Artisan Partners Asset Management Inc. (APAM) Q3 2019 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. My name is Jammie, and I will be your conference operator today. [Operator Instructions] As a reminder, today’s conference call is being recorded.At this time, I’ll turn the conference call over to Makela Taphorn, Director, Investor Relations for Artisan Partners Asset Management. Ma’am, you may begin.

Thank you. Welcome to the Artisan Partners Asset Management business update and earnings call. Today’s call will include remarks from Eric Colson, Chairman and CEO; and C.J. Daley, CFO. Our latest results and investor presentation are available on the Investor Relations section of our website. Following these remarks, we will open the line for questions.Before we begin, I’d like to remind you that comments made on today’s call, including responses to your questions may deal with forward-looking statements, which are subject to risks and uncertainties that are presented in our earnings release and detailed in our filings with the SEC. We are not required to update or revise any of these statements following the call. In addition, some of our remarks made today will 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.

Thank you, Makela, and thank you, everyone for joining the call or reading the transcript. Today, I want to discuss the topic of thoughtful growth. After I finish, C.J. will review our financial and business results. Thoughtful growth is one of the three pillars of our business philosophy. We have always been and remain a growth firm.Growth is important for our talent, for our clients and for our owners. To recruit, develop and motivate exceptional talent we must provide resources, space, time and guidance for people to grow: professionally as investors and entrepreneurs; intellectually as a curious, engaged people; personally as responsible members of diverse communities; and financially as accountable citizens.By facilitating all facets of growth, we maximize the probability that we can attract and retain exceptional people for entire lengthy careers, which increases the profitability of long-duration clients and positive long-term financial outcomes for owners. Over the last 10 years, we have grown the real assets of our business in a multitude of ways. We’ve increased our investment franchises from five to nine, diversifying our sources of alpha and future growth.We have increased our strategies from 10 to 17, diversifying our AUM and creating a lineup that is a relevant for a variety of asset allocations. And we have built technology, infrastructure and operations to support greater degrees of investment freedom and the continued growth of our business. We have focused on multidimensional growth, strengthening and expanding our existing business, while also adding new teams, strategies and capabilities. Those investments in business growth have translated into financial growth.Our AUM has grown from $44.4 billion to $112.5 billion. Our run rate revenues have more than doubled. And throughout the past 10 years, we have maintained strong operating margins and distributed essentially 100% of our cash earnings. While growth is important, we constantly remind ourselves that growth is an outcome, not a strategy. We don’t seek growth for the sake of growth. We don’t try to engineer growth. We focus on what we can influence, what we do well and what’s consistent with who we are as a high value-added investment firm. The items listed on Slide two.We can recruit and develop great talent and maintain an ideal environment for our people. We can provide investment tools and flexibility to manage differentiated strategies and generate alpha. We communicate with clients and deliver on commitments. We can manage capacity to prioritize investment returns. We can design new investment strategies for evolving asset allocations and distribute those strategies in an efficient, leveraged way, minimizing distractions for investment teams.We can operate a financial model that is transparent and predictable. We can operate with integrity and we can remain patient. We cannot control the macro environment, market returns, client and investor sentiment or the timing of client cash flows. Since we can’t control those items, we try to avoid being distracted by them. Our patient approach results in a bumpy ride. We could try to smooth things and engineer short-term outcomes. We could launch whatever the latest hot product is, regardless of whether we have the right talent or edge. We could underprice alpha and limited capacity to boost short-term flows.We could massively spend on sales in an attempt to change buyer preferences, which would disrupt our investment-oriented culture. That’s simply not our approach, it’s not sustainable, the results and blowups that can fatally disrupt the long-term compounding process. We want to persist and thrive for talent, clients and owners for the very long term, which requires that we remain disciplined and patient.Slide three shows the current outcomes of our long-term approach. We have nine autonomous investment franchises, each with great leadership, stable talent and outstanding investment performance. The nine franchises manage a diverse set of high-value added strategies for a range of asset allocation styles. All nine franchises want to grow, and we continue to invest in each of them, adding new talent, providing new