Artisan Partners Asset Management (NYSE:APAM)
Q1 2016 Results Earnings Conference Call
April 26, 2016, 11:00 AM ET
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
Michael Kim - Sandler O'Neill
Alex Blaustein - Goldman Sachs
Ryan Bailey - Citi
Michael Carrier - Bank of America Merrill Lynch
Surinder Thind - Jefferies
Christopher Shutler - William Blair
Ari Ghosh - Credit Suisse
Robert Lee - KBW
Hello. And thank you for standing by. My name is Rocco 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 is being recorded.
At this time, I will turn the call over to Makela Taphorn with Artisan Partners.
Thank you. Welcome to the Artisan Partners Asset Management's Business Update and Earnings Call. I'm joined today by Eric Colson, Chairman and CEO and C.J. Daley, CFO.
Before Eric begins, I would like to remind you that our first 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 will include references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release.
And I will now turn the call over to Eric Colson.
Thank you, Makela. And thank you everyone for joining the call. As in the past 2 years we want to use these quarterly calls to explain our business philosophy and long-term approach. Today I will discuss high value added investing, on the next two calls, I will focus on talent and thoughtful growth.
After I finish, C.J. will discuss our quarterly financial results. He will also discuss our dividend and payout policy, which we often get questions about. To help frame our policy, let me provide you a few thoughts.
In our view, talent based businesses thrive when the structure and outcomes are highly predictable. Opportunistic situations are alluring in the short run, but often create noise and uncertainty. Many firms use share buybacks to potentially add value for shareholders. Approximate one half of our firm is owned by investors who predate our IPO, including employee partners who own about 29% of the firm today.
For many of these owners, our cash distributions have been and remain an important piece of the economic return they receive for investing in and adding value at Artisan. Because of our commitment to maintaining our culture when we think about dividends or any other matter, we are very cautious about departing from practices that have worked well for everyone involved, our talent, clients and investors.
Turning to slide 2, we reiterate our philosophy and approach because our business decisions, including our dividend and payout policy relates back to the foundational pillars like investments, people and trust.
For the remainder of this call, I will focus on high value added investing. Ultimately, high value added investing is about generating and compounding wealth for clients over the long-term, to achieve their goals and meet their needs.
At Artisan, we do that by hiring talented investors and providing an autonomous structure and resources, so our investment professionals can focus on building portfolios that reflect their distinct perspective and convictions.
This results in portfolios that are differentiated over the years from indexes and peers. We also develop investment strategies with flexible mandates allowing our talent to use an array of instruments and invest globally across the market cap spectrum.
Over full market cycles, we believe our talent can deliver outcomes that are superior to indexes and peers. That belief is based on historical experience. Our teams have consistently delivered alpha over extended periods, which has translated into more wealth for our clients and investors.
As I discuss in this quarter's earnings release, a portfolio of $1 million invested in each of our 15 strategies on the strategy’s inception date would have been worth about $57.5 million at the end of last quarter after fees. Had the same dollars been invested on the same date in a corresponding path of indexes, the portfolio would have been worth about $38.5 million or $19 million less than the hypothetical Artisan Partners portfolio, that's a high-value added outcome.
Moving to slide 3, it is important to appreciate that our industry evolved with shifts in the demand for and supply of investment strategies. On the demand side, clients now have more information and use more tools to analyze and allocate their portfolios. They now use factors not just dial boxes and they can better segment alpha and beta, which reduces their demand for active exposure or beta plus strategies.
There is less demand for active strategies with an index focus and a greater emphasis on higher value added strategies. The movement away from index focus strategies has opened the door for more degrees of investment freedom for traditional managers. This means broader investable universes, like global equities.
With more information, tools and flexibility, clients expect and in many cases require a greater emphasis on risk management, a highly flexible strategy is expected to navigate risk and compounded results that are been pure exposure. These changes in demand have also been accompanied by in my opinion, an unfortunate shortening of investment time horizons.
Today, too many investors have shortened their holding periods and no longer have the patience for discipline risk-taking to pay off. As an investment manager, we have to be cognizant of that change.
On slide 4, I want to use our Global Opportunities, Global Equity and Global Value strategies as examples of Artisan response to the shifting demands. These are high value added strategies that use broader universes to navigate the markets and deliver differentiated portfolios.
