Artisan Partners Asset Management Inc (APAM) 2015 Q1 法說會逐字稿

Hello ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management's first quarter 2015 earnings conference call. My name is Gary, and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, management will conduct a question-and-answer session, and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. At this time, I will turn the call over to Makela Taphorn with Artisan Partners.

Good afternoon everyone. Before we begin, I would like to remind you that our first quarter earnings release and the related presentation materials are available on the Investor Relations section of 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, and we undertake no obligation to revise these statements following the date of this call. In addition, some of our remarks made today include references to our 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 CEO, 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 by C.J. Daley, CFO. Time is a valuable asset. We hope to use this time wisely. As usual, I want to discuss the quarter in relation to our long-term strategy, and continue to reinforce the business philosophy that will drive our results over longer and more meaningful periods.

This quarter, I want to explain how our strategy of increasing degrees of investment freedom meets the demand of the clients who are evolving their investment policies and asset allocations. Our focus on differentiated high value-added strategies designed to meet the long-term demands of sophisticated clients is fundamental to our business model. Given that focus and our patience in executing our strategy, we do not expect linear outcomes from quarter to quarter or year to year. Once I'm done with the business update, C.J. will take the lead and discuss our financials.

On slide 2, I would highlight that our total AUM increased to over $108 billion due to market appreciation. Our average AUM has steadily grown over the past three years, leveling out over the past 12 months. Our asset diversification by investment teams and distribution channels remains solid. As noted in the bullets, we now have seven autonomous investment teams. Our new developing world team is led by Lewis Kaufman. We have hired two investment professionals to join Lewis on the team, and we plan to launch the team's first strategy in the next few months. I will further discuss the developing world team later in the call.

Adding new investment talent is an important part of our thoughtful growth strategy. While growth is necessary, patience and stability are equally important. We are extremely patient in searching for new talent. We wait for all of the right characteristics to align before bringing on new talent. Patience and stability help us avoid mistakes, allowing us to succeed by not losing.

Before turning to our long-term results slide, I want to spend a few minutes on slide 3, which is new. As I have said on prior calls, we are in the midst of an exceptional bull market that is generating some interesting outcomes.

The scatter plots on the left side of the play show one of the anomalies. The linear relationship that investors typically expect between volatility risk and investment return has not held across certain broad asset classes. Over the last five years, the Large Cap Russell 1000 index has generated greater average annual returns, with meaningfully less volatility than the Small Cap Russell 2000 index. Similarly the All World Index has outperformed the more volatile EC and Emerging Market indices.

The 10-year chart on the bottom left of the page shows the linear relationship that investors typically expect, and which underlies much of modern investment theory in practice. The recent risk return results are one of the factors prompting sophisticated investors to rethink asset allocation and manager selection, which impacts how we think about new strategies.

I also want to note the information in the tables on the right side of the page. We have included the gross returns of the median active managers for the five- and ten-year periods within the e-vestment categories corresponding to the indices shown in the scatter plots. For example, the performance of Global Equity managers is typically gauged against the All Country World index. As you can see the median active managers have added value during both periods. For investors who have invested with managers better than median, even more value has been added.

Slide 4 provides a current view of our long-term investment results. We analyze performance around several key points: faithfulness to a stated investment process, solid absolute performance, and performance compared to peers and the index. As of March 31st, eight of our 12 investment strategies that have a five-year track record have added value relative to their broad performance benchmarks over the trailing five years. Six of our seven strategies with a 10-year track record have added value over the trailing 10-year period. And on an absolute basis, 10 of our 12 strategies with a five-year track record have produced greater than 10% average annualized returns over the last five years.

All of our strategies continue to execute their distinct investment processes with integrity. Regarding process consistency, we believe that each of our investment teams possesses the kind of talent and investment process necessary to deliver strong performance over the long term. Our clients invest in our strategies because they believe in both the talent and the investment process. We can't risk surprising our clients. Similar to the way in which the uninspected risk return outcomes discussed on the previous slide are pushing investors to change asset allocation, if the outcomes we generate surprise investors they will seek alternatives, thus for us, real business risk to doing something unexpected that surprises our clients.

