Hello and thank you for standing by. My name is Andrew, and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, management will conduct a question-and-answer session, and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. At this time, I will turn the call over to Makela Taphorn, Director, Investor Relations for Artisan Partners Asset Management.

Thank you. Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Eric Colson, Chairman and CEO; and C.J. Daley, CFO. Our latest results and investor presentation are available on the Investor Relations section of our website. Following these remarks, we'll open the line for questions.

Thank you, Makela, and thank you all for joining the call or reading the transcript. At Artisan Partners, we bring together the consistency of who we are, constant change and patience. Slide 1, which we include in every presentation, summarizes who we are, the consistency of our philosophy and model for over 25 years. We are a high value-added investment firm designed for investment talent to thrive and committed to thoughtfully growing over the long term. Over our history, we have remained true to these foundational business elements. While we are consistent in who we are, we also use judgment to navigate change and grow over the long term. Responding to evolving asset allocations we have added degrees of freedom and generated portfolios and outcomes that are less easily replicated. In order to maintain an ideal home for investment talent, we invest in technology, data and infrastructure to support high value-added investing. To find the right clients on the right terms, we regularly evolve our leverage distribution model to include institutions, consultants, financial intermediaries, and non-U.S. regions. And to increase the sustainability and flexibility of our human capital business, we evolve our capital structure over time, while retaining a variable P&L model that itself provides consistency, predictability and stability. With these changes and many others, we have always remained patient. We have never felt compelled to be first to market. We prefer to observe and to determine which changes will become long-term trends that fit who we are as an investment firm. We are willing to take an incremental approach in order to avoid mistakes. We call this process bringing together who we are, constant change and patience, dynamic consistency. Turning to Slide 2. Our firm's purpose is to generate and compound wealth for our clients. On the left, you can see our long-term results. Since inception, 16 of 17 strategies launched prior to 2020 have added value relative to their benchmarks after fees. 12 strategies have outperformed by an average of more than 300 basis points per year since inception after fees.

Thanks Eric. In the calendar year ended December 31, 2020, our results were driven by exceptional investment performance across most of our strategies, strong net client cash inflows, as well as increases in global market indices. As a result, as illustrated on Slide 7, our AUM during the year increased $37 billion or 30% to $157.8 billion. Net client cash inflows for the year were $7.2 billion, a 6% organic growth rate, not including distributions that were not reinvested in our U.S. mutual funds. Investment returns in excess of benchmarks also contributed meaningfully to AUM growth and added over $11 billion in AUM. Net client cash inflows were driven by existing and new clients and were diversified across strategies, with 16 of our 19 strategies gathering net new AUM for the year. For the quarter, AUM growth was also strong, up 17.5% and net client cash inflows were $2.1 billion. This quarter, within our AUM roll forward, we began to break out the change in AUM due to Artisan funds distributions not reinvested. This amount represented a $594 million decline in AUM during the quarter and a $690 million decline for the full year. Our AUM by generation is presented on Page 8. I'll highlight a couple of items. Investment returns included strong excess returns across all three generations. Our second and third generation strategies had $10.8 billion of net client cash inflows in 2020, and AUM in these two generations now represents over 50% of total AUM. While our first-generation strategy experienced outflows for the quarter and year, AUM increased meaningfully, highlighting the compounding effect of market returns and alpha generation. Financial results for the quarter and year-to-date periods are presented on the next two pages.

We will now begin the question-and-answer session. The first question comes from Dan Fannon of Jefferies. Please go ahead.

So I guess my first question is on Franchise Capital and kind of the new compensation that you announced, so curious around timing as to why now kind of making this shift? And then were your investment professionals not allocating money or being paid at all or have any investment in their funds currently. So to something maybe from consultants or other asset allocators that was something that they view would be a positive to potentially more asset growth or better outcomes coming going forward?

Dan, this is C.J., I'll take that one. First, our key investment professionals already have significant holdings in their funds. So, it was not anything driven other than our desire to continually evolve the firm as we grow and people mature. We've aligned our long-term incentive compensation over the years to clients and shareholders. We've made changes to that back when we went public, and we introduced career shares as well as restricted shares at the IPO. So, the why now was really just a matter of us continually wanting to evolve and improve the security.