At Artisan, in addition to high value added results and portfolio characteristics we seek to deliver a high value added experience with stable and experienced leadership and proven time-tested processes. The result is unique and diverse alpha sources that are not tied to centralized research or macro views.
Starting with the growth team, all 50 members of the team work together in Milwaukee. The team’s core portfolio managers have been with Artisan for an average of 17 years each. The teams analyst our industry specialists, yet the entire team meets daily before the market opens to review overnight news and during lunch to discuss existing and potential holdings in depth.
The team focuses on investing in tower allies which are economic areas that through time have displayed great innovation, organic growth and protective barriers to entry. Allocating capital using their trademarked Garden Crop and Harvest approach, the team builds top positions sizes according to conviction, seeking to be right and a bigger way than when wrong.
The Global Equity team also has a growth orientation, but the team and process are different. The teams 24 members sit in New York, San Francisco, London and Singapore. Mark Yockey has been leading the team for 21 years with co-portfolio managers Charles Hamker and Andrew Euretig now having been with Mark for 16 and 11 years respectively.
While the team interacts with each other and formally on a daily basis, the entire team meets via video conference every week for research meetings. The team seeks to identify a long-term secular growth trends and invest in companies that have meaningful exposure to those trends. In the past, these trends have included increase global travel, demand for environmental solutions in China and auto innovation and safety.
Lastly, on the right side of the page, we featured our Global Value strategy which is managed by our Global Value team. Portfolio managers David Samra and Daniel O'Keefe came to Artisan together 14 years ago and have built a team of eight value investors who work together out of their own office in San Francisco.
David and Dan assume full or partial coverage of all portfolio holdings and are assisted by their team of analysts who serve as generalists organized by geographic regions. The team's research process is focused on finding high quality, undervalue businesses that offer the potential for superior risk reward outcomes.
In the middle of the slide 4, we've highlighted several examples of how the teams have taken advantage of the flexible global mandate over time and how the three global strategies are differentiated from one another. On the bottom of the page, we've highlighted something that the three strategies have in common, each is highly active and highly convicted.
As I've discussed on prior calls, in order to add value and beat the benchmark, a portfolio must be different. As you can see, each of the Artisan strategies is more active and more convicted than the medium global equity strategy. In addition, as we highlight on the next slide, each of the Artisan portfolios has significantly outperformed the benchmark over the long-term.
On slide 5, we have highlighted the average annual returns of the three global strategies across multiple time horizons, as well as the value-added since inception. Using the same methodology discussed earlier, a portfolio of $1 million invested in each of the three global strategies on the strategies inception date would have been worth about $5.5 million at the end of last quarter after management fees.
Had the same amounts been invested in all Country World Index on the same date, the path of portfolio would have been worth about $4 million. The hypothetical Artisan global portfolio returned about $1.5 million more on a $3 million investment.
While we usually focus on long-term performance results, our two newest strategies high income and developing world have both significantly outperformed their benchmark indexes since inception. Both of those strategies are also consistent with the evolving approach to high-value added investing that I discussed on slide 3.
Looking across the other teams, while the US value team's one year absolutely returns reflect the equity market contraction that has occurred over the last 12 months, the team's strategies have performed better on a relative basis in recent periods.
The multiyear underperformance though continues to result in that outflows which we expect will continue. As you know, in February we announced that we will seek to manage assets in the US small cap value strategy in the second quarter.
We continue to work with the US value team to improve performance and outcomes for clients and investors. As expected of high value-added, high conviction investors, our teams took a different view in the market over the last several years, and in this case, was punished for doing so. We know that can happen.
As I'll discuss on the next slide because we have multiple economist teams extended under performance for one team or strategy does not overly impact the rest of our business or environment.
On slide 6, we have illustrated the diversity of our investment returns by showing the rolling 3 year value added for the largest strategies of our four largest teams. The shaded areas are time periods during which the 3 year average annual return of one of the strategies were below benchmark.
For example, the US mid cap growth strategy experienced a period of underperformance that extended into 2007. During that time, the US mid cap value strategy was out performing its benchmark by meaningful amounts.
