Artisan Partners Asset Management's (APAM) CEO Eric Colson on Q4 2015 Results - Earnings Call Transcript

| About: Artisan Partners (APAM)

Artisan Partners Asset Management Inc (NYSE:APAM)

Q4 2015 Results Earnings Conference Call

February 10, 2016, 12:30 pm ET

Executives

Makela Taphorn - Director, Management Reporting and Investor Relations

Eric Colson - President, Chief Executive Officer, Director

C. J. Daley - Chief Financial Officer, Executive Vice President, Treasurer

Analysts

Michael Kim - Sandler O'Neill

Bill Katz - Citi

Michael Carrier - Bank of America Merrill Lynch

Surinder Thind - Jefferies

Eric Berg - RBC Capital Markets

Robert Lee - KBW

Chris Shutler - William Blair

Operator

Welcome to Artisan Partners Asset Management fourth quarter earnings conference call. My name is Laura and I will be your conference operator today. [Operator Instructions]. After the prepared remarks, management will conduct a question-and-answer session and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded.

At this time, I would like to turn the call over to Makela Taphorn with Artisan Partners. Please go ahead.

Makela Taphorn

Thanks for joining us today. Before Eric begins, I would like to remind you that our fourth quarter earnings release and the related presentation materials are available on the Investor Relations section of our website. Also the comments made on today's call and some of our responses to your questions may deal with forward-looking statements which 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 our remarks made today 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 I will now turn the call over to Eric Colson.

Eric Colson

Thank you Makela. Welcome to Artisan Partners Asset Management business update and earnings call. I am Eric Colson, CEO and I am joined by C. J. Daley, CFO. On this call, I want to discuss the performance of our investment strategies, asset allocation trends and our positioning for future growth. After I am done, C. J. will discuss our fourth quarter and full year 2015 financial results.

Let me begin by taking a minute to discuss the market volatility we have seen so far in 2016. As we reported yesterday, during January our totally AUM declined by 8% from $99.8 billion to $92 billion primarily as a result of declines in equity markets. As I have discussed before, our firm was consciously designed with market volatility in mind. Our flexible expense structure is a key part of our business model. Majority of our expenses fluctuate automatically with changes in AUM and revenue. As AUM and revenues decline, our investment team bonus pool also decline. This has two important benefits.

First, our investment professionals understand in advance how market volatility will affect their compensation. They know what to expect when market drive down AUM and we don't have to renegotiate compensation or set new expectations. This predictability creates a more stable environment in which our investment professionals can do their best work.

Second, because the majority of our expenses automatically adjust, we can continue to focus on our long-term business objectives. We are forced to revisit or depart from our business plan. In fact, we believe market volatility generates long term opportunities for our business as well as for our investment team.

Over the past 15 years, we have experienced 18 monthly periods in which assets declined by 5% or more. We don't know whether last month's market declines will prove to be the beginning of a prolonged market downturn or just an isolated event. Either way, it won't change the way we manage our business.

Slide two outlines who we are as a firm. We are a high value added investment firm designed for talent to thrive in a growth oriented culture. We always return to who we are because our business is predicated on trust. Our credibility with clients, employees and investors relied on the consistent application of our business and investment principal and the outcomes generated by execution of those principles. Regularly coming back to the definition of who we are grounds our decision-making and minimizes surprises.

Slide three shows the performance of our 2015 investment strategy. Our goal was to deliver solid, absolute and relative return in portfolios that are consistent with the stated investment philosophy of each strategy. That's what we do. As an investment management firm for our clients, our ability to generate alpha is why clients hire us in the first place. If we generate alpha, as we have historically, our clients benefit and we benefit. With more satisfied clients, greater AUM and a better brand with which to market future product. Investment returns not net sales have been and will continue to be the most important driver of our long-term growth.

Focusing on long-term returns, you can see the eight of Artisan's 12 strategies with a five year track record beat their benchmarks over that period. Six of those eight strategies outperformed by over 450 basis points on an annualized basis during the period. Of our eight strategies with 10 year track records, six have beaten their benchmarks over the last 10 years. This outperformance reflects the high-value added asset management style of our investment team. Our teams develop unique portfolios that are highly differentiated from indices, portfolios that reflect the hard work, experience, insight and judgment of our investment talent.

The differentiated investing that generates alpha can also result in significant and sustained underperformance. That's what we have seen in the strategies managed by our U.S. value team over the last couple of years. As I have discussed before, the prolonged bull market that persisted through 2014 was a difficult environment for the team's investment philosophy. While 2015 saw domestic equity indices level off, the U.S. value team's performance did not improve as momentum and growth stock continues to outperform the rest of the market which worked against the team.

