Artisan Partners Asset Management Inc. (APAM) Earnings Call Transcript

Good day, everyone, and welcome to the Artisan Partners Asset Management Business Update and Second Quarter 2026 Earnings Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Artisan Partners Asset Management. Please go ahead.

Welcome to the Artisan Partners Asset Management business update and earnings call. Today's call will include remarks from Jason Gottlieb, CEO; and C.J. Daley, CFO. Following these remarks, we will open the line for questions. Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin today, I would like to remind you that comments made during today's call, including responses to questions, may include forward-looking statements. These are subject to known and unknown risks and uncertainties, including, but not limited to, the factors set forth in our earnings release and detailed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those disclosed in the statement, and we assume no obligation to update or revise any of these statements following the presentation. In addition, some of our remarks today will include references to non-GAAP financial measures. You can find reconciliations of these measures to the most comparable GAAP measures in the earnings release and supplemental materials, which can be found on our Investor Relations website. Also, please note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any Artisan Investment product or a recommendation for any investment service. I will now turn it over to Jason.

Thank you for joining the call today. Our purpose at Artisan Partners remains unchanged, to generate and compound wealth for our clients over the long term. That purpose continues to guide every aspect of our business. We believe our autonomous investment team model, combined with the disciplined business management and thoughtful long-term growth initiatives, differentiates Artisan Partners and creates durable value for clients and shareholders alike. The second quarter demonstrated the resilience of that business model. We delivered record quarter-end assets under management, strong investment performance across much of the platform, continued growth in credit and alternatives, and another quarter of attractive financial performance despite continued headwinds in several equity strategies. As we have discussed, we are building a diversified global investment platform focused on producing attractive long-term growth across market cycles. The results this quarter reinforce that strategy. Strong investment performance continues to create opportunities for growth, particularly as clients increasingly seek differentiated active managers. Long-term investment performance remained strong across our platform with 86% of our AUM outperforming their benchmarks over 3 years, 77% over 5 years, and 99% over 10 years gross of fees. The 12 Artisan strategies with track records over 10 years have compounded capital at average annual rates between 6% and 13%. Since inception, their average annual rates of return have in the aggregate, exceeded their benchmarks by an average of 189 basis points annually, net of fees. The investment performance of our equity strategies improved meaningfully over the 1- and 3-year time horizons, with 81% of our AUM outperforming their benchmarks over 1 year and 84% over 3 years, gross of fees. During the quarter, global equity markets rebounded sharply before volatility returned in June. Our investment teams navigated well, generating more than $20 billion of returns for our clients. Turning to Slide 4. We continually evaluate our investment franchises against both client demand and long-term economic viability. As previously announced, following the loss of 2 large sub-advisory mandates in the U.S. Value business, we concluded the prudent decision was to wind down the U.S. Value team and redeploy resources toward areas where we see substantially greater long-term opportunity. The U.S. Value franchise has been an important part of Artisan Partners for nearly 30 years, and we are extremely proud of what the team has accomplished for clients and shareholders during that time. We expect the wind-down to be largely completed by the end of the third quarter, and C.J. will describe the financial impact during his remarks. Including the U.S. Value outflows, net client outflows totaled $10.5 billion during the quarter. Approximately $9.2 billion or nearly 90% of the total net outflows came from the U.S. Value and Growth teams, with $6.4 billion from U.S. Value and $2.8 billion from Growth. We continue to diversify our platform and execute on growth opportunities. Credit strategies generated nearly $700 million of net inflows, representing our 16th consecutive quarter of positive organic growth and a 15% annualized organic growth rate. Alternative strategies have gathered approximately $300 million of net inflows, representing a 25% annualized organic growth rate and positive organic growth in 5 of the last 6 quarters. Within equities, we secured a $1 billion Global Discovery institutional mandate and our sustainable emerging market strategy continues to attract meaningful new client capital. Throughout the history of Artisan Partners, we have evolved the platform while remaining true to the principles that have defined the firm since its founding: high value-added investing, talent-driven strategies, and alignment with long-term asset allocations. Consistent with these principles, we have successfully added new investment teams, expanded into attractive asset classes and increased the capabilities of our existing investment franchises. EMsights Capital Group demonstrates that strategy in action. This quarter marks the 4-year anniversary of EMsights Capital Group. In 4 years, the team has built a distinctive business spanning 3 investment strategies, combining emerging market expertise with sophisticated derivative capabilities to deliver differentiated investment solutions for clients. Today, the team manages more than $5 billion of assets, supported by strong investment performance and growing client demand. We believe EMsights remains in the early stages of its growth opportunity. Looking ahead, we see meaningful potential to continue expanding the business through additional investment vehicles and broader distribution. EMsights demonstrates what our platform is designed to do: identify exceptional investment talent, provide the resources and autonomy to succeed, and build enduring investment franchises that create long-term value for clients and shareholders. We are now applying that same long-term approach to Grandview Property Partners. Like EMsights, Grandview expands our platform into an attractive area of long-term client demand while preserving the autonomy that allows great investment talent to thrive. Since completing the acquisition of Grandview earlier this year, the investment team has maintained their distinctive investment philosophy, process and leadership. We are laying the foundation for Grandview's next phase of growth. We are making good progress on the launch of their new flagship fund, including advanced discussions with an anchor institutional investor and active engagement with many of the limited partners that supported Grandview's prior funds. We recently hired a dedicated business leader to accelerate fundraising and expand institutional investor relationships. While it's early, we are encouraged by the progress to-date and are excited for the opportunities ahead. As we look ahead, we see meaningful opportunities across the investment platform. We are preparing to launch additional vehicles to meet evolving client demands, expanding our credit capabilities, advancing Grandview's next phase of growth and continuing to invest behind exceptional investment talent. Combined with our strong balance sheet and active pipeline of opportunities, we believe we're well positioned to drive long-term growth. We're excited about the opportunities ahead. I will now turn the call over to C.J., to discuss our financial results.

