Hello and thank you for standing by. My name is Gary 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 at Artisan Partners.

Thank you and 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 our comments made on today’s call include responses to questions, may deal with forward-looking statements, which are subject to risks and uncertainties that are presented in the earnings release and detailed in our filings with the SEC. In addition, some of our remarks made today will include references to non-GAAP financial measures. And you can find reconciliations of those measures to the most comparable GAAP measures in the earnings release. I will now turn the call over to Eric Colson.

Thank you, Makela and thank you everyone for joining the call or reading the transcript. Last week, we published our 2018 annual report. The report focuses on our commitment to generating high value-added sustainable outcomes for clients, employees and shareholders. I encourage you to read the report, which is available on our website. As a firm, we have always focused on sustainable outcomes. For our clients, we compound wealth over the long term to help them secure their futures and achieve their goals. For our investment talent, we take a deliberate approach to bringing on new people and developing franchises, which increases the probability of success across generations and through market cycles. For our shareholders, we thoughtfully grow our business value while maintaining financial discipline and generating significant cash. Lastly, we operate with integrity and behave ethically. We remain true to who we are as a firm, and we communicate our long-term approach to our stakeholders. That’s our primary purpose on these calls. None of this is new for us. We have built and managed our relationships with clients, key investment talent, employees and shareholders with a long-term approach and mutual respect in order to establish and maintain trust. We have a real substantive and successful record on sustainability, not just new policies or initiatives and reaction to a popular movement. We have always felt strongly about building and growing a sustainable firm. Now we are providing greater transparency and speaking more specifically about these topics. As a firm, our sustainability over time will ultimately rest on our ability to add value for clients. Slide 2 shows our long-term investment performance net of fees. On average, our 9 investment strategies with track records of at least 10 years have outperformed their benchmarks by 237 basis points per year net of…

Thanks, Eric. Our financial highlights are presented on Slide 7. As usual, I will focus my comments on adjusted results, which we utilize to evaluate our business results and operations. Following the sharp declines in global equity markets in the fourth quarter of 2018, our assets under management began the quarter at $96.2 billion. However, the strong rebound in markets during the first quarter of 2019 as well as alpha generated by our investment teams drove assets under management $108 billion at March 31. Average AUM for the quarter was consistent with the previous quarter, while revenues decreased 2%, primarily due to 2 fewer billing days in the quarter. Our effective average fee rate remained at 72 basis points, reflecting our active, high value-add product mix. Operating margin in the March quarter was 30.9%, reflecting the impact on revenue of 2 less billing days in the quarter; higher seasonal expenses, which are typical in the first quarter; and a previously discussed occupancy charge for relocation of one of our investment teams. Adjusted earnings per adjusted share were $0.55. And our Board of Directors approved a quarterly variable cash dividend of $0.55 per share, which represents approximately 80% of the cash generated during the quarter. Assets under management and net client cash flows are on Slide 8. Average AUM for the quarter was $104.9 billion, consistent with the preceding December 2018 quarter. However, as a result of the strong rebound in global equity markets and alpha generation across our investment strategies, both of which were offset in part by net client cash outflows, our ending AUM was up 12% from last quarter and ended at $107.8 million. Client cash outflows in the quarter of $1.1 billion reflected continued headwinds as well as structural changes in asset allocation and the defined contribution…

[Operator Instructions] And the first question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Thanks for taking my question. Appreciate the overview of the key distribution trends. Just a follow-up on the prepared remarks regarding active ETF and the smaller separate accounts distribution trends, what potential changes would you be would you expect to see over the near term given these trends? Thanks.

Hi Ken, it’s Eric. In the near term, I’ll define that, the next year, I don’t see any changes for us. First on the active ETF, as you look at our array of strategies, primarily using high degrees of freedom, the current ETF, active ETF structure will only incorporate U.S. securities. So, it’d be difficult for us to leverage that new vehicle. Secondly, around the ETF, given our focus on high value-added results and a need to control capacity, and we’ve always stated that we look at the total capacity, the velocity of assets and the mix of assets, we need to be more thoughtful and think about how to control capacity within that vehicle. So that structure, I think is a little laid out weighed out us. I do think the smaller separate account business and many of the, I guess call them fintech or smaller companies developing platforms to help us leverage their operations to go out and service smaller accounts is moving along. But again, I think that it’s that’s also probably about a little over a year out as well.