The three U.S. value team strategies experienced $6.5 billion of net outflows during 2015 which was more than 100% of our firmwide net outflows during the year. During the fourth quarter, those three strategies experienced $1.6 billion of our $2 billion of total net outflows. We expect that the team strategies will continue to experience outflows in 2016, but we are confident several of our other strategies are well-positioned for continued growth.

Moving to slide four, I want to explain why we are more excited than ever about asset management. True asset management thrives with a philosophically sound strategy, a judgment of talented professionals, flexibility for that talent to implement a philosophy and exercise its judgment and market volatility and uncertainty that allows for differentiated returns from an expensive alternative.

From the early 90s through to 2008 financial crisis, we saw lion's share of actively managed asset were amassed into constrained strategies that provided exposures limited by the index universe and investor's appetite for tracking one. Standardized constraints allowed investors to easily bucket managers and strategies by style and categories. This is what clients and investors demanded and what traditional asset managers supply.

As dollars continue to flow into these constrained exposure oriented strategies, supply eventually overshot long-term demand. We have illustrated the access with the blue historical curve on this page. Over the past few years, the blue curve has flattened. We think that the green curve is a better representation of investor's allocations going forward. This has created obvious opportunity at the tails.

On the left, passive and factor based investing have increased in popularity. On the right, the popularity of alternative assets including hedge funds, real assets and private equity has increased. The evolving allocation dynamic has also created new, if less obvious, opportunities for traditional asset managers like Artisan. The emerging opportunity set for us is represented by the shaded area which identifies the growing demand for high value-added asset strategies that bridge the gap between traditional strategies and alternative strategies.

In this space, sophisticated long-term investors are giving managers the flexibility to act on philosophy and judgment to further differentiate their portfolios from the industry. These newer strategies have broader investment universes and allows them more tools to manage risk and outcomes. This is an exciting long-term development for high value added investment managers.

Clients that were formerly most comfortable in traditional strategies with the associated constraints are increasingly giving managers more flexibility. That freedom in turn allows managers to further differentiate their portfolios and add value in ways not possible with asset class, regional and security constraints. We believe that this trend is creating a significant opportunity for investment talent and investment firms that are willing and able to embrace it.

We have already seen and experienced this new and emerging demand with our global strategies. And our two newer strategies, Artisan high income and Artisan developing world also fit within this theme. I expect our future strategies and new teams will also fit within this theme as we focus our efforts on long-term sustainable demand.

Slide five features our three global strategies with five-year track record. The prior slide highlighted how these strategies are positioned within the large per asset allocation trend. This slide illustrates the success we have with global and our positioning going forward. The strong absolute and relative performance shown on the bottom of the page has translated into outstanding peer group positioning.

The chart show peer core talent performance for each of the strategies against their relevant eVestment peer universe. Over a three-year and five-year time period, all three strategies are in the top quartile of performance and the strategies outperformed the benchmark over all time periods shown. The strategy's absolute and relative performance position them well for future growth. The global opportunity strategy had over $2 billion in net flows last year. It finished the year with $7.6 billion in AUM and it has realizable capacity.

The global equity strategy passed the five-year mark in 2015 adding an impressive five-year figure to its performance statistics. We expect these performance numbers and increased marketing efforts outside the U.S. will support a pickup in assets for this strategy.

As I said on a call last year, after a global opportunity strategy's first five years, it had only $357 million in assets. The global equity strategy is almost twice the assets after its first five years. I am confident that it is positioned for growth.

The largest of the strategy is global value with close to most new investors and client relationships until the fourth quarter of 2015 when we reopened the strategy to investors and pooled vehicles. We believe that the combination of the strategy and impressive track record and the team's reputation will allow the strategy to grow in a relatively smooth and structured manner. But we will continue to be thoughtful about that growth.

Importantly, the global strategies have proven to be attractive to clients and investors both within and outside of the United States. The non-U.S. clients and investor asset in these strategies constitute the vast majority of our total non-U.S. business. We have, in large part, built our non-U.S. marketing capabilities through the distribution of these strategies which has increased considerably the geographic diversification of our overall business.

The investment and business success of these global strategies is a testament to the skill of our investment talent and to our business philosophy. A decade ago, we began to contemplate and design these strategies. We saw an emerging long-term demand for global products. The global mandate was interesting to our talent and provided a natural next step for their growth. Today these strategies are thriving and represents the core of our realizable capacity.

Slide six shows our latest generation of strategies, the high income and developing world strategies. As I have discussed before, the high income strategy has the flexibility to invest in a variety of credit instrument including corporate bonds, bank loans, revolving loans and credit default swaps. This expands the universe of fixed income investments available to our credit team which gives the team more opportunities to generate returns and build a differentiated portfolio. This is active flexible high value-added investing. While the strategy has only a short-term track record, you can see that during that time period, it has differentiated itself from the index. At the end of January, the strategy had over $1 billion in assets.

