Artisan Partners Asset Management's (APAM) CEO Eric Colson on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: Artisan Partners (APAM)

Artisan Partners Asset Management Inc (NYSE:APAM)

Q2 2014 Earnings Conference Call

July 22, 2014 10:00 AM ET

Executives

Makela Taphorn - IR

Eric Colson - CEO

C.J. Daley - CFO

Analysts

Mike Kim - Sandler O'Neill

Marc Irizarry - Goldman Sachs

Steve Fullerton - Citigroup

Andrew Donnantuono - Keefe, Bruyette & Woods

Cynthia Mayer - Bank of America/ Merrill Lynch

Eric Berg - RBC Capital Markets

Surinder Thind - Jefferies

Chris Shutler - William Blair

Operator

Hello ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management’s Second Quarter 2014 Earnings Conference Call. My name is Keith 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.

Makela Taphorn

Hello everyone. Before we begin I would like to remind you that our second quarter earnings release and the related presentation materials 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 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 with that I will now turn the call over to our Chief Executive Officer, Eric Colson.

Eric Colson

Thanks Makela. Welcome to the Artisan Partners Asset Management Business Update and Quarterly earnings call. I am Eric Colson, CEO and I’m joined today by C.J. Daley, CFO. Thank you for your time today and I hope you find this discussion useful. As of past call I want to reinforce our business model relative to quarter and go deeper into our business philosophy and approach that drives our results over a longer and more meaningful time period. This quarter, I will spend time discussing the environment we have developed to support success for our talent. I will dive deep into the elements that are crucial to creating this environment.

Autonomy, alignment, growth and stability individually each carries value. We believe that the benefits of having them all work together with the right talent in place produces great synergy over the long term for our business. Once I’m done, C.J. will take the lead and walk through our financials.

On the first fact page, page two of the presentation; I have two quick points to make. First, our overall AUM has increased to $112 billion from $107 billion last quarter. The growth in those numbers reflects market appreciation as well as positive client cash flows.

Second, we have seen strong demand for our global equity team and its non-U.S. growth strategy. Over the years, our global equity team has built a robust franchise and the development of a broad group of decision makers has produced solid results and meaningful interests from a number of distribution channels and four strategies with realizable growth. We have also seen solid early interest in our high income strategy as it close to quarter with over $300 million in assets under management. Bryan Krug and his team are coming together well. He excelled in his permanent office space and has established a strong team around him.

Slide three, is somewhat of departure from our normal opening to quarterly calls. But we found this worthwhile to provide some market perspective in the context of what we do. First, if you look at the long term trend line and interest rates, there are already much better points in the credit cycle to launch a high income strategy that is in our goal though. We are not a product manufacturer, we are a talent firm. So we want to find the best talent that fits our business model and culture. Second, trends towards passive strategies ETS solution and alternatives are dominating asset allocation discussions.

Given the dominance of these trends the competition among seeders, platforms, private equity, multi-boutiques and large integrated firms or basically everybody for top talent disappears. Fortunately, the increase in regulation impact offset capabilities requires top talent to seek a good home. We will continue to look for talent and the alternative space but only move forward if the answer in our favor for success.

Finally, the current market rally that began in early 2009 seems to be continuing. For example, the Russell 2000 index closed up for the eighth consecutive quarter this June. Previously, the longest retail up quarters in the index which started in 1980 with sixth consecutive quarter. We are in the business of predicting market churns, but the length of the rally and the characteristics of businesses that are performing well, such as relative strength and price momentum, are generally inconsistent with fundamental investing our strength.

A lot of times say three to five year period can give you insight between managers ability to perform over a market cycle. We think the direction of lost sided nature of the most recent three to five timeframe is making the traditional performance analysis less useful.

The next two slides provide a current view of our long term investment results, on page 4, you can see the point that drive our performance analysis, faithfulness to a stated investment process, solid absolute performance and performance compared to periods and the index. As of June 30th, 7 of our 11 investment strategies that have a five-year track record have added value relative to their broad performance benchmarks over the trailing five-year and since each strategies inception.

All seven of our investments strategies with a 10 year track record have added value over the trailing 10 year period. During this ball mark the valuation discipline of our team has impacted relative results of our value equity, U.S. midcap value, U.S. small cap value and emerging strategies, each of which has trailed this benchmark for the five year period.

Most importantly all of our strategy continues to allocate their distinct investment profit with integrity, this has been particularly important in the recent period. Lost sided cycles can make it attempting to abandon a discipline and pursuit of relative near term success. Our teams continue to stay focused on their long term goals.

Slide 5, illustrate the lumpiness that’s stems from a process discipline, as of June 30, more than three quarters of our assets under management or in strategies outperforming the respect of benchmarks over the trailing three and five year period, while 99% of asset under management outperformed over the trailing 10 year condense each strategies and assumption. As you can see the impact of the current ball mark it is reflected in the one, three and five year numbers.

