Good afternoon and welcome to the Artisan Partners Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Eric Colson, Chief Executive Officer. Please go ahead.

Welcome to the Artisan Partners Asset Management business update and earnings call. Today's call will include remarks from Eric Colson, CEO; Jason Gottlieb, President and C.J. Daley, CFO. Following these remarks, we'll open the line for questions. Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin, I would like to remind you that comments made during today's call, including responses to questions, may include forward-looking statements. They are subject to known and unknown risks and uncertainties, including but not limited to the factors set forth in our earnings release and detailed in our SEC filings. Risks and uncertainties may cause actual results to differ materially from those discussed in the statements, and we have no obligation to update or revise any of these statements following the presentation. In addition, some of our remarks 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 and the supplemental materials, which can also be found on our Investor Relations website. Also, please note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any Artisan Investment product or a recommendation for any investment service. I'll turn it over to Eric Colson.

Thank you for joining the call or reading the transcript. For us, these calls are an opportunity to repeatedly communicate who we are, what we seek to accomplish, and the time horizons that matter to us. We intentionally de-emphasize quarterly and annual outcomes. Instead, we focus on what we are doing to create and maintain an environment and culture that maximizes the probability of long-term performance for clients, talent and shareholders. Artisan Partners is a high-value-added investment firm designed for talent to thrive in a thoughtful growth environment. Our purpose is to compound wealth for clients over long time periods. We do this through our talent-driven business model. We attract, recruit and partner with exceptional and differentiated investment leaders, and we give them autonomy, resources and time to generate investment returns over long time periods. As Jason will discuss, we have been doing this for nearly 30 years in public equities, for a decade in fixed income and are in the early innings in alternatives. Time is a crucial ingredient in what we do. We protect the time of our investment teams so they can maximize time spent on research, investing and adding value for clients. We work to earn time to extend duration. We do this by being true to who we are, by maintaining a culture focused on long term, by avoiding the temptation to engineer short term results, by remaining disciplined through difficult periods, by constantly communicating our time horizon to clients and shareholders, setting the right expectations and doing business with individuals, allocators and institutions that are aligned with our long term approach. The chart on Slide two reinforces why we focus on the long term. Short time periods are noisy. Skill and luck are indistinguishable. Over longer periods, the value of process and discipline become apparent. As we extend time, the value of what we do becomes evident. Of our five strategies with 20-year track records, all five have added value over the period after fees. With enough time, alpha can compound into meaningfully more wealth for clients and investors, a simple example of which is on the right side of the slide. We take a similar long term approach to developing our business. We look for opportunities that are consistent with who we are and where we have an edge. We are methodical. We don't chase fads. We remain focused on high value added investing. If we do these things with patience, we are confident that quality long term outcomes will follow. I've asked Jason to elaborate on this approach as it applies to our investment platform.

Thank you, Eric. As Eric mentioned, we have been building equity franchises for nearly three decades. We are a decade in with fixed income and are in the early innings with alternatives. I want to start with our equity businesses. Today we have eight equity investment teams and 16 strategies accounting for $137 billion in AUM and approximately $900 million of annual revenue. Several of our equity teams are well established franchises with recognized leadership, depth of resources, disciplined investment processes, unique cultures and long term track records. These characteristics result in powerful and durable investment and business engines, but it takes time. The path is not linear and there are periods of decline as well as growth. Slide three features our international value franchise. Lead portfolio manager David Samra joined Artisan 22 years ago and launched the international value strategy. David has a well-articulated value investing philosophy and process that the international value team has applied with discipline through market cycles. The result is outstanding investment performance over long time periods. The international value strategy has generated 466 basis points of average annual alpha net of fees since inception. The Artisan international value fund is ranked number one in its Lipper category. You can see the business outcome on the page. The team laid the foundation in the early years, establishing themselves and their track record. They have steadily grown their business by compounding client capital and net new flows. Today the team manages $41 billion across a diversified book of institutional and wealth channel clients. In 2020, Beini Zhou and Anand Vasagiri joined the international value franchise and partnered with David to launch the International Explorer strategy. The International Explorer now has a three year record. It has generated 549 basis points of average annual alpha net of…

Thank you, Jason. We remain extremely excited about the long-term investments we are making across equities, fixed income and alternatives. Our excitement stems from a proven approach across asset classes and time periods, successful long-term outcomes for clients, shareholders and key investment talent and the limited supply of homes for investment talent providing our combination of autonomy, resources and time. We will continue to think in decades versus years or quarters, and we will continue to focus on those things that we can directly influence day in and day out in pursuit of long-term success. Thank you for your time, and I will now turn it over to CJ.

Thanks, Eric. Our 2023 results reflect the impact of a rising market and strong investment performance. Market volatility experienced in 2022 and 2023 highlights the importance of our financial model. We maintain a highly variable expense structure to minimize the distractions of short-term market volatility. As we've shown in the past, our financial model is able to deliver stable and predictable results through market cycles. An overview of our financial results begins on Slide eight. Assets under management ended the fourth quarter at $150 billion, up 10% from the September 2023 quarter, and up 17% from the prior December year-end. Investment returns contributed $14.6 billion to the increase in AUM in the quarter. Net client cash outflows during the quarter were $400 million, and there was $500 million of Artisan funds distributions that were not reinvested. Average AUM for the quarter was down 1% sequentially, and up 10% compared to the December 2022 quarter. The full year, investment returns contributed $27 billion to the increase in AUM. $3.9 billion of those returns were attributed to investment performance in excess of benchmark returns. Net client cash outflows were $4.1 billion for the year. Net outflows continue to be impacted by industry trends in favor of low-fee passive index products, and more recently, the move of have funds into fixed income. Gross inflows remain muted and well below our historical levels. Average AUM for 2023 was down 2% year-over-year. Our complete GAAP and adjusted results are presented in our earnings release. Revenues in the quarter increased less than 1% compared to last quarter, as performance fees more than offset the impact of lower average AUM. Total performance fees were $6.1 million in the quarter. However, as a result of the required consolidation of our credit opportunity strategy, $2 million of the performance…

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Hey, everybody. Good afternoon. Thanks for taking the question. Eric, I was hoping maybe we could start with the prospects you guys have for the fixed income business. Nice traction over the last couple of quarters and years. Clearly, there's a pretty high expectation that market demand for fixed income will continue to improve. So how are your products positioned to perhaps participate in that? What are your expectations for growth in these strategies for '24?

Hi, Alex. We have been emphasizing the credit franchise with Bryan Krug as well as the EMsights franchise with Mike Cirami. I'll start with the EMsights franchise. We saw quite a bit of outflow in emerging market debt in '22. I think it was the largest emerging market debt outflow in the history of that category and then '23 last year, we saw probably close to a 10% outflow in the category. We look at our EMsights team in the same way we looked at our global strategies, global value or global opportunities. The bulk of the allocations come from the institutional channel. A high percentage, if not majority, comes from outside the United States. There is a competitive landscape, but I think we stack up very well performance-wise and we expect, as we witnessed with global opportunities and global value, the requirement for a three-year track record and then starting to see that steep slope and buildup of assets once you get that three-year track record. Between now and the three-year track record, we were getting quite a bit of inquiries. We're building the asset base close to about a billion, and we expect to continue building the asset base over the next year, but really expect meaningful growth after the three-year mark, given the traits and characteristics around that client base. Similar to the credit, we also have an alternative strategy with global unconstrained that we highlighted in the deck. The returns, the risk, the correlation are all very favorable to participate in the movement in a higher allocation to alternatives, specifically liquid alts. So we're quite pleased with where we're at with EMsights and the progress they're making to get to that three-year mark. With credit franchise with Bryan Krug, we've established a very strong base that has built in the same way that we saw our early stage franchises build. We're about $10 billion in the franchise, and we're saving quite a bit of capacity to go into degrees of freedom and create alternative strategies and with credit opportunities, which was highlighted, the drawdown fund that Jason mentioned and the floating rate fund, we just see a strong runway for building out that franchise and really seeing that take its second phase and build up, as we've seen with our other more mature franchises. So again, it's patiently waiting for the right clients, right terms and building those over time.

Great. Thanks for that overview. CJ, one for you, just on the change in long-term incentive awards that you highlighted earlier. Can you talk a little bit about what prompted you guys to go down this path and what caused this change and as you look out beyond 2024, it sounds like an elevated retirement acceleration clause will weigh on incentive comp for a couple years. So should we think about that incremental $9 million to $10 million as the new incremental expense beyond 2024 as well?

Yeah. Thanks for the question, Alex. We've always aligned our business with the long-term value creation and sustainable growth and we've designed it for investment talent to thrive, to extend their duration, and provide a path for them to spend their careers here. We've evolved and have been thoughtful over the 10 years we've been public as well as a partnership before that. In 2014, we introduced these career shares, which are comprised of both time vested as well as qualified retirement provisions and we've introduced this retirement clause as sort of the next phase of extending duration and providing a path for investment talent to spend their career here so that they don't have to worry about whether they're going to wind up forfeiting anything. They do the right thing. They have the qualified retirement. It'll further align our interests, our shareholders' interests, our clients' interests, with proper retirement and succession planning. With respect to the expense, I would expect it to be elevated in the $8-ish million for the next three years, and then it'll step down pretty meaningfully and then over a five-year period, it'll level off and just to be clear, the provision only applies to grants that started in 2024 and forward and so we think that benefit will be a long-term benefit for everyone.

The next question comes from John Dunn with Evercore ISI. Please go ahead.

Hi. Thank you. Could you maybe give us an update on the drivers of the non-U.S. institutional channel for equities, maybe stuff like Europe, Australia, because it got better this quarter?

The non-U.S. drivers, a bit of it was around EMsights that we had some early-stage wins there was probably the big change and I would say Australia has continued to wane on our distribution that we've had early fades in the first quarter, and then in the fourth quarter and we had some outflows and then with one of our key relationships in the U.K., we had a strong inflow as well in our global ops and global value strategies. So if you really broke it down for the quarter, it probably a good flow in global ops, global value, and as well as our EMsights team and that was out of the Middle East.

And then at your guys' Investor Day, you talked about not having to be first into newer areas, but lately there's been a bunch of private market firms and teams joining bigger firms. Have you observed any changes in the backdrop for that or potential sellers thinking about stuff like getting better distribution or whether it's better to be part of someone bigger?

Hi, this is Jason. I'll take that. I think we've seen a lot of activity in the private market space, primarily in the private credit world, not to be surprising. We see it both in the world of lift-out opportunities, which is part and parcel with our model as well as the acquisition and we don't see that as something that's going to stop. I think the changes might come more in the form of lift-outs and our belief around that is that there's going to be a series of funds that may in fact wind up disappointing, and so the carry opportunities for some of the investment teams could be a little bit more shallow than they were in the past, and that might shake some opportunities free and that has been correlated to the inbound inquiry that we've been experiencing here at Artisan. So it's given us the opportunity to really take a very hard look and be deliberate with the opportunities in that area of the world. That is an asset class, as we had discussed at the Investor Day back in September, and we've talked about in the world of where we go strategically with alternatives, certainly that is an area of interest, but we're not going to obviously adjust our business model just to find a team. It has to be right for us, one that we think we can deliver differentiated returns in a segment of the market and identify the right clients. And to your point, all of these big, let's call them acquisitions or mergers, tend to come in the form of what can you do for me on distribution and as you know, that's not necessarily directly our model. We're not here to first and foremost distribute. We're here to produce world class differentiated results and find the right clients on the right terms to deliver that outcome. And so we're going to remain very consistent with our past and our history and take the right shot as and when it arises, recognizing that it might take time.

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

Okay, thank you very much for taking the questions and appreciate the prepared commentary. Just maybe start off on the flow side. So it seems like there's a lot of different opportunities here, and I guess you made some comments in your press release around the opportunities within equities. Is it some of the smaller incremental vehicles that you are sort of seizing into attractive timelines, attractive performance, or are there some maybe older, more seasoned vehicles where you're seeing the demand? And I guess for lately, you've always watched capacity pretty carefully. I appreciate you highlight the International Value Fund, but at $40 billion, my instinct was, okay, that's a pretty big fund. Where do you tend to sort of cap out incremental new dollars coming into that? Thank you.

Thanks, Bill. It's Jason again. Yeah, our franchises have continuously sought to identify opportunities for expanding degrees of freedom. They've come in many forms, including broader securities via differentiated markets, market caps, liquidity structures. Also, we see our teams build capacity through recruitment and acculturation of that talent. David Samra with high value and, as Eric mentioned, Bryan Krug with credit embody this mindset. Importantly, with their success, they have the ability to work with like-minded, sophisticated clients who understand their philosophies, and importantly, their time horizons. This is in large part why we believe the opportunities for modest, thoughtful growth are in place while they remain methodical in the pursuit of their top-tier returns for existing shareholders and so we recognize that David's success on the return side has propelled him to a reasonably large-sized fund, but his team has broadened out the types of securities he can use. You've seen us, and I mentioned this on the commentary, having Beini and Anand join the team, getting down market cap, really does give a much more expanded opportunity set for David and the international value franchise. And then, more broadly, I guess I would say, and this isn't specific to any one team or any one market, but you've just seen a huge increase in the world of money market vehicles. I might get the numbers off a little bit, but I think it's grown from somewhere in the high threes to about $6 trillion at the end of 2023. I don't know what the numbers are today, but until we see a reversal of that, I think there's a lot of pent-up demand and money on the sidelines, but when we do see that reversal, we think that our returns and our performance and our teams speak for themselves, and we think that those assets will ultimately find a home, whether it be with high value or credit or some of the global strategies in the institutional space or in EMEA. So we're just going to stay thoughtful. We're going to stay patient, but we think when there is that move back out of safety and money markets, we're very well positioned to capture that.

Okay, thank you and maybe one for C.J. As you look ahead to the year, how are you thinking about balancing reinvestment back into business versus the payout? I guess your payout ratio came in maybe a little bit at the higher end of what I think folks were thinking about this year, like 96.5% if I did the math right. You've been running closer to 90%-ish a couple years before that. So when you look ahead to this year, recognizing some of the seasoning, some of the reinvestment needs, seed capital, etcetera, how do you think through the payout ratio as you look ahead for the year? Thank you.

Yeah, sure. Bill, at this time, I think we're staying the course. We held back some cash this year to seed new products. I think we feel pretty good about where we are in the size of our seed book. So there could be potentially some additional cash freed up for other uses next year, including adding to the special dividend. But, as we sit here right now, we continue to see the 80% variable dividend paid each quarter, along with that special dividend at the end of the year to be our course of action. So I wouldn't anticipate any major changes to what you're seeing from a payout percentage.

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

Hey, good afternoon. Thanks for taking my question. Just one on the credit alternative investment strategies, I wanted to talk a little bit more about how you see potential demand, especially in the current rate environment. Thanks.

Yeah. Hi. This is Jason again. I'll talk about a couple of them and then if there's a follow-up question, just let me know, but when you think about the credit opportunity strategy that Bryan has been building and developing over the past six years, we now think we've got a phenomenal asset in the form of his performance, as we highlighted. It's around almost just shy of 10%, 9.8% net of fee and we've always been really patient on the distribution side because we firmly believe that time well spent is time spent owning the record and we've now done that. I think the uptake with clients, whether it's existing clients that are evaluating Bryan in a different way through an alternative lens, or some of the new clients that are starting to evaluate him that are building up in the pipeline, we think that that's a really interesting opportunity for us to continue to develop and build and grow the alternatives allocation and then going back to the global unconstrained strategy on the EMsights team, likewise, what's interesting is this is somewhat counter-cyclical to the money market conversation that we just had on a prior question. Whereas if you have money market rates somewhere in the 4% to 5% range, and the strategy that the global unconstrained strategy deploys, if you can generate a 3% to 6% excess return on top of that money market rate, you get really, really interesting outcomes. Somewhere in the, let's call it mid to high single digits, potentially in the low double digits if we're able to execute, tends to be uncorrelated to the broader markets and I think people are starting to take note of that. Again, it's very, very early innings, as Eric mentioned. We're sort of two years into the journey, not even quite two years and we think that once people evaluate the team early stages, they hit their three-year record. We think that that could be a really interesting leg to the growth stool and I'd be remiss if I didn't mention the dislocation, the drawdown fund. Raising $130 million for Bryan in dislocation opportunities is really a testament to, I think, the strength of his brand and our credit platform broadly and this is hopefully going to be one of many. Once we deploy that capital, Bryan produces the returns, we return the capital. This should be an opportunity to continue to develop and grow and build a really exciting platform around these drawdown vehicles and so I think we've got really interesting short, intermediate, long-term duration opportunities for the platform and there's more that will ultimately reveal themselves, whether it's with the existing teams, which is the highest and best use of our time to develop that. The probability of success is much higher. Or whether we go out and we identify the next team to bring out of the platform, we still feel like we've got really good opportunities for growth here.

Great. Very helpful there and just one follow-up, if I may. I think at the prepared remarks, you talked about an increase in distribution headcount. I'm wondering if you could just talk a little bit more about expansion plans for distribution this year. Thanks.

Yes, certainly. Last year, we spent quite a bit of time optimizing our distribution team. We looked at the array of strategies, getting up to 25 strategies, the complexity of the product mix, including credit and alternatives. We felt the need to emphasize the sales orientation of our distribution, of our centralized distribution, groups going after the intermediary, non-U.S. That centralized group, we adjusted compensation. We added resources. We built in training with a real focus on sales and expanded relationship management for continued cross-selling. We then also emphasized client service and product knowledge inside the dedicated distribution, those individuals attached to our autonomous teams and with those adjustments, we're also adding a few individuals into both areas, as well as we launched a alternatives distribution team that is focused in the center of the firm to help amplify sales for credit opportunities, global unconstrained, and other alternative strategies. We think at the end of the day, that will create a smoother sales cycle selling across the firm and also, with the complexity, our clients will get direct relationship management and product knowledge from individuals that are closest to the teams.

Thanks again. This concludes our question-and-answer session and the Artisan Partners fourth quarter 2023 earnings conference call. Thank you. You may now disconnect.