Artisan Partners Asset Management Q1 2025 Earnings Call Transcript

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April 30, 2025

There are 9 speakers on the call.

Operator

Good day, and welcome to the Artisan Partners Asset Management Business Update and First Quarter Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Brennan Hughes, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Welcome to the Artisan Partners Asset Management business update and earnings call. Today's call will include remarks from Eric Colson, CEO Jason Gottlieb, President and C. J. Daley, CFO. Following these remarks, we will open the line for questions.

Speaker 1

Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin today, I would like to remind you that comments made during today's call, including responses to questions, may include forward looking statements. These are subject to known and unknown risks and uncertainties, including, but not limited to, the factors set forth in our earnings release and detailed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those disclosed in the statement, and we assume no obligation to update or revise any of these statements following the presentation. In addition, some of our remarks today will include references to non GAAP financial measures.

Speaker 1

You can find reconciliations of these measures to the most comparable GAAP measures in the earnings release and the supplemental materials, which can be found on our Investor Relations website. Also, note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any Artisan investment product or a recommendation for any investment service. I will now turn it over to Eric.

Speaker 2

Thank you for joining the call or reading the transcript. We value your time. Artisan Partners is built for the uncertainty and volatility of markets. Our investment teams have the autonomy, experience and degrees of freedom to execute through these periods. The ability to use cash, geography, market cap and array of instruments to take and manage risk and the judgment, discipline and patience to remain true to their investment philosophies and client expectations.

Speaker 2

Historically, our investment teams have taken advantage of uncertainty and volatility to add value for clients. We believe the same will be true this time around. Our business model is a source of stability for our people, our clients and our shareholders. A majority of our expenses including compensation adjust automatically with changes in our AUM allowing us to remain focused on executing for our clients and thoughtfully growing our business. In that regard, volatility creates opportunity for us in the broader marketplace as asset allocators seek established and trusted managers and investment talent seeks a stable long term home.

Speaker 2

For Artisan, disruption truly creates opportunity. Since 2013, we've expanded from five investment teams to 11. We have increased the number of investment strategies we offer from 12 to 27. We have evolved from a long only public equity manager to a multi asset class investment platform. We now have two fixed income teams, four fixed income strategies and six alternative strategies.

Speaker 2

And we have reoriented our firm to align with demand from both the traditional institutional channel and the private wealth market. This includes realigning our distribution structure and team and evolving from a bought not sold mentality to a sales culture. Today, approximately 60% of our AUM is managed on behalf of what we consider intermediated wealth clients. Through all this change, we have demonstrated the repeatability of our model and process across investment leaders, generations, geographies, asset classes and distribution channels. We have performed for existing clients, thoughtfully grown the firm from next generation high value added investing and generated a healthy return for shareholders.

Speaker 2

Slide

Speaker 3

two is

Speaker 2

a snapshot of our repeatable success. This shows our 11 strategies with track records of more than ten years. Developing World, which Jason will discuss will join this group in July. The returns on this slide are average annual return since inception To help better understand the significance of our outperformance, let me translate one of these outcomes into dollars.

Speaker 2

Dollars 1 million invested in the Artisan global value strategy eighteen years ago would be worth $4,100,000 today after fees. At the same $1,000,000 been invested in the same manner as the index, would be worth $2,900,000 today. Artisan's global value is two zero five basis points of average annual outperformance after fees translated into $1,200,000 of more wealth, over 40% more wealth than the index approach. In addition to the consistency of the absolute and excess returns, we are equally proud of the consistency of our investment talent and their execution through time. We have done what we have told our clients, what we would do over long periods of time.

Speaker 2

Even the strategies no longer led by founding portfolio managers are led by portfolio managers with long tenures at Artesyn. They are known entities. We have achieved these long term outcomes by knowing who we are, focusing on what we can influence and taking a long term view and avoiding trying to be all things to all people. We try to maintain an ideal home for investment talent. We provide that talent with expanding degrees of freedom to generate absolute returns and manage risk.

Speaker 2

We launched strategies we believe will have long term demand from sophisticated investors who understand the scarcity of Alpha. We execute through periods of short term noise, uncertainty and volatility to generate long term outcomes for our people, our clients and our shareholders. Jason will discuss several recent examples of this process at work.