technology and data, improving physical environments and developing new strategies.The nine existing franchisees are a powerful platform for thoughtful growth, through future investment performance, net flows and additional investment strategies. The existing business, those not our only source for future growth. At any given time, Artisan as a firm is more than a sum of its existing parts. We have a repeatable and proven process for adding new franchises and strategies.Slide four summarizes our execution of that process in recent years. Since 2013, we have built three new investment franchises, six new strategies, recruited a new leader for and added degrees of freedom to our non-U.S. Small-Mid Growth strategy, evolved our Global Value Team into two distinct investment franchises, and invested in new people, infrastructure and technology to support greater degrees of freedom in our increasingly global business.We have taken advantage of disruption in the talent marketplace. We have provided a home for proven investors who want an investment-centric firm that provides support, independence and time to do things the right way. We have also taken advantage of the disruption to style box allocation.We have designed and launched global and third-generation strategies that fit allocations evolving way – evolving away from the traditional approach in both the institutional and wealth channels. These investments have significantly increased the diversification of our firm, adding new independent alpha sources, new asset classes, new capabilities and new sources of growth. We are already seen significant early returns as shown on Slide five.Today, we manage over $10 billion in the seven third-generation strategy developed since 2013. The strategies are growing through investment performance and new client demand. Year-to-date, we have raised a combined $3.3 billion in net inflows. They are experiencing demand at fee rates that reflect their high value-added nature and relatively limited capacity. And so far, the early adopters have gotten good value for money.The four publicly available third generation strategies with track records of more than a year have outperformed their indexes by an average of 156, 523, 838 and 1,447 basis points annually since inception after fees. The third generation strategies are continuing in the tradition of our first-and second-generation strategies. Year-to-date, those strategies have generated collectively $2.8 billion and $1.3 billion of excess returns. The first-and second-generation strategies remain incredibly important to our clients and our business.In keeping with our multidimensional holistic approach, we continue to spend the lion share of our time and energy reinvesting back into the first and second generation. We have added an elevated talent, increased degrees of freedom and thoughtfully managing capacity and business mix over time. Those effort have paid off in the form of continued strong investment performance.Looking forward, we believe that a significant portion of the market will retain style box components, which will drive long-term demand for our first-generation strategies. You can see that in the $6.2 billion of gross inflows into those strategies so far this year. Our second-generation strategy have multiple avenues for continued growth, they fit well into institutional OCIO programs, model delivery, sub-advisory and the non-U.S. wealth channel. These are relatively large capacity strategies that can be delivered to end clients in many formats.And we expect the third-generation strategies to continue to draw demand from the U.S. wealth channel, where advisors want to complement core positions with differentiated alpha generating satellites. Over time, with longer track records, we expect the third-generation strategies will also increase their institutional, separate account and non-U.S. businesses.If we continue to generate excess returns, we are confident in the long-term growth prospects of all three generations. Our diversified business can access growth with different types of clients in different geographies and through different vehicles. Clearly, our approach to growth is focused on generating investment returns for clients.Slide six shows an estimate of our excess returns over the last 11 years. Over the entire period shown, the excess return totaled nearly $15 billion. Generating excess returns lengthens the duration of our client relationships, earning us more time to compound client wealth and grow our AUM. We have been doing this for 25 years across multiple teams, strategies, asset classes and time periods.We are focused on continuing to generate excess returns and growing our business alongside our clients' capital. We are not letting recent net outflows change anything fundamental about our long-term approach. If we are performing for clients, we are accomplishing our mission. We expect the ongoing disruption in client preferences, whether for asset classes, vehicle types, customization or ESG, will create plenty of opportunities to connect our investment focus and expertise with clients' long-term needs.We are confident that investment performance will create a sufficient combination of flows, long-duration client relationships and investment returns to generate a growth outcome for all our constituents.I will now turn it over to C.J, to discuss our recent business and financial results.

