Artisan Partners Asset Management Inc. (APAM) Q3 2015 Earnings Report, Transcript and Summary

Hello thank you for standing by. Welcome to Artisan Partners Asset Management Third Quarter Earnings Conference Call. My name is Roger and I will be your conference operator today. [Operator Instructions]. At this time, I would like to turn the call over to Makela Taphorn with Artisan Partners.

Thank you. Before Eric begins, I would like to remind you that our third quarter earnings release and the related presentation materials are available on the Investor Relations section of our website. Also comments made on today's call and some of our responses to your questions may deal with forward-looking statements which are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are presented in the earnings release and are detailed in our filings with the SEC. We undertake no obligation to revise these statements following the date of this conference call. In addition, some of our remarks made today include references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in our earnings release. I will now turn the call over to Eric Colson.

Thanks, Makela. Welcome to Artisan Partners Asset Management business update and quarterly earnings call. I'm Eric Colson, CEO, and I am joined by C.J. Daley, CFO. Markets continue to reflect short term uncertainty; I expect market volatility to persist producing long term opportunities for high value added investment firms like Artisan Partners. We have thoughtfully designed our firm and diligently execute our strategy including communication to minimize uncertainty about who we are and how we will behave in these market environments. On this call I want to discuss the quarter in relation to our long terms strategy, this quarter I’ll focus on thoughtful growth, if we create stability and build business value through volatile periods, we belief that our economic value increase overtime. In sometime C.J will take the lead and discuss our financial stability despite volatile markets. On slide two you will see that we finished the quarter with 97 billion in AUM, our lowest quarter end AUM since the third quarter of 2013. The decline during this past quarter was due to declines in equity markets worldwide and 1.3 billion in net client cash outflows. During the quarter net outflows from the strategies managed by our U.S. value team, continued to offset positive net flows from the rest our business. We saw 1.6 billion of net outflows from the U.S. value team's strategies during the quarter as the team's performance continued to lag in these amperes. We expect to continue to see attrition from the U.S. value team's strategies, however the team's approach to building a better, safer, cheaper portfolio has generated strong outperformance in prior period. We don’t want the team to sacrifice the integrity of its investment philosophy and profits in order to chase short term returns nor do we want to make any abrupt changes that would surprise the team for our clients. Before leaving this slide I want to make a more general point, while our total AUM maybe at about the same level as it was two years ago, Artisan is stronger and better positioned today. We have made significant investments in new and existing talent and we have expanded degrees of investment freedom. If you set aside the U.S. value team's flows over the last 24 months, our other teams have generated 8.3 billion in positive net flows for an annualized organic growth rate of more than 5%. I think that's strong evidence that there remains and will remain a very significant place for high value added active management within sophisticated clients and investors asset allocations. On slide three, we plotted the closing prices of the ACWI and VIX indices, each over the last 10 years, as you can see there is a lot of uncertainty in the market today, the uncertainty results from a number of factors including macro events, changing investor behavior and increasingly popular forms of investing such as high frequency trading, liquid alternatives and EPS. In this environment, we remain focused on who we are as a firm, and continue to make long term investments in our business, our variable cost financial model which C.J. will discuss allows us to remain focused on identifying long term opportunities and executing on those that are consistent with who we are. The launch of our developing world strategy is an example of our approach. Despite uncertainty in emerging markets at the beginning of 2015, we hired an experience portfolio manager with a history of delivering strong results and a mindset consistent with Artisan’s values, we launched the developing world strategy at the beginning of July, when the team was ready, we were trying to time markets or secular industry trends. While third quarter prove to the be worse quarter for emerging markets in four years, the creation of developing world team and the launch of developing world strategy are positive investments in Artisan’s long term business value that we made despite market uncertainty. While the upfront investment we made in the new team runs through our P&L, we view the upfront expenses as an investment in the long term value of our business, and we expect to reap the benefits over the longer term. On slide four, you can see our long term performance. As you know we look for faithfulness to the stated investment process, solid absolute performance and outperformance compared to peers and the index, as of September 30, eight of our 12 investment strategies that have a five year track record have added value relative to their broad performance benchmarks over the trailing five years, six of our eight strategies with a 10-year track record have added value over the trailing 10-year period. All of our investment teams remain focused and committed to delivering alpha based on their individual investment processes. Slide five is our standard business philosophy and approach slide that defines who we are, we are a high value added investment firm, designed for investment talent that thrives, make growth oriented culture. Today I want to discuss how our commitment to thoughtful growth is reflected in the way we manage our business. Given who we are, we are not structured to nor do we have experience in growing out high volume scale businesses like passive products or smart data offerings. We also don't consider ourselves a distribution firm, focusing on vehicle management such as [VTS] or liquid [alt mutual funds]. We focus on differentiated investment strategies that are well suited for sophisticated clients and investors. Our new investment strategies remain rooted in fundamental analysis but broaden the investible universe or allow for the use of additional security types, providing our portfolio managers with more tools to produce an outcome for risk profile. These strategies fit well within outcome and risk based asset allocations, a natural fit with our business model and allow for a high value added results, differentiated from exposure oriented strategies. Turning to slide six, on this slide we have unpacked Artisan’s revenue equation to help you understand how we think about growth, the equation is simple, revenue equaled units for us AUM multiplied by price for us fee rate. The simplicity of the equation can lead to a preoccupation with AUM growth, in particular, a preoccupation with client cash flows, positive net flows are critical, over the long term, but we’ve always shied away from placing importance on short term flow results, whether the flows are good or bad, we’ve always said, flows will be lumpy. We believe that focusing too much on short term net flows can lead to product launches that don't make sense, disregard existing clients and talent and unsustainable distribution strategies. To generate long term sustainable net flows, we stay focused on the levers lifted on the slide. Keep in mind that these levers works together and influence one another, for instance, talent produces alpha which generates and sustains client demand with unmanaged capacity to