Artisan Partners Asset Management Inc (APAM) 2015 Q3 法說會逐字稿

Hello. Thank you for standing by. Welcome to Artisan Partners Asset Management third-quarter earnings conference call. My name is Rocco and I will be your conference operator for 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.

Thanks. Before Eric begins, I would like to remind you that our third-quarter earnings release and the related presentation materials are available on the investor relations section of our website. Also, comments made on today's call and some of our responses to your questions may deal with forward-looking statements, which are subject to risks and uncertainties.

Factors that may cause our actual results to differ from expectations are presented in our 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 our remarks made today 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 I will now turn the call over to Eric Colson.

Thanks, Makela. Welcome to the Artisan Partners Asset Management business update and quarterly earnings call. I am Eric Colson, CEO, and I am joined by CJ Daley, CFO.

The market has continued to reflect short-term uncertainty. I expect market volatility to persist, producing long-term opportunities for high value-added investment firms like Artisan Partners. We have thoughtfully designed our Firm and we diligently execute our strategy, including communication, to minimize uncertainty about who we are and how we will behave in these market environments.

On this call, I want to discuss the quarter in relation to our long-term strategy. This quarter, I will focus on thoughtful growth. If we create stability and build business value through volatile periods, we believe that our economic value will increase over time. Once I am done, CJ will take the lead and discuss our financial stability, despite volatile markets.

On slide 2, you'll see that we finished the quarter with $97 billion in AUM, our lowest quarter in AUM since the third quarter of 2013. The decline during this past quarter was due to declines in equity markets worldwide and $1.3 billion in net client cash outflows.

During the quarter, net outflows from the strategies managed by our US value team continued to offset positive net flows from the rest of our business. We saw $1.6 billion of net outflows from the US value team strategies during the quarter as the team's performance continued to lag indices and peers.

We expect to continue to see attrition from the US value team strategies. However, the team's approach to building a better, safer, cheaper portfolio has generated strong outperformance in prior periods. We don't want the team to sacrifice the integrity of its investment philosophy and process in order to chase short-term returns. Nor do we want to make any abrupt changes that would surprise the team or clients.

Before leaving this slide, I want to make a more general point. While our total AUM may be at about the same level as it was two years ago, Artisan is stronger and better positioned today. We have made significant investments in new and existing talent, and we have expanded the degrees of investment freedom.

If you set aside the US value team's flows, over the last 24 months, our other teams have generated $8.3 billion in positive net flows for an annualized organic growth rate of more than 5%. I think that is strong evidence that there remains and will remain a very significant place for high value-added active management within sophisticated clients and investors' asset allocations.

On slide 3, we plotted the closing prices of the ACWI and VIX indices, each over the last 10 years. As you can see, there is a lot of uncertainty in the market today. The uncertainty results from a number of factors, including macro events, changing investor behavior, and increasingly popular forms of investing, such as high-frequency trading, liquid alternatives, and ETFs.

In this environment, we remain focused on who we are as a Firm and continue to make long-term investments in our business. Our variable cost financial model, which CJ will discuss, allows us to remain focused on identifying long-term opportunities and executing on those that are consistent with who we are.

The launch of our developing world strategy is an example of our approach. Despite uncertainty in emerging markets, at the beginning of 2015, we hired an experienced portfolio manager with a history of delivering strong results and a mindset consistent with Artisan's values. We launched the developing world strategy at the beginning of July when the team was ready. We were not trying to time markets or secular industry trends.

While the third quarter proved to be the worst quarter for emerging markets in four years, the creation of the developing world team and the launch of the developing world strategy are positive investments in Artisan's long-term business value that we made despite market uncertainty.

While the upfront investment we made in the new team runs through our P&L, we view the upfront expenses as an investment in the long-term value of our business. And we expect to reap the benefits over the longer term.

On slide 4, you can see our long-term performance. As you know, we look for faithfulness to the stated investment process, solid absolute performance, and outperformance compared to peers and the index. As of September 30, 8 of our 12 investment strategies that have a 5-year track record have added value relative to their broad performance benchmarks over the trailing 5 years. 6 of our 8 strategies with a 10-year track record have added value over the trailing 10-year period. All of our investment teams remain focused and committed to delivering alpha based on their individual investment processes.

Slide 5 is our standard business philosophy and approach slide that defines who we are. We are high value-added investment firm, designed for investment talent to thrive in a growth-oriented culture. Today, I want to discuss how our commitment to thoughtful growth is reflected in the way we manage our business.

Given who we are, we are not structured to, nor do we have experience in, rolling out high-volume scaled businesses like passive products or smart beta offerings. We also don't consider ourselves a distribution firm focusing on vehicle management, such as ETFs, or liquid alt mutual funds. We focus on differentiated investment strategies that are well suited for sophisticated clients and investors.

Our new investment strategies remain rooted in fundamental analysis, but broaden the investable universe or allow for the use of additional security types, providing our portfolio managers with more tools to produce an outcome or a risk profile. These strategies fit well within outcome and risk-based asset allocations, are natural fits with our business model, and allow for high value-added results, differentiated from exposure-oriented strategies.