Moving to slide five, the lumpiness that can stem from process discipline is reflected in our trailing one-, three-, and five-year numbers. As of March 31st, over 80% of our assets under our management were in strategies outperforming the respective benchmarks over the five-year period, while 98% of our assets under management outperformed over the trailing 10-year period, since each strategy's inception.

Our mutual fund peer ratings, which are highlighted at the bottom of the page, show how our results translate into industry-wide rankings by Morningstar and Lipper. Our firm-wide asset-weighted Morningstar rating remains outstanding at 4.1 stars.

While on the topic of rankings, our Global Value team recently received two 2015 Lipper US Fund Awards, the Artisan Global Value Fund received awards for being the number one fund in both the three-year and the five-year category within Lipper's Global and Multi-Cap Core Funds universe. This is the third year in a row that the team has been recognized by Lipper's US Funds Awards.

The earlier slide on broad market performance showed the remarkable returns of US stock indices over the last five years. Those returns have driven up the valuations of stocks in the universities within which our US mid-cap and small-cap value strategies operate. That's why, as we have said before, we are not surprised that those strategies have underperformed their benchmark indices during the bull market. Keep in mind that the average annual returns of the benchmarks for those strategies over the last five years are around 16% and 15% respectively.

Moving on, slide six illustrates the current outcomes of our long-term asset diversification strategy. As I said earlier, we don't expect our outcomes or growth to be linear. Despite strong performance, we experienced net outflows during the quarter in four of our six investment teams and all three distribution channels. Given our firm-wide long-term performance, we believe that we are well-positioned to continue to grow over a more meaningful time period. The growth and the diversification of our AUM are the results of deliberate, long-term decision making. We expect that expanding investment degrees of freedom within existing investment teams and with new teams will result in further long-term growth. On the next slide, we have illustrated two other successful growth stories.

On slide seven, the first chart shows the growth of assets in our intermediary distribution channel over the last five years. We began a concerted effort in the broker dealer and financial advisor channels in 2002, with the addition of an individual to focus on those areas. While we experienced net outflows in the channel, during the last quarter our three-year and five-year annualized organic growth rates in the channel have been very strong. We now have over 34 billion of AUMs sourced through our intermediary channel.

The second chart shows the growth of our non-US AUM. We began to focus on global distribution in 2009 and the efforts are paying with three- and five-year annualized organic growth rates of over 20% and 57%. We now have $13.8 billion of AUM sourced from clients domiciled outside of the United States.

These growth stories are similar to a period during the late 1990s and early 2000s, when we experienced strong growth in defined contribution assets. We identified the DC channel as a potential source of considerable organic growth. We developed a plan to focus on that channel, and we experienced tremendous success. These examples illustrate our track record of delivering organic growth over time. While we have experienced net outflows over the last 12 months, we remain very optimistic about continuing to grow our business over the long term. As C.J. will discuss, our open strategies have seen solid organic growth over recent periods. We are also confident that our global distribution efforts will continue to pay dividends. However given our business discipline, we don't expect a smooth pattern on a year-to-year basis.

On slide eight, you can see the three core principles that define who we are. We are a high value-added investment firm, designed for investment talent to thrive in a growth-oriented culture. We manage our business with a mind-set similar to that of our investment teams in managing their strategies. We operate for the long term, and execute with a commitment to our business philosophy. On recent quarterly calls, I have explained our talent-driven business model and thoughtful approach to growth. With the next flew slides, I will discuss how our commitment to high value-added investment strategies aligns with the long-term trends in institutional investing.

Let's move to slide nine. Institutional investment policies are shifting away from style box categories, and towards risk-based and outcome-oriented approaches. Instead of focusing on allocating asset across categories like US, non-US, or large cap, small cap, these approaches focus on how particular strategies, regardless of traditional asset classes, will contribute to a larger portfolio's expected return and risk.

Within these allocation frameworks, institutions are not hiring managers to add value across the entire portfolio. If an index can provide a desired exposure or outcome, investors will use the low cost passive product.

But there remains a very important and large role for active management. Institutional investors are looking to active managers to deliver return and risk profiles and outcomes that are differentiated from the index returns. Active managers can deliver these types of strategies by loosening investment constraints so that investment teams can use more judgment and flexibility to deliver the differentiated benchmark agnostic outcomes.