Thanks, Jason. Our complete GAAP and adjusted results are detailed in our earnings release. Assets under management ended the quarter at $183 billion, a record quarter end level and an increase of 6% from the March quarter and 5% from a year ago. Average assets under management were $182 billion, flat sequentially and up 9% compared to the June 2025 quarter. Year-to-date average AUM improved 9% over the prior 6-month period. Revenues for the quarter were $308 million, up 2% from the March quarter, primarily reflecting 1 additional day during the quarter and a modest increase in our average fee rate. Compared to the June 2025 quarter, revenue increased 9%, driven by higher average assets under management. Our weighted average fee rate for the quarter was 68 basis points, up from the March quarter, primarily due to the loss of the U.S. Value team mandates. Adjusted operating expenses declined 1% from the March quarter, primarily reflecting lower seasonal expenses and reduced long-term incentive compensation, offset in part by employee separation costs, including those associated with the wind-down of the U.S. Value team. Looking ahead, the September quarter will be negatively impacted by approximately $0.03 per share compared to the second quarter as a result of the wind-down of the U.S. Value team. Additionally, fixed expenses are expected to decline in the September quarter due to continued roll-off of seasonal expenses and a decline in employee separation costs. Fixed expense guidance has not changed for the year. Compared to the prior year quarter, adjusted operating expenses increased 7%, driven primarily by higher variable incentive compensation associated with increased revenues. As a result, adjusted operating income increased 8% sequentially to $101.4 million. Adjusted operating margin expanded 180 basis points to 32.9% and adjusted earnings per share increased to $0.94. Compared to the second quarter of 2025, adjusted operating income increased 13%. Margin expanded 120 basis points and adjusted EPS increased 13%, highlighting the operating leverage inherent in our business model. Looking at the year-to-date results, average assets under management increased 9% compared to the first half of last year, driving a 9% increase in revenue. Year-to-date adjusted operating expenses increased 9% from 2025, primarily from higher incentive compensation on elevated revenues. Adjusted operating income increased 10% to $195.6 million, adjusted operating margin improved to 32% and adjusted earnings per share increased 9% to $1.81. In our non-GAAP measures, non-operating income includes only interest income and expense. The balance sheet remains strong with $335 million of cash. During the second quarter, we redeemed approximately $20 million of seed capital, reducing seed investments on the balance sheet to approximately $100 million. Proceeds from seed capital redemptions are included in cash available for corporate purposes, reinvestment or potential return to shareholders through our year-end special dividend. Consistent with our dividend policy, our Board of Directors declared a quarterly dividend of $0.80 per share for the June 2026 quarter, representing a 4% increase from the prior quarter and a 10% increase year-over-year. After funding the quarterly dividend, we retained over $180 million of excess capital to support organic growth initiatives, evaluate potential M&A opportunities or return to shareholders. That concludes my prepared remarks. I will now turn the call back to the operator.