Over a longer period, their normalized cycles we have compounded wealth for clients and outperformed the industries across their asset base. Our mutual fund peer radiant which I’ll highlighted at the bottom of the page are a great snapshot of power results translate into industry wide ranking.

Slide 6 illustrates the outcomes of our business discipline around asset diversification, there’s always a lot of detail behind this visuals so let me hit on a few notable items. Our appropriate dealer account continues to be a solid source of flows for the firm with six straight quarters, as a distribution channel with the highest net inflows.

Looking at the top left, our business continues to be downgraded by two main groups of clients, institutional and intermediate areas, generally speaking our DC business is aligned with the institutional and our FA and BD business is, are the great referencing when discussing intermediary.

The institutional channel continues to be lumpy and impacted by process of taking and shifting tax of allocation, close from intermediaries remains robust and continues to influence our mix of co-mingled to separate account vehicle mix.

On the bottom right, you will notice different assets from outside of the U.S. picked up slightly this quarter, although this is a relatively small shift in the asset mix, it is an indication of the outside growth we are experiencing overseas, relative to the U.S. in the institutional channel. This quarter EMEA was solid but positive trends are developing in Australia and New Zealand all positive development as we look to further diversify our business.

Page 7 as a review of the three core principals as defined who we are. We are a high value added investment firm design for investment and to drive a growth oriented culture. Let’s talk about talent further this quarter. Slide 8 is always a great place to start quarterly discussion because likes the prior who we are page, it anchors the conversation.

Similar to all asset manager our talent is critical to our success, however we are not all saying to all investors, our model is not good for all talent and all types of talent are not good for us. Some individuals want to manage their business and run portfolios, now there’s lot to construct portfolios utilizing current views and centralized research. Our long term success requires us to be patient for the right talent.

Then the hard part began the business model, management team and most importantly the investment team must come together. We believe we can bring talent to a higher level through the execution of a number of additional business elements. On page 9 we note the first economy. Economy is a key part of our portrait Artisan Partners, having economic structure provides time for our teams to focus on their process without distraction in a culture that is unique to their franchise.

The uniqueness of our each team produces the creative perspective that leads to value creation. Finally, economy established a pure environment or ideas can be developed, embedded and guess by a pure with the same goals and interest. This purity of process and perspective is cruel for the discipline that is necessary to successfully manage portfolios through all market environments, ultimately increasing the output potential of the team.

On page 10, I have listed philosophy first on purpose, alignment is most commonly associated with economics, economic alignment is definitely critical, equity ownership and transparent compensation systems are necessary to build long term relationships in retaining an attracting talent. We also believe in time horizon alignment around return expectation and business development. Inconsistency in either can lead to unintended outcomes.

Finally, we think that having philosophical alignment around priorities sets a tone that leads to the most desirable outcome and I assume we have still and look for talent that naturally have a client first then firm then individual mindset. For years this was a problem to hedge fund industry, funds would launch and close based on compensation arrangements.

C&A producers were prioritize lower than our standards while still not perfect the industry is evolving which is why our interest is as well. Slide 11 is about growth. Growth is necessary to talent development but not all cost, it has to be thoughtful and done in the right way. Growth that is too fast can be stabilizing to a firm and quickly put at risk long term goal and the business as a whole. Growth must be investment minded. As a business growth alpha to come at the larger input to organic growth since sales.

So, all the elements being brought up stability it perhaps the one that over a last mode with all of the other concepts presented today. Knowing the game is going to stay the same with no rules or misunderstood changes is incredibly important to talent and hence really can surface in many ways. More than a year ago we completed our IPO, that could have been distracting to our talent but we have a distinct business management team in place ensuring the economy and focus of our team. That came over to Steve, a robust operations group and client serving efforts better than in place to make sure our talent maximizes the time spent on investment decisions.

Finally, crude stability comes from the franchise development we emphasize. Franchise development drives broader decision making opportunities and new product opportunities which in turn leads to longevity and more certain clear outcomes. Slide three brings the whole concept together. Synergy is the idea that the interaction between certain elements can lean to a total effect greater than the contribution of the individual elements. Today, I feel like we have a lot of proof statements to support our belief. Execution is the hard part but we think our experience gives us a natural edge with our existing teams and new opportunities.

Slide 14 is a quick summary of our 2014 equity grant approved at our last board meeting. Our equity grants very based upon value creation by individual, teams and the firm. Our equity grants improve our alignment of interest and retention of talent. We allocate approximately 1.4 million shares primarily to our investment talent. Our equity grants reward talent for career achievement not annual compensation. Historically, our liquidity rules required proper notification and tenure of the firm, this year we have two vesting in schedule that we are putting in place the standard vesting as a five year schedule.

