Artisan Partners Asset Management Inc (APAM) 2014 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management's fourth-quarter 2014 earnings conference call. My name is Emily, 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.

Hi, everyone. Before we begin, I would like to remind you that our fourth-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 our 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 or this afternoon include references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release.

And 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'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.

The end of 2014 marked our second year as a public company. More importantly, it marked the 20th anniversary of our Firm. Having been in business 20 years, if we have learned anything, it's that quarterly and annual business outcomes are less impactful to our success than a long-term strategy and philosophy.

During this discussion I will review our results for the quarter but emphasize the year. I will reinforce how the business developments that occurred over those short time periods aligned with our long-term strategy and future plans. Once I'm done, C.J. will take the lead and walk through our financials.

On the Firm's back page, page 2 of the presentation, I will make just two quick comments. First, our overall AUM increased to nearly $108 billion at the end of the year from $106 billion at the end of the third quarter. This change was largely the result of market appreciation. Our net client cash outflows partially offset market gains. I will discuss that further later in the presentation.

The second item worth noting is our distribution channel pie chart. Last year we discussed our logic behind reporting three broad channels instead of the five channels that we historically reported. We are now consolidating the former financial advisor and broker/dealer channels as the intermediary channel, and we rolled the defined contribution channel into our institutional channel.

The retail channel remains unchanged. We believe these updated classifications are a more appropriate representation of our client base and align better with our distribution model and team structure.

Page 3 highlights the three core principles that define who we are. When our founders established a business plan for our Firm 20 years ago, they had a number of perspectives about the investment management business that have shaped our long-term strategy. The first was that we would compete on the merits of our investment acumen. We would not compete on price, distribution strategy, market spend, or a myriad of other things. In short, we would be an investment firm, first and foremost.

A second perspective was a recognition that the investment management industry is a talent business. Our assets would be our people. We would have to rely on our investment talent to provide a differentiated offering. This shaped our autonomous team structure and drove the decision to have distinct business management team, central operational structure, and aligned business development efforts. We believe that this has allowed our talent to focus on investing, placing them in the best position to succeed.

Finally, we have always sought to manage and grow the business thoughtfully. The right clients, asset diversification, and financial discipline are principles that ensure we prioritize the investment process. By applying those principles we have been able to grow while maintaining the integrity of our business model.

Our business has involved over the past 20 years, but the general perspectives that shaped our business strategy at the founding of the Firm have remained intact. We are a high-value added investment firm, designed for investment talent to thrive in a thoughtful growth environment.

Over the next three pages I will spend time reviewing our long-term investment results. On page 4 you can see how we analyze investment performance. We look for faithfulness to a stated investment process, solid absolute performance, and attractive performance compared to peers and the index over full cycles. As of December 31, all of our strategies had followed their objectives with integrity, and all had positive absolute returns since inception.

Seven of our 11 investment strategies with at least a five-year track record added value relative to their broad performance benchmarks over the trailing five-year period. All seven of our investment strategies with a 10-year track record added value relative to their broad performance benchmarks.

Page 5 adds some additional color to our results by presenting a range of time frames. As of December 31, more than 80% of our assets under management were in strategies outperforming their respective benchmarks over the trailing three-year and five-year periods. Over the trailing 10-year period, 100% of our assets under management were in outperforming strategies.

Our one-year results reflected the difficult environment for active management, broadly. I will elaborate on that in a moment. Our mutual fund peer ratings, which are highlighted at the bottom of the page, are a great snapshot of how our results translate into industrywide rankings from Lipper and Morningstar. Generally speaking, our teams are performing quite well relative to the peers.

While on the topic of peer results, I want to recognize our global value team. For the fourth year in a row the global value team was nominated for Morningstar's International Stock Fund Manager of the Year in the US. The team previously won the award in 2008 and 2013 and was also nominated for the award in 2011 and 2012, making this the fifth year in the last seven that the team has received a nomination. The continued recognition from a high-quality organization like Morningstar is a tremendous accomplishment and testament to the team's efforts and the long-term track record they have produced.

On the next page, page 6, I want to spend some additional time talking about the market environment and providing some additional color on our short-term performance results. Let me start by saying that short-term performance outcomes are driven by numerous factors. It would be disingenuous to imply that results are entirely or even mostly impacted by external factors; they certainly haven't been. But if our teams are maintaining a consistent investment process, on occasion the market environment can cause one or more of our teams to experience what we consider an exaggerated outcome.

