Artisan Partners Asset Management Inc (APAM) 2016 Q3 法說會逐字稿

Hello and thank you for standing by. My name is Jamie and I will be your conference operator today. (Operator Instructions). As a reminder, today's conference call is being recorded.

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

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

Before Eric begins, I would like to remind you that our 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 will include references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release.

I will now turn the call over to Eric.

Thank you, Makela, and thank you, everyone, for joining the call.

We begin each of these calls with the same slide laying out who we are. Artisan Partners is a high value-added investment firm designed for investment talents that thrive in a thoughtful growth environment. We design and operate our Firm to create an ideal atmosphere for investment professionals. Thoughtful growth is a critical component of our culture. Growth provides new opportunities for talent, enhances the return for shareholders and partners, and diversifies and stabilizes our business.

In 1994, when Artisan Partners was founded, open architecture and portfolio manager free agency presented risk for some firms and opportunity for others, such as Artisan. Today, changing investor preferences, new regulations, and technology are all disrupting the investment management industry. As the industry is disrupted, investors are rethinking how their wealth is managed. They are moving to low-cost exposure-oriented products on the one hand and differentiated strategies with high degrees of freedom on the other. Active closet indexers are left behind.

This presents us with an exciting opportunity, just like open architecture and free agency did 20 years ago. The key for us is to continue to deliver superior long-term investment outcomes that are differentiated from indexes and other managers. If we do that, we believe that the disruption that we see today will work in our favor over the long term.

In order to deliver for our clients, we must continue to recruit and incentivize the best investment talent. We must also continue to work with our talent and clients to design and run investment strategies with increasing degrees of freedom, so that our teams have a broad set of tools to outperform and manage risk.

On slide two, we have highlighted some of the ways the US equity markets have changed over the years. These changes demonstrate why is important that investment strategies continue to evolve. Over the last 20 years, the number of listed companies in the US have declined by over 40%, going from more than 7,000 companies to around 4,000 companies, partially as a result of roughly 50% decline in IPOs.

As the number of listed companies has contracted, the percentage of publicly traded companies with negative earnings has increased. In 1995, about 9% of the companies included in the Russell 3000 were losing money. For 2015, approximately 20% were losing money, further reducing the opportunity set for active managers, whose investment philosophy steers them away from loss-making companies.

While the investment opportunity set has been shrinking, competition for alpha has increased. The lower left-hand chart shows the growth of active domestic equity mutual funds. While much of the AUM growth can be explained by market performance, it's simply the case that there is an unprecedented level of actively managed dollars at work today.

Lastly, the chart on the lower right-hand side shows the dollars flowing into passively managed mutual funds and ETFs. Dollars managed in passive products now represent a significant percentage of the market cap of many companies and also account for a significant amount of trading activity. According to The Wall Street Journal, passive mutual funds and ETFs own nearly 12% of the aggregate equity value of the S&P 500, up from about 5% only 10 years ago.

In theory, these passive products rely on the price discovery function provided by active decision-makers. In practice, it's arguable that the flood of passive money can distort price discovery, especially over short time periods.

All of this adds up to a very different investment environment than 10 or 20 years ago. If an investment strategy is limited to domestic equities, the opportunity set is shrinking, competition is increasing, and passive dollars are clouding the picture. This constantly changing investment landscape is why we have always believed that it's important to evolve existing investment strategies towards additional flexibility and launch new strategies with high degrees of investment freedom.

On slide three, we visually represented how we think about this evolutionary process. In the 1990s and early 2000s, when the domestic equity opportunity set was larger and fewer active and passive dollars were at work, clients wanted strategies with relatively narrow investment parameters. They wanted to allocate across segmented managers and expected those managers to stay within the assigned asset classes.

Over the years, clients have increasingly appreciated that, as the investment landscape changes, talented investors are better able to deliver alpha and manage risk if they are given greater degrees of investment freedom within conviction-weighted portfolios. For traditional strategies, these increasing degrees of freedom come in the form of modest but, over time, significant expansions of investment guidelines. Market caps expand, international companies are permitted, and geography caps are raised or eliminated. These changes expand the alpha opportunity set and provide our teams with more tools to manage risk.