Thanks, Eric. Our earnings release includes both GAAP and adjusted results. On our call today, I will focus my comments on adjusted results, which we utilize to evaluate our business and operations.Financial results begin on Slide seven. We ended the quarter with AUM of $112.5 billion, down 1% from last quarter and down 4% year-over-year. Year-to-date, AUM was up 17%. The September 2019 quarter AUM declined resulted from approximately $700 million of client cash outflows and market depreciation of approximately $600 million. Outperformance across most of our strategies positively impacted AUM in the quarter.Many of our strategies are growing. And in particular, our third-generation strategies have had strong organic growth in both the quarter and year-to-date periods. Overall, 10 of our strategies had aggregate net inflows of $1.1 billion during the quarter. These net inflows were offset by $1.8 billion in aggregate net outflows in the earlier generation strategies, principally our non-U.S. growth, Global Value and U.S. Mid-Cap Strategies.As a reminder, next quarter flows will include the impact of Artisan’s funds, annual income and capital gains distributions. Based on our current estimates, we expect this year’s distributions to result an approximately $450 million of net client cash outflows from investors who choose not to reinvest their dividends.Average AUMs and revenues are on Slide eight. In the quarter, average AUM was up 3% to $113 billion from June. Revenues grew only 1% as the June quarter included $4 million of performance fees. Compared to the prior year’s quarter, average AUM was down 3% and revenues were down 5% as the average fee rate was down [Technical Difficulty] slightly due to a decline in assets managed in higher fee pooled vehicles. Average AUM for the year-to-date period was $109.4 billion, down 6% compared to the same period last year due to significantly lower AUM heading into 2019. Revenues were 7% lower in the current year-to-date period, primarily due to lower average AUM and lower average management fees, excluding performance fees.Operating expenses are presented on Slide nine. Operating expenses declined in the quarter and year-to-date largely due to the variable expense components in our P&L model, adjusting to the lower level of revenues and lower equity-based compensation expense as higher valued grants fully amortized in the quarter. Compared to the quarter and year-to-date 2018 periods, those decreases were partially offset by increases in occupancy expense related to investment team relocations and increases in salary and benefit costs related to additional full-time employees in 2019.Operating margin and adjusted per share earnings are on Slide 10. Our operating margin increased to 37.2% this quarter from 35.3% in the June quarter, reflecting the impact of slightly higher revenues along with the decline in equity-based compensation expense. Compared to the same quarter a year ago, the operating margin declined from 38.5% to 37.2% primarily due to lower average AUM and revenues.For the 9-month period, the operating margin was 34.6% compared to 37.8%, also as a result of lower average AUM and revenues and the expense items I explained earlier. The adjusted effective tax rate increased in the quarter due to higher state income tax expense. We expect the full year adjusted effective tax rate to be 24.1% in 2019 and further increase in 2020 to between 24.5% to 25%. As a result of the change in our deferred income tax rate, our deferred tax assets and amounts payable under tax receivable agreements were also remeasured. Deferred tax assets increased by $23 million with a corresponding decrease to the provision for income taxes. amounts payable under tax receivable agreements increased by $19.6 million. Revaluation of deferred income taxes and the related payables under tax receivable agreements did not impact our adjusted results.Adjusted net income was $54.8 million, $0.70 adjusted share in the September 2019 quarter. This is up $0.03 compared to the June 2019 quarter and down $0.09 compared to the September 2018 quarter. Year-to-date, adjusted net income was $145.5 million or $1.92 per adjusted share.Capital management discussion begins on Slide 11. Company’s Board of Directors declared a variable quarterly dividend of $0.65 per share of Class A common stock with respect to the September 2019 quarter. This variable quarterly dividend represents approximately 80% of the cash generated in the September 2019 quarter. Subject to Board approval, we currently expect to pay a quarterly dividend of approximately 80% of the cash the company generates each quarter. After the end of the year, our Board will consider payment of a special dividend. Finally, our balance sheets summary is on the last slide. Our balance sheet disposition as a remained relatively consistent in 2019. Their cash position is healthy and leverage remains modest. That concludes my comments and we look forward to your questions. I will now turn the call back to the operator.

