Artisan Partners Asset Management's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 4.14 | About: Artisan Partners (APAM)

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

Q4 2013 Earnings Conference Call

February 04, 2014 08:00 AM ET

Executives

Makela Taphorn - Investor Relations

Eric Colson - Chief Executive Officer

C.J. Daley - Chief Financial Officer

Analysts

Bill Katz - Citigroup

Robert Lee - KBW

Michael Kim - Sandler O'Neill

Marc Irizarry - Goldman Sachs

Cynthia Mayer - Bank of America

Chris Shutler - William Blair

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management’s Fourth Quarter 2013 Earnings Conference Call. My name is Emily 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 will turn the call over to Makela Taphorn with Artisan Partners. Please go ahead.

Makela Taphorn

Thank you, good morning everyone. Before we begin I would like to remind you that our fourth quarter earnings release and the related presentation materials are available on our 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 obligation to revise these statements following the date of this conference call.

In addition some of their remarks this morning 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 exhibits. And finally as you may have seen we have filed an initial registration statement for the follow on offer and we agree to conduct on behalf of our limited partners on or about the first anniversary of our initial public offering. We cannot discuss the offering on this call so please refer to the documents on file with the SEC if you would like more information.

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

Eric Colson

Thank you Makela. 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. I hope you find this discussion useful.

Like our first three updates, I want to spend time reinforcing our business strategy. So, given that this quarter concludes our first calendar year as a public company, I also want to spend some time framing the year in the context of our strategy. Key areas of emphasis for me will be the integrity of our investment results, the quality of our investment franchises and development of investment teams, the alignment of interest with our clients and professional talent and the help of our asset base.

Once I am done C.J. will take the lead walking through our financials before I conclude with some thoughts about the outlook for our business.

Let's start with a quick review of some of our static pages to give you a sense of how our year closed out. On the first slide, there are two points we're touching on. First AUM has increased to over a $105 billion from $97 billion last quarter and $74 billion last year. The growth in those numbers has been influenced by strength in the stock market, additional client cash flows and most importantly alpha generation from our investment teams.

We always make sure to put years like 2013 into perspective. In the past 189 years, the stock market has lost more than 30% in a calendar year only three times. And one of those years was 2008. The market has returned over 30% just 26 times and one of those years was 2013. More than two-thirds of the time, the stock market returns between plus and minus 20%.

The key takeaway is that we have seen some very unique outcomes from the market over the past six years. 2013 was a tail outcome that was beneficial to results, but it was outside the range of normal and we continue to plan of normalized assumptions. The second point we’re just touching on is the addition of a fixed investment team. As we noted in earlier press release, we hired Bryan Krug to start a credit team. I will elaborate further about Bryan, later in my discussions.

Our long-term investment results are illustrated on the next two slides in a consistent manner to past quarters. As of December 31, 2013, all of our strategies have followed their process with integrity and generated attractive absolute results since inception. Eight of our 11 investment strategies, excluding strategies that launched after December 2008, had added value relative to their broad performance benchmarks over the trailing five year period and since each strategy’s inception.

[All seven] of our investment strategies with a 10 year track record have added value relative to their broad performance benchmarks over the trailing 10 years.

Slide four, further reinforces the impact of our performance philosophy across their asset base. Our teams run active portfolios with high degrees of investment freedom, each adhere to a time tested investment process and execute the same over any market environment; none have a process or incentives that plays much value on very short timeframe. Therefore the return patterns of all of our teams will be lumpy. Year-over-year this is evidenced in annual results. More than 90% of our assets under management were in strategies outperforming the respective benchmarks over the trailing 3 year and 10 year periods and since each strategies inception.

Over the trailing 5 year period our U.S. midcap value strategy which represents 15% of our assets under management trailed this benchmark by less than 20 basis points, essentially in line with the market during a robust environment. I will talk about our midcap value strategy further in a couple of minutes to elaborate on our process for evaluating investment results.

Our mutual fund peer ratings, which are highlighted at the bottom of the page are a great illustration of how our results translate in long term peer ratings Lipper and Morningstar. While on the topic of Morningstar, it is worth pausing for a second to recognize our global value and global equity teams. For the second year in a row both teams were nominated for Morningstar’s 2013 International Stock Fund Manager of the Year in the U.S. In January Morningstar awarded David Samra and Dan O'Keefe of the global value team with the award for the second time in six years. This is a true testament to the discipline of their process.

The first time they won was in the once in 60 plus years down market of 2008. And the second time was in the once in more than seven plus years up market of 2013. It is a combination of success in the global financial recession of 2008 and [global] market of 2013 that has led to the long term record recognized by Morningstar.

As a firm, we have achieved nine nominations and four awards in the history of our firm. Our U.S. value team and global equity team have also won their awards in the domestic stock fund and international stock fund categories respectively.

Slide five, is a quick outlook at our asset diversification. For the year, four of our five distribution channels experienced positive flows led by our broker dealer channel. Within the institutional channel, we experienced sizable rebalancing that skewed and net flows. 11 of our 13 strategies experienced positive flows led by our global value in non-U.S. growth strategies. Overall, we think we had a solid diversification across channels and teams.