Turning to slide 6. On this slide, we have unpacked Artisan's revenue equation to help you understand how we think about growth. The equation is simple: revenue equals units -- for us, AUM -- multiplied by price -- for us, fee rate.

The simplicity of the equation can lead to a preoccupation with AUM growth. In particular, a preoccupation with client cash flows. Positive net flows are critical over the long term, but we have always shied away from placing importance on short-term flow results, whether the flows are good or bad. We have always said flows will be lumpy.

We believe that focusing too much on short-term net flows can lead to product launches that don't make sense, disregard existing clients and talent, and unsustainable distribution strategies. To generate long-term sustainable net flows, we stay focused on the levers listed on this slide.

Keep in mind that these levers work together and influence one another. For instance, talent produces alpha, which generates and sustains client demand. We then manage capacity to protect our team's ability to generate alpha and preserve client trust, which we believe increases the longevity of our existing AUM and makes it easier to raise additional AUM when the time is right.

One thing we can't control is the market. Obviously, it has a significant impact on our overall AUM, so we have included it on this page. Because we can't control markets, we believe that it is critical that we remain true to who we are. As our clients, investors, and employees are impacted by shifting markets, it is important that they trust us to faithfully execute our stated investment strategies and business plans.

Slide 7 highlights our approach to talent. Our growth is a product of talent and driven by talent, both existing and new. In the last 2 years, we've added two new teams founded by talented portfolio managers. Brian Krug founded the credit team, which launched a high income strategy over a year ago. Some may have thought that a period of historical and persistently low interest rates was an inauspicious time to launch our first fixed-income strategy.

That is not how we thought about it. We found a talented investor with a mindset that was consistent with Artisan's values. Like the developing world strategy, we launched a high income strategy when Brian and his team were ready. Since the strategy's inception in April 2014, its benchmark index has returned negative 2%. The Artisan high income strategy, which is differentiated from the benchmark, has returned positive 3.42% on a [gross-to-fee] basis.

When I think about the high income in developing world strategies, I think about our development of the global value, global opportunities, and global equity strategies over the last 10 years. We designed and developed those strategies in response to the increasing irrelevance of issuers' corporate domicile and to sophisticated and clients' demands for global strategies. Now those strategies are firing on all cylinders and the global equity and global opportunity strategies represents the core of our realizable capacity.

With the high income and developing world strategies, we have continued to expand degrees of freedom and provide the teams with tools and flexibility to manage risk and outcomes. We will be patient and protective of alpha, but in a few years, I expect that those strategies will have transitioned into their full growth potential.

Slide 8 is one of our standard performance slides. As a high value-added active manager, outperforming indices and peers is critical to our growth. Data on this page shows the long-term success of our talent and business model.

At the end of the quarter, 87% or more of our AUM was in strategies generating alpha over the trailing 3-, 5-, and 10-year period and since inception. For the 1-year period, our non-US growth strategy trailed the MSCI EAFE benchmark by 4 basis points, which explains the lower percentage outperforming for the 1-year period.

While we don't focus on short-term performance, it is worth noting that consistent with the strategy's investment guidelines, about 13% of the non-US growth portfolio is allocated to emerging markets compared to no EM exposure for the MSCI EAFE index. Compared to the ACWI ex-US Index, which does include emerging markets, the non-US growth strategy has outperformed by 346 basis points over the trailing 1-year period.

The data on this page supports our high value-added proposition. If we continue to deliver value, we believe asset flows will follow. It will be lumpy and market uncertainty and industry trends may work against us for the short-term periods, but over a long term, asset growth should follow our long-term investment results.

Slide 9 shows the AUM history of our non-US growth and global value strategies. When we think about capacity, we focus as much on managing the asset levels in our existing strategies as we do on launching new strategies. Managing capacity protects alpha generation potential, supports investment talent, and builds client trust, each of which is critical to long-term sustainable growth.

In September, we announced that we were closing the non-US growth strategy in phases, beginning in February of 2016. The stage approach works for the investment team and allows us to work with clients, consultants, and intermediaries to slow the pipeline and close the strategy in a nondestructive way.

Closing the non-US growth strategy should also allow the global equity strategy to continue to grow its assets base without impacting the performance of either strategy. The two strategies have a number of cross-holdings, so the exciting growth prospects of the global equity strategy were an important factor in our decision to begin closing non-US growth.

This is similar to how we managed the stage closing of our non-US value strategy back in 2010 and 2011. We began to limit flows into the non-US value strategy in order to allow global value the runway to grow without hindering the performance of either strategy.

Less than 2 years after we completed the non-US value closing process, the global value strategy surpassed $9 billion in assets. Managing capacity at the team level and not just the strategy level helps protect alpha by allowing for appropriate asset growth.

The non-US growth closing process will impact flows. So will other factors, like market uncertainty and performance. We don't know with any precision what the results on short-term net flows will be. We are not managing to that.

