Hello and thank you for standing by. My name is Mike 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 Ms. Makela Taphorn, Director Investor Relations for Artisan Partners Asset Management. Ms. Taphorn the floor is yours ma'am.

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 measure in the earnings release. And 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. I hope you are well. First a quick update on our operating environment. The health and safety of our people remains our highest priority. We continue to work mostly from home with some investment personnel back in the office. Despite the environment, we continue to operate well. Our investment teams have taken advantage of market volatility to invest opportunistically. Our distribution professionals have used technology to communicate with existing clients prospects and new relationships and our operation professionals continue to support our mobile and flexible environment. At Artisan we focus on people investments and trust. The pandemic and social unrest has resulted in more volatile and uncertain environment for people and investments. Responding well requires patience and trust, critical components of our thoughtful growth mentality. Our approach allows our teams to remain focused on their investments and utilize degrees of freedom to produce differentiated long-term performance. We allow our people to operate in trusted and autonomous working environments and our patience and commitment to doing things right reassures clients and consultants. As we've always stated the outcomes are lumpy over short periods. But over the long term we compound capital for clients, create opportunities for our people and grow business value for our shareholders. Slide two shows that we have consistently added value for clients for 25 years. Year-to-date 12 of 18 investment strategies have outperformed their benchmarks after fees. Across the firm, we have generated over 600 basis points of firm-wide gross alpha. That translates into approximately $7 billion of additional wealth for our clients. Our recent performance rivals that of any period in our history, except for around the TMT bubble when we were a smaller less diversified firm. Our performance over time…

Thanks Eric. Good morning everyone. Just as Eric described, our business model functioning well, our financial model principles which are on Slide 7 has served us well during these uncertain times. Our P&L continues to act as intended and our financial results for the quarter and year-to-date are in line with our expectations. Strong alpha generation led to meaningful increase in performance fees earned this quarter. In addition, our bottom line benefited from the variability of expenses that fluctuate with revenues, as well as reduced expenses as our associates observed travel restrictions and predominantly worked from home. Our AUM is on Slide 8. AUM ended the quarter at $120.6 billion, up 27% compared to last quarter and 6% compared to the June quarter of 2019. The change in AUM over the quarter reflected a recovery in global, equity markets and strong excess returns generated by our investment teams. In addition, we benefited from broad-based inflows across our investment teams and strategies. Net client cash inflows totaled $3.3 billion this quarter, representing a 14% annualized organic growth rate. For the first six months of the year net client cash flows totaled $2.9 billion or a 5% annualized organic growth rate. During the quarter, the volume of client activity drove record levels of gross inflows. These inflows were across a broad range of clients, strategies and distribution channels both in the U.S. and outside the U.S. Our recent flows also include some sizable withdrawals from clients needing liquidity to navigate the COVID-19 crisis including endowments and hospital operating pools. These withdrawals were also broad-based across strategies and distribution channels, although primarily from U.S. clients. Changes in AUM by generation are on Slide 9. The net impact of client activity in the quarter resulted in net client cash inflows across all three generations…

Thank you, sir. We’ll now begin the question-and-answer session. [Operator Instructions] The first question we have will come from Dan Fannon of Jefferies. Please go ahead.

Hey, good afternoon. This is actually James Steele filling in for Dan. So, my question is just on kind of the cadence of flows throughout the quarter. It looked like they were predominantly occurred in April and June and May was a little bit lighter. So, I was just curious if there's any explanation for why that might have been the case? And then, I'd just hope for any color that you might give on July flows to the extent possible? Thanks.

Hi, James, it's Eric. I think in our remarks, we've set over the years and reinforced this quarter that the lumpiness of flows will persist going forward just as they've done in the past. It's very hard to pinpoint why a single month or a single quarter or even a given year, when you look at how the institutional due diligence process works, the clients that we go after, tend to take a long time evaluating and doing quite a bit of due diligence on us. In essence, we like having a high bar and a long process, because it eliminates a lot of the competition. It allows us to get sophisticated clients and it typically extends the duration of the type of client we get. So, through years or even months of work why the flow occurred in a given month to us is irrelevant. And we think that on a go-forward basis given our performance and given the current environment we're working in, we're having good dialogue with a broad base of clients that have done due diligence and know us well and we still have quite a bit of active dialogue going on with the client base and as well as interested parties.

Got it. Thank you.

Next we have Bill Katz with Citigroup.

Okay. Thank you very much for taking the question this afternoon. Just coming back to the three teams that you highlighted in your prepared commentary. How large of an opportunity do you think collectively those three teams can get to? And then relatedly you had mentioned that you're getting some pretty robust opportunities here just given sort of the migration into Gen 3. Can you talk a little bit about where you see the incremental opportunity from there?

