Artisan Partners Asset Management Inc (APAM) 2015 Q4 法說會逐字稿

Hello. Thank you for standing by. Welcome to Artisan Partners Asset Management's fourth quarter earnings conference call. My name is Laura, and I will be your conference operator today.

(Operator Instructions)

As a reminder this conference call is being recorded. At this time, I will turn the call over to Makela Taphorn with Artisan Partners. Please go ahead.

Thanks for joining us today. Before Eric begins, I would like to remind you that our fourth quarter earnings release and the related presentation materials are available on the Investor Relations section of our website.

Also, the 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 the earnings release and are detailed in our filings with the SEC. We undertake no obligation to revise these statements following the date of this conference call.

In addition, some of 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.

Thank you, Makela. Welcome to the Artisan Partners Asset Management business update and earnings call. I'm Eric Colson, CEO, and I'm joined by C.J. Daley, CFO.

On this call I want to discuss the performance of our investment strategies, asset allocation trends, and our positioning for future growth. After I'm done, C.J. will discuss our fourth quarter and full-year 2015 financial results. Let me begin by taking a minute to discuss the market volatility we have seen so far in 2016.

As we reported yesterday, during January, our total AUM declined by 8% from $99.8 billion to $92 billion, primarily as a result of declines in equity markets. As I've discussed before, our firm was consciously designed with market volatility in mind. Our flexible expense structure is a key part of our business model.

Majority of our expenses fluctuate automatically with changes in AUM and revenue. As AUM and revenues decline, our investment team bonus pools also decline. This has two important benefits.

First, our investment professionals understand in advance how market volatility will affect their compensation. They know what to expect when markets drive down AUM and we don't have to renegotiate compensation or set new expectations. This predictability creates a more stable environment in which our investment professionals can do their best work.

Second, because the majority of our expenses automatically adjust, we can continue to focus on our long-term business objectives. We are not forced to revisit or depart from our business plan. In fact, we believe market volatility generates long-term opportunities for our business as well as for our investment teams.

Over the past 15 years we've experienced 18 monthly periods in which assets declined by 5% or more. We don't know whether last month's market decline will prove to be the beginning of a pro longed market downturn or just an isolated event. Either way it won't change the way we manage our business.

Slide 2 outlines who we are as a firm. We're a high value-added investment firm designed for talent to thrive in a growth-oriented culture. We always return to who we are because our business is predicated on trust.

Our credibility with clients, employees, and investors relies on the consistent application of our business and investment principles, and the outcomes generated by execution of those principles. Regularly coming back to the definition of who we are grounds our decision-making and minimizing surprises.

Slide 3 shows the performance of our 15 investment strategies. Our goal is to deliver solid, absolute, and relative returns in portfolios that are consistent with the stated investment philosophy of each strategy. That's what we do as an investment management firm for our clients.

Our ability to generate alpha is why clients hire us in the first place. If we generate alpha, as we have historically, our clients benefit and we benefit. With more satisfied clients, greater AUM and a better brand with which to market future products. Investment returns, not net sales, have been and will continue to be the most important driver of our long-term growth.

Focusing on long-term returns, you can see the 8 of Artisan's 12 strategies with a five-year track record beat their benchmarks over that period. 6 of those 8 strategies over performed by 450 basis points on an annualized basis during the period. Of our 8 strategies with 10-year track records, 6 have beaten their benchmarks over the last 10 years.

This out performance reflects the high value added active management style of our investment team. Our team's develop unique portfolios that are highly differentiated from indices. Portfolios that reflect the hard work, experience, insights, and judgment of our investment panel.

The differentiated investing that generates alpha can also result in significant and sustained under performance. That's what we've seen in the strategies managed by our US value team over the last couple of years. As I've discussed before, the prolonged bull market that persisted through 2014 was a difficult environment for the team's investment philosophy.

While 2015 saw domestic equity indices level off, the US value team's performance did not improve as momentum in growth stocks continued to outperform the rest of the market which worked against the team. The three US value team strategies experienced $6.5 billion of net outflows during 2015, which was more than 100% of our firm-wide net outflows during the year.

During the fourth quarter, those three strategies experienced $1.6 billion of our $2 billion of total net outflows. We expect that the team strategies will continue to experience outflows in 2016, but we're confident several of our other strategies are well positioned for continued growth.

Moving to slide 4, I want to explain why we are more excited than ever about active management. True active management thrives with a philosophically sound strategy, the judgment of talented professionals, flexibility for that talent to implement its philosophy and exercise its judgment, and market volatility uncertainty that allow for differentiated returns from an expensive alternative. From the early 1990s through the 2008 financial crisis, we saw the lion's share of actively managed assets were amassed into constrained strategies that provided exposures limited by the index universe and investor's appetite for tracking air.