In 2014 one of the market factors that had exaggerated impact on performance was momentum. You can see by the table on the left side of the page that in the year when the market, represented here as the Russell 3000, was up about 12%, the range of possible outcomes depending on the portfolio's exposure to stocks in the top or bottom momentum quintile was significant.

The stocks in the first quintile outperformed the stocks in the bottom quintile by more than 50 percentage points in this example. None of our strategies had either full exposure or no exposure to stocks with momentum characteristics, but some strategies were more skewed than others. Underexposure to momentum stocks had a particularly large impact on our US value team, most notably in their small- and mid-cap value strategies. That team gravitates towards fear and uncertainty when they invest; the result is the team's new investment ideas are often downtrodden stocks that are often priced near their 52-week lows. Those are not momentum stocks.

Market-wide, the momentum factor is one of the factors that generally resulted in passive investing realizing better outcomes than active investing over the last year. More money moving towards winners will do that. Another phenomenon that hurt active strategy was the divergence and performance of in and out of benchmark stocks. Active investors tend to look for the best long-term opportunities anywhere. Passive indexes just own the benchmark.

Our teams are generally agnostic about whether a holding is in the benchmark or out. When money is flowing into passive strategies, the performance of benchmark names benefits and the relative performance of non-benchmark names suffer. Portfolios with significant exposure to non-benchmark holdings will generally underperform. This has had an impact on the recent performance of our US value team portfolios, and it has had a large impact on the performance of our emerging markets team for a while now.

Finally, before moving on, I just want to highlight the importance of a full-cycle view. Since April of 2009, stocks have consistently trended higher. With a bull market now approaching six years, three- and five-year performance results only reflect performance during a bull market.

We assess the success of our teams over full cycles, which should include a bull and a bear market. We believe that's a more instructive way of assessing investment performance.

Take the chart on the right of the page. The chart is looking at two time periods: the bear market from April 2008 through March 2009 and the bull market that has extended from April 2009 to the end of 2014. The left column illustrates how managers that were in the top quintile relative to peers during the bear market has performed relative to peers in the current bull market.

The right column illustrates how managers that were in the bottom quintile during the bear market have performed relative to peers in the current bull market. With exception of the large-cap categories at the bottom of the table, managers that retained capital well in the bear market are trailing peers in the current bull market, particularly those that struggled during the bear market.

The US small-cap value and US mid-cap value categories have especially exaggerated differences. What this suggests is the characteristics of the current bull market have not favored managers that performed very well relative to peers in the bear market of April of 2008 to March of 2009. We believe this further strengthened the case for a full market cycle view when assessing investment performance.

Page 7 illustrates the outcomes of our business discipline around asset diversification. The most noticeable shift in assets over the year took place across our investment teams in client domicile. For the quarter three of our six investment teams experienced positive client cash flows, and four of the teams saw positive client cash flows over the full year. It was a strong year for our global equity team, due largely to a high level of interest in the team's non-US growth strategy and early interest in the global small-cap strategy.

Our growth team also had a solid year due to growing demand for its global opportunities strategy. The global value team was positive, but cash flows were muted because the two strategies they manage are closed. Our US value and emerging markets team experienced flow pressure as performance results impacted some of our assets based on those teams.

On the bottom right you will notice the Firm's assets from clients outside of the US continue to grow and represent a larger portion of our client base. Non-US flows were positive for the quarter and year. I'd like to elaborate on this part of the business on the next page.

On Page 8 we pulled together some brief statistics about the evolution of our non-US distribution efforts. As shown on the chart, this is a business we committed to a little over five years ago. We put a strategy in place and had some general goals in mind, but we knew that progress would take time.

We don't believe a distribution strategy can be successfully executed in haste -- at least not one without significant investment -- and financial discipline has been one of our core principles since our founding. We believe that deliberate, thoughtful decisions result in the best long-term outcomes, and we are starting to see that with our results outside the US. For several years we have been knocking on doors and picking up the phone to introduce our brands directly with potential clients, at conferences, and through press interaction.

In a year when our US distribution results were muted, we saw the benefits of all that work: assets grew; we had solid net client cash flows; our number of relationships increased; and we delivered high-quality results for our clients. This has been a nice build that reflects our long-term diversification strategy. I look forward to continuing to report on our developments overseas, as we are just scratching the surface.