For existing strategies, this is an evolution, not a rapid shift. The parameters that define the traditional asset classes continue to anchor the strategies. We expanded the tools available to our investment teams without interfering with client expectations about the type of strategies they have invested in. We have been applying this evolutionary process to a number of our strategies for many years. As we go forward, we expect to continue considering and seeking expanded degrees of freedom in existing strategies. Change is inevitable and doing nothing is a losing proposition.

Turning to slide four, in developing new strategies and recruiting new talent we have applied the same philosophy of added degrees of freedom. On the bottom of this slide, you can see our new strategies and teams over the last decade.

The Global, High Income, and Developing World strategies each provide investment talent with additional degrees of freedom to generate alpha and manage risks. The usefulness of those additional degrees of freedom is borne out by the strategy's investment performance. The Global Opportunities, Global Value, and Global Equity strategies have each delivered more than 448 basis points of average annual outperformance since inception.

Our two newest strategies, High Income and Developing World, have also delivered significant alpha since inception, though over shorter time periods.

The success and growth of our newest strategies is often overshadowed by the cash flows in our larger and more traditional strategies. As of quarter end, the strategies listed on this page have year-to-date positive net client cash flows of nearly $2.2 billion. Over the last three years, these strategies have positive net flows of $8.8 billion. The High Income and Developing World strategies have gathered assets at a quicker pace than any strategies in Artisan's history.

The strategies listed on this page provide a blueprint as we think about additional new strategies and investment talent. They also support our plan to add additional degrees of freedom to our existing strategies as and when it makes sense to do so.

Moving to slide five, our newest portfolio manager, Chris Smith, started with us just a few days ago. Chris is in the early stages of establishing our eighth investment team, the Artisan thematic team. Prior to joining Artisan, Chris managed a pool of capital as a senior analyst at Kingdon Capital. Chris brings to Artisan a wealth of experience in concentrated long-only and long/short investing.

At Artisan, we expect that Chris and his team will manage both a concentrated long-only strategy and a long/short strategy. These strategies will represent a further evolution for Artisan towards additional investment flexibility and risk management tools.

I also want to note that Jason Gottlieb recently joined the firm as Chief Operating Officer of Investments. Jason joins Artisan after 20 years with Goldman Sachs, where he was a partner and most recently worked as a senior member of the team responsible for manager selection. In that capacity, Jason evaluated hundreds of investment managers across the globe with a broad range of investment strategies. Jason's knowledge in the alternatives area will be particularly helpful as our investment teams continue to broaden degrees of freedom and we continue to search for new talent that will fit well within our business and culture.

Moving to slide six, as I mentioned at the beginning of the call, ultimately our growth will depend on long-term investment results. This slide shows the percentage of rolling five-year periods in which our strategies have outperformed their benchmarks by more than the fee we currently charge on the corresponding mutual fund. As you can see, in the vast majority of rolling five-year periods our teams have outperformed their benchmarks by more than our management fee.

On the right side of the page, we have highlighted the strategy's performance since inception. We believe that investors should analyze a strategy's performance across the full market cycles, which won't necessarily be reflected in five-year data. But if you look at the since-inception performance, you'll see that most of our strategies with the longest-term track records have generated very strong absolute returns and beaten their benchmarks by meaningful amounts.

Over 20 years, the Global Equity team has compounded assets in the non-US growth strategy at an average annual rate of over 10%. That's more than twice the average annual rate of the benchmark. The Mid Cap Value and Mid Cap Growth strategies have compounded assets since the late 1990s and have average annual rates in excess of 13% and 15%, respectively. And the Global Value team's first strategy, Non-US Value, has average annual returns of over 12% since inception, representing 670 basis points of average annual value added.

Towards the bottom of the slide, you'll see our Emerging Market strategy, which we launched in 2006. Over the strategy's 10-year history, the Emerging Markets Index has returned about the same as the EFE index and considerably less than the US equity markets. The fact that over such a long time period taking greater risk has not rewarded investors with greater returns suggests that even a 10-year period may not encapsulate a full market cycle.

Over the last year, the Emerging Market Index is up almost 17% and our Emerging Market strategy is up almost 30%. In spaces like EM, it's particularly important to invest with a thoughtful time horizon.