protect our team’s ability to generate alpha and preserve client trust, which we believe increases the longevity of our existing AUM and makes it easier to raise additional AUM when the time is right. One thing we can’t control is the market, obviously it has a significant impact on our overall AUM, so we've included it on this page. Because we can’t control markets we believe it is critical that we remain true to who we are. As our clients and investors and employees are impacted by shifting markets, it is important that they trust us to faithfully execute our stated investment strategy and business plans. Slide seven highlights our approach to talent. Our growth is a product of talent and driven by talent both existing and new, in the last few years. We’ve added two new teams founded by talented portfolio managers. Brian [indiscernible] founded the credit team, which launched the high income strategy over a year ago. Some may have thought at a period of historical and persistently low interest rates, with an inauspicious time to launch our first fixed income strategy, that’s not how we thought about it. We found a talented investor with a mind-set that was consistent with Artisan’s values. Like the Developing World strategy, we launched the high income strategy when Brian and his team were ready. Since the strategy's inception in April 2014, its benchmark index has return negative 2%. The Artisan high income strategy, which is differentiated from the benchmark to return positive 3.42% on a growth of fee basis. When I think about the high income and developing world strategies, I think about our development of the global, global opportunities and global equity strategies over the last 10 years. We designed and developed those strategies in response to the increasing irrelevance of issuers corporate domicile and to sophisticated clients demands for global strategies. Now those strategies are filing on all cylinders on a global equity and global opportunity strategies represents the core of our realizable capacity. With the high income and developing world strategies, we have continued to expand the greatest freedom and provide the team with tools and flexibility to manage risk and outcomes who will be patient and protective of alpha within a few years, I expect that those strategies will have transitioned into their full growth potential. Slide 8 is one of our standard performance slides. As a high value-added active manager outperforming in the season tiers is critical to our growth. Data on this page shows the long-term success of our talent and business model. At the end of the quarter, 87% or more of our AUM within strategy is generating alpha over the trailing 3, 5 and 10-year period and since inception. For the one-year period, our non-U.S. growth strategy trailed the MSCI EAFE benchmark by 4 basis points, which explains the lower percentage outperforming for the one year period. While we don’t focus on short-term performance, it’s worth noting that consistent with the strategies investment guidelines about 13% of the non-U.S. growth portfolio is allocated to emerging markets compared to no EM exposure for the MSCI EAFE index. Compare to the [indiscernible] U.S. index, which does including emerging markets, the non-U.S. growth strategy is outperformed by 346 basis points over the trailing one year period. The data on this page supports our high value-added proposition. As we continue to deliver value, we believe asset flows will follow, it will be lumpy and market uncertainty and industry trends may work against us for the short-term periods, but over a long-term asset growth should follow our long-term investment results. Slide 9 show the AUM history of our non-U.S. growth in global value strategies. We think about capacity we focus as much on managing the asset levels in our existing strategies as we do on launching new strategies. Managing capacity protects alpha generation potential, supports investment talent and builds client trust, each of which is critical to long-term sustainable growth. In September, we announced that we were closing the non-U.S. growth strategy in phases beginning in February of 2016. The stage approach works for the investment team and allows us to work with clients, consultants and intermediaries to slow the pipeline and close the strategy in a non-disruptive way. Closing the non-U.S. growth strategy should also allow the global equity strategy to continue to grow its assets base without impacting the performance of either strategy. The two strategies have a number of crossholdings. So the exciting growth prospects of the global equity strategy, one important factor in our decision to begin closing non-U.S. growth. This is similar to how we managed the stage closing of our non-U.S. value strategy back in 2010 and 2011. We began to limit flows into the non-U.S. value strategy in order to allow global value, the runway to grow without hindering the performance of either strategy. Less than two years after, we completed the non-U.S. value closing process, the global value strategy surpassed 9 billion in assets. Managing capacity at the team level and not just the strategy level helps protect alpha by allowing for appreciate asset growth. The non-U.S. growth closing process will impact flows. So will other factors like market uncertainty and performance. We don’t know with any precision what the results on short-term net flows will be, we’re not managing to that. At the same time that we announced the non-U.S. growth closing process, we announced the reopening of the global value strategy across pooled vehicles. The global value strategy went through a stage closing process in 2013 and 2014. Over the past year, the market environment has presented increased investment opportunities, meeting the global value team's criteria and the team was comfortable reopening to pooled vehicles. Reopening to pooled vehicles exclusively will help smooth the lumpiness of flows that is more common with separate accounts. That also mean that we don’t expect the reopening to result in large inflows that will significantly grow the strategy total AUM. Managing capacity the way we do may negatively impact short term growth, that's acceptable to us because we strongly believe that doing what's best for clients and investment talent will result in long term sustainable growth. Turning to Slide 10, you will see the diversification of our AUM, as with talent, alpha and capacity management, these distribution outcomes result from our deliberate and patient approach. Take for instance, our approach to distribution outside of United States, over the past two years non-U.S. AUM has grown from 11% of our total to 14%. More importantly over the last two years we have nearly doubled our number of non-U.S. relationships. We have expanded our affords in EMEA, Australia, Asia and Canada one step at a time. Non-U.S. Market remains a very significant opportunity for us. We believe we are well positioned both from a product and distribution standpoint, continue to grow outside of the U.S. and to do so consistently with who we are. Another long term opportunity for us is that the fine contribution market place, in a short term the opening up and reconfiguration of DC plans has worked against us because overtime, some of our strategies have grown to the point where any comprehensive reallocation would cut against us. The long term opening up of these plans to best of bred managers should work in our favor. Similarly, we are often asked about the currently proposed [DOL] rule, expanding application of fiduciary status. The proposed rule would not directly affect us, we already serve a fiduciary capacity and we always embraced our fiduciary responsibilities. By one comment on the specifics of the current proposal, we believe that changes that pushes financial advisors and broker dealers' further in the direction of acting in their client's best interest will increase the chances that our strategies are included in client portfolios. I will now turn it over to C.J to discuss our financial results.