At the same time that we announced the non-US growth closing process, we announced the reopening of the global value strategy across pooled vehicles. The global value strategy went through a stage closing process in 2013 and 2014. Over the past year, the market environment has presented increased investment opportunities meeting the global value team's criteria and the team was comfortable reopening to pooled vehicles.

Reopening to pooled vehicles exclusively will help a smooth the lumpiness of flows that is more common with separate accounts. That also means that we don't expect the reopening to result in large inflows that would significantly grow the strategy's total AUM.

Managing capacity the way we do may negatively impact short-term growth. That is acceptable to us because we strongly believe that doing what is best for clients and investment talent will result in long-term sustainable growth.

Turning to slide 10, you will see the diversification of our AUM. As with talent, alpha, and capacity management, these distribution outcomes result from our deliberate and patient approach. Take for instance our approach to distribution outside of the United States. Over the past 2 years, non-US AUM has grown from 11% of our total to 14%.

More importantly, over the last 2 years, we have nearly doubled our number of non-US relationships. We have expanded our efforts in EMEA, Australia, Asia, and Canada one step at a time. Non-US markets remain a very significant opportunity for us. We believe we are well positioned both from a product and distribution standpoint to continue to grow outside of the US and to do so consistently with who we are.

Another long-term opportunity for us is the defined contribution marketplace. In the short term, the opening up and reconfiguration of DC plans has worked against us because over time, some of our strategies had grown to the point where any comprehensive reallocation would cut against us. The long-term opening up of these plans to best-of-breed managers should work in our favor.

Similarly, we are often asked about the currently proposed DOL rule, expanding the application of fiduciary status. The proposed rule would not directly affect us. We already serve in a fiduciary capacity. And we have always embraced our fiduciary responsibilities.

While I won't comment on the specifics of the current proposal, we believe that changes that pushes financial advisors and broker-dealers further in the direction of acting in their clients' best interest will increase the chances that our strategies are included in client portfolios.

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

Thanks, Eric. Good morning, everyone. During the quarter, global equity markets experienced significant declines in market values. The benchmark indices for the bulk of the AUM that we manage experienced declines ranging from 8% in the US mid-cap space to 10% in the EAFE space.

The AUM we manage was not immune to these declines, as we ended the quarter with assets under management of $97.0 billion, down from $109 billion at the beginning of the quarter. Given the significance of declines in the global equity markets this quarter and the impact on our financial results, I thought it would be a good exercise to review our how model performed in this significant down market.

The five key elements of our financial philosophy are listed on slide 11 of the deck. I want to focus primarily on 3 of them in order of importance to our results this quarter. First is the highly variable cost structure built into our P&L.

Over 60% of our expenses are variable in nature. These include, but are not limited to, the incentive compensation revenue-sharing arrangements for our investment in distribution professionals as well as third-party distribution payments to our intermediaries. In a market downturn such as we experienced this quarter, most of those expenses automatically adjust with declining revenues and this allows us to maintain healthy margins.

Second, with the discipline that is built into our P&L, we are able to maintain strong cash flows in a conservative and healthy balance sheet. We are not forced to alter our execution of long-term business goals because of short-term market declines.

Finally, with high employee ownership and a practice of paying out a majority if not all of our adjusted earnings in the form of quarterly and special annual dividends, our key professionals are aligned both economically and strategically with our other stakeholders during periods of growth as well as during periods of market decline.

Because of our financial philosophy, despite uncertain market conditions, we have continued to invest for the long term with the addition of our seventh investment teams, the developing world team, and have continued to the buildout of our credit team, which now manages over $900 million only a year and a half since launch of its first strategy.

With that backdrop, I will move on to slide 12 and our September quarter 2015 financial results. For the quarter, ending AUM decreased 11% to $97 billion. The decline was primarily driven by the declines in global markets I have referenced as well as net client cash outflows of $1.3 billion. Average AUM decreased 6% quarter over quarter.

Revenues for the September quarter were $198.4 million, down 6% in from revenues in the preceding June quarter of 2015 and in line with our decline in average AUM. Our adjusted operating margin for the September 2015 quarter was 40.9% and consistent with our expectation, given the decrease in revenues we experienced during the quarter and the variable nature of our expense base.

Net income per share on an adjusted basis was $0.67 compared to $0.74 in the June quarter. For the 9 months ended September 30, 2015, revenues were $613.5 million, down 1% from revenues of $622.7 million for the corresponding 9 months ended September 2014. Our adjusted operating margin was 40.5% for the 9 months ended September 30 compared to 45.2% for the prior-year period.

On October 21, our Board of Directors declared a regular quarterly dividend of $0.60 per share of Class A common stock. This is our fourth quarterly dividend of $0.60 in 2015 and represents the distribution of a portion of our year-to-date adjusted earnings.

Slide 13 is a review of our AUM. As Eric discussed, during the quarter, the strategies managed by our US value team experienced $1.6 billion in net client cash outflows, primarily from our US mid-cap value strategy and mostly from the Artisan mid-cap value mutual fund.