In the aggregate, our long-term results, both on an absolute and relative basis, have translated into more wealth for our clients and investors to use for their retirement, education, charity, and other purposes and goals. While the world seems to be focusing on shorter and shorter time periods, the sophisticated clients and investors that we target are long-term investors because they have long-term goals. With their trust and patience, combined with increasing degrees of investment freedom, we are confident that our teams will continue to deliver long-term results.

Slide seven shows the distribution of the sophisticated client investor base that we target. When I look at this page and think about the changing investment landscape and our evolving investment strategies, several things come to mind. First, I look forward to seeing the Artisan thematic team added to the investment team pie chart, and our addition of Jason Gottlieb will help us add and evolve strategies with broader investment degrees of freedom.

Looking at our distribution channels, we believe that our strategies with greater degrees of freedom will work well for clients and investors in both the institutional and intermediary channels. Our global strategies have proven popular with the institutional clients that form the backbone of our business. These clients are long-term partners who understand our strategies and what we're trying to accomplish.

We maintain the integrity of our strategies. These clients are patient and willing to give us the time that they know is necessary for a long-term investment strategy to play out.

Much of the recent growth in our institutional business has come from outside of the United States, a trend that I expect will continue. Year to date, non-US net flows are positive $600 million and asset management non-US clients now represent 16% of our total AUM.

We also see strong demand in the intermediary channel for the kind of evolving strategies I've been discussing. Most of the early growth of our High Income and Developing World strategies has come through the intermediary channel, where wealth managers are looking to place their clients in differentiated strategies that can deliver alpha and include enhanced tools to manage risks.

Lastly, the evolution I've been discussing will also be reflected in the vehicle chart. In particular for certain future strategies, private offered funds will be the best vehicle in which to provide our investment talent the necessary degrees of freedom and risk management tools. That will be another indication of how we are adjusting to the changing landscape and doing what's necessary to continue to deliver for clients and investors over the long term.

I'll now turn it over to C.J. to discuss our more recent financial results.

Thanks, Eric. I'll start with a review of our GAAP results on slide eight and then follow with a discussion of our adjusted results, which we use to manage our business.

On a GAAP basis, operating income for the September 2016 quarter was $62 million, up 5% from the June 2016 quarter and down 12% from the September 2015 quarter.

Our GAAP operating margin, which includes pre-IPO related compensation expense, was 33.7% for the September 2016 quarter, compared to 32.6% for the June 2016 quarter and 35.6% of the September 2015 quarter.

Earnings per share on a GAAP basis was $0.41 per share for the September quarter, $0.38 per share for the June 2016 quarter, and $0.44 per share for the September 2015 quarter.

For the nine months ended September 30, 2016, GAAP operating income was $175.7 million, down 19% from the prior-year nine months, and earnings per share was $1.15 per share in 2016, compared to $1.38 per share in 2015.

On an adjusted basis, our operating margin increased this quarter to 37.3% from 36.6% in the June 2016 quarter. Adjusted earnings per adjusted share were $0.56 this quarter, up from $0.53 in the June 2016.

Moving on to slide nine, as of September 30, 2016, assets under management rose to $99.8 billion, an increase of $4.8 billion from June 30, 2016, as a result of market appreciation, offset in part by net client cash outflows. Net client cash outflows in the September 2016 quarter were $935 million, a significant improvement from the $2.3 billion of outflows experienced last quarter.

Inflows from continued client demand in the Global Opportunities, Global Equity, Non-US Value, High Income, and Developing World strategies were more than offset by continued outflows in the Non-US Growth and Mid Cap Value and Mid Cap Growth strategies. Net outflows in Non-US Growth picked up in the quarter, as short-term performance lagged indices and peers and intermediaries continued to decrease their overall allocation to EFE-related strategies. The net outflows in both our Mid Cap Value and Mid Cap Growth strategies were meaningfully less than experienced in the June quarter.

Our global strategies continue to see strong interest from clients outside the US. Global Opportunities, in particular, enjoys a strong pipeline of client demand and had net client cash inflows of $536 million during the quarter.