Standardized constraints allowed investors to easily bucket managers and strategies by style and categories. This is what clients and investors demanded and what traditional active managers supplied. As dollars continued to flow in to these constrained exposure oriented strategies, supply eventually overshot long-term demand.

We've illustrated the excess with the blue historical curve on this page. Over the past few years, the blue curve has flattened. We think that the green curve is a better representation of an investor's allocations going forward.

This has created obvious opportunities that details. On the left, passive and factor base investing have increased in popularity. On the right, the popularity of alternative assets, including hedge funds, real assets, and private equity has increased.

The evolving allocation dynamic has also created new, if less obvious, opportunities for active managers like Artisan. The emerging opportunity set for us is represented by the shaded area which identifies the growing demand for high value-added active strategies that bridge the gap between traditional strategies and alternative strategies.

In this space, sophisticated long-term investors are giving managers the flexibility to act on philosophy and judgment to further differentiate their portfolios from the indices. These newer strategies have broader investment universes and allow for more tools to manage risks and outcomes. This is an exciting long-term development for high value added investment managers.

Clients that were formally most comfortable in traditional strategies with the associated constraints are increasingly giving managers more flexibility. That freedom in turn allows managers to further differentiate their portfolios and add value in ways not possible with asset class, regional, and security constraints.

We believe that this trend is creating a significant opportunity for investment talent and investment firms that are willing and able to embrace it. We have already seen and experienced this new and emerging demand with our global strategies and our two newest strategies, Artisan High Income and Artisan Developing World, also fit within this theme. I expect our future strategies and new teams will also fit within this theme as we focus our efforts on long-term sustainable demands.

Slide 5 features our three global strategies with five-year track records. The prior slide highlighted how these strategies are positioned within the larger asset allocation trends. The slide illustrates the success we've had with global and our positioning going forward.

The strong absolute and relative performance shown on the bottom of the page has translated into outstanding peer group positioning. The charts show peer quartile performance for each of the strategies against their relevant e-vestment peer universe. Over the three-year and five-year time periods, all three strategies are in the top quartile of performance and strategies out performed the benchmark over all time periods shown.

The strategy's absolute and relative performance position them well for future growth. The global opportunity strategy had over $2 billion in net flows last year. It finished the year with $7.6 billion in AUM and has realizable capacity.

The global equity strategy passed the five-year mark in 2015, adding an impressive five-year figure to its performance statistics. We expect these performance numbers and increased marketing efforts outside the US to support a pickup in assets for the strategy. As I said on a call last year, after the global opportunity strategy's first five years, they had only $357 million in assets.

The global equity strategy has almost twice the assets after its first five years. I am confident that it is positioned for growth. The largest of the strategies, global value, was closed to most new investors and client relationships until the fourth quarter of 2015 when we reopened the strategy to investors and pooled vehicles.

We believe that the combination of the strategy's impressive track record and the team's reputation will allow the strategy to grow in a relatively smooth and structured manner, but we will continue to be thoughtful about that growth. Importantly, the global strategies have proven to be attractive to clients and investors both within and outside of the United States. The non-US clients and investors' assets in these strategies constitute the vast majority of our total non-US business.

We have in large part built our non-US marketing capabilities through the distribution of these strategies, which has increased considerably the geographic diversification of our overall business. The investment and business success of these global strategies is a testament to the skill of our investment talent and to our business philosophy. A decade ago we began to contemplate and design these strategies.

We saw an emerging long-term demand for global products. The global mandates was interesting to our talent and provided a natural next step for their growth. Today, these strategies are thriving and represent the core of our realizable capacity.

Slide 6 shows our latest generation strategies, the high income and developing world strategy. As I've discussed before, the high income strategy has the flexibility to invest in a variety of credit instruments including corporate bonds, bank loans, revolving loans, and credit default swaps. This expands the universe of fixed income and investments available to our credit team, which gives the team more opportunities to generate returns and build a differentiated portfolio.

This is active, flexible, high value-added investing. While the strategy has only a short-term track record, you can see that during that time period it has differentiated itself from the index. At the end of January the strategy had over $1 billion in assets.

Perhaps our most notable 2015 business development was the establishment of the developing world team and the launch of the Artisan Developing World Strategy in June. Unlike most traditional emerging market strategies, the Developing World strategy has the flexibility to and does invest significantly in companies that are domiciled in developed markets that are economically tied to the developing world. A resulting portfolio offers differentiated exposures to emerging markets.