The success of our broker dealer channel and global values team was meaningful, but only led to a small mix shift in our overall assets. We continue to see positive results from our non-U.S. distribution efforts during 2013 on an absolute basis. Long term, we expect to see more meaningful mix shift as a continued rate of growth of our non-U.S. domicile clients outpaces our growth in the U.S.

Slide six highlights three core principles that define who we are. This page is the anchor to our belief and we’ll anchor our comments each quarter. 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 to define who we are. As I summarize the year and reviewed some of our business accomplishments, you will see how these principles shaped our outcomes.

The purpose of the chart on slide seven is not to argue the definition of a market cycle because the debate would distract from the point. We have chosen trough-to-trough or peak-to-peak as a way to illustrate a cycle for the purpose of highlighting the market cycles vary and link, but generally spent five to 10 years. While not perfect, we believe this view is more logical than the three or 12 month windows that drive standard reporting periods. Tight management is a recurring topic for us. We have emphasized our business management strategy before highlighting quarterly or yearly outcomes to set expectations.

Similar to our investment strategies, we have dedicated resources to set expectations about performance cycles. The importance of these dedicated resources is to buy time; act of management requires long term thinking. Our business strategy also requires a long term normalized view.

[Too high] a level of importance is placed on calendar years and quarters. Business decisions require time, time to develop a plan, time to communicate a strategy, time to execute properly, and time to measure the execution and success of a decision. In 2013, we accomplished some high profile business decisions that required years of planning and continued years of execution such as becoming a public company.

Our business decisions don’t develop around calendar years, they occur when they are appropriate to achieving our long-term objectives. The addition of our sixth team is a great example of this. We announced the addition of Bryan Krug in the fourth quarter. We are spending the first quarter of 2014 establishing operational readiness. We will spend the next five plus years developing the team’s track record and building Bryan’s team into a franchise.

Slide eight is simply a transition to the discussion; represents a reminder of our management guideposts and outlines what we think were some of our most notable accomplishments of 2013. I will walk through these investment results, alignment of interest, capacity management and our talent focus on the four pages to follow.

Investment results are one of the primary measuring tools for our business success. Our teams run active portfolios with high degrees of investment freedom. As a result, there is an expectation that our teams will produce superior investment returns on an absolute and relative basis over a full market cycle. It is our goal to deliver on those expectations with integrity. Rather than review the results of each strategy, we thought it would be more beneficial to review one strategy in detail relative to the metrics that we take into consideration. Given that I called out U.S. mid-cap value strategy earlier, I thought I would come back to it.

So off the top of the page are the criteria we look at. We want to answer three questions, have we been faithful to a strategy stated investment philosophies and process? Has the strategy produced good absolute performance? And how does the strategy’s performance compared to the performance of its peers, competitors and the index?

In determining the answer to question one, it is probably easier to think about our portfolios as conglomerates. With that in mind, we roll up the characteristics of our portfolios relative to the broad market taken into consideration that tenants of each team's process. In the case of our U.S. value team, we want to see it conglomerate with attractive business economics, attractive cash flow and a solid balance-sheet trading at an undemanding valuation. We have that when we compare the U.S. mid-cap value strategy, relative to a broad mid-cap index. As the team puts it, they think to build a portfolio that is better, safer, cheaper.

The green bars represent rolling five year average annualized returns. We could have picked other time frame, so you can see very consistent wealth compounding over time. The gray line represents five year rolling excess returns compared to a broad mid-cap index. Over every period presented but the current one, the team has added value. So, how should we think about the current period? It would be inappropriate to take the data on its faith. We have to consider the acceleration and momentum of the market over the past five years.

As I noted earlier, it is outside the range of normal. We'd expect a team that emphasizes valuation and business quality would participate strongly but not lead in that type of environment.

Finally, they will not represent it. We know that this strategy has operated in the top decile of this peer group over the ten year and since inception time period. Taken together, these results are process consistent and consistent with expectation. The current period is an outlier. I believe this is also the first five year period that Warren Buffett has trailed the S&P over his career; this puts them in good company.

Moving to slide 10, the most visible event of 2013 was our IPO. We spent a lot of time waiting up to the IPO, not simply planning for it but discussing the importance of it in the long-term evolution of our business.

Equity ownership is critical to our investment culture, because it plays a big role in supporting our talent focused business model. The IPO created a mechanism for broad and multi-generational ownership that established a structured path to liquidity and it allows ownership to be shared more broadly among value producing employees. At its core, our IPO was about ongoing alignment of interests.

Our first equity grant which took place last summer furthered our goal of interest alignment among our employee owners, analyst clients and shareholders. Like any business that seeks to grow and thrive, at certain level reinvestment in core assets is necessary. Our core assets are people. And one of the ways we reinvest in that talent is through rewarding and incentivizing that with equity. We also create alignment through consistency. Bigger dramatic changes from past practices create instability with people, clients and eventually shareholders. A great workplace provides stability through predictability and our distribution at learning through dividends extends from that belief. We believe in sharing the success of our business, our dividend policy is a consistent extension of that long held belief.

Just last quarter, we spent a fair amount of time talking about capacity management. So, I won’t spend a lot of time on slide 11 but (inaudible) the information in. Given the choice of continued short-term asset gathering for a long-term protection of alpha, as an investment firm, we will air on maximizing present value and compounding of client wealth above short-term growth rates. With this statement in mind, I just want to hit on one or two quick points, most notably related to our global value strategy, since we just announced a further closing of the strategy about 10 days ago.

