Artisan Partners Asset Management Inc (APAM) 2022 Q1 法說會逐字稿

Hello, and thank you for standing by. My name is Rocco, and I will be your conference operator today. (Operator Instructions) As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to Makela Taphorn, Director, Investor Relations, for Artisan Partners Asset Management. Please go ahead.

Thank you. Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Eric Colson, CEO; and C.J. Daley, CFO. Our latest results and investor presentation are available on the Investor Relations section of our website. And following these remarks, we will open up the line for questions.

Before we begin, I would like to remind you that comments made on today's call, including responses to questions, may deal with forward-looking statements. These are subject to risks and uncertainties and are presented in the earnings release and detailed in our filings with the SEC. We are not required to update or revise any of these statements following the call.

In addition, some of our remarks made today will reference non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in our earnings release.

With that, 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. We appreciate you taking the time. Artisan Partners is a high value-added investment firm designed for investment talent to thrive in a thoughtful growth environment. We know who we are and constantly remind ourselves and others. We have remained disciplined in our philosophy and business model while also expanding our investment platform and capabilities.

Today, we offer investment talent the same entrepreneurial opportunity and investment autonomy that we have offered since 1995, but we have significantly expanded investment degrees of freedom, operational support and multichannel global distribution. The consistency and repeatability of who we are and what we do have steadily grown our business value over time, our ability to generate alpha for clients, our ability to generate successful careers for people and our ability to generate long-term return for shareholders.

We recently launched the Artisan Global Unconstrained and Artisan Emerging Markets Debt Opportunities strategies. These launches and all of the work behind them exemplify how we execute and build business value.

On Slide 2, you can see the team we have built with Mike Cirami, Mike O'Brien and Sarah Orvin. Since they joined last September, we have built a diverse team of 11 investment professionals. We located the team inside their own 4 walls in Boston, where they wanted to be. We have built, customized research management tools, stood up new order management and trade execution technology and established local market access in over 100 developed, emerging and frontier countries at initial launch.

We seeded the team's first 2 strategies, and we recruited and hired a proven distribution leader with deep experience building an EM debt business. Today, after a little more than 6 months at Artisan Partners, the team is running money and open for business.

Emerging Markets Debt brings together a number of attractive investment and business characteristics, a large and growing investment opportunity set to differentiate from the index and peers, a large addressable market of sophisticated investors and allocators to build a long-duration client base with attractive fees and a limited supply of investment talent with the experience, resources and degrees of freedom possessed by the Artisan EMsights Capital Group.

On Slide 3 is our repeatable process for franchise development. This is how we drive business value. We take the time to find and recruit the right investment leadership, unique investment leaders who are passionate about what they do, want to own the outcome and are willing to take risk and bet on themselves.

Around that leadership, we bring together additional talent and resources, including proven distribution leadership. We provide infrastructure and customized technology. We provide autonomy and space to execute a process and develop a culture. And we are patient, focusing on establishing a strong foundation and a compelling investment track record.

We have successfully executed this process across time and asset classes and through market cycles. While each franchise takes its own path, we have a stated set of franchise characteristics we seek to achieve, and we have a disciplined process for achieving and maintaining those characteristics through time.

This is what our management team does. We maintain an investment-first culture. We bring to bear the entire resources of our firm to support our investment teams. We minimize investment team distractions. We maintain economic and risk alignment. We insulate our firm from short-term pressures and noise. We focus on building long-term business value.

Today, we see opportunity all around us. Industry consolidation is focused on scale, solutions and distribution, not on creating great homes for investment talent. Creative investors are increasingly risk-managed, diluted and disintermediated from end clients. At Artisan Partners, we are staying true to who we are, emphasizing creative talent, autonomous investing, broad opportunity sets in a patient, long-term mindset.

The milestones we've passed with the EMsights Capital Group are milestones we've passed many times before. We know we have a lot more to do. We also know the potential outcome if we execute as we have in the past, business value that compounds and diversifies and ultimately yields economic value.

On Slide 4, you can see the AUM outcome of recent launches. Underlying the AUM outcome is tremendous business value creation, investment leadership surrounded by additional talent and resourced well, established investment process and emerging investment team cultures, compelling early investment track records and foundational business development on which to build broader investment platforms. It takes time, but if we remain patient and focused on the things we can control, we expect successful outcomes will follow.

On Slide 5, we have expanded the view across time and across the firm. On the top part of the page, we have summarized investments we have made in our business over the last 10 years. By following the repeatable process I described earlier, we have doubled investment teams from 5 to 10 and doubled investment strategies from 12 to 24.