Yeah. Certainly. It's -- I think it's very hard to predict how large a given team or strategy could become or what they could look like. If you -- some of the teams we highlighted in the long run if you went all the way back to U.S. small-cap growth, I think back then we really thought it would be amazing to get $1 billion in small-cap growth or in mid-cap growth, we would have been wowed by $3 billion to $4 billion. And now you look at the combination of the growth platform and the breadth and size, it's expanded to a variety of areas up and down the market cap and then also geographically. And so when we look at our new teams, we don't really look at the mindset of what could the size of this single strategy become. We work with each of the leaders to envision a franchise that can develop with multiple strategies with multiple decision makers and have a robust group of clients that make this sustainable. So while any of these single strategies may be limited in some form you have to think much bigger than that that we're going to develop talent and strategies from this. And I think all three that we've highlighted with regards to how the developing world thinks about the emerging markets outcome or how Thematic thinks about various themes and segments they can apply their process to could expand quite nicely. So it's very hard for me to come up with an exact number or forecast for that of how large those could become.

Okay. Just a quick follow-up -- that's helpful, Eric. Thank you. Just the follow-up for C.J. -- even though we’ll speak to you. So C.J. just on the cost side, could you sort of maybe update thinking on some of the maybe the discretionary items and how you see that playing through in the second half of the year? I certainly appreciate the fluidity of the backdrop that we're all operating in. But any sense on what may be structurally different versus more transitional in terms of benefit?

Yeah. I mean, I would say obviously the majority of the declines in expenses are related from our current work-from-home situation and that's driven the majority of the savings, and so I think the outlook for the rest of the year really remains as to how long we're working from home. So I would expect in the current environment, you would see a similar type of run rate for the year. But as we get back into the office and travel picks up you'll see that that will gradually increase. So I'd work from where we were this quarter. And based on the environment depends on where that expense goes.

Okay, terrific. Thank you.

Next we have Kenneth Lee with RBC Capital Markets.

Hi, good afternoon and thanks for taking the question. A very interesting slide. Slide number 4 in terms of franchise development. Wondering if you could just share with us some of your thoughts on where in terms of the progression of development are the three investment teams that you highlighted where are they currently, and perhaps wondering if there's any kind of related thoughts in terms of progression, in terms of organic growth for those teams as well? Thanks.

Yeah, certainly if using slide 4, obviously, we bring individuals into the mix. So there's a whole courtship period before the whole development of bringing an individual or a group of individuals in. Usually it takes three, four, five years to really build the correct foundation of the team, the resources, a foundational group of clients, most consultants and intermediaries and advisers like to see a three to five-year track record to occur. So I would say that the developing world now with a five-year track record has moved out of the development phase and into a growth phase and thinking about the franchise, the breadth of their franchise, which would include the mix of clients, the mix of fee rates, the breadth of the business. At the three-year mark where Thematic is at is clearly in the midst of the development stage. And it will probably stay at least there until the five year. When you operate in a U.S. equity strategy with an S&P benchmark, there's quite a bit of competition both active and passive. With that big of a supply you have to expect a little bit longer gestation period there until you really hit a real good growth curve, but we've had good movement in that strategy. And then clearly Rezo with only less than two years is in the development his asset gathering has been very strong, though. But with regard to the rest of the business and how we think about teams he's in the development phase, he's squarely in that development phase. And as we think about these franchises when you hit those milestones whether it's a performance track record the breadth of AUM or additional strategy that really gets into the heart of the curve of what we say is business management and franchise development. Hopefully that helps you.

Very helpful. And just one quick follow-up if I may and this is just following up on your prepared remarks. Wondering if you could just further expand on, some comments you mentioned on striving to maintain spare capacity. Thanks.

Yeah. Certainly, we -- yeah, we've always stated that we try not to be all things to all people. We try not to just bring in every opportunity we can because then you're stretching the business out to a level that it's very hard to take advantage of unforeseen opportunities, whether it's a new team that we never really thought about that came to us. And we felt that this is a no-brainer opportunity and you need either to drop a few things to move on that new team. Or what we've occurred right now during the pandemic, that we had spare capacity in the operations and distribution, to be able to pivot focus on more of a digital distribution model. We launched a blog, which we've called Artisan Canvas. We've upped our video and podcast content to market in this environment. And you need some spare capacity in the system, to be able to have the leverage, to take advantage of those unforeseen situations versus trying to push the model too fast. And too broadly not allowing you to execute at the level you want.

Very helpful. Thanks again.

And next we have Robert Lee with KBW.

