Artisan Partners Asset Management Inc (APAM) 2017 Q3 法說會逐字稿

Hello and thank you for standing by. My name is Austin and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, management will conduct a question and answer session and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded.

At this time, I will turn the call over to Makela Taphorn, Director of Management Reporting at Artisan Partners.

Thank you. Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will be – will include remarks from Eric Colson, Chairman and CEO; and CJ Daley, CFO. Following these remarks, we will open the line for questions.

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 reference to the 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 Colson.

Thank you, Makela. Thank you, everyone, for joining the call. During the first nine months of this year, our AUM grew by $16.9 billion, a 17% increase from the beginning of the year. We finished the quarter with our highest ever quarter end AUM. We are managing more wealth on behalf of clients than ever before.

That makes this a fitting time to discuss how we think about growth. Obviously, our AUM has benefited from the prolonged bull market around the world. The size of our business though is a product of who we are as a firm, the strong long-term investment performance of our teams, and business decisions we've made over the years. At Artisan Partners, we view growth as an outcome not a strategy. We believe that our firm will grow if our investment teams continue to generate returns that meet client goals and are consistent with client expectations.

In running the business, we constantly work to increase the odds that we get investments right. We are not focused on short-term AUM. We work with teach of our teams to develop and maintain a franchise capable of generating returns for clients over multiple generations. We manage investment capacity in the interest of our existing clients. We take a deliberate and patient approach to adding new investment teams and new investment strategies.

This is what we mean by thoughtful growth, growth that is consistent with who we are, increases our ability to meet clients' goals and expectations. As I'll discuss at the end of my comments, to make this approach work over the long term, we try to be both consistent in our decision making and patient in allowing positive outcomes to materialize.

Slide 2 shows the strong absolute and relative performance of Artisan's investment strategies since the launch of our first strategy 22 years ago. The value added is net of fees and is across various market cycles and conditions. Our business model, our people, and our investment results stack up well against our competition and passive strategies, underlining the numbers on this page, the significant wealth creation for clients across multiple teams, time periods, and market conditions. During the year-to-date period, on an absolute basis, our strategies generated approximately $20 billion in returns after fees. Of that amount, approximately $3.1 billion represents investment returns over and above the strategies broad benchmark indexes.

On Slide 3, I want to put our business activities this year into perspective. These are the activities that we believe will increase our long-term business value. In making business decisions, we haven't tried and don't try to time the market or run our business differently in good times or bad. We want to consistently strengthen our firm over time, do so in a way that is consistent with our client and talent centric approach, and then be patient to let positive outcomes materialize.

2017 has been the busiest year in our firm's history. On the right side of the page, we have listed some of the recent activities. Each of these is the culmination of a lot of thought and hard work. We are confident that each of these recent investments is consistent with who we are and will help us continue to deliver for clients.

Starting with our Thematic team, earlier today we launched the team's second strategy, a long/short strategy offered to investors through a private fund structure. The Thematic team's first strategy launched in May of this year is off to a very strong start. The new long/short strategy gives Chris Smith and his team additional degrees to generate returns and manage risk. The thematic long/short strategy is the fourth strategy we have launched this year, the most we've ever launched in a single year. It's also our second private fund strategy. Our credit team launched a privately offered long/short strategy earlier this year, which has performed well during the first few months.

Moving to our Growth team, at the beginning of the third quarter we launched the team's global discovery strategy. The global discovery strategy is a perfect example of thoughtful growth that benefits clients and investment talent. The growth team has successfully managed the US Mid-Cap growth strategy, which is primarily a domestic strategy over 20 years. Ten years ago, with the launch of the global opportunity strategy, the growth team expanded their investment process to the larger cap and global universe. Now, with the global discover strategy, the team is bringing together their Mid-Cap experience and global research coverage. Jason White is the lead portfolio manager on the new strategy. Jason joined the growth team in 2000 and has served as a portfolio manager since 2016, as an associate portfolio manager since 2011. The opportunity to grow into a leadership role is critical to attracting, retaining, and incentivizing talented investors, all of which benefits existing clients as well as future clients of new strategies.

