Hello and thank you for standing by. My name is Gary, and I will be your conference operator today. At this time, all participants are in a listen-only mode. 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, today’s conference call is being recorded.At this time, I’ll turn the conference call over to Makela Taphorn, Director of Investor Relations for Artisan Partners Asset Management.

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 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. 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 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. Given the significant and ongoing change in the investment management industry, it's more important than ever that we at Artisan Partners know who we are and that we understand our competitive edge. It's also important that our clients and our shareholders understand this. So, you know what to expect and what not to expect.Artisan Partners is an investment firm. We provide differentiated and high value-added investment opportunities to sophisticated clients. We are not, nor do we aspire to be a product manufacturer, engineering distribution-oriented strategies to build scale and compete solely on fees. Our edge is the combination of our talent and our operating model.We partner with talented investors to build and develop investment franchises that deliver for clients. We provide our investment franchises with a unique combination of investment autonomy and operational and business support. Our platform is designed to serve our investment franchises. Their success equals client success, which equals our success. Everything we do is designed for investment talent to thrive.We are a growth firm. Thoughtful growth is important to our people, our clients and our shareholders. As an investment firm, our business growth has followed and will follow the success and development of our investment strategies and capabilities. As we mark our 25th anniversary, we continue to believe that this business model and philosophy are right for our firm and for our future. They have driven the long-term results and growth. I will discuss in a minute. And they will guide our operations and decision-making going forward. This is who we are.Turning to Slide 2. We continue to position who we are as a firm within the framework of long-term asset allocation and manager structure. Since we do not engineer products…

Thanks, Eric. I'll begin on Slide 7. Assets under management ended the year at $121 billion, which was up $8.5 billion or 8% compared to the September 2019 quarter and up $24.8 billion or 26% compared to the end of 2018. Growth in both the quarter and year were primarily due to rising global equity markets and strong excess performance, partially offset by net client cash outflows. Net client cash outflows during the quarter and year included $470 million of outflows related to cash dividends paid, but not reinvested in our U.S. mutual funds. In the 12 months ended December 31, 2019, excess returns added approximately $4.8 billion to AUM and more than offset net client cash outflows of $3.3 billion.Eric discussed the 10-year history of our strategies by generation. Slide 8 shows the progress we have made over the last year. As stated, we now manage over $12 billion in seven third-generation strategies, almost double the AUM from a year ago, and now those strategies represent 10% of total AUM. Growth has been through both investment performance and net client cash inflows. Our first and second-generation strategies also generated strong excess returns for their clients, offset in part by continued outflows, driven in large part by client profit taking and rebalance away from active equities.Turning to our financial results. Slide 9 highlights the changes in our AUM in 2019 and 2018. Given strong AUM growth in the fourth quarter of 2019 and ending AUM at $121 billion, we begin the 2020 calendar year with a 9% head start over average AUM in 2019 of $111 billion. This is a very different position than in 2019 when we began the calendar year at AUM of $96.2 billion as a result of the sharp decline in global equity markets in the…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mike Carrier with Bank of America. Please go ahead.

Hi guys. This is actually Shaun Calnan on for Mike. So, you mentioned you're reviewing the distribution structure and strategy and looking at some of the third-party distribution relationships. Can you just tell us what some of the areas of interest are in terms of channels and geography?

Yes, sure, Shaun. This is Eric. I think we've all seen a pretty progressive change in distribution partnerships moving to more captive distribution, so a downtick over the last few years and open architecture to more captive distribution. And there are partners that we want to look at from a regional standpoint to partner with.There are partners that we want to think about with regards to vehicle or holdings-based delivery to help diversify how we distribute, and we're reviewing those groups, which we think will help bring leverage to our model as opposed to us trying to replicate and become a vehicle-oriented firm. So we continue to look for those opportunities. And as distribution has been changing and networks have been evolving and including technology, we are fairly optimistic in this year and next year of expanding how we distribute with various partners.

Okay, got it. And then just as a follow-up on performance fees, do you guys had strong performance this year. And we typically see some fees in the fourth quarter. I know you mentioned a couple of million next quarter. But just wondering why you guys didn't realize any performance fees this quarter and how we should be thinking about them going forward in terms of seasonality?

Yes. So -- this is C.J., Shaun. We have a number of handful of performance fee accounts, about $2 billion in AUM. Two of those have a December 31 performance measurement period. And based on the formula, we just didn't any -- earn any in those two. So it's quite a limited opportunity in each of the quarters. The one in next quarter had a January measurement date. So that one is fairly locked in, which is why we indicated that we'd be realizing that.

The next question is from Chris Shutler with William Blair. Please go ahead.

You mentioned private markets and alternatives, maybe just provide a little more detail there on, I guess, where do you think you'll be in a few years in that space, and is the Global Value Team strategy in that area as well?