When in late in 2007 and early 2008, the non-US value strategy was underperforming on a 3 year basis, the non-US growth strategy had outstanding three-year performance. This is one way of illustrating our general experience. When one of our strategies has had periods of underperformance, other strategies have been outperforming and better positioned for organic growth.
Over the last couple of years as our US value in emerging markets teams have struggled, our global equity growth and global value teams has continued to deliver alpha and grow their assets. Over the 36 months ending in March, those three teams had aggregate net inflows of $10.2 billion.
Before leaving this page, I want to make a more general observation about these strategies. Since inception the non-US growth, US mid-cap value, US mid-cap growth and non-US value strategies have compounded client assets at an average annual rate of 10%, 13%, 15%, and 12.5% growth of fees. That's four different strategies managed by four different teams with four different investment processes each with outstanding absolute performance.
On slide 7, we've captured the rolling data shown on the prior slide and expanded the analysis to include all of our strategies and additional rolling periods. Compared to the standard trailing period returns on slide 5, the return data represented on this slide reduce the impact of the most recent performance and provided additional insights into clients and investors experience with our strategies over time.
To generate the bars on the top of the page, we started at inception and measured the average annual growth performance of each of our strategies for each one year, three year five year, 10 year and 15 year rolling periods.
For instance, as you can see at the bottom of the page, there are 666 rolling 10 year periods across our 8 strategies with 10 year track records. We then compared each Artisan return to the average in return of each strategies broad-based benchmark for the same rolling time period.
Sticking with the 10 year returns and 591 or 89% of the 666 periods, the Artisan strategies annual growth return beat the index. On the bottom half of the page, we show the magnitude of outperformance, staying with the 10 year returns and 47% of the 10 year periods in which Artisan strategies outperformed their indexes, they outperformed by between 100 and 500 basis points growth of fees, and 38% of the outperforming periods, we outperformed by more than 500 basis points growth of fees.
Our outperformance is a product of exceptional investment talent working within our economist structure. We provide the space, freedom, time and resources for investors to do what they do best. As with the earlier examples, ultimately, this effort translates into more wealth for our clients and investors.
My final slide, slide 8 shows our distribution outcome. Consistent with our high value-added approach to investing, our distribution professional’s focus on leveraging consultants and intermediary relationships to access and service the sophisticated and long-term clients and investors we see. The distribution team also preserves the time of our investment professionals, so they can maximize their time spent on investing.
This page shows the current diversification of our AUM across investment teams, distribution channels, investment vehicles and client domicile. It does not show the extent to which our diversification has increased over recent years.
For example, 5 years ago we had only 5 teams, 70% of our AUM was sourced from our institutional in DC channels and only 7% of our AUM was from non-US clients. We have made significant progress diversifying our business along these lines.
Together with the investment performance diversification, I discussed earlier, these efforts have added strength and stability to our business. Over time we believe the long-term trend is towards greater investment freedom, more open architecture and more accountability.
Those trends should work well for investment managers with a track record of high value added investing. If we continue to add alpha, we are confident that sophisticated asset locators will continue to demand our high value added strategies over the long-term.
I will now turn it over to C.J. to discuss our most recent financial results.
C. J. Daley
Thanks, Eric. Slide 9 begins to review the results for the quarter ended March 31, 2016. Despite a sharp drop in equity markets in January, markets recovered in large and we ended the quarter with AUM of $97 billion, which was only down 3% or $2.8 billion from year end. The decline in AUM was due to $1.5 billion of market depreciation and $1.3 billion of net client cash outflows.
Outflows in the strategies of three of our teams, US Value, Global Equity and EM were offset in part by positive net client cash flows in our Credit, Global Value and Developing World teams.
Our US value strategies continue to see meaningful outflows of $1.2 billion during the quarter across institutional and intermediary channels, as a result of multi year-end underperformance and the announced closing of our small cap value strategy.
Our newest strategies, high income and developing world continue to see positive net client cash flows for the quarter, as a result of strong early performance and investor interest in these asset categories. Our global value strategy which reopened to investors in our pooled vehicles late in 2015 began to experience positive net flows as a result of its strong long-term performance.
