Artisan Partners Asset Management Inc (APAM) 2018 Q3 法說會逐字稿

Hello, and thank you for standing by. My name is Gary, 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, Director, Investor Relations, at Artisan Partners. Please go ahead.

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

Before Eric begins, I'd 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 Colson.

Thank you, Makela. And thank you, everyone, for joining the call or reading the transcript.

Let me begin by taking a minute to discuss the market volatility and the drawdown we have seen in October. At the end of Monday, our AUM was $104.2 billion, down from $116.6 billion at the end of September. Nearly 3 years ago, in January 2016, we experienced a similar sell-off that reduced our AUM by about $8 billion in 1 month. I commented on the volatility and drawdown on our February 2016 earnings call. I want to restate those comments verbatim, because they remain true today, as they were then.

Our firm was consciously designed with market volatility in mind. Our flexible expense structure is a key part of our business model. The majority of our expenses fluctuate automatically with changes in AUM and revenues. As AUM and revenues decline, our investment team bonus pools also decline.

This has 2 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 the market volatility generates long-term opportunities for our business, as well as for our investment teams.

Since 2000, we have experienced 21 monthly periods in which assets declined by 5% or more. We don't whether October's market decline will prove to be the beginning of a prolonged market downturn or just an isolated event. Either way, our business and financial model has performed as we expected, providing predictability and stability. With that in mind, I want to turn to some of the recent investments we've made in our business.

Turning to Slide 2. David Samra and Dan O'Keefe joined Artisan Partners together in 2002. They initially launched the Artisan Non-U. S. Value Strategy, and later, in 2007, the Artisan Global Value Strategy. Both strategies have generated strong long-term results for clients.

In addition to delivering for clients, David and Dan built a culture, a brand and a team of talented investors. The Global Value franchise grew to 11 investment professionals managing over $40 billion in client AUM. Rather than resting on laurels or maintaining the status quo, David and Dan have constantly sought to improve as investors and leaders. Ultimately, that pursuit of excellence led them to decide that the Global Value franchise should divide into 2 teams and promote a next generation of investment leaders.

The changes result in 2 distinct investment franchises, each with proven leadership, more room for professional growth and greater investment flexibility, all of which should directly benefit clients. The promotions strengthen the ability of both teams to develop talent meaningfully. Each of the senior leaders shown on this page is now 1 of 3, not 1 of 6. While David and Dan will retain the final decision-making authority, each of the co-portfolio-managers will have wider research coverage, increased portfolio oversight responsibility and increased accountability for results. We are pleased with the early feedback from clients, consultants and intermediaries. That said, as with most of the decisions we make, we expect the benefits to materialize over long timeframes in the form of high-quality outcomes for our clients, investors, talent and firm.

Shortly after announcing the Global Value changes, we announced that Rezo Kanovich joined our Global Equity Team and assumed portfolio leadership of the Artisan Non-U. S. Small Cap Growth strategy. Rezo has a unique life story, a differentiated investment approach and a history of success.

He was born in the then-Soviet Republic of Georgia. As a teenager, he emigrated to Israel and then to the United States, where he attended college and graduate school. He speaks 4 languages and has spent time in healthcare consulting and investment banking. He started his investment career at OppenheimerFunds as an analyst. Eventually, he became portfolio manager of an international small cap strategy in 2012. Under Rezo's leadership, the strategy was transformed in -- to include mid-cap companies and eventually grew from less than $1 billion in AUM to more than $10 billion.

At Artisan, Rezo's team includes 2 analysts that he knows well. We are embedding Rezo and his analysts within our broader Global Equity Team, with whom they share a similar investment philosophy. This arrangement, which is unique for Artisan, allows each group to draw on the intellectual resources and ideas of the other while maintaining the benefits of autonomous investment decision-making. We have reopened the Non-U. S. Small Cap Growth Strategy to new clients and investors. We have also announced a series of changes to increase the strategy's degrees of freedom. Most importantly, by the end of the year, we expect the strategy's guidelines to permit Rezo to invest in mid-cap companies.

We are incredibly excited to have Rezo and his team on board. Rezo is unique, passionate and entrepreneurial. His investment process is based on deep fundamental research into secular themes and individual companies. He has a history of adding value with a differentiated portfolio. In addition, international small and mid-cap is a high-value-added space that should fit well for many intermediary and institutional clients.