Global Equity had $181 million of net client cash inflows, primarily from institutional non-US clients, and our newest strategies, High Income and Developing World, both continue to experience positive net client cash inflows.

Moving on to the financial results for the quarter on slide 10, for the September quarter, both average AUM and revenues rose 2% when compared to the June quarter. Compared to the September 2015 quarter, average AUM decreased 6% and revenues decreased 7%, while year-to-date average AUM was down 11% and revenues were down 12%. During the quarter, our average effective fee rate was slightly lower, reflecting a small shift in the mix of our AUM between full vehicles and separate accounts.

Slide 11 shows our expenses on an adjusted basis. Our adjusted measures, including net income, operating margin, and earnings per share, are measures which we as management use to evaluate our profitability and the efficiency of our business operations. The adjusted measures remove the impact of pre-offering related compensation and the net gain or loss on the tax receivable agreements. We also remove the nonoperational complexity of our structure by adding back noncontrolling interests and assuming all the income of our underlying partnership is allocated to the public company.

For the most recent quarter, operating expenses, net of pre-offering related compensation expense, were $115.4 million, up $0.7 million or 1% from the June 2016 quarter. This increase was primarily the result of higher compensation and benefits expense as a result of higher revenues. Compared to the September quarter of 2015, operating expenses, also net of pre-offering expense, decreased $1.9 million or 2%, primarily as a result of lower incentive compensation and third-party distribution expense. These decreases were partially offset by higher technology and equity-based compensation expenses in 2016.

For the nine months ended September 2016, operating expenses, net of pre-offering expense, were down $23.2 million or 6%, as our variable expenses adjusted with the 12% decrease in revenues and we rolled off the start-up costs associated with the formation of our Developing World team in 2015. Offsetting these decreases were increased technology and equity-based compensation expenses in 2016.

On slide 12, we've broken out our compensation and benefits expenses, which comprise close to 80% of our total operating expense. In the September 2016 quarter, compensation and benefits, excluding pre-offering related compensation expense, increased slightly, but stayed consistent as a percentage of revenues. Equity-based compensation expense was up slightly, reflecting the accelerated expense due to the passing of our friend and partner, Dean Patenaude.

Compared to the same quarter last year, compensation and benefits increased as a percentage of revenues due to higher equity-based compensation and an increase in the number of full-time employees.

Comp and benefits declined $18.2 million or 3% in the nine months ended September 30, 2016, compared to the prior-year period. Incentive compensation declined in 2016 as a result of lower levels of revenues and the rolloff of the costs associated with onboarding the Developing World team in 2015. Partially offsetting those declines was an increased level of equity-based compensation expense and increased salary expense as a result of higher number of full-time employees.

Moving on to slide 13, for the current quarter, our adjusted operating margin increased to 37.3%, compared to 36.6% last quarter, and decreased when compared to 40.9% in the September 2015 quarter.

For the nine months ending September 30, 2016, our adjusted operating margin declined to 36.6% from 40.5%, due to lower levels of revenues, partially offset by increased equity-based compensation and technology expenses as we continued to make strategic long-term investments in our business to support our investment teams.

Adjusted net income and adjusted net income per adjusted share for the current quarter were $42 million and $0.56 per adjusted share. For the current nine-month period, adjusted net income was $119.4 million or $1.60 per adjusted share, compared to $151.1 million or $2.06 per share for last year's nine-month period.

Moving on to slide 14, last week we announced that our Board of Directors declared a quarterly dividend of $0.60 per share payable on November 30, 2016, to shareholders of record on November 16. Our Board set the current level of our quarterly dividend in January 2016 at a level that we believe would be sustainable throughout the year, taking into consideration our expected cash generation, the amount of cash retained from the cash generated in 2015, expected cash savings resulting from partner exchanges after payments under the tax receivable agreements, and also considering market conditions.

During the quarter, we generated cash in excess of the $0.60 quarterly dividend. Last quarter, I detailed the components of our quarterly cash generation, which principally includes the $0.56 per adjusted share of earnings, plus the non-cash post-IPO equity-based compensation expense.

In January of each year, the Board considers whether to pay a special annual dividend with respect to the prior year and, if so, the amount of that dividend. In making that determination, the Board will consider cumulative cash generated in the year, net of dividends paid or declared; cash retained from the prior-year cash generation; as well as cumulative TR related cash savings.