Turning to page 9 and 10, I thought I would close with thoughts about our capital structure and investment talent. During the quarter and year our capital structure stayed largely the same. External ownership has shifted with the sale of Hellman & Friedman's stake to public investors. Employees own about a third of the economics of the business, and their access to liquidity is occurring in a structured way. Many of our founding investors who have had the right to sell their interest since our IPO remain significant owners in our business.

One change worth re-emphasizing is our post-IPO equity grants. We have an equity ownership culture at our Firm to encourage a long-term mindset, retain key talent, and align the interest of our employees with clients and shareholders. In 2014 we introduced the concept of career shares to complement awards of standard restricted shares. Standard shares vest over a five-year schedule, with 20% of the award vesting in each of the five years after the grant. This is a traditional stock structure.

For career shares, vesting is similar to our historical rules. In general, career shares only vest upon the satisfaction of both pro rata time vesting, like the standard shares, and a qualifying retirement. For a qualifying retirement this recipient must have at least 10 years with Artisan at retirement, and portfolio managers and named executive officers must have given us their three-year notice in advance.

Other employees that receive career shares must give a one-year notice in order to have a qualifying retirement. There are exceptions to these terms, but we think career shares will enhance the stability of our Firm by increasing our ability to retain our key people.

My final page, slide 10, is a quick depiction of our investment teams. 20 years ago we had one dot located in Milwaukee. As we have grown to six teams over the years, you can see the impact our business model has had on our locations.

We resource our teams in a way that supports their unique investment processes. Our decision to allow our teams to establish their franchise where they feel they can do their best work is just one aspect of our investment culture. Each team's analysts are organized in a unique way. Each team's products reflect our work with them to align their investment research with sophisticated investors' demand, and the size of each team's business is determined by the level at which they believe they can invest most successfully.

We have called out our newest team here because we have spent a fair amount of time with Bryan Krug over the last year, doing all those things I just mentioned, and it has been a unique buildout. Just as each of our teams were different buildouts, Bryan has established a credit team of three analysts and a trader fully dedicated to the Artisan high-income strategy, which launched in 2014. All team members are located in our new Kansas City office, which is the location Bryan selected.

We have seen some early asset-raising success for the credit team, but we have done so with very minimal involvement from Bryan. He and his team are focused on investing.

That concludes my prepared remarks. I will turn it over to C.J. to go through the financials.

Thanks, Eric. Good morning, everyone. The December quarter marked the end of our calendar and fiscal 2014 year. For the year our results were very strong when compared to the full year of 2013.

Revenues for the year were up 21% from calendar 2013, reflecting an increase in average AUM of 21%. Adjusted operating income for the calendar 2014 was $371.7 million or a 44.9% adjusted operating margin. The first two quarters of calendar 2014 were strong as flows into active strategies were robust, and at Artisan we had strong flows from international mandates in the intermediary space. That activity trailed off in the last half of 2014, and we ended the year with two consecutive quarters of modest net outflows.

Specifically, we experienced net outflows of $538 million in the fourth quarter of 2014, ending the year at $107.9 billion in AUM. Revenues for the December 2014 quarter were $206 million, down 3% from September 2014 quarter and up 4% from the December quarter in 2013.

Adjusted operating income in the December 2014 quarter was $90.4 million, also down 3% from the September 2014 quarter and up 7% from the fourth quarter of 2013. We move into 2015 encouraged by the strong performance and continued client interest in our non-US growth, global equity, global opportunities, and high-income strategies, but cautious as performance challenges in several of our strategies remain and the headwinds we experienced in the last half of 2014 continue into 2015.

A summary of our fourth-quarter and full-year 2014 financial results is on slide 11. For the quarter ending AUM increased 2% to $107.9 billion. The increase was driven by market appreciation, partially offset by net client cash outflows of $538 million. Although ending AUM was up during the quarter, our average AUM decreased 3% quarter over quarter, with market depreciation experienced early in the quarter driving the decline. Consistent with the decrease in average AUM, revenues for the December quarter were $206 million, down 3% from revenues in the preceding September quarter of 2014.

Our adjusted operating margin for December 2014 quarter was 43.9%, which was in line with our prior quarter's adjusted operating margin of 44%. Net income on an adjusted per-share basis was $0.76 compared to $0.79 per adjusted share in the September quarter.