Perhaps our most notable 2015 business development was the establishment of the developing world team and the launch of the Artisan developing world strategy in June. Unlike most traditional emerging market strategies, the developing world strategy has the flexibility to and does invest significantly in companies that are domiciled in developed markets but are economically tied to developing world. The resulting portfolio offers differentiated exposures to emerging markets. While the performance track record for developing world strategy is short, it reflects the recent negative returns in emerging markets. The strategy is off to a great start relative to the emerging markets benchmark.

With these strategies, we have continued to expand degrees of freedom and provide the team the tools and flexibility to manage risk and outcomes. This is the next generation, a rebirth of asset management defined by value added or asset share, not categories and indices.

Slide seven shows the diversification of our AUM by investment team, distribution channel, client domicile and investment vehicle. Over the years, our diversification by team, channel and client domicile have all increased as a result of conscious and thoughtful effort to launch new teams and develop existing talent, to execute our leverage intermediary distribution strategy and to methodically build out our non-U.S. marketing effort. As we continue to execute our long-term business plan, expect these pie charts to continue to evolve. We expect to add more investment teams and strategies over time and I expect that the types of teams and strategies that we add will be consistent with the high value-added, active and flexible theme I discussed earlier.

Moving to the distribution chart. I expect our intermediary business which encompasses broker-dealers, financial advisors and private banks will continue to grow as a percentage of our total business for several reasons. First, 401(k) assets will continue to roll over in IRA's which will put more assets into the hands of these types of advisors. Second, we continue to see wealth management firms centralize the investment decision making process which fits well with our leverage marketing approach that focuses on home-office decision-makers. Third, the popularity of fee-based programs and an expansion of the asset base of the fiduciary standard should bode well for independent investment firms with best-in-breed products like Artisan.

Our institutional business will also continue to evolve. Right now, the defined contribution space is difficult for us. In the short term, the opening up and reconfiguration of DC plans has worked against us because overtime some of our strategies have grown to the point where any comprehensive reallocation cuts against us. New DC business has also been slow because custom target based funds have developed slowly due to the complexity of structure, vehicle, fee and the potential for litigation. So we are looking ahead over the next three to five years, I think will start to see plan sponsors open up their target based solutions and include best-in-breed managers and global mandates which should work in our favor. While it may take time, open architecture and freedom of choice should prevail as we have experienced in the past with institutional assets.

Moving to the client domicile chart, I expect our assets from non-U.S. opportunities to continue to grow. As I remarked earlier, the growth of our global strategies has been set significantly by the assets from non-U.S. clients and investors. I expect that trend to continue as we further build out our non-U.S. marketing effort. In 2015, we made significant but calculated additions to our marketing efforts in EMEA, Australia and Canada. Non-U.S. markets remain a very significant opportunity for us. We are pursuing them in a thoughtful way consistent with who we are.

Lastly, the vehicle chart. For these presentations, we break down client assets by separate accounts, Artisan funds and Artisan global funds that use it. In the separate account category, we include a variety of traditional separate account relationships as well as mutual funds, non-U.S. funds and collective investment trust that we sub-advise. As I look forward I expect existing pool vehicles to grow as a percentage of our total business and for us to launch additional pooled vehicles. With increasingly global and flexible investment mandates, pooled vehicles are operationally more efficient and oftentimes more convenient for clients, even for large clients that have the operational wherewithal to maintain a separate account.

In addition PICs continue to grow in popularity in the defined contribution space. We currently sub-advise Artisan branded CITs in our non-U.S. growth, global equity, global opportunities and value equity strategies and anticipate that our footprint in this space will continue to grow.

I hope that my remarks have helped you understand why I am excited about our business and the future. I will now turn it over to C. J.

C. J. Daley

Thanks Eric. I will start with a reminder our financial philosophies which are on slide eight. These philosophical principles guide our actions at all market conditions. And while recently markets have acted with uncertainty and volatility driving our AUM down and ultimately lowering our revenues and profits, our actions have and will continue to be consistent, transparent and guided by these philosophical principles.

Slide nine begins a review of our results for the quarter and calendar year ended December 31, 2015. For the quarter, AUM rose 3% to $99.8 billion, primarily through market appreciation, half of which was offset by net client cash outflows of $2 billion. For the year, AUMs increased 7% due to net client cash outflows of $5.8 billion and market depreciation of $2.2 billion. As Eric mentioned, in both the quarter and full-year, we continues to experience net outflows in our U.S. value strategies as a result of extended underperformance.

We also experienced net outflows in several other strategies as a result of institutional asset allocation decisions away from active equities into solution based products particularly in the DC space. On the plus side, absent the outflows in our value team, demand for our global products particularly from clients outside the U.S. resulted in positive net client cash flows for rest of the firm. We expect to continue to see demand for these products in 2016.