Slide ten, which I have shared with you before, is a very simplistic representation of the investment continuum from passive beta on the left to high value-added active alpha on the right. Today, in building their customized risk- and outcome-based portfolios, institutional investors are increasingly using passive unconstrained alpha and alternative investments. This is much different than the 1990s when constraint-style box strategies were growing assets. At Artisan, we have been evolving our investment strategies in light of these larger trends.

Turning to slide 11, our evolution in response to the trends discussed on the prior slides began in earnest with the launch of our global opportunities and global value strategies in 2007. In 2010, we added our global equity strategy. Prior to the launch of these strategies, our teams had focused their efforts in the constrained alpha category. They were constrained by requirements as to market capitalization, geography, and security instruments.

Within the global products, we removed the traditional US versus non-US allocation constraints, and excluded or reduced many standard portfolio construction limitations. This provides our teams with greater freedom to add value wherever they find it, which the teams want and which aligns with the trends I have been discussing. These global products also appeal to investors using more traditional asset allocation methods or hybrid approaches. The value-added performance numbers and five-star overall Morningstar ratings speak to the success we have achieved so far with these strategies. Together with our global distribution strategy, these strategies provide us with a great opportunity to further grow and diversify our business. With the market evolving towards even higher degrees of freedom, our new strategy development continues along this path.

Slide 12 outlines our new strategy development. As you know, we seek to add new strategies within our existing teams, and by bringing on new talent from outside Artisan. In either case, our development of new strategies will reflect the following.

First, the interest and experience of our current and future investment professionals will drive the new strategy we offer. We believe that strategies start and end with investment talent.

Second, we will design strategies that fit well within traditional outcome- and risk-based allocation strategies. While we have discussed the evolutionary trend away from traditional asset allocation, we believe that the bulk of asset allocators still utilize a traditional approach, producing stability and opportunity for our more mature strategies. Going forward, many allocators will utilize a hybrid model.

Third, our new strategies will reflect increasing degrees of investment freedom, which will further allow our investment teams to manage investment risk and outcomes. This approach will help us within many models including a hybrid approach.

Lastly, these new strategies will be difficult to replicate with passive products. Our launch of the Artisan high income strategy in 2014, and our current development of the Artisan developing world team are consistent with those objectives. The high income strategy is and the developing world strategy will be high value-added and relatively unconstrained. We don't believe that the risk return profile of either strategy could be easily replicated through indices.

Turning to slide 13, I want to return to our new developing world team. As you know, in February we hired Lewis Kaufman as the founding portfolio manager of the Artisan Developing World team. We have also hired two investment professionals with whom Lewis has worked closely in the past. We are in the process of setting the team up in its own office in San Francisco. The team's first mutual fund is currently in registration with the SEC. We hope to launch the fund in the next few months. We are excited about the team's potential and its place in our growth-oriented culture. There are tremendous opportunities in emerging markets. Sophisticated clients are comfortable with the asset class, and want the diversification and the opportunity it provides. It also is a great place for active managers to differentiate themselves and offer investors a unique high value-added strategy.

I will now turn it over to C.J. to discuss our financial results.

Thanks, Eric. Hello everyone. A summary of our March quarter 2015 financial results is on slide 14. For the quarter, ending AUM increased 1% to $108.7 billion. The increase was driven by market appreciation, substantially offset by net client cash outflows of $2.2 billion. Average AUM also increased 1% quarter-over-quarter, but revenues declined 1% because of two less calendar days in the March quarter. Our adjusted operating margin for the March 2015 quarter was 38.4%, and was impacted by several unique items in this first quarter. The most significant item was the start-up costs associated with the onboarding of our seventh investment team, the developing world team. Those costs reduced operating margin by 320 basis points, and reduced adjusted net income by $0.06 per share.

In addition, in the first quarter of each year, we incurred seasonal compensation costs and we also began to recognize expense from the January 2015 equity grant. The seasonal costs decreased operating margin by 160 basis points or $0.03 per share, and the grant of equity decreased adjusted operating margin by 40 basis points, or a penny per adjusted share. Adjusted net income per adjusted share was $0.65. Our Board of Directors approved a regular quarterly dividend of $0.60 per share. The dividend will be paid May 29th to shareholders of record on May 15th.