While the performance track record for Developing World Strategy is short and reflects the recent negative returns in emerging markets, the strategy is off to a great start relative to the emerging market benchmark. With these strategies we have continued to expand degrees of freedom and provide the teams the tools and flexibility to manage risk and outcomes. This is the next generation for rebirth of active management defined by value added or active share, not categories and indices.

Slide 7 shows the diversification of our AUM by investment team, distribution channel, client domicile, and investment vehicles. Over the years, our diversification by team, channel, and client domicile have all increased as a result of conscious and thoughtful efforts to launch new teams and develop existing talent, to execute our leverage intermediary distribution strategy, and to methodically build out our non-US marketing efforts.

As we continue to execute our long-term business plan, I expect these pie charts to continue to evolve. We expect to add more investment teams and strategies over time, and I expect that the types of teams and strategies that we add will be consistent with the high value-added active and flexible themes I discussed earlier.

Moving to the distribution chart, I expect our intermediary business, which encompasses broker dealers, financial advisors, and private banks will continue to grow as a percentage of our total business for several reasons. First, 401(k) assets will continue to roll over into IRAs which will put more assets in to the hands of these types of advisors.

Second, we continue to see wealth management firms centralize the investment decision-making process which fits well with our levered marketing approach that focuses on home office decision makers. Third, the popularity of fee-based programs and the expansion of the application of the fiduciary standard should bode well for independent investment firms with best-in-breed products like Artisan.

Our institutional business will continue to evolve. Right now the defining contribution space is difficult for us. In the short-term, the opening up and reconfiguration of DC plans has worked against us because over time some of our strategies have grown to the point where any comprehensive reallocation cuts against us.

New DC business has also been slow because custom target date funds have developed slowly due to the complexity of structure, vehicles, fees, and the potential for litigation. However, looking ahead over the next three to five years I think we'll start to see planned sponsors open up their target date solutions and include best-in-breed managers and global mandates which should work in our favor. While it may take time, open architecture and freedom of choice should prevail as we have experienced in the past with institutional assets.

Moving to the client domicile chart, I expect our assets from non-US opportunities to continue to grow. As I remarked earlier, the growth of our global strategies has been fed significantly by the assets of non-US clients and investors. I expect that trend to continue as we further build out our non-US marketing efforts.

In 2015, we made significant but calculated additions to our marketing efforts in EMEA, Australia, and Canada. Non-US markets remain a very significant opportunity for us. We are pursuing them in a thoughtful way consistent with who we are. Lastly, the vehicle chart.

For these presentations we break down client assets by separate accounts, Artisan funds, and Artisan global funds -- the UCITS. In the separate account category we include a variety of traditional separate account relationship as well as mutual funds, non-US funds, and collective investment trusts that we sub-advise. As I look forward, I expect existing pooled vehicles to grow as a percentage of our total business and for us to launch additional pooled vehicles.

With increasingly global and flexible investment mandates, pooled vehicles are operationally more efficient and oftentimes more convenient for clients, even for large clients that have the operational wherewithal to maintain a separate account. In addition, CITs continue to grow in popularity in the defined contribution space. We currently sub-advise Artisan branded CITs in our non-US growth, global equity, global opportunities and value-equity strategies, and anticipate that our footprint in this space will continue to grow.

I hope that my remarks have helped you understand why I'm excited about our business and the future. I will now turn it over to C.J.

Thanks, Eric. I'll start with a reminder of our financial philosophies which are on slide 8.

These philosophical principles guide our actions in all market conditions. While recently markets have acted with uncertainty and volatility, driving our AUM down and ultimately lowering our revenues and profits, our actions have and will continue to be consistent, transparent, and guided by these philosophical principles.

Slide 9 begins the review of our results for the quarter and calendar year ended December 31, 2015. For the quarter, AUM rose 3% to $99.8 billion, primarily through market appreciation, half of which was offset by net client cash outflows of $2 billion. For the year, AUM decreased 7% due to net client cash outflows of $5.8 billion and market depreciation of $2.2 billion.

As Eric mentioned, in both the quarter and full year we continue to experience net outflows in our US value strategies as a result of extended under performance. We also experienced net outflows in several other strategies as a result of institutional asset allocation decisions away from active equities into solution-based products, particularly in the DC space.

On the plus side, absent the outflows in our value team, demand from our global products, particularly from clients outside the US, resulted in positive net client cash flows for the rest of the firm. We expect to continue to see demand for these products in 2016.