Expanding investment degrees of freedom, we have added multiple new asset classes and significantly increased the markets and instruments available to our investment teams. And we have built out our distribution capabilities across geographies and channels, nearly tripling relationships greater than $200 million and increasing our number of non-U.S. investors and client relationships more than sixfold.

Our disciplined approach, repeatable process and proven success strengthens our brand and reputation and increases our probability of successful outcomes going forward.

Similar to the power of compounding revenue growth, successful franchise development has a compounding effect on future business value. For example, in 2013, when Bryan Krug joined Artisan to launch our credit team, we were unproven in fixed income. What we have built with Bryan was an important data point when Mike Cirami, Sarah Orvin and Mike O'Brien decided to join Artisan last year. They saw a firm that could support fixed income, build new operations to support emerging market debt and be a successful home for a differentiated fixed income team.

We lean into franchise development by identifying the right talent for us and stacking resources to put the odds in our favor. Our approach differs from firms that refer to investments as manufacturing or engineering products for mass distribution. They play the odds and time horizon differently. In the long run, we believe that we produce sustainable growth outcomes with lower risk for all stakeholders.

On these calls and in other forums, I spend almost all of my time on investments and how we are driving business value as opposed to reading off recent numbers. We focus on what we can control and seek to build business value over the long term. So quarterly, or even annually, economic outcomes are not terribly relevant to what we are trying to do in managing the business. But over longer periods, we do expect economic outcomes to reflect the growth of our business value.

Over the last 10 years, since approximately the time we launched the credit team and began focusing in earnest on degrees of freedom, we have more than doubled our AUM, from $74 billion to $160 billion; more than doubled our annual revenue, from $506 million to $1.2 billion; maintained an adjusted operating margin in the 40% range; and inclusive of our upcoming dividend, distributed $30.31 per share to our shareholders, more than our IPO price of $30 per share in 2013.

Looking forward, we will continue to focus on building business value, investing in our existing franchises, recruiting new talent and launching new franchises; launching new strategies with broad opportunity sets and large addressable markets; expanding our operating platform in fixed income, private investing and Greater China; and further investing in digital marketing, accessing the wealth channel and other global distribution capabilities.

We are confident we can grow business value as we have in the past. And eventually, we expect economic value to reflect business value creation.

I will now turn it over to C.J. to discuss our more recent results.

Thank you, Eric. Following Eric's comments on our long-term results, I'll provide some commentary on our financial results for the first quarter of 2022. Our earnings release includes both GAAP and adjusted financial results. My comments will focus primarily on adjusted results.

After advancing most of 2021, global markets fell considerably in the first quarter of 2022 due to broad uncertainty regarding the war in Ukraine, inflation, rising interest rates and the continued cloud of the pandemic. Given the lower markets, our AUM and revenues declined as well. AUM, at the end of March 2022, was $159.6 billion, down $15.2 billion or 9% compared to the prior quarter. AUM declined 2% compared to the first quarter of 2021.

Despite negative markets, net client cash flows for the quarter were positive at $700 million, representing a 2% annualized organic growth rate. We launched 2 new strategies during the quarter: the Value Income Strategy, managed by the U.S. Value team; and the Global Unconstrained strategy, the first strategy launched by the EMsights Capital Group. The second strategy managed by the team, Emerging Markets Debt Opportunities, was launched on April 7.

15 of our strategies had net client cash inflows during the quarter. The International Value strategy was the largest contributor to net client cash inflows, with inflows from a diverse set of clients.

AUM by generation is on Slide 8. All generations declined in AUM as a result of the market declines. Generation 1 experienced net inflows and drove the firm's overall net flows for the quarter. Percentage mix of AUM by generation, fee rates and other metrics remain largely unchanged from the prior quarter.

Quarterly results are on the next slide. Revenues in the first quarter declined $33 million, 11% sequentially, in line with the 8% decline in average AUM, along with 2 fewer days in the quarter. Year-over-year, quarterly revenues declined 3% principally due to the absence of performance fees in the current quarter compared to the 2021 quarter.

Adjusted operating expenses in the first quarter declined $1.7 million compared to the fourth quarter of 2021. The decline in operating expenses reflects lower variable operating expenses, primarily incentive compensation, partially offset by higher first quarter seasonal expenses, annual merit increases and higher long-term incentive compensation expense.

Adjusted operating expenses increased $6.6 million year-over-year, reflecting the addition of the EMsights investment team, annual merit increases and an increased number of full-time employees, consistent with our talent-driven business model.