Hey Chris, it's Eric. First on, the Global Value is not into the alternative space. It's leveraging off of their current core capabilities with regards to the alternative and private market space. We clearly see that's where asset allocation is going. We think that our model fits quite nicely. With the success of some of our newer strategies to fit into that space of asset allocation, we continue to see more teams externally that we're looking at as well as more thoughts of how to develop that within our teams and you're starting to see an uptick on how people create public/private strategies that have a crossover capability, which I would define is just another confirmation of our thesis of degrees of freedom.And we believe that, that should be the broad definition that dictates where we go going forward as opposed to this lose definition of just what is an alternative space. So we continue to challenge our current teams on how to differentiate -- use degrees of freedom. And we continue to look at new investment professionals and strategies that would enhance the direction of the firm and the direction will be toward the alternative or private market space.

Got it. Makes sense. And then I guess secondly, any thoughts on non-transparent active ETF space. I know it's super early days, but at a high level, are you leaning more positive or more negative on the potential for that wrapper?

We are very indifferent on the wrapper. If the wrapper is something that clients request and start demanding, we're very open to packaging up our strategy in a more effective wrapper for clients. And as that takes hold and it fits who we are, we'll move forward on that. We rarely get excited about a vehicle or a wrapper, as opposed to investment talent.

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

Okay. Thank you very much for taking the questions this morning. I appreciate your prepared comments, so just starting off with maybe that last sort of line of questioning. Two part question and then I'll ask my follow-up after that. So first part of it is, do you have enough real-time capacity today to more meaningfully compete? It seems like in the alternative space among the publicly traded names, one of the themes is there has been global solution providers, they're able to sort of consolidate market share from LPs. And then secondly, just sort of a challenge you on not scaling the business a little bit more. Those same companies are able to generate significant alpha on the quantum level of higher AUM. So why not open yourself up to a little bit more growth in some of the most scalable opportunities?

Yes. The -- part of the real-time capacity to compete for what we're trying to achieve and we review capacities for consistent and long-term alpha generation and our team in the middle works with each of the investment franchises to discuss capacity. We make joint decisions. And as we see alpha waning or if it's difficult to put the dollars to work, we will review capacity on a very frequent basis. So my mindset and I think the firm's mindset is all about excess return delivery. And if capacity gets in the way of that, we will shut the strategy down. That doesn't generate the level that the market anticipates for stock price.The client comes first, so as alpha delivery. And the fact that others can significantly scale up. That is always something we're looking at how firms can compete and scale up and consistently deliver alpha, and we will learn from those firms. But we will stay true to who we are and deliver the alpha first and foremost. The compounding of that wealth and the consistency of those clients and the present value that creates with long duration clients, I think, is the most powerful thing in this business as opposed to just pure capacity and asset gathering.

Okay, that's helpful. And just a follow-up maybe on the same line thinking. Thinking of your prepared comments, you talked about a number of products out there that you sort of feel good about as you look into 2020 and you also mentioned that sort of the pipeline. Do you have any sort of color on sort of what's coming in the door for Gen 3 versus any kind of potential rebalancing you might see and how that might compare to maybe last year or two or the last couple of quarters just in terms of relative impact?

I mean, the signaling is what we stated, which I think our model given the results we've produced in 2019 and the consistency and longevity of our strategies and professionals speaks for itself in the marketplace. And that output is highly differentiated versus going to a large hedge fund. That's multi-strategy and manages a risk at the central -- at the center of the firm and allocate dollars out versus the risk of going to start your own firm. The model is picking up in the industry. So we are seeing more and more talent and reviewing that talent, and the direction is a continued degrees of freedom.What we've always preferred and like to do is to take those steps of degrees of freedom that doesn't tax the operational infrastructure at a heavy load. And so, we've tried to incrementally step out of degrees of freedom that links to the operational footprint we have. And we've developed into the alternative as well as to the credit space. So we have a lot of operational capacity there, but we will be mindful not to get too extreme.

The next question is from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hi, thanks for taking my question. You touched upon within your prepared remarks, they could potentially see some growth within the first generation and second generation over the next year. So just wondering if you could just highlight what specific strategies you had in mind, one that could be poised for growth. Thanks.

The strategies we are optimistic about is there's been a few strategies that there has been some rebalancing around that have picked up capacity, as well as have extremely strong performance. And the comment there revolves around those three points that we do think rebalancing ebbs and flows. And as long as you have a healthy relationship with clients, you can expect that money can come back in the strategies, coupled with we've opened up some of our strategies or some available capacity as well as strategies, such as our Global Equity has quite a bit of overall capacity to grow. And given the performance that we've experienced last year and now over longer periods, we have decided to make a more optimistic statement on some first and second generation strategies.

