Welcome to Artisan Partners Asset Management fourth quarter earnings conference call. My name is Laura and I will be your conference operator today. [Operator Instructions]. After the prepared remarks, management will conduct a question-and-answer session and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to Makela Taphorn with Artisan Partners. Please go ahead.

Thanks for joining us today. Before Eric begins, I would like to remind you that our fourth quarter earnings release and the related presentation materials are available on the Investor Relations section of our website. Also the 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 the earnings release. And I will now turn the call over to Eric Colson.

Thank you Makela. Welcome to Artisan Partners Asset Management business update and earnings call. I am Eric Colson, CEO and I am joined by C. J. Daley, CFO. On this call, I want to discuss the performance of our investment strategies, asset allocation trends and our positioning for future growth. After I am done, C. J. will discuss our fourth quarter and full year 2015 financial results. Let me begin by taking a minute to discuss the market volatility we have seen so far in 2016. As we reported yesterday, during January our totally AUM declined by 8% from $99.8 billion to $92 billion primarily as a result of declines in equity markets. As I have discussed before, our firm was consciously designed with market volatility in mind. Our flexible expense structure is a key part of our business model. Majority of our expenses fluctuate automatically with changes in AUM and revenue. As AUM and revenues decline, our investment team bonus pool also decline. This has two important benefits. First, our investment professionals understand in advance how market volatility will affect their compensation. They know what to expect when market drive down AUM and we don't have to renegotiate compensation or set new expectations. This predictability creates a more stable environment in which our investment professionals can do their best work. Second, because the majority of our expenses automatically adjust, we can continue to focus on our long-term business objectives. We are forced to revisit or depart from our business plan. In fact, we believe market volatility generates long term opportunities for our business as well as for our investment team. Over the past 15 years, we have experienced 18 monthly periods in which assets declined by 5% or more. We don't know whether last month's market declines will prove…

Thanks Eric. I will start with a reminder our financial philosophies which are on slide eight. These philosophical principles guide our actions at all market conditions. And while recently markets have acted with uncertainty and volatility driving our AUM down and ultimately lowering our revenues and profits, our actions have and will continue to be consistent, transparent and guided by these philosophical principles. Slide nine begins a review of our results for the quarter and calendar year ended December 31, 2015. For the quarter, AUM rose 3% to $99.8 billion, primarily through market appreciation, half of which was offset by net client cash outflows of $2 billion. For the year, AUMs increased 7% due to net client cash outflows of $5.8 billion and market depreciation of $2.2 billion. As Eric mentioned, in both the quarter and full-year, we continues to experience net outflows in our U.S. value strategies as a result of extended underperformance. We also experienced net outflows in several other strategies as a result of institutional asset allocation decisions away from active equities into solution based products particularly in the DC space. On the plus side, absent the outflows in our value team, demand for our global products particularly from clients outside the U.S. resulted in positive net client cash flows for rest of the firm. We expect to continue to see demand for these products in 2016. Average AUM shown on page 10 decreased 3% to $101.4 billion for the current quarter when compared to the previous quarter and 5% when compared to the December quarter of 2014. Revenues, which are the product of average AUM and fee rates, decreased 3% to $192 million from last quarter and in line with the decrease in average AUM. When compared to the same quarter a year ago, revenues decreased…

[Operator Instructions]. Our first question will come from Michael Kim with Sandler O'Neill.

Hi guys. Good afternoon. First Eric, I know you highlighted your commitment to differentiated act of management. But just given the ongoing market share gains for ETFs more broadly, can you just update us on your thoughts as it relates to actively managed ETFs and some of the different options that are available out there or might become available down the road?

Sure Michael. Let me add, that vehicle has been extremely popular in the marketplace for passive strategies and you are starting to see in the marketplace some interest on actively managed ETFs. We are still in the camp waiting for clients and demand to come to us as opposed to the build it and hope they come model and if our clients and the prospects are coming to us and wanting that packaged in a different form outside of a separate account or a mutual fund or collective investment trust or ETF, we are open to creating a vehicle if demand is there. But right now in the asset management space, given the current rules of disclosure, we have not seen that interest.