The changes we announced earlier this month for both the Global Value and Global Equity teams reflect our commitment to reinvesting in our existing franchises to make them stronger and more capable for clients. Since 2013, in addition to launching 3 new investment teams, we have made meaningful reinvestment in each of our 5 pre-existing teams -- reinvestments that are unique to each team's people, culture and investment process.

I won't review each of the items on Slide 4, but I want to mention 2 things. First, while not shown on the slide, we have made meaningful investment in our Emerging Markets Team over the last 5 years, in order to maintain the team's stability and provide time for the team's investment process to play out. The team's performance over the last 5 years has been exceptional, and we remain committed to growing the team's asset base.

Second, in 2016, we hired Jason Gottlieb to lead our investment operations. Since joining, Jason has been involved in all aspects of our investment operations, including hiring and establishing the Thematic Team, assisting the U.S. Value Team with a new portfolio manager, the recruitment of Rezo Kanovich and the evolution of the Global Value franchise. Jason is an experienced and skilled leader. With him, we have enhanced our ability to help existing teams with franchise development and we have increased our ability to recruit new investment talent.

Slide 5 shows our long-term investment results. 13 of the 15 strategies shown have added value for clients net of fees, with 11 strategies having generated 180 basis points or more of average annual outperformance. Not shown on this page are the Credit Opportunities and Thematic Long/Short strategies, both of which have performed well for clients since launching last year. Also not shown are 2 strategies we historically managed but previously liquidated or merged. One of those strategies, the U.S. Small Cap Value Strategy, had exceptional long-term performance.

So in our 23-year history, we have launched 19 strategies for our clients. We have operated all 19 with integrity, investing as we told clients we would. 16 of the 19 have value-added track records. Of the other 3, the Value Equity and Emerging Markets strategies have both generated positive long-term absolute returns, while trailing their benchmarks by minimal amounts.

As a firm, we are proud of our investment track record. We look forward to continuing to grow our business value through value-added investment performance and new investment talent. Our patience, discipline and long-term performance for clients will define who we are, not industry trends or performance cycles. Our financial model and long-term orientation allow us to operate through market cycles without impairing our people or process, or sacrificing investment capacity to generate short-term client cash flows. We will remain patient. If we continue to add value over the long term for clients, we are confident that high-quality outcomes will follow for our people, our shareholders and our firm.

Financial highlights for the quarter and 9 months are presented on Slide 6 and include both GAAP and adjusted results. I will focus my comments on adjusted results, which we utilize to evaluate our business results and operations.

We ended the September quarter with higher AUM of $116.6 billion due to rising equity markets, partially offset by net client cash outflows. The sharp global equity market declines in October have impacted AUM levels since quarter-end and our AUM as of Monday's close was $104 billion. Eric talked about the benefits of our financial model in volatile markets in his remarks. I will also touch on those later.

Average AUM and revenues for the quarter were up slightly compared to the previous quarter. Adjusted operating margin increased to 38.5%, primarily due to the decrease in equity-based compensation expense.

Adjusted earnings were $0.79 per adjusted share, compared to 76% (sic) [$0.76] per adjusted share last quarter and $0.65 for the same quarter last year. For the 9-month period, revenues were up 9% and adjusted operating income was up 10%, also primarily as a result of higher average AUM. Adjusted net income was up 35% and adjusted earnings per share were up 33%, both boosted by the benefits of tax reform, as well as higher average AUM.

Assets under management and net client cash flows are on Slide 7. During the September quarter, ending AUM increased $2.4 billion, or 2%, compared to $114.2 billion at the end of the previous quarter and up 3% from assets of $113.7 billion at the end of the same quarter last year. Our AUM rose from the comparative periods as a result of strong global equity markets, offset in part by continued net client cash outflows. Net client cash outflows in our Non-U. S. Growth, U.S. Mid-Cap Growth and U.S. Mid-Cap Value strategies accounted for more than 100% of our firmwide net outflows. Inflows into the strategies we've launched over the past several years continue to be strong, but have not yet reached a size that they can meaningfully impact the negative flows in our larger, more traditional strategies.

Next quarter's flows will include the impact of Artisan's funds' annual income and capital gains distributions. Based on our current estimates, we expect this year's distributions to result in approximately $850 million of net client cash outflows from investors who choose not to reinvest their dividends.

Turning to revenues on Slide 8. Revenues of $212.8 million in the September quarter were up slightly and in line with the increase in average assets under management. There was no significant change in the affected fee rate for the quarter. The increase in revenues of $8.2 million, or 4%, from the September 2017 quarter, was also driven by the increase in average AUM. In the 9-month period, revenues increased $52.2 million, or 9% compared to the prior year period, and were driven by the 10% increase in average assets under management.