The career vesting is similar to our historical rules and includes provisions around qualifying retirement. We think this enhances our stability and the ability to retain our key people. C.J. will discuss this in a little bit more detail. With that I will turn it over to C.J.

C.J. Daley - Chief Financial Officer

Thanks, Eric. I will begin the review over the second quarter financial results on slide 15. In summary for the quarter AUM increased $112 billion and net client cash flows are $558 million. This is our 11th consecutive quarter of positive client cash flows and represented 2.1% annualized organic growth rate for the quarter and year-to-date organic rate of 3.8%. Revenues for the June quarter over $208.5 million up 3% over revenues and preceding launch 2014 quarter and up 29% over the corresponding June 2013 quarter.

Our adjusted operating margin rose to 46.5% up from 45.1% and reflects operating leverage in our financial model. Net income performance share on an adjusted basis was $0.84 per share compared to $0.78 per share in the March 2014 quarter. On July 15th, our board of directors declared a regular quarterly dividend of $0.55 per share. On a GAAP basis, we reported net income per share $0.42 for the current June quarter and on an adjusted basis as mentioned we reported an earnings of $0.84 per share.

Our adjusted earnings measures remove the accounting impact of certain transactions related to our IPO and the complexities of our equity structure. These non-GAAP measures provide investors with the same financial metrics that we as management use to manage the company. Slide 16, is a review of our AUM for the quarter. Earning assets under management of 112 billion were up 4% from assets of 107.4 billion at March 31, 2014 and up 31% from our earning assets a year ago. Average assets for the June quarter were 108.2 billion up 2% from average assets in the March 2014 quarter.

The increase in AUM during the June quarter was due to $3.9 billion or 3.7% in market appreciation and $558 million as net client cash inflows. Net client cash inflows for the quarter equated to 2.1% annualized requirement growth rate and 3.8% for the year. Excluded from client cash flows for the June quarter was an inflow from a client reinvestment of $141 million which was withdrawn from another strategy within the same team in the March quarter. We’ve broken out that client transfer separately in our earnings release table. Second quarter client cash flows were mixed. As we expected, we saw a pull back in investor activity this quarter. As we’ve communicated previously, our experience, net inflows are typically higher during the first quarter when compared to the second. The June 2014 quarter included strong net client cash inflows into our non-U.S. growth, global opportunities and high income strategies with our $800 million of net client cash inflows sourced from clients outside the United States.

We continue to see strong growth in our non-U.S. growth strategy particularly from the broker dealer channel where centralized decision makers and broker dealers were rewaving their allocation more heavily to international mandates.

However, we are beginning to see a slowing of this reallocation trend. These net client cash inflows were offset primarily by net client cash outflows and our U.S. mid-cap value, U.S. small-cap value and U.S. mid-cap growth strategies which we think reflected institutional clients’ asset allocation decisions, the need for cash, for benefit payments and in certain cases, short term performance challenges.

On slide 17, you will see that our non-U.S. client AUM grew 13.5 billion, up 13% from 11.9 billion last quarter and up 38% from a year ago. Progress than the last year has been encouraging. Over the last year, we have added over 30 net new non-U.S. client and investor relationships.

Our one year non-U.S. organic growth rate is at 13% and the three year organic growth rate is 25%. During the June quarter, we began managing assets in our global opportunity strategy for our first Australian superannuation fund client with our Australia’s mandatory employer contribution requirements, we see this first client to be a strong foundation in this appealing market and recognition of our efforts in Australia over the last couple of years.

Throughout our history, our growth has been lumpy and has come from certain strategies and teams during the pockets of time. Looking ahead, we continued to be encouraged by interest in our non-U.S. growth global equity and global opportunity strategies.

Our financial results begin on slide 18. For the June 2014 quarter, revenues were $208.5 million on average AUM of 108.2 billion and to the increasing revenues of 3% of the preceding March quarter and a 29% increase from the corresponding June quarter in 2013. For the six month period ended June 30, 2014, revenues were $410.3 million on average AUM of 107.2 billion, that’s up 32% from revenues of 310.2 million in the six month period ended in June 2013.

Our weighted average management fees for the quarter and for the six months ended June 30 was 77 basis points. Our adjusted operating margin which excludes pre-operating share-based compensation expense was 46.5% for the current June quarter, compared to 45.1% in March 2014 and 44.6% in the corresponding second quarter of 2013.

Our adjusted operating margin benefit and the increasing revenues offset by minimal increase in total operating expenses. During the quarter, we experienced higher technology and distribution expenses as we ramped up our technology projects for the year. These higher expenses were offset by a slightly lower compensation and benefits expenses which were seasonally higher in the March quarter.