Setting aside those net outflows, net client cash flows were generally positive, though modest, across our open strategies. Our global value team strategies, both of which were closed to most new investors throughout the quarter, experienced a little more than $300 million of total net outflows despite strong 1-, 3-, and 5-year performance.

As Eric discussed, on October 1, we reopened the global value strategy to most new investors through pooled vehicles. Our mid-cap growth strategy, which is also closed to most new investors, experienced about $300 million in net outflows, despite continued strong performance.

As a reminder, in November, the Artisan funds will make their annual income and capital gains distribution. Last year, those distributions resulted in about $650 million of net client cash outflows from investors who chose not to reinvest their dividends. Based on our current estimates, we expect this year's distributions to have a similar aggregate result.

On slide 14, you will see that our non-US AUM was $13 billion, down close to 8% from $14.2 billion last quarter and in line with AUM a year ago. The decrease in the September 2015 quarter was due to market depreciation, offset slightly by net client cash inflows. Non-US AUM represented 14% of our total assets under management.

Looking ahead, we continue to be encouraged by interest in our global equity strategy, managed by our non-US growth team, and our global opportunity strategies, managed by our growth team. In addition, our two newest teams are off to strong starts as they build their performance track records.

The credit team, which launched its high income strategy in April 2014, now manages over $900 million. Our newest strategy, developing world, launched in July 2015 and has surpassed $100 million in AUM in just a few months. This level of AUM is encouraging, but our primary focus has been on supporting the team as they work to develop a strong performance record.

Our financial results highlights begin on slide 15. During the September quarter, our revenues decreased 6% to $198.4 million, consistent with the 6% decrease in average AUM. Our average management fee rate for the quarter was 75 basis points, down just slightly from the June 2015 quarter.

For the 9 months ended September 30, 2015, revenues were $613.5 million on average AUM of $108.2 billion, which is down 1.5% from revenues of $622.7 million on the same average AUM for the 9 months ended September 2014. Asset mix has shifted slightly away from pooled vehicles, resulting in a lower weighted average fee rate for the recent nine-month period by a little over a basis point.

Slide 16 is our adjusted operating margin, which excludes pre-offering share-based compensation expense, and was 40.9% for the current September quarter compared to 42.1% in the June 2015 quarter and 44% in the September 2014 quarter. Margin was negatively impacted, primarily by decreased revenues, offset in part by lower operating expenses, primarily those that are variable and adjust with revenues. Adjusted net income for the September 2015 quarter was $49.2 million or $0.67 per adjusted share, which is down 9% from the preceding June quarter.

For the 9 months ended September 30, 2015, our adjusted operating margin was 40.5%, down from 45.2% for the 9 months ended September 30, 2014. The decline in margin was largely driven by our investments in existing talent through equity compensation and our investment in the new developing world team in the March quarter of this year, offset in part by a decrease in third-party distribution expense. This translated into adjusted earnings per adjusted share of $2.06, down 15% from $2.41 for the 9 months ended September 30, 2014.

A breakout of compensation expense is on slide 17. This quarter, we have separately broken out salaries and cash incentive compensation. This should help demonstrate the variable nature of our largest expense: incentive compensation.

As you can see, incentive compensation was down for the September quarter and as a percentage of revenue was just slightly higher, reflecting the fact that a majority -- but not all -- of our incentive compensation varies directly with revenues. Equity-based compensation expense, which we have also broken out, increased in the September quarter compared to the June quarter due to the annual true-up of our estimated [expected] forfeitures.

As a reminder, our current equity compensation expense represents the amortization of employee equity grants that we have made since our IPO. These awards, which we view as an investment in our business, will continue to amortize at the remainder of the amortization period, which is generally five years from the original grant date. We expect to make additional annual grants of equity in January of each year, subject to Board approval.

Lastly, our compensation expense 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.

Slide 18 shows our balance sheet highlights. Our balance sheet remains strong with a healthy cash balance and modest leverage. Borrowings of $200 million are supported by strong earnings and cash flows and our leverage metrics remain very strong.

The last slide summarizes the quarterly dividends we have paid since our IPO in March 2013. On October 21, our Board of Directors declared a regular quarterly dividend of $0.60 per share of Class A common stock, payable on November 30, 2015, to shareholders of record on November 16. Consistent with our dividend policy, after the end of this year, we expect our Board will consider paying a special dividend, taking in consideration our annual adjusted earnings, business conditions, and the amount of cash we want to retain at that time.

The financial philosophy we follow today is much the same as the philosophy instituted upon the founding of the Firm in 1994. During periods of volatility, like the quarter we just experienced, we strive to reduce the impact of volatility on our results and our stakeholders. While we cannot control markets, we can and do attempt to run a business and financial model that will yield predictable outcomes.

As Eric stated earlier, in times of uncertainty, our clients, talent, and investors should know that we remain committed to our business and financial philosophy.

We look forward to your questions and I will now turn the call back to the operator.

(Operator Instructions) Michael Carrier, Bank of America Merrill Lynch.

Eric, just one question on -- I guess it is a combination of flows and distribution, something that you hit on on your prepared remarks. So when you look at the net flows for the quarter, particularly X the value product, it still held up relatively well, despite a pretty tough backdrop for the industry.