[Operator Instructions] Our first question today comes from Bill Katz from Citi.

Thank you for the added slides in the slide deck, very helpful. So I want to start there if I could. Maybe tying together some of the commentary in your prepared remarks as well as maybe Slides 5 and 6. On 6, I’m still intrigued by what do you think would sort of recouple the excess return and the flows? And then within then, on Page 5, you had mentioned that you expect that the first-generation flow story could get a little bit better. So I was wondering what would suggest that maybe the back book of the platform could start to see some better growth, all else being equal?

Sure, Bill. Thanks for the questions. The – a more mature strategy is that tend to be in the style box categories have seen some outflows, which we’ve talked about, primarily in the Mid-Cap space. Some of those outflows has been ramped-up a little bit in the international growth strategy, which had some difficult performance for one year.And over the last two years that performance is rammed-up. That performance is going to mitigate some of the outflows there that should give us a lift in that first-generation group. So it gives us confidence there. And we also see some stickiness to the style categorization in the equity allocations. We believe that most asset allocators will continue to diversify by philosophy or process or a general term for that is style. No one’s going to hire three managers that all do dividend discount modeling. Some are going to look for earnings growth. Some are going to look for a valuation approach. So those trends give us confidence that, that’s on the road on to stabilization.

Okay. Just a follow-up question then I will get back in the queue. So maybe a few or so for C.J. Just as you think about the incremental sort of scale to business from here, where are you on your spending cycle? Or maybe another way to sort of ask about, to the extent that asset just sort of continue to migrate up, assuming new market dynamics aside for a moment, help me about the spend against that? Maybe the incremental margin associated with that growth?

Yes, bill. I would say that, absent any new teams or new initiatives, which are on the docket right now we’re looking at probably mid-single digit growth, sort of, a little bit more than an inflationary. We’ll spend a little bit more on technology, but the occupancy cost that you saw, creeped up this year due to some relocations will subside and stabilize and tech should level out although it’d be up probably mid-single digits. So I think incremental dollars, we should see some nice margin leverage.

Okay, thank you.

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

Just maybe if you. Talk a little bit about it. I mean in previous earnings calls, you’d talked about how changing retail landscape may provide some opportunities for you and maybe that’s evident in the third-generation success and wealth management. Could you maybe update us on maybe what kind of investments or new opportunities you’re seeing there? And maybe how you’ve started to – try to take advantage of them?

Sure, Rob. The third-generation strategies have a – currently a higher tilt towards the intermediary or wealth-management segment, which is more skewed to that group than our first and second generation, which – the fact that generation has a bit of higher allocation to some global allocation and obviously the first on style in the institutional space.With regards to the intermediary and the wealth management, we all are seeing disruption in that space, with regards to how these models are operating, how the fees are being generated to support fees models, the vehicles that will be used or whether there’s going to be a holding space and how customization flows through. We believe this disruption has lowered the number of our strategies, our managers that operate in this platform.And as the change occurs, we believe that the intermediaries and wealth managers are going to put a higher weight on alpha delivery, since they’ve already increased their passive weight and given our performance and the strategies that fit into that asset allocation, we’re quite optimistic that we can work with a variety of different solutions, vehicles or customization. And the demand is going to be towards strategies that we deliver.

And maybe as a follow-up. Maybe some – oftentimes getting newer strategies onto different platforms or to different channels, but certainly different platforms can take time as different wealth managers go through their due diligence process. So if you think of your third generation, obviously, credit’s already been around for like three years or so. But if you think of Thematic and maybe Developing World, which were maybe not quite there yet, I mean, this feels like there’s a lot more opportunity in wealth management as you have – let’s just call it, a pipeline of new wealth managers who are going through the process of vetting them that could accelerate some of the demand there?