We’ve launched a new advisory share class of our high income fund and anticipate launching the class for certain of our other U.S. mutual funds in response to demands from intermediary market place. As intermediaries transition their clients to this new share class over the next year or so, we expect our payments to intermediaries for distribution and administrative services to decrease.

Offsetting this reduction in expense beginning in the September 2014 quarter, we expect to incur approximately $1 million to $1.5 million of additional expenses per quarter related to a reallocation of a portion of certain payments to intermediaries from our mutual funds to us as the advisor. Over the next year or so, we expect the margin impact to these two developments to be minimal.

Adjusted net income for the June 2014 quarter was $60 million or $0.84 per adjusted share. That’s a 7% increase in adjusted net income over the preceding March quarter and a 35% increase over the prior June 2013 quarter. For the six months ended June 30, 2014, our adjusted operating margin was 45.8%, up considerably from 41.0% for the six months ended June 30, 2013.

Adjusted earnings per adjusted share was $1.62 up 46% from $1.11 for the six months ended June 30, 2013. Compared to the prior year six month period the increase in margin is primarily attributable to higher revenues and lower compensation expenses related to the investment team cash retention award that concluded at the end of 2013 and severance expenses in 2013.

Slide 20 highlights our compensation ratio. As you know, our compensation expense in the current June quarter continues to include the amortization of pre-IPO equity based compensation which we adjust out of expenses when calculating our adjusted operating margin and adjusted earnings per share. Our compensation expense for the June quarter also includes the amortization of the July 2013 equity grant of restricted shares divest over five years.

Last week, our Board of Directors made the second grant of post-IPO equity based compensation. As with grants over the history of our firm, equity grants were used to reward value creation and long-term sustainable growth. Over our history, approximately 85% to 90% equity grants have gone to key members of our investment teams reflecting our value added investment culture. This year our Broad granted approximately 1.4 million shares which included a portion of the awards in a new form of grant that we call career shares. Like our standard restricted share awards, career shares have a five-year time vesting component. But importantly also required the recipients leave Artisan through a qualifying retirement process.

In summary, this means the key investment talent and our executive officers must have at least 10 years of service and provide a 3 year retirement notice before they leave in order for their shares divest. This concept further reinforces our commitment to creating long-term sustainable growth. The additional quarterly expense related to this year’s grant will be approximately $3.5 million a quarter, which is approximately a 170 basis points of our current revenue levels.

This will equate to approximately $3 million for the September 2014 quarter given the expense we recognized for partial quarter. We continue to expect it on a fully loaded basis, our comp ratio will grow to the mid-40s overtime as a result of annual equity grants. Conversely, that increase in the compensation ratio will be partly offset by scale as we grow our business. Of course future equity based compensation expense is largely dependent upon the size of future grants and our stock price at the time of grant.

The last slide is our balance sheet highlights. Our balance sheet remains strong, our cash balances healthy ending the June quarter at $204 million, down 4% from 2012 million at December 31. During 2014, we returned capital of $63.1 million to our shareholders in the form of cash dividends. We plan to continue our practice returning the majority if not all of our annual earnings to our shareholders. On July 15th, our Board of Directors declared our quarterly dividend of $0.55 per share of Class A common stock payable on August 29, 2014 to shareholders of record on August 15.

At June 30, our stockholders equity was $124 million, down slightly compared to December 2013 as a result of quarterly and special annual dividend paid in February and the quarterly dividend paid in May, offset impart by the equity added in the March follow on offering and current year earnings. Our debt remained at $200 million and our leverage ratio further reduced to 0.5 times EBITDA.

In June 2014, Hellman & Freidman disposed off the remaining investment it had in Artisan Partners since 2006. The sale of 1.8 million shares increased the percentage of common stock held by the public to 44%. As a result of that transaction, we recorded $64 million of additional deferred tax assets and $54 million amounts payable related to the tax receivable agreement with selling partners.

In addition, following his final disposition of Hellman & Friedman’s investment in Artisan, Allen Thorpe, who is H&F’s representative on our Board of Directors, has resigned. Eric and I would like to thank Allen for his support over the last eight years as a stake holder and partner of Artisan.

To wrap up, this quarter’s financial results were strong. We generated strong cash flows from operations returned meaningful capital back to our investors and we continue to expand our public ownership, all important components of a healthy and growing business.

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

Eric Colson

Thank you C.J. C.J and I appreciate your time including shareholders, client and employees to understand our business better. I will now open the call for questions.

Question-and-Answer Session

Thank you. We will now begin the question-and answer-session. (Operator Instructions) And the first question comes from Mike Kim with Sandler O'Neill.