On this slide, we have illustrated the closing time lines of our U.S. small cap growth and global value strategies. We have perfectly excluded asset levels to eliminate the destruction around the points I want to make because total asset is just one consideration.

As we create capacity for growth, we have to ensure we are managing that capacity appropriately. We are an investment firm first and foremost. That means that as we grow, we need to protect alpha potential. Protecting alpha means understanding the impact of total assets, number of clients, distribution mix and velocity of assets on the investment process; it also requires market contacts and other non-typical variables.

The evolution of our U.S. small cap growth strategy was impacted by asset size and asset velocity but it was also impacted by a huge market decline, team integration and ultimately a huge market recovery. The result was multiple closing decisions and reopening.

Every strategy is unique when we consider closing. The further closing of global value strategy extends from its own path. Last year we closed the new separate account business to better manage asset growth and diversification. Asset velocity has continued as performance surged through 2013. The result has been a growing imbalance between cash and industrial ideas.

The parameters of the strategy may allow for additional assets but the confluence of events demands we restrict further growth to protect the alpha potential over the long term. Investment results, our capital structure and our capacity development decisions can intend to be some of our most visible accomplishments. But our talent focus highlighted on slide 12, is a one that we believe is the primary driver for our business. 2013 was a great year in that regard.

Our global equity team promoted Charles Hamker and Andrew Euretig to additional decision making responsibilities during the year and established a new global small cap to growth strategy which is a natural extension of the team’s research and through the launch created additional depth in decision making with the promotion of Dave Geisler to co-portfolio manager for this strategy.

These were great strides in the breadth of decision making and creation of natural succession options. Our growth team expanded the roles of Matt Kamm and Craigh Cepukenas to portfolio managers on all of its strategies and formalized the lead portfolio manager role on its team. The team now has incredible decision making breadth and a highly fluid research and portfolio management process that positions the team very well for years to come.

The U.S. value team promoted Dan Kane to portfolio manager across all of its strategies joining him Scott, Jim and George. It also announced the retirement of Scott Satterwhite, which is planned for 2015, which is a great illustration of its ratio transition and succession plan we envisioned.

Finally, we hired Bryan Krug to build out, our sixth economist investment team. So, right now for Artisan it cares resource and should not be forced. Similar to the institutional decision making process, our account development and requirement process is a gradual one, like investing one very bad decision can more than offset multiple good decisions. So we meet with a lot of teams and only move forward when we are fully confident. We are very confident that Bryan is a right person to lead to the build out of a credit franchise at our firm.

Bryan has a characteristic we look for in an investor. He is passionate about investing, he’s a creative thinker, he has a disciplined approach, he has a great fit within our business model and culture and his product is one that aligns well with our institutional focus. We are working with him over his first few months here to build his team, establishing office and develop the infrastructure, research and trading platforms he will need to execute his strategy. We will talk more about his strategy during our first quarter earnings update.

As I wrap up, I want to touch on a few quick items about our expectations for 2014. I’ll begin this update talking about the time business decisions require; time to develop a plan, time to communicate a strategy, time to execute properly and time to measure the execution and success of a decision.

As I look forward to 2014, we are going to continue to do things gradually. 2013 was a big year for our firm in a lot of ways. We don’t want to lose sight of doing things the right way. We believe that patience is a virtue and protects against bad decisions. If the market finds this uninteresting we are fine [this morning].

We are going to continue to manage capacity with prudence. We have illustrated that through the further closing of our global value strategy, we will continue to develop new business in a way that matches our high value added philosophy by not compromising on portfolio structure or fees. We will pursue markets globally that provide leverage to our business model.

Our on-boarding of Bryan will incorporate some early introductions and asset gathering so we’ll settle into a focus around his portfolio. We will solidify the research and operational items he needs to be successful. We want his time focused on investing.

As I said last quarter, we view ourselves as a growth firm and we are committed to growth over the long-term, but our commitment is to profitable growth.

With that business perspective, I will pass the lead to C.J. for a financial update.

C.J. Daley

Thanks Eric. Welcome everyone. I will begin with slide 13, which is a review of our fourth quarter and full calendar year December 2013 results. In summary, we ended the year with another solid quarter. AUM increased to $105.5 billion and net client cash inflows were $1.5 billion. Revenues were $197.6 million, up 11% over revenues in the preceding September 2013 quarter and up 44% over the December 2012 quarter.

Our adjusted operating margin declined slightly to 42.9% after factoring in strong AUM growth offset by the [fourth] quarter of expense related to our first public company employee equity grant in July and cost associated regarding our sixth investment team.

Net income per share on an adjusted basis was $0.77 per share compared to $0.67 per share in the September 2013 quarter. Yesterday, our Board of Directors declared an increased quarterly dividend of $0.55 per share, up from $0.43 per share, as well as a special annual dividend of a $1.63 per share. Combined Class A common shareholders will receive $2.18 per share as a dividend.

On a GAAP basis, as a result of IPO-related charges, which we have previous discussed, as well as the GAAP effects on our EPS calculation of the follow-on offering conducted in November, we recorded a GAAP loss per share of $1.42 for the quarter and a GAAP loss of $0.63 per share for the year.

