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Edited Transcript of APAM earnings conference call or presentation 31-Jul-19 3:00pm GMT

Q2 2019 Artisan Partners Asset Management Inc Earnings Call

Milwaukee Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Artisan Partners Asset Management Inc earnings conference call or presentation Wednesday, July 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles James Daley

Artisan Partners Asset Management Inc. - Executive VP, CFO & Treasurer

* Eric Richard Colson

Artisan Partners Asset Management Inc. - Chairman, President & CEO

* Makela Taphorn

Artisan Partners Asset Management Inc. - Director of Management Reporting & IR

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Conference Call Participants

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* Christopher Charles Shutler

William Blair & Company L.L.C., Research Division - Research Analyst

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Kenneth S. Lee

RBC Capital Markets, LLC, Research Division - Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Robert Andrew Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* William R. Katz

Citigroup Inc, Research Division - MD

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Presentation

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Operator [1]

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Hello and thank you for standing by. My name is Carrie, 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 for Artisan Partners Asset Management.

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Makela Taphorn, Artisan Partners Asset Management Inc. - Director of Management Reporting & IR [2]

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Thank you. 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. Our latest results and investor presentation are available on the Investor Relations section of our website. Following these remarks, we will open the line for questions.

Before we begin, I'd like to remind you that comments made on today's call including responses to your questions may deal with forward-looking statements, which are subject to risks and uncertainties. These 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 this call. In addition, some of our remarks made today will include references to non-GAAP financial measures. You can find reconciliations to those measures to the most comparable GAAP measures in the earnings release.

I will now turn the call over to Eric Colson.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [3]

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Thank you, Makela, and thank you everyone for joining the call or reading the transcript. As in the past, I will use this second quarter call to discuss our talent-driven business model, which is core to who we are as a firm.

Artisan Partners provides a unique platform for investment talent. We provide stability, support, transparency, predictability and time. We are also extremely flexible. Established investors and teams evolve over time. New individuals and teams enter the markets with fresh perspectives, what they want and need changes over time. As a firm, our structure and culture allow for change while maintaining the discipline and alignment necessary to deliver for clients. In our earnings release, we reviewed three recent examples of the flexibility in our model.

Last year, Rezo Kanovich joined our firm to manage what is now the Non-U. S. Small-Mid Growth strategy. Rezo and his analysts operate within the Global Equity franchise, but they have control of their philosophy, process, research and decision-making. They own their strategy and at the same time collaborate with their larger group of like-minded peers without the responsibility of managing a larger entity.

Also last year, we evolved our Global Value team into two separate teams, Global Value and International Value. The division was driven by the build-up of high-quality talent, a good problem to have. To increase space for that talent to grow and thrive, we disrupted ourselves. We knew that consultants and clients would struggle to compare this reorganization to other industry examples, but that's because our structure is uniquely focused on managing talent over the long-term.

A third example of talent evolution within our model is Jason White on the Growth team. Jason joined Artisan out of the United States Navy in 2000. He was promoted to Associate Portfolio Manager in 2011 and Portfolio Manager in 2016. In September 2017, we launched the Global Discovery strategy with Jason as Lead Portfolio Manager. These are three very different approaches to optimize aim for talent. With Rezo, we assembled a team of established individuals and embedded it within the existing franchise to create a larger collaboration network while maintaining autonomy and the alignment and accountability that go with it.

With the Global Value team, we reorganized an established franchise creating space and opportunity for professional growth. And with Jason White, you see how our growth team has constantly built a platform for developing and unleashing internal talent. These examples are what we mean when we say our firm is talent driven. They demonstrate the flexibility that distinguishes us and which is increasingly important as our people continue to grow and develop and as collaboration models and preferences change.

Turning to Slide 2, when our firm was founded there were limited options for great investors who wanted to build a unique investment franchise without the non-investment distractions of running a business. Artisan provided an ideal home for these free agents. At the same time, open architecture allowed independent investment managers to efficiently access clients through intermediaries, fund marketplaces, DC plants, and institutional consultants. Having established our firm, we evolved as the investment world globalized and as investment talent and asset allocators sought greater investment freedom. Today, these trends remain relevant and important. In addition, we have added two new defining trends to the timeline, investment talent platforms and client outcomes.