Just as important is finding and developing new teams and launching new strategies is helping build and maintain our existing investment franchises. We are very pleased to announce at the beginning of October that Tom Reynolds joined our US value team as a portfolio manager on both the US Mid-Cap value and value equity strategies. As a high value-added investment manager, we want individuals with deeply passionate beliefs about their investment philosophy and investment perspectives that differ from consensus. Tom is a natural fit for us on all accounts. He's also a great fit for the US value team. Tom has been on the team for about a month and things are going well.

In addition to investment talent and degrees of freedom, we have consistently invested in our levered distribution and centralized operations. These are critical components of our business model. Our distribution effort is designed to minimize the amount of time our investment teams spend marketing and efficiently reach the sophisticated clients we seek. In recent years, we have focused on broadening out our non-US distribution including Europe, Australia, and Canada. We have also continued to invest in our centralized operations. We have added capabilities to help with new investment instruments, asset classes, and vehicles. We have also invested in information technology and data to help our investment teams do what they do better and more efficiently. These investments have made our firm stronger and more capable than ever before.

Turning to Slide 4, this chart is a reminder that the investments we made in our business take time to pay off. We have grouped our investment strategies into three generations and plotted their launch dates on the bottom of the chart. There's no regular pattern to when we have launched new strategies and we have launched strategies when client demand and investment talent align. Our 1st generation strategies fit well into asset allocation with high exposure to active management and, therefore, less tolerance for tracking to the index. The 2nd generation strategies fit well into global asset allocation, often those of non-US clients and have significant degrees of freedom. Our newest, 3rd generation strategies are attractive to clients searching for highly differentiated sources of alpha to complement a portfolio that relies heavily on index exposure or to clients looking for absolute return and risk management. The 3rd generation strategies are difficult to replicate with index products and use more security types, instruments, and techniques to differentiate returns from exposure strategies and manage risk.

Once we make the decision to launch a strategy, we are patient and give our investment teams the time necessary to generate a compelling track record. As they have done so, client assets have followed, but it takes time. Our non-US growth strategy took over six years to reach $10 billion in assets. The non-US value strategy took 10 years to reach that point.

The growth of our 2nd generation strategies has also taken time with the global value strategy taking six years to reach $10 billion and the global opportunity strategy taking almost 10 years. Today, the second generation strategies, which we began launching 12 years ago, constitute about one-third of our total AUM and the value equity, emerging markets, and global equity strategies remain fully open to new clients with significant additional capacity.

We've indicated the strategies that are closed to some or most new investors. A closed strategy is to protect existing clients. Sustainable growth follows from a long-term track record, not short-term asset flows. The growth of the 3rd generation strategies, four of which we've launched this year, will take time. In addition, because the higher degrees of freedom, most of the 3rd generation strategies will have less total capacity than our 1st and 2nd generation strategies. Over time, we expect that our business will consist of more but smaller strategies compared to fewer, larger strategies. We apply the same consistent and patient approach to investments and distribution and operational capabilities that we apply to investment strategies. In his remarks, CJ will describe the long-term commitment we've made to global distribution and the outcome so far.

On Slide 5, we've included the evolving asset allocation diagram that we've discussed before and estimated future flow data that supports the long-term asset allocation trends we see. Our business model is designed for investment talent to thrive. But as I've been discussing, we have always taken into account the long-term needs of sophisticated clients using asset allocation models and investment policy statements. Allocations to traditional strategies are shrinking. The opportunity set remains massive. If our 1st generation strategies perform well on an absolute basis and relative to peers and the index, we are confident that certain types of clients will continue to allocate to them long into the future. As you move to the right and see allocations to high value added strategies increasing, you can understand why we believe that now is the time to launch the 3rd generation strategies we've been discussing.