For the calendar year, ending AUM increased 2% to $107.9 billion, up from $105.5 billion at the end of calendar 2013. Average AUM, however, was up significantly in calendar 2014. Average AUM rose 21% to $107.9 billion. Revenue and adjusted operating income correspondingly rose 21% and 29%, respectively.

Our adjusted operating margin for the calendar year was 44.9%, up from 42.1% in 2013. Adjusted earnings per adjusted share were $3.17, up from $2.54 in 2013. Yesterday we announced a regular quarterly dividend of $0.60 per share. This represents a 9% increase from our regular quarterly dividends paid in 2014. Our Board of Directors also declared a special annual dividend of $0.95 per share, which represents a distribution of our remaining 2014 adjusted earnings and some excess cash.

Slide 12 details our AUM and client cash flows. Ending assets under management of $107.9 billion for the December quarter were up 2% from September 2014 quarter, as we continue to see outflows resulting from institutional clients' profit-taking, rebalancing, asset allocation decisions, and relative underperformance in certain strategies.

In addition, our US mutual funds made their annual income and capital gains distribution in November, which resulted in net client cash outflows of $648 million from clients who chose not to reinvest their dividends. These outflows were offset in part by net client cash inflows into our non-US growth and global opportunities strategies, with flows coming from both institutions and intermediaries.

Looking over a longer period -- and, as you know, we like to stress longer-term views than quarterly periods -- our December 2014 ending AUM was up 2% compared to AUM at the end of December 2013. Market appreciation contributed $1.7 billion or 1.6% of this growth, with the remaining growth attributable to net client inflows, particularly strategies managed by our global equity growth and credit teams.

We also experienced significant early flows into our global value strategy, which is now closed to new investments. Average AUM for the year of $107.9 billion was up 20% from $89.5 billion in 2013.

Slide 13 highlights our non-US client AUM, which was $13.9 billion at the end of 2014, up from $13 billion at the end of September quarter, and up 17% from a year ago. The increase in non-US client AUM was primarily due to net client cash inflows into our global opportunities strategy as well as market appreciation. Client demand outside of the US remained strong for certain of our strategies, particularly global opportunities.

Our financial results begin on slide 14. For the December 2014 quarter, revenues were $206 million on an average AUM of $106.9 billion. The 3% decline in revenues quarter over quarter is in line with our decline in average AUM but is a 4% increase in revenues from the corresponding December 2013 quarter. We had a handful of clients with performance-based fees, most of which accrue in the December quarter.

Performance fees in the December quarter were $700,000, down from $2.5 million in the corresponding 2013 quarter. For the year ended December 31, 2014, revenues were $828.7 million on average AUM of $107.9 billion, up 21% from revenues of $685.8 million on average AUM of $89.5 billion for the year ended December 2013. Our weighted average management fee for the December quarter was 76 basis points; and for the year ended, 77 basis points.

Turning to slide 15, our adjusted operating margin, which excludes pre-offering share-based compensation and other GAAP expenses, was 43.9% for the December quarter compared to 44% in the September 2014 quarter and 42.9% in the fourth quarter of 2013. Our adjusted operating margin declined slightly to a full quarter of equity-based comp expense related to our July 2014 employee equity grant. Adjusted net income for the December 2014 quarter was $55.5 million or 76 per adjusted share, which is a 3% decline for the September quarter and a 1% increase over the September 2013 quarter.

For the year ended December 31, 2014, our adjusted operating margin was 44.9%, up from 42.1% for the year ended December 2013. This increase in adjusted operating margin was the result of higher revenues and a decrease in cash retention and severance expenses, partially offset by increasing compensation expense as a result of the employee equity awards and incentive compensation and an increase in distribution and marketing expenses. For 2014 adjusted earnings per adjusted share was $3.17, up 25% from $2.54 in December 2013 year.

Slide 16 highlights our compensation ratio. Our compensation expense in the current December quarter continues to include the amortization of pre-IPO equity compensation, which we adjust out of expenses when calculating our adjusted operating margin and adjusted earnings per adjusted share. Our compensation expense for the December quarter also includes a full quarter of amortization of our July 2014 equity grants, which increased our quarterly expense for post-IPO equity awards to $7.7 million, as we discussed on our previous earnings call.

Also as indicated on our previous call, we have moved our annual equity grant cycle to a calendar-year basis. Accordingly, at the end of January our Board approved a pro-rated six-month grant of 621,000 shares of restricted stock to certain members of our investment teams. Including that grant, we expect the total equity-based compensation expense to be approximately $8 million in the March 2015 quarter.