Collaboration models are changing all around us, most notably in the gig and sharing economies where technology enables individuals to access vast networks and a nearly unlimited array of tools and resources. Today's environment places a premium on the value we can add for talented investors by operating our firm and investment teams as flexible high value-added platforms. We fulfill that role by providing stability, guidance and time, curating and validating talent, vendors and data, reducing transaction cost and distractions; and by creating an alignment and accountability between an increasingly short-term and transactional marketplace on the one hand and clients trying to solve for long-term financial outcomes on the other.

Today, we are pushing ourselves harder than ever before to think broadly about how we partner with and operate for talented investors, those at Artisan today and those who will join us in the future.

Before moving on, let me say just a few words about the client outcomes concepts. Clients are increasingly demanding more customized outcomes, which can include things like tax optimization, vehicle preference, alternative fee schedules, customized ESG and the like, but many of these trends we are still in the early stages. We expect to continue to evolve our business to align with those that are durable and fit with who we are as a talent-driven investment firm. You should expect to hear more from us on these topics as we move forward.

Slide 3 shows our investment performance. No slide better summarizes why we believe our talent-driven model works. Long-term investment results are strong across the entire firm. For 11 of the 15 strategies, the corresponding mutual funds ranked in the top 10% of its Lipper category since inception. Year-to-date returns across our growth, global equity and developing world teams have been exceptional on both an absolute and relative basis. In particular, the global discovery strategy has outperformed its benchmark by 1,359 basis points after fees and the strategies' corresponding mutual fund is ranked Number 1 of 141.

The Non-U. S. Small-Mid Growth Strategy has outperformed its benchmark by 1,083 basis points, after fees the strategies' corresponding fund is ranked 9 of 222 funds in its peer group. And the developing world team has outperformed its benchmark by 2,028 basis points after fees placing it in the top 1% of its mutual fund peer group.

As a reminder, in these materials we show value-added against each strategies' broad market benchmark. For several of our style-oriented strategies, many clients use a style benchmark to evaluate performance. At quarter-end, the value equity strategy was outperforming its value index by 184 basis points year-to-date and underperforming by just 7 basis points since inception. Likewise against its value index, U.S. Mid-Cap Value strategy underperformed by only 34 basis points year-to-date and outperformed by 199 basis points since inception.

Slide 4 shows how our investment platform has translated into AUM growth over time. For our investment talent, we think in terms of developing and growing over an entire career, 20 or 30 plus years. For our clients, we think about delivering results over a long time horizon through multiple market cycles. Accordingly, when we think about the growth and development of our business, we emphasize the importance of long-term time frames.

It takes time to build and develop an investment franchise and the path is never linear. If we create an environment in which talented people can grow and thrive and we deliver for clients, we are confident that our business will grow as well. It's also important to remember that the vast majority of long-term growth shown on this page is a result of investment returns, not net sales. That's what we expect and want, when we grow through investment returns we grow with our clients. Year-to-date, our strong absolute and relative returns for clients have translated into $19.2 billion of AUM growth. Approximately $4.4 billion or 23% of that growth represents returns we have generated in excess of broad market indexes.

On Slide 5, we have broken out the growth of our newest strategies and teams and compared them to our historical experience. In the aggregate, the new strategies and teams highlighted on this page have seen $2.7 billion of net inflows in the first six months of 2019. Their growth is tracking very nicely against the growth of our earlier strategies. In the early years, we take the time to establish the talent, process and track record that are the foundation for long-term success, like that shown on the prior slide. Each of the teams highlighted on this page is doing an excellent job building a foundation for long-term investment excellence and business growth.

Getting the hockey stick effect that some of our early strategies experienced often requires an outside event such as a change in asset allocation preference or a competitor blow up. Our new teams and strategies remain focused on building their franchises and delivering for existing clients. We are confident their businesses will continue to grow. Our talent-driven model remains at high demand. We will continue to build and execute on that model.

I will now turn it over to C.J. to discuss our financial performance.

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Charles James Daley, Artisan Partners Asset Management Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Eric. Financial highlights for the quarter and year-to-date are on Slide 6. I will focus my comments on adjusted results, which we utilized to evaluate our business results and operations.