We also continue to invest in our talent through annual grants of franchise capital and restricted stock awards to align our key talent with clients and shareholders and in technology and data, through the expansion of the breadth of our operating and distribution capabilities within active management to support new teams and strategy launches.

Adjusted operating income for the March 2022 quarter was $106 million, which is an adjusted operating margin of 37.7%. The decline in our operating margin from the December 2021 quarter was principally due to lower revenues as a result of market declines and higher seasonal expenses. Adjusted net income per share was $0.98 for the March 2022 quarter.

Our balance sheet remains healthy as modest borrowings are supported by strong cash generation. And as we have throughout our history, we remain committed to distributing the majority of the cash we generate every year. This quarter, our Board of Directors declared a quarterly dividend of $0.76 per share. Including this dividend, we have declared dividends of $4.58 over the last 12 months, resulting in a 12% dividend yield using the share price at the end of March.

In closing, our financial model and in particular, the variability of approximately 60% of our expenses, continues to serve us well and provides predictability and sustainability to weather ever-changing global market conditions.

That concludes my remarks. And I will now turn the call back to our operator for Q&A.

(Operator Instructions) Today's first question comes from Dan Fannon at Jefferies & Company.

So just thinking about the EMsights opportunity, is there anything structurally different about this strategy that might make it scale faster? And then also, just thinking about versus, I guess, other strategies that you've launched and grown and maybe where you are, the channels for which you think you will initially be targeting AUM from and then also the opportunity given all the global unrest that's out there for this kind of strategy, is this something where there is -- the demand is high, if you could talk about that as well?

Yes. Hi, Dan. It's Eric. Yes, I don't know how much I can talk to the speed or how fast we can scale. As we've said, that we've created these franchises and have done it in a high-quality way that it has duration to it as opposed to trying to short-circuit, just getting them to market for the sake of it. In my mind, that's really just engineering to hit a timing of uncertainty. And I don't think we've been great at timing, but I think we've been really good at finding the right talent and building those resources around the team, which we discussed on the call.

The opportunity is very sizable. And if you look at the Emerging Markets fixed income, it's about 30% of all global fixed income, approximately about $30 trillion out there. Since 2004, you've gone from roughly $3 trillion to $24 trillion in just the local, which makes up 80% of the emerging market opportunity.

Within that, there is quite a bit of inefficiency. So active management tends to thrive much better than passive. The passive substitutes, we believe, are fairly weak and costly. So we think it's a great opportunity for active management and a growing universe of securities, both sovereign, corporate and loans.

Then we look at the marketplace of emerging market debt, it's very similar to what we saw in the high-yield market. In the high-yield market, there's roughly 160 strategies out there in traditional high-yield in the U.S., backed by 120 firms. The top 5 range from $40 billion to $100-plus billion in all of high yield. And you translate that to emerging market debt and you have, in the emerging market debt blend market, you do have about 100 strategies, so a little bit less than high yield and fewer firms, but you also have the top 5 managing $40 billion to $75 billion.

So very sizable, growing. We think the opportunity over the long haul is underrepresented in traditional asset allocation. And I agree with you on the current uncertainty, that may yield a good opportunity over the long run.

And you look at the team, you look at the ability for active management, you look at the total market, this clearly fits how we think about getting into an asset class. Then layer on top the fees and then, more importantly, which we spent some time on, is the operational barriers to get into this strategy. This is not the easiest strategy to bring to market, especially for an entrepreneurial environment. I think there's very few opportunities out there for a team to go and prop this up.

So I think the opportunity is quite scalable for us. Clearly, we're not trying to be the top 5, but it shows the direction of scale. And we will do this in the highest-quality manner so that we have the duration to go with it.

That's helpful. And then just as a follow-up, C.J., just thinking about the 1Q expense levels and as you look through the rest of the year, you had some funds that started the team's -- been on the new team that we just chatted about has been on for some time. But how should we think about the progression of some of the fixed costs if there was any onetime things in this quarter associated with those fund launches or kind of normalization of other expenses would be helpful.

Now with -- hey, Dan. So I think we're on target with the guidance we gave you last quarter. And we brought on the new team in September of last year. So there was a fair amount of run rate expense built in last quarter. So quarter-over-quarter, I think we're at a pretty good run rate. They will be moving into some permanent space in Boston eventually. So you'll see occupancy tick up just a slight bit, but the rest of the expenses really should be fully baked in.

And then, ladies and gentlemen, our next question today comes from Bill Katz at Citigroup.

So just picking up on that last line of questioning, can you sort of just reframe for us where you are in terms of the overall headcount build? I think you were talking last quarter about, sort of across the board, sort of roughly a 10% increase in headcount. Where are you in that and then sort of what a concomitant increase in expenses that might be associated with that?