Beginning in June 2015 quarter, we expect the full quarterly run rate of equity-based comp expense to be approximately $9 million. Keep in mind that that run rate includes amortization with respect to 2.5 annual grants since our IPO. Of course, the cost of future equity-based awards is largely dependent upon the size of future grants and the stock price at the time of grant.

Slide 17 shows our balance sheet highlights. Our balance sheet remains strong. Our cash balance is healthy, ending the December quarter at $182.3 million, which was down 14% from $211.8 million at December 31, 2013. Our cash balance at December 31, 2013, included a portion of cash proceeds from our IPO offering which were distributed through our special annual dividend paid in the first quarter of 2014.

At December 31, 2014, our stockholders' equity was $107.5 million, down $25 million compared to December 2013, primarily as a result of the liquidation of Launch Equity, a consolidated investment vehicle. Nearly all of Launch Equity's capital was attributable to noncontrolling interest.

Our debt remained at $200 million, and our leverage ratio is 0.5 times EBITDA. As you are aware, our employee partners are restricted from selling more than 15% of their pre-IPO equity in any one-year period. The one-year period will reset in March, at which time the employee partners will have the right to sell in the aggregate approximately 3.3 million Class A common shares.

They are not required to sell any shares, and we don't know how many shares they will choose to sell. Depending on employee partner interest, we may consider conducting a coordinated offering similar to the offering we conducted in March of last year to provide partners with liquidity.

The last slide summarizes our dividends. Our Board of Directors has declared our regular quarterly dividend of $0.60 per share. This represents a 9% increase from our regular quarterly dividends paid in 2014. Our Board has also declared a special annual dividend of $0.95 per share. Both dividends, a total of $1.55 per share, are payable on February 27, 2015, to shareholders of record as of February 13, 2015. As a reminder, the special annual dividend a year ago includes excess cash raised in the Company's IPO, so this year's special annual dividend is less than the prior year due to the absence of that excess IPO cash.

Finally, looking forward to 2015, I want to remind you that throughout our history our growth has been lumpy and has come from certain strategies and teams during distinct pockets of time. We continue to remain focused on growing in a responsible and thoughtful manner that prioritizes our investment talent and their investment processes. Looking ahead, we continue to be encouraged by client interests in our non-US growth, global equity, global opportunities, and high-income strategies, although we will expect we will continue to face headwinds stemming from institutional reallocation decisions and relative performance challenges in certain of our strategies.

From a financial perspective for the March quarter of 2015, we expect an increase in compensation expense giving our first quarterly equity grant, as well as seasonal expenses, such as employer-funded retirement and healthcare contributions and payroll taxes. Historically these seasonal costs have added approximately $3 million to $4 million to our first-quarter expense of each calendar year.

In addition, we expect to continue our measured investments in technology to support our investment teams' distribution efforts and scalable operations, bringing our expected quarterly run rate for communications and technology to approximately $6 million to $7 million per quarter. Over time, which may be several quarters or years, we believe these continued investments in our business and talent will be rewarded by long-term growth in AUM and revenues. Our model has been designed for long-term success, and it enables us to continue to produce predictable earnings, meaningful returns of shareholder capital, and a healthy balance sheet -- all of which reinforces our commitment to our investment teams, clients, and shareholders.

I look forward to your questions. I will now turn it over to the operator for Q&A.

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

First, just to follow up on some of your comments earlier -- but just curious to get your current thoughts on trends you may be seeing in the institutional landscape in terms of derisking or shifting into passive from an asset allocation standpoint, and then how those trends might be impacting your pipeline, or RFP activity, or what you are seeing in terms of sort of decision timelines more broadly?

It's Eric Colson. Our current thoughts are about what they were in the third and the fourth quarter. We continue to see the institutional marketplace rebalancing. They still have an interest in passive, primarily in the DC space. You see more and more passive getting inserted in the target dates to protect the proprietary nature of those funds.

We continue to see some of our clients exploring options to customize; seeing some interest in the middle-market area of the DC space or institutional space that is showing some positive signs. But overall, the continued trend is this passive investing.

And I think we said on the call, momentum was a big factor last year. Being in the index was a big factor, and that supported passive returns even more so. Fortunately, we've seen these cycles over the years -- various factors and trends -- and the key for us is holding our ground and not chasing a short-term trend that doesn't fit our business model. But we would expect at some point there the passive side of the equation would fill up, and you will see some balance back in the market.