As a high value added investment firm with a track record of meeting client goals and expectations, there is and will remain a very large opportunity set. Understanding and appreciating that helps us remain focused on generating returns and managing risk for our clients. If we continue to do so, we are confident that we will continue to have business success and grow as a firm.

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

Thanks, Eric. I'll begin on Slide 6. The earnings release and presentation disclose both GAAP and adjusted financial results. My comments will focus on the adjusted results, which we use to evaluate our business operations.

Since our IPO, the primary adjustment to our GAAP operating results has been the removal of pre-IPO equity expense. Pre-IPO equity awards are now fully vested and the expense fully amortized as of the end of the second quarter of this year. So you will notice that for the first time our GAAP and adjusted operating margin are the same for the quarter. Moving forward our GAAP net earnings and earnings per share will continue to differ from our adjusted results primarily because of our corporate structure and consolidated investment products.

In the current quarter, strong market appreciation and alpha generation grew our AUM to $113.7 billion, our highest level of quarter ending AUM ever. As a result, revenues rose 4% and our operating margin increased to 39.4%. GAAP earnings were $0.61 per share and adjusted earnings per adjusted share were $0.65.

Taking a closer look at our AUM on Slide 7, quarter end assets of $113.7 billion were up 4% compared to last quarter and up 14% compared to the same quarter last year. The increase in the current quarter reflected market appreciation of $5.4 billion, a portion of which was from alpha generation offset in part by $1.2 billion of net client cash out flows. Year to date, net client cash out flows were $3 billion.

In the current quarter and year to date, net client cash out flows were driven primarily by the non-US growth, US Mid-Cap growth, and US Mid-Cap value strategies. We continue to experience strong net client cash inflows in the global opportunities, high income and developing world strategies. As a reminder, next quarter's flows will include the impact of Artisan funds annual and income and capital gains distributions. Based on our current estimates, we expect this year's distributions to result in about $450 million of net client cash out flows from investors who choose not to reinvest their dividends.

Moving on to our financial results on Slide 8. For the quarter and year to date, revenues have grown with the increase in average AUM. Our average fee rate has declined over the past several quarters due to the continued increase in the proportion of our assets managed in separate accounts. Currently, our AUM is approximately 50% in separate accounts and 50% in Artisan funds and Artisan global funds. This compares to 46% in separate accounts and 54% in Artisan funds and global funds in the first quarter of 2016.

Operating expenses are summarized on Slide 9. Adjusted operating expenses this quarter were substantially flat compared to last quarter. Our variable expenses, primarily incentive compensation, increased with revenue but the increase was substantially offset by lower fixed operating costs in the third quarter. Operating expense rose 7% in year-over-year periods as a result of higher incentive compensation expense on increased revenues, the addition of equity-based compensation expense, and costs associated with the addition of our eighth investment team and four new strategies in 2017. These increased expenses were offset in part by lower third-party intermediary expense.

The details of our compensation and benefits expenses are broken out on Slide 10. In the current quarter, compensation and benefits expense was $98.5 million or 48.1% of revenues. The increase primarily reflects higher incentive compensation, most of which varies directly with revenues. Compared to the same quarter and year-to-date period last year, incentive compensation increased primarily due to higher revenues. Compensation costs also increased due to added employees from the formation of new teams and strategies and equity-based compensation expense.

Moving on to Slide 11, our adjusted operating margin this quarter improved 230 basis points to 39.4% from 37.1% last quarter, primarily due to increased revenues. Year to date, adjusted operating margin was 37.2% compared to 36.6% last year. The improved adjusted operating margin reflects the benefits of higher AUM and includes the expense impact of the investments we've made in our eighth investment team and the infrastructure to support our newer strategies and private fund vehicles, all of which run through our P&L.

Slide 12 highlights the results of investments we have made to support our growth. Critical to our historical and future investment performance is providing our investment talent with degrees of freedom to differentiate portfolios and manage risk. We are doing this both with existing teams and new teams we have on-boarded over the past several years.