This GAAP loss per share occurred because the market price per share of the common stocks sold in our November follow-on offering exceeded the per share carrying value of the convertible preferred shares we repurchased with the portion of the operating proceeds.

On an adjusted basis, we reported earnings per share of $0.77 for the quarter and $2.54 for the year. The adjusted earnings measures reported in our earnings release [under] the accounting impact of certain transactions related to our initial public offering and the November follow-on offering. These non-GAAP measures provide investors with the same financial metrics that we as management use to manage the company.

Slide 14 is a review of our AUM for the quarter and year 2013. Ending AUM of $105.5 billion were up 9% from assets of $96.9 billion at September 30, 2013 and up 42% from assets a year ago. Average assets for the December quarter were $101.0 billion, up 9% from average assets in the September 2013 quarter.

The increase in AUM during the December quarter was due to $1.5 billion of net client cash inflows, which equates to a 1.5% organic growth rate for the quarter and a 6% annualized rate, as well as 7% of market appreciation including alpha generation.

Included in client cash flows for the December quarter were outflows of approximately $500 million related to Artisan Funds’ annual income and capital gains distributions net of reinvestments. Level of cash that clients chose to retain and not reinvest in issuance distribution was not unusual in terms of percentages, but was significantly more in dollar terms as a result of the increased size of the distribution.

For the year ended December 31, 2013, net client cash inflows were $7.2 billion, a 10% annualized organic growth rate. Market appreciation including alpha generation added another $24 billion or 32% of AUM growth. While [fueling] with the strength of flows this year, we continue to be equally pleased with the quality of our growth as seen through the diversification of our client cash flows in the U.S. and abroad, as well as across our vehicles, channels and investment teams.

As Eric previously discussed, we just recently announced that we are further closing our global value strategies, which have been a meaningful source of our growth over the past two years. Throughout our history, our growth has been lumpy and has come from certain strategies and [fuelings] during distinctive profits of time.

We closed strategies to preserve alpha creations, because we put the interest of our clients first and value growth throughout the creation over the growth from mid client inflows. The closing of our global value strategies is an example of this. Looking ahead, we see encouraging interest in our non-U.S. growth and global opportunity strategies that we expect will provide our future growth.

On slide 15 you will see that our non-U.S. client AUM ended the fourth quarter at $11.9 billion, up $1 billion from last quarter and up 51% from $7.9 billion a year ago. Our non-U.S. flows were flat this quarter, but for the full year were $1.3 billion and represented 18% of our overall flows. As a result, our non-U.S. organic growth rate was 17% for 2013. We have seen increased investment interest overseas and our pipeline of opportunities outside the U.S. is strong.

Financial results begin on slide 16. For the December 2013 quarter, revenues were $197.6 million on average AUM of $101 billion, after the increasing revenues of 11% over September quarter and 44% increase in the corresponding December quarter in 2012. The December 2013 quarter included $2.5 million of annual performance fees earnings and measured at December 31, 2013.

For the year ended December 2013, revenues were $685.8 million on average AUM of $89.5 billion, that's up 36% from revenues of $505.6 million in the corresponding fiscal year ended December 31, 2012. The weighted average management fee for the current quarter rounded up to 78 basis points as a result of the annual performance fee earned in the quarter. For the year, our average management fee rounded up to 77 basis points.

Slide 17, our adjusted operating margin, which excludes pre-operating share-based compensation expense is 42.9% for the current quarter compared to 43.3% in the September 2013 quarter and 40.4% in the corresponding fourth quarter of 2012. A slight [down strip] from September was a result of a fourth quarter of equity-based compensation expense and initial on-boarding cost related to the build-out of our newest investment team.

Beginning in the March quarter, we will begin to layer in additional operating cost associated with starting the new team including the hiring of additional investors and operational professionals, as well as related occupancy and technology cost. We expect that total incremental net expenses related to the team will be in the $6 million to $7 million range in calendar 2014. That assumes a very modest amount of asset raising the year, which maybe conservative.

While excluded from our non-GAAP earnings last quarter, we began the process of obtaining the necessary client approvals in connection with the change of control for purposes of the investment companies and investment advisors ask that will occur in March, 2014. That process is almost complete and during the December quarter we incurred $2.6 million of cost related to those efforts. The March 2014 quarter will include some additional costs which we expect will be immaterial as we wind up the process.

Adjusted net income for the December quarter was $55 million or $0.77 per adjusted share, that’s a 15% increase in adjusted net income over the prior September quarter and a 52% increase over the prior December 2012 quarter. Included in adjusted net income for the December 2013 quarter is a non-operating gain of $5.1 million this gain resulted from the sale of our investment securities held in connection with the pre-IPO returns and awards for the investment team members, which is concluded on December 31, 2013.

The expense related to that award is tied to the market value of these investments. After considering the related expense for the quarter the effect on annual income was $1.3 million or approximately $0.02 per share. In comparison the September quarter included expenses related to that arrangement were resulted in $0.03 negative impact to adjusted net income per adjusted share.

For the year ended December 31, 2013 our adjusted operating margin was 42.1% an increase from 40.1% in the prior year and adjusted earnings per adjusted share was $2.54.