Average AUM shown on page 10 decreased 3% to $101.4 billion for the current quarter when compared to the previous quarter and 5% when compared to the December quarter of 2014. Revenues, which are the product of average AUM and fee rates, decreased 3% to $192 million from last quarter and in line with the decrease in average AUM. When compared to the same quarter a year ago, revenues decreased 7% reflecting both a decrease in average AUM and a slightly lower average effective fee rate earned on assets.

For the year, average AUM decreased 1% to $106.5 billion. Corresponding revenues decreased 3% to $805.5 million reflecting both a decrease in average AUM and a slightly lower average effective fee rate. The lower effective fee rate in 2015 stems from a shift in the mix of AUM between our strategies and vehicles primarily a reduction in the proportion of our AUM managed through Artisan funds.

Expenses are on slide 11. During the quarter, overall expenses excluding the pre-IPO related compensation were down 1%. The decline in expenses was driven primarily by lower incentive compensation and third party distribution costs which are tied to levels of AUM. The decrease in these expenses was offset in part by higher compensation costs related to our newest investment team and higher technology costs.

For the year, expenses excluding the pre-IPO equity based compensation rose 5% despite a decrease in revenue mostly due to our continued investments in existing talent through annual equity grants and the formation of our seventh investment team. Equity based compensation expense rose $13 million year-over-year as a result of the equity grants in 2014 and 2015.

In 2015, we incurred approximately $12 million in expenses from onboarding our newest team and launching their first strategy which over a short period got us approximately $400 million of AUM. In addition, we made investments in talent, technology and infrastructure to support our current and future AUM to increase full-time employee headcount and technology projects related to information security and our distribution capabilities.

The largest component of our expenses is compensation and benefits which makes up approximately 80% of our total expenses. Slide 12 shows the details of this expense. Our compensation ratio has settled in around 46%, a result of the increase in equity based compensation expense which adds about 500 basis points per ratio as well as reduced levels of revenues. As a reminder for next quarter our compensation ratio runs higher in the March quarter of each year due to increased equity based compensation expense from January equity grants and seasonal compensation costs. We expect the January 2016 equity grants to increase equity based compensation expense by $1.1 million in the March quarter. In addition, seasonal expenses have added approximately $3 million to $4 million to our first quarter expenses of each calendar year.

Moving on to margin in earnings. For the quarter, the adjusted operating margin declined to 39.7% compared to 40.9% last quarter and 43.9% in the December 2014 quarter. The decline was primarily an impact of lower revenues. Resulting adjusted net income for the current quarter was $46.2 million or $0.63 per adjusted share. for the year, the adjusted operating margin decreased 460 basis points reflecting lower revenues, increased equity based compensation expense and investments in our newest team. Adjusted net income declined to $197.3 million or $2.69 per adjusted share, down from $228.9 million or $3.17 per adjusted share in 2014.

Slide 14 provides a summary of our public company dividend history. On January 26, 2016, our Board of Directors approved a quarterly dividend of $0.60 per share and a special annual dividend of $0.40 per share. We calculate and pay our dividends and arrears based on earnings from the prior quarter or year and the amount of cash we want to retain. The fourth quarterly dividends declared from April 2015 through this January together with the special annual dividend also declared this January represented total of $2.80 per share. The $2.80 is a yield of over 9% based on our current share price and represents a return of our 2015 adjusted earnings per share plus a portion of the cash earned above our adjusted earnings measures.

We calculate the amount of cash earned above adjusted earnings primarily by subtracting capitalized expenditures from cash generated from non-cash expenses that reduce reported earnings. The additional cash retained from 2015 earnings is above and beyond the normal excess cash levels we retain and should allow us the flexibility to maintain our current $0.60 quarterly dividend while we allow time to determine if the January market decline represents a longer term level for markets. In other words, if our AUM levels remain at current levels or decline, it will be necessary for us to reduce our quarterly dividend at some point.

Once again this quarter, in order to help our shareholders we have disclosed to them that we expect a portion of their 2016 dividend payments will represent a return of capital. We make the disclosure because we expect the amount of cash we distribute to shareholders in 2016 will exceed the sum of our 2016 taxable and previously undistributed earnings and profits. That was the case in both 2014 and 2015. The portion of cash that may be treated as a return of capital does not represent a diminishment of our cash liquidity. As discussed, we maintain cash levels in excess of our ordinary operating needs and have on balance sheet in excess of $100 million of cash and continue to have an unused line of credit of $100 million.

If we are required to reduce our quarterly dividend, a decrease to our quarterly dividend rate will not affect our practice of targeting a payout of a majority of our adjusted earnings and net excess cash generated during this year nor will it affect the $100 million of excess cash we target to remain on the balance sheet.

With that in mind, slide 15 shows our balance sheet highlights. Our balance sheet remains strong with a healthy cash balance and modest leverage. Borrowings of $200 million are supported by strong earnings and cash flows and our leverage metrics remain very strong.