Got it. Okay. And from an economic perspective, looking at Slide 12 and the $79.5 million for the long-term incentive, how does this compare to 2020? The $34.2 million relates to the income statement. You recorded equity-based compensation of $36.5 million in 2020. If we consider what will be allocated, what is the impact for 2021 compared to what we saw in 2020?

Yes. These grants typically vest over five years. Historically, our annual amortization expense has ranged from 4% to 6% of revenues. We don't have a specific formula for determining the size; it’s more of an evaluation of value created during the year. In 2013 and 2014, this year's grant was comparable to those years when significant value was generated for clients and shareholders. The last five years have seen less success in asset growth, both organically and through the market. However, this year has been exceptional. Therefore, regarding amortization for 2021, based on our current assets under management revenue run rate, we will likely remain in that lower end of the 4% to 6% range we've experienced historically. The sizing is somewhat based on value creation but lacks a precise formula.

The next question comes from Bill Katz of Citigroup. Please go ahead.

Okay, so just one more question on expenses. Does your guidance for this year factor in some of the spending that you spoke to earlier in terms of the China and private market opportunity? Or would that be above and beyond? And then within that, how are you thinking about maybe the normalization of travel and entertainment through 2021, if at all?

Yes, good question. It does factor in everything that we're working on today. What it would not factor in is if there's a new team that we were to bring on beyond the China post-venture group. With respect to other expenses, that really depends on when we get back to normal. And so, I would expect a similar level of travel and G&A expenses in the $5 million to $6 million range a quarter, which is down from the $7 million to $8 million pre-COVID that we were running until we get back to normal and whether that happens in the summer or the fall remains to be seen. The other thing that I should mention is that we always do have in the first quarter a spike in expenses due to seasonal expenses. We would expect that to be somewhere in the $4 million range in compensation as a result of reset of 401(k) health fundings and payroll tax contributions and then about $1 million down in G&A for our non-employee director compensation. So other than that, I think I've sort of identified everything that we could have any insights into.

Okay, great. And just my follow-up, maybe for Eric, just going back to the flows, and I appreciate they're more of a fallout of the investment process. But as you look to '21, can you sort of speak to where you stand in some of the momentum on the Gen 3 portfolios? And then anything on the Gen 1 or Gen 2 that's starting to buck up against any kind of capacity constraints?

Yes, certainly, as you know, we do manage capacity quite diligently. And we've seen a lot of velocity and flows, which you see in the gross flows of both in and out. And we see some evolving mix as well and we're also very cautious of the total capacity. And we think about the long duration orientation of clients that we use that capacity with. So with a few strategies, more notably on the growth side with the small-cap growth and the global opportunities, so you're straddling a couple of generations there. Those two are very mindful in managing the mix in the flow there. And with regards to the third generation, we've seen a pretty successful year last year across many of the strategies. I think as they showcase the design of those strategies and how they fit in long-term asset allocation, we're still seeing great interest in those and we continue to field questions around new strategies that we're launching as well. So the third generation, we're still seeing strong interest.

The next question comes from Alex Blostein of Goldman Sachs. Please go ahead.

I wanted to dig a little more into the franchise awards and just kind of think about to your point earlier kind of trying to align the words with a value for all the constituents, including the shareholders. So if you guys are aiming to do sort of 4% reserve on just management fees, how should we think about that overtime, so it feels like value creation is really an alpha dynamic and maybe organic growth dynamic versus beta? So in a year what they able to really strong, just index performance, equity market performance, could that 4% be lower because of the sort of inflation you're getting on the revenue side or 4%?

The 4% is sort of to put some predictability and transparency into the sizing of the franchise award and the APAM equity would be in addition to that to get to the total grant that we would have made if we had not introduced franchise capital. Most of our key investment professionals have already significant APAM equity or on their way to getting APAM equity. And our objective is to provide substantial alignment both in APAM equity, again, which most of them already have, as well as, directly with clients and their funds, to provide a balanced outcome for them over the life of their career.

But I guess is the methodology in terms of the grant predicated more on alpha and organic growth or just total management fees?

Total management fees.