Slide 18 highlights our comp ratio, as you know our comp expense continues to include those related to pre-IPO related compensations and the cash intention award we grant three years ago. We’ve broken out those components so you can see the ongoing expenses with equity based comp 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 awards which generally rests over five years and excluding the pre-IPO expenses, our compensation ratio will settle in the mid-40s. As a reminder, our compensation ratio will and can fluctuate and will be impacted by our rate of growth and the costs of future equity based awards which is largely dependent upon the size of future grants and our stock price at the time of the grant.

The last slide is our balance-sheet highlights. Our balance-sheet remains strong, cash in the balance-sheet remains healthy and grew throughout the year adding a $312 million. Our debt levels remained at $200 million and our credit ratios are strong that leverages 0.7 times EBITDA. In connection with the November 2013 follow on offering and contingent value [rent] liability of $15 million at September 2013 was extinguished.

Lastly, our Board of Directors declared a quarterly dividend of $0.55 per Class A common stock and a special annual dividend of $1.63 per share. Both dividends, a total of $2.18 per share will be paid on a February 28th to shareholders of record as of the close of business on February 14th. Our dividend policy targets the distribution with the majority of our annual adjusted earnings through a quarterly dividend with subject to firm profitability and business conditions, a special annual dividend. This initial special annual dividend reflects strong earnings in 2013 and excess cash on the balance-sheet. I do not expect the next year's special dividend to include a distribution of excess cash and therefore will likely be lower than this initial special annual dividend other than (inaudible).

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

Eric Colson

C.J. thank you for your time and patience. This is important to understand our business before evaluating the outcomes. To provide additional clarity we’ll open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Bill Katz with Citigroup. Please go ahead.

Bill Katz - Citigroup

Okay, thank you. Good morning I appreciate the thorough updates. Could you talk a little bit about your policy for a dividend payout for 2014, I think the fourth quarter’s extra payment this year or an extra payment I should say was significant above everyone’s expectations, a little bit higher than your earnings run rate. Could you maybe just update how are you thinking about sort of cash flow this year?

C.J. Daley

Yeah, sure. Hey Bill this is C.J. Our expectation is we increased the quarterly dividend to $0.55 we’ll pay that through the October quarter and then consider revision to the quarterly in next January or early February. And then we expect through that quarterly that we would distribute more than half of our earnings and then distribute the remaining with the special annual. Approximately half of the special annual this year was the result if earnings and half was the result of excess cash, which is probably what you’re trying to get to.

Bill Katz - Citigroup

Right. So we should be thinking a 100% of free cash flow goes for dividend this year?

C.J. Daley

Between the quarterly and the special annual, yes, we are anticipating most if not all of the annual earnings.

Bill Katz - Citigroup

Okay, that is very helpful. And then, as I look to the stock mix, I spent a moment on the breakdown between U.S. and non-U.S. sales, and Eric you mentioned those some rebalancing during the year. Could you talk little bit about, what kind of demand you are seeing outside the United States as it relates in that sales?

Eric Colson

Certainly, the demand outside the U.S. has been primarily institutional for us. So you see a lumpier pattern there, with regards to specific strategies we see interest in our global equity strategy or global opportunities. We saw last year the global value strategy pick up assets as well. We have been much, I think more consistent in the U.S. then the intermediary channel over the last four quarters. But when we look at our opportunities set and demand, there is clearly a higher demand outside the U.S. although it will just be I think lumpy which it’s pretty consistent with the institutional channel.

Bill Katz - Citigroup

Okay. Just one last one. Thanks for taking all my questions. As you think about the new team, you bring it on board for high yield. In the past, what’s been sort of the up flow for asset gathering some of the other groups, just trying sort of frame with the flow opportunity might be for there. And then against, C.J., you mentioned, you gave some guidance for expenses this year. Would that be subject to an increase to the extent that you would beat those AUM expectations?

Eric Colson

Yeah, Bill, I will take the first part of your question. And I will turn over to C.J. there. New teams that we have brought on or even new strategies that we have launched, we have had fairly low expectations with regards to asset build up. Our primary focus is on making sure that we find the right people to put on the team with Bryan and also have the proper infrastructure, so that over the short run, we can build the right foundation to the high yield strategy and then hopefully over the next three to five years, really turn it into a key franchise into the firm.

In past years, the assets really ranged from a hundred million to a few hundred million. And flows, they are very hard to predict. So we’re being [obviously] conservative on it. And having all expectations on asset flows, we are more focused on the team and the build out of the strategies.

So, on this cost, so we would not expect to see a material increase in costs depending on the asset raise. We think we have sort of a fully baked initial startup cost going in. I did mention that we also experienced some costs in the fourth quarter as we began, the on-boarding of the team and building it out and that impacted margin negatively by little less than 1%.

Bill Katz - Citigroup

Okay. It’s very helpful. Thanks for taking all my questions.

Eric Colson

No problem.

Operator

Our next question is from Robert Lee of KBW. Please go ahead.

Robert Lee - KBW

Greetings, thanks, good morning guys. On the global value strategy, [counsel advice], how much of that or your business comes from platforms where existing investors can still contribute money, I know that, I guess that mainly [become] these kind of platform as fast, as significant, and being a full contribute to new sales with that strategy?