Yes. there’s certainly, – the asset allocation and manager structure that goes on in various platforms are certainly not as homogenous as they used to be. So not everybody is lining up just to do a Mid-Cap growth or value, which occurred in the late 90s or early 2000s. And you have various disruption and people are looking for differentiated satellite managers. And – so certainly as we increase the number of differentiated strategies that gives us more opportunity to work with a variety of platforms that operate with different asset allocation and manager structure. I think that our success in bringing new teams and strategy to the market are being recognized by the research analysts. And in these platforms that give us a leg up to have earlier success, given our repeatability of strategies that we’ve delivered and the returns that have come with that. So it clearly is a competitive marketplace. And we’re hoping that our brand, our proven success and the history of teams and strategies being launched are recognized. And that’s what we consistently say about thoughtful growth as opposed to launching as many strategies as we can and hoping one works.

Thanks for taking my question.

Our next question comes from Dan Fannon from Jefferies & Company. Please go ahead with your question.

I guess a follow-up also on just kind of the third-generation strategies. And I think you mentioned in your comments, Eric, about over time getting more SMA and more institutional contribution. So can you talk about if that’s more at – you’re kind of managing that capacity now and as you want you’ll open – I guess trying to think about the timing on when that might open up to kind of broader mandates on the institutional side, if that’s a PM decision? If that’s a firm decision? Or just kind of an evolution that just might have other factors associated with it.

Yes, Dan. That – it’s all three of those. And clearly the marketplace has to evolve with regards to the SMA business. And technology is certainly moving to that direction. There are growing number of providers that, I think, are advancing in technology and the efficiency of getting lower, minimum, separate accounts into the wealth management space, if there is a leveraged model that we could tap and operate effectively with the right strategies, and myself and the investment team are in agreement that is the right road forward, then we will triangulate on that. And we do think all three are coming together.We’re not going to force it or try to jump the gun on it. And I think there’s still some development in the marketplace that needs to happen as well as the adoption of the technology into the intermediary and wealth platforms. I mean we’re going to see that with the active ETF as well, but these new developments take time to work into the ecosystem.

Okay. And then just as a follow-up with regards to, kind of, talent acquisition and kind of the environment today, and maybe if you could just kind of characterize what your – the opportunity set that you see today versus other periods in terms of talent that’s out there that you’re potentially looking at?

Yes. We believe right now, it’s a phenomenal time to look at talent. If we go back to why Artisan was launched and it was launched because there was talent at large organizations that didn’t want to be embedded into a house view or centralized research. And you see that today, in many of the hedge funds, where it’s a structured environment, philosophically or from a risk point of view. And then on the flip side, a lot of these individuals did not want to start their own firm and deal with running the business.And I think we all agree that the regulatory environment, the distribution environment and the ease of starting your own business is much harder today. And I go back to our success of bringing talent on and as we brought on our Thematic team and entered into the equity Long/Short as we broadened out our credit into a – of a Long/Short or alternative oriented strategy. And the success we’ve had overseas, we’ve become a very interesting home for proven talent. And the number of opportunities for that talent is abundant. But the best talent out there, I think we’re getting a good look at.

Great, thank you.

Our next question comes from Mike Carrier from Bank of America. Please go ahead with your question.

This is actually Shaun Calnan on for Mike. We just had a couple of questions on flows. So first, over the last couple of quarters, non-U.S. client flows have been better than U.S. flows. But it looks like that trend reversed this quarter. So we’re just wondering what you think may have driven that?

Yes. Hi, Shaun. It’s Eric. The primary driver we’ve seen at our Global Value and Global Opportunities is a bit of rebalancing, they are both fairly mature strategies when you look at the total assets under management. And we’d had a bit of rebalancing in some of those relationships. And given the size and the success of those two strategies and the minimal net flows, those were offset.

Okay. And then there was also a slowdown in sales for Global Equity products quarter-over-quarter. So we just want to know if that was driven by lower sales in the non-U.S. Small-Mid Growth strategy, which were relatively strong last quarter. And if so, what you think drove that?

