Yahoo Finance Artisan Partners Asset Management Inc. (NYSE:APAM) Q1 2024 Earnings Call Transcript
Artisan Partners Asset Management Inc. (NYSE:APAM) Q1 2024 Earnings Call Transcript April 24, 2024
Artisan Partners Asset Management Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone and welcome to the Artisan Partners first quarter 2024 conference call. All participants will be in a listen-only mode. [Operator instructions] Please note this event is being recorded. I'd now like to turn the floor over to Artisan Partners Asset Management. You may begin.
Unidentified Company Representative: 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, C.J. Daley, CFO. Following these remarks, we will open the line for questions. 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 the not limited to the factors set forth in our earnings release and detailed in our SEC filing. 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. You can find reconciliations of those 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, please 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 advice. I will now turn it over to Eric Colson, CEO.
Eric Colson: Thank you, and thank you everyone for joining the call or reading the transcript. We constantly come back to who we are. We are a high-value-added investment firm designed for talent to thrive in a thoughtful growth environment. This is who we have always been. It is our DNA and our competitive edge. We steer clear of narrow labels. A term like traditional manager has never accurately described who we are and what we do. We have always taken a broader view. Our focus has always been on high-value-added investments managed by exceptional talent. In our earliest years, with great talent, we entered the marketplace in non-core, high-dispersion areas like small-cap and mid-cap equity. International growth and value investing.
These were and remain areas where exceptional talent can generate differentiated results. When we entered fixed income in 2014, we started with high Yield, another inefficient space where talented portfolio management can add value and manage risk. We have expanded our fixed income capabilities with additional high-value-added strategies, including long-short credit, emerging market debt, and global macro. We have demonstrated time and again our ability to deliver across different talent, generation, asset classes, geographies, and client types. By building and maintaining a home designed specifically for investment talent, we are able to generate alpha for clients, develop durable investment franchises, and produce quality outcomes for shareholders.
Turning to slide two in my 2023 annual letter, I described the characteristics that we believe define an ideal home for investment talent. It all starts with our investment-first culture. This culture originates from the belief system of our investment talent, who must have a passionate conviction in their investment philosophy and a willingness to execute through thick and thin over long periods of time. This waterfall of passion, philosophy, process, execution, and alignment flows into business operation and distribution, which we build and manage for our investment talent and investment capabilities, not the other way around. At Artisan Partners, every single person prioritizes investments, from the Board of Directors to our newest associates and across all functional areas of the firm.
Everything is focused on and flows from investments. We attract and retain great talent. That talent generates results for clients. Revenues grow over time. We generate successful outcomes for our associates and shareholders. At Artisan, each investment team operates autonomously with respect to its investment philosophy, process, people, research, and decision-making. We complement investment team autonomy with extensive resources and support, customized to fit each team. We believe that the Artisan combination of investment autonomy, resources, and support is unique in the industry and a competitive advantage. It is what attracted Brian Krug to join Artisan Partners in 2013 and partner with us to establish the Artisan Credit Team. On April 1, the credit team's high-income strategy had its 10 anniversary, joining 10 other Artisan strategies with track records of more than 10 years.
I've asked Jason to spend a few minutes on the credit team's platform and, most importantly, the team's future.
Jason Gottlieb: Thank you, Eric. The development of the Artisan Credit Team over the last 10 years is a testament to two things. First, Brian Krug is an investor, leader, and entrepreneur. And second, the quality and relevance of the Artisan Partners operating and business model across asset classes. It bears repeating that when Brian joined Artisan in 2013, the firm had no prior experience in supporting and distributing a fixed-income investment strategy. Brian joined Artisan Partners because he believed in the power of the autonomous investment team model and our investment-first culture. Prior to joining Artisan, Brian was already a successful investor and leader, but he was willing to step away from what he had already achieved for the freedom to build an investment franchise designed specifically for him.
He wanted control over investment capacity, and he wanted his ideas implemented in strategies that he managed. Over the last decade, we have partnered with Brian to methodically build a team, a track record, and a franchise. Since inception, the high-income strategy has generated average annual returns of 6.18% after fees, which is nearly 42% more return on average per year for 10 years compared to the passive index. Over that period, the Artisan High-Income Fund is ranked number two out of 135 funds in the Morningstar High Yield Bond category. Starting from scratch without any pre-existing fixed-income business, we have raised a cumulative $9.2 billion of net inflows into the high-income strategy, including $1.5 billion in 2023 and $866 million in the first quarter of 2024.