The weighted average investment management fee was 73 basis points in 2018, compared to 73.3 basis points in 2017. The fee rate decreased due to the negative impact of the continued shift in the mix of our assets under management to lower fee vehicles, partially offset by the impact of performance fees earned in the current year. Performance fees were $2.4 million in 2018, compared to $300,000 in 2017.

Operating expenses are presented on Slide 9. Operating expenses for the September 2018 quarter were $131 million, 2% less than operating expenses in the June 2018 quarter, primarily reflecting a decrease in equity-based compensation expense, which more than offset increases in occupancy and technology costs.

During the September 2018 quarter, we incurred approximately $700,000 of incremental occupancy expense related to an office relocation of one of our investment teams. The increased expense includes duplicate rent, accelerated amortization and lease termination charges from exiting the prior location. Occupancy costs in the December quarter are estimated to be approximately $5 million. We currently anticipate additional incremental office relocation costs of approximately $2 million in the first quarter of 2019 related to 2 other office relocations.

Technology costs for the September 2018 quarter were $9.6 million, reflecting increased spend in investment and distribution-related capability improvements. That spend should trend upwards in the December quarter to approximately $10.5 million.

Compared to the September prior year quarter, expenses were up 6% as a result of the occupancy and technology charges I just explained, as well as higher variable incentive compensation, increased equity-based compensation expense and cash compensation costs associated with a higher number of employees. For the 9-month period, operating expenses were $396 million, up 8% from the prior year period. This was primarily the result of higher variable incentive compensation expense, increased equity-based compensation expense and increases in salary and benefits costs, and technology and occupancy expenses.

Further detail on compensation and benefits expenses are presented on Slide 10. Compared to the June 2018 quarter, the September 2018 quarter compensation ratio declined, reflecting the roll-off of equity-based compensation expense related to higher grant date value equity awards that fully amortized. Equity-based compensation expense in the December quarter should be just over $11 million.

You can also see the benefits of our financial model in our compensation expense. Incentive compensation fluctuates with the level of revenues, and then in the September quarter, declined with the slight revenue decline, but increased compared to the prior year quarter given increased revenues. This variable expense model serves us well in volatile markets such as the one we are currently experiencing. While revenues in the December quarter will decline with the current lower levels of AUM, incentive compensation will automatically adjust downward as well.

Year-to-date as of September 2018, compensation expense, excluding pre-IPO GAAP expenses, increased consistent with the increase in revenues. As a percentage of revenues, compensation is essentially flat.

Looking forward to the December quarter, and as Eric discussed, earlier this month we announced the addition of new investment talent to our Global Equity Team, evidence of our commitment to investing in talented professionals focused on value-added investing. We expect these investments will result in incremental expense of approximately $5 million in the fourth quarter of 2018. In future quarters, we expect the incremental expense to be approximately $1.2 million, net of the investment team revenue share generated by the Non-U. S. Small Cap Growth Strategy.

The adjusted operating margin and EPS are presented on Slide 11. Adjusted operating margin in the September quarter was 38.5%, up slightly from June quarter and down from the prior year quarter of 39.4%. The adjusted operating margin for the 9 months ended September 2018 was 37.8%, improved from 37.2% in the prior year period. Adjusted net income per adjusted share improved in both the September quarter and year-to-date periods. The impact of tax reform was approximately $0.14 per adjusted share for the quarterly period and $0.37 per adjusted share for the 9-month period.

Discussion of capital management begins on Slide 12. Our capital management philosophy has been and continues to be payment of a majority, if not all of the cash generated from operations in the form of a cash dividend. The cash generated from strong operations year-to-date has been partially distributed to shareholders through fixed quarterly dividends. As we have in the past, we currently expect to pay out the majority of the remaining cash generated in 2018 through a combination of the quarterly and special dividend in the first quarter of 2019. Year-to-date, we have declared or paid dividends of $1.80 through the fixed quarterly dividend policy, which is approximately 63% of cash generated.

The next slide illustrates the transition of our capital management policy to a variable quarterly model. Starting in the first quarter of 2019, the quarterly dividend declared will approximate 80% of the cash generated during the preceding quarter. The move to a variable quarterly payout policy allows us to, first, put cash into the hands of our investors more timely; eliminate the uncertainty of the viability of our fixed payout levels during times of market volatility and lower levels of AUM; and it reflects who we are and is consistent with how we operate our business for the long term.

