, this is Steve Fullerton filling in for Bill. First question, are you able to size the Australian AUM win that you had? And what is the depth of the opportunity there that you see? How much could we see come in from this?

The Australian market, as C.J. mentioned, is a very healthy market. I think we all know the positives to that market.

But we have had some very good traction from two of the primary consultants down there for various strategies, and we continue to be supported by some of the global consultants. So we are quite optimistic on Australia overall.

But I don't think we can give you any specifics to that marketplace. Really, we have to see it through until the research process, to the ratings service, to the finals to really understand what the final outcome will be.

Okay, great. Then just saying on the Non-U.S. topic, I guess, you talked about how the amount of relationships ticked up this quarter. Is there anything specifically that you are doing different? Any change in strategy?

No, no change in strategy. We ended the last year at about 55 relationships overseas. We are up a good 20 over that.

So we are starting to see a little bit broader acceptance outside the US. I think we have spent quite a bit of time with our website; we have put videos online. We are trying to leverage technology and marketing to broaden our footprint around the world as well as, I believe, going public helped build some brand identity as well. And it is just a little bit more acceptance in the marketplace of who we are.

Okay, great. Thank you very much.

Robert Lee, KBW.

Hi, this is actually Andrew Donnantuono filling in for Rob. Just my first question is on specifically the High Income Strategy. Just kind of curious. The inflows for the quarter and going back to first quarter actually, would you be able to just give us a sense of which distribution channels are driving that?

Then just on a relative basis, I know it is early days still, but just wanted to see how -- where you guys think the strategy has both performed and grown relative to your expectations when it was launched a few months ago.

Sure, the High Income Strategy is now 100% put together with all three analysts on the team located in Kansas City with Bryan. So from an operational and from an investment point of view, we think we have the right foundation now to go forward.

From a distribution standpoint, we're just right around $300 million under management, primarily coming from the intermediary channel, mix of broker dealer and financial and advisors into the mutual fund.

And on an outlook going forward, we are really looking to manage that and manage Bryan's time so that we are focused on the investment integrity of the strategy. In the early phases of a strategy you have to watch asset flow, either positive or negative in any significant way, so that it doesn't become distractive to the performance in the initial portfolio.

The portfolio is what we expected. It is a mixture of corporate and bank loans. It's highly differentiated from the Index and peers.

And so we feel that it is in line to our expectations from an investment, operation, and distribution we feel is a little bit above where we thought it would be.

Okay, great. Thank you. Then shifting gears just a tiny bit, I wanted to ask you about -- to the extent that you felt you have had success or could continue driving flows via -- getting Artisan's strategies on 401(k) platforms. Just wanted to know if you had any color there of late; and if so, what strategies have really been driving the flows onto 401(k) platforms?

Currently, the defined contribution segment still remains fairly flat for us, and continued client share of the net new flows are going to target date funds, primarily the proprietary target date funds. You have seen a few consultants put together customized target dates and solutions that are making us feel a little bit more optimistic for the future of target dates.

But as of late, in the near term, it still remains flat for us.

Okay, thanks for taking our questions. Appreciate it.

Cynthia Mayer, Bank of America Merrill Lynch.

Hi, good morning. Just going back to some of the Value Strategies, it looks like a few of them have a really high percentage of cash, like 8% plus, up to 13%. I am just wondering; is that typical? Does that explain the underperformance? Or is it more securities selection?

And then just more generally on the Value Strategies, when you guys have some strategies that are lagging like that, could you describe a little bit what, if any, extra steps you take in terms of reaching out to clients or distributors? Whether it is more presentations from PMs or from you guys, do you change the way you communicate at all? Thanks.

Cynthia, the Value Strategies tend to hold a little bit higher cash than our growth oriented strategies. Certainly an 8% to 10% cash position over the last year has been a drag. The market overall is up 20%, 25% in the Mid-Cap and the Small-Cap segments of the marketplace.

Our value team has a more conservative approach to value investing, and we fully expect the team -- that over the last 5 years of this bull market, especially in Small-Cap and Mid, this team should lag. And it has lagged in past years as well in up-markets.