Our 7 investment teams managing distinct strategies with autonomous processes diversifies our investment performance and asset flows. We do not expect all of our teams and strategies to have strong performance in cash inflows during all periods and all at the same time.
Underlying our model is an understanding that there will be periods of time when certain investment approaches are more successful than others and when certain products are in greater demand from clients and investors.
We have found that over time the diversification of our teams and strategies provides a stable environment for our talent and allows us to manage our business to achieve long-term, high value added results.
Moving on to financial results for the quarter on slide 10. As usual, I will focus on non-GAAP adjusted measures which remove the accounting impact of certain transactions related to our initial public offering and the complexities of our equity structure.
For the March quarter, average AUM decreased to $92.9 billion, down 8% when compared to the previous quarter and 14% when compared to the March quarter of 2015. The sharp equity market declines in the first two months of the quarter drove down our average assets under management for the period that were partially offset by the rebound experience in March.
For the March 2016 quarter revenues were $174.5 million, that's down 9% from the prior quarter and generally inline with the decrease in average AUM, given that the March quarter had one less billing day than the prior quarter. When compared to the same quarter a year ago, revenues declined 14% also inline with the decrease in average AUM.
Total operating expenses excluding pre-IPO related compensation were down $4 million or 3% from the prior quarter. The decline is primarily attributable to lower incentive compensation expense and third-party distribution expense as a result of the decline in revenues. These declines were partially offset by higher seasonable compensation costs and increased equity-based compensation.
On slide 11, we've broken out our compensation and benefits expenses, which makes up approximately 80% of our total expenses. Despite comp expense declining in absolute dollars our compensation ratio excluding pre-IPO comp rose to 50% this quarter, primarily as a result of the lower revenue base, higher seasonal compensation costs and the addition of equity-based compensation expense from the January 2016 employee equity grant.
As reminder, in the first quarter of each year we incur seasonal benefits and payroll tax expenses caused by the reset of the new calendar year. Those costs contributed an additional $2.9 million of expense in the March 2016 quarter compared to the prior quarter. In addition, equity-based compensation expense increased approximately $1.2 million, as a result of our January 2016 annual equity grant.
The variable nature of our P&L model and the downside risk protection it provides can be seen here on this slide. Incentive compensation which is by far our largest expense declined in proportion to our revenue decline and as a percentage of revenues was relatively flat in this quarter compared to the December quarter and was down from the March quarter of 2015.
Moving on to margin and earnings on slide 12. For the quarter, our adjusted operating margin declined to 35.8% compared to 39.7% last quarter and 38.4% in the March 2015 quarter.
The decline was primarily result of lower revenues, higher seasonable competition costs and increased equity based compensation expense. Resulting adjusted net income for the current quarter was $37.8 million or $0.51 per adjusted share.
Slide 13 provides a summary of our public company dividend history. On April 20, 2016, our Board of Directors approved a quarterly dividend of $0.60 per share consistent with our previous quarterly dividend.
During the March quarter despite lower AUM in revenues, we generated sufficient cash from operations to support our $0.60 dividend. And when I say cash from operations, I’m generally referring to our adjusted net earnings, adding back non-cash expenses principally equity-based compensation which reduced our adjusted net earnings. In addition, after paying the dividend, we will still have over $100 million in excess cash on our balance sheet.
Throughout our firm's history, including when we were a private, partnership and through the most recent years as a public company, we have distributed the majority if not all of our cash generated from operations to our equity owners in the form of quarterly and special annual cash dividends and we continue to target that same payout policy going forward.
Slide 14 shows our balance sheet highlights. Our balance sheet remains strong with healthy cash balance and modest leverage. Borrowings of $200 million are supported by strong earnings and cash.
Looking forward to next quarter, AUM at the end of March was approximately 5% higher than our average AUM for the quarter and provides a former lien for revenues levels in the second quarter. In addition, we expect to roll off of higher first quarter seasonable expenses will positively impact our margin in compensation ratios into the second quarter.
That concludes my prepared remarks. We look forward to your questions. And we'll now turn it back the call back to the operator.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Michael Kim of Sandler O'Neill. Please go ahead.
Hey guys, good morning. First question, I know it's still early days, but any initial high-level thoughts on the final DOL rules, particularly as it relates to potential shifts in fees and or your product set under the new regulations?