In the chart on the top of this page, we highlighted the investments we have made over the last five years in new teams and strategies and technology and operational capabilities to support increased degrees of investment freedom. The chart depicts the annual expenses incurred and revenues generated since 2013 and the AUM growth as a result of those efforts.

The bottom chart highlights the development of our global distribution capabilities. Starting with the chart on investments and teams and strategies, the investments we have made have enabled our teams to evolve their strategies and add degrees of freedom. In 2014, we on-boarded Bryan Krug and established the Artisan High Income Fund. In doing so, we evolved our infrastructure to support the fixed income asset class. Earlier this year, the credit team launched a long/short strategy in a private fund structure. In 2015, we brought on Lewis Kaufman and launched the Developing World strategy. In late 2016, Chris Smith joined the firm and the Artisan Thematic Fund was launched in April of 2017. And an associated long/short strategy and a private fund structure was just established. Over these years, while investments have focused on adding degrees of freedom, in the background we have been making significant investments to enhance our operational and technological capabilities to support our business growth.

Since 2010, when we opened our first overseas office in London, we have also continued to make strategic investments to expand our global distribution capabilities, opening sales offices, locations in Australia and Canada and expanding our international and intermediary distribution teams. As a result, we have seen a number of clients we have outside the US double with currently over 100 non-US client relationships and the AUM that we manage for non-US clients has grown significantly. Currently, approximately 20% of our AUM is from clients located outside the US and the development of our global distribution capabilities has, in large part, facilitated that growth.

Investments in our business have been measured and thoughtful and have primarily focused on supporting increased degrees of freedom in global distribution. These investments have resulted in a strong foundation for future growth.

Slide 13 shows our dividend history. Last week, we announced that our board of directors declared a quarterly dividend of $0.60 per share, payable on November 30th to shareholders of record on November 16th. It has been our practice to distribute the majority of cash we generate in the form of regular and special dividends.

Slide 14 presents our balance sheet, which remains strong with a healthy cash balance and modest leverage at 0.6 times EBITDA. In summary, our strong balance sheet and our transparent and predictable financial model continues to support a stable environment for our clients, shareholders, and investment talent while allowing us to invest in our growth over the long term.

That concludes my prepared remarks. We look forward to your questions. And I will now turn it back to the operator.

We will now begin the question and answer session. (Operator Instructions) Our first question comes from Kenneth Lee with RBC. Please go ahead.

Hi, thanks for taking my question. Just wanted to follow up on remarks about potentially having more strategies, maybe in smaller sizes in the future. Wondering if you could just expand a little bit further on what's driving this potential direction.

Sure, Kenneth, this is Eric. I think we've talked over the last couple of quarters about increasing degrees of freedom, which is allowing strategies to use different security types, asset classes, and providing more flexibility and to differentiate from the index. To do those, in some cases you lower your beta exposure and you know rely more on the flexibility. And asset size can work against you on that and as we move into newer strategies such as long/short as well as other private vehicle strategies, we don't see the assets getting to the same level of a international growth strategy or some more long oriented strategy. So we'll limit that size knowing that alpha will be the primary driver for growth in the future and less dependent on asset flows for the smaller strategies.

Okay, great. Very helpful. And just a follow-up question, in terms of the non-US distribution, how should we think about how the economics compare with assets for clients domiciled in the US? Like more specifically within the AMEA region is there potential to get more favorable economics from products being sold there versus ones in the US? Thank you.

Yes, I think around the world, fees are normalizing. If you look back 20 years ago, you had some discrepancies due to the cost of distribution in various regions. You see that coming down dramatically around the world, you know in part just by information flow and the information age and part by regulation. We don't see a major difference in our fee rates that we charge in pooled vehicles or separate accounts around the world. It's one fee rate. The fee differential you're seeing is what we stated in the call and the data that there's increasing shift towards separate account clients that's driving down the fee rate slightly from 75 basis points roughly a year ago to 73. And that's just really about the type of vehicle that clients are accessing as opposed to regional differences and fee rates.