Eric Colson

Yeah, Rob, I think your question around -- you have broke up a little bit on there but the question around the global value strategy and one close what type of reoccurring dollars could blow into the strategy. The strategy has a pretty balanced mix of assets between institutional and the intermediary channel. The intermediary channel will be a source of ongoing flows but we’ve managed those relationships so that we wouldn’t expect any large or unexpected flow. So that lower expectations around dollars coming in that close strategy.

Robert Lee - KBW

Okay, great. And C.J. and I apologize I think I probably have missed some of these comments but the little modeling question, but the gain in the quarter, did you suggest that came from some investment gains related to deferred comps so there is some other expense offset it, I just want to make sure I understood that correct.

Eric Colson

Yeah, the net impact was the 1.3 million, we had the $5 million gain with the realized gain because we actually liquidated the investment security that we had funded to fund that deferred comp plan in the quarter because that ended -- that arrangement ended December 31, 2013.

Robert Lee - KBW

Okay, great. One last question on the emerging market strategy, if I remember correctly, outside of the one large redemption about a year ago I guess it was, I guess that business has been relatively stable from a flow perspective. But I think recently you had suggested that you've been seeing some at least prior to last month or so, you have been seeing some continued interest in that strategy. So, I was just trying to get a feel for how you see investors, institutional investors kind of reacting to some of the recent slow off and turmoil. Do you get a sense, is there a kind of reassessing, their allocations to emerging markets one way or another or is that at all impacting kind of the dialogues you're having around emerging markets or other strategies.

Eric Colson

Certainly, we've seen a lot of flows over the last three years going to the emerging markets category. You've seen it both in the active and the passive categories. So, there has been a strong interest in the space. I think the fall off and returns compared to the developed market certainly slowed the flow there. And people are reassessing their mix of style as well as active and passive. So there has been I think a slowdown in that category and with our strategy specifically. We've been challenged on performance over the last few years. So, you've seen a loss which you mentioned a year ago. Over the last year, we've been fairly stable on close but overall, we haven't seen much interest in the strategy. It’s been primarily in our global equity strategies which has the ability to invest in emerging markets. And that's where we keep some our clients getting exposure is allowing us to make those allocations within broader and higher degrees of freedom in those strategies.

Robert Lee - KBW

Okay. Thanks for taking my questions.

Operator

Our next question is from Michael Kim with Sandler O'Neill. Please go ahead.

Michael Kim - Sandler O'Neill

Hey guys. Good morning. First, up until at least more recently, it did seem like retail investors were getting more comfortable taking on more risk in terms of their asset allocation. So, assuming that dynamic continues to play out, just curious to get your thoughts on where you see opportunities to continue to gain market share and how that might influence flow trends across the different investment teams?

Eric Colson

Yes. Hey Michael, it’s Eric. As you know, our retail assets under management is under 10%, so it’s not a meaningful part when you look at our other channels with regards to the intermediary and institutional. But we are seeing interests in the intermediary; we saw that last year and it flows off the intermediary channels, specifically the broker dealer channel. Our preference is clearly looking for an institutionally oriented process embedded into intermediary because we think that extends the duration of assets. And within the high net worth broker dealer intermediary, whatever you define it there, which it does -- I think it does pick up that retail trend. We are seeing a definite flow into active equity strategies. And the strategies have been pretty broad-based when you look few last quarter when we look at the assets that came into Artisan it was a very healthy diversification across multiple teams.

Michael Kim - Sandler O'Neill

Okay. And then maybe just focusing on the institutional side of business, now that some pension plans are closer to being fully funded, following the rally in equities, it sounds like some of them maybe adopting a bit more of a defensive stands to immunize liabilities to a greater degree. You mentioned that some ongoing rebalancing that impacted your separate accounts flows in the fourth quarter. So just wondering to what extend that might -- that trend might further narrow growth opportunities for institutional equities more broadly?

Eric Colson

We have definitely, as you highlighted the trend towards immunizing plans or some type of liability matching within the institutional channel has been in existing over the last three, four years. Certainly with the strong equity returns last year, a lot of plans have become close to fully funded. And if you layer on top our performance for the year on top of a robust equity market. I mean we were at least 450 basis points as a firm across our weighted index.

So, a lot of our clients for rebalancing in the strength, so we saw muted result in the institutional marketplace. Fortunately, there is a large asset base there in that institutional marketplace and there is always opportunities for growth depending our competitors and how they perform and how the index performs. So while the growth is probably somewhere around 2% to 3% and that traditional institutional defined benefit, probably a little bit better in the endowment channel. And we could still see good growth rates given the size of assets there for our strategies. But there is clearly headwind out there.

Michael Kim - Sandler O'Neill

Okay. That's it from me, thanks.

Operator

Our next question is from Marc Irizarry of Goldman Sachs. Please go ahead.

Marc Irizarry - Goldman Sachs

Great, thanks. Eric, can we -- just staying on the topic of rebalancing and the headwind that you face, if you think about your business and your strategy to bring new teams, I mean where are these assets going and there is a sort of imperative over time that suggests that you need to sort of build out teams that can help you maybe capture more of the asset allocation, if so, where, what will be some of the strategies that may have, that maybe able to sort of help you, as investors think about rebalancing or moving across asset allocations that might help you sort of capture some of that share?