Hey, Michael, it's Eric. It is early days. In our view, it's going to increase the standard, given that we've always operated in the institutional marketplace and the centralized intermediary model of research that in the long run we think this is a good outcome for us in the way we run our business and the strategies that we've put in place and how we've operated in the various channels.
I'd be speculating on the lower end is of the assets under management or more into the retail space. I think it probably have a greater impact, but for our marketplace, we don't think its going to impact us much.
Okay. Fair enough. And then my follow-up, any expectations for attrition related to the winding down of the US small cap value strategy? I know the fund is going to be folded into the mid-cap value fund.
But just curious to get your thoughts on how much of the residual separate account asset you think might be able to be retained?
We have fairly low expectations on the residual. Given our strategies are bought by sophisticated clients to be positioned in a segment of the overall portfolio. It would be fairly rare for those type of clients to say mid-caps a good replacement for small cap.
I think in some of the wealth channels and broader market channels that we operate mainly I guess the intermediary channels you might see some transition. But overall we play a certain role when we're bought.
If we had a different distribution model that we actually sold in the marketplace, you might see a different outcome, but for our client base, I think you'll see a fairly higher attrition rate.
Understood. Okay. Thanks for taking my questions.
And our next question comes from Alex Blaustein of Goldman Sachs. Please go ahead.
Thanks. Hi, good morning guys. So just kind of a follow-up on your early discussion around the diversification of the business and how different strategies perform in different market environments.
I guess if you look at the more near term track record a number of teams had a tougher time over the last year or so granted you know 3, 5 your number still remain quite good.
Any observations around kind of I guess the current market environment that made it particularly difficult for those teams to outperform that's part A? And then part B anything new from a risk management perspective that you guys are doing already or thinking about doing to assist your teams navigate current market backed a little better?
C. J. Daley
The diversification as we highlighted in the prepared remarks and the slides is always been there. And in the most recent quarter, you obviously had a fairly volatile quarter. You really had you know, two different periods within the quarter and the main factor there that rolled off is the momentum factor came off and some of the more growth oriented strategies, specifically more into the healthcare, technology space, got hit a little bit harder and that’s what you saw in our global equity team and our growth team.
And you know the performance numbers over the one year, whether it the non-US growth being off you know, 170 some basis points from the index or you know, the growth team in their mid-cap or small cap being off you know, closer to 150 to 200.
Those are fairly short-term results and I think you highlighted the three and five year are strong. The team is in place from a people standpoint. We have process integrity. So from a business standpoint I feel very good about where we're at. I think you know the short term is always hard to predict on people's behavior around it, but we have the building blocks for a solid business in all of the teams.
And from our risk management, it's each of the teams are spending a little bit more time on the changing factors driving securities, each team is going to be operating differently. Someone maybe feeling a little bit more bearish and others are going to get more conviction and certain names that are been beaten up and out of favor that they might get more conviction in that space.
And that's - I think the beauty of our model is having that you know, seven different alpha engines. And you're not going to show up where all of the teams are making the same bet at the same time, which you may see in a centralized or a firm that has a single macro view.
So I think the diversification is working and I think the teams risk management of how they're looking at factors, or even countries or currency are very much intact team-by-team.
Got it. And then, on a couple of strategy specifically, looking at the growth team in the global ops strategy, it's been a pretty big growth driver for you guys over the last year or so. It seems like they’ve had a little bit of a softer first quarter, still looks like it's growing but at much lower pace.
Is that anything - is there anything particularly about their performance that's causing a pause in flow momentum there or is it mainly a reflection of just a tougher backdrop in the first quarter and is it just taking longer to fund some of the institutional ones?
C. J. Daley
Sorry, what’s exact strategy with the Global Opportunities?
The Global Opportunities, right, that seems to be a pretty big driver for you guys last year, in flows in the first quarter seems to be little slower?
C. J. Daley
I think the flows it's lumpy. The timing of when – especially the institutional marketplace where we operate the most. And that's where we see the most demand of global strategies, US and non-US, it's a little slower in the intermediary marketplace.