From its inception, the Artisan High-Income Fund ranks number two in net flows out of 138 funds in the Morningstar High Yield category. Critically, though, Brian and the credit team have expanded beyond high income. They've been building out an array of capabilities, strategies, and vectors for future growth. In 2017, the credit team launched one of Artisan's first alternative strategies, credit opportunities. Using a broader array of securities, long and short positions, and greater flexibility across the credit and liquidity spectrum, credit opportunities has generated an average annual return of 10.24% after fees since inception. We believe the credit opportunity strategy has generated comparable to better returns and private lending with greater liquidity and transparency.
In January 2022, the credit team launched the floating rate strategy, which provides clients with access to the team's long-demonstrated skill in the leveraged loan market, along with a portfolio consisting largely of floating rate loans resulting in minimal duration risks. And just last year, we closed $130 million of commitment to the Artisan Dislocation Opportunities Fund. The Dislocation Fund will allow the credit team to put new capital to work quickly and efficiently in both public and private securities if and when the credit markets dislocate. The team has a successful record navigating periods of market stress. For the COVID drawdown and recovery period from March 31, 2020 through March 31, 2021, credit opportunities generated a 50.16 return net of fees.
We congratulate Brian and the credit team for establishing a credit platform with broad degrees of freedom and capability. As Eric said in our earnings release, we believe that great talent transcends narrow categories. Looking ahead, we believe the credit team is just getting started. We are diversifying the high-income strategy business with institutional and non-US capital. Of the nearly $2.4 billion in AUM we have raised in the strategy over the last five quarters, 20% is from institutional separately managed accounts and 17% is from non-US investors. We are particularly focused on growing the credit team's alternative capabilities, strategies, and businesses. Credit opportunities has an impressive nearly seven-year track record, taking advantage of broad opportunity sets, the ability to short, the COVID dislocation, and the ability to hold less liquid positions.
Market dispersion in the triple-T space is right for credit selection. And the structure of credit opportunities gives Brian more flexibility to invest in smaller and less liquid issuances, another area where more potential for absolute return in alpha. As Eric has previously discussed, we have picked up the pace and volume of marketing credit opportunities and certain other alternative strategies. We are seeing progress in terms of more and higher quality engagement with prospects and clients. We still have a lot of work to do in order to better market alternative strategies, but we are seeing signs that our investments are paying off. We are extremely excited to continue to develop the credit franchise over the next decade. Turning to slide four, as Eric mentioned earlier, on April 1, the high-income strategy became our 11 strategy with a track record of 10 years or more.
We have five strategies with track records over 20 years. The average tenure of the portfolio managers on these 11 strategies is 21 years. Seven of these strategies continue to be managed by their founding portfolio manager. These facts point to the effectiveness of our business model, our talent focus, and our investment-first culture. There is a wide spectrum of individuals, teams, strategies, asset classes, and time periods represented on this slide. There are, though, common themes. Outstanding and stable leadership over long periods, compelling absolute returns that we believe have generally met or exceeded client return expectations, significant alpha generation, and differentiated investment philosophies and processes. These KPIs over long periods are the metrics we care about the most.
They indicate that we are attracting and retaining great talent, maintaining and evolving our investment platform, and compounding wealth for clients over long periods. Including our first fixed-income strategy on this list, launched from scratch 10 years ago, gives us tremendous confidence that our platform can deliver across even broader ranges of asset classes and geographies going forward.
Eric Colson: Thank you, Jason. Congratulations to Brian Kruge and the credit team. The credit team is reminiscent of other successful outcomes we have had at Artisan Partners. Our growth team, founded in 1997 with a single strategy focused on US. mid-cap growth equities, now invests globally and across market caps. Truthful Strategies launched over a span of 22 years that collectively manage over $41 billion. Our international value and global value teams manage over $70 billion in the aggregate and were born out of a team founded in 2002 with a strategy focused on non-US value equities. Our global equity team manages over $14 billion and served as the launching pad for our 11 autonomous investment team, the international small mid team, which manages over $7 billion.
Building enduring investment franchises takes time. It's a multi-decade process that requires a solid foundation of people, process, culture, and results. When those characteristics have come together, we have established durable, long-term, highly profitable businesses. Because our model and philosophy are geared towards talent and high-value-added investing in general, as opposed to any one type of individual or investment strategy, we have been able to methodically add investment talent, teams, asset classes, and strategies over time. Having added fixed income 10 years ago and our first alternative strategy seven years ago, in many respects, Artisan Partners as a firm is just getting started. We continue to align our distribution model with the progress we are making in broadening degrees of freedom for our investment talent and adding alternative strategies.