Slide 15 shows our balance-sheet highlights. Our balance sheet remains strong with a healthy cash balance and modest leverage at 0.6 times.

Looking forward to the next quarter, as a reminder, in November the Artisan's funds will make their annual income and capital gains distributions. Based on our current estimates, we expect this year's distributions to result in about $250 million of net client cash outflows from investors who choose not to reinvest their dividends.

In addition, we expect to incur approximately $3 million to $4 million of expenses in the fourth quarter related to the establishment of our eighth autonomous investment team and other hires made in the fourth quarter.

In closing, our financial model continues to perform as designed and our high variable expense component provides margin leverage as revenues increase, as experienced this quarter. That concludes my prepared remarks. We look forward to your questions and we'll now turn back to the operator.

(Operator Instructions). Alex Blostein, Goldman Sachs.

Great. Good morning. Thanks, everybody. So our first question around the trends you guys are seeing in the intermediary channel and Artisan's position, I guess, within that channel. So maybe, A, help us with just a breakdown between the assets and advisory accounts versus other accounts, and that's part one, I guess. And part two, as we think about implementation of DOL from various platforms, maybe spend a minute on how you envision economics to Artisan to evolve in the post-DOL world within the, again, intermediary channel, both I guess from a growth management fee perspective, revenue share agreements, et cetera.

Sure, Alex. As you can see on slide 7, we had -- 30% of our assets are in the intermediary channel, roughly split pretty equally between broker-dealer and financial advisors, maybe leaning a little bit more towards the broker-dealer side.

Inside those broker-dealers, you have a mix of clients, discretionary and nondiscretionary, and our focus is really off of the centralized research platforms and looking for those discretionary assets that follow an institutional model and a high standard, and with regards to the DOL, you have one side there of the DOL outcome that is putting quite a bit of scrutiny on the managers used in those programs and so we think those high barriers are quite helpful for us.

On the other side of the equation there, which is somewhat getting to your second part, the impact will be looking at fees and the fees are really around the administrative side of the equation. What are people paying, whether it's in a 401(k) or whether it's in a wealth platform, what those third-party fees are paying for from an administrative side.

We've seen, obviously, the fiduciary question of, will you negotiate your fees down? Our fees has been very stable and remain stable. I think the moving component you see in the marketplace is around the administrative fee component.

Got it. That's helpful. And then looking at the individual strategies, so Global Equity seems to be getting pretty nice momentum here. I guess the strategy is over $1 billion for a couple months now, and I think in the past you guys have talked about getting to critical mass being a pretty important driver of flows within that strategy. So maybe spend a minute, I guess, on the opportunities you guys see for the growth, given it looks like the flows in the near term actually have picked up nicely in that product.

We have three global strategies, and I think you can see the path we've taken on each one. Global Value built up a nice client base and we've also followed up with Global Opportunities, and we think at this point that Global Opportunities is probably in the strongest position for growth, given the performance and the assets around that strategy and the team.

And Global Equity had a nice pickup here. It's past the five-year track record. We also had some early changes on the investment team that slowed growth for a little bit, and at this point the team has solidified. The performance is very competitive. The tenure of the track record meets most screens of institutional investors, so we're passing the hurdles that it takes to get into institutional and sophisticated clients' opportunities, and we think Global Equity just has a big runway in front of it, given the depth of that team and the positioning of that product. So it's primarily been occurring outside the US, which we feel well positioned, and as C.J. mentioned earlier, we have a good pipeline outside the US.

Great. Thanks so much.

Ari Ghosh, Credit Suisse.

Good morning, guys. So based on your conversations with your distribution partners, how has the topic of performance and fees been evolving? So is there a greater focus now on your one- and three-year track versus the 10 year, just given the DOL rule?

And then, you just mentioned a little bit about fees, but actually admin portion of that, are you seeing any increased pressure from distribution platform partners on maybe the management fee component? Can you just talk a little bit about that?

Certainly. The intermediary channel has obviously been under a lot of scrutiny lately, and with the new DOL rule, people are looking for outcomes that will get clients into the lowest share class acceptable for the client, and that's where the pressure is.