Yes, that's helpful. And then just given sort of the decline in AUM for some of your franchises, just wondering if the teams have maybe started to see better investment opportunities out there, and what some of the potential implications could be for capacity across channels and strategies -- and possibly reopening some of the strategies to more fully capitalize on some of those opportunities?

No real change on capacity. Really, if you look at the teams -- and C.J. mentioned this -- on global equity, and the growth team, and the credit team are a really good spot right now to capture trends for asset gathering, especially global equity and global opportunities. If you marry that with our overseas distribution, the credit team is in the early cycle there.

The global value team is closed. We don't see any reason to reopen there and really leave the US value team in the emerging markets. The US value team, when you look at the mid-cap and the small-cap, still remain closed. Even if you came up with a reopening on one of those, the strategy would be difficult to realize assets at this point.

So we've always looked at realizable assets. And whether you open or close something is -- you know, they still have to present a record and present traits that the asset would be realizable. So we have not made any decisions to open those two strategies.

Okay. And then maybe just one last one for C.J. The margins have held up more recently, but just sort of given some of the ongoing investment spending that you alluded to earlier and some of the AUM headwinds potentially in the near term, and kind of factoring in sort of the ramp-up in equity comp, just trying to get a sense of sort of the outlook for margins as you look out over the next year or two?

Yes. Certainly, our margin has improved nicely since we went public. I think we were at 40.6 around the IPO, and we have trended up to 45. As we continue to layer in equity-based comp grants, that's going to drive the margin down a couple hundred basis points, and especially in this first quarter, where we have these seasonal expenses -- healthcare, 401(k) contributions, flair contributions, and the reset on FICA. You know, our first quarter always is eroded 100 basis points or so.

So over time we expect growth to offset those and work our way back up. But in the short-term you are going to see some margin pressure there down into lower 40.

Okay. Great. Thanks for taking my questions.

Bill Katz, Citi.

You mentioned that you are going to do some cautious marketing around the high-yield platform. Can you talk about the strategy of doing so? And are you going to tie the portfolio manager to it, or is it more so a branding opportunity? I'm just trying to understand the opportunity there.

Bill, you are talking about the high-income fund?

Yes.

Really, around the high income fund we see continued marketing into the intermediary channel. We saw early success there last year and into -- continued into this year. As we hit the one-year track record, the intermediary channel really looks for that one-year period to be able to put it onto their platform.

So I think we will see continued distribution efforts around the intermediary. And then, also, we are starting to get some inquiries on the institutional side that we are being reactive to. I think with the one-year track record and over $500 million in the strategy, we are starting to meet the hurdles for many of the centralized research to put our strategy into a buying position. So we feel we are in a good spot with that strategy, and we'll continue to see growth.

Okay. That's helpful. My second question is: looking at the slide that -- you lay out the non-US, and you wanted to show us both the AUM and the number of different relationships you have, and certainly a very nice trend. Maybe this is just bad math, but if you look at the average size of the AUM per relationship, that number looks like it's sort of small, if you will.

I know you have markets and maybe FX dynamics affecting all that. Could you talk about how scalable that is at this point in time? I'm just sort of curious why, given the very strong ramp in the number of accounts and relationships, you haven't seen a deeper -- a steeper slope, if you will, in terms of the AUM lift against that.

We have a mixture of clients in that chart that shows the $13.9 billion in assets and 76 clients. We've seen a few institutional clients go into the global opportunities strategy, and we've also seen us win some smaller accounts, but they are in the financial intermediary channel. So they seed those with some smaller allocations, and then we will grow with those advisers and brokers over time.

So I think the last couple of months we've seen a little bit more interest by the intermediary channel outside the US, and they start with a smaller allocation. So a few more accounts than normal, and so your average size is down. It's somewhat barbelled. Since you are new in this space, we are either getting attracted at the higher-end large institutional or starting to ease into an intermediary.

Okay. And then last question -- thanks for taking all my questions -- you didn't mention anything about the fee rate. It looks like it ticked down about 1 basis point sequentially. How much of that was maybe market forces versus mix? And what's the outlook going forward?

Yes. I mean, we've been trending around 76, 77 basis points -- it's a bit of rounding. We had some redemptions. We've seen some outflows in the US value space, primarily, in the fund, and that has a higher fee rate.