Slide 15 details our AUM and client cash flows ending assets under management of $108.7 billion for the March quarter was up 1% from the December 2014 quarter, primarily due to a strong equity market in the first quarter. Client cash flows were below our expectations as we experienced net outflows of $2.2 billion for the quarter. These net outflows were primarily the result of performance driven client redemptions in two of our US value strategies, and asset allocation decisions across a number of our other strategies. Overall, outflows were generally consistent with what we experienced last quarter, and reflective of the headwinds we expected to face in early 2015. Despite overall net outflows we are encouraged by healthy growth this quarter in our strategies with realizable capacity, our non-US growth, global equity, global opportunities, and high income strategies. Those strategies brought in a total of $1.2 billion in net client cash inflows in the current March quarter, which represents a 14% organic growth rate.

Slide 16 highlights our non-US client AUM, which remains just under $14 billion, or 13% of total AUM at the end of March, consistent with the December quarter. We experienced slight net outflows in our non-US client base this quarter, as a result of a client rebalancing decision in our global value strategy.

Our financial results begin on slide 17. For the March quarter, revenues were $203.6 million on average AUM of $108.4 billion. Despite higher average AUM, the 1% decline in revenues quarter over quarter was driven by two less billing days in the current March quarter when compared to the December quarter. Our weighted average management fee for the March quarter was 76 basis points, consistent with the December quarter. Our adjusted operating margin which excludes pre-offering share-based compensation and other GAAP expenses was 38.4% for the current March quarter, compared to 43.9% in the December 2014 quarter and 45.1% in the first quarter of 2014.

Our adjusted operating margin for the March quarter was down 550 basis points from December, and in line with expectations when factoring in the onboarding of our developing world team, which negatively impacted margin by 320 basis points, seasonal first quarter expenses which reduced adjusted margin by 160 basis points, and a January equity grant which also reduced margin by 40 basis points.

We expect the ongoing cost per quarter of the developing world team to be approximately $1.5 million per quarter, or about $0.01 per share. Adjusted net income per adjusted share was $0.65, down from $0.76 in the December quarter, primarily due to the items I previously mentioned that impacted our margin. Our annualized adjusted effective tax rate rose from 36.5% to 37% in the current March quarter, due to the apportionment of more income to states with higher tax rates, primarily New York.

We include slide 18 to highlight the components of our compensation expense. In the first quarter of each year, we incur seasonal benefits and payroll tax expenses caused by the reset of the new calendar year. Those costs attributed an additional $2.6 million of expense in the March quarter, compared to December.

In addition, the developing world team added $7.1 million of compensation in the salary and the incentives line, of which $6 million is unique to the March quarter. The remaining $0.5 million of start-up costs related to the developing world team is included in general and administrative expense.

Finally, our Board approved an equity grant to employees in January of 2015, which increased our run rate equity-based compensation expense to $8.5 million.

Slide 19 shows our balance sheet highlights. Our balance sheet remains strong. Our cash balance remains healthy, ending the March quarter at $215 million, which was up 18% from $182 million at December 31, 2014.

The last slide summarizes the dividends we have paid since our IPO in March 2013. For the second quarter of 2015, our Board of Directors has declared a regularly quarterly dividend of $0.60 per share. This is consistent with our previous quarterly dividend. Our dividend policy targets distribution of the majority of adjusted earnings, after considering business conditions and the amount of cash we want to retain at the time. Over the last four quarters we have returned cash of $3.20 per share to our shareholders, which is slightly in excess of our adjusted earnings per share for 2014. And based on a share price of $45, represents a yield of approximately 7%.

We continue to remain focused on growing in a responsible and thoughtful manner that prioritizes our investment talent and their investment processes. In the first quarter, we continued to make investments in our talent and infrastructure to build realizable capacity for the future. Our investments over the last several years have provided us the opportunity for continued growth, particularly in our international and global strategies, and from our new investment teams. Although, we expect to continue to face headwinds stemming from institutional reallocation decisions and relative performance challenges, which will occur at times in certain of our strategies. Over time, which may be several quarters or years, we believe our measured approach to running a talent business 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.

Gary, I will turn it back to you for questions.

We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Michael Kim with Sandler O'Neill. Please go ahead.