Speaker 4

Thank you, Eric. I'm going to discuss several investment strategies, all of which embody the themes and characteristics Eric was describing and has been describing for many years. Talent driven, increasing degrees of freedom, high value added differentiated investing, long term demand in particular in the private wealth space. The first is the Artisan Global Special Situation strategy. We launched this new strategy in March.

Speaker 4

It is led by Brian Luco, who joined the Artisan International Value Group in September of last year. The investment strategy is multi asset focused on issuers experienced stress or dislocation. The portfolio will be highly differentiated targeting attractive risk adjusted absolute returns through market cycles. In addition to managing global special situations, Brian and his team will provide corporate credit and special situations expertise to the broader international value group led by David Samra. This is the second time David has added new capabilities to the International Value Group.

Speaker 4

In 2020, Baini Zhao and Anand Vasagari launched the Artisan International Explorer strategy, which has generated over five forty basis points of average annual outperformance since inception after fees. Bainie and Anand now manage over $600,000,000 including net inflows of almost $221,000,000 during the first quarter. We are excited to have started the journey with Brian, his team and the global special situation strategy. And we are very pleased to see David, Sammer and the International Value Group further expand their degrees of freedom and capabilities into fixed income, special situations and alternatives. Our second new strategy is the Artisan franchise strategy managed by the growth teams Jim Hamill and Angela Wu.

Speaker 4

The franchise strategy is a highly concentrated global equity strategy that seeks to generate significant alpha for investors willing to hold through periods of volatility and tracking. In particular, we expect the franchise strategy will be attractive to family offices and other intermediated wealth clients. In addition to representing a new investment offering from the growth team, the franchise strategy is yet another demonstration of the team's thoughtful and methodical development of investment talent. Moving from new launches to important milestones on Slide four, on April 1, we marked the third anniversary of the Artisan Global Unconstrained Strategy. Tomorrow, the emerging market debt opportunity strategy will hit three years and in August, the emerging markets local opportunity strategy will do so as well.

Speaker 4

All three strategies have performed extremely well since inception. The absolute return oriented global unconstrained strategy has generated average annual returns of 9.87% net of fees and a Sharpe ratio of 2.1. Since inception, emerging market debt opportunities and emerging market local opportunities rank in the first and seventh percentiles respectively of their eVestment peer universes. All three strategies have large institutional anchor clients. Historically, the three year mark has been an inflection point for business development.

Speaker 4

With the foundation firmly established, we are increasing our marketing and distribution efforts across the M Sight strategies. We have raised over $300,000,000 for M Sight so far this year and we expect to do much more across distribution channels and geographies. In July, we will celebrate the tenth anniversary of the Developing World strategy. As Eric mentioned, it will become our twelfth strategy with a ten plus year track record. When portfolio manager, Louis Kaufman joined Artisan more than a decade ago, we very intentionally set out to do something different to design an investment strategy that could capture the potential of emerging markets, but provide Louis with the degrees of freedom to move optimally, capture the economic opportunity and better manage risk.

Speaker 4

Lewis has dared to be different, methodically communicated his unique approach, remained disciplined around a core set of principles and delivered. As we approach the 10 anniversary, we believe the Developing World team is a great example of our strategy of identifying unique talent and supporting them with broader degrees of freedom to add value for clients over long periods. We believe the ten year track record will make Developing World that much more appealing to investors seeking an emerging market strategy with degrees of freedom to navigate geopolitical and economic uncertainty.

Speaker 2

Thank you, Jason. It's gratifying to see our established investment franchises adding degrees of freedom and our more recent franchises hitting important milestones with impressive investment and business results. It speaks directly to the repeatability of our business model and philosophy. Our approach to thoughtful growth has always emanated from who we are, a high value added investment firm designed for talent to thrive in a thoughtful growth environment. Consistent with that, we have always focused on the intersection of investment talent, alpha opportunity and long term asset allocation demand.

Speaker 2

Historically, that led us to design much of our business primarily with an eye towards institutional investors and the consultants who serve them. That remains important part of our business today and will continue long into the future. Today though, we're increasingly designing and evolving our business primarily with an eye towards the private wealth market. Private wealth is large and growing with demand for high value added management. We have a significant presence in this market today.