Mike Kim - Sandler O'Neill

First, a fair amount of your strategies remain closed to some extent, so just wondering how you are thinking about flow prospects going forward. I know you've got a lot of capacity across your Non-U.S. and Global Strategies. But just assuming investor risk appetites remain somewhat uneven, just be curious to get your take on the flow profile in that sort of environment.

Eric Colson

And certainly Mike, this is Eric, I will lead off and maybe C.J. might chime in here. I think we have all seen the aggregate fund flows go from roughly 50 billion in the first quarter down to 9 billion in active equity strategies and if you look at primarily year-to-date it’s been roughly 90 billion to close to the 60 billion there. So the overall environment in the institutional and in the fund market is gone down a bit along with the continued institutional rebalancing that we are seeing. Both of them slight headwinds this quarter but overall, we have seen a nice uptick in our non-U.S. growth strategy. You can see for a year-to-date we are roughly 2.8 billion and that close which puts it into place where our global value team was also last few years. The growth team is positioned quite nicely especially the global opportunities. So that, those two teams are showing great promise for a ticking in that flow in the next few quarters even the next year and we have seen a good movement in the high income strategy now at 300 million overall.

So, I think we feel we are very well positioned, our open strategies are picking up nice flow and we always coach people that it will be lumpy and that’s we are not a smooth asset gathers, we are more institutional lumpy flow. So, I think that from a product perspective, broker-dealer channel and the overall intermediary it seems to be very strong management to overall it’s been growing and we are picking up good market share in the overall intermediary channel and we had also a nice uptick over season internationally with some good wins as C.J. mentioned in Australia and the pipeline out overseas and institutionally still remains strong.

So, I think the environment has affected us a bit in the past, we have grown strongly in core environment and we have grown slowly in great environment really if our goal is to remain disciplined to our business model, and really can’t control to flow our human behavior when dollars actually coming around, C.J. you have anything to add?

C.J. Daley

I don’t think I would add on the meaningful side I think we are where we expected to be would, where we thought this quarter was just investors pulling back and rebalancing out of some growth areas, when we saw growth and momentum stocks pull back in the March into April period. So, I think that’s been the one area that was a bit of surprise towards this quarter.

Mike Kim - Sandler O'Neill

Okay. That's helpful. Then second, I know it is still a relatively small part of your overall AUM base, but the longer-term track records for the emerging markets team are still a bit challenged. So any incremental insights into the drivers behind the underperformance? Then at some point do you start to think about maybe taking more a proactive stance with that team?

C.J. Daley

The numbers are continuing to trail the index a bit, the folk of the underperformance for that team incurred in 2011 since then we have been moderately behind and the primary driver there around and asset class and asset flows really tasting the index return and again we saw an enormous amount of dollars go back into ETFs and the index and really reinforced that relative strength and price momentum that occurs by buying stocks and the index and our portfolio tends to have a high active share ratio, we intend to be out of the index quite a bit in the number and names and when you are out of the index, you are not getting that after flow support we continue to trail and we also saw that same issue occurring the value team so the value team it was again fairly concentrated in the number of names and outside the index and the flow that we saw in the last year and two years into the midcap value index was extremely high versus past years and that penalize this quite a bit we annualized our stock that were inside the index and outside the index and there is an extreme difference in return between the two driven by the continued push in dollar towards BTS but that’s been a technical factor that continues to push and the emerging market team has been very consistent to their process and producing a strong fundamental portfolio but once we start seeing some inconsistency in process and inconsistency in the talent there, then we start to waiver more; but we have always looked at having integrity in the people first, process and then the performance follows that and right now from what we see from a performance standpoint we are just fighting a technical factor.

Operator

Thank you. And the next question comes from Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Great, thanks. Eric, can you just give maybe some historical performance across some strategies in terms of -- obviously it sounds like you'll continue to stick to your knitting, in terms of not having in terms of not having style drift in the strategies. But have you seen periods where there has been some near-term underperformance? How long do those extend for? And do you think your clients and the consultants understand that?

Eric Colson

Yes, Mark. It’s each of the strategies sense their inception have had anywhere from a year to three year of underperformance versus their index and the peers and you can go through each of the strategies whether it’s midcap growth or international growth, the first couple of years have international values strategy has some fairly lumpy results, if you looked at '02, '03, '04, '05 that was really two good years, two top years and there was moments there where the three two numbers were difficult as well. And we’ve spend it often lot of time with our business leaders, the business leaders are dedicated each investment team to focus on clients service. And so we’ve spend a lot of time educating our clients about our process, what to expect and there’s not so much time right that people are willing to stick with you and I think as long as we can point to the consistency and understanding of why we’re underperforming and show proof statement to that, our client tend to stick with this quite well.

Now there are a lot of other reasons in the market place right now, that we see institutional and even some of intermediary clients rebalancing and de-risking and taking money off the table. But I, top-line, I can pull some data for you and show you various cycles there with each team has done that and it’s a little bit more prolong in the emerging markets right now, but we’ve never really seen this much momentum around ETFs and index flows into a segment such as whether it’s a Chinese staff of emerging market ETFs.