Hey guys, good afternoon. First, just in terms of expanding sort of the investment degrees of freedom, can you just go into a little more color in terms of how you are planning on implementing that nuance, if you will, across your existing strategies? And then any follow-through as it relates to maybe being able to better recruit investment talent down the road?

Sure Mike. It's Eric Colson. Yes, we have been talking about the expanding degrees of investment freedom for a couple of years. And in fact, I had to go all the way back to the launch of our global strategies of opening up the mandate. And we are starting to see clients give us degrees of freedom into other asset classes. So some of our team has been able to add more cash, or include fixed income securities if they so choose. Likewise, we have seen a little bit more hedging occur in our strategies on a currency basis.

And as we look out going forward, and looking at asset allocations, models, allowing active managers to short securities, or create a risk/reward outcome, or an outcome such as an emerging markets outcome with developing world, we are going to allow our teams to broaden the use of securities or hedging strategies, for either future strategies or existing.

And we have been modifying guidelines over the last few years to take advantage of that. We do this in an evolutionary manner, because you do have to get approval from a broad array of clients, especially the separate account clients, to modify those guidelines. And we continue to see those trends reinforced with our client base, and I think you can see the outcome with our two new strategies with new world or developing world and the high income strategy.

Got it. That's helpful. And then maybe just following up on sort of a demand for more concentrated high active share strategies that you just mentioned, just wondering how you think you may be able to capitalize on that trend in light of sort of the team's investment approaches, but also in the context of some of the recent performance trends and maybe more limited capacity broadly speaking.

I think from an active share standpoint, we already have a fairly high active share across the majority of our strategies. And we will be rewarded for that active share over time. I think the higher use of passive strategies will continue for a little bit of time, and the use of high active share or high value-added managers will get a little bit more concentrated, and they'll separate exposure-oriented strategies with true active strategies. And lately that's been measured by active share ratio where historically there were many advisors and consultants were looking at tracking this to an index. I think that will continue, or benefit our current strategy, whether it's the global small cap which is a fairly new strategy, as a concentrated portfolio. Our large cap value is also concentrated with I believe it's right now 32, 33 securities. So we are already in that space right now on the concentrated high active share. We think the next step is really degrees of freedom with use of newer securities that we haven't used in the past.

Got it. And then just final question, now that the high income strategy has reached its one-year track record, just wondering if you expect to see a step-up in demand. Or are the three-year numbers still more important? And just from a scale perspective, does the fund still need to maybe get to a certain asset level in order for investors to be able to allocate bigger amounts into the strategy?

Yes, we still believe that for true realizable capacity, which is a term we have used in past years, that a three-year track record with certain level of assets and more predictability of the strategy underneath the Artisan umbrella is required for true large asset growth. I think we'll have a positive lean going forward. We could be surprised in the short run, just given the one-year performance, the team that we have assembled so far, Bryan's past record. And we have just hired a dedicated relationship manager to focus on the institutional channel, and she'll start next quarter. So we are getting ready for anticipated interests, but we truly think the asset, the true asset movement will occur more in line with the three-year mark.

Got it. Okay. Thanks for taking my questions.

Sure.

The next question comes from Bill Katz with Citi. Please go ahead.

Okay. Thank you so much. So just starting on that last question, as you think about the new world team you brought on, and the fact that they are going to launch a fund over the next couple of months, is it the similar type of growth curve, Eric, do you think in terms of just a couple of years to get the track record up and going? Or do you think similarly, given the strong performance track record of that team that it might accelerate the opportunity?

Bill, our baseline assumption is always that new strategies always take some time, and given the great track record that we saw on the high income side with Bryan Krug, Bryan produced a similar alpha in his asset class. Lewis certainly has created a great track record, and has a strong reputation in the marketplace. I think the real question is around demand for emerging markets at large. For the last seven years, the emerging markets index has produced a 0.6% return. If people think there's going to be some reversion to the mean towards a higher return and there's greater interest, that could help us out in the short run, just as much as the last couple of years in high income or high yield. But the overall flows have been muted versus previous years.