Average AUM shown an page 10 decreased 3% to $101.4 billion for the current quarter when compared to the previous quarter and 5% when compared to the December quarter of 2014. Revenues, which are the product of average AUM and fee rates, decreased 3% to $192 million from last quarter and in line with the decrease in average AUM. When compared to the same quarter a year ago, revenues decreased 7%, reflecting both a decrease in average AUM and a slightly lower average effective fee rate earned on assets.

For the year, average AUM decreased 1% to $106.5 billion. Corresponding revenues decreased 3% to $805.5 million, reflecting both a decrease in average AUM and a slightly lower average effective fee rate. The lower effective fee rate in 2015 stems from a shift in the mix of AUM between our strategies and vehicles, primarily a reduction in the proportion of our AUM managed through Artisan funds.

Expenses are on slide 11. During the quarter, overall expenses, excluding pre IPO-related compensation, were down 1%. The decline in expenses was driven primarily by lower incentive compensation and third party distribution costs which are tied to levels of AUM.

The decrease in these expenses was offset in part by higher compensation costs related to our newest investment team and higher technology costs. For the year, expenses, including pre-IPO equity-based compensation, rose 5% despite a decrease in revenue, mostly due to our continued investments in existing talent through annual equity grants and the formation of our seventh investment team. Equity-based compensation expense rose $13 million year-over-year as a result of the equity grants in 2014 and 2015.

In 2015, we incurred approximately $12 million in expenses from onboarding our newest team and launching their first strategy, which over a short period now has approximately $400 million of AUM. In addition, we made investments in talent, technology, and infrastructure to support our current and future AUM to increase full-time employee head count and technology projects related to information security and our distribution capabilities. The largest component of our expenses is compensation and benefits, which makes up approximately 80% of our total expenses.

Slide 12 shows the details of this expense. Our compensation ratio has settled in around 46% as a result of the increase in equity-based compensation expense which adds about 500 basis points to the ratio as well as reduced levels of revenues. As a reminder for next quarter, our compensation ratio runs higher in the March quarter of each year due to increased equity-based compensation expense from January equity grants and seasonal compensation costs.

We expect the January 2016 equity grant to increase equity-based compensation expense by $1.1 million in the March quarter. In addition, seasonal expenses have added approximately $3 million to $4 million to our first quarter expenses of each calendar year. Moving on to margin and earnings.

For the quarter the adjusted operating margin declined to 39.7% compared to 40.9% last quarter and 43.9% in the December 2014 quarter. The decline was primarily the impact of lower revenues. Resulting adjusted net income for the current quarter was $46.2 million or $0.63 per adjusted share.

For the year, the adjusted operating margin decreased 460 basis points, reflecting lower revenues, increased equity-based compensation expense, and investments in our newest team. Adjusted net income declined to $197.3 million, or $2.69 per adjusted share, down from $228.9 million or $3.17 per adjusted share in 2014.

Slide 14 provides a summary of our public company dividend history. On January 26, 2016 our Board of Directors approved a quarterly dividend of $0.60 per share and a special annual dividend of $0.40 per share. We calculate and pay our dividends in arrears based on earnings from the prior quarter or year and the amount of cash we want to retain.

The four quarterly dividends declared from April 2015 through this January, together with the special annual dividend also declared this January, represented a total of $2.80 per share. The $2.80 is a yield of over 9% based on our current share price and represents a return of our 2015 adjusted earnings per share plus a portion of the cash earned above our adjusted earnings measure. We calculate the amount of cash earned above adjusted earnings primarily by subtracting capitalized expenditures from cash generated from non-cash expenses that reduce reported earnings.

The additional cash retained from 2015 earnings is above and beyond the normal excess cash levels we retain and should allow us the flexibility to maintain our current $0.60 quarterly dividend while we allow time to determine if the January market decline represents a longer-term level for markets. In other words, if our AUM levels remain at current levels or decline it will be necessary for us to reduce our quarterly dividend at some point. Once again this quarter in order to help our shareholders, we have disclosed to them that we expect a portion of their 2016 dividend payments will represent a return of capital.

We make the disclosure because we expect the amount of cash we distribute to shareholders in 2016 will exceed the sum of our 2016 taxable and previously undistributed earnings and profits. That was the case in both 2014 and 2015. The portion of cash that may be treated as a return of capital does not represent a diminishment of our cash liquidity.

As discussed, we maintain cash levels in excess of our normal operating needs and have on balance sheet in excess of $100 million of cash and continue to have an unused line of credit of $100 million. If we are required to reduce our quarterly dividend, an decrease to our quarterly dividend rate will not affect our practice of targeting a payout of a majority of our adjusted earnings and net excess cash generated during this year nor will it affect the $100 million of excess cash we target to remain on the balance sheet.