I just wanted to get a sense of where you are seeing the demand for those products, meaning by distribution channel. And when you look at outside the US, you mentioned expanding the distribution there. Is the interest in these types of products -- do you see any more interest versus in the US or is it pretty similar just more opportunity, just given that you are relatively small in those channels?

Sure, Michael. It has been a tough environment for active managers. And I think X the US value team, we have held up very well, as you mentioned, with positive flows across the other teams. I will go in reverse order a little bit.

Outside the US has been strong for us, particularly because of the comments I made about our global strategies. The global opportunity strategy and the global equity strategies are, in our mind, right in the realizable capacity or realizable flow, which means they are clicking on the criteria for institutional clients of a proven track record, having a minimal asset threshold, having a stable team, reside in a strong organization that has a good operation.

So we would I think continue to see strong interest in our global strategies. And with the reopening of global value and pooled vehicles, that just enhances our position overseas.

In the US, we are still waiting to see the switch from the strong trade in non-US strategies or EAFE-oriented strategies to global. We have good capacity, as I mentioned, in global. But the transition has been a little bit slower than we have anticipated of going to EAFE to global.

And with regards to the US, the broker-dealer and financial advisor, or what we call the intermediary channel, has still seen flows to the non-US. And has been an attractive area for us.

Okay. That's helpful. And then just as a follow-up. CJ, just on the expense side, I think you were pretty clear on just the variable nature. Some of the investments that have been made and some of the new teams, just wanted to get a sense: is the run rate pretty accurate right now?

And then if we are in 2016 and you are still seeing new outflows and markets are still pretty volatile, where are the levers that you can look to to try to manage through some volatility?

Yes. Thanks, Michael. With respect to expenses, yes, this quarter we have a full run rate of investments in our new teams. I think I initially gave guidance when we brought on the developing world that would be somewhere around $1.25 million to $1.5 million a quarter. And that has been fully baked in in the last 2 quarters.

The beauty of our operating model is that the levers are really built into the model. The arrangements with the investment teams and our distribution compensation is formulaic and adjusts with revenues, as I mentioned. And then some of our other expenses -- discretionary bonuses, we do have levers there, but they are not nearly as meaningful.

And then on our fixed expenses, such as headcount and our technology spend, we are committed to continuing to invest in those areas for the long term. But just to reiterate, the major drivers are the ones that are built into our model.

Bill Katz, Citi.

This is actually Ryan Bailey filling in for Bill. One of our questions that we had was what sort of products or teams are you looking to add to the platform over the near term? Is there anything that you are looking at in particular? And then what sort of conversations are you having right now?

Yes. The products and teams that we look at are heavily dependent on the talent that we find in the marketplace. So we said on past calls that we don't have a predetermined view that we need to bring on a asset allocation product or need to bring on a long short strategy or an event-driven or a core-plus fixed income. There is a whole slew of strategies that we would be open to.

I think in general, the strategies that we've launched with, with high income and with developing world are the type of strategies we are looking for. And those types would have a much broader definition of an initial universe of ideas, not wedded to an index. So something like the developing world that is redefining what emerging markets' universes look like.

Instead of being beholden to the MSCI emerging markets index, the developing world is looking at companies that have revenue tied to the emerging market's story or, as we said, in a strategy that is tied to domestic demand in emerging markets. Or on the back end of the strategy of having a much broader use of various security types as opposed to just being wedded to a high yield bonds or corporate bonds, our high income strategy utilizes an array of securities, whether it is bank loans, bridge loans, revolvers, credit default swaps. You would have an array of securities to help manage either risk or an outcome.

And those are the types of strategies that are appealing to us because they are high value-added. They are capacity constraineds. They are not competing on price or volume. And those are the areas that we are most interested in.

Got it. And then just one quick question for our model. How should we think about G&A expense going forward? It seemed that you could have flexed a little bit this past quarter, so just wondering how should we think about that. Is it kind of a run rate level or --?

Yes. I would say G&A fluctuates a little bit. Typically, summer months are low travel. We have been averaging around $6.7 million a quarter and I think that is, for modeling purposes, as accurate as a guess as we could give you.

Alex Blostein, Goldman Sachs.

Good morning, everybody. Question for you guys around non-US growth strategy. So clearly, a little bit of underperformance year to date as you highlighted. And just curious to hear what the reaction has been from various channels, given the fact that the track record is still clearly quite strong. I was just trying to assess any risk-off redemptions for maybe some of the shorter-term money that might be associated with that product.

Sure, Alex. The returns in the non-US growth strategy have been quite strong over the three- and five-year and since inception. So it is a good endpoint for the strategy. The current year has been underperforming the EAFE index. And on the prepared remarks, talked about how it has performed versus the MSCI ACWI index ex-US. We have outperformed.

So it is a little bit of a mixed bag. I wouldn't call it negative this year. And the bulk of the opportunities that we look at are in the institutional world or have an institutional process. They are looking at much longer time periods and various endpoints. The overall asset base has a little bit of retail in it that could be defined as short-term money, but we haven't seen any negative in the asset base over the last few months.