Got you. Very helpful. And just one follow-up on the commentary regarding the outflows seen in the quarter. Once again in the prepared remarks, you talked about the defined contribution as well as some asset allocation changes. Wonder if you could just provide a little bit more details on that. Presumably, it’s been impacted the Mid-Cap strategies. But wondering if there is any other key strategies where you’ve seen any impact across those two items?

The DC channel’s been the same. So, there’s no changes from past statements. I think you’ve seen an also continued movement in the active/passive rebalancing. We saw a bit of that in the international space this past quarter, which impacted the international growth and international value strategies with regards to flow movement. That would probably be the 2 trends for the quarter.

Okay very helpful thank you very much.

The next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Hi good morning everyone. Your growth team and the Global Equity teams both continue to have very strong performance. Obviously, long term has been good, but even the 1 year looks like it’s improved on the excess performance net of fees, that is. Is that starting to resonate, do you think with any of the channels to actually drive better flows on either side of those teams or the kind of secular shift to passive, ultimately, still kind of always that? And do you guys see any opportunities to open any of the closed strategies there, given again strong performance from a capacity perspective?

Yes, certainly, Alex. This is Eric. The global equity and the growth teams have had very strong performance. And with regards to the Global Equity team and primarily the international growth strategy, which is the bulk of the assets for the Global Equity team, has delivered good performance. We’ve seen quite a few clients just rebalancing around that strong performance. So Q1 saw some asset allocation of rebalancing some outflows that occurred because of strong performance being rebalanced towards value managers or other asset classes, given the strength of the strategy. So, there was normal in my mind, normal flows that occurred in Global Equity. The growth team, again, strong performance. We saw quite a bit of interest in the Global Opportunities, U.S. Small Cap Growth and Discoveries strategy. The Mid-Cap growth, we’ve talked about in the past. A little bit of rebalancing actually occurred in Global Opportunities now that it’s a little bit more mature. I think those were fairly normal rebalancing, and especially given strong performance. With regards to open or closed, at this point, we probably have never been more open in the history of the firm, when you look across all the strategies, especially since we’ve been public. This is probably the greatest capacity story we have.

Got it. I guess I’m just curious, is there anything that you guys see on the horizon that could actually accelerate growth sales in any of the strategies that’s performing well?

The sales cycle and being able to predict that has always been difficult in this industry, as so we have no forward statement on flows to make.

Got it. Alright, fair enough. C.J., just one for you, I don’t think I caught your sort of near-term outlook on expenses, so maybe just kind of run us through what you guys expect on the expense front for the rest of the year, especially maybe taking into account some of the discussion points you guys made earlier around distribution.

Yes. I mean, I think the guidance remains similar to what I gave last quarter. Occupancy, we expect to run around $5 million a quarter. This quarter we had a $2 million charge for that lease abandonment in New York. So, we still think that $5 million is a good number. We’ll have some double rent that’ll start to subside as we move into the middle of the year there. Technology cost, as we talked about our spend around distribution and investments, that’s continued to expect to run about $10 million a quarter. Although that will fluctuate a bit, as you saw this quarter, because it just ebbs and flows based on product and project start and ramp-up time. So that’s still good. And then we expect equity-based comp to be quite a bit lower as a result of those early grants rolling off. They were at a higher value at the grant date. So overall, take that all into consideration, expense overall should be relatively flat to last year. But that, of course, given our variable model, really will depend a lot on what revenues and AUM levels do throughout the year.

Great. Thanks for all the detail there.

The next question comes from Robert Lee with KBW. Please go ahead.