With that in mind, slide 15 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 matrix remains very strong.

Slide 16 summarizes our financial outcomes over the past five years. We have always said in our business growth is lumpy, but over longer periods of time our model has and should continue to produce attractive opportunities for shareholders who have the patience to earn a healthy cash return while waiting for the long-term growth in AUM and revenues that we expect will follow from our disciplined adherence to our principles. Proof in point is the growth we've experienced over the five years illustrated on slide 16.

Since 2010, AUM growth has compounded at a 12% rate, revenues at a 16% rate, and adjusted operating earnings at a 15% rate. Looking at longer periods of time, such as this five-year timeframe, helps see the bigger picture despite lumpiness and short-term market swings. Looking forward to 2016, we're cautious given the market decline's experience in January, but we continue to remain focused on growing in a responsible and thoughtful manner that prioritizes our investment talent and their investment processes.

While the severe market declines we experienced in January will have a negative impact on our revenues and earnings in the first quarter this year, we'll continue to be true to our philosophies that have served us well over our 20-year history. Before I finish up, a couple points on employee partner liquidity. Our employee partners are restricted from selling more than 15% of their pre-IPO equity in any one-year period.

That one-year period will reset in March, at which time the employee partners will have the right to sell in aggregate approximately 3.2 million class A common shares. They're not required to sell any shares and we don't know how many shares they will choose to sell, but given the market conditions it is unlikely we will be facilitating a coordinated share offering on behalf of employees. They will, however, have the right to sell on their own.

Thank you. We look forward to your questions. I'll now turn the call back to the operator.

Thank you.

(Operator Instructions)

Our first question will come from Michael Kim with Sandler O'Neill.

Hey, guys. Good afternoon. First, Eric, I know you highlighted your commitment to differentiated act of management but just given the ongoing market share gains for ETFs more broadly, can you just update us on your thoughts as it relates to actively managed ETFs and some of the different options that are available out there or might become available down the road?

Sure, Michael. Obviously that vehicle has been extremely popular in the marketplace for passive strategies and you're starting to see in the marketplace some interest on actively managed ETFs. We're still in the camp of waiting for clients and demand to come to us as opposed to the build it and hope they come model. And if our clients and prospects are coming to us and wanting that packaged in a different form outside of a separate account or a mutual fund or a collective investment trust, or a [UCIT], we're open to creating a vehicle if demand is there, but right now in the active management space, given the current rules of disclosure, we have not seen that interest.

Got it. That's helpful. And then maybe for C.J. I know roughly 60% of the expense base is variable, but just given sort of the reset in AUM in revenues, has the thinking shifted at all as it relates to investment spending? Are there areas you might be able to sort of dial back on or delay to some extent just to support profitability in the near-term?

As you know, you mentioned low 60% of our expenses are variable so they adjust automatically but there are other levers. We have been investing in technology, distribution efforts, and equity-based comp for future growth. Right now we're not going to react to one month or a month and a half of AUM declines, but we will keep an eye on it and there are some minor levers that we can pull but the majority of the levers are already built into our P&L which is nice because we don't have to take action.

Okay. Then just one modeling quick question. You mentioned $3 million to $4 million seasonal step-up in the first quarter. Just want to make sure that is specific to the comp line. Is that correct?

Yes, it is. It's basically FICA reset, 401(k) matching contribution reset, and we fund our health savings accounts, a portion of that in the first quarter, so that's all in the comp line.

Got it. Thanks for taking my questions.

The next question comes from Bill Katz of Citi.

Thanks very much. I appreciate you taking the questions and the call is very helpful. Can we start on that last question? Just from a modeling perspective, sorry to be so fine tuned on the first question. Is that sequential increase or is there first the mechanism of the AUM are lower; therefore, your base compensation would be a little bit lower but then offset by the seasonal pickup?

Yes, it's the latter, Bill. Incentive comp will adjust down with lower AUMs and then that would be offset by the higher seasonal.

Thanks. On the dividend policy -- thanks for addressing that, could you talk a little bit about -- I hear you answer the special and the balance sheet liquidity, could you talk a little bit about the type of payout that you may be targeting if you were to address the dividend?

I don't think we've discussed what we would target yet, but obviously with the market declines, as you guys have all modeled out and projected, our earnings will be down. So, as I mentioned, we do have some excess cash on the balance sheet that will allow us a couple quarters to ensure that these levels or to see if these levels are where we'll remain before we have to take action, so we haven't really discussed that yet and we'll wait and see and we'll have to see where we are in the next quarter or two.