Thanks Eric. Good morning, everyone. During the quarter global equity markets experienced significant declines in market values. The benchmark indices for the bulk of the AUM that we manage experience declines raising from 8% in U.S. mid cap space to 10% in the UT space. The AUM we manage was not an immune to these declines as we ended the quarter with assets under management of 97.0 billion down from 109 billion at beginning of the quarter. Given the significant sub-declines in the global equity markets this quarter and the impact on our financial results, I thought it would be a good exercise to review how our model performed in this significant down market. The five key elements of our financial philosophy are listed on Slide 11 of the deck. I want to focus primarily on three of them in order of informs to result this quarter. First is the highly variable cost structure built into our P&L, over 60% of our expenses are variable in nature, these include but are not limited to incentive compensation revenue sharing arrangements for our investment in distribution professionals as well as third party distribution payments to our intermediaries. In a market downturn such as we experienced this quarter most of those expenses automatically adjust with declining revenues and this allows us to maintain healthy margins. Second, with the discipline that is built into our P&L, we are able to maintain strong cash flows and a conservative and healthy balance sheet. We aren't forced to alter our execution of long term business goals because of short term market declines. Finally with high employee ownership and a practice of paying out a majority if not all of our adjusted earnings in the form of quarterly and special annual dividends, our key professionals are aligned both economically and strategically with our other stakeholders during periods of growth as well as during periods of market decline. Because of our financial philosophy despite uncertain market conditions, we have continued to invest for the long term with the addition of our seventh investing team, the developing world team and the continued to the build out of our credit team which now manages over $900 million on a year and a half since launch of its first strategy. With that backdrop I’ll move on to Slide 12 and our September quarter 2015 financial results. For the quarter AUM decreased 11% to 97 billion, the decline was primarily driven by the declines in global markets I referenced, as well as net client cash outflows of 1.3 billion. Average AUM decreased 6% quarter-over-quarter, revenues for the September quarter were 198.4 million down 6% from revenues in perusing June quarter of 2015 and in line with our decline in average AUM. Our adjusted operating margin for the September '15 quarter was 40.9% and consistent with our expectation given the decrease in revenues, we experienced during the quarter and the variable nature of our expense base. Net income per share on adjusted bases was $0.67 compared to $0.74 in the June quarter. For the nine months ended September 30, 2015 revenues were $613.5 million down 1% from revenues of $622.7 million for the corresponding nine months ended September 2014. Our adjusted operating margin was 40.5% for the nine months ended September 30th compared to 45.2% for the prior year period. On October 21st, our Board of Directors declared a regular quarterly dividend of $0.60 per share of Class A common stock, this is our fourth quarterly dividend of $0.60 in 2015 and represents the distribution of a portion of our year-to-date adjusted earnings. Slide 13 is review of our AUM, as Eric discussed during the quarter, the strategies managed by our US value team experienced $1.6 billion in net client cash outflows primarily from our US midcap value strategy and mostly from the Artisan midcap value mutual fund. Setting aside those net outflows, net client cash flows were generally positive, though modest across our open strategies. Our global value team strategies both of which were closed to most new investors throughout the quarter experienced a little more than $300 million of total net outflows despite strong one, three and five year performance. As Eric discussed on October 1st, we reopened the global value strategy to most new investors through pooled vehicles. Our midcap growth strategy which is also closed to most new investors experienced about $300 million in net outflows despite continued strong performance. As a reminder in November, the Artisan funds will make their annual income in capital gains distribution. Last year those distributions resulted in about $650 million of net client cash outflows from investors who chose not to reinvest their dividends. Based on our current estimates, we expect this year’s distributions to have a similar aggregate result. On slide 14, you will see that our non-US AUM was $13 billion down close to 8% from $14.2 billion last quarter and in line with AUM a year ago. The decrease in September 2015 quarter was due to market depreciation offset slightly by net client cash inflows. Non-US AUM represented 14% of our total assets under management. Looking ahead we continue to be encouraged by interest in our global