Okay, great. Thank you very much.

Our next question comes from Bill Katz with Citigroup. Please go ahead.

Okay, thank you very much for taking the questions as well. So, first question is bit of a counterbalance question. It seems like you're migrating to greater flexibility but smaller funds. But when I listened to CJ, it sounds like a lot of the operational spend is sort of in the past. That's sort of my perception, maybe that's wrong. So how do you think about structurally buying versus margins as you look at sort of the next phase of growth for the company?

Yes, sure Bill. Yes, I mean I think we've you know my remarks around our operational capabilities have really focused on the spend that you know we've incurred to add a fixed income class to our lineup as well as more degrees of freedom with alternative products that we've launched here recently this year. You know the greater volume, I don't -- from a margin perspective, you know our P&L is variable in nature and the economics really, from a margin perspective, are about the same on additional assets because we have the same revenue share in place, the same distribution, economics, so, you know both of our major expenses are formulaically driven and really tied off of revenues.

Bill, I'll just add on with regards to you know some costs that could come up. It is dependent on the team. If we expand deeper into credit in emerging markets that strategy, you know the operations on emerging market debt, there's a lot of sub custodial work that's required and we'd have to invest a little bit there. If we go deeper into distressed debt, there would be a little bit of spend there as well. If we find a team outside the United States and open up in a different region, you know you could see some additional cost there. So I agree with CJ that there's good leverage there off of what we've done already with regards to putting in a credit team and putting that whole back office in place, putting in more technology to support some of the information and data as well as looking at the increased prime brokerage relationships that we're building out for some of the more alternative-oriented products. So, you know there is this kind of balancing going on that we have some built up and we may have some additional pending the strategy.

Okay thanks for that. And my follow-up sort of ties together a couple of your charts. I'm sort of curious, if you think through what you said in terms of Page 4 and that sort of the next generation is going to be probably smaller funds at the end of the day versus what's likely to be further runoff in the 1st generation as market continues sort of barbell, which is on now Page 5 of your handout. And I think about the area that's in the middle of the page was what, to the right, was things what you're going after. What, walk through the dimensions of the overall organic growth for the company just in terms of the netting of those two dynamics? And then the other part of the question is by growing it de nova and waiting 6 to 10 years to -- earning the full (inaudible) are you going to miss the opportunity set as you sort of see the shift happen over the next several years?

Sure Bill, the, you know the first part there is just, you know, the runoff there and you are getting some runoff, which we've highlighted in the past in some of our traditional strategies. We do think that there's a large block of assets and a large group of clients that stick with the current asset allocation model. There's quite a bit of assets that are built up in traditional categories. The change in assets has caught everybody's eyes from going to active to passive. That won't go 100%. We're starting to see that runoff slow down and see strategies that are starting to normalize a little bit. We saw that last quarter with our Mid-Cap value strategy. And so we do think there's some natural balance there that'll occur. And on the new strategy, you know standpoint of, you know, letting time play out on that is that's the market. You can't short circuit a good track record and building a good base and a good team. And that's what built this firm. So we're not going to try to short circuit that just to chase growth and try to come up with a growth rate that offsets. We think it'll naturally play off each other. But right now, it's just focusing on good teams.

Okay, thanks for my very long-winded questions today.

Our next question is from Robert Lee with KBW. Please go ahead.

Thank. Good morning, everyone. And I got on the call a little bit late so I apologize if you covered this in some prepared remarks. But, you know, with about just over 20% of your assets now sourced from non-US clients. I guess you mentioned about 100, CJ. Could you give me updates on your thoughts around MiFID II costs and taking, you know, paying for research out of your own pocket? Clearly I'm assuming you have a bunch of EU clients and that'll have some impact.