Got it. That's helpful. And then maybe for C. J., I know roughly 60% of the expense base is variable, but just given sort of the reset in AUM and revenues, has the thinking shifted at all as it relates to investment spending? Are there areas you might be able to dial back on or delay to some extent just to support profitability in the near-term?

Yes. I mean as you know, you mentioned 60% of our expenses are variable, so they adjust automatically, but there are other levers. We have been investing in technology, distribution efforts and equity based comp for future growth. And right now, we are not going to react to one month or a month-and-a-half of AUM declines, but we will keep an eye on it. And there are some minor levers that we can pull, but the majority of the levers are already built into our P&L which is nice because we don't have to take action.

Okay. And then just one modeling quick question. You mentioned $3 million to $4 million seasonal step-up in the first quarter. Just want to make sure that is specific to the comp line. Is that correct?

Yes. It is. It's basically FICA reset, 401(k) matching contribution reset that we fund our health savings accounts, a portion of that in the first quarter. So yes, that's on the comp line.

Got it. Okay. Thanks for taking my questions.

And the next question comes from Bill Katz of Citi.

Okay. Thanks very much. I appreciate you taking the questions and the call is very helpful. Just can we start on that last question? Just from a modeling perspective, sorry to be so fine tuned on the first question. Is that sequential increase? Or is there first the mechanism of AUM are lower, therefore your base compensation would be a little bit lower but then offset by the seasonal pickup?

Yes. It's the latter, Bill. It's incentive comp will adjust down with lower AUMs and then that would be offset by the higher seasonal.

Okay. Thanks. So on the dividend policy, thanks for addressing that, could you talk a little bit about, I hear you all show the special and the balance sheet liquidity, could you talk a little bit about the type of payout that you may be targeting if you were to address the dividend?

I don't think we have discussed what we would target yet. But obviously with the market declines, as you guys have all modeled out and projected, our earnings will be down. So as I mentioned, we do have some excess cash on the balance sheet that allow us a couple of quarters to ensure that these levels are, we are to see if these levels are where it will remain before we have to take action. So we haven't really discussed that yet and we will wait and see and we will have to see where we are in the next quarter or two.

Okay. And then maybe just a big picture, Eric, perhaps for yourself. As you have talked about repositioning the franchise for a shift in demand, where do you think you are in terms of leveraging the high yield portfolio which has just tremendous performance? Could that grow at a faster clip than maybe has historically been the case, given the turmoil that's been happening within the asset class and the outperformance of the fund? And the second question is, can you go back to that diagram, the conceptual diagram and talk about, are you a net winner in that dynamic because there are some pros and cons as you think through that bell curve? Thanks.

Sure, Bill. Certainly on the high-yield category, where we have seen a lot of disruption in that space, so I feel like we are very well positioned with our strategy. We have seen it in the flows over the last year. I think our current positioning of the portfolio and its performance puts us in a very attractive proposition. I would say that's also true for developing world in emerging markets. The developing world was also launched in a fairly noisy year with the emerging markets index down 15%. So I think both strategies have quite a bit of advantages built-in in their short records here and when we get to that realizable phase which we deem is true realizable capacity is when you get to those hurdles that many of the institutional buyers and consultants put on you of a certain asset level, a certain length of record that once the team has really stabilized and built-out, then you start getting those hockey sticks, especially in capacity oriented strategies like high income and developing world. We have talked in past calls that global strategies take a little bit longer given the massive supply out there in those strategies. So I feel confident that high income is in a good spot. It looks good for this year of 2016 given the build-out of the team and the current performance since inception. With regards to the diagram there of the flattening of the distribution curve of strategies, I think we are a net winner in the category. That top part of the curve of the historical distribution of exposure oriented products, a good chunk of those assets are going to passive or factor based strategies, but we were never up in that that frothy group there that's just getting exposure. So we have a little the loss possibly in our more constrained category strategies of mid-cap and small-cap. It's really constraints style boxing. But there is a large part of the world that's going to maintain that type of structure and it will be very slow to move and then there will be a more adopted group and category that would pick up the strategies that we are building with higher degrees of freedom. So I think the outflows that we are seeing in the value strategy is masking this trend. If you take out those strategies off of the last couple years of performance, you see good solid performance of the strategies that have flexibility and you see flows going to those strategies. So we think we are a net gainer.