Got it. And just a follow-up to your point on the benchmarks. A majority of clients that are in the product looking at results relative to ACWI ex-US or MSCI EAFE.

Yes, I think most of our clients know that we are a high value-added manager, which means that we are active, which means that we design a strategy regardless of how an index is constructed. So most of our clients take a holistic view at our strategy versus an EAFE strategy versus an MSCI ex-US, which includes emerging markets. Some clients also use in the short term style-oriented strategies to get a gauge how our strategy is positioned in the short run.

But I think over longer time periods, your goal is to perform the broad market, whether it is EAFE or MSCI ex-US. At the end of the day, if we don't outperform that over a long period, then we would be at risk.

Okay. That's helpful. And then CJ, just a follow-up for you on the capital management strategy. Any thoughts around share repurchase here, give a little bit of accrete from [are sues], but also obviously fairly attractive valuation and a pretty big dividend yield.

So just kind of curious how you are thinking about the trade-off between that 100% payout that you typically try to achieve with a special dividend at the end of the year versus maybe using some of that for share buybacks.

Yes, Alex. I don't think our views have changed on that. We've historically paid out all of our earnings. It has been the primary return that a large group of our shareholders, our employed partners, have realized over the years. And while the valuation is attractive, our employee partners still, while we have limitations on the amount of equity they can sell. So we are still 70%-plus owners of what we owned at the IPO. So there is a high employee ownership. So I would expect that we would continue the cash payout philosophy for the foreseeable future.

Surinder Thind, Jefferies.

I will start off with a question around the global value product and the reopening of that fund. How do you guys think about the incremental capacity there? At least, how does the team about it in that sense that AUM levels are not that really different from when the product was first closed or closed last time. So is this simply more a matter that the investment team sees a much bigger opportunity set at this point versus last time?

Yes. The global value team sees a better opportunity in the marketplace. And so the discount in their portfolio has widened to a more attractive entry point. And that attractive entry point is probably the primary driver.

We have also seen some attrition in the overall book there. Given the strong performance, the stability of the team, the proven process, we feel that there's room to add a few clients, but not be disruptive. We have the same phenomena in the mid-cap growth strategy, too. You see those two strategies have all the realizable capacity criteria and you're going to get a little bit of attrition there.

And over the long run, if we maintain those key criteria for realizable capacity, we will have opportunities to position this correctly. And this just happens to be a moment for the global value team to provide an opportunity to get back into the marketplace for a little bit. If we see above that gap close in the discount of the portfolio, or a sudden change in assets that would be deceptive, we will continue to manage capacitive in the best interest of clients and performance.

Okay. That's helpful. And then quick question for CJ here. Just on the fee rate, you did provide some color around the step-down, but if we kind of break down the fee rate into just looking at the separately managed accounts, there was a meaningful step-down in 3Q of last year and again, there was a meaningful step down this quarter as well.

Now is that simply a mix issue, given that estimated accounts are more heavily weighted towards international markets, which underperform during those periods? Or is there something else that -- ongoing fee negotiations or anything else that we should be thinking about?

Yes. We also -- there is an opportunity for a performance fee in the second quarter. So if you're looking second quarter to third quarter, there is a slight performance fee in there. Other than that, it is really just -- it's fee mix. It's AUM mix.

Eric Berg, RBC Capital Markets.

This is [Rosa Hunskinny] in for Eric Berg. Thanks for taking our questions. Our first one is related to the global value strategy, which has continued to produce solid returns against benchmarks, yet it continues to be in outflow mode for five consecutive quarters now. Eric, you mentioned that this was the result of institutional rebalance in your June quarter call. Does that continue to be the case and what is your outlook for the global value business?

Yes. We definitely would see that as rebalancing of institutional accounts. We would continue to assess some rebalancing, but given that we have opened up the strategy to pooled vehicles, our expectation is that we would mitigate some of that rebalancing over the near term. But the main reason for reopening, I would reiterate, is because of the discount in the portfolio.

Got it. Okay. That's helpful. And our next one is related to your US value business. While we understand that you take a long-term orientation in your investment approach, we also know that the market does demand that that fund managers produce good performance members over the short term as well.

So can you just provide some more details on top of your opening remarks as to your outlook and what steps are being taken to potentially engineer a turnaround in this business?

Sure. It's very hard to engineer a people business. I know many people think of asset management as a manufacturing and distribution business and by no means do we think of our people business as a manufacturing business that can be engineered in a short-term period. The investment team has a very deep-rooted philosophy looking for fear and uncertainty in the marketplace and they've designed a portfolio that's better, safer, and cheaper. And in various time periods, this strategy has performed exceptionally well. And there is also periods such as now, similar to the TMT bubble back in the late 1990s that create an endpoint that questions the viability of this strategy.

But the strategy is very well rooted in value investing and has a proven record. Our goal as a firm is to properly resource this group; reinforce the discipline so that we become highly predictable to our clients and not surprise them. And at this point in time, the momentum factor has been so dominant over the last one-year and three-year.