And we made a move a little over a year ago where we had two share classes. We had an investor share class and an institutional share class. We added a third share class that put a cap on the administrative fees that would go into the total expense ratio and we saw a fairly significant move of assets towards that, and I think you'll see continued trends towards a lower share class by many intermediary clients and that might even move all the way to an institutional share class with no third-party revenue attached to it.

I think that would be the growing trend there with regards to our management fee. We've obviously fielded a lot of questions because that's a fiduciary's responsibility is to ask the cost of those services, and we've responded with our typical arguments around that, and we believe that our fees are quite competitive when we rank them against peers and look at the various peer groups for the type of strategies that we're making available to clients. It's a noisy peer group and it's getting noisier with regards to the smart beta products getting inserted into the peer groups, and you have to distinguish yourself versus passive or smart beta or high value-added, and we are in the high value-added category and I think our fees are going to be quite stable where they're at.

And then, you mentioned continued demand from your institutional channel, and although this channel tends to be a little more longer term-focused, I think we've been seeing an increasing number of mandates rotate out of active into passive over here. So I just wanted to get your thoughts on this and if you've been experiencing any similar trends with your institutional clients.

I think the institutional clients we've had are much more long-term thinking, and you have seen some rotation in assets on the institutional side, but it's a lot of defined pension plans moving to liability matching or going to passive as those DB plans are maturing out, so you see some lumpy flows in there and a push towards passive or liability matching.

We've seen growth outside the US in the institutional market for our Global Equity strategies. We've seen an uptick in our institutional assets, and on slide seven you see that our institutional assets are 65%. That's upticked a couple of percent over the last few quarters, and we see a continued trend towards the institutional client and that uptick, which we think is healthy because it creates a much more longer duration asset inside of our Firm.

Great. Thanks, guys. And actually, if I could just squeeze in one quick one here, you mentioned the $3 million to $4 million per quarter of additional cost. Is that per quarter or is that the annual run rate? Sorry if I missed that.

It's an annual run rate, so you'll see a spike next quarter for the onboarding piece of it, and then ongoing we'll have about $3 million to $4 million spread over the next full year as well.

Got it. Thanks for taking my questions.

Chris Shutler, William Blair.

You mentioned the addition of Jason Gottlieb is going to help you add -- or be part of the process of adding degrees of freedom to existing strategies. Maybe, Eric, could you just talk about that a little bit more, how you see that playing out, what teams? And then, when it comes to alternative investing, the alternative investing is kind of a catchall for a lot of things. Maybe dive into what areas of alt you see as most interesting. Thanks.

Sure, Chris. I've known Jason for over a decade. Jason and I have spent time over the years talking about trends in the industry, investment talents, and just the general direction of Artisan, and the direction of Artisan has been towards higher degrees of freedom.

Where the line of traditional meets alternatives, we're not sure anymore. We see that blending of those two areas, and Jason and I both believe that all of the investment teams will continue to add degrees of freedom. You look at what's happened in the US equity markets there of just a number of securities that have declined, so will teams need to use more synthetic opportunities, whether its derivatives or options. Clearly, more hedging will be involved to manage risk. You've seen some firms out in the marketplace going to private.

I think there's more acceptance by institutional clients that give broader guidelines than we experienced when we started the Firm, and I see Jason helping out to work with each of the investment teams to say where is their natural skill set and where can we expand their opportunities so they can differentiate and navigate the markets as opposed to just delivering exposures in a category.

And the definition of alternatives for us is -- it's pretty wide open. It's looking at investment talent that has a philosophy, a process, and a strategy that we think will fit the asset allocation on a go-forward basis. Jason has been very involved with Goldman Sachs and their asset allocation, whether it's a risk based or an outcome based or a traditional mean variant, and that background is extremely helpful to figure out the long-term demand of alternative-oriented strategies that fit those investment policies and asset allocation categories for the future.

All right. Thanks. And then just one more on the comment about maybe using private vehicles, can you dive into that a little bit more? When could we potentially see you do something on that front? Thanks a lot.