Okay. Thanks very much.

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

Thanks, guys. C. J., maybe just on the expenses. You hit on the comp, just on non-comp, you have particularly just given some of the investments that you guys have made, whether it's on the distribution or on the team side. Anything from a leveling off on maybe the non-comp side in this environment and maybe that's where some of the levers are, but just wanted to get some indication of what the outlook is for this year?

It's a good question. And I think the lever in the non-comp is really in that communication and technology, where you will see we have ramped up spending there last year around security initiatives as well as distribution related projects on the capabilities. And so there is project spend in there that we can pull back if we need to. But as it currently stands, I would expect that this quarters level of occupancy in communications and the G&A are probably decent run rates to think about for the next few quarters, asking us deciding to pull back.

Okay. Got it. And then Eric, maybe just in terms of the outlook, given some of the newer strategies, what you mentioned in terms of the demand for the global strategies, when you look at the product set, where you are seeing some of the challenges because of institutional allocations that may be separating out the area of underperformance on the U.S. value side? Are you starting to see the uptake of either the global or new strategies start to offset some of the challenges in terms of the reallocation among institutions? I am just trying to get a sense of where you are seeing the momentum versus maybe the negative momentum that the whole industry is facing?

I think as you look at the positioning of our strategies in aggregate, we are starting to see some good asset flow and some good opportunities excluding the one team that we have performance challenges with. Maybe it's a good time here to look at January in isolation and really despite my views on short-term performance and flows, I understand that many shareholders are heavily influenced by these shorter term numbers but given the timing of this call and our January AUM release and just the volatility, I want to clarify our January net flows given the available data that's out in the marketplace. Our net flows in January was approximately $500 million in net outflows. And you are starting to see some netting effect going on of positive trends happening with the strategies that we highlighted in the call of global and higher degree of freedom strategies and given the value team's performance in January which was quite strong, I mean in January the small-cap value was up about 650 bips over its index and mid-cap value up three 300 bips and the value was up 200 bips, really in that anti-momentum trade. So I think you might have an exchange of kicks going on this year. It's early to tell given off of one month which I actually try to ignore but given that we get asked quite a bit, I thought it would be helpful to respond to just the month of January.

Okay. That's helpful. And then C. J., just real quick on the dividend. I just want to make sure I understand your comments. When you look at what's happened in January, just the pressure over the markets, you are saying at this AUM level or lower you will have to review just the payout just given the pressure on the business, but if we had a rebound and you are at this AUM level back to say where you ended 2015, then you would be fairly comfortable in terms of where things are at, all else being equal?

Yes. I think that's right. Our methodology is related, as you know, is to payout all of our adjusted earnings and then the non-cash expenses less capital expenditures through the quarterly dividend and the special. And we want the quarterly to be at a level where we have some cushion so that there is some left over for a special. And so any adjusting would really just be semantics of adjusting it, because at the end of the day we are going to continue to pay it all out. It's just whether it comes in the quarterly or the special.

Got it. Okay. Thanks a lot.

And the next question comes from Surinder Thind of Jefferies.

Hi guys. I will start with the international fund. So with that fund soft closed, has there been any change in the conversation over the interest around the global equity strategy at this point? Or is it just too early to tell?

Hi Surinder, it's Eric I think there hasn't been any related movement inflows from the closing of one which, as you said, is a soft close to the global equity strategy. And in general, we see quite a bit of demand for global equity outside of the U.S. with demand from institutional clients in the U.S. that have switched to a global categorization where we still see pretty good demand in international strategies, especially in the intermediary channel that still use that type of asset allocation and then to structure that focus on international strategies.