Yes, Bill. We're on target. We've had pretty robust recruiting in last year, into this year. So we're both on target in terms of headcount and the expense guidance I gave on those fixed compensation costs.

Okay. And then just in terms of the rest of the business -- actually, I'll reframe that. Eric, you had mentioned that it's a good backdrop here for other teams. Could you speak a little bit about, a, is the market activity and recent volatility having any kind of effect one way or the other? And then where are the sort of incremental areas of growth, is it sort of continuing to build out the credit side of the platform, or is it a little more eclectic than that?

Yes. We've seen quite a bit of activity in the alternative space. In our view, many of these hedge fund platforms have become quite sizable. I think we can look back over the last few years. And the bulk of the assets have gone to hedge fund platforms. So there's some scalable teams that reside in those franchises, and that ranges the gamut, from credit to other liquid alt strategies that may fit the Artisan model.

And we also see the M&A activity has been quite active. And as we've seen in our past, that type of activity has yielded a favorable outcome for our model of teams becoming available or interested in finding an entrepreneurial home.

So the catalysts are still out there, and the market uncertainty is growing. And our history of launching teams and sticking with those teams, as we've said in the past, the teams we have today are the same teams we've had since inception. And seeing those teams through build a great brand, and we continue to have a very active dialogue in the marketplace, more in the alternative space.

And many of the areas that we've listed out, some of the themes around Asia and China, specifically around credit, and continue to think about the public-private, hybrid product mix. Those are all areas of interest for us, Bill.

And ladies and gentlemen, our next question today comes from Alex Blostein with Goldman Sachs.

Just building on that line of question from Bill, to the last point you guys made. So I guess, question is around newer teams, and it sounds like the conversations are picking up and Eric, as you sounded mostly on the -- more so on the alt side.

But given the capabilities you guys have built out internally to sort of support these teams, should we be thinking about resources that are already largely in place and therefore sort of incremental margins on bringing in new teams should yield better results than what we've seen over the last, let's say, a couple of launches, just given the fact you've been adding more capabilities and more infrastructure to support those teams?

Yes. Certainly, we have made a sizable investment in Emerging Markets Debt. We also made a sizable investment back when we first launched Credit, with Bryan Krug in 2014. And as we stated on the call, we think that there is a lot of leverage built in the onboarding of new teams and new asset classes, that as you expand your capabilities in Credit, you have really sunk that cost into the business, and the incremental cost of a new team in Credit will be much lower given the 2 teams we have today.

I will add that while the activity is quite active in the alt space, we have a lot of existing team growth and franchise growth, which we've highlighted over past calls. So while activity is high on looking at new talent, our core focus right now is delivering on what we brought in and seeing that through. So my expectations are fairly low on new teams.

Looking at the next few quarters, these quarters will be really looking and broadening our network. The focus of the business on these next quarters and year is to deliver on what we brought in at the highest quality.

So I don't want to have people walk away from this call that, that activity is going to yield a short-term outcome. The broad networking is an opportunity to broaden out the business over the medium term. It typically takes a year to 2 of courtship in bringing in teams. So my mindset is on the current teams right now, but the activity remains high on networking.

Got it. Great. That's helpful. My second question is around some of the capital return dynamics. And Eric, you mentioned on this call and on prior calls as well that there is still a quite substantial disconnect between the value of the business and the economic value, I guess, that you guys are sort of seeing. So with that in mind, any updated thoughts around pivoting the capital return strategy and introducing a more sizable buyback?

I'll take that one, Alex. Our model does not really lend itself very well to buyback. Since the IPO, as Eric mentioned and we've mentioned before, we paid out close to 100% of the cash we've generated with a pretty healthy dividend yield. So we really have limited cash available for buybacks.

We do invest in the business through seed capital and launching new products, which over time generates economic value. But we continue to prefer the predictability of the dividend policy and see no reason to change that at this point.

And ladies and gentlemen, our next question today comes from Robert Lee, KBW.

And I apologize, Eric, you may have covered some of this in your prepared remarks, but looking in the current environment, I mean, obviously, you did talk about it being attractive for active strategies such as the EMsights. But can you talk a little bit more about some of the more traditional strategies?

If you think back 2 years and we had the initial throes of COVID, markets are down a lot and you saw kind of a surge of demand in the immediate quarters subsequent to that sharp selloff, so do you see this weakness we've had year-to-date starting to create similar types of opportunities for you? Are you starting to see a lot of your long-term, or maybe not so long-term, clients start to rethink and start to look -- take more time to look at allocating towards your strategies of liquid, call it, equities, active equities in general?