So versus other strategies you don't have as much of the intermediary driver and given the institutional book which we see in global value and global opportunities, I think we have a very healthy pipeline. I think we're talking timing more than we are you know, whether assets are going to come or not come.
Got you. Great. Thank you.
And our next question comes from Bill Katz with Citi. Please go ahead.
Good morning, this is actually Ryan Bailey filling in for Bill Katz this morning. So I had a quick question about the emerging markets funds. Based on the fact that we have the mandate loss, AUM is basically halved quarter-over-quarter.
How should we about the operations of the fund going forward? And are you going to change anything, any thoughts there would be very helpful? Thank you.
Sure. Hi, Ryan. It's Eric. The emerging markets, I think you can see that the shorter-term results there, I think the patients and conviction around the team is starting to pay off. You can see the performance there in the short run is about 600 Bps above the index and 200 over the three year period and you're starting to see some of the factors and trends coming back in favor of the emerging markets strategy.
And you know, our mindset is that we have the tolerance to have consistency and integrity, and I don't see any short term changes around the emerging markets operations.
Got it. Thank you.
And our next question comes from Michael Carrier of Bank of America Merrill Lynch. Please go ahead.
Thanks, guys. Hey Eric, some of the stats that you put up, especially the investing since inception, the outperformance relative passive, its pretty powerful. I think when you look at the short-term performance, obviously there is other things that are driving the flows.
But I just want to get a sense, like when you look at your distribution in the clients and you look at the long-term track record, is there something like shifting in terms of the way that people are allocating assets from the short-term versus that long-term? Because it seems like, if you focus on that then the trends are pretty powerful and the allocation should continue to go in that direction.
I know you mentioned something you know in your prepared remarks in terms of you are too much of a short-term focus and I wasn’t sure if that was from the management side like the asset management of funds or if that was on the client-side in terms of your allocations?
Let me try to break that down a bit. Just going backwards there, Michael, it's both the supply and a demand. Obviously, the demand there I discussed in the opening remarks of, what our clients and many clients are looking for and you’ve seen the rise in indexation, and you’ve seen the rise in alternative strategies and the alternative strategy is mainly is to provide some type of higher return with more risk management and to play in a shorter-term horizon, and I think we've seen the results of that, that it's very difficult to do.
And then from a supply side, we – what we saw in the 90s was an oversupply of exposure oriented in beta plus strategies and that's what clients want – wanted back in the 90s and today you want to see more indexation and more alternative orientations.
And now you see a massive supply and a flooding of the market of those strategies. Just the amount of ETFs that are created everyday, it's just a massive rise of hedge funds. So you have this natural demand change and oversupply and these things normalize over time and there's always going to be some portion of an aggregate portfolio looking for traditional active, high value added strategies which we do and we feel that we're well-positioned for that.
So there are shorter-term trends that are playing out. We know what we're good at and we're sticking to you know the areas that we excel in and we're just making a statement here that we have excelled at it. And we believe that the way we look at active management is going to fit well in the long-term allocation over time.
Okay. That's helpful. And then, just a quick follow-up for C.J. Some of your comments on just the seasonality and where the assets are, it's helpful just in terms of thinking about the cash flow, new generation outlook and how that floats with the dividend or the distribution.
I just wanted to get your sense, in terms of having the study quarterly distribution say right now it's at $0.60 or looking at it as a payout, meaning, if you had a 95% payout or 100% payout, whatever the earnings are, just want to get your sense on the pros and cons for one versus the other? Just given that you can always have some, obviously, volatility in the business just given the market dynamics.
C. J. Daley
Yeah. No, that's a good question. I think it's just a difference in the way we think about it because, we believe we do have a consistent policy. It's paying out 100% of the cash that's generated in each year as defined by adjusted net income plus non-cash expenses, less sort of capital expenditure needs.
And so, we allocate that in the form of a quarterly dividend and then a special annual. So I think it's just amount of timing and I think we're getting a number of questions, because our adjusting earnings this quarter were $0.51 and we paid out $0.60.
But if you look at sort of the cash generated including non-cash expenses, we were able to cover our dividend. And certainly, that $0.60 is eating up more of the projected at this run rate annual earnings, so that just comes out of the special annual.
But we do target that 100% plus payout of adjusted earnings and whether we do it in a quarterly or special are just sort of the timing of cash.