And then maybe just around the international distribution or demand trends. You mentioned three areas, EMEA, Canada and Australia. Any geographic differences in aggregate demand there or different trends that you are seeing, just given the macro backdrop at this point?

No. I can't say there is any specifics or that I can add to that, it's the areas that we focused on. So those are the areas that we are getting good feedback in the marketplace. There's always some interest that comes in and out of Asia which is an area that we haven't been that proactive in. But we are mainly highlighting where we are putting resources towards.

I see. And then one final question. One of the things you have talked about in the past is just making sure you spend a lot of time making sure that interests are aligned amongst the different teams and within the teams. If we were just focus on the U.S. value team, which has been facing these headwinds and they are probably the only team not to have, what I would call, a true global product, like I understand the value product I think invest upwards of maybe like 25% outside the U.S. Are there any thoughts of that team maybe adding a new product at this point? Or do they feel disadvantaged versus the other teams at this point? Or how should we think about the way the future positioning of that team at this point?

As you guys know, each of our teams are economists and they each have their state of philosophy and passion of what they invest in and for this team obviously it's their views, as I would say, is better, safer, cheaper portfolio. And they like to stack the deck in their favor. And so when you think about their belief system, I would expect interest out of this team more in how to create a newer strategy around those core beliefs. And some teams are more inclined to have a global nature and others are going to use their degrees of freedom in a different manner. And we work with each team to create that outcome. So just because the other teams went and created global strategies, it's not going to be the path for every team.

I see. Thank you. That's it for me.

And next, we have question from Eric Berg of RBC Capital Markets.

Thanks very much. Good afternoon. C. J., the bottom of page 14, getting back to the dividend and the payout ratio, it makes very clear that you didn't earn your payout in 2015, at least the earnings in 2015 did fall short by whatever it is, $0.11, from the four quarter dividends that you paid plus the special, but that was true in 2014 as well. You are currently earning your dividend, the $0.60, I think you earned on an adjusted basis $0.63 in the quarter. So what is the arithmetic? Is the point here that is it uniquely because of what happened in the month of January that the dividend is now, I need to understand better than I do the arithmetic of why the dividend is now a question mark?

Yes. Because in our adjusted net income per share, there are non-cash expenses primarily equity based comp that increase our cash, but decrease our earnings on adjusted earnings basis. So there's more cash earnings and as you know cash earnings is not a metric that we disclose or use. So the math is really adjusted earnings plus non-cash expenses less capital expenditures is the amount of cash that we generated during the year.

If it is still materially in excess, if you take your $2.69 and you add back the items that you said that are non-cash, it leaves you with cash being generated still in excess of the $2.80. So is it just the uncertainty that's leading you to consider a reduction in the quarterly payout? Because you would seem to have the cash to do it is what I am saying?

Yes. We don't want to set the quarterly dividend rate, we want to set it at a rate allows us some flexibility for market fluctuation. And we also have capital expenditures which obviously you don't have the benefit of seeing for infrastructure et cetera. So you don't have all the data to get that perfectly, but the point being that if we are earning lower levels, we have lost some or most of our cushion for market fluctuations.

Hi Eric, it's Eric. I don't think any of them the math has changed, so to speak, at your high level. There is no mathematical change. So I think you have had it right. I think there's been some confusion in the marketplace a bit of just how that all come together and we just want to make sure that we are transparent in just clarifying how we think about the dividend.

If I could also ask, Eric, one question of you. Your growth team, largely domestic in its orientation and your global value team also has very, very good performance relative to their respective benchmarks. Yet they too, in 2015 suffered outflows. Again I am talking about the growth team and the global value team. For the full year, they experienced outflows. Maybe you have already touched on this. I just would like to sharpen my understanding perhaps of why that is, in your judgment, in the face of strong performance, more money is coming out than is coming in?