Yes, certainly, Rob. We do have a fair amount of EU clients. You know it's kind of really hard to understand where this is all leading to for a US manager that's not under MiFID II, given that all of our teams, all of trading operates here in the United States. We are not subject to MiFID II, but we clearly see where the market is going. Like a lot of things that we've done in distribution or in various operations, you know we're going to take a measured approach to it and watch how the market behaves. With regards to the transparency, the distribution of research, the price of research and we're taking a wait and see approach to see how we're going to move forward with that. So we are you know working with our EU clients and taking a wait and see approach.

Okay and then maybe just a, sticking on the kind of US/non-US theme, just curious I mean you've obviously had a lot of success building a business outside the US, at least in terms of product placement so to speak, but curious to your take on the whole passive/active demand dynamic as you think of say non-US institutional investors versus US? I mean is there -- are you seeing the same kind of passive movement outside the US among institutional clients? Is it much more pronounced in the US? Just trying to get a sense of your take on kind of how -- I mean I know it's a broad region outside the US, but your take on differences maybe in demand patterns?

Yes, the US is more pronounced with the passive movement. However, there are many parts of the world that become more quantitative and passive-oriented. So you do see various pockets around the world. And the conversation comes up everywhere. But with regards to the general trend, the US clearly leads the way.

Great. That was it. Thanks for taking my questions.

Our next question comes from Surinder Thind with Jefferies. Please go ahead.

Hi, Eric. Any updated thoughts on fulcrum fees and maybe where the industry might be going with that now that Fidelity International has gone down that route? It seems like there's more momentum building in that direction at this point.

Yes, there certainly is you know more press and you know the press happens to be more in Europe at the moment. And we've certainly seen fulcrum fees our entire careers here and that's, you know, the industry has always gone back and forth. We've been open to fulcrum fees with you know many of our clients, you know specifically in the separate account space. And open to it. And again, like most trends, you really don't need to be a first mover. You need to understand you know what's going to adopt into the marketplace and then as clients start demanding that move in that direction and so far as we haven't seen that pressure to move into the fulcrum fee. And you know further, they're difficult to operate in a daily priced vehicle. You have to pick a timeframe. You have to pick an index. You have to pick, you know, a hurdle and operate that in a vehicle that's going to be priced daily. So, we'd like to see how that that plays out. Clearly, if the market moves that way, that's something we could do.

Understood. And then as kind of a follow-up, you know a number of people have asked about you know and you've talked in the past about you know potentially your future products being smaller in size versus in scale versus where the, maybe let's say the 1st generation strategies are. Does that also potentially change the way you think about adding new teams or the pace of new teams, if a lot of the products are going to be noticeably smaller in size? Do you kind of have to pick up the pace of adding new teams or launching new products? How should we think about that? And ultimately do you -- are you a 30-product firm or a 25-product firm or how should we think about that?

I don't think the size of the teams or the change there will cause us to think differently about bringing on a new team. Cause a new team as we've talked about requires the right person, the right strategy and the right fit into, to asset allocation. And the asset allocation and investment policy bucket opens up a bit or institutionally-oriented clients that have a longer duration and we so happen to find more talent that fit that, our new strategies will pick up. If we don't find that talent and the talent's not available in the marketplace, we're not going to fabricate or create a strategy just to fit market demand. So it really takes that intersection and it's very hard to predict the pace, given that approach.

I guess just to clarify something there, but all else equal I assume just the pace would pick up if you're trying to evaluate more strategies or is that just not true?

The only thing that's picked up is that you know we did a credit strategy for the first time. So when you do a credit strategy for the first time, you get quite a few fixed income portfolio managers and teams calling and saying that I didn't know you guys would do fixed income because we thought you were an equity shop. And then once you start doing some private vehicles and you start operating in the credit long/short and the equity long/short. Again, you have a whole new grouping of investors that didn't know that Artisan would go that route and that opens up more opportunities. You still have to go through the process of vetting those teams. But that's the only thing that's really changed is as you venture into new spaces, you start getting more and more teams calling you. As we've ventured overseas and are picking up non-US clients, even though we haven't put a team over there, we are starting to get more interest outside the US as well. So as we move forward and grow the firm, it gets exponential with regards to the interest of our model.