Okay. Then maybe just big picture. Eric, perhaps for yourself. As you've talked about sort of repositioning the franchise for a shift in demand, where do you think you are in terms of the leveraging the high yield portfolio which has just tremendous performance? Could that grow at sort of a faster clip than maybe has historically been the case given the turmoil that's been happening in the asset class and the out performance of the fund? And the second question is can you sort of go back to that diagram, the conceptual diagram and talk about -- are you a net winner in that dynamic because there's some pros and cons and sort of think through that bell curve? Thanks.

Sure, Bill. Certainly on the high yield category we've seen a lot of disruption in that space, so I feel like we're very well positioned with our strategy. We've seen it in the flows over the last year. I think our current positioning of the portfolio and its performance puts us in a very attractive position. I would say that's also true for Developing World and Emerging Markets. Developing World was also launched in a fairly noisy year with the Emerging Markets index down 15%.

So, I think both strategies have quite a bit of advantages built in, in their short records here and when we get to that realizable phase, which we deem as true realizable capacity is when you get to those hurdles that many of the institutional buyers and consultants put on you of a certain asset level, a certain length of record, once the team is really stabilized and built out, then you start getting those hockey sticks, especially in capacity oriented strategies like high income and Developing World. We've talked in past calls that global strategies take a little bit longer given the massive supply out there in those strategies. So I feel confident that high income is in a good spot. It looks good for this year of 2016 given the build-out of the team and the current performance since inception.

With regards to the diagram there of the flattening of the distribution curve of strategies, I think we're a net winner in the category. That top part of the curve of the historical distribution of exposure-oriented products, a good chunk of those assets are going to passive or factor-based strategies, but we were never up in that frothy group there of just giving exposure, so we have a little bit of loss possibly in our more constrained category strategies of mid cap and small cap that's really constrained style boxing, but there's a large part of the world that's going to maintain that type of structure and will be very slow to move and there will be a more adopted group and category that would pick up the strategies that we're building with higher degrees of freedom.

So I think the out flows that we're seeing and the value strategy is masking this trend. If you take out those strategies off of the last couple years of performance, you see good solid performance of the strategies that have flexibility and you see flows going to those strategies. So we think we're in that gainer.

Okay. Thanks very much.

The next question will come from Michael Carrier of BofA Merrill Lynch.

Thanks, guys. C.J., maybe just on the expenses. You hit on the comp -- on non-comp, particularly just given some of the investments that you guys have made, whether it's on the distribution or on the team side. Anything from a leveling off on maybe the non-comp side in this environment and maybe that's where some of the levers are, but just wanted to get some indication of what the outlook is for this year?

Good question. I think the lever in the non-comp is really in that communication and technology. You see we've ramped up spending there over the last year around security initiatives as well as distribution-related projects and capabilities and so there's project spend in there that we can pull back if we need to, but as it currently stands I would expect that this quarter's level of occupancy, communications, and the G&A are probably decent run rates to think about for the next few quarters absent us deciding to pull back.

Okay. Got it. Then, Eric, maybe just in terms of the outlook given some of the newer strategies, what you mentioned in terms of the demand for the global strategies, when you look at the product set, where you're seeing some of the challenges because of institutional allocations, it may be separating out the area of under performance on the US value side. Are you starting to see I guess the uptake of either the global or new strategies start to offset some of the challenges in terms of the reallocation among institutions? Just trying to get a sense of where you're seeing the momentum versus the negative momentum that the whole industry is facing?

I think if you look at the positioning of our strategies in aggregate, we are starting to see some good asset flow and some good opportunities, excluding the one team that we have performance challenges with. Maybe it's a good time here to look at January in isolation, and really despite my views on short-term performance and flows, I understand that many shareholders are heavily influenced by these shorter term numbers, but given the timing of this call and our January [AUM] release and just the volatility, I want to clarify our January net flows given the available data that's out in the marketplace.

Our net flows in January is approximately $500 million in outflows. You're starting to see some netting effect going on, positive trends happening with the strategies that we highlighted in the call of global and higher degree of freedom strategies, and given the value team's performance in January, which was quite strong, in January the small cap value was up about 650 bps over its index and mid-cap value over 300 bps and the value was up 200 bps really in that anti-momentum trade, I think you might have an exchange of kicks going on this year. It's early to tell given off of one month which I absolutely try to ignore, but given that we get asked quite a bit, I thought it would be helpful to respond to just the month of January.

Okay. That's helpful. C.J., just real quick on the dividend. I just want to make sure I understand your comments. When you look at what happened in January, just the pressure of the markets, you're saying at this AUM level or lower you'll have to review the pay out given the pressure on the business, but if we had a rebound and you're at this AUM level back to say where you ended in 2015, then you would be fairly comfortable in terms of where things are at all else being equal?