Okay, very helpful. And just one follow-up if I may. In the past, you mentioned in regard to the third-generation strategies, there could be some potential opportunity to expand further into the institutional channel, wondering if there's been any progress updates on that front. Thanks.

There is -- that's helped us in the marketing and distribution to some -- open some doors that we haven't seen in a while. The institutional marketplace more specifically, that the endowment and foundation space, given our newer strategies fits that segment, they've -- the third generation has done well in the intermediary space, but the blending of intermediary and institutional kind of fits in that family office, endowment and foundation space. So we haven't seen an enormous amount of wins in there in that space, but we continue to see a strong interest.

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

Great. Thanks for taking my questions. Maybe one for you, C.J., just a little bit of a modeling question, I just wanted to be -- make sure I understood your comments around comp expense for 2020. I think you said, up about 10%. I want to make sure I have that right. And is that kind of assuming kind of static asset levels?

Yes. So, I was specifically referring to sort of the salary and benefits line. Obviously, incentive comp is going to fluctuate with revenues. Equity-based comp, I think we've given some guidance there that should be down over next year as well in total, by about $6 million. So my 10% was really focused on the salary line just due to some hiring plans that will move forward with for the most part despite what the markets do.

Okay, great. And then maybe just a broader question, Eric, maybe this is part of the distribution review kind of you're going through, but can you talk a little bit about your kind of your non-U.S. initiatives or are you thinking there? I mean, for many years, that had been kind of an incremental contributor to growth. It's certainly been a key driver. And I mean, if I look at last year, the market share of assets from outside U.S. has been pretty flat, had a little bit of outflow probably for similar reasons to hear from rebalancing. But kind of do you feel -- how do you feel about your kind of non-U.S. footprint? Do you see that as a particular opportunity for growth in investment going forward?

Yes, we do. We really attack the non-U.S. space over the last 10 years from our institutional reputation and institutional relationships. We are broadening the breadth of channels we're looking at and continue to think about how to expand into the intermediary and family office space outside the U.S. We also believe that some of the strategies, such as Developing World and Emerging Markets.The Sustainable Emerging Markets and the Developing World strategy, both have good opportunities outside the U.S. that we think look promising in this year and next year, and as well as the Global Discovery strategy establishes their record. And the early alpha generation has been very strong. That will spark another -- I think another growth phase outside the U.S. So it's a combination of having the right strategies and broadening out our distribution footprint.

And if I could maybe one last quick question. Maybe it's a little bit more near term, but clearly given the run-up in the markets to past year or past decade I guess -- for the past year, you talked about obviously some rebalancing, we'll call it profit taking. But as we look ahead to this year, do you have any sense that a lot of that actions kind of happened already or would you just expect normally? As you get into the new year, you could see some more of that at least over the first part of the year?

Those are always hard to predict. I'd be looking into a crystal ball if I answered that so far through January and there tends to be some rebalancing, but most are looking at their asset allocation and resetting their capital market assumptions. And throughout the quarter, you will see some rebalancing. And as the quarter progresses, we'll get a feel for that. But clearly with the current market environment with regards to the rates and where equity markets are at and I think you would see some continued rebalancing away from equities, but everybody is at a fairly low allocation. So I'm not sure how much lower they will go.

The next question is a follow-up from Bill Katz with Citigroup. Please go ahead.

Okay. Thanks for taking an extra question. Just going back, maybe C.J. for you, spend capital allocation as you think about 2020, given your commentary around potential unlocking of shares that could be sold by employees and the size of it, what is your thought or how are you thinking about sort of capital management policy between the dividend payout? I appreciate your prepared comments, sort of seeing this year will look like 2019 strategically, but any sort subtlety to that, flexibility to that to potentially absorb some of the secondary pressure that could be in front of you?

Yes. Bill, there really hasn't been any change to our thoughts around allocation of capital or repurchasing shares to offset the public. We -- the number of shares that have been available really haven't changed dramatically, available for sale haven't really changed dramatically. We do have -- each year, another tranche becomes eligible, but that number has been 7 million, 8 million for the last two years. And up to now, people have opted not generally to sell. So the short answer is, no, we haven't changed our thinking here.

And just one last qualifier, I'm sorry to be the dead horse here. Eric, just comes to rebalancing, maybe to answer the question this way, since you are through the month of January. How does this January look for rebalancing perspective versus a year ago, obviously a lot going on in the market levels as well?

All right. That's a dramatic change year-over-year. You're talking about fourth quarter of '18. That was down significantly. I think there is a little bit of people and clients a little frozen by the major decline.And then the compare that after this fourth quarter and coming into this year, I think there is more optimism coming into this year. And I think we see -- I would say, we see more opportunity after this January than last January.

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.