Speaker 2

Of our $162,000,000,000 in AUM at quarter end, approximately $97,000,000,000 was sourced from the intermediated wealth channel. In the intermediated wealth, we have approximately 172 relationships of greater than $50,000,000 and 117 are invested in three or more strategies. We believe there is a tremendous opportunity for us to further grow in the intermediated wealth channel. We will continue to bring together unique investment talent with large opportunity sets requiring active management. We will continue to align interests between investment talent, clients and the firm.

Speaker 2

And we will continue to reorient our distribution structure and team to better access and service the intermediated wealth channel. By remaining focused on who we are and executing on this strategy, I'm highly confident we will continue to generate successful long term outcomes for our people, our clients and our shareholders. I will now turn it over to CJ to discuss our recent financial results.

Speaker 3

Thanks, Eric. First quarter results reflect lower revenues primarily as a result of the absence of $17,000,000 performance fees realized in the fourth quarter of twenty twenty four. The fourth quarter included performance fees realized in seven different strategies. The majority of our performance fee arrangements pay annually and have measurement states at the December. The expected absence of performance fees in the first quarter and higher seasonal expenses led to a 7% decline in revenues, 19% lower adjusted operating income and four seventy points decrease in our adjusted operating margin from the fourth quarter of twenty twenty four.

Speaker 3

Assets under management ended the March at $162,000,000,000 up slightly from last quarter and from a year ago. Ending assets under management for the March reflect $4,100,000,000 of market returns, including $1,800,000,000 or 110 basis points of returns in excess of benchmarks. Net client cash outflows during the March were approximately $2,800,000,000 and included a $1,200,000,000 outflow from a separate account rebalancing within our mid cap growth strategy. Gross outflows for the quarter excluding the separate account rebalance were in line with historical levels. Equity outflows in the quarter were partially offset by positive flows into our fixed income and alternative businesses.

Speaker 3

First quarter twenty twenty five marks the eleventh consecutive quarter of positive fixed income flows. Average AUM for the quarter was up 1% sequentially and up 8% compared to the March. Slide nine is a new cut of our AUM by distribution channel. Eric has highlighted how Artisan has become firmly established in the wealth channel. This view of AUM provides a five year view of the strength of our intermediate wealth relationships in the $97,000,000,000 of assets sourced from that channel.

Speaker 3

The intermediate wealth channel has grown tremendously over that period and now accounts for 60% of total AUM with annualized organic growth rate over that period of 5%. As discussed in Eric's remarks, our distribution efforts continue to focus on this channel with more dedicated resources and a build out of enhanced digital marketing and sales enablement capabilities. Our complete GAAP and adjusted results are presented in our earnings release. Revenues for the quarter decreased 7% compared to the December and are up 5% compared to the prior year first quarter. In addition to the seasonal decline in performance fees, 5,400,000.0 of the decline in revenue was attributable to two fewer days in the first quarter of twenty twenty five compared to the fourth quarter of twenty twenty four.

Speaker 3

Our weighted average recurring fee rate for the quarter remained at 68 basis points. Adjusted operating expenses for the quarter were flat from the fourth quarter with variable expenses declining 6% on lower revenues offsetting seasonal increases in fixed expenses of 8% or $7,500,000 Comparison to the same quarter last year, adjusted operating expenses are up 3% primarily from higher incentive compensation expense due to increased revenues. For the full year of 2025, fixed expenses are still expected to increase mid to low single digits consistent with our previous guidance. Adjusted operating income is down 19% sequentially from the absence of performance fees and up 9% compared to the same quarter last year as a result of revenue growth outpacing increases in operating expenses. Adjusted net income per adjusted share declined 21% compared to last quarter, again primarily from the expected absence of performance fees and up 9% compared to the same quarter last year.

Speaker 3

In calculating our non GAAP measures, non operating income includes only interest expense and interest income. Although valuation changes on our seed investments impact shareholder economics, we fully exclude these valuation changes from our adjusted results to provide transparency into our core business operations. Turning to Slide 11. Our balance sheet remains strong. We currently have 138,000,000 of seed capital in our investment products with ample liquidity to seed future strategies.