Eric Colson

Hey sure, Marc. In the institutional face, that rebalancing, I think we saw dollars flow out into the alternative space and we saw rebalancing within the fixed income face into more specialized higher degree freedom strategies. And we clearly have picked up a great opportunity with Bryan Krug with the credit team to be able to pick-up assets to get rebalanced in the fixed income. And we have a very strong interest looking at the alternative space, various hedged on strategies that could fit into the Artisan model. So, those are two areas that we would look to for growth.

Marc Irizarry - Goldman Sachs

Okay, great. And then just on the closing of your strategy, the global value, I guess if we look at the fourth quarter trends, did some of the activities sort of pulled forward meaning to sort of anticipated at those strategies where these channels sort of now it’s going to close and therefore was there some activity that was pulled forward perhaps?

Eric Colson

There is no anticipation on the strategy closing. You do have a little bit of a tail to closing because you announce your closing; you have to work with intermediary channel on actually closing this ticket within each of those platforms. And then secondly we also create a grandfather list for the institutional and separate accounts so that we are not pulling out midstream of finals or some other RFP process there. So the front-end, there is no anticipation of it but the backend has a little bit of a tail to it. So it does take a little while in the closing process.

Marc Irizarry - Goldman Sachs

Okay. And then just in terms of first quarter I know it’s somewhat early but obviously it’s been -- there has been some volatility; could you give some perspective on maybe the pipeline of institutional money, what you are seeing -- what you are currently seeing and how we should sort of expect the -- what we should sort of expect in terms of institutional wins and maybe you are in the pipeline or sort of maybe redemptions that we can expect going forward?

Eric Colson

Yeah. Our pipeline has been fairly consistent, remains skewed outside the U.S. which I think C.J. alluded to in his comments earlier. But overall, the pipelines are always difficult to get too specific on or be that accurate. So I think the best thing is that it seems fairly consistent quarter-over-quarter and it’s been that way probably bulk of last year and going into this year seems healthy.

Marc Irizarry - Goldman Sachs

Okay. And then first quarter, the flows, I mean there is some I guess some seasonality that we should expect in 1Q for you guys?

Eric Colson

I don’t think with financing abnormal quarter over -- this quarter relative to the first quarter of last year.

Marc Irizarry - Goldman Sachs

Okay, great. Thanks.

Operator

Our next question is from Cynthia Mayer of Bank of America. Please go ahead.

Cynthia Mayer - Bank of America

Hi, thanks a lot. Just to clarify maybe on $6 million to $7 million that you expect associated with the new team. How much of that I guess -- what was the cost of the new team exactly in 4Q and is it $6 million to $7 million on top of that or should we think of it as sort of the entire cost?

C.J. Daley

Yeah. So, in the fourth quarter we did incur some expenses as we started to bring on the new team and started the process of building out the infrastructure. And so, we would expect to see typically about the same amount levels of expenses and the $6 million to $7 million was really related to next year or so. Obviously that's, if it occurred evenly over the year that's about $1.5 million to $2 million a quarter.

Cynthia Mayer - Bank of America

Okay. I see. So, it's not on top of the 4Q and maybe the 4Q…

C.J. Daley

No, it's on top of…

Cynthia Mayer - Bank of America

That's right. Okay. And then with the new franchise that you guys are building out, so it's credit, which typically has lower fees. So, what kind of fee rate are you anticipating and are you little -- does it matter to you particularly if the fee rate was as to those assets fill if the fee rate was a little bit lower and had an impact on the overall fee rate?

Eric Colson

Yeah Cynthia, it’s Eric. Certainly we’ve analyzed the high yield base and we think that the fee rates are in-line to some of our other strategies more specifically some of the large cap value or global equity strategies there. But with the -- starting off with the credit strategy and the high yield base there will be capacity constraints and we’ll manage those flows and we’ll manage our fee rate. So, I think you’ll see a slightly lower fee than our weighted average in the firm, which is 77 basis points, but we’re not expecting a meaningful impact on lowering the overall fee within the firm. And then also it’s going to be skewed towards and emphasis on using pool vehicles for the new strategy.

Cynthia Mayer - Bank of America

You mean you want to emphasize funds as you begin to [sell] it?

Eric Colson

Yes.

Cynthia Mayer - Bank of America

Okay. And I guess last thing is you mentioned strategies [overall], so overtime, am I right you sort of expect this team to develop a few different credit strategies?

Eric Colson

Yeah. We expect -- when we bring a team on overtime that we would have multiple strategies and hopefully develop multiple decision makers and match our definition of a true franchise. We’ll stay focused on the one strategy we have in mind right now, which we hope to launch in the next few months. And then where appropriate we’ll lay in other strategies. We have no definitive strategy; it would be the number two strategy within this franchise. But over the long-term we [peer] with the more than one strategy.

Cynthia Mayer - Bank of America

Great, all right. That’s it from me. Thanks a lot.

Eric Colson

Thanks.

Operator

(Operator Instructions). And our next question is from Chris Shutler of William Blair. Please go ahead.