Yes, I think that's right. Our methodology is really as you know is to pay out all of our adjusted earnings and then any of the non-cash expenses less capital expenditures through the quarterly dividend and the special and we want the quarterly to be at a level where we have some cushion so that there is some leftover for a special, and so any adjustment would be semantics of adjusting it because at the end of the day we're going to continue to pay it all out. It's just whether it comes in the quarterly or the special.

Got it. Okay. Thanks a lot.

The next question comes from Surinder Thind of Jefferies.

Hi, guys. I'll start with the international fund. With that fund kind of soft closed, has there been any change in the conversation over the interest around the global equity strategy at this point or is it just too early to tell?

Hi, Surinder. It's Eric. I think there hasn't been any related movement in flows from the closing of one which, as you said, is a soft close to the global equity strategy. In general, we see quite a bit of demand for global equity outside of the US with demand from institutional clients in the US that have switched to a global categorization where we still see pretty good demand in international strategies, especially in the intermediary channel that still use that type of asset allocation and management structure that focuses on international strategies.

And then maybe just around kind of the international distribution or demand trends, you kind of mentioned three areas, EMEA, Canada, and Australia. Any geographic differences in kind of aggregate demand there or different trends that you're seeing given the macro backdrop at this point?

No, I can't say there's any specifics or -- that I can add to that. It's the area we've focused on. Those are the areas that we are getting good feedback in the marketplace. There's always some interest in and out of Asia which is an area that we haven't been that proactive in. We're mainly highlighting where we're putting resources towards.

I see. And then one kind of final question. One of the things you've talked about in the past is making sure you spend a lot of time making sure that interests are aligned amongst the different teams and kind of within the teams. If we were just kind of focused on the US value team, which has kind of been facing these headwinds, and they're probably the only team not to have what I'd call a true global product. I understand the value product I think invest upwards of maybe like 25% outside the US. Are there any thoughts of that team maybe adding a new product at this point or do they feel disadvantaged versus the other teams at this point or how should we think about the way the future positioning of that team at this point?

As you guys know, each of our teams are autonomous and they each have their stated philosophy and passion of what they invest in. For this team obviously it's their views, as they would say, is a better, safer, cheaper portfolio and they like to stack the deck in their favor, so when you think about their belief system, I would expect interest out of this team more in how to create a newer strategy around those core beliefs. Some teams are more inclined to have a global nature and others are going to use their degrees of freedom in a different manner and we work with each team to create that outcome. So just because the other teams went and created global strategies, it's not going to be the path for every team.

I see. Thank you. That's it for me.

Next we have a question from Eric Berg of RBC Capital Markets.

Thanks very much. Good afternoon. C.J., the bottom of page 14, getting back to the dividend and the payout ratio, shows -- makes very clear that you didn't earn your payout in 2015, at least the earnings in 2015 did fall short by whatever it is, $0.11, from the four quarter dividends you paid plus the special, but that was true in 2014 as well. You're currently earning your dividend, the $0.60, I think you earned on an adjusted basis $0.63 in the quarter, so what is the arithmetic? Is the point here -- is it just because -- is it uniquely because of what happened in the month of January that the dividend is now -- I need to understand better than I do the arithmetic of why the dividend is now a question mark?

Yes, because in our adjusted net income per share there are non-cash expenses, primarily equity-based comp, that increase our cash but decrease our earnings on an adjusted earnings basis. There's more cash earnings and, as you know, cash earnings is not a metric that we disclose or use. So the math is really adjusted earnings plus non-cash expenses less capital expenditures is the amount of cash we've generated during the year.

If it's still materially in excess, if you take your [269] and you add back the items that you said that are non-cash, it leaves you with cash being generated still in excess of the [280.] So is it just the uncertainty that's leading you to consider it reduction in the quarterly payout? Because you would seem to have the cash to do it is what I'm saying?

We don't want to set the quarterly dividend rate -- we want to set it at a rate that allows us some flexibility for market fluctuation. And we also have capital expenditures which obviously you don't have the benefit of seeing for infrastructure, et cetera. So you don't have all the data to get that perfectly but the point being that if we're earning lower levels, we've lost some or most of our cushion for market fluctuations.

Hey Eric, it's Eric. I don't think any of the math has changed so to speak at your high level or there's no mathematical change, so I think you've had it right. I think there's been some confusion in the marketplace a bit of just how that all comes together and we just want to make sure that we're transparent and just clarifying how we think about the dividend.