So, the team producing 20%-plus return over the last 5 years and the Index producing 20% and 22%-plus return, it can be pointed a little bit to the cash position. We have also found a big differential in stocks that are outside the Index. There has been a big drag in those names, given the price momentum that has occurred and the dollar flow into Indexes.

So it is a combination of our overall strategy, more conservative with cash, and what is going on in asset flow around the Index would be the primary areas that we have seen when we have looked at performance.

Our communication certainly upticks as clients, consultants, intermediaries want to understand the strategy better. And in these cases our portfolio managers will get on the phone and visit clients to talk about the strategy and why the portfolio is positioned.

Fortunately, for all of our strategies we have seen some very strong periods. The value team was performing quite well through 2011, where they were named Morningstar Manager of the Year at that 2011 year. So coming off the next 2 years of lagging takes some education for the portfolio manager and an uptick in communication. And we are happy to educate our clients to extend the duration of those assets with us.

Okay, great. Then on the separate accounts, it looks like the flows turned positive. I am assuming that was -- I think you said overseas clients. So was that the Global Equity product?

What changed there? Why do you think that that has ticked up? What types of clients were those? Thanks.

It was a mixture of institutional and a little bit on the financial intermediary side of the business. It was primarily in the Global Opportunities. We saw some larger mandates come in as well as one good-sized account for our international Growth Strategy.

Great. Thank you.

Eric Berg, Royal Bank of Canada.

Good morning. As I look at the big picture and I assess the overall flow picture, it looks to us here at RBC that the inflows have been fairly steady. And what has been driving -- again, on an overall Company-wide basis -- the decline in net flows has been a fairly sharp increase in outflows.

I guess my question is -- and I have listened to you quite attentively, so maybe you have answered this question and perhaps I just need to sharpen my understanding. If the outflows are rising in the face of what has been admittedly some pressure on performance, does that mean that despite your discipline that just the message -- that the customers are not tolerating it? The message is not getting across? Or do you think I should reach a different conclusion about these growing outflows?

I would have a different conclusion. We are working with quite a few institutional clients that are rebalancing and rerisking. And I would like to say that the rebalancing is occurring in the strategies that have poor performance in the short run; but we have seen quite a bit of rebalancing in our strategies that are having strong performance, too.

So when I go through the data and look at where the rebalancing is coming from, it has touched all of our investment teams over the last quarter and year-to-date. But it is difficult for me to point to and say it is because of performance and they are not understanding the strategy.

Now, there has clearly been a couple extra accounts that we have lost around performance, and that is natural when you are going through a cycle. But I would say the uptick is primarily around the institutional marketplace rebalancing and derisking their portfolios a bit.

That's helpful. Then just one, I would say, more straightforward question. Maybe not, but you will be the judge.

As you compare the performance of your domestic or U.S. Value team versus your Global Value team, it is pretty striking, the difference, with the Global Value team seemingly doing much better. They are both value investors. They both are committed to sticking to a discipline.

What is your best sense of why the global guys have done so much better, at least it appears, than the US team?

I think the U.S. Value tends to have a little bit more of a conservative approach. You can see a few more securities especially in their Small-Cap and Mid-Cap. So there is a bit more diversification there.

And the second point is that the U.S. Value tends to have a little bit more of a traditional value bent to them, as opposed to the Global Value being more intrinsic value oriented. So there is slight nuances to their philosophical approach and process, and a little bit more concentration that occurs in the Global Value team than in the U.S. Value team.

Thank you.

Surinder Thind, Jefferies.

Good morning, guys. I just wanted to touch base on -- previously you've spoken about the lifecycle of funds and ultimately getting them to like a maintenance phase. But what about the opposite? So once a fund has been soft closed, what are the considerations into maybe reopening that fund?

Does it have to get to a certain level below capacity? Or how do you think about that process?

It is a similar process of looking at the market environment of where we are at, and where the investment team feels like is a good entry point to open up. Because as you open up, it is quite a bit of investment back into seeing the consultants again and reeducating the marketplace.

So it is a combination of time, where the marketplace is at, what's the overall dollars of the portfolio. It is not simply if dollars deteriorate $1 billion in one of the strategies, it is time to reopen it. That is a fairly fluid conversation I have with each of the investment teams.