Yes, certainly. With, obviously, Chris Smith at joining us and our expectation that next year we'll be launching a long/short strategy, we'll be putting together a limited partnership next year, and we would expect that Chris and potentially other teams would also have an LP which gives them more degrees of freedom and more opportunity to navigate and build liquid strategies that require longer time frames.

Okay. Thanks a lot.

Bill Katz, Citi.

Okay. Thank you very much. I appreciate it. So when I step back, I think about the platform. Very good performance. Some sort of cyclical growth pattern in terms of net new assets. It seems we have a lot of M&A picking up in the industry, a lot of chatter around scale in terms of needing to have size to really stay on distribution platforms. How do you think about strategically a potential merger with a larger entity to potentially, A, improve the strategic positioning of the Company, if you think that's a fair assertion, and, secondly, to maybe amplify organic growth?

Hi, Bill; it's Eric. I think we'll always be thoughtful about our growth. You've seen our thoughtful approach over the years of how we've managed capacity and strategies, whether it's just the ultimate size of a strategy or the growth of that strategy or just the velocity of assets that we've looked at within the strategies, and we've managed the mix to control growth, and if there's an opportunity in the marketplace that we think is a thoughtful opportunity for ourselves, that we think in our evaluation would benefit our investment team to perform better and that would benefit our clients, we certainly would be looking at that and take a look to see if it works for us.

We haven't been presented with that, and currently I think we have a really strong Firm and culture and brand, and at the end of the day, I think it really comes down just to delivering performance. We're in an information age; we're in a digital age. Everybody knows each other's performance and it's out there in the marketplace, which negates some of that size and scale discussion. So delivering performance, providing a transparent and open structure for your Firm given the information age, I think, negates some of that size and scale argument. But that being said, we're always going to be thoughtful about how we look at opportunities.

Okay. That's helpful. And just a follow-up question, just based on your conceptual slides and the discussion behind your slides, looking at the dynamics of domestic equity, is that a zero longer term for the industry, based on just the dynamics going on, or could you see that stabilize at some point in time, and what will it take to do so?

I see that stabilizing. There's always, I think, a role for active management. I think the definition of a US equities strategy will evolve, creating more opportunities. There's numerous companies in the United States that have well over 50%, 60%, 70% of their revenue outside the US. Where a company is domiciled is really meaningless today, and the US equity opportunities will evolve, allowing more degrees of freedom, and you'll see more concentrated conviction-weighted portfolios. What's going away is that 200, 300, 400 active US equities strategy in the marketplace.

Got you. And just one last one, thanks for taking my questions this morning. Maybe a discussion sort of buying versus margins, if you will. So looking at your quarterly flow pattern, it looks like both High Yield and Developing World have slowed from their earliest start levels, and you had very good performance. So how do you think about -- maybe what's driving that slowdown, and how do you think about maybe marketing or margin to grow the business from here? Thank you.

I'll hit that first part there. The High Income will be coming on at three-year record early next year. We typically see excitement the first year in a strategy, a little bit of lag in some of the broker/dealer where there's some hurdles you have to cross to get on the platform. And then, the institutional marketplace tends to wait for about the three-year track record and the team has solidified, and then you get a growth spurt if you have the team in place, the assets in place, and the performance is strong, which we see the High Income, looking into next year, we feel quite positive to increase the institutional assets and diversify that strategy.

So the lull is a pretty typical pattern as you approach the institutional hurdles. The Developing World is in the early phases here, not quite into that second year, so there's still good interest around the Developing World, but both of those strategies, I think, have performed phenomenally well, given our expectation and our history for new strategies. So we're quite pleased on it, and the pace of growth is always going to be lumpy in many of these strategies as we approach an institutional client base.

Surinder Thind, Jefferies.

Hi, Eric. So are any of the existing capacity-constrained teams, such as Global Value, are you guys evaluating any new products or ideas at this point with maybe more than just a passing thought?

We have not solidified any type of new strategy on the Global Value. We're always in dialogue back and forth and opportunities are batted around, but there's no serious plans right now to launch a new strategy with that team. The team is focused on the Global Value and International Value and delivering on that performance and building out their franchise with regards to the depth of their team and solidifying their process. So, I guess it's probably just a passing thought right now, the usual risk.