Hi. Thanks and good afternoon or good morning. Thanks for taking my questions. I guess first one is, one of the things that I think in the quarter was the level of inflows into what you categorize as funds so -- which have been kind of steady outflow for a while. So -- and you've talked in the past about investments you've made in various types of intermediary distribution capabilities relationships you've been building. So is there this quarter any two -- well maybe there's two -- an A and B question here. Is there -- you said maybe there was some kind of inflection point you've reached with some of these initiatives starting to pay off in better sales. And/or maybe was there kind of a couple of outsized platform wins that kind of came on board that we should also think of helping future gross sales?

Yeah. I do think that our long-term relationships and the reputation we've built with many of our intermediary partners in the broker dealer the bank trust and even some larger advisers has paid off more recently. Given the breadth of success across the entire platform I'd say broadly we've been successful on an array of clients and opportunities. We did have one good outsized win with our mid-cap growth strategy with an existing intermediary partnership and that helped out the mid-cap growth strategy. But if you look at the rest of the strategies it's just been solid blocking and tackling. And I think, with the environment, we're in and leaning on partners that you've already done due diligence with, that you have a history with, and are performing, we've just seen broad success with those intermediary partnerships.

And maybe my follow-up, maybe this leverages that response. But how often do you see clients utilizing multiple strategies understanding they have to do their separate due diligence and each investment team but kind of once you have the relationship. And this is about intermediary institutional once you have that relationship. And do you find that, I don't know oftentimes those clients may end up investing in another team's strategy? Just trying to get a sense of how much you kind of leverage the Artisan brand so to speak in that sense.

During this shelter in place, I would say that, the activity of existing clients whether large-scale clients with multiple strategies or even small-scale clients with just one strategy have been broadening their interest in the Artisan brand. And we've seen an uptick in clients looking at multiple strategies. And we've been benefiting during this period of many clients increasing the dialogue with us and in some cases acting on newer strategies or increasing their allocation to the existing strategies. So I think most people would call that out a cross-sell opportunity, those opportunities have increased.

That’s great. Thanks for taking my questions.

And next we have Chris Shutler of William Blair.

Hey, guys. Good afternoon. A couple of questions. First, can you talk about the institutional pipeline? And second, the investment performance at Artisan has obviously been tremendous. So how do you look at the potential? Or what are you hearing from clients around the potential for some rebalancing decisions over the near to medium term, just given how strong things have been?

Yes. I guess two parts there. First is the institutional pipeline. We have a fluid dialogue with many institutional clients and consultants. I think the idea of a pipeline is very hard. There's not a widespread list of people just saying they have searches going on and there's a big pipeline. But there is a very active dialogue with our clients of how to work with this in a broader manner. It's hard to translate that to any number and give you a sense of what pipeline is, but we are having robust conversation with a broad array of clients. With regards to performance, we've had some very strong performance in many of our strategies. So the amount of rebalancing has been a little bit more elevated with us probably than a few other firms out there. And we saw outsized gross inflows and outflows. Some of the outflows were clearly around rebalancing of some strategies that have just performed extremely well. And that's elevated our numbers. So that would be my comments on the performance and rebalancing.

Okay. And then, this one may be a bit tricky to answer, but I'll ask anyway. So, looking at the strategies in totality across Artisan, many of them, most of them outperformed in the first quarter when markets were weak and then outperformed again when markets rebounded in the second quarter. Usually, we don't see that happen quite that way. So, I guess, is there anything you would call out in terms of like how your teams or why your teams, you feel like they pivoted so well? And then, as you look across the firm today, I know, you're cognizant of like factor exposures and things like that, is there anything you see or that you'd want to talk about that you're just wary of, with everything performing so well at the same time?

I feel like that we're a little bit more into a normal market in the sense that there's ups and downs and that you can act on the volatility, you can act on a lower cross-sectional correlation among individual securities that allow active managers to showcase the process and skill set that's embedded there. So, I think, from a performance standpoint, it's what we should be doing, is participating in up markets and protecting in down and it's nice to see some movement there versus the 10-year run we've had, where a single factor was dominating the bring up factors, that was clearly fueled by cheap money and it was fueled by government action and it was fueled by a massive amount of index, perpetuating a long one way market. So, we did quite well during that period. And now that we're in an environment with a little bit more activity, we're showcasing why active management works and more importantly why it works at Artisan. I don't want to defend all of active managers; it's hard to do that. But I can certainly defend the active management at Artisan Partners. And that's why we showcased that 25-year history of producing alpha and we're showcasing it again right now across the entire platform.

Great. Thanks, Eric.

Next we have Ryan Bailey with Goldman Sachs.

Good afternoon and thank you for taking our questions. Maybe a question for C.J. to begin with. On the separate account fee rate, we saw quite a strong improvement there. I was wondering if you could decompose some of the puts and takes in this. And if you see any sustainability in a positive trend? I'm assuming it's from the generational shifts. But if there was anything else underlying then maybe losses of mandates from loyalty rates or anything else that would be very helpful.