Understood. That's helpful. Thank you.

Our next question is from Chris Shutler with William Blair. Please go ahead.

Hey, guys. Good morning. First on the Emerging Market team, the performance there has improved nicely. What are the things you guys think you're in, in terms of reenergizing this, the marketing efforts? And would it be more around retail or institutional clients?

Yes, we've been happy with the turnaround in the Emerging Markets performance. It's a team that you know we felt always had all the ingredients to be a strong team and now it's lived with you know the roller coaster of emerging markets. And you're starting to see the emerging markets returns you know resurfacing year to date, having strong performance in the asset class. So both the Emerging Markets team and the Developing World team are very well positioned with Emerging Markets having over 450 basis points of alpha on the three year and a strong five-year record as well, along with the Developing World having a good start.

We see both these strategies positioned well for the institutional client. We don't focus too much on the retail space, as you can see with our asset mix. We primarily see the growth coming from institutionally-oriented clients for the Emerging Markets and Developing World.

Okay. Then Eric turning to the non-US growth strategy, is there any sign there that the out flows could soon abate? I know the performance has been a lot better this year. And any thoughts around potentially reopening that strategy? Thanks.

Yes, the returns have been strong. We have, you know, been seeing a mix of people moving to passive as well as reallocating in that space. I think the returns will start slowing down, some of the out flows. Don't have the specific numbers with regards to how that's been changing month over month. But the returns clearly have been very strong and we're starting to see more interest on the new funding side as well, participating in a few searches more recently.

And with regards to the reopening of that strategy, you know the strategy is -- go about $25 billion, $26 billion and we have a lot of opportunity in the Global Equity strategy with the same team. So we're looking to grow the global equity strategy and diversify the asset mix and product mix with that team.

Makes sense. Thank you.

Our next question is from Alex Blostein with Goldman Sachs. Please go ahead.

Great. Thanks. Good morning, guys. Question, just another bigger picture question I guess regarding some of the strategic you know shift is a big word, but like a strategic tilt I guess to over some of the private funds that you're hoping to grow. Can you spend a minute I guess on distribution dynamics of that versus your more kind of traditional ways of distributing product and you know historically you guys obviously have been much more known in a more kind of liquid wrapper. So how does that differ? Where's the edge for you guys versus some of the larger competitors? And again, any additions you need to make in terms of investments on the distribution side of things for private funds?

Sure, our model is very well set up for moving into various strategies as well as market segments. And the reason we're very well set up for that is because we hire business leaders for each team. We don't have a large fixed structure on how to market to channels, regions, and certain segments of the marketplace. Our model has always been bringing a strong investment team and pair them with a business leader. And so with regards to Chris Smith, and the Thematic team and the Thematic long/short strategy, we've brought in a very seasoned business leader that will go out to the marketplace, sell, service, and act as a product specialist for Chris. We hired that person a few months ago and she's very well positioned to market inside of the traditional private fund allocators. So we're in the midst of laying the groundwork there through the business leader.

Okay, that's helpful. Thanks. And just a quick follow-up around MiFID II. CJ, I think you answered the question earlier, but you know in terms of, I just want to make sure I got this, you guys still haven't decided fully whether to absorb or not given kind of the difference between US and the EU regulators but if you had to absorb, have you guys given us the number roughly of what that would be and what the impact on P&L is?

No, we haven't, we haven't given you that number. And you know as Eric commented earlier, you know we're going to take a wait and see approach and see how all this sort of plays out and gets rationalized in the marketplace.

Got you. Great. Fair enough. Thanks.

Our next question is from Michael Carrier with Bank of America. Please go ahead.

All right, thanks. Eric, just on the 3rd generation funds, when we think about you know that, you know the growth trajectory and partially given some of the things that you guys have been working on, the distribution. Given those types of products, should we be thinking like anything differently in terms of you know the ramp you know versus say the 2nd or the 1st generation? Whether it's you know more of the non-US clients, you know, and how they're up taking? You know do some of these more differentiated products, you know just trying to get a sense relative to the past, you know how that could potentially change just given the shift in distribution?