The transition to a variable quarterly dividend does not change our intent to distribute the majority of the cash we generate. It only changes the amount that is paid quarterly to better reflect the operating results of the quarter. We expect to follow the same process each January when we consider the payment of a special annual dividend. That process involves us assessing the current market environment and business conditions and any needs to retain cash for strategic investment or corporate purposes. We expect that the remainder of cash will continue to be paid as a special annual dividend in February each year. An illustration of the difference in the quarterly payout policy under the variable model is on Slide 13.

Our balance sheet summary is on our last slide. Our cash position is healthy and leverage remains modest. Our leverage ratios have improved slightly from last year due to increased levels of earnings.

I want to end by underscoring the importance of what Eric said about the market volatility in his remarks. Our P&L and balance sheet are designed to weather the market volatility we expect in this business. We will not change how we manage the business or invest for the long term. Of course, that said, we do understand the realities of the impact that a lower AUM has on our revenues and profitability, and we have the ability to manage certain fixed expenditures without impairing our long-term plans, such as staff additions and certain infrastructure and technology spend. We remain confident our model will serve us well during these volatile times.

That concludes my comments, and we look forward to your questions. I will now turn the call back to the operator.

(Operator Instructions)

The first question comes from Bill Katz with Citigroup.

Just maybe starting on capital management policy, and sort of -- appreciate the math that you laid out in the slide. I guess, stepping back a little bit, thinking about how you sort of see the value creation of your business over a longer timeframe versus how the market is sort of treating that view; how did the board and you guys think about buyback versus the dividend policy, just given what -- market appears to be a relatively high yield, but maybe not "believing" in full. I'm just trying to get a sense of the priorities as you think about the decision-making with that.

Yes. So, Bill, our view on that really hasn't changed. We've always valued the dividend, and we attempt to create stability and transparency in our model, and we believe that a consistent dividend policy with a very attractive yield is beneficial for our shareholders and our investment talent based on the predictability. We try to avoid mistakes, and over the last 5 years, we went back and did a -- quite a bit of analysis on buybacks, and by any metric, buybacks would not have been a good investment decision, and we believe that buying back shares is an investment decision and we can either put the money in the hands of our shareholders through the cash dividend, which is a very attractive yield, or make an investment decision for them. So our lean is towards the cash dividend. We don't rule out share buybacks, but we just haven't found it to be an attractive use of capital for shareholders when you compare it to the dividend yield we're able to achieve with a cash dividend.

Okay, thanks. And just the follow-up question is -- and thank you for the extra disclosure on where the AUMs sit today. Sort of based on some back-of-the-envelope math, just sort of penciling in about $1 billion of outflows in October, I guess the question is, is that a reasonable back-of-the-envelope calculation? And if it is, can you sort of talk a little bit about where you're seeing some of the pressure on the business model given your long-term track records? And maybe the broader question underneath that -- I'm sorry to ask the second one -- is, what are you seeing in terms of allocations, just given what's been a more turbulent few months now?

Yes, certainly, Bill. It's Eric. The $1 billion is about right for the month there. And what we saw was a few of our intermediary clients starting to rebalance in the international equity space, so within International Value and International Growth, those 2 strategies were the dominant flows there from a rebalance. And I think the volatility is, as we said, is an opportunity for our investment teams as well as the business. And we've seen some rebalancing occur, but the relationships and the long-term clients are very strong, and we think the business is positioned very strong, so we don't see anything abnormal with regards to the rebalancing.

The next question comes from Chris Shutler with William Blair.

On the occupancy expense, C.J., could you just reiterate what you expect for Q4? I think you said $5 million of extra expense that's one-time, and Q1 is $2 million of incremental that's one-time? Maybe just -- is that correct? And what's the right run rate beyond the one-time costs?

Yes. Yes, so if you exclude the one-time costs for office relocations, the run rate's going to be about $5 million a quarter into 2019. And the first quarter of '19, relocation costs are going to be somewhere around $2 million.

Okay, perfect. And regarding the addition of Rezo, is -- just want to confirm the right way to think about from a flow perspective, is that he needs to kind of rebuild a 3-year track record, so similar to hiring of Bryan and Lewis?

Yes, we definitely will treat it similar to our other hirings, where the first things first are to focus on investments and talent. And so we'd like Rezo to get situated and build the right foundation with regards to how he wants to conduct research. We were fortunate to hire 2 strong analysts to join Rezo. And really build on the team, the process and the research to build a record that's durable for the long run. As you noticed in years past, we -- what we don't do is bring someone in and parade them around the country or the world trying to gather assets as quick as we can. We prefer to focus on delivering investment results and letting that build for the long run.