equity strategy managed by our non-US growth team and our global opportunity strategies managed by our growth team. In addition, our two new newest teams are off to strong starts as they build their performance track records, the credit team, which [launched with] high income strategy in April 2014, now manages over $900 million, our newest strategy developing world launched in July 2015 and has surpass $100 million in AUM in just a few months. This level of AUM is encouraging but our primary focus has been on supporting the team as they work to develop a strong performance record. Our financial results highlight begin on slide 15. During the September quarter, our revenues decreased 6% to $198.4 million consistent with the 6% decrease in average AUM, our average of management fee rate for the quarter was 75 basis points down just slightly from June 2015 quarter. For the nine months ended September 30, 2015 revenues were $613.5 million an average AUM of $108.2 billion which is down 1.5% from revenues of $622.7 million on the same average AUM for the nine months ended September 2014. Asset mix has shifted slightly away from food vehicles resulting in a lower weighted average fee rate for the recent nine month period, by a little over a basis point. Slide 16 is our adjusted operating margin, which excludes pre-offering share based compensation expense and was 40.9% for the current September quarter compared to 42.1% in the June 2015 quarter and 44% in the September 2014 quarter. Margin was negatively impacted primarily by decreased revenues offset in part by lower operating expenses primarily those that are variable and adjust with revenues. Adjusted net income for the September 2015 quarter was $49.2 million or $0.67 per adjusted share, which is down 9% from the preceding June quarter. For the nine months ended September 30, 2015, our adjusted operating margin was 40.5% down from 45.2% for the nine months ended September 30, 2014. The decline in margin was largely driven by investments in existing talent through equity compensation and our investment in the new developing world team in the March quarter of this year, offset in part by a decrease in third party distribution expense. This translated into adjusted earnings per adjusted share of $2.06 down 15% from $2.41 for the nine months ended September 30, 2014. A break up of compensation expenses on slide 17, this quarter we have separately broken out the salaries and cash incentive compensation, this should help demonstrate the variable nature of our largest expense incentive compensation. As you can see incentive compensation was down for the September quarter and as a percentage of revenue was just slightly higher reflecting the fact that the majority but not all of our incentive competition varies directly with revenues. Equity based compensation expense which we’ve also broken out increased in the September quarter compared to the June quarter due to the annual true-up of our estimated expected [indiscernible]. As a reminder, our current equity compensation expense represents the amortization and employee equity grants that we have made since our IPO. These awards which we view as an investment in our business will continue to amortize up the remainder of the amortization period which is generally five years from the original grant date. We expect to make additional annual grants of equity in January of each year subject to Board approval. Lastly, our compensation expense continues to include the amortization of pre-equity compensation which we adjust out of expenses when calculating our adjusted operating margin and adjusted earnings per adjusted share. Slide 18 shows our balance sheet highlights. Our balance sheet remained strong of a healthy cash balance and modest leverage. Borrowings of $200 million are supported by strong earnings and cash flows and our leverage metrics remain very strong. The last slide summarizes the quarterly dividends we paid since our IPO in March 2013. On October 21st, our Board of Directors declared a regularly quarterly dividend of $0.60 per share of Class A common stock payable in November 30, 2015 to shareholders of record on November 16. Consistent with our dividend policy after the end of this year, we expect our Board will consider paying a special dividend taking a consideration our annual adjusted earnings, business conditions and the amount of cash we want to retain at that time. The financial philosophy we follow today is much the same as the philosophy instituted upon the founding of the firm in 1994. During periods of volatility like the quarter we just experienced, we strive to reduce the impact of volatility on our results and our stakeholders. While we cannot control markets, we can and do attempt to run a business and financial model that will yield predictable outcomes. As Eric stated earlier in times of uncertainty, our clients, talent and investors should know that we remain committed to our business and financial philosophy. We look forward to your questions and I will now turn the call back to the operator.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Michael Carrier from Bank of America Merrill Lynch. Please go ahead.