No. The primary was the global strategies, but the non-U.S. Small-Mid Growth strategy has remained fairly strong. We see quite a bit of interest in that strategy. The performance has outpaced the benchmark and has outpaced most, if not all, of its – of the relevant peers.

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

Good morning. This is Ryan Bailey on for Alex. I wanted to piggyback off the last question – off the prior question on talent acquisition. And kind of if we go back to Slide 4. Clearly, APAM has a differentiated skill set in identifying talent that can birth AUM and generate alpha. And I appreciate that you brought in a PM recently. But if we look back, the last team that you brought in was in 2017, but you’ve mentioned that as a phenomenal times if you’re looking at talent. So I guess my question is, why haven’t we seen you guys bring in more teams recently?

One, over 25 years, we have nine teams. So the standard and the bar that we have is quite high. And the fit into our organization, we take a quite a bit of time to ensure a strong fit, so that we have the outcome that we’ve created on Page 3, which is the performance page. My comments on the phenomenal timing right now or phenomenal point in the market is that we see an uptick in the number of talent, and we’re starting with that numerous opportunities. But we don’t think that there’s an abundance of a perfect fit for our model and for where we want to attack in the distribution cycle. So the opportunity for that is growing, and we think that is a plus for looking at another group to bring in or team to bring in.

Got it. And maybe one, turning to the fee rate. It looks like on the institutional side of the separate accounts side, the fee rate has trended down over the couple of quarters. I know historically, you’ve been – you’re very protective on maintaining that fee rate because you deserve to get pay for alpha. Has anything changed in your strategy there? Or is it a mix shift dynamic that’s going on that’s leading to the lower fee rate?

Yes. Primarily, you’re seeing the mix shift that’s bringing down the fee. Yes, I will say that the last couple of years, we’ve seen fees come down for clients because, obviously, client fees are more passive. Clients are also looking for the most appropriate vehicle or separate account and that’s brought down their fees. And we’ve seen many of our competitors in the marketplace drive down fees to manage a one-dimensional mindset towards growth, which is find flows at all cost.And over the last couple of years, this disruption and noise in the marketplace has changed, I think, the overall fee structure. I think fees will come down slightly, but our strategy with the day shift and see how the market’s changing and what does it mean for high value-added managers. With that, I do think that you’ll see separate account fees come down slightly, but we will always manage that based on the alpha and the capacity, which I think you see in the third-generation strategies.

Thank you.

Our next question comes from Chris Shutler from William Blair. Please go ahead with your question.

Hi, guys good morning. Eric, you talked about exploring such as customization, tax optimization, ESG, maybe more performance fee related pricing over time. Would you mind just getting a little more specific and give us your latest thinking around each of those areas? I’m just, kind of, wondering what efforts might be underway behind the scenes to address those. Thank you.

Certainly. The – probably the most prolific is the ESG as we’ve grown our presence in Europe and outside the U.S., ESG had to be addressed across all the investment teams with regards to how we’re conducting research and embedding that into each team’s philosophy and process. And each of our teams are taking that at different rates. And in some cases, you’re seeing a lot more separate accounts come in that have some restrictions or negative screening.You’re starting to see that show up more and more in demands that we implement that into our broader vehicles, which were given some thought to, that if it’s not changing the overall strategy and the output of the portfolio, it is following certain rules then why not incorporate that into the vehicles, especially in Europe. With regards to the customization, which would take into effect the tax as well as ESG preferences, those are early stages, Chris. We’re really exploring various partners, various groups that we can work with to package that up. So I – there’s not much details on those because – on those changes as we wait for better discussions in the marketplace.

Okay. And then anything new, Eric, on performance fee pricing? Or whether that something that will see increase noticeably over the next few years?

Certainly, we’re having more discussions. We have adjusted a couple relationships into performance-based fees going forward here. I think that will be an active dialogue and we’ve always been open to those type of discussions. And I think you will see an uptick there. Will it be meaningful? Probably not in the next year. But it could occur in two to three years out, pending the behavior of institutional clients.

Okay, thank you.

Our next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead with your question.