The next question is from Dan Fannon with Jefferies.

This is James Steele, filling in for Dan. So my question is on fund capacity. I understand that Non-U. S. Small Cap was reopened to investors; is this mostly due to the mandate being broadened to include mid-cap, or does it have to do with recent performance and/or AUM numbers? And then in general when thinking about reopening strategies, what's the balance between AUM level and performance? Thank you.

Hi, James. It's Eric. With regards to the reopening of the International Small Cap Strategy, the catalyst there was the hiring of Rezo Kanovich and also broadening the guidelines. But the primary driver of reopening was due to hiring Rezo and building out a dedicated team for this strategy. And with regards to how we think about opening and closing, one of the first things we think about is performance. And we've said this on past calls of how we think about capacity, but we'll close a strategy if we feel that the overall capacity is hindering investment performance. We'll close a strategy if it's hindering the integrity, usually if there is a high velocity of flows that are coming into a strategy that would impair number of securities or the market cap or some type of characteristic. And we also will close a strategy due to the mix of assets; if we get too concentrated in a single client channel, we'll manage capacity. But investment performance comes first.

The next question comes from Robert Lee with KBW.

Eric, I maybe just want to touch a little bit on kind of fee pressure that's out there. I mean -- and obviously, you've talked extensively over time about the best way to maintain fees, obviously, is to generate alpha, manage capacity and kind of keep your fee structure intact. But I'm just curious in -- and maybe particularly in the intermediary world, in retail, are you -- how are you thinking about -- or do you feel like you're getting your -- because of that, you're -- there's -- you're maybe missing meaningful opportunities in some products that have capacity because the different intermediaries are becoming ever more focused on kind of just being in a certain, I don't know, quartile, percentile from the fee construct perspective? I mean, certainly you hear a lot of competitors talking about having to chip away at their fees just to get on model portfolios. So how do you kind of -- how are you currently -- any change in how you're thinking about balancing those two?

We haven't changed our thinking around our fee schedules or how we manage fees. We obviously talk quite a bit of our performance and more specifically our net of fees performance, which we believe clients look at first and foremost, is how are we compounding their assets after fees? And we have highlighted our record there across our 17 strategies. With -- specifically to the retail and intermediary, as you know, our makeup of assets has a very small percentage in the retail space. With regards to the intermediary, we believe we have a very good-size exposure into the various platforms, whether it's the broker-dealer platforms or the financial advisors, and we haven't seen a pressure, in a sense, for the current makeup of strategies we have today. We have seen fee pressure, which we've talked about on past calls. When you get into the very large allocations, especially in the public funds or the sovereign wealth funds, and when you get to the sizeable mandates, there's been a real shift in the market price of fees right now. They've gone much lower than we've -- than we're willing to go. We've been open to performance-based fees in that category of large mandates. But with regards to allocating a large percentage of assets to the capacity of a strategy that's doing well, we really just don't want to impair the overall fees for the long term.

And then maybe as a follow-up, if you'd also, I mean, update us on RFP activity out there, just -- and maybe your sense of, given the volatility in -- over the past month or couple of months, particularly in global strategies, what it's -- how LPs are behaving? I mean, are they -- do you have things that, gee, you're waiting to fund, but people are putting it off, or -- just kind of trying to get a sense of the pace of activity and investors' mindset.

We haven't seen much of a change over the last couple of weeks with regards to the pipeline, especially in the institutional and institutionally oriented clients. Those are long processes with regards to asset allocation, to the structure and then the search process. We haven't seen this last couple of weeks derail activity in the pipeline. And with regards specifically to RFPs, we haven't seen any change there. And I think we've mentioned on past calls, the process of RFPs has gone down in general over the last decade, so that the usage of a request for proposal or some type information has -- is not as dominant as it used to be in the past.

The next question comes from Michael Carrier with Bank of America.

Maybe first one just on the flows in the quarter, and you guys may have mentioned this but I didn't catch it. Just anything that was more specific to you guys. I know, like, the industry trends, just that weighed on the sequential direction when you look across the products or the distribution channels.

No, the -- for the quarter, it was basically a continuation of sort of people being a little more cautious, as well as the allocation to EP mandates we saw come down, and that hurt our international products. But sort of more of the same trends we've seen over the last several quarters.