That's helpful. And then in your prepared remarks, you talked about the current environment generally being unfavorable for active managers. That's something also we're seeing quite a bit in media reports. What do you think would constitute what a favorable environment would be? It seems like the definition keeps changing. You rewind a couple years and its correlation was too high, and then there was the discussion the market data being too high and then ultimately it was too low.

It just seems like there's always something that's kind of a headwind. Isn't it the job of active management to be thinking about this and just working through this, or is it just simply it's just absolutely that much more difficult now, given the competition levels of generating alpha?

In the remarks, there's a lot of active management dollars available out there, and there's still, I think, quite a few exposure-oriented strategies that are moving into passive, which is fueling that passive trend.

But as we look at our teams and our strategies and I look across our performance, our performance is positioned very well, and especially the strategies that we've been working in those degrees of freedom in. With regards to defending active management across the whole industry, I don't know what's going to cause that change, except for maybe just the index return falling off or having some type of event in the marketplace where a cap weighted momentum-based strategy is no longer in favor. And you are certainly getting some noise on the fixed-income side, too, on the feasibility of passive investing.

So I don't have a direct answer for you, Surinder. I think our focus is on our teams and delivering performance, and if we can deliver performance, we know assets follow.

Fair enough. And then, just maybe a really quick question on just trying to clarify a comment you made in your prepared remarks. You talked a little bit about the growth of passive potentially negatively impacting price discovery, especially over maybe shorter time frames. It sounded like from your perspective that was -- correct me if I'm wrong, but that was a bad thing for active managers. I would've thought the opposite, which is, doesn't price dislocation actually represent more of an opportunity to find the so-called gems?

There's certainly dislocation. Right now, we've had a very powerful trend of assets fueling a one-way trend. When that abates, then we'll certainly see more disruption, and disruption certainly is an opportunity for us.

With regards to price discovery, the point we're making is being an active buyer and seller out in the marketplace to fundamentally determine a price, and as more passive gets into the marketplace, it will create distortion. I think if there is distortion, an opportunity in our minds is out there in the marketplace and it will continue to be.

Thanks. That's it for me.

Michael Carrier, BofA Merrill Lynch.

Thanks, guys. Eric, just on -- when you look at the teams that you have and then also bringing on Gottlieb, just when I think about the products that are, say, closed to new investors versus what you have in the lineup, and then allocating resources to new investments versus maybe focusing more on distribution to basically gain assets in some of these strategies, just where are you at maybe in -- I don't know if you want to call it a cycle or the growth outlook of the Firm, because it seems like there's a decent number of teams that are, as you mentioned, either approaching three years or within a start to three years. So I just wanted to see on the distribution side particularly if you are focusing more on the institutional channel; you know where things are there.

We've been focusing quite a bit on the distribution side of the equation with our new strategies, and on the slides are the investment teams and the portfolio managers and the performance. We take just as much time thinking about the business leader of each of the investment teams, and over the last few years, we've hired some really strong business leaders to represent the Developing World team, to develop the High Income team.

We're out in the marketplace and we'll be looking for a really strong business leader to represent the Artisan thematic team with Chris Smith, and those individuals help us navigate the institutional marketplace and that client base that's in the endowment foundation, DC marketplace.

And then, we also leverage our intermediary team that's been doing a very strong job right now in the marketplace in navigating the trends. So we have been spending quite a bit of time on distribution, and those business leaders also focus on the world, not just on a segment of the world, and so that's why I think we've had a strong outcome in Europe and in Australia and parts of the Middle East to build our asset base. And I expect that to continue, given the business leaders we've hired.

Okay. Thanks. And then C.J., just a quick one, I think -- I just wanted to make sure we understand. Just heading into the fourth quarter, you were just saying with some of these new hires expect $3 million to $4 million, and as we get into 2017, that will moderate and go somewhere around maybe $1 million a quarter for that full run rate for the year.

That's exactly correct.

Okay. All right, thanks a lot.

And ladies and gentlemen, that does conclude today's question-and-answer session. At this time, I'd like to turn the call back over to management for any closing remarks.

I want to thank everybody for their time. I know it's valuable and we appreciate everybody being on the call. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.