If I could also ask, Eric, one question of you. Your growth team, largely domestic in its orientation, and your Global Value team also has very, very good performance relative to their respective benchmarks. Yet they, too, in 2015 suffered out flows, I'm talk about the growth team and Global Value team for the full year, they experienced outflows. Maybe you've already touched on this. I'd like to sharpen my understanding perhaps of why that is in your judgment in the face of strong performance, more money is coming out than is coming in?

Those are two teams with really strong performance in the marketplace right now. I think it really gets down to the nature of the mix of assets and the level of closing. There's a level of closing that happens even in the definition of soft close and the mix, having a little bit more institutional and getting some rebalancing, you can get some outflows.

And to highlight that, I think the US Mid Cap Growth is a good example. The mix is heavily skewed toward a defined contribution client and in that segment of the marketplace we saw some outflows as 401(k)s were reconstructed and there was some rebalancing that went on. Over the years our strong performance built up a good asset base. I think you saw some rebalancing occur in the last couple years in that space.

Likewise on the Global Value and International Value we've been closed in those strategies and we've reopened into pooled vehicles for Global Value. We will manage -- with those moves and with the outflows, we'll manage that balance over time, it just won't be quarter to quarter or year-to-year. Your greatest asset is your alpha. We have alpha in those teams and we're going to manage them I think in the most prudent way possible to continue alpha and position them for positive flows.

Thank you. Very helpful.

The next question comes from Robert Lee of KBW.

Thanks and good afternoon, everyone. Just curious. I'm sorry to beat a dead horse a little bit, but to stick with the capital management theme. Given the decline and the re-rating of the stock, most of -- all your peers the past year, why isn't this a good time to maybe think about adding share repurchase to the capital management mix? You feel pretty upbeat about the long-term prospects. At this point maybe repurchasing stock is a good long-term use of cash. Liquidity on the stock has improved over the last couple years as more has come public. So, just trying to get a sense of why not or maybe you are starting to think about including that within the capital management in the year ahead?

Hi, Rob. It's Eric. It's that balancing act of consistency and stability of presenting our model in a people business. We think that's highly valuable to be consistent, stable, and transparent and we believe in the long-term of our business model and delivering and we're still evaluating as we grow in to our maturity as a public company how we want to use all the levers from a capital management. We're definitely much more focused on our business integrity and consistency than trying to financially engineer or manage the outcome. But as our history grows and we look at all the various levers, we'll take that in to consideration, which we've said in past calls. We're obviously not making a decision today to move towards a buyback.

Just curious on the new developing markets strategy, I understand that your expectations are pretty modest until you kind of build up the record of the team within your shop over the next couple of years. Just kind of curious given their record in their prior shop, which I know isn't necessarily transportable, what are your thoughts around their ability just kind of generally to not have to wait for that three years in order to really start seeing some reasonable demand for their strategy? Do you think there's a chance markets permitting in the next 18 months or so we could actually see some decent uptake?

I think in the first three years of any strategy you can see some early adopters and you can see either a big uptake or a slow build. We manage over the slow build process so that we're managing the foundation and the team appropriately. Obviously there are times there that strategies and asset classes get more interest and can have a backdrop of which more flows could come in. They're very hard to predict. That's why we've always said let's not look at this quarter to quarter or year-to-year.

The one thing I feel really competent is the ability to manage the integrity of our strategies, our ability to find and maintain strong investment talent, and I feel like we have a really good ability to position ourselves for long-term growth inside of asset allocation and sophisticated demand. What we feel really inadequate at is understanding what is the behavioral trends in the short run where asset flows go. So it's very hard for me to respond to what do you think over the next 12 or 24 months in the short run. So I'd say it's in the realm, Rob, but we're not managing towards that.

Thanks for taking my questions.

We have time for one more question. That question will come from Chris Shutler of William Blair.

Good afternoon. Eric, I know your team has very much managed money over the cycle and you're less concerned about short-term performance. I guess with that as context, are you concerned at all that the DOL fiduciary rule is going to encourage greater advisor emphasis on shorter time horizons?

Our view, which I stated on the call and in talking to our intermediary distribution team, we just feel the higher fiduciary standard and the standards being put in by the DOL heavily favors firms like Artisan. If there's higher hurdles and standards that get in to centralized buy lists or in consultant ratings, we just think the odds heavily skewed towards us. We built our firm day one with that institutional buyer in mind and if there's a higher standard, we just feel that we're well positioned for that. So I guess I don't see that short-term emphasis coming in to play. You see a heavier fee discussion than what you see right now, but I don't know if you see the real short-term performance emphasis.

Okay. 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.

Just want to thank all you guys for your time today. I know everybody is busy. Appreciate your time. Thanks.

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