Okay. Got it. Thanks a lot.
And our next question comes from Surinder Thind of Jefferies. Please go ahead.
Hi, Eric, I'd like to touch base on slide three, kind of your comments around the evolution of active management. Can you please expand upon the comments especially around the ideas of you know risk management and kind of focus on short-term risk and how that's being incorporated in your strategies like kind of what our clients demanding in these areas at this point?
Hi, Surinder. It’s the evolution in all these areas has been slow and as we think about newer strategies, you know, we're looking at you know, going from an narrow universe to a broader universe and we go to a broader universe you are not tied to the index as much.
And so you know, you have more levers to pull and navigate strategies instead of relying on the index to dictate the risk you are taking. You're going to be able to move across countries in a more nimble manner.
You’re going to - with that take on more currency risk and the clients are, you know for us they are looking for an understanding of the risks and been able to discuss that back to the process. And so as long as we understand our risk that we are taking and how we are managing that by the process.
So classic examples of value strategy could easily get into a value trap or there's you know the time value of money or there's various characteristics that you lean towards in value strategies.
And how do you manage those and are you more or where but also being proactive to manage those? We're getting a lot more questions from clients and it's primarily dictated from a lot of the hedge funds that are taking much shorter risk or shorter time horizon risk and looking for instant payback.
We don't see ourselves you know, changing how we are investing so much, but trying to understand and build to communicate that to clients. So that they can put it into their overall framework which you know, that overall framework has evolved and it's no longer just dial boxes, its various factors they are looking at.
And those factors could be looking at the not just size and style it's looking at what's the momentum factor, what's the quality factor, what’s the yield factor, what’s the interest rate, inflation.
And they have all this analysis now to look at our strategies and they want to understand our strategy and how it fits into the overall mix. And then we need to be aware and been able to discuss that with clients.
That's helpful. And then kind of related to the short-term versus the long-term concept of risk? And then maybe kind of related to an earlier question about you know, just your comments around investor time horizons or patients getting shorter and shorter as well as the earlier question around that. I mean, how important is that one year track record now?
I mean, do you need to basically focus on that a little bit more you know especially given that that seems to be especially on the retail side of the business meaning the open and mutual fund structure closer are much more correlated to that.
And maybe that divergence and the factors between kind of what I'll call that retail clients that is looking for versus maybe the way you sell to the institutional which is focused much more on the longer-term track record or do you have to start rethinking about maybe the importance of that one year track record?
I think for the clientele we go after whether it's the institutional or the intermediary marketplace that has a centralized research or even within a registered investment advisor that has a research team, they are making a longer-term commitment.
I think the one here number has more importance obviously today than it did 10 years ago. And so there's at the margin I think you see a little bit more flight in asset.
I don't see it as a major affect on our business given that we're not heavily in the retail space, but it clearly is I think shortening the duration of client's time horizon with active strategies and we definitely see a diminishing of holding period across all of our clients, as a greater supply of indexation comes about and that plays into how we think about our strategies that we need more degrees of freedom to be able to navigate that shorter term performance that if we see a factor or space becoming unfavorable that we can navigate to less than the below.
But some of our teams will gravitate towards that and it’s a great opportunity for long-term value. We just got to find the right clients for those strategies.
I see. That's helpful. Thank you, that's it for me.
And our next question comes from Christopher Shutler of William Blair. Please go ahead.
Hey, guys, good morning. Could you maybe comment on flow trend so far in April and any comments on the pipeline broadly today as -- in comparison to previous quarters? Thanks.
Yeah, I mean, we are seeing continuation of what we've seen in sort of flow trends and our pipeline for the most part has remained consistent. Our opportunities in are open strategies are fairly consistent over time.
We did see a dip in that sort of pipeline of opportunities, a small dip last year, but that's picked up again. So, nothing really material to report that should change your thinking.
Okay. And then secondly on I guess recruiting efforts for new teams, maybe first Eric, just give us a sense of how active you've been over the last several months and compare that to a couple of years ago? And are the areas that you're looking still kind of the same, so mainly the alternatives area?