In summary, we ended the June 2019 quarter with AUM of $113.8 billion, up 6% from the March 2019 quarter. Average AUM for the quarter was up 5%, which along with performance fees grew revenues 7% to $200.7 million. Expenses were flat compared to last quarter, reflecting higher variable costs and lower seasonal and occupancy expenses relative to the March 2019 quarter. Our operating margin improved 440 basis points to 35.3% and adjusted net income per adjusted share was $0.67, up 22% compared to the March 2019 quarter.

Results for the six-month period reflect lower average AUM, following the sharp decline in global equity markets in the fourth quarter of 2018. Average AUM for the six-month period was $107.6 billion, 8% lower than the prior year six-month period. Revenues were down 9%. Expenses declined 2%, reflecting lower variable expenses, which were partially offset by increased costs related to investments in occupancy, technology and an increased number of full-time employees. Our year-to-date operating margin was 33.2% in 2019 compared to 37.4% in 2018. And adjusted net income per adjusted share was $1.22, down from $1.53 for the same year-to-date period in 2018. Our Board of Directors approved a quarterly variable cash dividend of $0.60 per share, which represents approximately 80% cash generated during the quarter. Year-to-date, we have declared quarterly dividends of $1.15.

Assets under management and net client cash flows are on Slide 7. AUM at the end of June 2019 quarter was $113.8 billion, up $6 billion or 6% from the March 2019 quarter, basically flat compared to the June 2018 quarter.

Rising global equity markets and strong excess returns generated across our investment teams grew AUM $6.5 billion during the June 2019 quarter. This appreciation was modestly offset by $500 million in net client cash outflows. Client cash outflows in the quarter were largely in the non-U. S. growth and non-U. S. value strategies, as we continue to see client portfolio rebalancing as well as asset allocation decisions away from active international equity. These net client cash outflows were offset in part by net client cash inflows from new clients and additional allocations into the non-U. S. small-mid growth, developing world and global discovery strategies among others.

The June 2019 quarter-end AUM was essentially flat compared to the June 2018 quarter-end AUM, $114.2 billion, as net client cash outflows were almost entirely offset by market appreciation and alpha generation over the 12-month period. Year-to-date as of June 30, 2019, AUM grew 20% due to rising global equity markets and strong excess returns generated by our investment teams. This growth was partially offset by $1.6 billion in net client cash outflows.

Average AUM and revenues are on Slide 8. Average AUM for the June 2019 quarter was 5% higher than the March 2019 quarter and 5% lower than the June 2018 quarter. Revenues for the June 2019 quarter were up 7% than the March 2019 quarter, reflecting higher average AUM and $4.3 million of performance fees earned in the June quarter on accounts managed in our global equity and global opportunity strategies.

Compared to last year, revenues for the quarter and year-to-date were down, primarily due to lower average AUM. Our effective fee rate rose this quarter to 73 basis points compared to the March 2019 quarter as a result of performance fees earned in the quarter, offset in part by a slight decline in the mix of AUM by vehicle.

Operating expenses are presented on Slide 9. Operating expenses in the June 2019 quarter were flat compared to the operating expenses in the March 2019 quarter, reflecting higher variable incentive compensation and third-party distribution costs and lower seasonal and occupancy expenses compared to the March 2019 quarter. Compared to the same periods last year, quarterly and year-to-date operating expenses reflect a decline in variable incentive compensation and third-party distribution costs, and increased expenses related to investments in office space, technology and employees.

Details of our largest expense, compensation and benefits are presented on Slide 10. Total compensation and benefits expense as a percentage of revenue declined in the June 2019 quarter to 51%, compared to 53% in the March 2019 quarter, and were up slightly compared to the June 2018 quarter. The decline in the June 2019 quarter compared to March 2019 was due to lower seasonal expenses.

Equity-based compensation expense in the June 2019 quarter was slightly higher compared to the March 2019 quarter, as we recognize a full quarter of amortization related to our 2019 employee equity grant and was $3.3 million less than the June quarter of 2018 as earlier higher grant paid value equity awards fully vested.