Thanks a lot. So one question on, I guess to the combination of flows and distribution something that you hit on your prepared remarks. So when you look at the net flows for the quarter particularly ex the value price, it's still help up relatively well despite a pretty tough backdrop to the industry. And just want to get a sense of where you’re seeing the demand for those products meaning by distribution channel and when you look at outside the U.S., you mentioned expanding the distribution there. Is the interest in these types of products, do you see any more interest versus in the U.S. or pretty similar just more opportunity just given that you're relatively small news channel?

Sure Michael, it has been a tough environment for active managers and I think ex the U.S. value team we’ve held up very well as you mentioned with positive flows across the other teams. I’ll go in reverse order a little bit, outside the U.S. has been strong for us, particularly because of the comments I made about our global strategies, the global opportunity strategy and the global equity strategies in our mind right in the realizable capacity or realizable flow, which means their clicking on the criteria for institutional clients a proven track record, having a minimum asset threshold have a stable team, residing a strong organization that has a good operation. So we would continue to see strong interest in our global strategies and with the reopening of global value and pooled vehicles that just enhances our position overseas. In the U.S. we’re still waiting to see the switch from the strong trade and non-U.S. strategies are easy oriented strategies to global. We have good capacity as I mentioned in global, but the transition has been a little bit slower than we’ve anticipated going to [EBIT] to global. And with regards to the U.S., the broker dealer and financial advisor that we call the intermediary channel has still seen flows to the non-U.S. and has been tracked an area for us.

Okay, that’s helpful. And then just as a follow-up. C.J. just on the expense side. I think you were pretty clear on just a variable in the nature. Some of the investment that have been made and some of the new teams, just wanted to get a sense is the run rate pretty accurate right now and then for N16 we’re still seeing new outflows and markets are still pretty volatile. Where are the levers that you can look to try to manage in this recent volatility?

Yes, thanks Michael. With respect to expenses yes, this quarter we have a full run rate of investments in our new teams, I think I initially gave guidance [indiscernible] developing world that it will be somewhere around a million and a quarter to million and half of quarter and that’s been fully baked in the last two quarters. The beauty of our operating model is the levers are really built into the model -- the arrangements with the investment teams and our distribution compensation is formulaic and adjust with revenues as I mentioned. And then some of our other expenses discretionary bonuses, we do have levers there but they are not nearly as meaningful and then our FX expenses such as headcount and our technology spend we are committed to continuing to invest in those areas for the long term but just to reiterate the major drivers are the ones that are built into our model.

And our next question comes from Bill Katz with Citi. Please go ahead.

Hi this is actually Ryan Baillie filling in for Bill. I guess one of our questions that we had was what sort of products to teams you looking to add to a platform over the near term, is there anything which you are looking at in particular and then what sort of conversations you are having right now?

Hey Ryan, it's Eric. The product and teams that we look at are heavily dependent on the talent that we find in the market place, so as we said on past calls that we don’t have a predetermined view that we need to bring on an asset allocation product or anything on a long short strategy or on event driven or a core plus fixed income, there is a whole slew of strategy that we will be open to. I think in general the strategy that we've watched with high income and with developing worlds are the type of strategies we are looking for and those types would have a much broader definition of an initial universe of ideas not vetted to an index so something like a developing world that’s redefining what emerging markets universes look like instead of being beholden to the MSCI emerging markets index. Developing world is looking at companies that have revenue tied to the emerging markets story or as we said in the strategy that's tied to domestic demand in emerging markets. We are on the backend of the strategy of having a much broader use of various security types as opposed to just being vetted to a high yield bonds or corporate bonds or high income strategy utilizes an array of securities whether it's bank loans, bridge loans, revolvers, credit [indiscernible] swaps that when youto have an array of securities that help manage either risk or an outcome and those are types of strategies that are appealing to us, because they arehigh value added, they arecapacity constrained, they are not competing on price or volume and those are the areas that we're most interested in.

Got it. And then just one quick question from model, how should we think about G&A expense going forward [I think] you get a fluctuate little bit this last quarter so just wondering how we should think about that, is it kind of a run rate level or?

Yes I would say generally G&A fluctuates a little bit typically summer months are low travel. We have been averaging around 6.7 million a quarter, I think that’s for modeling purposes is accurate as I guess as we could give you.

And our next question comes from Alex Blostein of Goldman Sachs. Please go ahead.

Great, good morning everybody. Question for you guys around non-U.S. growth strategy, so clearly a little bit of underperformance year to date as you highlighted, I am just curious to hear what the reaction has been from various channels given the fact that the track record is still clearly quite strong. I am just trying to assess any risk of redemptions for maybe some of the shorter term money that might be associated with that product?

Sure Alex, this is Eric. The returns in the non-U.S. growth strategy have been strong over the three and five year and since inception so it's a good end points for the strategy, the current year has been underperforming the EP index [analytics] on the prepared remarks talked about how it's performed versus the MSCI, [indiscernible] index ex-US we outperform, so it's a little bit a mixed bag. I won't call it negative this year and the bulk of the opportunities that we look are in the institutional world or have an institutional process, they are looking at much longer time periods and various end points. The overall asset base has a little bit of a retail in it that could be defined as short term money, but we haven't seen any negative in the asset base, over the last few months.