Speaker 3

As strategies reach scale and our seed investments are redeemed, any gains realized are included in the cash available for corporate purposes, future seed investment needs or as an addition to our year end special dividend. During the first quarter of twenty twenty five, we fully redeemed our remaining $23,000,000 seed investments in our credit opportunities fund with a cost basis of $8,000,000 The original seed investment of $22,000,000 was made in 2017 and generated total realized gains of $27,000,000 and an annualized return of 13%. As a result of the redemption of the remaining seed capital, the credit opportunities fund was deconsolidated from our balance sheet during the first quarter. Moving to our borrowings, our $100,000,000 revolving credit facility remains unused and $60,000,000 of senior notes will mature in August 2025. We currently expect to refinance all or a significant portion of the maturing amounts with a new series of long term senior notes.

Speaker 3

We continue to return capital to shareholders on a consistent and predictable basis through quarterly cash dividend payments and a year end special dividend. Consistent with our dividend policy, our Board of Directors declared a quarterly dividend of $0.68 per share with respect to the March 2025 quarter. The decline in the dividend from Q4 reflects lower cash generation from the absence of performance fees in the first quarter of twenty twenty five. That concludes my prepared remarks. I will now turn the call back to the operator.

Operator

Thank you. We will now begin the question and answer session. And your first question today will come from Alex Blostein with Goldman Sachs. Please go ahead.

Speaker 5

Hey, good afternoon. This is Anthony on for Alex. I guess to first start, I would say congrats Jason on the new role. But for my first question, you guys have talked about fixed income and alternatives being the key strategic growth areas for the firm. Could you maybe expand on opportunities you see here, specifically in the retail or insurance channel?

Speaker 4

Yeah. Hi, Anthony. Thank you for the kind words. There's a couple of ways that I think we can continue to build and expand and grow. The first way, and it's one that we've historically talked about quite a bit, which is the highest and best use of our time is to continue to expand degrees of freedom with our existing franchises, and we think we've got a long runway with our high income team and franchise, as well as our M Sites team.

Speaker 4

Think that there's multiple paths. I'd highlighted Global Unconstrained as one of our marquee franchises that cuts across fixed incomealternatives and certainly fits in that high net worth space. It's a liquid alternative that gives people the ability to use it as a fixed income, traditional fixed income, non traditional fixed income, a cash surrogate, or just purely in an alt context. We view this as a pretty big opportunity for us and we're, as we've mentioned on the call, leaning in on the expansion there. Maybe on the new endeavor front, there's multiple ways in which we can grow.

Speaker 4

The fact that we only have two teams suggests that we have a clear path to grow via lift out or via M and A. We're going to continue to evaluate those opportunities as we always do and as and when we see that, what we call the no brainer, we feel like we've got really strong alignment with really strong investment capabilities, we'll certainly go ahead and do that. Those are really the areas that I would suggest are clear paths for us, both in the intermediate wealth channel as well as just pure platform expansion.

Speaker 5

Got you. That's helpful. And I guess for my follow-up, expenses came in well managed this quarter, especially on the non comp side. So how should we think about normalized expenses from here? And if uncertainty continues, what kind of levers can you use to maintain margins?

Speaker 3

Great. Thanks, Anthony. Good question. Our guidance for the full year really hasn't changed much. I think there is a bit of a miss from folks on G and A.

Speaker 3

We did have some FX gains this quarter and travel typically slows down a bit in the first quarter after a heavy fourth quarter. So that guidance still remains. So I think you'll see the rest of the quarters pick up the savings that you had in your model for the first quarter. On the variable expenses, obviously they fluctuate with revenues and then long term incentive comp guidance is still similar to what we gave for the full year. In the first quarter, there is a little bit of a holiday because our 2025 grant happens at the of January.

Speaker 3

So there isn't a full quarter of expensing there. But all the guidance that we gave in January related to 2025 remains intact.

Speaker 5

Okay. Thanks, guys.

Operator

And your next question today will come from John Dunn with Evercore ISI. Please go ahead.