I appreciate you calling out some of the newer initiatives that are working, high yield, and I think international global. When you look at your array of the $109 billion or so of AUM that you have -- I know a bunch of this is closed -- how much of that do you think is style box centric that could be at risk to the structural change that you talked about? I guess the question is how quickly can you make this migration toward the solutions and outcome-oriented portfolio, which I think you are on the way to doing, versus just the general attrition or the commoditization of that core business?

Yes, the evolution and the asset allocation, it moves slowly. If you are currently adhering to a traditional asset allocation model, someone doesn't wake up that day and say, well, let's terminate all of those managers, and move to this new outcome or risk base. You have some really strong managers in there that you may just want to leave in place for a while. And you are willing to tolerate a hybrid approach, because you have a good, strong manager in place.

So I don't think that our traditional or more mature strategies are going to go anywhere. And as time moves on, those strategies will get more degrees of freedom, but we have that balancing act. We can't go too far where we take the strategy outside of what was intended for within a client portfolio.

So I think these trends move really slow, and you have time to modify and adjust. You have to do it at the right pace and not surprise anybody, and I think we have successfully done that over the years.

Just one more maybe for C.J., curious if -- even adding back all of the adjustments that you highlighted in terms of the temporary pressure on the margin in Q1, and looking over the last several quarters against the market where the equities are generally higher over the last year, the margin has been trending lower. So how are you you thinking about the trade-off between world versus margins on a go forward basis?

I think what we saw was we had some periods in the last several years of some significant growth, and our margins trended up higher and faster than we would have originally anticipated. So I see -- I think some of the pullback you are seeing is reflective of just having gotten to where we thought we would get so quickly.

And we continue to believe that over time, our margins will settle in the low to mid-40s, and our comp ratio will settle in the mid-40s. And our view hasn't changed, although you guys can do the math and the modeling to understand what 10% growth in revenues would do to that. And I think that's what we saw over the past couple of years, which is why we are trending down now.

Okay. Thanks for taking my questions.

The next question comes from Robert Lee with KBW. Please go ahead.

Thanks. Good morning or afternoon, guys. My question is just shifting a little bit to capital management and the dividend. And the first couple of years you paid out 100% of earnings, pretty predictable in that sense. With the stock having come back some and maybe some new teams coming on, and thinking about evolving portfolios, what juncture, particularly since the liquidity on the stock has gotten better --. At what time or juncture, number one, does share repurchase start coming into the mix from a capital management perspective? And secondly, do you envision as the business evolves having to devote incrementally more capital to a seed at this point?

Yes, I will start with sort of the last point. Our use of cash hasn't -- our thoughts around that really haven't changed. We don't see any sort of major capital commitments in regards to the business or seed capital that would prevent us from returning that, our capital and our earnings, to our shareholders.

Now the form of that at least for the short term, the next year, I don't see any change in our lean towards paying out a cash dividend versus stock repurchase. I would never say never, but I clearly think that you should expect cash dividend versus stock repurchase over the next 12 months. And at some point, I do think that stock repurchase will be part of the discussion, but it currently is much more in favor of cash dividend and a 7% yield, which is currently about where we are running.

Okay. Great. And then just curious to me, understanding that non-US is a long-term opportunity for the firm, and with about I guess it's about $14 billion-ish or maybe just under in terms of assets at this point --. But if you look at the exhibit, and I lost the page that it's on, I mean the organic growth, at least the last four or five quarters from that channel has been pretty muted.

So considering that global -- at least my perception is that global strategies in general have been in demand. And notwithstanding having one of those key strategies close, can you talk a little bit about why you think that organic growth has been more muted from that kind of key distribution channel, since the beginning of 2014? Is there something about what you think those clients are looking for? Or has it just not been really as much of a distribution focus in the short term because maybe, you want to focus on funds? I'm trying to get a feel for that.

Yes, sure, Rob, it's Eric. The global equity space is fairly competitive and given the number of strategies that tend to be on buy rated lists for many of the consultants or various platforms, it requires a little bit more time and enough dollars for it to be realizable. So certainly if you have an emerging market strategy with a couple hundred million and a three-year track record, given the scarcity of that availability of that strategy, it lowers the hurdles there for realizable.

With regards to the global strategies, our global equity team just hit the five-year track record. It has, I think, the size now to be put onto many of the consultant lists, as well as platforms. And that five-year track record just hit this last quarter, as of March 31st.