So there isn't anything wholesale going on there. Early in the year we saw assets flowing into our global equity team in the mutual fund space, intermediary space. And during the end of the year, we saw it flowing out of -- you know, the outflows in the value team were coming from that space.

Okay. Thanks for taking my questions.

Robert Lee, KBW.

Just curious -- in going back to follow up to Bill's question on non-US AUM: if I think back with, say, global value, you first closed it to institutional relationships before you closed it to more broadly, I guess, to retail or the fund business. So is there -- you know, as global equity grows, as global opportunities -- where you said has had good demand outside the US -- is there anything on the horizon that we should be thinking about that, some of those more successful strategies right now, given your desire to control the mix of clients that could be some limiting factor on kind of growth outside the US for a period of time?

It's Eric. Right now the global opportunities has a nice mix. It has had quite a bit of interests from larger institutional clients, but we wouldn't -- we are right now not thinking about shutting down a segment or a channel to skew the mix. So that would continue. And the global equity strategy is in early phases there, with roughly $680 million in the strategy. That has quite a ways to go for that strategy.

The global opportunities is a little over $5 billion. So we are not in a position on either one of those strategies that would skew the mix versus global value today at over $15 billion. So I guess the short answer would be no.

Okay. And I'm just curious to know -- on the RSUs or RSAs, you know, the career shares, I'm just curious how -- when you award stock, how that -- what the kind of mix is between those career shares and more traditional grants? To make sure I understand it correctly, when you award a career share -- so you awarded one on January 1; those immediately start vesting, assuming there is some longevity criteria that's been met?

From an accounting standpoint we start vesting the first year, at the point of grant. So that layers in -- the amortization layers in immediately. And the mix is generally, on future grants, going to be around 50%/50%. This grant was primarily to investment teams, and they have sort of met our threshold for receiving career shares. So it was largely 50%/50%.

Okay. And maybe one last question if I could. So, clearly, you distributed about 100% of the earnings this past year in 2014; but looking forward, as you grant more shares or you start to have kind of share count creep up, so to speak, at what point -- or how you start thinking about share repurchase as part of the capital management mix? Is that something we should be thinking could become more part of the conversation in 2015 and 2016? Just trying to get your thoughts on that.

Yes, I think it's too early. We are still trying to build our float. We are only, what, 18 months into the IPO. So right now we are not discussing using any cash for share repurchase.

I do think it will at some point -- probably another liquidity event or two to be a conversation. And we will certainly try to give you guys a heads-up when we are thinking about that, so you can sort of adjust your models. But either way, it's a return of capital to shareholders, just in a different form. So we certainly will consider it in the future, but we are not presently having those discussions.

Great. Thanks for taking my questions.

Michael Carrier, BofA Merrill Lynch.

I just wanted -- a quick question just on the buildout of strategies. So you brought on the credit strategy, and obviously it's relatively short, but it's been pretty successful from a short period of time. I just wanted to get a sense on the outlook over the next one to three years: where the priorities are, how active you plan on being, looking for any gaps or new talent?

Sure. It's Eric. We feel that the credit team buildout has gone very well, from back-office, to distribution, to the investment resources, as well as the talent that we recruited to join Bryan Krug.

We've seen over the last 12 months a very healthy dialogue going on in the marketplace with investment talent that resides either in the emerging markets or emerging markets' equity or debt. We've seen a variety of alternative strategies that we feel fits into the high-value added space, or high degrees of freedom that we would call it, and that would fit quite nicely into our business model.

And we continue to meet quite a few teams and individuals that warrant follow-up discussions. So we will continue to meet with those groups. It takes time to find the right team with the right alignment of interests into our business model, and the strategy that we think fits long-term asset allocation.

I think that last point -- there's quite a bit of movement on in the asset allocation world of whether it's going to be a risk-based asset allocation or outcome-based asset allocation. The growth into the high net worth marketplace warrants one of those two asset allocation models as opposed to the traditional asset allocation that we've all grown up and experienced with over the last 15 to 20 years. So we are optimistic on it, but obviously we want to make sure we get it right. And that will take time.

Okay. Thanks. And just as a follow-up, C.J., in terms of the foreign exchange moves that we've been seeing in the market, just wanted to get a sense -- each firm is a little different in terms of how they manage it or the impact that they can have. But both on the funds -- and then as you are building out the international distribution, just how does that have an impact on the business?