Hi, thanks for taking my question. Wondering if you could just expand further upon your efforts to further reinvest in the first-and second-generation strategies. We’ve obviously seen some team changes, just wondering if there’s any other efforts that you’d like to highlight?

No. We’ve been very transparent about our evolution there of bringing talent in, evolving teams where appropriate, bringing more degrees of freedom into those strategies, so that we provide an opportunity to outperform. So as we work with each team and each strategy, we’ve been very open and transparent. So nothing new to bring up there.

Got you. And just one follow-up, if I may. On a broader level and presumably the firm’s solid track record in generating excess returns is resonating well with clients in the current environment, but just wondering if there’s any other factors and just wondering in general if you could just give us a little bit more color as to what’s resonating with clients right now? Thanks.

Our conversations with clients have been a focus on increasing their passive, increasing opportunities, potentially to work in a outsourced manner or an OCIO, that they may work with a consultant or a provided in a different way, are they in the right vehicles, and those have been the discussions that dominated the industry. And has gotten many of our clients and investors to just shore up their plans. And there’ll be refocusing back on the stable and trustworthy and consistent value-added managers. That’s not going away. It’s – there have been other conversations over the last year or two, and that happens from time to time, and that’s why we consistently say, this is a lumpy ride. And if you force that conversation, you’re going to have to bend on other areas, which is probably not needed in the long term.

Got you. Very helpful, thank you very much.

Our next question is a follow-up from Bill Katz from Citi. Please go ahead with your follow-up.

Okay, thanks very much. Just a couple of them. Number one, can you talk a little, Eric, about where you stand today in terms of within your total asset pool that’s in the high net worth channel?

Total asset pool’s probably right around 30% that we would deem in the intermediary space.

And then within that, is there any exposure? You’re still talking a little bit about the sort of shifting nature of the SMA platform. I know there’s definitely institutional and retail, but there’s certainly been a lot of discussion about the implications coming off of what UBS is doing on their own, sort of, platform and whether or not that’s not going to effect for some of their competitors. So can you talk a little bit what you have on the retail intermediary side in terms of SMA? And if pricing changes, wanted to play through how that might filter down to what it might mean for APAM?

Yes. Certainly, we don’t have any SMA business in these retail platforms. Historically, the technology, the impact on your trading desk and the probability of errors on implementing the old technology and old arrangements, we have stayed away from. So as that develops and we have the right strategies, where we’re very open to get into that discussion. The newer strategies that tend to be in the third generation, tend to have a high degree of freedom. They operate well in pooled vehicles. They might be a bit difficult to move into a SMA platform. However, our second-generation strategies are of interest, especially the larger: Global Equity, Global Value, Global Opportunities, and looking at global intermediates, it could be a nice fit. But to answer your question, we don’t have any exposure right now to the SMA, inside of a intermediary platforms.

Okay. And just one last one. Thanks for your patients answering all the questions. So you’d mentioned some conversations with clients in terms of moving performance fees. So is that more of a flex fee product, what Fidelity is doing outside United States and what Alliance is trying to do in United shares, number one. Or is it just more traditional 2 and 20 type model? And then the second part of that is, I’m surprised that you’d say it’s more of the institutional side than the retail side, could you sort of talk about your views? How you see it potentially developing on the retail channel?

Sure. The – we have not incorporated a performance-based fees in a publicly traded vehicle, such as a mutual fund or a [indiscernible]. So we have not incorporated that into our publicly traded vehicles. With regards to my comments on performance-based fees, it’s been around our traditional strategies in the institutional separate account business, and those fees tend to fulcrum around our current separate account fee level. With regards to your comment on the 2 and 20, we do not have a hedge fund structure that’s in the 2 and 20 space. Our strategies tend to be more directional in the hedge fund space, and are not looking to replicate the – I think the old hedge fund structure.

Okay, thanks for taking all the questions.

And ladies and gentlemen, with that, we’ll end today’s question-and-answer session and today’s conference call. We do thank you for joining. You may disconnect your lines.