Chris Shutler - William Blair

Hey, guys. Good morning. C.J., as you mentioned good momentum in the non-U.S. growth and global opportunity strategies, which makes sense. So, on non-U.S. growth you are at $25 billion AUM as of ‘12 31, obviously that strategy has been over $30 billion in the past. So, as you think about capacity there assuming velocity new money remains reasonable and you are finding opportunities to invest. And is it fair to think that strategy could get materially over $30 billion at some point in time?

Eric Colson

Hey Chris, it’s Eric. I (inaudible) jump in here on this one. The strategy overall is a growth-orient strategy that tend to be into larger capital [chip] names. We have been over $30 billion in a strategy with room for growth there on top of it. I don’t know how much meaningfully over that we would be, but certainly when we look at the $24 billion, $25 billion exactly, I’m not sure the exact number on that that non-U.S. growth strategy we have good room for growth there. But we don’t have a definitive number in mind. And at this point as we experience some velocity or experience any strain on the integrity of the strategy, it will certainly come into discussion.

Chris Shutler - William Blair

Okay, makes sense. Thanks Eric. And then in the global equity strategy obviously you’ve had a [PM] change there I think about a year ago, but the performance was terrific you have a three year track record. Just curious what the conversations are like right now with the consultants and what the pipeline looks like, because you would think that guys could start seeing some more meaningful closure at some point in time?

C.J. Daley

I think overall we’re getting improved traction with the PM change, a well over a year ago now. And the promotion of Charles Hamker and Andrew Euretig on the team, it’s created great depth and created comfort in the marketplace. And then you layer the performance is an exceptional and in overall when you look at the strategy outside of the global equity versus there is an international equity or the international small cap business been great consistency to the overall characteristic. So, we have high expectations for that strategy picking up in the institutional channel, as well as potentially Inter-media or in overseas. But I think we’re very well positioned there.

Chris Shutler - William Blair

Okay. Do you feel like you need the five year or is three year plenty?

C.J. Daley

In the more mature strategies, I got large CapEx, plenty in global equities. A three, four years is starting to get some good interest, at five years is when you would be more of a hockey stick that’s start occurring say versus a small cap strategy, the global small cap strategy will meet a shorter time period. But I think we’re in a really good spot to start building a foundation of consultants following that and clients coming into the strategy. So I wouldn’t expect as high as growth as you might see in the global ops or the international equity, but I think it will get on the radar this year.

Chris Shutler - William Blair

All right great. Thanks a lot.

Operator

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

Bill Katz - Citigroup

Okay. Thank you. Actually I have two follow-ups. C.J., I’m sorry, just multi-tasking a little bit. As I think about the incremental $6 million to $7 million of expenses, you had mentioned before that the fourth quarter had a couple of million already in there. So I guess the question is, is it a step up from here or is it flat all else being equal? And then I have a follow-up.

C.J. Daley

Pretty much flat all else being equal, we have some initial on-boarding cost and then we started the implementation of the strategy. So, we would expect it to be a similar cost assuming we spend equally over the four quarters.

Bill Katz - Citigroup

Right. Okay and then with the closing of the global value fund, is there any sort of surge we should anticipate, surge mean just normal term pickup of volume just in front of high close that might hit in January and/or February?

C.J. Daley

No I wouldn’t expect a major surge there. We have closed multiple strategies and I think the first time we probably closed the strategy two years ago, you saw surges are running to get in before the door closes. We’ve managed that so that we wouldn’t expect that strong push coming into the strategy. So I wouldn’t expect it.

Bill Katz - Citigroup

Okay. Thank you so much for answering the questions.

C.J. Daley

Sure.

Operator

Our next question is a follow-up from Cynthia Mayer, Bank of America. Please go ahead.

Cynthia Mayer - Bank of America

Hi, just wanted to circle back once more on expenses. So, just a couple of things; one is the severance expenses was in this last year should no longer be in for 2014, right. Wasn’t that a one year event?

C.J. Daley

That’s correct.

Cynthia Mayer - Bank of America

Okay. And on the G&A a lot of the rise in the fourth quarter was I think the proxy expense, is that right so that would not be in first quarter? So all else equal we go down?

C.J. Daley

That's correct, we do adjust. Yeah, it was $2.6 million; we do adjust that in our adjusted earnings per adjusted share. We also had a slight uptick in [TNE] as we traveled around the world on a distribution side primarily and then also on technology side, I've been talking about some uptick in expense there and we saw that in the fourth quarter as well.

Cynthia Mayer - Bank of America

Okay. And the mid 40s cost of revenues ratio that will eventually yield -- you guys will eventually build up to. Is that inclusive of the $6 million to $7 million cost or is that apart from that?

C.J. Daley

Yeah, that reflects, including all expenses that we know could add and anticipated.

Cynthia Mayer - Bank of America

Okay. So then once your build up is done, in fact your cost of revenues ratio should begin to back off a little bit from that, right?

C.J. Daley

Well, I mean the major driver there is going to really be layering in of directly based comp expenses. As a public company offsetting that from a margin perspective is growth.

Cynthia Mayer - Bank of America

Right. So it would really probably be a function of the revenues in the end after the comp is built in. All right, thanks a lot.

C.J. Daley

You're welcome.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Colson for any closing remarks.

Eric Colson

Great, thank you very much. And that concludes the call. Thanks.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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