Yes. There is a number of ways FX touches us. On the translation of our AUM, we certainly saw a negative impact in the fourth quarter, given the strengthening of the dollar. And about 40% of our assets are overseas, so it was a bit more material this past quarter than it has historically been.

Performance-wise, it runs through our market appreciation line. Really, it's part of the investment process. From a P&L perspective, obviously the lower AUM this quarter would impact that, because -- you know, the way we bill on average assets. But from a P&L perspective, our clients are largely billed here in US dollars, and we only have a handful there that are billed outside the US. So it's very immaterial from a P&L perspective.

Okay. Thanks a lot.

Eric Berg, RBC.

There was one concept that I was hoping, Eric, you could review from your prepared remarks. I just would like to deepen my understanding of this idea of securities in and out of the benchmark and how that affected your performance. If you could just maybe walk me through again the table on slide 6, just maybe picking one or two numbers from the table as illustrations for how this table works? I need a little help understanding it. Thank you.

Sure. First, on the in and out of index, we do quite a bit of attribution across all of our strategies. And some of our strategies, which we have highlighted in the past around emerging markets -- invest in quite a few names that are not in the MSCI Emerging Markets Index. And given the asset flows into indexes and given the price momentum, there has been a nice upward push on the returns of those names versus names outside of the index.

So if we had 30% of our portfolio of, say, of 100-stock portfolio out of the index, and those 30 stocks underperformed the index names by quite a bit; and then we went across all of our strategies and took a look at in-index and out-of-index names, and for the most part across every one of our strategies the out-of-index names dramatically underperformed on average versus the names in the index -- which would make sense, given last year's factor weighting towards momentum.

With regards to the chart there, we'll just take small-cap value, because it was the most extreme. But that first column there on small-cap value -- if you took all the managers that ranked in the top quintile of their peer group during the bear market --, so that April of 2008 to March of 2009 -- and took that group of managers and ranked them then during the current bull market run of March of 2009 to now, that group of top-quartile managers during the bear market on average was in the 88th percentile over the current run.

And the managers that were performing in the bottom quintile of that bear market period during this bull market run are in the 18th percentile. And the quintile spread there is obviously the differential of 71. So it was the most extreme market or the most extreme peer group there.

And that's where we have seen our small-cap value -- did quite well during the bear market -- has been lagging during this bull market run. And we have always said we were going to participate in the bull market, but you know, we're -- the small-cap value strategy is not a momentum-oriented strategy and has lagged quite a bit. And that's been the case for quite a few small-cap value managers.

We are not looking to make excuses here. But we clearly think there is an exaggerated factor in the marketplace that's creating some endpoint exaggeration across the group.

Very good. That helps me out a lot. Thank you again.

Chris Shutler, William Blair.

First, I just want to get an update on the flows thus far in the month of January, recognizing that that's a very short period of time. And on the institutional pipeline -- just how that's looking. So RFPs final is one, but not funded? Thanks.

Certainly, Chris. I think we are releasing our January flows in a couple of days here. And what we have been seeing so far is pretty much a consistent trend to what we saw in the third and fourth quarter. And I would say that's true for the pipeline as well -- that that institutional marketplace has been rebalancing in third- and fourth-quarter results that we saw from flows, and the third- and fourth-quarter pipeline is carrying into January.

All right. Thanks, Eric. Then you touched on the appetite for potential new teams and meeting with several individuals and teams. But any update on the appetite of your existing teams to roll out new strategies?

We are always in constant dialogue with our existing teams, but we have no near-term plans here to roll out a new strategy within any of the six teams right now.

Okay. And just lastly, the global equity strategy is sitting here at $680 million. In a top-upper decile on a three-year basis, I think it hits its five-year here in April. I know you had the PM departure issue a couple of years ago, but what's the catalyst in your view for that taking off? Because the Launch performance is very good.

We think the -- you are correct -- the five-year number hits in March, at the end of March. So going into second quarter, we will have a five-year record. Typically in the mid- to large-cap categories, you need a five-year plus record versus capacity-constrained areas, such as small-cap. The trigger is a three-year record, sometimes shorter given the strategy.

And with the five-year record, and now $680 million in the strategy, and the performance over the last couple of quarters has been quite strong, and the time elapsed from our portfolio manager turn that you brought up has been a couple of years -- we think we are pretty well positioned there for growth, especially outside the US.

All right. Thank you.

This concludes our question-and-answer and conference call. Thank you for attending today's presentation. You may now disconnect.