The global opportunity strategy is in a similar state. The first couple of years, we operated that strategy as what we called an opportunistic growth strategy, and it had a US emphasis, and then we evolved it to global. And in reality, it just hit its true five-year record. And both of those strategies, I think, are right in the sweet spot for realizable assets, global opportunities being a little bit ahead of it, just on the maturity and the size right now.

And if you couple that with our distribution efforts in Europe, as well as in Australia, that we think the flows are a timing issue. You are going to have some outflows and inflows. And as you go after institutional accounts, we have always said it's going to be lumpy. And given specifically those two global strategies, which we listed all three there on slide 11, and you couple that with our distribution efforts outside of the US, we're fairly optimistic about the outcome over the next few years here, as people realize our strategy.

And you did bring up the distribution a bit. We do think our strategies are bought, not sold, and we work on those sophisticated buyers, as well as intermediaries to put us on those lists. So it makes it even lumpier.

Okay. Great. Maybe just one follow-up. And this goes back to kind of your comments, Eric, around the evolving asset management industry, and focusing on adding degrees of freedom to strategies. And I just want to make sure I understand it correctly. If the focus is taking with existing strategies kind of migrating how those portfolios are run where you can, to I don't know whether it's using other, you mentioned securities, or somehow putting more flexibility or freedom into those portfolios. But you also touched on why that's a touchy thing. It depends on the timing over time, and you want to make sure you deliver what clients expect.

So to what degree does it make sense to just start brand new strategies that have those degrees of freedom from day one, get them started, get them, feed them, and build the track records that way? Is that maybe you are doing some of that, but would that -- why not go through that approach versus just trying to morph a little bit what you already have?

Rob, we do think about that exact tradeoff. In fact, we looked years ago when we were looking at launching global opportunities, that can we do this in our midcap growth strategy. Can we add degrees of freedom? Or if we are so convicted about growing degrees of freedom, shouldn't we just evolve the midcap into a pure global strategy?

And then you look at your client base, and that strategy is over half of the assets are institutional if not DC-oriented assets. And we play a very specific role there. And so pending that client base and asset base, we'll make a decision on the evolution, or a brand new strategy. Back then we made the decision to launch a brand new strategy with higher degrees of freedom.

Now over the years, we also made simple evolutionary steps in midcap growth, where we had an ability to go 5% ADRs 10 years ago. Now we then made a step of 5% ADRs in non-US, and then we moved to 10% non-US. So in areas where the strategy fits a very specific mandate in a structured allocation, we will be more mindful of that not to disrupt the flows, and we will have to go slowly on the evolution. And other cases, we will launch brand new strategies. That is something we discuss with each of our investment teams as they ask for degrees of freedom, or want to evolve.

Great. Thanks for taking my questions, guys.

The next question comes from Michael Carrier with Bank of America, Merrill Lynch. Please go ahead.

Thanks, guys. C.J., just on the expenses in terms of the outlook. So I think I get the moving pieces, particularly on the comp line. When I think about you going into second quarter or third quarter and the rest of the year, are there any additional costs on the grant side, or is that fully in the run rate at this point?

Yes, on the grant side, it's pretty much fully baked. We had a stub period in the first quarter for the January grant, but it was a partial grant. So that guidance we gave you is going to be within a couple hundred thousand dollars. We did last quarter sort of indicate that we were going to uptick our technology spend, and we got off to a slow start this year. So that will uptick a bit. But otherwise, we are going to be pretty consistent trending down, because of those seasonal expenses, and obviously the absence of those unique costs to the developing world team in the first quarter on onboarding them.

Okay. Got it. And then Eric, and you have hit on some of this, but I just want to understand when I think about the growth outlook over the next couple of years, it seems like on some of the core products, based on the flow trends, you've got a little bit of a headwind on the performance side, and some on the allocation side. And then you've got a lot of new opportunities, whether it's on the new teams or the distribution front, to offset some of those.

On the areas where it's performance or it's allocation based, is there anything that you guys can do on the distribution side or with those clients, particularly I would say on the performance aspect of it, that given this strategy, it's part of that cycle so clients can understand that, versus seeing the level of redemptions, or is it just part of the cycle that you deal with, and then at some point that will start to shift?