Yeah, the areas are still looking at is alternatives or some of the further areas in the fixed income. And also exploring various asset allocation products that are more bottom-up oriented. Those are the areas I think versus past periods, about the same and we still get a lot of inquiries.
We still see quite a few teams, nothing too exciting that has come on top of mind, so we have nothing to announce on any new teams or new products that we’re thinking about.
Okay. Can I speak one more in just on the expenses? I just wanted to get clarity on the G&A in communications technologies or is Q1 a good run rate to use, or should we expect those to gradually migrate upwards a little bit over the course of the year?
Yeah, I mean, I think on the communications and technologies, as we've seen before that tends to fluctuate. I think we gave a $28 million to $30 million annual run rate and that still looks good.
This quarter was just – some projects were ramping up and so I think we'll see that $7.5 million as sort of a good proxy that we had last quarter and this was just a little bit of a dip.
On the G&A, we just had lower travel expense and, some cost related professional fees this quarter. So, I think last quarter around 6 million-ish is a better run rate 6 to 6.5 for G&A.
All right. Thanks a lot, guys.
And our next question comes from Craig Siegenthaler of Credit Suisse. Please go ahead.
Hey, good morning guys. This is Ari Ghosh filling for Craig. So my question is, the last time you closed global value I believe it was around the $14 billion mark and since reopening the strategy, you’re seeing some nice flows. So just wondering how much access capacity you still have there? Thanks.
Yeah, the opening and closing is in our mind around the total capacity of the strategy and where the strategy is at from a valuation perspective. It's about the velocity of flows and the mix of assets and conversations with the investment team. We've seen some outflows occur in that strategy over the last year or two from rebalancing.
We've seen a lightning of the discount and believe that there is an opportunity to put some money to work. And it's not an enormous amount of capacity. I don't have an exact number for you. It's going to depend on a variety of factors and one of them could just be the velocity of flows.
And we're also only open in pooled vehicles, so we did not open to the big lumpy separate account. So we're managing the asset flow and keeping an eye on it, so I wouldn't put in a large full amount for the team.
Got it. That's helpful. And just as a follow-up sticking with capacity. Can you talk a little bit about other strategies that maybe pushing capacity thresholds, I don't know if like global office is one of them are not?
And also the other side of it, if there strategies that are currently closed that you think can reopen given the current asset values? Thanks.
Yeah. We don't have any discussions going right now for opening or closing a strategy right now. So no change in the current open and close status.
Got it. Thanks for taking my questions.
And our next question comes from Robert Lee of KBW. Please go ahead.
Thanks. Good morning, guys. Most of my questions have been asked but I'm just curious Eric on your take. There's been so much win talked about in the industry around I guess I'll call it factor-based investing which I guess is active in a different sense.
So I was just kind of curious your thoughts about since this industry is so often subject to fads over the years, I mean do you kind of view this as in your opinion is kind of one of those time periods where maybe just the enhanced indexing from pre-crisis years and another guys or do you think it's something that as a broad-based investment style that would be a fit for your platform if you could find the right team?
Yes, it's certainly phases for the factor base. I think, if you look at the institutional process of the investment policy statement the asset allocation to structure and the manager and product usage, the asset allocation will be fairly difficult to use. I think factor-based asset allocation unless all of the assets are with one manager.
If you have an open structure it's going to be very difficult to manage factor-based asset allocation. I do think that factor-based analysis will be used heavily in how managers get selected.
So if you have a few investment managers that have a more momentum or quality or yield or you break down the various factors, I think clients and investors are going to be able to analyze portfolios in a different way and they're going to analyze what we do and try to complement other managers.
And if there's a hole in the structure they can now fill it, and so, if they really like the manager they have now and they are missing someone that really focuses say on yields, they can buy a smart based or a factor based to fill the void.
But if you have more and more flexibility in managers, that could be quickly offset so I just don't know how clients are going to manage that day-to-day or month-to-months or quarter-to-quarter. So it's a fairly big unknown and I think it's getting a little ahead of itself right now, and things have in flow and we'll see how it settles.
Fair. That was my only question. Thank you.
This concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.
Great. Thanks Rocco for hosting the call and thank you everybody for joining. Have a good day.
Thank you, Sir. We thank you for your time. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect and have a wonderful day.
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