Yes. Sure Ryan. Good question. It's actually really more of a function of the fact that the first quarter was a little abnormally low because we had such a low quarter ending AUM point as well as at the end of March very low average balances. And so the billing it's really a billing cycle issue that the first quarter was low because those clients that are billed on quarter end assets had very low AUM, and the clients that were billed at the end of this past quarter were higher than normal. So I would say, this quarter was a little more closer to normal than last quarter which was a bit low.

Got it. Okay. And maybe kind of shifting gears a little bit. A question on, sort of, new talent. You've I guess worked through the initial shock of work from home and at the same time we've seen some of your larger competitors face some sort of platform challenges. So I guess, I was just wondering if there's been any change to the pace of a number of conversations you've had with potential new talent?

Yes. I think the disruption and work from home, we've had a fair amount of inquiries. I'd say that the pace of inquiries and the outgoing reach out that we do has been pretty consistent, I would say, maybe a few more individuals that we're interested in that we're spending more time with than normal. And I would point to -- there's a decent amount of activity out there. We listed out in our prepared remarks the different firms whether it's the larger integrated firms all the way down to the hedge fund platforms. And if you saw some of the activity around some of those hedge fund platforms there is quite a bit of movement of talent inside of those. So there are people out there interested in making the move during this environment. There's a decent amount of conversations going on. I don't -- I wouldn't describe it as really out of the norm or abnormal in any which way on either direction, but clearly we have time. And with individuals working for home you have more time -- people privately looking at making some different moves. So slightly elevated I guess I would say.

Great. Thank you.

The next question we have will come from Mike Carrier, Bank of America.

Good afternoon. Thanks for taking the questions. Just given the strength and diversity of flows I just have a question on like the sustainability. You guys mentioned the mid-cap growth win a lot of blocking and tackling. You've got the performance and the differentiated strategies. So the third-generation funds are more weighted to the intermediary channel. Like have you been added to any new platforms or portfolios that could be more like recurring in nature? Or has it been more driven by other kind of decision-makers or on the institutional side?

With the generation three strategies, we definitely had a tilted mix towards the intermediary tilted towards the U.S. and tilted towards pooled vehicles and we're starting to broaden that interest out with some institutional dialogue and looking at the breadth of that client base the mix of that client base with many of the generation three. And the reason for hitting those milestones does introduce other client types into the discussion and brings up opportunities. So we would expect that we'd be able to broaden out the mix in those strategies on a go-forward basis.

Got it. Okay. And then C.J. just a quick one. Just given the elevated performance fees in the quarter how does that like tend to impact the comp ratio? It seemed fairly straightforward, but I just want to make sure there's no nuances there. And then so we expect more of that ahead. I think there's still not much that generates performance fees, but I just want to make sure that hasn't shifted too much?

Yes. No. Obviously it did impact the comp ratio we have a higher payout on performance fees than we do on recurring management fees. So there was some extra comp in the P&L for performance fees this quarter. And we're still running around 3% of AUM, 2% to 3% a little under $3 billion of AUM that's subject to performance fees. And that's really as we've said it's spread over a number of quarters with June and December being the largest opportunities for performance fees. And given the performance that you've seen this year, it's no surprise that the performance fee number spiked a bit this quarter.

Got it. Thanks guys.

The next question we have is a follow-up from Bill Katz with Citigroup.

Okay. Thanks very much. Just tying up a couple of things. Just in terms of the ins and outs you had mentioned a few lumpy outflows rebalancing. Any way to sort of size, how much pressure maybe incremental pressure you might have experienced just given some of the need to draw down the cash? And then any commentary around sort of July trends?

Yes. The elevated flows we talked a bit about the success of a variety of strategies of people just wanting to rebalance. Given the strong performance, I think we continue to perform, you'll see some natural rebalancing that occurs especially in the more sophisticated institutional clients that have a strong investment policy statement, strong oversight and sticking to their asset allocation. That's going to be natural. You have a little bit of structural outflow going on in the intermediary space. We saw elevated outflow in the international space. So both international growth, international value saw a little bit higher outflow as you saw some of the intermediaries bring in some passive exposure strategies into the asset allocation and balance that mix of passive and active. So that happened across both the strategies. That will probably persist a bit. I'd call that a little bit more secular as people weave in the active-passive mix into the international space. And so I think on a go-forward I think the situation still -- and the environment still the same. And I think that our brand and reputation and that's why we focused on really sticking to who we are in building trust is going to shine through on a go-forward basis right now. But I would -- I mean I'd clearly think as I mentioned on the month-to-month, it's very hard to say any given month or any given quarter that we can give you any outlook with any accuracy given our client base.

Thank you.

Well this will conclude our question-and-answer session and today's conference call. We would like to thank the management team for their time today and thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you again everyone. Take care and have a great day.