Just to give you an example on the one-year period in the Russell Midcap Index, if you took the top quintile versus the bottom quintile of the Russell Midcap, the spread of return there is about 78%. So the bottom quintile produced a negative 42% and the top quintile produced a positive 36%. If you are skewed towards fear and uncertainty, then you're going to have a pretty extreme outcome on a negative.

And these factors and cycles rotate over a time and we fully expect that to rotate. As long as we stay disciplined, we won't be whipsawed. So we are working with our investment team quite heavily, but unfortunately, engineering a short-term outcome is not in the cards for the current period.

Michael Kim, Sandler O'Neill.

First, just to follow-up on the discussion on increasingly penetrating the non-US institutional channel. Just curious to get your thoughts on more recent flow trends for global equities in light of some of the moves from select sovereign wealth funds. And whether you view the current shift as maybe more of an opportunity from a manager replacement standpoint, if you will, over time.

Sure, Michael. There has been news, obviously, out there that sovereign wealth funds have been pulling back some of their equity exposure in the marketplace. I think there's two or three that I have read.

I don't think that's impacting the flow trend in the marketplace that we see. We continue to see good interest and demand for our global strategies. Unfortunately, it remains in that larger asset category or large mandate category, which creates concentration in specific strategies and also creates pressure on fees as well. So we're going to be selective looking for the right clients on the right terms that fit our model, but the interest remains high in what we have seen.

Got it. Okay. And then just to follow up -- I know each situation is a bit different, but just wondering if historically you have seen any correlation between maybe market volatility and the availability of investment talent. And related to that, if you could maybe just update us on what you are seeing in terms of the environment and in terms of availability. Thanks.

I don't have any historical data to look at pure market volatility in talent. I think our premise is there is always dysfunctionality in the marketplace somewhere with various firms. Whether volatility is in place or not, there's a behavioral trend that occurs that allows us to capitalize on talent availability. But I wouldn't link it directly to market volatility.

And currently, the asset management business is quite healthy. There is a little bit of volatility, but if there was a major downturn, I think there you do see some talent percolate up. We definitely saw that during the 2008, 2009 period. We had a lot of discussions, but I don't know if it's tied purely to volatility.

Chris Shutler, William Blair.

On the global equity strategy, seems like a very good opportunity there, given the performance. And you alluded to the success that you had in global value after you closed non-US value several years back. Maybe just, Eric, compare and contrast those two situations a little bit more.

And I ask frankly because the global equity team has had very good performance for a while. I know there were some -- there was a turnover issue there a couple years back, but I think we've seen less than $100 million of flows over the last 12 months and it's a really competitive category. So just help us compare and contrast those two situations. Thanks.

Sure, Chris. Each team is slightly different and each point in time is different, and we've see that over the years of how our teams have evolved. If the global value and international value team came on when the wealth platforms were changing from more of a commission-based to a fee-based. And so that they have a skewed asset base towards the intermediary channel, say, versus our growth team came online when open architecture inside of DC plans were occurring in the early 2000s.

So there's a combination of what's going on in the marketplace and a type of strategy that the global equity strategy just hit its five-year record. I don't expect the same outcome as global value, where once we closed international value, the pickup in demand just moved to right to global value. I think that was a fortunate outcome for us.

Our expectation is that the international equities strategy has been predominately a US-oriented story in the intermediary space. We don't see the intermediaries gravitating to the global equity in a direct way.

So I think we're just going to be out there with institutional consultants and positioning the strategy with clients overseas. But we don't have the same expectation that happened in global value. If it does occur, we are fortunate, but I think that was just a point in time.

Robert Lee, KBW.

I guess my first question would be -- understanding, Eric, that [coming] out of a distribution-oriented firm and not trying to bring out the hot product of the day or quarter. But that being said, as you have added a credit team, you have more capabilities within your group of managers.

Is there any potential or thought to how you can start maybe combining strategies from different teams into well-constructed products that you think could be receptive? And if so, how do you kind of manage that in-house?

Rob, over the years, we have thought about how we could combine various strategies and create an outcome. But as we get out into the marketplace and see where clients are moving towards a solution-based or outcome-based approach, we think it's best that that specific client or consultant design the outcome. And we will provide the investment strategy in its purity as opposed to manufacturing a solution.

And so I think it's best to put that in the end client or the firm that is best designed to create a solution. I think we are best designed to find talent, house that talent, and resource them to produce the results as opposed to packaging a solution. And so we are very much attentive to what we are best at and how we can compete.

And that leads me back to some of the trends. If we are not organized and structured to compete in a volume business or in a competitive fee environment or a solution, this marketplace is way too competitive just to do it to get exposure in the marketplace. So we definitely see that should be put on to other solution providers.

Okay. And I know you commented earlier on the environment for new teams. I'm just curious, as you think about -- and with the premise that you don't want to add teams that duplicate other teams.

As you think about adding types of asset classes or strategies that you would like to over time if the right team or person is available, can you maybe update us on your thoughts there? I guess I'm specifically curious would you ever consider going down more of a quantitatively oriented investment strategies and teams versus kind of the more fundamental orientation of all your teams?