Marc Irizarry - Goldman Sachs

Great. That’s helpful. And just C.J. for your on the comp expense, can you give us some perspective on just how much flexibility there is in terms of comp just given maybe given the one year numbers, I mean there’s sort more of a maybe fix component to the comp if you will, but I mean I’d imagine that there is some variability there, maybe specifically when you think about the mid 40% comp ratio what sort of the timeline to get there?

C.J. Daley

Yes. So in the comp area, I would approximately 70% of our expenses in the comp line is variable so there’s a quite bit of variability there it will fluctuate with increases and decreases in revenue but as you saw in this quarter there’s also leverage when we grow quarter-to-quarter to pick up some margin expansion because of that fixed component. So the mid 40s, it will take us, on slide 20 we’ve break up the comp ration, you’ll see that we’re currently in the low 40s but given moderate growth as we’ve seen over the last three to five years, as well as varying on the equity based comp expense, I think it will take us in the three to four years given those assumptions to get to the mid 40s.

Operator

Thank you. And the next question comes from Bill Katz with Citi.

Steve Fullerton - Citigroup

Hi, this is Steve Fullerton filling in for Bill. First question, are you able to size the Australian AUM win that you had? And what is the depth of the opportunity there that you see? How much could we see come in from this?

Eric Colson

The Australian market is looking, as C.J. mentioned is very market, I think we all know that positive to that market, but we’ve had some good attraction from two of the primary consultant down for various strategies and we continue to be supported by some of the global consultant so we’re quite optimistic on Australia overall but I don’t think we can give any specifics to that market place, really we have to see it through until this research process that our radiant service is final to really understand if what the final outcome will be.

Steve Fullerton - Citigroup

Okay, great. Then just saying on the Non-U.S. topic, I guess, you talked about how the amount of relationships ticked up this quarter. Is there anything specifically that you are doing different? Any change in strategy?

Eric Colson

No, no change in strategy we ended the last year about 55 relationships over these, we’re up to good 20 over the last, so we’re starting to see a little bit broader acceptance outside the U.S. I think we’ve spend quite a bit of time with our website we’ve put videos online we’re trying to leverage technology and marketing to broaden our footprint around the world. As well as I believe going public that help to build some brand identity as well. And it’s just a little bit more acceptance in the market place as who we are.

Operator

Thank you. The next question comes from Robert Lee with KBW.

Andrew Donnantuono - Keefe, Bruyette & Woods

Hi, this is actually Andrew Donnantuono filling in for Rob. Just my first question is on specifically the High Income Strategy. Just kind of curious. The inflows for the quarter and going back to first quarter actually, would you be able to just give us a sense of which distribution channels are driving that? Then just on a relative basis, I know it is early days still, but just wanted to see how -- where you guys think the strategy has both performed and grown relative to your expectations when it was launched a few months ago.

Eric Colson

Sure, the high income strategy is now 100% put together with all three analysts in the team located in Kansas City with Brian. So from an operational and from an investment point of view, we think we have the right foundation now to go forward. From a distribution standpoint we just right around 300 million under management primarily coming from the intermediary channel, mix of broker dealer and financial advisors into the mutual fund. And I mean outlook going forward, we are really looking to manage that and manage Brian’s time so that we are focused on the investment integrity of the strategy in the early phases of strategy, you have to watch asset flow either positive or negative in any significant way, so that doesn’t become distractive the performance and in the initial portfolio, the portfolio is what we expected. It’s a mixture of corporate and bank loans, it’s highly a differentiated from the index and peers, and so we feel that it’s inline to our expectations from an investment, operation and distribution, we feel it a little bit above where we thought it would be.

Andrew Donnantuono - Keefe, Bruyette & Woods

Okay, great. Thank you. Then shifting gears just a tiny bit, I wanted to ask you about -- to the extent that you felt you have had success or could continue driving flows via -- getting Artisan's strategies on 401(k) platforms. Just wanted to know if you had any color there of late; and if so, what strategies have really been driving the flows onto 401(k) platforms?

Eric Colson

Currently, the defined contribution segment still remains fairly flat for us and continued client share of the net new flows are going to target the date funds, primarily the proprietary target date funds. You have seen a few consultants and put together customized target dates and solutions that are making feel a little bit more optimistic for the future of target dates but as of late in the near term it still remains flat for us.

Operator

Thank you. The next question comes from Cynthia Meyer with Bank of America/Merrill Lynch.