Got it, and I guess just a follow-up to your point on the benchmarks, a majority of clients that are in the product looking at results relative to equity ex-US or MSCI EAFE?

I think most of our clients know that we’re a high value added manager, which means that we're active, which means that we design a strategy regardless of how an index is constructed, so most of our clients take a holistic view at our strategy versus an EAFE strategy versus an MSCI, ex-US which include emerging markets, some clients also use in the short term style oriented strategies to get a gauge how our strategy is positioned in the short term, but I think over longer time periods, and your goals to perform the broad market, whether EAFE or MSCI, ex-US at the end of the day if we don't outperform that over a long period, then we will be at risk.

Okay. That's helpful and then C.J. just a follow-up for you. on the capital manager strategy, any thoughts around share repurchase, share given, little bit of [indiscernible] from RCUs but also fairly attractive valuation of pretty big dividend yield so just kind of curious how are you thinking about the trade-off between the 100% payout that you typically try to achieve with the special dividend at the end of the year versus maybe using some of that for share buybacks?

Yes, Alex, I don't think our views have changed on that, we’ve historically paid out all of our earnings, it's been a primary return that a large group of our shareholders, our employee partners have realized over the years, and while evaluation is attractive our employee partners still, while we have limitations only not of equity they can sell, so we’re still 70% plus owners of what we owned at the IPO, so there is a high employee ownership, so I would expect we would continue the cash payout philosophy for the foreseeable future.

And our next question comes from Surinder Thind of Jefferies. Please go ahead.

Hi guys, I’ll start off with a question around the global value product and kind of the reopening of that fund, kind of how do you guys think about the incremental capacity there, at least how does the team think about it in that sense that AUM levels are in fact really different from when the product was first close or closed last time and so is this simply more a matter of that the investment team sees a much bigger opportunities at this point, versus last time?

Yes, Surinder this is Eric. In the global value team, we’ll see a better opportunity in the market place and so the discount in their portfolio has widened to more attractive entry point, and that attractive entry point is probably the primary driver, we’ve also seen some attrition in the overall book there, given the strong performance, the stability of the team on the proven process, and we feel that there is room to add few clients but not be disruptive and we have the same phenomenon in the midcap row strategy too, you see those two strategies, have all the realizable capacity criteria and you are going to get a little bit of attrition there and over the long run, if we maintain those key criteria for realizable capacity, we’ll have opportunities to position this correctly and this just happens to be a moment for the global value team to provide an opportunity to get back into the market place for a little bit, if we see the gap close and the discount of portfolio or sudden change in assets that would be disruptive, we'll continue to manage capacity in the best interest of clients and performance.

Okay. That's helpful and then quick question for C.J. here, just kind of on the fee rate, you did provide some color on kind of the step down, but if we kind of break down the fee rate into just looking at the separately managed accounts, there was like a meaningful step down in 3Q last year and again there was a meaningful step down this quarter as well, now is that simply a mix issue, given that estimated accounts for more heavily weighted towards like international markets which underperformed during those periods or is there something else that ongoing fee negotiations or anything else that we should be thinking about?

Yes, there is an opportunity for performance fee in the second quarter so if you are looking second quarter to third quarter, there is a slight performance fee in there, other than is really just, it's just fee mix, it’s AUM mix .

And our next question comes from Eric Berg of RBC Capital Markets. Please go ahead.

Hi. This is actually [indiscernible] for Eric Berg. Thank you for taking our questions. Our first one is related to the global value strategy which has continue to produce solid returns against benchmarks, yet it continues to be in outflow mode for five consecutive quarters now. Eric you mentioned that this was the result of institutional rebalancing during your June quarter call. Does that continue to be the case and what is your outlook for the global value influence?

Yes. We definitely would see that as rebalancing of institutional accounts. We would continue to see some rebalancing but given that we’ve opened up the strategy to pool vehicles, our expectation that we would mitigate some of that rebalancing over the near-term. But the main reason for reopening I would reiterate is because of the discount in the portfolio.

Got it, okay. That’s helpful. And then our next one is related to your U.S. value business. While we understand that you take a launch of orientation, your investment approach, we also know that the market does demand fund managers produce good performance numbers over the short term as well. So can you just provide some more details on some of opening remarks as to your outlook and what steps are being taken into potentially engineer to return the value in this business?

Sure. It’s very, very hard to engineer a people business, I know many people think of asset management as a manufacturing and distribution business. And by no means do we think of our people businesses as a manufacturing business that can be engineered in a short term period. The investment team has a very deep-rooted philosophy looking for fear and uncertainty in the marketplace and they’ve designed a portfolio as better, safer and cheaper. In various time periods this strategy has performed exceptionally well and there is also periods such as now as similar to the TMT bubble back in the late 90s that created an end point that questions the viability of this strategy. But the strategy is very well rooted in value and that has a proven record. Our goal as a firm is to properly resource this group, reinforce the discipline, so that we become highly predictable to our clients and not surprise them. And at this point in time, the momentum factor has been so dominant over the last one year and three year, to just give you an example on the one year period in the Russell Midcap Index if you took the top quintile versus the bottom quintile of the Russell Midcap, the spread of return there was about 78%. So the bottom quintile produce a negative 42% and a top quintile produce a positive 36%. If you squeezed towards if there an uncertainty that you’re going to have a pretty extreme out come on the negative. And these factors and cycles rotate overtime and we fully expect that to rotate as long as we stay disciplined we won’t be [whipped]. So we are working with our investment team quite heavily. But unfortunately engineering a short-term outcome is not in the cards for the current period.