Turning to Slide 11. Our operating margin was 35.3% for the June 2019 quarter, up 440 basis points from the March quarter. Compared to the June 2018 quarter, our operating margin was down 190 basis points, primarily due to lower average AUM. The impact of our increased investments in occupancy, technology and additional employees was offset by lower equity-based compensation expense. For the six months ended June 2019, our operating margin was 33.2% or 420 basis points below our margin for the six month period ended June 2018. The majority of this decline was the result of lower average AUM year-to-date and higher occupancy expense and relocation charges in the March 2019 quarter.

Trends in adjusted net income and adjusted net income per share were consistent with the trends in operating margin. Adjusted net income and adjusted net income per adjusted share were up 24% and 22% respectively compared to the prior quarter. Compared to the June 2018 quarter, adjusted net income and adjusted net income per adjusted share were 11% and 12% lower in the June 2019 quarter respectively. June 2019 year-to-date adjusted net income and adjusted net income per adjusted share reached down 20% compared to the same year-to-date period last year.

Slide 12 shows our dividend history since 2014. Our Board declared a quarterly variable dividend of $0.60 per share, which reflects approximately 80% of the cash generated in the June 2019 quarter. Year-to-date, we have declared quarterly dividends of $1.15 per share. As in prior years, we will consider the payment of a special annual dividend after the end of the year. That process involves assessing the current market environment, business conditions and any needs to retain cash for strategic investments or other corporate purposes. 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 cash dividends.

The balance sheet summary is on Slide 13. Our cash position is healthy and leverage remains modest. We continue to maintain $200 million in borrowings, $50 million of which matures on August 16. Subject to certain customary closing conditions, we expect to refinance the maturing notes with new notes maturing in 2027, bearing interest at 4.53%. We expect the covenants to remain the same.

In closing, we remain focused on executing on our model, provide our talent with the best opportunity to deliver results for our clients and investors over the long-term. From a financial perspective, this requires that we maintain a high variable cost structure and invest thoughtfully to support our business model. The results for the quarter year-to-date and over longer periods reflect this discipline.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Dan Fannon of Jefferies & Co.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [2]

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Thanks. Good morning. I guess, as you look at your performance and the strength that you're seeing year to date and on a longer-term basis, and then we look at flows, you're not necessarily translating. I guess, my question is on distribution and the resources that you have allocated to that part of your business, I you feel like there's enough -- there's more investment that needs to be made to kind of take advantage of what's happened in terms of the performance you have or if there's other changes that have gone on that maybe you could highlight that you're either working on or looking at to maybe improve the momentum in gross sales.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [3]

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Hi, Dan, it's Eric. Certainly the performance has been stellar year-to-date as well as for the long-term. And I think everybody wants to translate specifically the flows as the most success for an asset manager. And we think controlling flows, we think managing capacity and delivering excess return as we stated in the call, is aligning with clients as best as we can. When we look at from a flow perspective, we're going to maintain both disciplines of capacity and that also translate to a fee discussion. So there's a lot of opportunities that we could win with these performance numbers, if we want to play at the lowest fee spectrum. We have decided to play in the medium to upper fee perspectives and compete with clients that want a long term performance outcome that we present.

So the biggest negating fact right now is the fee discussion and you'll see it probably on a go-forward basis, is an uptick maybe on performance-based fees. I think they compete on a go forward or might be a little bit more flexible when it comes to the vehicle choice, which we have been adding some share classes to our UCITS. We've been adding some CITs to some strategies. And those are just more flexible delivery vehicles. I think in the future you might see an active ETF, the non-transparent ETF that's being discussed, that also provides a more flexible vehicle. And for some strategies, you could see a more model delivery or holding base delivery. So those would be the areas on a go-forward basis that may translate to more flows. But I would say, the number one factor is being more disciplined on the capacity and fee factors.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [4]

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Great. That's helpful. And I guess, just C.J. on expenses, just thinking about the remainder of this year, if there's anything that you would kind of highlight in terms of rate of change and then I know it's early, but 2020, like what's outside of compensation or kind of what's the rate of growth we should be thinking about for the other line items?