While our business model has endured the test of time across asset classes, the evolving industry landscape has required us to evolve from being bought to selling a broader array of investment capacity. Patience and determination has served us well versus cutting corners and forcing outcomes. As Jason said today, we have tremendous conviction in our ability to apply our model and philosophy to an even broader set of opportunities. We look forward to executing on those opportunities and continuing to perform for our clients, our talent, and our shareholders. I will now turn it over to CJ to discuss our recent financial results.
C.J. Daley: Thanks, Eric. An overview of financial results begins on slide seven. Asset center management ended the March quarter at $160 billion, up 7% from the last quarter and up 16% from the March 2023 quarter. Investment returns contributed $10.8 billion to our AUM in the quarter. Approximately $1.4 billion of those returns were in excess of benchmark returns. Net client cash outflows during the quarter were just over $500 billion. Net outflows in our equity strategies were partially offset by net inflows in our fixed income and alternative strategies. For the quarter, the annualized organic outflow rate was 1%, an improvement from 3% in 2023. Average AUM for the quarter was up 10% sequentially and up 14% compared to the March 2023 quarter.
Our complete GAAP and adjusted results were presented in our earnings release. Revenues in the quarter increased 6% compared to last quarter. The increase was less than the increase in average AUM due to a decrease in performance fees recognized relative to the fourth quarter of 2023 and one less day in the March quarter. Compared to the March 2023 quarter, revenues were up 13% on higher average AUM. Our average recurring fee rate for the quarter was 69 basis points, consistent with last quarter. The fee rate is down slightly from the March 2023 quarter, largely due to strategy mix and the tiered billing structure within many of our investment management agreements with clients, wherein the fee rate declined as assets under management grew.
We expect the recurring fee rate to remain consistent with the last few quarters at 69 basis points. Adjusted operating expenses for the quarter increased 8% sequentially, primarily due to a $7 million increase in expenses that are front loaded in the first quarter of each year. Those include 401k matching contributions, healthcare costs, employer payroll taxes, and director compensation. Short-term incentive compensation also increased in the quarter in line with higher revenues. During the quarter, we continue to invest in talent for our annual long-term incentive awards. Over 85% of the awards were granted to investment professionals to align our key talent with clients and shareholders. The 2024 award consisted of $38 million of cash-based franchise capital awards and $21 million of restricted stock awards.
Generally, 50% of the award vests pro-rata over five years and the remaining 50% vests on or 18 months after a qualified retirement. The majority of the 2024 awards includes a new traditional retirement acceleration feature. This new provision eliminates the five-year time vesting requirement when certain recipients have a qualified retirement after having met an age plus years of service threshold of 70. All other vesting conditions, including career vesting service and notice periods, and clawback provisions remain. From a financial statement perspective, the new feature results in front loaded expense for awards granted to employees who already meet the age plus years of service requirement. The cumulative amount of expense recorded over the entire vesting period remains the same.
The feature added $2 million to long-term incentive compensation expense for the quarter, including the impact of this acceleration feature. Long-term incentive compensation expense, excluding mark to market impact, will be approximately $17 to $18 million for each of the remaining quarters this year. Adjusted operating income increased 2% sequentially and 17% compared to last year's March quarter. Adjusted net income for adjusted share declined 3% compared to last quarter and increased 19% compared to the March 2023 quarter. In calculating our non-GAAP measures, non-operating income includes only interest expense and interest income. Although the income generated on our seed investment adds to shareholder economics, we fully exclude these investment gains from our adjusted results in order to provide transparency to our core business operations.
Our balance sheet remains strong. We currently have about $155 million of seed capital invested in our investment products with significant amounts of realizable capacity. As those products begin to scale, we will redeem the seed capital deployed in our new products, otherwise reinvested in the business or returned to shareholders. In addition, our $100 million revolving credit facility remains unused. 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 $0.61 per share with respect to the March 2024 quarter, which represents approximately 80% of the cash generated in the quarter.
Cash generated in the quarter was reduced by $6.8 million to net total vesting of employees' restricted stocks and boards during the quarter. The repurchased shares were retired and reduced the number of shares outstanding. That concludes my prepared remarks. I will now turn the call back to the operator.
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