Hi thanks for taking my question this morning. Maybe, C.J. following up a little bit on kind of some of the distribution initiatives. And I mean, I could you maybe drill down into that a little bit and give us a sense of what is actually underway right now? I mean understanding some of tax spending may be related to that, but are you actively, currently kind of feeding and building SMA, CIT vehicles? And maybe the second question related to this is oftentimes, in retail at least, they’re demanding larger at least initially larger it’s a new product, larger asset bases or seed capital. Does this at all impact how you’re thinking about capital management going forward? Do you think you’ll see a need to put up more seed capital than you have historically?

Yes. So, our technology spend is really around supporting our investment teams, and distribution spend is supporting our distribution team. So, on the investment side, we’re putting more development into tools for the investment teams around their research process. Market data spend is up as teams demand more data and better ways to utilize that data. And then on the distribution side, it’s more of a move from a relationship-based model to a knowledge-based model, where we’re using data as well to help the teams capture and utilize data to be more efficient in their sales efforts. So, there is no underlying R&D going on with vehicles that we’re not disclosing. And from a capital management standpoint, we fund all of this from our strong cash earnings generation. So, there isn’t any capital management policy changes. And all that spend, you see in the line items on P&L.

Okay. And maybe just as a follow-up, I mean if I think of some of the things you’re talking about, SMAs, other investment vehicles and kind of working more closely with changing intermediary models, I mean do you envision having to re-staff or staff up more in the retail channels or maybe start more aggressively looking at newer channels within intermediary, whether choice of your investment advisors? So, should we be thinking that over the next several years, that that could be something where we see some investment?

Hi Rob, it’s Eric. I wouldn’t forecast any investment in there, with regards to, I guess the ETF structure. I think people are kind of guesstimating out there anywhere from 2 to 3 basis points of some type of cost that would go in there if you did move forward on the current proposed active ETF. I think more structures would come out, and cost of that would probably come down a bit. That vehicle or structure would go through our same channels. We wait for that client demand to surface for the vehicle that best suits their needs. Our focus on is delivering the investment strategies. And as of our clients surface up different needs, such that we saw in the past of the evolution of an advisory share, which we put in place a few years ago due to the demand by the client base, and we would expect the same for the active ETF as well as the SMA business. So, it wouldn’t be a spend into trying to forge a new channel. It’s reacting to the dynamics of our current clients and intermediary relationships.

Great. Thanks for taking my questions.

The next question comes from Bill Katz with Citigroup. Please go ahead.

Okay. Thank you very much for taking the questions this morning. First question comes back to the discussion on sustainable investing, I guess, ESG more broadly. Obviously, you spent a lot of time in your prepared remarks today and sort of looked at your annual shareholder letter, which is very helpful, thank you for that. Are you envisioning any sort of shift in product opportunity to leverage or harness what you’ve been doing for a bit of time now? It seems like there’s a fairly higher level of growth in ESG product in the system, I’m sort of wondering how you’re thinking about maybe leveraging it on the sort of sales side?

Yes, hi, Bill, it’s Eric. I – when we thought about the ESG, there’s a firm perspective of our shareholders asking how we’re positioned, there’s our investment teams seeking information and data to go into their research and how they evolve and then there’s the question you’re posing on a client perspective of the strategy output and how a portfolio is designed to fit into ESG demands. We primarily are focusing on the firm side of the equation. Secondly, making sure our teams have the data and research to go into their investment process to understand the risks of all securities that are – they’re invested in. And as clients request restrictions, as we’ve done in the past with any type of ESG or social restriction, we will react to that and create a portfolio. We have not designed a specific ESG portfolio and market that to sell into the industry. I agree with you that there has been a large proliferation of ESG products. My view is it’s just going to be incorporated into the investment philosophy and process of all strategies that people are going to seek to have that incorporated. So, the differentiation between just a typical active product and a specific ESG portfolio will converge.

Okay, that’s helpful. And I just want to come back to your comments where you used the slide from one of the consultants out there. It sounds like you’re – maybe I misheard and I apologize if I did, that you’re still not really changing any kind of distribution philosophy yet, you’re just sort of waiting for something more profound to potentially emerge. But I guess, what might change in the near-term that you’re looking or watching for that might sort of ignite the more proactive growth path – organic growth path?