Slide 16 summarizes our financial outcomes over the past five years. We have always said that in our business growth is lumpy. But over longer periods of time our model has and should continue to produce attractive opportunities for shareholders who have the patience to earn a healthy cash return while waiting for the long term growth in AUM and revenues that we expect will follow from a disciplined adherence to our principles.

To proven this point is the growth we have experienced over the five years illustrated on slide 16. Since 2010 AUM growth has compounded as a 12% rate, revenues at a 16% rate and adjusted operating earnings at a 15% rate. Looking at longer periods of time such as this five year timeframe helps see the bigger picture despite lumpiness and short term market swings.

Looking forward to 2016, we are cautious given the market declines experienced in January but we continue to remain focused on growing in a responsible and thoughtful manner that prioritizes our investment talent and their investment processes. While the severe market declines we experienced in January will have a negative impact on our revenues and earnings in the first quarter this year, we will continue to be true to our philosophies that has served us well of our 20 year history.

Before I finish up, a couple of points on employee partner liquidity. Our employee partners are restricted from selling more than 15% of their pre-IPO equity in any one year period. That one year period will reset in March at which time employee partners will have the right to sell in aggregate approximately 3.2 million Class A common shares. They are not required to sell any shares and we don't know how many shares they will choose to sell. But given market conditions, it is unlikely we will be facilitating a coordinated share offering on behalf of employees. They will however have the right to sell on their own.

Thank you. We look forward to your questions and I will now turn the call back to the operator.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question will come from Michael Kim with Sandler O'Neill.

Michael Kim

Hi guys. Good afternoon. First Eric, I know you highlighted your commitment to differentiated act of management. But just given the ongoing market share gains for ETFs more broadly, can you just update us on your thoughts as it relates to actively managed ETFs and some of the different options that are available out there or might become available down the road?

Eric Colson

Sure Michael. Let me add, that vehicle has been extremely popular in the marketplace for passive strategies and you are starting to see in the marketplace some interest on actively managed ETFs. We are still in the camp waiting for clients and demand to come to us as opposed to the build it and hope they come model and if our clients and the prospects are coming to us and wanting that packaged in a different form outside of a separate account or a mutual fund or collective investment trust or ETF, we are open to creating a vehicle if demand is there. But right now in the asset management space, given the current rules of disclosure, we have not seen that interest.

Michael Kim

Got it. That's helpful. And then maybe for C. J., I know roughly 60% of the expense base is variable, but just given sort of the reset in AUM and revenues, has the thinking shifted at all as it relates to investment spending? Are there areas you might be able to dial back on or delay to some extent just to support profitability in the near-term?

C. J. Daley

Yes. I mean as you know, you mentioned 60% of our expenses are variable, so they adjust automatically, but there are other levers. We have been investing in technology, distribution efforts and equity based comp for future growth. And right now, we are not going to react to one month or a month-and-a-half of AUM declines, but we will keep an eye on it. And there are some minor levers that we can pull, but the majority of the levers are already built into our P&L which is nice because we don't have to take action.

Michael Kim

Okay. And then just one modeling quick question. You mentioned $3 million to $4 million seasonal step-up in the first quarter. Just want to make sure that is specific to the comp line. Is that correct?

C. J. Daley

Yes. It is. It's basically FICA reset, 401(k) matching contribution reset that we fund our health savings accounts, a portion of that in the first quarter. So yes, that's on the comp line.

Michael Kim

Got it. Okay. Thanks for taking my questions.

Operator

And the next question comes from Bill Katz of Citi.

Bill Katz

Okay. Thanks very much. I appreciate you taking the questions and the call is very helpful. Just can we start on that last question? Just from a modeling perspective, sorry to be so fine tuned on the first question. Is that sequential increase? Or is there first the mechanism of AUM are lower, therefore your base compensation would be a little bit lower but then offset by the seasonal pickup?

C. J. Daley

Yes. It's the latter, Bill. It's incentive comp will adjust down with lower AUMs and then that would be offset by the higher seasonal.

Bill Katz

Okay. Thanks. So on the dividend policy, thanks for addressing that, could you talk a little bit about, I hear you all show the special and the balance sheet liquidity, could you talk a little bit about the type of payout that you may be targeting if you were to address the dividend?

Eric Colson

I don't think we have discussed what we would target yet. But obviously with the market declines, as you guys have all modeled out and projected, our earnings will be down. So as I mentioned, we do have some excess cash on the balance sheet that allow us a couple of quarters to ensure that these levels are, we are to see if these levels are where it will remain before we have to take action. So we haven't really discussed that yet and we will wait and see and we will have to see where we are in the next quarter or two.