[Operator Instructions] Our first question today comes from Kenneth Lee from RBC Capital Markets.

Just from a high level, during the quarter, as you've been talking to the clients, I wonder if you could just characterize overall client appetite for emerging market and global risk assets more recently.

Yes, we have seen a really strong demand for EM. They're looking for not only access to the asset class, but certainly, they're looking for differentiated capabilities. And we're seeing that flow through more specifically to our Sustainable Emerging Markets team. They've had a couple of good quarters of strong net new inflow, Growth, I believe, for the quarter, they were up about 2.35%, and for the year, they're sort of double that. The pipeline of activity, specifically in EM is robust. Pipelines need to be crystallized, but we are happy with what we're seeing there. I'd say more generally across global risk assets, specifically equity, there's maybe a slightly more cautious tone. We've seen a fair bit of rebalancing. I look at the top separately managed accounts, which are institutionally focused just to see what kind of activity we're experiencing. And naturally, there's benefit payments and adjustments, but we saw a pretty broad-based rebalancing activity across a number of our largest relationships, nothing meaningful on an isolated basis. But when you sort of add it all up, it becomes relatively meaningful. But we are still seeing good opportunities in international. David and the International Value pipeline continues to be quite robust and strong across our global franchises and global strategies, we're seeing good interaction with clients. But I think where it tends to push people is they're tend to looking a little bit more across credit. They're tending to look for more goal or income-oriented strategies, and they're tending to focus a little bit more time and effort and attention on alternatives where they can get a, again, a differentiated return that might complement their current or existing equity portfolio that's done obviously very well coming out of COVID.

Just one follow-up if I may. I wonder if you could share your latest thoughts around any kind of outlook around potential platform expansion opportunities.

Yes. I'll highlight a few areas of expansion. I think there are 2 clear initiatives that we have. The first one is we're going to continue to focus our time, effort and attention in the areas where we see that overlap between asset allocation, demand, where we believe alpha is prevalent, and where we think the talent is available. And where we're really seeing a good source of opportunity and pipeline is certainly in credit. We think that there is good possibilities and opportunities for expansion more globally to our credit platform and franchise. The second is within alternatives. And there's a couple of areas that we've talked about in the past, but I'll highlight one maybe that we spent a little less time on in the world of hedged equity, equity long-short in particular, with more of a focused bias to it. We've been sourcing and identifying really interesting talent within that sphere of the market. And we've seen a pretty meaningful uptick in the demand for hedged equity, which for the first time in a long time, is starting to bear itself out in terms of actual implementation and allocations. Those are 2 clear areas that we're focused on. And then as we've discussed in the past, areas in private markets such as equity secondaries and real assets via either infrastructure or even a more global real estate to complement and sit within or alongside the Grandview Property Partners are also areas that we've been active in. And they're coming, as you would expect, in both forms. So certainly willing and interested in looking at lift-outs, which is our bread and butter, but we're also considering inorganic opportunities for growth where we see that really first or second generation of talent that we can partner with and align ourselves and the firm alongside our clients to potentially bring a new team on. Then the second piece that we talked a little bit about that's been a strategic initiative is just the broadening the aperture of the vehicles. So trying to get in between and find the intersection between where and how our clients want to implement some of our existing strategies and provide them the easier way to access that. And so that can come in many different forms. We've talked about SMAs. We talked about models. There's likely going to be something that we can envision an interval-based oriented product that gives us the ability to do a hybrid between public and private securities, and certainly more private funds. And as I'm sure you've seen, we did file for exemptive relief in the world of ETFs. And so we have received that relief. We have not announced or we haven't determined when or what we are going to be launching within ETFs, but we certainly recognize that that is an area that many of our clients are focused on implementation. And so we need to be thoughtful about how that would work with our existing investment teams and strategies and franchises. But that's clearly an area and a path for us to continue to broaden out the aperture and utilize our existing platform in a way that I think our clients are more increasingly looking to access us.