Speaker 6

Hi, congratulations Jason. I wanted to ask about just given with the movement in markets, are there any areas you wanted to highlight about being capacity constrained or the reverse having a lot of capacity?

Speaker 4

Yes. We're always in constant communication with the teams about capacity management. There are certainly a couple of strategies that have been in the soft close mode for several years now, and we don't anticipate them to be adjusted or changed or opened. That being said, there are some opportunities where there could be the potential for a shift there. It comes down to the team being comfortable taking on that additional capacity, certainly we want to work with them and evaluate why that potential is available.

Speaker 4

Is it the dislocation in the market and that there's opportunities? Has there been some attrition that they're looking to replace? And so it's a bit of an ongoing dialogue and discussion with teams, but we do think in the not too distant future, there is the potential for some capacity opening coming in the form of these soft closes being removed.

Speaker 6

Got it. And then also just with the market movements, on the M and A front, a bunch of your peers have seen like a renewed interest in maybe doing some team lift outs or small deals in private markets with smaller firms looking for better distribution in the wealth channel. Can you just kind of give us your thoughts around that topic?

Speaker 4

Yes. There is no shortage of opportunity in the market right now for sure. We're extremely active as we have been and always have been. We're going to stay true to our process, our time tested process of evaluating each opportunity on the merits of their investment acumen, as well as the asset allocation trends that we see in the markets. I would just continue to advocate that we see really, really good and interesting opportunities, but we're going to just be very judicious with how we think about adding capability onto the platform.

Speaker 4

They're going to come via lift out. They're going to come possibly via M and A. The market volatility, as you rightly pointed out, is very much working to our benefit. I know people don't always love the disruptions that are occurring, but we view them as really great opportunities for us and they do come in the form of these opportunities that you rightly pointed out.

Speaker 7

Thank you.

Operator

Your next question today will come from Bill Katz with TD Cowen. Please go ahead.

Speaker 7

Thank you very much and as well congratulations, Jason. So just coming back to new disclosures, so thank you for that. I did spend some time on that last night. So a couple of questions embedded in that. Can you unpack some of the commentary you mentioned in terms of, Eric, maybe in your commentary, I forget which, I apologize.

Speaker 7

But just in terms of the 172 relationships and then 117, maybe you could just sort of unpack exactly what you mean by those relationships. And then as you think big picture of the franchise, as I think about the channels, the institutional business has been under a fair amount of pressure over that same five year timeframe. How do you sort of see the backdrop for that business? Does that continue to sort of migrate down in terms of flows? Or is there an opportunity for that to stabilize to supplement the wealth side?

Speaker 7

Thank you.

Speaker 2

Hey Bill, it's Eric. We just really wanted to highlight the progress we've made in the wealth space. Mean we clearly defined it as intermediated wealth versus the wealth management space. We view ourselves as a pure play investment platform for talent that want to be resourced with high degrees of freedom. Many of those individuals are seeking to manage assets in the wealth space and plug into this growth area.

Speaker 2

We are not looking to build out the accounting, the tax, the legal, the overall portfolio allocation. It's going be a direct wealth player, but many of our clients and clients are sourcing assets from the wealth channel. The number of relationships have been growing and we wanted to highlight that channel. We think the characteristics really line up to what we were looking for in the institutional channel day one. We always wanted barriers of entry and we felt the institutional channel had research barriers.

Speaker 2

We always wanted to compete on investment performance and operational quality and not compete on sales marketing fees. And so the institutional channel had that research barrier. It allowed the time required for strategies to deliver excess return. And most importantly, created a leveraged outcome with the institutionally, it had the consultant channel and in the intermediated wealth channel, the RIAs we're working with, the broker dealers have been providing that leverage and that's the number, the second number that you highlighted there was the number of relationships with more than three strategies. So that we're getting enormous leverage with these relationships.

Speaker 2

And so we think more and more we're aligning our distribution to grow that. We've talked about the distribution evolution and that's exactly the outcome we're looking for. With regards to the institutional space, we have grown that in The U. S. And we've then taken it overseas.

Speaker 2

We believe that's going to maintain a solid growth area for us, but we did over this period away from equities into other asset classes of credit and alternatives. And you've seen us align the organization to fill out with fixed income strategies and alternatives. We the institutional space will remain a very strong area for us.