Those are two teams with a really strong performance in the marketplace right now and it really gets down to the nature of the mix of assets and the level of closing. And there is a level of closing that happens even in the definition of soft close. And the mix having a little bit more institutional and getting some rebalancing, you can get some outflows and to highlight that, I think the U.S. mid-cap growth is a good example. The mix is heavily skewed towards defined contribution client and that segment of the market place we saw some outflows as 401(k)s were reconstructed and there was some rebalancing that went on. And over the years, our strong performance built up a good asset base and I think you saw some rebalancing occur in the last couple of years in that space. Likewise, on the global value and international value. We have been closed in those strategies and we have reopened into pooled vehicles for global value. With those moves and with the outflows, we will manage that balance over time. It just won't be quarter-to-quarter or year-to-year. And your greatest asset is your alpha and we have alpha in those teams and we are going to manage them, I think, in the most prudent way possible to continue alpha and position them for positive flows.

Thank you. Very helpful. Thank you.

And the next question comes from Robert Lee of KBW.

Great. Thanks and good afternoon everyone. I am just curious and I am sorry to beat a dead horse a little bit, but to stick with the capital management theme. Given the decline and the rerating of the stock, mostly all your peers in the past year, why isn't this a good time to maybe think about adding share repurchase to the capital management mix? You feel pretty upbeat about the long-term prospects. At this point maybe repurchasing stock is a good long-term use of cash. Liquidity on the stock has improved the last couple of years as more has become public. So just trying to get a sense of why not or maybe you are starting to think about including that within the capital management in the year ahead?

That balancing act of the consistency and stability present in our model in the people business, we think that's highly valuable to the consistent stable and transparent and we believe in the long-term of our business model and delivering, we are still evaluating as we grow into our maturity as a public company, how we want to use all the levers, from a capital management [indiscernible]. We are definitely much more focused on our business integrity and our consistency than trying to financially engineer or manage the outcome. But as our history grows and we look at all the various levers, we will take that into consideration which we have said in past calls. So we are obviously not making a decision today to move towards a buyback.

Just curious on the new developing markets strategy. I understand that your expectations are pretty modest until you build up the record of the team within your shop over the next couple of years. But just kind of curious given their record in their prior shop, which I know isn't necessarily transportable, but what are your thoughts around their ability just generally to not have to wait for that three years in order to really start seeing some reasonable demand for their strategy? Do you think there is a chance markets permitting in the next 18 months or so we could actually see some decent uptake?

I think in the first three years of any strategy, you can see some early adopters and you can see either a big uptake or a slow build. We manage over the slow build process so that we are managing the foundation and the team appropriately. Obviously there are times there that strategies and asset classes get more interest and can have a backdrop of which more flows could come in. But they are very hard to predict. That's why we have always said let's not at this quarter-to-quarter or year-to-year. And the one thing I feel really confident is our ability to manage the integrity of our strategies, our ability to find and maintain strong investment talent and I feel like we have a really good ability to position ourselves for long-term growth inside of asset allocation and sophisticated demand. Where we feel really inadequate at is understanding what is the behavioral trend in the short run where asset flows go. So it's very hard for me to respond to what do you think over the next 12 or 24 months in the short run. So I would say, it's in the realm, Rob, but we are not managing towards that.

Thanks for taking my questions.

And we have time for one more question and that question will come from Chris Shutler of William Blair.

Hi guys. Good afternoon. Eric, I know that your team has very much managed money over the cycle and you are less concerned about short-term performance. So I guess with that as context, are you concerned at all that the DOL fiduciary rule is going to encourage greater advisor emphasis on shorter time horizons?

Our view is what I have stated on the call in talking to our intermediary distribution team and we just feel that the higher fiduciary standard and the standards that are being put in by the DOL heavily favors firms like Artisan. If there is higher hurdles and standards to get into centralized buy lists or in consultant ratings, we just think that the odd is heavily skewed towards us. We built our firm day one with that institutional buyer in mind and if there's a higher standard we just feel that we are really well-positioned for that. So I guess I don't see that short-term emphasis coming into play. You see a heavier fee discussion what you see right now but I don't know if you see the real short-term performance emphasis.

Okay. Thanks a lot.

And this concludes our question-and-answer session. I would like to turn the conference back over to Eric Colson for any closing remarks.

I just want to thank all you guys for your time today. I know everybody is busy and I appreciate your time. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.