Okay, thank you. Then, just earlier you highlighted some of your thoughts on work around new strategies and stuff. I think in your monthly AUM disclosures you guys also note that you have roughly $40 million in a managed portfolio that is currently not available to clients.

Now is that one strategy, or more strategies? And can you comment on what that is, what that strategy might be?

It is a single strategy. It is an internal strategy that we have listed on the balance sheet there as launch equity. It is a long/short strategy managed by one of the teams.

It is a team that has been thinking about degrees of freedom. And like all the strategies that we think about, we like to take quite a bit of time to get those to market and understand the overall strategy.

So at this point we are not putting any plans in place to put that into a marketing and opening up to external investors.

Okay. Then typically, you mentioned it takes a bit of time. Is it a number of years before you think about that? Is it like a 3-year type of period that you try and at least evaluate? Or what kind of an incubation period do you guys generally think about for something like this?

I don't think we have a set time frame on it. It could be a couple of quarters; it could be a couple of years. It is really a comfort level with the investment team of where they are at in their resources, where they are at in their current strategies, and do they feel that this is a strategy and a portfolio that will be in place and be representative of the future.

And sometimes that just takes a few quarters and sometimes it may take a few years. We put no time frame to our launches.

Okay, thank you. That's it for me.

Chris Shutler, William Blair.

Hey, guys. Good morning. On the Global Equity strategy, still seeing excellent long-term performance there, but no real pickup inflows yet. So just walk us through what we could see.

When do you think we could see that strategy start to generate some more meaningful flows? And do you think the 1-year number there holds you back very much?

We are starting to get more and more meetings with the Global Equity Team, both for the Global Small-Cap and the Global Equity Strategy. And that is a process that does take some time for consultants to put you on the buy list and move you up in the ratings.

And what we have seen in the marketplace is the supply of Global Equity products is quite large. You can look at the new fund data coming out; it seems like every month someone is launching a new global strategy. So it is a highly competitive area, similar to probably 10 years ago in the US large-cap equity space.

So we expect a little bit longer cycle than say a capacity-constrained strategy that is in the small-cap space where you would need 3 or 4 years, a few hundred million dollars; and due to capacity constraints you can get to market a little quicker. In a more capacity-oriented strategy with quite a bit of supply in the marketplace, the time frame to really expect assets takes more than the 4- or 5-year period that we are seeing right now.

Overall, though, the consultants are starting to put this high on their research priorities. We are starting to see some buy ratings, and I think we are seeing some early signs of this strategy starting to grow in the next year to 2. So I'd fully expect the next year or 2 that we would see good flow here.

The performance on the 1-year doesn't really hold it back. It gives us a reason to say how is the portfolio positioned. Most of the consultants and clients are looking at the longer-term performance, and the short-term performance just helps them get an understanding of what type of strategy they are buying.

Okay, understood. Then the only other question on the comp expense, for C.J. It was a little bit lower than we expected this quarter. I recognize the share-based comp is going to step up next quarter.

But outside of that, how should we think about comp over the next few quarters?

Yes, I mean, I think what you saw this year -- this quarter was the absence of those seasonal expenses in the first quarter, which is what drove it down a bit in the second quarter. So next quarter, you would see it similar to this year -- to this quarter's quarter, except for the addition of the equity-based comp.

All right, great. Thank you.

Marc Irizarry, Goldman Sachs.

Thanks. Eric, I might've missed this, but any perspective just in terms of July and maybe any other replacement activity that might be in the pipeline? And conversely, any other big unfunded wins that we should be thinking about?

No, we haven't had any meaningful funding or announcements of assets leaving over the first couple -- 3 weeks here into the quarter. And looking at the rest of the quarter --

Who knows?

It is tough for us to know.

We will release July AUM around the 7th business day in August.

Okay, great. Thanks.

Thank you. This concludes our question-and-answer session. I now would like to turn the conference back over to management for any closing remarks.

Thank you for your guys' time today. C.J. and I did the call here from London for the second time. We did it as well last year, and it's good to get out to all our offices and do the calls from various locations. So we will continue our practice of getting out to the offices and doing the earnings call from various locations, and we appreciate your time today.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect. Have a nice day.