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Charles James Daley, Artisan Partners Asset Management Inc. - Executive VP, CFO & Treasurer [5]

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Yes, I think the previous guidance I've given on some of the categories remains intact. As you know, we had a occupancy charge in the first quarter of which uptick there. Our occupancy line item in Q1 and then this quarter, we had a little bit of double rent. So that's on target to be in the $22 million to $23 million range for full year, including those charges. And then communication and technology, I think we guided to 41-ish on a full year and as we know that fluctuates quarterly a little bit just with where projects are. And that guidance still remains on target. So really no upticks and it's -- so in 2020, I'd say, it's a little early. But at this point, we don't anticipate anything major that I'd be able to call out.

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Operator [6]

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The next question will come from Bill Katz with Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [7]

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Okay. Thank you very much for taking the question this morning and appreciate the slide that shows the glide path of some of the newer teams roll out to through some of the historical ones. So on that page specifically, I guess two questions. What do you think is driving the more rapid adoption of the newer teams and then as you sort of play that slide through and I'm speaking to Slide 5, what do you think is the end state for those teams? Because if you look at the -- on the right-hand side, that five years out the central tenets need generally about $5 billion per team. So it kind of skews, is it more just capacity for these teams now within your notion of trying to maintain alpha and fee rates? Thank you.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [8]

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Yes. Hi, Bill, it's Eric. I think we credit the earlier adoption in that first three years just to Artisan's brand in the marketplace. If you go back into some of those strategies, the mid-90s and we're just starting to build our presence. And it was primarily in the institutional marketplace, which usually required a three-year track record. Given the footprint of the organization now and its breadth into the intermediary space and financial advisers to broker-dealers, we're getting a bit more earlier adoption there. On the flip side there, I mentioned in my points there that the beauty of the institutional marketplace after the three-year track record and playing in the structured categories of the '90s and early 2000s of style and market cap.

Once you succeeded in that category, it was a fairly homogeneous marketplace. It create a rapid uptick. So that did I think mute some of the 3, 4, 5 year spikes that you might see in our current -- earlier newer strategies today. I would also say that these lines are by product, not by team. So some of these products today that are on the early stage are $10 billion, $15 billion, $20 billion products and then they roll up into the teams that have two, three, four strategies. So there's quite a bit of capacity within strategies as well as in teams to grow this out to the future.

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William R. Katz, Citigroup Inc, Research Division - MD [9]

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Okay. That's helpful. And then just one follow-up, thanks for taking all the questions. So you've mentioned a variety of sort of more flexible products. Presuming that on the pricing, but maybe that's not correct, so when you speak to greater flexibility, is that breadth of the mandate and/or how do you structure the fee rate? If you could just expand on that, that'd be helpful. Thank you.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [10]

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My primary point on that was the flexibility of the vehicle, the Mutual Fund 40 Act is a very rigid vehicle. When you think about how you operate with individual accounts, or how you operate with restrictions such as ESG factors, it makes it very difficult to operate and customized to a specific client. So the flexibility is across the spectrum of being able to have a end either platform or end solutions based provider taking into account tax are taking into account ESG. And so it's beyond price in my mind.

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Operator [11]

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The next question will come from Kenneth Lee of RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - Analyst [12]

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Hi, good morning. Thanks for taking my question. Just a follow-up one on the potential to expand distribution. I think in the past, you've mentioned potential areas to expand distribution include non-U. S. clients, registered investment advisers as well as wealth management platforms. Just want to gauge what the progress is in terms of expanded distribution within those channels and whether you would necessarily need to add some distribution capability in order to further access those channels. Thanks.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [13]

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Yes. We continue to look at expanding distribution outside the US, I think you've seen our assets and client base grow over the years. We think the product mix we have today fits very well for a global client. The distribution efforts outside the US, we continue to expand deeper into the intermediary and wealth channel and trying to partner with banks and various open architecture platforms primarily in Europe. We also are expanding into a broader footprint.