Bill Katz

Okay. And then maybe just a big picture, Eric, perhaps for yourself. As you have talked about repositioning the franchise for a shift in demand, where do you think you are in terms of leveraging the high yield portfolio which has just tremendous performance? Could that grow at a faster clip than maybe has historically been the case, given the turmoil that's been happening within the asset class and the outperformance of the fund? And the second question is, can you go back to that diagram, the conceptual diagram and talk about, are you a net winner in that dynamic because there are some pros and cons as you think through that bell curve? Thanks.

Eric Colson

Sure, Bill. Certainly on the high-yield category, where we have seen a lot of disruption in that space, so I feel like we are very well positioned with our strategy. We have seen it in the flows over the last year. I think our current positioning of the portfolio and its performance puts us in a very attractive proposition. I would say that's also true for developing world in emerging markets.

The developing world was also launched in a fairly noisy year with the emerging markets index down 15%. So I think both strategies have quite a bit of advantages built-in in their short records here and when we get to that realizable phase which we deem is true realizable capacity is when you get to those hurdles that many of the institutional buyers and consultants put on you of a certain asset level, a certain length of record that once the team has really stabilized and built-out, then you start getting those hockey sticks, especially in capacity oriented strategies like high income and developing world.

We have talked in past calls that global strategies take a little bit longer given the massive supply out there in those strategies. So I feel confident that high income is in a good spot. It looks good for this year of 2016 given the build-out of the team and the current performance since inception.

With regards to the diagram there of the flattening of the distribution curve of strategies, I think we are a net winner in the category. That top part of the curve of the historical distribution of exposure oriented products, a good chunk of those assets are going to passive or factor based strategies, but we were never up in that that frothy group there that's just getting exposure. So we have a little the loss possibly in our more constrained category strategies of mid-cap and small-cap.

It's really constraints style boxing. But there is a large part of the world that's going to maintain that type of structure and it will be very slow to move and then there will be a more adopted group and category that would pick up the strategies that we are building with higher degrees of freedom. So I think the outflows that we are seeing in the value strategy is masking this trend. If you take out those strategies off of the last couple years of performance, you see good solid performance of the strategies that have flexibility and you see flows going to those strategies. So we think we are a net gainer.

Bill Katz

Okay. Thanks very much.

Operator

And the next question will come from Michael Carrier of Bank of America Merrill Lynch.

Michael Carrier

Thanks, guys. C. J., maybe just on the expenses. You hit on the comp, just on non-comp, you have particularly just given some of the investments that you guys have made, whether it's on the distribution or on the team side. Anything from a leveling off on maybe the non-comp side in this environment and maybe that's where some of the levers are, but just wanted to get some indication of what the outlook is for this year?

C. J. Daley

It's a good question. And I think the lever in the non-comp is really in that communication and technology, where you will see we have ramped up spending there last year around security initiatives as well as distribution related projects on the capabilities. And so there is project spend in there that we can pull back if we need to. But as it currently stands, I would expect that this quarters level of occupancy in communications and the G&A are probably decent run rates to think about for the next few quarters, asking us deciding to pull back.

Michael Carrier

Okay. Got it. And then Eric, maybe just in terms of the outlook, given some of the newer strategies, what you mentioned in terms of the demand for the global strategies, when you look at the product set, where you are seeing some of the challenges because of institutional allocations that may be separating out the area of underperformance on the U.S. value side? Are you starting to see the uptake of either the global or new strategies start to offset some of the challenges in terms of the reallocation among institutions? I am just trying to get a sense of where you are seeing the momentum versus maybe the negative momentum that the whole industry is facing?

Eric Colson

I think as you look at the positioning of our strategies in aggregate, we are starting to see some good asset flow and some good opportunities excluding the one team that we have performance challenges with. Maybe it's a good time here to look at January in isolation and really despite my views on short-term performance and flows, I understand that many shareholders are heavily influenced by these shorter term numbers but given the timing of this call and our January AUM release and just the volatility, I want to clarify our January net flows given the available data that's out in the marketplace.

Our net flows in January was approximately $500 million in net outflows. And you are starting to see some netting effect going on of positive trends happening with the strategies that we highlighted in the call of global and higher degree of freedom strategies and given the value team's performance in January which was quite strong, I mean in January the small-cap value was up about 650 bips over its index and mid-cap value up three 300 bips and the value was up 200 bips, really in that anti-momentum trade. So I think you might have an exchange of kicks going on this year. It's early to tell given off of one month which I actually try to ignore but given that we get asked quite a bit, I thought it would be helpful to respond to just the month of January.

Michael Carrier

Okay. That's helpful. And then C. J., just real quick on the dividend. I just want to make sure I understand your comments. When you look at what's happened in January, just the pressure over the markets, you are saying at this AUM level or lower you will have to review just the payout just given the pressure on the business, but if we had a rebound and you are at this AUM level back to say where you ended 2015, then you would be fairly comfortable in terms of where things are at, all else being equal?