Yes. The -- we've come off of really the 2020 pandemic, where when a crisis like that occurs, and we've obviously seen it again with Russia and Ukraine, correlations go closer to 1 and everybody is behaving the same. And I think what you're saying, Rob, is after that initial March 2020, you saw the active management thrive there. And more in that period, you saw growth thrive as many of the technology, health care coming off of the pandemic lended itself for work at home or many people operating differently.

The Russia-Ukraine crisis obviously caused another period where everything started behaving in a similar fashion. And now, as that starts settling down and we clearly aren't anywhere near coming out of that conflict, we're still heavily in it, but you've seen a rotation occur there, and some of the Value managers have done better with, obviously, energy, industrial, utility pushing that forward. You see our traditional strategies, in some cases, thriving there. And you see it most acutely with the International Value team, a first-generation strategy.

And many people do look at these generations and say, our Generation 1 in attrition and it's just all about Generation 3. I think we've built an enormous amount of diversification, and we're continuing to build that now with a new franchise. But the power of some of our traditional franchises are shining through some of these periods. And you saw that with the growth franchise in 2020, and now, you're starting to see it with International Value and some of our other Value franchises in 2021.

And it does bring back, I think, the power of traditional asset management. But it's a great asset to have, and it will continue to be. And as things normalize and provide the time period for both styles to shine, you see the 3- and 5-year numbers, which are very strong across the mix of Artisan strategies.

Great. And also, maybe my follow-up question. If I look on Page 5 of your handout, you provide some color on how the distribution relationships have developed over the past decade. I was wondering if we can maybe take a little bit of a different slice of that.

I'm just curious, if you look at your distribution footprint today, I mean, and if you think of the various distribution channels, whether it's DC, RIA, additional institutional, wire houses, I mean, is it possible to kind of, maybe in some way, kind of rank order, like where you're seeing kind of the most momentum or strength, and -- or where do you feel like there's the most opportunity for greater penetration, where you're currently maybe underexposed?

Yes. On a go-forward basis, the intermediary channel and a subset of the institutional, and those are converging. Let's take the endowment foundation, family office, coupled with the financial adviser, RIA, that group of clients have been more active for us. The traditional institutional has been a very strong client base and has been sticky as well as the non-U.S. institutional.

But on a future basis, using more digital resources and broadening out our distribution efforts within our dedicated franchises to focus on the financial adviser, RIA, family office, endowment foundation, if you put that grouping together, we see a push in that space.

And ladies and gentlemen, our next question today comes from John Dunn with Evercore ISI.

I was wondering, can you maybe talk about how much the market moves so far this year may have changed the fund closing kind of picture.

Yes, certainly. It's -- obviously, we look at a variety of factors when we think about managing capacity. Clearly, the overall total capacity comes into play with regards to the liquidity of the portfolios. We also look at the volume of dollars coming in or the velocity of dollars, if something is running one way. And then we also look at the mix of assets. If it's coming from a very narrow and concentrated asset base, these all give us signals that we need to manage capacity. And certainly, the pullback provides a little bit of opportunity. Markets do ebb and flow, so we're cautious.

We've seen us trying to manage capacity, and markets run up 20% or 30% and markets run down, as we've seen, given a little bit more availability. And it has allowed us to take some of these soft closings and talk to clients. And there, we've always left room for working with existing clients to manage capacity. So in our soft closing, we've done that with International Value for sure, and we'll certainly, with some of our other strategies, work with existing clients to rebalance and manage capacity.

So it does give us a little bit more leeway, but we're always cautious of markets running the other way, and then you're then in a position where the integrity of the strategy wanes and clients and consultants pick up on that. And it's very difficult to recover if you go over that line. So short answer, it does give us room to take on a bit more.

Got you. And then just where we are in '22, probably to put a pause on how fast the China Post-Venture efforts can go, could you maybe talk about how you think about that playing out more over the medium term once we maybe get to a better place than we are now?

Yes. I think you can say that for privates too, that there's been a little bit of pause in the private markets as well. And it's the whole point of why we don't manufacture or engineer products and try to manage for the short run because it's very easy to then get disheartened by that and unwind it.

And we really look at the medium to long term there, that it's the second largest economy. We think that most funds are underweighted to China in the long run. The opportunity and the breadth of securities in China, we remain quite wide with the ability for active management. And as we see some of the volatility dampen, and in the next midterm time period, clearly, the short term is still challenged, that China remains a very attractive opportunity for us.

(Operator Instructions) And ladies and gentlemen, this concludes today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.