The trend we’re highlighting specifically is the movement to cleaner shares. And as the revenue of share goes down to 0, which you’ll see in the institutional or clean share, and as assets migrate into lower revenue share structures, that’s going to put pressure on the intermediary open architecture business. And we will see more and more discussions with those platforms and how we work, but those platforms will change, which we’re clearly at a tipping point, which we think is a very good tipping point. We welcome a much more transparent open structure to compete on net of fees as opposed to a closed structure, which we clearly saw occur in the defined contribution business with target-date funds moving primarily to growth into closed structures. So, we are going to be working more with our intermediary partners. And as that evolves and you move to a clean structure, it does open the door quite a bit for the active ETF, which carries a 0 revenue share as well. We believe the infrastructure and operations are very close on the intermediary side to move towards this clean structure, as well as the active ETF. And so we’re spending quite a bit of attention and our time on the distribution space at this point.

Okay, that’s helpful. And then just last one, bigger picture question for you, just play devil’s advocate. You have among best-in-class performance, you’re one of the few that’s actually seen a nice improvement in performance over the last year or so versus many of your publicly traded peers. Yet as conversation is showing today, you’re really not seeing it translate into sort of gross or net sales at this point in time. As good as your performance is and appreciating sort of some of the distribution changes that are out there, does Artisan need to be part of a larger platform to potentially leverage more of a global distribution network to really take advantage of the growth at this point or is the independent path the most likely conclusion?

From a distribution angle, we 100% believe in the global mindset, going from virtually 0 non-U.S. client base 7, 8 – 7 years ago to today over 20% of our assets. We also believe that you have to go broader and deeper into the wealth channel, both put quite a bit of a demand on independent firms to broaden out. The continuation of open architecture and the continued efforts in digitalization create a wonderful opportunity for a firm like Artisan that can leverage those models, compete in open structures and leverage a digital marketing and sales strategy to go deeper into the wealth channel, creates a wonderful opportunity for us. And we think those are both at tipping points at this point in the cycle that we’re excited about. And that’s why we’re highlighting the changes this quarter. It’s a signal that where we believe the market is going, where we’re spending time and where we’re putting resources behind with the mindset that these trends play out over time.

Okay. Thank you very much for taking the questions.

The next question comes from Dan Fannon with Jefferies and Company. Please go ahead.

Thanks. So, kind of following up on that last point around global distribution. You highlighted the 20% of AUM coming from outside. That number has been stagnant for last several quarters. And just thinking about some of the changes that are happening here in the U.S. that you highlighted or are watching or – and looking at, I guess outside of the U.S., what are you guys doing to kind of improve your positioning or continue the growth that you have seen in any – doesn’t seem that there’s as much structural changes or opportunities as there is here in the U.S., but maybe give us a little bit of insight there too?

Certainly, Dan, this is Eric, again. We primarily have built that non-U.S. leveraging our institutional brand or institutional distribution, and we’ve been building a presence in the intermediary space outside the U.S., that takes a bit of time. First, you have to build up your vehicles in the UCIT structure, get that to a size and scale that you can operate on these platforms. These non-U.S. intermediary platforms have been reinvesting to broaden out into open architecture. And again, that just takes some time, but we believe that we’re on track to broaden out the distribution outside the U.S. from where we’ve been, which is right around that 20% number for the last year or 2. So, we think there’s quite a bit of interesting opportunity both inside the U.S. and outside the U.S. given the changes going on.

Okay. And then just switching topics, performance fees, I know they’re a small contributor, but with your performance improving, can you give us a sense of or remind us which funds carry those attributes, and is there a way to maybe frame kind of what – a year where performance is good, that number – those numbers could look like?

Yes, Dan, we have opportunities for performance fees primarily in the June and the December quarter. And there’s only a handful of performance fee accounts across 3 or 4 strategies, primarily our global strategies and obviously our hedge funds, so our private structures. They’ve been very immaterial. I think the largest quarter for recollection has been just a couple of million dollars of performance fees. So, I would – we would expect that continue to be a very small portion and not material to our overall results.

Okay. Thank you.

This concludes our question-and-answer session, and the conference is also now concluded. Thank you for attending today’s presentation. You may now disconnect.