And our next question comes from Michael Kim with Sandler O'Neill. Please go ahead.

Hey guys good morning. First just a follow-up on the discussion on increasing like penetrating the non-U.S. institutional channel. Just curious to get your thoughts on more recent flow trends for global equities in light of some of the moves from select sovereign world funds and whether you view the current shift as maybe more of an opportunity from a manager replacement standpoint if you will, overtime?

Sure Michael, this is Eric. There has been news obviously out there that sovereign world funds have been pulling back some of their equity exposure in the marketplace, I think there is two or three that I've read. I don’t think that’s impacting the flow trend in the marketplace that we see, we continue to see good interest in demand for our global strategies. Unfortunately it remains in that larger asset category or large mandate category which creates concentration in specific strategies and also creates pressure on fees as well. So we’re going to be selective looking for the right clients on the right terms that set our model, but the interest remains high in what we’ve seen.

And then just to follow-up, I know each situation is a bit different. But just wondering if historically you’ve seen any co-relation between maybe market volatility and the availability of investment talent and related to that, if you could maybe just update us on what you are seeing in terms of the environment and in terms of availability? Thanks.

Yes, I don’t have any historical data to look at pure market volatility and talents and I think our premise is there is always dysfunctionality in the marketplace somewhere with various firms whether volatility is in place or not is a behavioral trend encourage that allows us to capitalize on talent availability, but I wouldn't link it directly to market volatility. And currently the asset manager business is quite healthy, there is little bit of volatility but if there is a major downturn, there you do see some talent percolate up, because we might saw that during the '08, '09 period we had a lot of discussions, but I don't know if it's tied purely to volatility.

And our next question comes from Chris Shutler of William Blair. Please go ahead.

The global equity strategy seems like a very good opportunity there given the performance and you alluded to the success that you had in global value after you closed non-U.S. value several years back, maybe just Eric, compare and contrast those two situations a little bit more and I ask frankly because the global equity team has had very good performance for a while, I know there were some -- there was a turnover issue there a couple years back but I think we've seen less than 100 million of flows in the last 12 months and it's a really competitor category, so just help us compare and contrast those two situation? Thanks.

Sure Chris, each team has slightly different and each point in time is different and we've seen that over the years how our teams have evolved with the global value and international value team came on when the wealth platforms were changing from more of a commission base to a fee based and so they have a skewed asset base towards the intermediary channels say versus our growth team came online when open architecture inside of DP plans were occurring in the early 2000. So there is combination of what's going on in the marketplace and the type of strategy, the global equity strategy just hit its five year record. I don’t expect the same outcome as global value where once we closed international value, the pickup and demand just moved to right to global value, I think that was a fortunate outcome for us, our expectation is that the international equity strategy has been predominately a U.S. oriented story in the intermediary space, we don’t see the intermediaries gravitating to the global equity in a direct way, so I think we're just going to be out there with institutional consultants and position in the strategy with clients overseas, but we don’t have the same expectation that happened in global value, if it does occur, we're fortunate but I think that was just a point in time.

And our next question comes from Robert Lee of KBW. Please go ahead.

Thanks and good morning guys, I guess my first question would be understanding Eric that the distribution oriented firm and not try to kind of bring out the hot part of the day to quarter but that being said as you have added a credit team you have more capabilities within your group managers. I mean is there, any potential or thought to how you can start maybe combining strategies from different teams into well-constructed products that you think to be receptive and if so how do you kind of manage that in half?

Yes Rob, [indiscernible] year as we thought about how we could combine various strategies and create an outcome but as we get down to the market place and see where clients are moving towards a solution based or outcome based approach. We think it's best that that specific client or consultant design the outcome and we will provide the investment strategy in its purity as opposed to manufacturing a solution and so I think it's best to put that in the end client or the firm that is best designed to create a solution. I think we’re best designed to find talent, how is that talent and resource [some that precludes] the result as opposed packaging the solution and so we’re very much attentive to what we’re best at and how we can compete, and that believes to back some of the trends that if we are not organized and structured to compete in a volume business or in a competitive fee environment or a solution, this marketplace is way too competitive just to do it to get exposure in a market place, so we definitely see that that should be put on to other solution providers.

Okay. And I know you commented earlier on the environment for new teams. I'm just curious, as you think about -- and with the premise that you don't want to add teams that duplicate other teams. As you think about adding types of asset classes or strategies that you would like to over time if the right team or person is available, can you maybe update us on your thoughts there? I guess I'm specifically curious would you ever consider going down more of a quantitatively oriented investment strategies and teams versus kind of the more fundamental orientation of all your teams?