Okay. And then just in terms of the outlook, so when you look over the past years, you guys have hired teams, you've done -- you've kind of (inaudible) the value this quarter, bringing in the small cap. Just when you think about the outlook and which funds are now open, maybe just an update on what the distribution teams are able to bring to clients in order to generate the organic growth over the next year or so?

Yes. Across all 9 teams, and looking at the 17 strategies, I mean, I feel highly confident that each of the teams have strong returns. The teams are well positioned and our intermediary and sales teams have quite an array of strategies to sell. With regards to capacity specifically, the Global Value Team, the Non-U. S. Value, we haven't reopened the fund, but we clearly have been managing flows there as people rebalance. We have the ability to manage some of the outflow just from natural attrition. So even in the closed strategies due to some of the higher level of rebalancing, there's an opportunity across all 9 franchises. So I mean, I think the sales and marketing are -- have the entire array of 17 strategies to look at.

The next question comes from Alex Blostein with Goldman Sachs.

This is actually Ryan Bailey filling in for Alex. I was just wondering if you were seeing anything in terms of demand from non-U. S. clients? I think in 2017 that had been a -- they -- non-U. S. clients had been a source of inflows, and it seems like it had flipped to negative this year. So I was just wondering if there was anything you could highlight?

Ryan, this is Eric. I have not seen any change with regards to the interest. I think that the primary strategies remain our global strategies, and looking across our Global Opportunities, our Global Discovery, Global Equity and Global Value, those strategies have strong excess return and are very well positioned in the marketplace. So we haven't seen any change in the marketplace with regards to the consultants and intermediaries that we've been talking to.

Great, thank you. And maybe just as a follow-up, can you give us a reminder on any teams that might be interested in launching more private-style strategies?

We -- with all of our teams, we talk about degrees of freedom and how to add value and differentiate against indexes and create strategies that are difficult to replicate given the trend towards indexation and exposure. So we're in discussions with our teams with that theme in mind, but we have no new strategy or team that's announcing a product as of yet.

The next question comes from Kenneth Lee with RBC Capital Markets.

Just one on the potential excess cash on the balance sheet available that could potentially help fund the dividend. Wonder if you'd just give us the latest update on that and maybe also help us think through how that excess cash could potentially fluctuate, depending on market conditions, and what the company might need to hold back? Thanks.

Yes, so the cash that you see on the balance sheet, a good chunk of that is really accumulated throughout the year to pay incentive compensation at year-end. There's some unpaid dividends and TRA payables that are on the books. So in general, we hold about $100 million of cash when all the liabilities are paid. We do use some of that cash for seed investments, and we currently have about $40 million of seed there. So we'll go through the same process at the end of the year when we get to the special dividend. We did provide some insight in the deck on sort of the transition from the fixed to the variable, and that was done to show the transition, not to really help estimate a special at the end of the year. But you can see that through the 3 quarters, we've accumulated around $1 per share of excess cash that will be available. But when we get to the end of the year, we'll transition to the variable, so we'll probably pay out 80% of the December earnings. We'll retain that 20% on the balance sheet; that won't be paid out, that will be accumulated throughout the year and considered for a special annual in the following year. So that's about how we think about it.

Got you, thanks. And then one more follow-up: Broadly speaking, what's your sense in terms of how clients view the value proposition of differentiated investment strategies with multiple degrees of freedom, especially in times of market volatility? Do you see any change, whether it's an increase or a decrease, in that kind of interest? Thanks.

Yes, with regards to the high-value-added approach and strategy that we focus on, when you get away from a price momentum market that goes up over the last 9 years, 10 years, it's highly beneficial for exposure-index-oriented products. So with regards to the volatility and our degrees of freedom and our history of delivering an active approach that has delivered, our belief is that it will be highly beneficial.

The next question is a follow-up from Chris Shutler with William Blair.

So C.J., I just wanted to get a little more clarity on the expenses, particularly the communications and tech line. Just how do we think about the run rate from here? I know you said $10.5 million in Q4, but is that right run rate to think about heading into 2019? And same type of question on G&A. What's the right run rate there?

Yes. So -- yes, I did guide to $10.5 million in the fourth quarter, and I think, absent any clarity that I have today, I think I would use -- $10.5 million would be a good proxy for next year. Tech spend rarely goes down, and so I think we'll continue to make investments in the business, given our new strategies, new asset classes and investments in distribution technology. So I think that's about right. And G&A, that fluctuates within a range, as you can see from history, so my best estimate would be just to use [7.25]. It's going to fluctuate up and down from there based on business activity, but on average, I would think [7] would be a good proxy.

This concludes the question-and-answer session and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.