Yes, certainly. I think with our exposure overseas and our name getting out more and more overseas, we are starting to see investment teams in different geographies. And we are very much open to a variety of strategies.

I think there is quite a few quantitative strategies that are well rooted in fundamental analysis to provide a high value-added outcome. We certainly have met with teams in the past and continue to meet with teams that would have a quantitative orientation. And so we would definitely be open to those strategies.

Okay. And I appreciate your taking my questions. Just one last one. Again, understanding you're not looking to roll out the next gimmicky product or anything, but just kind of curious on your take. Some of our peers have agreed to license the -- assuming it gets up and running and some acceptance -- the Eaton Vance ETMF structure.

And given whether they maintain and can deliver for active managers in terms of lower costs, less whatever it may be, just kind of curious your take on that structure and if you think that is ultimately something that has -- would have some interest for your managers. Or do you not think that its perspective benefits are really what it may be cracked up to be?

We are open to a variety of vehicles. Obviously, we have mutual funds, UCFS, collective investment trusts. If a demand occurs in the ETFs or the [Nexshare] platform, whatever vehicle that comes into the interest of sophisticated institutional clients and there is demand and clients asking us to provide it in that structure, we will certainly provide that. And I think there will be in the future. It remains to be seen there if that's what clients really want in their active management strategies.

Ryan Sullivan, Credit Suisse.

Thank you for taking the question. The first question I have is I know you said you don't plan to make any changes to the value strategies in order to preserve the process and you don't want to surprise clients. But are you making any -- have you started conversations on having concessions on fees or any other areas to keep the clients engaged?

And the follow-up for that is has the funds been put on any strategy watchlists due to the poor performance near term? Thank you.

On the fees, we've remained disciplined. It's a very slippery slope going to fee concessions related to short-term performance. This clearly is an endpoint-driven return pattern with some dominant factors in the marketplace. So we haven't made fee concessions and we certainly have been put on watchlists. Given the outflows we have seen, clients have made determinations to find other alternatives, which we have seen with the $1.6 billion in outflows this last quarter.

And with that, you are on watchlist with various platforms and clients. Some of those are just strictly mechanical, that there's written rules in their investment policy statements that automatically puts you on watchlists and then there is a subjective overlay. And our main focus is the client service and setting proper expectations with those clients so they understand where we are at in our performance cycle. But I fully expect to be on most watchlists, given the performance.

Okay, great. And then just one quick follow-up to kind of go the other direction here. I think you, Eric, you threw out a figure earlier the call that some of the other strategies, ex-US value, were growing at a 5% annual organic growth rate. I'm not sure if I heard that correctly, but that's pretty impressive, given the industry backdrop.

And what I'm really trying to do is isolate the strategies with realizable capacity. So I know you've given some color in the past based on that metric. Can you give us some color there in terms of organic growth rate and how you view realizable capacity in some of the growing funds? Thanks.

We had a 5% over the last 24 months in the other strategies. And with regards to realizable capacity, that's why we look at that criteria of what strategies have a five-year track record. Which one have a minimum asset threshold to be included in the majority of searches, which funds have: stability of the investment team and a proven process.

And when they use that criteria, that high hurdle rate, which we like to get into institutional clients or sophisticated clients, it provides a longer duration asset to our business as opposed to the hot short-term money. And using that realizable criteria in certainly global opportunities is one of our key strategies in the marketplace.

The non-US growth strategy is in that sweet spot right now, but we're obviously managing flows over the next year. Global value would clearly be in that list there in a pooled vehicle capacity. The global equity strategy, it just hit the 5-year record. It has about a little over $700 million in the strategy.

For larger mandates, that $700 million may not meet the asset threshold for a search, but it's getting into that realizable capacity on a broad basis probably over the next year. And I think closing of the non-US growth strategy will help that strategy -- the global equity strategy as a whole.

And then the earlier ones coming online, which is developing world in high income, are in their infancy stages. So you're getting the new adopter money as opposed to the realizable capacity because obviously, they don't have a three-year record or that minimum asset or that proven history with the Firm. But in a year or two, both those will come on line into that realizable capacity if we can continue the excess return.

Got it. And given Brian and Lewis's tenure in the investment community, do you see any institutional pickup or interest from consultants on their strategies? Or do you think you need to wait for the three-year threshold?

For true realizable capacity, you have to wait for the criteria. The unknown is the level of -- or the number of early adopters that would come in because of Lewis's and Brian's history and track record in the marketplace. We don't predict that or assume what that number will be. I think it could've been a little higher for the developing world if you didn't have a negative 17%, 18% in emerging markets for the quarter.

And this concludes our question-and-answer session. I would like to turn the call back over to our leaders for any final remarks.

Again, great. I thank you, everybody, for your time. I've always said I know time is a valuable asset. And clearly with the volatility and with the demand on all of our businesses that we have to make choices on time. And I appreciate everybody dialing in this quarter. Thank you.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines.