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Artisan Partners Asset Management, Inc. (NYSE:APAM)

Q3 2013 Earnings Conference Call

October 28, 2013 5:00 PM ET

Executives

Makela Taphorn – IR

Eric Colson – CEO

C.J. Daley – CFO

Analysts

Bill Katz – Citigroup

Robert Lee – KBW

Michael Kim – Sandler O'Neill

Marc Irizarry – Goldman Sachs

Cynthia Mayer – Bank of America-Merrill Lynch

Chris Shutler – William Blair

Surinder Thind – Jefferies

Operator

Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the Artisan Partners Asset Management’s third quarter 2013 earnings conference call. My name is [Jamie] 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, this conference call is being recorded.

At this time I would like to turn the conference call over to Makela Taphorn with Artisan Partners.

Makela Taphorn

Good afternoon everyone. Before we begin I would like to remind you that our third quarter earnings release and the related presentation material are available on the investor relations section of our web site. I would also like to remind you that comments made on today’s call and some of the responses to your questions may deal with forward-looking statements and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are presented in the earnings release and are detailed in our filings with the SEC. We undertake no obligations to revise these statements following the date of this conference call.

In addition some of the remarks this afternoon include references to non-GAAP financial measures. You can find reconciliations of those measures and the most comparable GAAP measures in the earnings release and exhibits and earlier today we launched a registered public offering of 4.8 million shares of our Class A common stock. Because we are currently marketing this offering we will not be discussing or taking questions on the pending transaction on this call so please refer to the documents on file with the SEC if you would like further information.

And with that I will now turn the call over to our Chief Executive Officer, Eric Colson.

Eric Colson

Thanks Makela. Good afternoon. Welcome to the Artisan Partners Asset Management business update and quarterly earnings call. I am Eric Colson, CEO and I am joined today by C.J. Daley, CFO. Thank you for your time today and I hope you find this discussion useful.

During this time I want to make sure to reinforce our long-term business strategy through a current presentation of our operational and financial statistics. Additionally as I mentioned last quarter I want to take some time to review our management approach.

Last quarter I focused on our talent driven business model. This quarter I am going to spend some time highlighting how we view growth. We are very committed to managing our business for growth. We think it is critical to talent acquisition and retention. But we don’t believe in growth for growth’s sake. We believe growth needs to be thoughtful and grounded in a long term view of success. Once I am done, CJ will take the lead walking through our financials.

Since our last reporting period, the only real change as noted on slide 2 is our AUM, which increased to nearly $97 billion during the quarter through a combination of organic growth, market appreciation and alpha generation from our investment team. Since quarter end, we have surpassed the $100 billion level. While reaching this milestone is noteworthy and worth recognizing this as an achievement for our hard work and great client support, $100 billion is just another number and states nothing about the quality of our business or thoughtfulness in our growth to achieve this milestone. I will elaborate our approach to growth later on this call.

The deck two slides provide a current view of our long term investment results. As a reminder, it’s our goal to produce superior investment returns on an absolute and relative basis with integrity over a full market cycle. So when we analyze investment performance we answer three questions. And we have been faithful to a strategy of stated investment philosophy and process. As the strategy produce good absolute performance how does the strategy’s performance compare to the performance of the peers, competitors and the index? As of September 30, 10 of our 12 investment strategies added value relative to their broad market performance benchmarks over the trailing 5 year and 10 year periods since each strategy’s inception. All 12 strategies have good absolute performance and followed their objective with integrity. We expect our 13th strategy, global small cap growth to be highly differentiated from its benchmark and relatively focused in nature. We will report on the strategy more closely after it has at least a year of results to discuss, even then we will emphasize a three to five year perspective if not longer.

With that stringent [ph] strategies we are not attempting to time the market. And more importantly, the first few quarters or any short time here is for that matter are not appropriate gauges of long term success for any of our strategies. Our global value strategy had a slow first six months and now has very attractive long term record. We launch strategies based on long term investment opportunities in alignment with secular asset allocation change. The process discipline of our investment teams will result in periods of relative weakness and that is okay. We value the long term value creation over short term success and we have confidence in the process and execution of our managers to be successful over long periods.

Slide 4 further reinforces the impact of our performance philosophy across our asset base. Our teams run active portfolios with high degrees of investment freedom. Each also adheres to a time-tested investment process. None have a process or incentive that place much value on very short timeframes. Therefore, the return patterns of all of our teams will be lumpy. That is evident in the one-year returns. But over a longer period that normalizes cycles or trends we have compounded wealth for clients and outperformed the indices as indicated by the 90% to 100% of assets outdistancing the benchmarks over the 5-year, 10-year, and since inception time frames.

Our mutual fund peer ratings, which are highlighted at the bottom of the page are a great illustration of how our results translate to peer ratings.

Slide 5 is a quick review of the three core principles that define who we are. This slide is the anchor to our beliefs. Summed up in one sentence, we are a high value added investment firm designed for investment talent to thrive in a thoughtful growth environment. We believe strongly in the philosophy and approach that define who we are, and we believe it should be well articulated.

This quarter it is my goal to articulate our thoughtful approach to growth. For those on our past calls, I will address asset diversification later and within the context of our thoughtful approach to growth.

It is probably not necessary to have Slide 6 to make this point, but we want to emphasize the point. We are a high value added investment firm. Growth should extend from who we are, and it should reflect the process and development of our investment teams. It should prioritize the client experience, and it should emphasize long-term business discipline over short-term results. It should not be driven by quarterly expectations or arbitrary business development targets.

Turning to Slide 7, our growth strategy like everything else extends from our four management guide posts. Firm evolution requires thoughtful growth. A lack of growth or growth for growth sake can make a business unattractive to investment talent. We are always looking for ways to maximize long-term career opportunities for our existing investment professionals and make our business attractive to prospective investment talent. We also want to make sure we never prioritize growth ahead of the investment process, and we need to make sure we are grounded in a long-term view that prioritizes our clients. If we stay focused on those three things, we believe growth will follow naturally.

Perhaps, the most important consideration in our growth strategy is team development, internally and externally. Our hybrid model and execution of results have created a unique brand for Artisan in the marketplace. To make our model continue over the long term, talent networking, sourcing new talent, and internal talent development must be a core competency and define who we are. Our process evaluates individual characteristics, fit with Artisan, and long-term demand within the institutional framework.

We don’t try to capitalize on short-term trends or [knit] (ph) strategies nor do we attempt to guess if a person or strategy will work in the next year or two. To the best of our abilities, we look for no-brainers that will work within our model and fit within the long-term asset allocation of institutional clients. This allows us to be patient and nurture the right outcome after we started a new strategy or brought in a new team.

The right talent for Artisan is a scarce resource and should not be forced. Similar to the institutional decision making process, our talent development and recruitment process is a gradual one. Like investing, one very bad decision can more than offset multiple good decisions. We meet with a lot of teams and only move forward when we are fully confident. Finding the investment talent to begin or evolve teams has been a key part of our growth story. Evolving our existing teams has been an even bigger part of our growth story.

The way we develop teams internally is just as rigorous as the way we evaluate external talent. We want recognized decision makers with strong belief systems, and the development of talent within each of our teams should be as unique as the teams themselves. There is no formula for developing talent within a team.

Moving on to Slide 9, all of our five investment teams at Artisan today began with a rigorous [internal] (ph) talent search. Each one started with a talented decision maker, a tight team, usually one analyst, and a commitment to developing each team in a way that fits their unique investment beliefs. There is no roadmap but our goal is the same. We want to build multi-generational franchises. We don’t want a single product built around one star. We want true franchises with breadth in decision making defined by distinct investment culture that has natural succession options.

You can see the outcomes on the slide. All but our newest team has multiple decision makers and each team has evolved the research in a way that is distinct to their investment culture. This development created greater capacity for growth and ultimately new products. For example, Andy Stephens joined in 1997 with a passion for growth investing, and he believed in the untapped mid-Cap segment of the market place. Jim Hamel was his first analyst. In 2001, Jim was promoted to associate portfolio manager and ultimately portfolio manager in 2006. Over the years, Andy and Jim have sought out the best people, trained them in their philosophy and process, and evolved a structure to ensure clients would benefit from the expertise of the team as it developed. The team now has an incredibly deep research capability that has produced additional decision makers in Matt Kamm and Jason White, and it has created the capacity for the team to launch the global opportunity strategy and integrate Craigh Cepukenas in the U.S. small Cap growth strategy. Today, Andy Stephens leads our growth franchise while Jim Hamel leads the global opportunities portfolio. Matt Kamm leads the mid Cap growth portfolio and Craig Cepukenas leads the small Cap growth portfolio. All of our teams have similar growth outcomes despite taking very different paths.

Emerging markets is early in the development process, and we expect it will eventually evolve in a similar fashion.

On Slide 10, we illustrate our capacity management life cycle. As we create capacity for growth on our teams, we have to ensure we are managing the capacity appropriately. We are an investment firm first and foremost. That means that as we grow, we need to protect the alpha potential of our teams. Growth can easily stagnate or reverse course if results falter, so we manage capacity proactively for each of our investment strategies.

In the first few years, we ask our teams to focus solely on investing. During the early years of a new strategy, the tendency can be to use the portfolio managers heavily in the marketing process to establish an early client base and quickly push product profitability. We don’t believe that is wise. We hire a dedicated business leader to cautiously market the new strategy, and we seek out early adopters, but we focus on long-term investors versus hot money. As the strategy matures over the first three to five years, if we have done a good job letting the team focus on investing and protecting alpha, institutional consultants and advisers begin recommending and allocating assets.

In many cases this is the hockey stick with asset growth. Once the strategy has hit its growth phase and begins to move to maturity we actively manage asset diversification to again protect the time of our portfolio managers and knowing that transparency and communication are necessary to establish trust and long term relationship of clients. For these reasons, just prior to our IPO earlier this year, we closed our global value strategy to most new separate account relationships. This asset mix is heavily biased towards separate accounts and we are now actually managing capacity to balance the mix with flows through other channels. Finally as a strategy hits maturity we protect alpha by closing possibly to preserve portfolio flexibility. At this stage we think growth is more appropriately measured by value added versus new money to the strategy.

In the third quarter we closed our U.S. small Cap growth strategy as the level of assets and the pace of cash flows reached a level that our growth team wanted to manage to ensure process consistency.

The next two slides illustrate the outcomes of our business discipline around team development and alpha protection. The diversification of assets by team varies because timing, demand, and opportunity line up in different ways but overall we believe we have balanced across channels, minimized concentration risk, and averaged fees that support our high value added business model.

Turning to the next slide you can see how this translates for us as a business. We think we have attractive diversification by team, channel, client and evermore each day by geography.

As I wrap up this discussion of thoughtful growth I believe it is appropriate to touch on expectations for growth on Slide 13. We manage our business as an investment firm. We manage our firm like business owners. What this means inherently is that our time horizon for growth aligns with our expectations to grow the firm’s value over the long term. It does not align with just the September 30 quarter or just fiscal 2013 or any other arbitrary time frame. We understand that profit cycle, that value is realized in unpredictable ways, and that in order to achieve the most sustainable outcome we must accept short term lumpiness. We view ourselves as a growth firm and we are committed to growth over the long term but as you have heard me say repeatedly, our commitment is to thoughtful growth. Linear business outcome requires compromising culture and process, which we don’t believe is productive. We understand and accept that our results will be lumpy. We don’t think lumpiness prohibits long-term growth, in fact we believe that a lumpy growth pattern reflects thoughtful growth based on our culture and discipline.

Now C.J. will provide our third quarter financial highlights.

C.J. Daley

Thanks Eric. Good afternoon everyone.

Slide 14 begins the review of our third quarter September 2013 results. In summary it was another very strong quarter for our firm. AUM increased to $96.9 billion and net client cash inflows were $2.1 billion. Revenues were $178 million up 10% over revenues in the preceding quarter ended June 30, 2013. Our adjusted operating margin declined slightly to 43.3% and was negatively impacted by 191 basis points as a result of the expense related to our first public company employee equity grant in July of this year. Net income per share on an adjusted basis was $0.67 per share compared to $0.64 per share in the June 2013 quarter. On October 22, our Board of Directors declared a dividend of $0.43 per Class A common share.

Moving on to Slide 15. Ending assets under management was $96.9 billion, up 13% from assets of $85.8 billion at June 30 and up 39% from assets a year ago. Average assets for the September quarter were $92.4 billion up 8% from average assets in the June quarter. The increase in our year-end during the September quarter was due to $2.1 billion of net client cash inflows which equates to 2.4% organic growth rate for the quarter and a 10% annualized rate as well as 10.5% of market appreciation which includes alpha generation. For the nine months ended September 30, 2013, net client cash inflows were $5.7 billion a 10% annualized organic growth rate. Market appreciation including alpha generation added another 23% of AUM growth.

While we are pleased with the strength of third quarter net inflows we were equally pleased with the diversification of our growth. Growth occurred from clients both in the U.S. and abroad with all vehicles, teams and distribution channels experiencing positive growth for the quarter.

On Slide 16 you will see that our non-U.S. client AUM ended the third quarter at $10.9 billion, up $1.1 billion from last quarter and up 63% from $6.7 billion a year ago. We continue to increase our non-U.S. client AUM as we generated $300 million of net inflow during the quarter and for the year $1.3 billion. Our non-U.S. organic growth on a percentage basis annualizes at 13% based on current quarter and 21% based on the nine month period.

Our financial results begin on Slide 17. The September 2013 quarter revenues were $178 million and average AUM was $92.4 billion that is an increase in revenues of 10% over the June quarter and a 39% increase from the corresponding September quarter 2012. For the nine month period September 2013 revenues were $488.2 million with an average AUM of $85.7 billion that is up 33% from revenues of $368.5 million in the nine month period ended September 2012. The weighted average management fee for the current quarter remained at 76 basis points.

On Slide 18 we highlight our adjusted operating margin and adjusted net results. Third quarter adjusted operating income was $77.1 million excludes pre-operating chair based compensation expense but includes $3.4 million of expense related to our first public company employee equity grant this past July. Our adjusted operating margin of 43.3% this quarter was negatively impacted by 191 basis points from the additional equity based compensation expense but it benefited from higher revenue levels. The equity based compensation expense recognizing the September quarter represents a partial quarter and future quarterly expense from this year’s award will be approximately $3.9 million. As mentioned previously we began to recognize costs related to obtaining the necessary client approvals in connection with the change of control for purposes of the Investment Company Act and Investment Advisors Act that we expect will occur in March 2014. Those expenses were minimal this quarter, approximately $250,000 and as discussed we have excluded those expenses from our non-GAAP adjusted earnings per adjusted share measure.

In addition thinking ahead to next quarter, we want to remind you that we expect to recognize $2 million – $4 million of unrecognized gain on investment securities that we purchased in connection with the cash retention bonus arrangement. That recognized gain is currently accounted for in other comprehensive income. Our obligation under the cash retention arrangement was tied to the value of the investment securities which we funded at the inception of the award. With the expiration of the arrangement at the end of this year, we expect to sell the underlying investment securities and realize the non-operating gain.

Adjusted net income for the September quarter was $47.6 million or $0.67 per adjusted share that is a 7% increase in the adjusted net income over the prior June quarter and a 64% increase over the prior September quarter. For the nine months ended September 30, 2013, our adjusted operating margin was 41.8 % an increase from 40.0% for the prior nine month period ended September 30 and the adjusted earnings per share was $1.77.

Slide 19 highlights our compensation ratio. As we discussed on last quarter’s call, our compensation expense continues to include noise relating to pre-IPO related compensation and the cash retention award we granted three years ago. The expense for the cash retention award ends after next quarter. We have broken up those components so that you can see the ongoing expense with equity based compensation layered in and excluding the pre-IPO and retention costs. We continue to believe that as we layer in the full effects of post-IPO equity based comp which generally vests over five years and excluding the pre-IPO expenses, our compensation ratio will settle in the mid-40s. Of course our compensation ratio can fluctuate and is impacted by our rate of growth and the costs of future equity based awards which are largely dependent upon the size of future grants and our stock rate at the time of growth.

Finally the last slide of financial highlights our balance sheet which remains strong and supports our dividend policy including the $0.43 dividend declared on October 22. We continue to target the distribution of the majority of our annual adjusted earnings. We expect to accomplish this by maintaining a schedule of consistent quarterly dividends and will consider an additional special dividend each year. We continue to build cash from the balance sheet but keep in mind that our cash balance of September 30 includes the cash we used for working capital needs primarily accrued compensation. If you adjust our September 30 cash balance for working capital, tax needs, and the recently announced quarterly dividend, our cash balance is approximately $170 million. That $170 million is available to use for our annual special dividend as well as other strategic corporate needs which we have indicated are typically minimal. We intend to target a cash balance of $100 million on the balance sheet after our annual special dividend.

And subject to the approval of our Board we expect to declare the special dividend at the January 2014 Board meeting.

Finally our long term borrowing of $200 million on a GAAP basis of gross leverage is 0.7 times.

In closing we are pleased with the success we continue to enjoy. Our results have been supported by continued strong performance across most of our strategies which creates alpha and AUM growth above and beyond benchmark results. We also have consistently had net flow activity and have benefited from positive equity markets. We caution that our client flow activity can and will be choppy and therefore our results will vary accordingly.

I look forward to your questions and will now turn it back to Eric.

Eric Colson

Thanks C.J. We will welcome a call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from William Katz from Citi.

Bill Katz – Citigroup

Appreciate the run down. Just Eric, so curious, a number of those reporting earnings already in the third quarter have been so struggling for unit growth, and by contrast you put up some pretty diversified and solid growth. Any sense you are getting, I know some of this is third-party money, but any sense you are getting in terms of the reasons why Artisan has been so successful? Is it replacement from others, is it just an asset classification, sort of curious what you are seeing there on those dynamics?

Eric Colson

Bill, I don’t have a great answer for you on any trend line. We don’t see it as replacement on the institutional business; you can see some modest growth there in the institutional side. On the broker/dealer side, you are seeing an uptick there in the allocation to Artisan. I wouldn’t want to state that it’s due to the rotation out of fixed income at this point or any major trend. I think we've been generating some solid performance results and are being recognized for those results.

Bill Katz – Citigroup

Second question maybe for C.J., just sort of curious in terms of your – you mentioned that the comp ratio all-in which was sailing to the mid-40s, but if you strip away the non-cash comp awards, if you were to look only at sort of the base comp if you will, and so if you strip out the cash retention package as well which I guess ends this quarter upcoming, I think that number was about 40-ish and 40.5 or so in the third quarter, what’s your sense for that dynamic as you look out into both the fourth quarter and into 2014? Is there any cognizant of the big move in assets both in the third quarter and again into this quarter?

C.J. Daley

I think the major driver of that ratio is going to be two-fold, one its growth in AUM and therefore leverage of holding that ratio down as we grow in the fixed costs are more stagnant than the growth, and offseting that is sort of the equity-based compensation expense which we said it’s going to be the major driver of that ratio going up. We plan to grant equity once a year, so our guidance of 3.9 per quarter will hold true for the next several quarters until the next grant in July of 2014.

Operator

And our next question comes from Robert Lee from KBW.

Robert Lee – KBW

I just had a question, Eric, this is actually kind of referring to Slide 9, I guess, where you’d go through the teams and team development, and understanding that they have expanded the teams since each ones start, but I guess when I just kind of glance at the two value teams and understanding each is unique, it does seem like there is maybe not quite as broad an analysts in the PM base as maybe some of the other teams, and I guess what my question is are any of the teams currently looking to expand there, their staff to any degree, kind of have with searches, and maybe you feel like – maybe the value teams or one or both of them could use a little bit more kind of build-up underneath the senior guys?

Eric Colson

Each of the five teams have their own culture and own way of designing their research. And so the value teams tend to build research analysts in a generalist framework as opposed to industry or sector or region expertise, and we’ve found that the value teams have tended to have a smaller team and a more focused decision making than the growth teams that have been broken out by industry or by sector and tend to demand a little bit more information flow to know how earnings are driving price versus the value teams looking for a discount.

So, there is going to be natural differences based off of philosophy and process across teams. I think the teams right now -- across the all five teams are very well resourced. With that said, we are always looking for a good talent to join any of the teams. We tend to in most cases develop talent in our research associate or analyst level and groom that talent within the philosophy and the process of each group to create decision makers. So we are always looking at the junior to the research associate level to build, and I wouldn’t say there is a need for any team right now to fill a hole.

Operator

Our next question comes from Michael Kim from Sandler O'Neill.

Michael Kim – Sandler O'Neill

Just a couple of questions. So, first in terms of the flow outlet going forward, number of your strategies remain close to new investors, but at the same time you are still generating pretty strong organic growth across teams. So, just wondering if you could maybe give us some incremental color in terms of the mix of the underlying inflows because I assume a number of the strategies that are closed are still generating inflows from existing clients or from channels that are still available?

Eric Colson

Certainly, it’s been fairly broad based especially this quarter here, all five teams experienced positive flows – and the flows were pretty well dispersed across the growth and the value teams there, with global value having a little bit higher flow than the other teams. And from a channel perspective, we still are seeing quite a bit come from broker dealer side of the equation. On a go forward basis, the closed strategies as we have said in the past are soft closed that we still see existing flows come in from defined contribution or broker dealer or the 15 institutional clients. So we will see a decent amount flow even though the product is closed but the pipeline and the growth for open capacity we are seeing more and more in the global equity space, whether it’s global opportunities, global equity and our global value. In the global value we are trying to control the mix there that I said on the call, -- some mature stage when I look at the balance of the assets more than we are looking for growth.

Michael Kim – Sandler O'Neill

Can you just maybe give us an update in terms of your plans as it relates to further building out non-U.S. distribution capabilities and how you are thinking about maybe potential incremental costs related to that as you build out the infrastructure?

Eric Colson

Right now we have a few individuals in London. We had a relationship in Australia and those act as our hubs into non-US distribution and those hubs are utilized primarily by our business leaders that represent our five teams here in the United States. And those business leaders do quite a bit of travel working with the group out of London and out of Australia; they gather assets through consultants and other advisors. We think we are fairly well staffed there for opportunities that we see in the marketplace. We potentially could see a person or two next year but I wouldn’t quote much of an expense there into our non-US distribution efforts, we believe it’s working quite well.

Operator

Our next question comes from Marc Irizarry from Goldman Sachs.

Marc Irizarry – Goldman Sachs

Just on the emerging markets strategy, just curious looks like flows turned the corner a little bit there. Any perspective on, number one, I guess how allocations are sort of shaping up for institutions in that space given some of the recent volatility in in the markets there, maybe just a view sort of maybe more what you are seeing specifically for that strategy which probably turns out occasions?

Eric Colson

Certainly emerging market is continuing to gather assets. I think we saw it more so in the first half of the year but emerging markets continue to get flows across the industry. You have seen fairly concentrated group of managers gathering that flow. They tend to be the larger cap growth oriented that have had a nice tailwind behind them. Our strategy is an active strategy distinguished against some of the larger emerging market players and we think we are fairly well-positioned of the diversified and emerging market portfolio and we also feel that the underperformance this last quarter hopefully the signal there is turning the corner.

Marc Irizarry – Goldman Sachs

And then can you just talk a little bit about either the retirement announcement from Scott Satterwhite in the US value team and obviously you have three year notice period. I am curious how the discussions with the consultants gone, can you just give some perspective on sort of the benefits that your structure provided in terms of managing –

Eric Colson

Certainly. Obviously our large cap value, small cap and mid cap value strategy was launched by Scott Satterwhite and Jim Kieffer and they built I think a nice team in Atlanta with now four decision makers -- of the announcement with the three year heads up provides an enormous amount of transparency and to how we manage key man risk is that we clearly like to build the depth inside of the investment teams and also work through that transition in the marketplace like communicating to our clients and we find that the consultants and our clients find it helpful to know how the team is evolving and what their expectation should be on a go forward basis that we sat in a couple of different meetings that – the biggest risk we see out there is not a statistical risk of trying to measure to an index or on any type of traditional statistics out there. But the real risk is surprising your clients and he set expectations on the philosophy, the process and the people, and you follow through with an outcome to hit client and consultant expectations. And we are setting expectations that we are evolving the team and we are going to deliver on that. And we believe that dilutes risk for the future. So it’s been well received in the marketplace and I think people are appreciative of the thoughtful nature of how we are growing and evolving the team.

Operator

Our next question comes from Cynthia Mayer from Bank of America-Merrill Lynch.

Cynthia Mayer – Bank of America-Merrill Lynch

Just to clarify some of the ways in which you shape the flows, I guess you said global value is closed to separate accounts to encourage flows from other channels. So which channels are those and how is that going? Is that mostly overseas, is that in the U.S.? And then if you look at slide – I guess it’s 11, the channels aren’t that diversified for global value but also not that diversified for emerging markets, so would you do something like that with emerging markets as well as the flows recover?

Eric Colson

Certainly Cynthia, the global value as we said we are closed to separate accounts, the asset base there on slide 11 has clearly shown an institutional bias in that team. We are seeing more flows in the broker dealer and financial advisor and global value versus our other strategies and we are seeing more non-US flows out of any of the teams, the global value receiving the highest amount of flow overseas, either primarily through the usage that we have for global value. So we believe by closing the separate account and focusing on the pool vehicles for those other distribution channels that it will diversify that team asset base quite a bit.

The emerging markets strategy interested in ‘06 when we launched the strategy, it’s kind of back to that lifecycle that we talk about. We launched an institutional share class, we did not open it up to the retail investor at the time we felt that we are in volatile period for emerging markets. We felt that if we raised some hot money in the first year due to good performance and if you had a boom-bust cycle in the following year, was a poor performance and we had redemption and fore-selling, you were putting the attract – the early track record caught in harms away there for a very adaptive flows. And so we controlled the asset flow and had a clear bias towards the institutional marketplace. As we get into a point where we feel the strategy is well-positioned for growth we will certainly think about how to balance that out.

Operator

Our next question comes from Chris Shutler from William Blair.

Chris Shutler – William Blair

As we look at the global value team, can you help us think about the magnitude of remaining capacity there, so is it more like 5 billion, 10 billion, any more color there would be helpful?

Eric Colson

As we get closer to the 5 billion we have to see how growth occurs in that rate. So we will be cautious on we layer that capacity in. Eventually long-term it could grow larger but we are error on a smaller number over time to protect alpha generation. So we don’t have the exact number but it’s out of your numbers there, that lean towards the smaller number. So we've looked at the philosophy of assets, we've always looked at total capacity and mix and we’ve protected the velocity to some degree. We are working on the mix and as we near our capacity number to protect alpha we will make that decision as we get closer.

Chris Shutler – William Blair

And then just one quick one on the P&L, the G&A expense in the quarter was flat sequentially, a little bit lower than what we had expected. So just wondering how we should look at G&A going forward, should they just gradually kind of increase over time or is there something that could cause that expense to jump up?

C.J. Daley

Yes, there isn’t really any one thing in particular other than the change in control costs. So we have told you about that should be in the $2 million to $3 million range over the next couple of quarters. But just sort of ongoing expenses around G&A and communications and technology we would expect to – communications and technology to more slightly uptick than G&A on an ongoing basis.

Operator

Our next question comes from Surinder Thind from Jefferies.

Surinder Thind – Jefferies

I was hoping just to maybe get a little bit of color around non-organic growth and you talked about perhaps either adding some new strategies or how that would go about, then you would be perhaps lifting out a team or maybe just bringing on a smaller individual or capabilities and then building that out?

Eric Colson

From looking at new teams, we would look at a lift-out situation to bring on a new team and new strategy. We clearly have seen quite a bit of activity in the marketplace and we have a good pipeline of groups out there that we are looking at but the intersection of the group, the type of strategy that fits with Artisan is a fairly limited set that becomes a scarce resource for us to really find. But we are guiding quite a few teams out and if an opportunity arises we would develop non-organic growth through a new team, or one of our existing teams having an additional strategy to add to the mix that we currently have.

Surinder Thind – Jefferies

And related to that, as you mentioned that it’s challenging to find the perfect fit out there. But is there kind of a timeframe that maybe you can think about or – is it more like a year timeframe out there that you can probably potentially pull a trigger on giving the amount of activity that you are seeing or is it just that kind of a wait-and-see that when the right fit does manifest itself, that’s when you guys pull the trigger?

Eric Colson

I would like towards wait and see having any artificial timeframe of saying we have to fill this type of strategy over this certain timeframe. We found it’s just a force event that didn’t have the right outcome. So when we find that opportunity, and we feel it’s a great fit and no brainer, we will make that decision.

Surinder Thind – Jefferies

And just one quick follow up, and if I may have missed this earlier. But I think last quarter your flows were relatively balanced between the US and international. How they fared this last quarter in 3Q?

Eric Colson

Slightly down, but slightly from last quarter and when you look at the growth in number of clients we've had a good growth in number of clients and depending on the assets level of each client, it will create a lumpy outcome. So we had a similar growth, number of clients quarter over quarter, and looking at year over year I think we are about on track for the same number of non-US clients. Sometimes you get some larger pools and sometimes you get some smaller pools and that’s lumpy nature of the institutional business. We feel that our non-US pipeline is healthy, it’s a balance of US and non-US opportunities and with that opportunities we feel that they'll uptick our non-US assets and will have a higher growth rate in non-US assets given the low asset base we have currently and the opportunities that we see.

Operator

And ladies and gentlemen at this time we will conclude our question and question. I would like to turn the conference call back over to Mr. Colon for any closing remarks.

Eric Colson

Thank you everybody for your time today and we will see your next quarter.

Operator

Ladies and gentlemen that concludes today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.

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