Yes, certainly, I think with our exposure overseas and our name getting out more and more overseas, we are starting to see investment teams in different geographies and we’re very much open to a variety of strategies, like there is quite a few quantitative strategies that are well rooted in fundamental analysis to provide a high value added outcome, we certainly have met with teams in the past and continue to meet with teams that would have a quantitative orientation, and so we will definitely be open to those strategies.

Okay. And I appreciate your taking my questions. Just one last one. Again, understanding you're not looking to roll out the next gimmicky product or anything, but just kind of curious on your take. Some of our peers have agreed to license the -- assuming it gets up and running and some acceptance -- the Eaton Vance ETMF structure. And given whether they maintain and can deliver for active managers in terms of lower costs, less whatever it may be, just kind of curious your take on that structure and if you think that is ultimately something that has -- would have some interest for your managers. Or do you not think that its perspective benefits are really what it may be cracked up to be?

We are open to a variety of vehicles, mutual funds, you said, collective investment trust, if there is -- a demand occurs and ETFs or the net share platform, whatever vehicle that comes into the interest of sophisticated institutional clients and there is demand and client is asking us to provided in that structure, we will certainly provide that. And I think there will be in the future, I remain to be seen there if that's what clients really want in their active management strategies.

And the last question is Bryan Sullivan with Credit Suisse. Please go ahead.

Thank you for taking the question. The first question I have is I know you said you don't plan to make any changes to the value strategies in order to preserve the process and you don't want to surprise clients. But are you making any -- have you started conversations on having concessions on fees or any other areas to keep the clients engaged? And the follow-up for that is has the funds been put on any strategy watch lists due to the poor performance near term? Thank you.

Sure Bryan. On the fees we’ve remain discipline, the very slippery slope going to fee concessions related the short term performance, this clearly is an end point driven return pattern with some dominant factors in the market place. So we haven't made fee concessions and we certainly have been put on watch list given the outflows we’ve seen clients have made determinations to find other alternatives which we’ve seen with the $1.6 billion in outflows this last quarter and with that you are on watch list with various platforms and clients. Some of those are just strictly mechanical, but there is written rules in their investment policy statements that automatically put you watch list and then there is a subjective overlay and our main focus is the client service and setting proper expectations for those clients, so they understand where we're at on our performance cycle, but I fully expect beyond most watch list, given the performance.

Okay, great. And then just one quick follow-up to kind of go the other direction here. I think you, Eric, you threw out a figure earlier the call that some of the other strategies, ex-US value, were growing at a 5% annual organic growth rate. I'm not sure if I heard that correctly, but that's pretty impressive, given the industry backdrop. And what I'm really trying to do is isolate the strategies with realizable capacity. So I know you've given some color in the past based on that metric. Can you give us some color there in terms of organic growth rate and how you view realizable capacity in some of the growing funds? Thanks.

Sure. We had a 5% over the last 24 months and the other strategies and with regards to realizable capacity. There is before we look at that criteria, what strategy have a five year track record, which one have a minimum asset threshold to be included in the majority of searches which one have stability of the investment team and a proven process. And use that criteria that high hurdle rate which we like begin into institutional clients or sophisticated clients it provides a longer duration asset to our business as oppose to the hard short-term money. And using that realizable criteria in certainly global opportunities is one of our key strategies in the marketplace. The non-U.S. growth strategy is in that sweet spot right now but we’re obviously managing flows over the next year. Global value clearly that list there and approval vehicle capacity. The global equity strategy just hit the five year record have lower 700 million in the strategy. For a larger mandate that 700 million may not need the asset threshold for a search, but it’s getting into that realizable capacity on a broad basis probably over the next year. And I think closing of the non-U.S. growth strategy will help that global equity strategy as a whole. And then the earlier ones coming online which is developing world in high income or in their [indiscernible] stages, are you getting the new adaptor money as oppose to the realizable capacity have a three year record or that minimum asset or that proven history with the firm. But in a year or two both of those will come online into that realizable capacity we can continue the access return.

Got it. And given, I mean given Bryan and Lewis’s 10-year in the investment community. Do you see any institutional pick-up or interest from consultants on their strategies or you think you need to wait for the three year threshold?

For true realizable capacity, you have to wait for the criteria. The unknown is the level of or the number of early adopters that would come and because of Lewis’s and Bryan’s history and track record in the marketplace. We don’t predict that or assume what that number will be; I think it could be a little higher for the developing world. If you didn’t have a negative 17%, 18% in emerging markets for the quarter.

And this concludes our question-and-answer session. I like to turn the call back over to our management for any final remarks.

Thank you, everybody, for your time. I’ve always said I know time is a valuable asset and clearly with the volatility with demand on all of our businesses that we have make choices on time and I appreciate it everybody dialing in this quarter. Thank you.

Thank you, sir. Today’s conference has now concluded. We thank you all for attending today’s presentation. You may now disconnect your lines.