Our next question comes from Bill Katz from TD Cowen.

First one is really just a set of clarifications. I just want to make sure I understand the math. You mentioned that the wind-down will cost $0.03 sequentially. Is that related to the fundamentals of the business and that's just the timing of that? Does that also include the wind-down that you're expecting for the remaining assets? Then you also mentioned that your fixed expenses would be down sequentially, reflecting both seasonality as well as less severance costs. Can you just sort of quantify the severance costs in the quarter, so we have a better sense of that?

Yes, sure, Bill. So on your first question, the $0.03 is the delta between the second quarter and what we expect in the third quarter. So we had a slight accretive nature to the U.S. Value team in the second quarter given the wind-down started midway. And then in the third quarter, we expect a very minimal loss before it evens out. So that $0.03 is the differential between the second quarter, this quarter's results and what you would expect next quarter. Then with respect to the costs, in the first quarter, we have a larger number of seasonal expenses, which the decline in the second quarter was partially offset by the wind-down of the costs related to the wind-down of the U.S. Value team, including severance as well as some other expenses related to the wind-down. And then in the third quarter, we would expect to see the absence of those separation costs and wind-down expenses and continued roll-off of the seasonal expenses, there is still a little bit more to go. So all of that compared to the second quarter, we'll see a benefit in fixed expenses related to those items. But our guidance for the year, mid-single digits is what I said in January, excluding the addition of Grandview and the long-term incentive comp expense we guided for the year, we still expect that to be mid-single digits even with the additional costs of the wind-down.

That's very helpful. Maybe a big picture question. You mentioned in your prepared comments just the opportunity to leverage the EM platform and then sort of turn that to Grandview as well. Can we click in a layer deeper and just sort of say, okay, can you give us a sense of some of the initiatives you might be getting toward? Then on Grandview, you had mentioned some early success in the conversations. I'm sort of wondering if you could just remind us how big the prior flagship fund was? Where are you in terms of invested? And then what the timeline might be for the new fund?

Yes, sure, Bill. I'm going to have you repeat the first part, but I'll tackle Grandview. The Fund III was about $150 million in committed capital. That's small relative to what they would have expected. They chose to stop taking commitments, recognizing that an opportunity to partner with us was on the horizon and really preserve the return capability that was put in the ground and is to be put in the ground for those that were the early adopters so that we could focus on ultimately the launch of Fund IV. Fund IV, their flagship fund, we expect will be launched sometime later this summer, but likely early in the fall of this year. And we're obviously having conversations with that one anchor as well as many of the existing LPs that have invested with them along funds I through III. And so we're feeling pretty good about where we're at with the anchor and the ability to get out there. It's important also to have some opportunities to share with clients that might make their way into the portfolio. So they're working aggressively to identify and solidify those that will help us with the marketing campaign. But Fund III was $150 million, and we expect that Fund IV will be multiples of that. As I mentioned in my prepared comments, we hired an institutional business leader that we expect to be helping us in a very meaningful way to help us grow the business. So that's where we're at with Grandview.

Okay. And just to clarify, sorry, I asked 5 questions in one. You mentioned that the opportunity to maybe expand vehicles and capabilities in some of the teams, I think you sort of highlighted the EM platform. Just wondering if you could maybe give us an update on what kind of vehicles, what kind of incremental distribution partners you might have on the horizon?

Yes. Sorry if I made it EM-specific, but it's really across all the teams. And I think that each team has their own set of clients and distribution opportunities. But I would view it as we have the opportunity to launch CITs, private funds where institutional clients don't want to access a capability or a strategy that might come in a mutual fund or a more liquid wrapper, but also don't want to deal with a separately managed account, which might require country openings or opening up of various derivative contracts and relationships with PBs and third parties. So I think if you look at the totality of it, we would view CITs, private funds, there's certainly the opportunity to widen the aperture in UCITS, and we expect to launch a UCIT in the not-too-distant future. We're in some active conversations with a potential anchor there. And as I mentioned, we're not quite there yet on ETFs, but there's the possibility of doing ETFs, and that's not specific to EM, but just more generic to the platform.

Thank you for taking all the questions.