Speaker 7

Okay, thank you. And just as a follow-up, in terms of, you mentioned the pipeline. I'm sort of curious maybe between just sort of Jason taking on a greater responsibility here and being at the vanguard of both driving the credit in the old platform. Is there any shift in strategy? You said you're going to sort of stay true to your time tested capabilities.

Speaker 7

But anything different? I feel like I'm hearing a little bit more lean forward into organic growth. Historically, I know you've tried to cap some of that growth. But is there more of a structural receptivity to growing without being sort of focused on fee degradation to drive that growth? Thank you.

Speaker 2

We've definitely been focused on growth. We've talked about our distribution evolution. We've talked about going from being bought to being sold. And as we focus on the intermediated space, we have shifted our sales team and grown our headcount last year was primarily in sales. So the focus is building on that intermediated wealth, really restructuring how we're selling into that channel and more importantly the strategies that Jason highlighted and the groups we're looking at is to build out investment opportunities and strategies that fit that channel, whether it's within team or within a lift out, which we think is quite opportunistic right now given the amount of teams available.

Speaker 2

So we definitely feel that we're positioned well for that channel and we are focused on growth.

Speaker 6

Okay, thank you. I'll get back

Speaker 7

in the queue. Thank you.

Operator

And your next question today will come from Kenneth Lee with RBC Capital Markets. Please go ahead.

Speaker 8

Hey, good afternoon and thanks for taking my question. Just wanted to add my congratulations to Jason on the new role. And one follow-up here on the intermediate wealth growth opportunity here. When you look out for further growth here, are there any particular segments that are possibly faster growing? I think you mentioned briefly family offices for the franchise strategy there.

Speaker 8

Somewhat relatedly, is it going to require a different mix of strategies or vehicles to really optimize that growth in that channel going forward? Thanks.

Speaker 2

Yes, I think when you look at the long term asset allocation of client mix, is slightly different than the institutional. So we've always looked at long term asset allocation to drive the type of strategies that fit within Artesyn. We believe that we need the time required to resource and play out those strategies. So when they do build a three year track record such as the records we highlighted in the call with the M Sites Group with Global Unconstrained, MDO and MLO, all coming into three year track records. We think that will play out quite well in the intermediated space whether it's in Europe or in The US.

Speaker 2

Really the types of strategies we are looking for will be slightly different because of that wealth space And I think that's a great opportunity for us, but in many cases our existing strategies given the track records we've highlighted on page two also play quite well. So we think the combination of what we have, the track records we've built more recently, we're starting to see bulk of our platform producing good alpha and solid performance given the volatility in the marketplace and more and more we'll see new strategies that fit the intermediated wealth space.

Speaker 8

Got you, very helpful there. And just one follow-up if I may on institutional side and realize it's still early days, but just given the more recent market volatility there, could you provide a little color around what you're seeing in terms of either RFP activity, due diligence activity, any kind of potential changes that you're seeing in terms of client allocations there? Thanks.

Speaker 2

Really, Q1 we saw quite a bit of rebalancing in the equity space. We highlighted the larger client that rebalanced $1,200,000,000 away. They were signaling that for a while. That was really a DC plan that had single manager options that moved into a multi manager plan. The strategy was mid cap growth.

Speaker 2

On Page two of our deck, you could see the performance on mid cap growth since inception is 12.78. So with that type of performance, it attracts a lot of assets. And when you reallocate back into a multi manager program and you go back to your target allocations, that gets cut back quite a bit. And so we've seen that occur across the platform of our platform doing well, rebalancing back to a target. That was the bulk of the dollar flow in Q1 that we saw.

Speaker 2

And we saw an increased interest in the credit space and the bulk of the activity was just asking for thoughts and opinions on uncertainty and the volatility in the market and how each team is positioning for that volatility. I'd say overall, I'd classify the quarter as a lot of communication, lot of touch points with our clients, which is always positive for us, but not much action.

Speaker 8

Got you. Very helpful there. Thanks again.

Operator

This will conclude today's question and answer session as well as conference call. Thank you for attending today's presentation. You may now disconnect your lines and have a great day.

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