Yes, when we look at the array of strategies that we have, the two areas where we are seeing some difficulty is the US value team and emerging markets. And outside of that, the teams have been producing fairly strong results, and are positioned quite well. Some of the noise and asset flow we think is exactly that: noise.

When it comes to the US value team, one of the statements we like to reemphasize is we are bought, not sold. The clients that buy us look for the stability of our talent, the integrity of our process, and the expectations.

The one thing that we do is we have a dedicated business leader for each one of our teams, and those business leaders' sole job is that one franchise. So in really strong performance periods, they are there to help amplify the asset gathering efforts. And likewise, when a strategy is out of favor like our US value team, who tend to be a little bit more absolute value, have difficulty buying high PE stocks, and certainly are somewhat of an anti-momentum strategy, you lean on these client service professionals to educate the client base. And given that their sole job is this one investment team, I think that commitment and dedication helps extend the duration of that asset through these difficult performance periods.

Okay. That's helpful. And then just last one, when you look at the teams that you have added, and then you look at the shift that you are talking about, in terms of expanding the degrees of freedom, do you still see quite a few opportunities or gaps that you don't have on the platform? So over the next three to five years, continue to be looking for those opportunities, or is it more from the products you have, building those out and maybe tweaking some of the strategies?

It will be a combination of both. We will always be out in the marketplace looking for great talent that has a strategy that we think fits well in long-term asset allocation as well as our organization. As well as the existing teams we have right now have an ability to launch new strategies. So it will clearly be a combination of both going forward.

Okay. Thanks.

The next question comes from Eric Berg with RBC Capital. Please go ahead.

Thanks very much. Eric, while I understand your answer to the immediately preceding question that the marketing people really need to, so to speak, lean into the pitch at this point in order to communicate the approach and discipline of the US value team, you are a very experienced person in the area, not only of managing your company but of being a former consultant. What is your sense of whether the audience will even listen to this, given the extent of both at the retail brokerage level and the institutional consultant level, given the extent of the underperformance? Will they even care is what I'm asking.

They certainly will care. I mean, there's always an array of clients on their willingness to tolerate underperformance, and what is their time horizon.

And a lot of factors come into play. Inception date, so not all of the clients have the returns over a one, three, five, seven, and are not endpoint dependent on these exact numbers that we see in the book. Many of our clients have been with us for a long period of time that have strong absolute returns. As you look at the -- certainly the three- and the five-year returns, you are looking at returns of mid-teens, well above their return hurdles they are looking for.

So it depends on the client's inception date, their view of absolute returns in this space, and their understanding of our strategy and conviction to our strategy.

And we think the way we position a strategy and work with the consultant community, as well as the broker dealer who have built very strong internal research departments that think of the stability of the people and the process and the portfolio results, the best thing we can do is reinforce the people, the process and let them understand -- help them understand why we are underperforming. And we think if we have a heavily skewed institutional client base -- which if you look at the value team, and more specifically at the midcap value, the midcap value is around 60% institutional, with the remainder being in broker dealer and financial advisors that we think have done strong due diligence on our process. We think that skew will give us greater time than most, but there always is a time horizon that is unique for each client.

The next question comes from Chris Shutler with William Blair. Please go ahead.

Good afternoon. Just a couple of real quick ones. First just wondering how April is shaping up from a flow perspective. And second, C.J., could you just review the comments again on the developed world team and the expenses there? I think I caught $7.1 million in Q1, $6 million of which was one-time, $1.5 million per quarter from there. I just want to make sure that's right and what the breakout per line item is. Thanks.

Sure. So on the start-up costs for developing world this quarter, we are about $7.6 million. $6.5 million of that was unique to the first quarter. And so the guidance of ongoing is going to ramp up to about $1.5 million a quarter. We have yet to move them into permanent office space. So that is going to occur over time. So hopefully that is helpful.

On the flows, we said we are going to be lumpy. April has generally been better than the last several months up to now. But we tend to look out over things over longer periods of time, and try not to get -- overreact or under react any one quarter or several-quarter period. So that's about as much as I can say on that.

Yes, makes sense. Thanks a lot.

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

Thank you everybody for chiming into the call today. We will look forward to our call next quarter.

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