Cynthia Mayer - Bank of America/ Merrill Lynch

Hi, good morning. Just going back to some of the Value Strategies, it looks like a few of them have a really high percentage of cash, like 8% plus, up to 13%. I am just wondering; is that typical? Does that explain the underperformance? Or is it more securities selection? And then just more generally on the Value Strategies, when you guys have some strategies that are lagging like that, could you describe a little bit what, if any, extra steps you take in terms of reaching out to clients or distributors? Whether it is more presentations from PMs or from you guys, do you change the way you communicate at all? Thanks.

Eric Colson

Cynthia, the value strategies tend to hold a little bit higher cash than our growth-oriented strategies certainly in 8% to 10% cash position over the last year it has been a drag I mean the market overall is up, 20%, 25% in the mid-cap and the small cap segments of the marketplace. Our value team has a more conservative approach to value investing and we fully expect the team that over those the last five years of the full market, especially in small cap and mid, this team should lag and it’s lagged in past years as well in up markets. So the team producing 20 plus percent return over the last five years and the index producing 20 and 22 plus return. Can be pointed a little bit to the cap position, we’ve also found a big differential in stocks that are outside the index.

There has been a big drag in those names given the price momentum that’s occurred in the dollar flow into indexes. So it’s a combination of overall strategy more conservative with cash and what’s going on in asset flow around the index would be the primary areas that we’ve seen when we looked at performance. And our communication certainly upticks as clients, consultants, intermediaries want to understand the strategy better and these cases are our portfolio managers will get on the phone and visit clients to talk about the strategy and why the portfolio is positioned. Fortunately, for all of our strategies we have seen some very strong periods, the value team was performing quite well through 2011, where they were names Morning Star manages a year at that 2011 year so, coming often the next two years of lagging takes some education for the portfolio manager and uptick in communication and we are happy to educate our client to the extent the duration of those assets with us.

Cynthia Mayer - Bank of America/ Merrill Lynch

Okay, great. Then on the separate accounts, it looks like the flows turned positive. I am assuming that was -- I think you said overseas clients. So was that the Global Equity product? What changed there? Why do you think that that has ticked up? What types of clients were those? Thanks.

Eric Colson

The mixture of institutional and although bit on the financial intermediary side of the business, it was primarily in the global opportunities, we saw some larger mandates come in as well as one good size account for international growth strategy.

Operator

Thank you. And the next question comes from Eric Berg with the Royal Bank of Canada.

Eric Berg - RBC Capital Markets

Good morning. As I look at the big picture and I assess the overall flow picture, it looks to us here at RBC that the inflows have been fairly steady. And what has been driving -- again, on an overall Company-wide basis -- the decline in net flows has been a fairly sharp increase in outflows. I guess my question is -- and I have listened to you quite attentively, so maybe you have answered this question and perhaps I just need to sharpen my understanding. If the outflows are rising in the face of what has been admittedly some pressure on performance, does that mean that despite your discipline that just the message -- that the customers are not tolerating it? The message is not getting across? Or do you think I should reach a different conclusion about these growing outflows?

Eric Colson

I would have a different conclusion I mean we are working with quite a few institutional clients that are rebalancing and rerisking and I would like to say that the rebalancing is occurring in the strategy that have core performance in the short run but we have seen quite a bit of rebalancing in our strategies that are having strong performance too. So, when I go through the data and look at where the rebalancing is coming from it is touched to all of our investment teams over the last quarter and year-to-date but it’s difficult for me to point to and say it’s because of performance and they are not understanding the strategy and it’s clearly been a couple extra accounts that we have lost around performance and that’s natural when you are going through a cycle but I have steady uptick primarily around the institutional marketplace rebalancing and derisking their portfolio as a bit.

Eric Berg - RBC Capital Markets

That's helpful. Then just one, I would say, more straightforward question. Maybe not, but you will be the judge. As you compare the performance of your domestic or U.S. Value team versus your Global Value team, it is pretty striking, the difference, with the Global Value team seemingly doing much better. They are both value investors. They both are committed to sticking to a discipline. What is your best sense of why the global guys have done so much better, at least it appears, than the US team?

Eric Colson

I think the U.S. value tends at a little bit more of a conservative approach, you can see a few more securities especially in our small cap and mid cap. So, it’s a bit more diversification there and the second point is that the U.S. value tends to have a little bit more of a value to more of a traditional value bank to them as oppose to global value being more intrinsic value oriented. And so there is slight new answer to their philosophical approach and process and a little bit concentration that occurs in the global value team than in the U.S. value team.

Operator

Thank you. And the next question comes from Surinder Thind with Jefferies.

Surinder Thind - Jefferies

Good morning, guys. I just wanted to touch base on -- previously you've spoken about the lifecycle of funds and ultimately getting them to like a maintenance phase. But what about the opposite? So once a fund has been soft closed, what are the considerations into maybe reopening that fund? Does it have to get to a certain level below capacity? Or how do you think about that process?