So we're not only going deeper, but we're also going broader into various countries. And so we will see additional resources be applied to non-US distribution and two forms, one will be a slight uptick in headcount over the next 12 months, but also a greater focus on using digital marketing to capture that broader client base.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Got you. Very helpful. And one follow-up if I can. What's the latest outlook in terms of potential for new investment team additions? Which strategies could be potentially interesting longer term? Thanks.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [15]

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Right. And right now we have nothing to announce on new strategies or teams. We always have an active dialogue with our existing teams of being mindful of talent percolating up within the teams or ideas they may have to broaden their degrees of freedom to provide alpha to clients. And that's our primary use of time. And in the external marketplace, we have a very active dialogue with a broad array of strategies. It's, I think, a very disruptive market right now when you look at trying to launch your own firm, the regulatory environment is making it difficult, the distribution is making it difficult, and Artisan has provided a very successful home for investors' careers. And I think the performance page highlights that success. And so we continue to see a pretty active flow of new talent knocking on our door. Thanks.

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Operator [16]

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The next question will come from Chris Shutler of William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [17]

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Want to follow-up on the sales pipeline. I was pleasantly surprised to see the International SMid growth see some separate account flows so quickly. Also Global Discovery, Global Equity, I think saw some separate account flows, which seemed to overdo given the really good performance. So maybe just, Eric, could you maybe talk about the sales pipeline for those products some more broadly?

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [18]

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Those strategies are all fairly early in their life cycle. We're pleased with the growth we're seeing. And the early adoption, I think it was mentioned earlier to see these early strategies growing at a slightly higher rate than we've seen in past strategies at this point in time. Really, the focus in these first few years is making sure that we have the right resources and the right foundation, so that we can deliver the numbers versus trying to run around the world and capture every asset out there to grow these as quickly as possible.

Our goal first and foremost is to make sure these teams have a solid footing that they have the resources to deliver alpha and if we deliver alpha, especially in a world today, where information is readily available, that assets will come, especially the right clients on the right terms. So, we're pleased that the growth of these early strategies and the separate accounts that you specifically, I think is -- we see as a positive in the marketplace right now.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [19]

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Okay. And C.J., just one quick one for you, the stock comp, could you give us your expectations for the back half and 2020?

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Charles James Daley, Artisan Partners Asset Management Inc. - Executive VP, CFO & Treasurer [20]

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Yes. I think we've outlined that in the past, but when equities calm, we'll see a bit of a down-tick in the next two quarters, because we do our grant in January and then there will be another grant in January 2020, which will add another layer of comp expense amortization. But there'll be a layer rolling off, so whether that's additive or subtractive of where we are remains to be seen based on the size of the grant and the value of our stock at the time of the grant when it's valued.

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Operator [21]

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The next question will come from Michael Carrier of Bank of America Merrill Lynch.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [22]

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Good morning and thanks for taking the question. I just have one. Most of the performance records in the newer strategies are impressive that you highlighted, particularly relative to the benchmark. Eric, I think in the past you discussed your different degrees of freedom as drivers. So just a few questions around that.

Can you provide -- some like attribution are maybe the drivers of the outperformance, whether it's between like sector or security selection within the benchmarks as well as away from the benchmarks. And then when you get away from the benchmarks, how do you guys think about managing either like concentration, risk, liquidity risk, just any of the things that are maybe different in these strategies.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [23]

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Certainly, the attribution is primarily coming from stock selection or security selection when we look across into the strategies. And you mentioned in the second part of your question with regards to concentration that more and more of our strategies see greater concentration in the Top 10 and Top 20 securities. And so we do see a much higher active share in our strategies versus the peer group that is by design that -- and we're seeking strategies that will be highly differentiated.

And in some cases, there's a security or two that goes out of region or goes out of market cap and we encourage that flexibility within the strategies. And with regards to your comment on liquidity, these are all liquid securities. We're not playing in the private markets and putting illiquid securities or private securities inside of a daily priced and liquid vehicle. So, the flexibility is really in the concentration side.