C. J. Daley

Yes. I think that's right. Our methodology is related, as you know, is to payout all of our adjusted earnings and then the non-cash expenses less capital expenditures through the quarterly dividend and the special. And we want the quarterly to be at a level where we have some cushion so that there is some left over for a special. And so any adjusting would really just be semantics of adjusting it, because at the end of the day we are going to continue to pay it all out. It's just whether it comes in the quarterly or the special.

Michael Carrier

Got it. Okay. Thanks a lot.

Operator

And the next question comes from Surinder Thind of Jefferies.

Surinder Thind

Hi guys. I will start with the international fund. So with that fund soft closed, has there been any change in the conversation over the interest around the global equity strategy at this point? Or is it just too early to tell?

Eric Colson

Hi Surinder, it's Eric I think there hasn't been any related movement inflows from the closing of one which, as you said, is a soft close to the global equity strategy. And in general, we see quite a bit of demand for global equity outside of the U.S. with demand from institutional clients in the U.S. that have switched to a global categorization where we still see pretty good demand in international strategies, especially in the intermediary channel that still use that type of asset allocation and then to structure that focus on international strategies.

Surinder Thind

And then maybe just around the international distribution or demand trends. You mentioned three areas, EMEA, Canada and Australia. Any geographic differences in aggregate demand there or different trends that you are seeing, just given the macro backdrop at this point?

Eric Colson

No. I can't say there is any specifics or that I can add to that, it's the areas that we focused on. So those are the areas that we are getting good feedback in the marketplace. There's always some interest that comes in and out of Asia which is an area that we haven't been that proactive in. But we are mainly highlighting where we are putting resources towards.

Surinder Thind

I see. And then one final question. One of the things you have talked about in the past is just making sure you spend a lot of time making sure that interests are aligned amongst the different teams and within the teams. If we were just focus on the U.S. value team, which has been facing these headwinds and they are probably the only team not to have, what I would call, a true global product, like I understand the value product I think invest upwards of maybe like 25% outside the U.S. Are there any thoughts of that team maybe adding a new product at this point? Or do they feel disadvantaged versus the other teams at this point? Or how should we think about the way the future positioning of that team at this point?

Eric Colson

As you guys know, each of our teams are economists and they each have their state of philosophy and passion of what they invest in and for this team obviously it's their views, as I would say, is better, safer, cheaper portfolio. And they like to stack the deck in their favor. And so when you think about their belief system, I would expect interest out of this team more in how to create a newer strategy around those core beliefs. And some teams are more inclined to have a global nature and others are going to use their degrees of freedom in a different manner. And we work with each team to create that outcome. So just because the other teams went and created global strategies, it's not going to be the path for every team.

Surinder Thind

I see. Thank you. That's it for me.

Operator

And next, we have question from Eric Berg of RBC Capital Markets.

Eric Berg

Thanks very much. Good afternoon. C. J., the bottom of page 14, getting back to the dividend and the payout ratio, it makes very clear that you didn't earn your payout in 2015, at least the earnings in 2015 did fall short by whatever it is, $0.11, from the four quarter dividends that you paid plus the special, but that was true in 2014 as well. You are currently earning your dividend, the $0.60, I think you earned on an adjusted basis $0.63 in the quarter. So what is the arithmetic? Is the point here that is it uniquely because of what happened in the month of January that the dividend is now, I need to understand better than I do the arithmetic of why the dividend is now a question mark?

C. J. Daley

Yes. Because in our adjusted net income per share, there are non-cash expenses primarily equity based comp that increase our cash, but decrease our earnings on adjusted earnings basis. So there's more cash earnings and as you know cash earnings is not a metric that we disclose or use. So the math is really adjusted earnings plus non-cash expenses less capital expenditures is the amount of cash that we generated during the year.

Eric Berg

If it is still materially in excess, if you take your $2.69 and you add back the items that you said that are non-cash, it leaves you with cash being generated still in excess of the $2.80. So is it just the uncertainty that's leading you to consider a reduction in the quarterly payout? Because you would seem to have the cash to do it is what I am saying?

C. J. Daley

Yes. We don't want to set the quarterly dividend rate, we want to set it at a rate allows us some flexibility for market fluctuation. And we also have capital expenditures which obviously you don't have the benefit of seeing for infrastructure et cetera. So you don't have all the data to get that perfectly, but the point being that if we are earning lower levels, we have lost some or most of our cushion for market fluctuations.

Eric Colson

Hi Eric, it's Eric. I don't think any of them the math has changed, so to speak, at your high level. There is no mathematical change. So I think you have had it right. I think there's been some confusion in the marketplace a bit of just how that all come together and we just want to make sure that we are transparent in just clarifying how we think about the dividend.