Eric Colson

It’s a similar process of looking at the market environment of where we are at and where the investment team feels like it’s a good entry point to open up because as you open up it is quite a bit of investment back into CMA consultants again and reeducating the market place. So it’s a combination of time where the marketplace is at, what’s the overall dollars of the portfolio, it’s not simply; if the dollars deteriorate a $1 billion and one of the strategies, it’s time to reopen it. And it’s a fairly fluid conversation I have with each of the investment teams.

Surinder Thind - Jefferies

Okay, thank you. Then, just earlier you highlighted some of your thoughts on work around new strategies and stuff. I think in your monthly AUM disclosures you guys also note that you have roughly $40 million in a managed portfolio that is currently not available to clients. Now is that one strategy, or more strategies? And can you comment on what that is, what that strategy might be?

Eric Colson

That’s a single strategy; it’s an internal strategy that we have listed on the balance sheet there as launched equity. And it’s a long short strategy managed by one of the teams, it’s the team that’s been taken about to agree the freedom, unlike all the strategies that we think about we like to take quite a bit of time to get those to market and understand the overall strategies. So at this point we’re not putting any plans in place to put that into a marketing and opening up to external investors.

Surinder Thind - Jefferies

Okay. Then typically, you mentioned it takes a bit of time. Is it a number of years before you think about that? Is it like a 3-year type of period that you try and at least evaluate? Or what kind of an incubation period do you guys generally think about for something like this?

Eric Colson

We don’t think we have a set timeframe on it, it could be a couple of quarter, it could be a couple of years it’s really a comfort level with the investment team, where they are at and their resources, where they’re at in their current strategies. And do they feel that this is a strategy and a portfolio that will in place and be representative of the future and sometimes that just takes a few quarters and sometime it may take a few years. We put no timeframe to our launches.

Operator

Thank you. And the next question comes from Chris Shutler with William Blair.

Chris Shutler - William Blair

Hey, guys. Good morning. On the Global Equity strategy, still seeing excellent long-term performance there, but no real pickup inflows yet. So just walk us through what we could see. When do you think we could see that strategy start to generate some more meaningful flows? And do you think the 1-year number there holds you back very much?

Eric Colson

We’re starting to get more and more meetings with the global equity team both for the global small cap and the global equity strategy and that process that does take some time for consultants to put you on the buy list and move you up in the ratings. And what we have seen in the market place is the supply of global equity product is quite large, you can look at the new funds data coming out seems like every month someone is launching new global strategies. So it’s a highly competitive area, similar to probably 10 years ago in the U.S. large cap equity space. So we expect a little bit longer cycle than the capacity constraint strategy that’s in the small cap space where you would need three or four years, few $100 million and due to capacity constraints you can get some market a little quicker, in a more capacity or in a strategy with quite bit of supply in the market place, the timeframe to really expect assets to take more than the four, five year period that we’re seeing right now. Overall though the consultants are starting to put this high on research priorities, we’re starting to see some bio ratings and I think we’re seeing some early signs of this strategy starting to grow in the next year or two. And I fully expect like year or two that we would see good flow here. The performance on the one year, doesn’t really hold us back to give us a reason to say how is the portfolio positioned, most of the consultants the clients are looking at, the longer term performance and the short term performance to help some, getting understanding of what type of strategy they’re running.

Chris Shutler - William Blair

Okay, understood. Then the only other question on the comp expense, for C.J. It was a little bit lower than we expected this quarter. I recognize the share-based comp is going to step up next quarter. But outside of that, how should we think about comp over the next few quarters?

C.J. Daley

Yes. I mean, I think what you saw this year, this quarter was the absence of the seasonal expenses in the first quarter which is would drove down a bit in the second quarter. So next quarter you would see it similar to this year, to this quarters quarter expect for the addition of the equity base comp.

Operator

Thank you. And we have a follow-up question from Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Okay, understood. Then the only other question on the comp expense, for C.J. It was a little bit lower than we expected this quarter. I recognize the share-based comp is going to step up next quarter. But outside of that, how should we think about comp over the next few quarters?

Eric Colson

No, we haven’t had any meaningful funding or announcements of assets leading over the first couple of three weeks here into the quarter. And looking at the rest of the quarter, it’s tough for us to know.

C.J. Daley

We will release July AUM around the seventh business day in August.

Operator

Thank you. This concludes our question-and-answer session and I would like to turn the conference back over to management for any closing remarks.

Eric Colson

Thank you for you guys time today. C.J. and I did the call here from London for the second time, we did it as well last year and it’s good to get out of our offices and do the calls from various locations, and so we will continue our practice getting out of the offices and doing the earnings from various locations and we appreciate your today.

Operator

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may all now disconnect. Have a nice day.

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