Yes, Mike, the 2nd generation strategies have actually surprised us a bit with regards to the asset flow. I think both the high income strategy and the developing world strategy have been our faster-growing strategies in the history of the firm. So certainly those two strategies have grown nicely and I think are helping build out our brand in the marketplace with regards to higher degrees of freedom and differentiation from the index. And as we layer in more strategies and have success in the private vehicle space and you know build our brand inside of a different client base, that to invest through private vehicles. You know I think we'll -- we won't see the exact same ramp that we had with 2nd generation because it's a little bit newer with regards to the distribution. But you know again, we've been somewhat surprised by our brands and success outside the US and likewise when we look at the marketplace out there for alternative or a higher degree of freedom strategies, and people understand our model and how we operate, we've been getting a good reception.

And then just a quick follow-up. On growth in global value, just given the inflection on Dow flows, is there anything you know unusual in this quarter that drove that or just you know puts and takes in terms of sales and redemptions?

No, I think both the growth and the Global Value team are very well positioned with global opportunities and the global value strategy. And given our success outside the US and specifically into the pooled vehicles that the UCITS vehicles where we are open for those strategies, we -- seen some nice success with those two strategies.

Okay, thanks a lot.

Our next question is a follow up from Bill Katz with Citigroup. Please go ahead. Mr. Katz, your line is live. You may proceed with your question.

Sorry about that. Had myself on mute. Thanks for taking the extra question. Talking to myself. So CJ as we get to the end of the year and you sort of think through the variable dividend if you will, can you just remind of in terms of where you stand in terms of working capital and the tax advantage opportunity in terms of the balance sheet? And then any sort of seasonal cash that might be going for compensation at the affiliate level?

You know for the most part, you know we're in the same position. We keep about $100 million of excess cash on the balance sheet, which we use for sort of working capital. $100 million is in excess of what we need really to run the business. We've more recently have funded some of our private vehicles. You'll see that on the balance sheet. We funded credit opportunities with about $20 million and we're going to -- and we funded the Thematic just here recently. So we've used a little bit more cash but that really doesn't affect how we think about cash when we get to the end of the year because you know dollars are able to be absorbed by the $100 million. So we'll you know in January when the board meets, we'll consider an annual special dividend like we do every year. And but, you know, as of now we really haven't had those discussions.

Thanks.

Our next question is a follow-up from Robert Lee with KBW. Please go ahead.

Thanks again for taking my follow-up. This is actually a follow-up to maybe some earlier questions about bringing on board new teams and I guess it was about a year ago where Mr. Gottlieb joined the firm. And if I understand his role correctly, Eric, it was to kind of help you and kind of maybe take off some of the load in terms of going out and looking at four new teams or exploring new, you know, new teams. So I'm just kind of curious, you know, since he's come on board, has -- how has that maybe for lack of a better way of putting it, you know impacted the pipeline of potential new teams or maybe also the types of teams you're looking at versus you know where you were maybe a year ago?

Yes, sure. Jason Gottlieb did join us about a year ago. He's been, you know, extremely helpful with regards to helping implement our thought process on expanding the degrees of freedom and he was joining right about the same time Chris Smith was being on-boarded. So, Jason's helped enormously in shepherding that team and you know integrating Chris into the firm. Jason's also you know taken a good role on the credit opportunity strategy in working with our credit team with Bryan Krug in helping build out the credit long/short strategy and those degrees of freedom. And along the way, we're integrating him into our existing teams cause you know the primary focus we have is making sure that the current teams that are under the Artisan umbrella today are getting the resources needed to expand their degrees of freedom as well as broaden out their teams. And so, you know what we've done with the growth team and what we've done with the value team, Jason's been working with me on all those efforts.

Thank you.

This concludes our question and answer session as well as today's call. We thank you for attending today's presentation and you may now disconnect your lines.