Eric Berg

If I could also ask, Eric, one question of you. Your growth team, largely domestic in its orientation and your global value team also has very, very good performance relative to their respective benchmarks. Yet they too, in 2015 suffered outflows. Again I am talking about the growth team and the global value team. For the full year, they experienced outflows. Maybe you have already touched on this. I just would like to sharpen my understanding perhaps of why that is, in your judgment, in the face of strong performance, more money is coming out than is coming in?

Eric Colson

Those are two teams with a really strong performance in the marketplace right now and it really gets down to the nature of the mix of assets and the level of closing. And there is a level of closing that happens even in the definition of soft close. And the mix having a little bit more institutional and getting some rebalancing, you can get some outflows and to highlight that, I think the U.S. mid-cap growth is a good example. The mix is heavily skewed towards defined contribution client and that segment of the market place we saw some outflows as 401(k)s were reconstructed and there was some rebalancing that went on. And over the years, our strong performance built up a good asset base and I think you saw some rebalancing occur in the last couple of years in that space.

Likewise, on the global value and international value. We have been closed in those strategies and we have reopened into pooled vehicles for global value. With those moves and with the outflows, we will manage that balance over time. It just won't be quarter-to-quarter or year-to-year. And your greatest asset is your alpha and we have alpha in those teams and we are going to manage them, I think, in the most prudent way possible to continue alpha and position them for positive flows.

Eric Berg

Thank you. Very helpful. Thank you.

Operator

And the next question comes from Robert Lee of KBW.

Robert Lee

Great. Thanks and good afternoon everyone. I am just curious and I am sorry to beat a dead horse a little bit, but to stick with the capital management theme. Given the decline and the rerating of the stock, mostly all your peers in the past year, why isn't this a good time to maybe think about adding share repurchase to the capital management mix? You feel pretty upbeat about the long-term prospects. At this point maybe repurchasing stock is a good long-term use of cash. Liquidity on the stock has improved the last couple of years as more has become public. So just trying to get a sense of why not or maybe you are starting to think about including that within the capital management in the year ahead?

Eric Colson

That balancing act of the consistency and stability present in our model in the people business, we think that's highly valuable to the consistent stable and transparent and we believe in the long-term of our business model and delivering, we are still evaluating as we grow into our maturity as a public company, how we want to use all the levers, from a capital management [indiscernible]. We are definitely much more focused on our business integrity and our consistency than trying to financially engineer or manage the outcome. But as our history grows and we look at all the various levers, we will take that into consideration which we have said in past calls. So we are obviously not making a decision today to move towards a buyback.

Robert Lee

Just curious on the new developing markets strategy. I understand that your expectations are pretty modest until you build up the record of the team within your shop over the next couple of years. But just kind of curious given their record in their prior shop, which I know isn't necessarily transportable, but what are your thoughts around their ability just generally to not have to wait for that three years in order to really start seeing some reasonable demand for their strategy? Do you think there is a chance markets permitting in the next 18 months or so we could actually see some decent uptake?

Eric Colson

I think in the first three years of any strategy, you can see some early adopters and you can see either a big uptake or a slow build. We manage over the slow build process so that we are managing the foundation and the team appropriately. Obviously there are times there that strategies and asset classes get more interest and can have a backdrop of which more flows could come in. But they are very hard to predict. That's why we have always said let's not at this quarter-to-quarter or year-to-year. And the one thing I feel really confident is our ability to manage the integrity of our strategies, our ability to find and maintain strong investment talent and I feel like we have a really good ability to position ourselves for long-term growth inside of asset allocation and sophisticated demand. Where we feel really inadequate at is understanding what is the behavioral trend in the short run where asset flows go. So it's very hard for me to respond to what do you think over the next 12 or 24 months in the short run. So I would say, it's in the realm, Rob, but we are not managing towards that.

Robert Lee

Thanks for taking my questions.

Operator

And we have time for one more question and that question will come from Chris Shutler of William Blair.

Chris Shutler

Hi guys. Good afternoon. Eric, I know that your team has very much managed money over the cycle and you are less concerned about short-term performance. So I guess with that as context, are you concerned at all that the DOL fiduciary rule is going to encourage greater advisor emphasis on shorter time horizons?

Eric Colson

Our view is what I have stated on the call in talking to our intermediary distribution team and we just feel that the higher fiduciary standard and the standards that are being put in by the DOL heavily favors firms like Artisan. If there is higher hurdles and standards to get into centralized buy lists or in consultant ratings, we just think that the odd is heavily skewed towards us. We built our firm day one with that institutional buyer in mind and if there's a higher standard we just feel that we are really well-positioned for that. So I guess I don't see that short-term emphasis coming into play. You see a heavier fee discussion what you see right now but I don't know if you see the real short-term performance emphasis.

Chris Shutler

Okay. Thanks a lot.

Operator

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

Eric Colson

I just want to thank all you guys for your time today. I know everybody is busy and I appreciate your time. Thanks.

Operator

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

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