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Operator [24]

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The next question will come from at Robert Lee of KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [25]

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So just maybe real quickly trying to tie a couple things together. So in talking about some of the potential new product delivery vehicles and some of the incremental investments may be in distribution outside the US and as we think about that maybe over the next new year or so, how should we -- and maybe with C.J. following up to an earlier question, think about that if at all, as we think about kind of expense trends beyond this year maybe, into next year, should we still be thinking that, hey, just kind of inflation rates are reasonable growth rate or is there enough going on that maybe the additional upward pressure on expense levels as we look beyond this year and more of those things come online? And then just one follow-up question after that.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [26]

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Yes, Rob. It's Eric. I'll take the first part and give the second to the C.J., as you've seen in the past with Artisan is has a real view that we have to see a real durable distribution trend. And when we see that trend, we'll glide into that. We don't see distribution as a first-mover space. If you get the performance right, it's getting into the right channels into the right clients and that doesn't happen overnight. This is a relationship business at the end of the day. And so we'll glide into these vehicles and these two new territories as opposed to exploding into them and surprising anybody on any expenses, but I'll let C.J. hit the expense side.

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Charles James Daley, Artisan Partners Asset Management Inc. - Executive VP, CFO & Treasurer [27]

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Hey, Rob. I think inflationary pluses a little bit slight uptick in the areas that Eric mentioned is the way to think about it. I mean, we're talking about a slight uptick in headcount, not a major invasion into a region, where we're going to put a lot of boots on the ground and incur a ton of costs. We're also, during these periods, trying to be very mindful of expenses. So we're trying to manage as we always have balancing revenue generation with expenses. So that's typically been our philosophy and has served as well. So I think you'll see gradual upticks and until we're successful on the distribution side, we typically don't really put the infrastructure in place, so we can use a fly-in/fly-out model up until then. So the bottom line is, I think inflationary plus slight uptick, based on the areas that Eric mentioned.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [28]

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And just maybe a quick follow-up and kind of maybe the inevitable capital question, but do you look at some introducing new vehicles, different vehicles, also kind of like continued share creep. Any update on kind of maybe how you're thinking about capital usage. Will some of these vehicles, I know some distributors on some vehicles do require more seed capital and then -- if it's a new vehicle and do you see that increasing potentially use, and kind of maybe thoughts about why not -- particularly since the stocks, certainly well off it ties, but why not think about more kind of at least to buy back enough stock to immunize share account, because I guess with share creep you could kind of argue that it's kind of taking away some of the alpha generation from underlying performance as kind of shares keep creeping up.

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Eric Richard Colson, Artisan Partners Asset Management Inc. - Chairman, President & CEO [29]

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Rob, I think that the first part is, I think there's two questions in there. One on the use of capital for vehicles, we really try to work with our clients and partners on what's the right vehicle that's in demand for them. And if they have a demand, then we'll work with them to launch that and work with them on funding both with a modest amount of capital from artists and they're primarily coming from a client that's seeking that as opposed to launching an array of share classes in vehicles and hoping that prospective clients fund those vehicles.

I think we've seen a lot of funding of vehicles over the years by various firms that just languished there overtime. And really, we like to partner with clients and find out what are their needs. And if we have a massive uptick of adoption of an active ETF, then we clearly will start bringing that to market to satisfy those clients that want that vehicle. And that's how we look at launching new share classes or vehicles. So, I wouldn't expect a massive uptick in capital needs for vehicles.

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Charles James Daley, Artisan Partners Asset Management Inc. - Executive VP, CFO & Treasurer [30]

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Yes. In fact, we have more use of our balance sheet for seed investment now than we've ever had, and we keep that $100 million of excess cash on the balance sheet. And that's what we use to deploy for a seed when we need to. Back to your share repurchase question, we revisit this every so often with the board and each time we do, we sort of get back to, we like our current policy, and we value transparency and predictability. We value avoiding mistakes. We've seen a lot of mistakes made over the years in share repurchase programs, and we ultimately view our decision to grant equity to our employees as a separate decision apart from whether we should buy back stock.

And we, obviously, have an equity culture, always have as a partnership and it's important to us to continue to reinvest in the talent that drives the business. And then on the share repurchase, we like utilizing cash to pay a cash dividend. And if you extrapolate out, we're still running around at 10% dividend yield, which is quite attractive and we think goes a long way to supporting the share price.

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Operator [31]

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And ladies and gentlemen, this concludes today's question-and-answer session. And this also concludes today's conference call. Thank you all for attending today's presentation. You may all disconnect your lines. Have a great day.