And then, the follow-up just maybe around capital management, with the new structure in place, maybe just a quick reminder. What would go forward annual share creep, I guess, is expected to be into what extent you guys are planning to offset any of that with share repurchases?

We're not considering a share repurchase program. Introducing franchise capital actually results in less dilution, achieving the same effect as a share repurchase plan. Additionally, the first 4% will be Franchise Capital, and the remainder will be APAM equity. It would be challenging to provide any directional understanding of potential dilution without knowing the size of the ground. Historically, we have amortized between 4% and 6% of revenues annually, and I expect us to stay within that range.

The next question comes from Robert Lee of KBW. Please go ahead.

Thanks for taking my question. Maybe just sticking with the Franchise Awards, should we be thinking that kind of similar to when you first went public, there's maybe a little bit of compounding at least in the next couple of years once you issue next year's award, you'd see incentive compensation maybe step up a little bit again and then take a couple of years to normalize for lack of midway funding it, particularly since the last couple of years or maybe awards were below average. Is that a fair way to think about it?

Initially, there was an increase in our amortization expense when we went public due to a 5-year vesting schedule. In our first year, we had one grant with only 20% vested. Each subsequent year, we increased our amortization expense until, after five years, it was fully loaded. In this situation, you shouldn't consider a ramp-up. Instead, if we continue to have successful years, you might see an increase simply because we would be granting more compared to the last five years when our assets under management fluctuated between $95 billion and $120 billion. This year, we've experienced significant growth from organic development, investment performance, and market conditions. We view this as a premium year, so the amount of the grant will determine our approach.

Okay, let's shift the focus to the business flows. This year saw a significant increase in gross sales, both in funds and separate accounts. On the fund side, while you've mentioned the expanded distribution investments, could you provide more detailed insights? Were there specific channels or programs that particularly contributed to this growth, almost as if there was a sudden surge at the beginning of the year that led to increased flows? I'm looking for a clearer understanding of what specifically drove this increase.

Rob, it's Eric. We've talked quite a bit over the years about how our flows can be unpredictable. As a firm focused on consistent investment rather than just short-term distribution, we've always recognized that our flows would be uneven, which was evident last year. The flows we experienced were somewhat boosted by the market conditions. Many of our existing clients reassessed their allocations with us, and we attracted new investors who were already knowledgeable about Artisan. Additionally, last year saw a shift to greater use of digital tools within the industry, and we've approached this with a focus on creating a knowledge-driven distribution model that enhances the client journey. We've been refining our CRM, adding new features, and producing more content, including a blog that has seen significant engagement. One notable article we published in October compared value investing to YOLO investing. We also developed videos and conducted interviews with company executives about our investments, sharing this content via email, our website, and social media channels. During this time of limited travel, our interactions have been strong, and with our long-standing relationships and new delivery methods, everything fell into place.

Next question comes from Chris Shutler of William Blair. Please go ahead.

Eric, just curious to get your take on growth versus value at this stage in the cycle, and what are you seeing from your institutional clients? Are you seeing any kind of early signs of rotation into value? And then what has that meant? Or what do you think it will mean for rebalancing activity over the next quarter or two?

Yes. Last quarter, we observed a rotation where value outperformed small-cap, and non-U.S. markets outperformed the U.S., with emerging markets leading the charge. There was evident rotation as we began the year, a time when many consider rebalancing their portfolios. We noticed some flows into our value strategies, indicating a degree of rebalancing, though it hasn't been substantial yet. Many still view it as early in the rebalancing process. This is why we focus on a variety of distinct teams that operate independently to enhance diversity within the firm. If a rotation occurs, we are well-prepared with our value strategies. They are competitive with our peers, have a solid reputation and asset base, and many have performed well against the broad benchmark and their value counterparts. Therefore, if there is a rotation, we are positioned to take advantage of it.

Okay. And then one specific one, just on the China strategy that you're going to be launching soon, I just want to clarify. So is that a, I think, it is a crossover strategy investing in both public and privates? And just any more broad color on the investment strategy there would be helpful.

No, I appreciate the question. I see this as a great opportunity for the firm. As I mentioned earlier, we have all observed China's growth, and more allocators are considering their asset allocation. There is a growing talent pool focused on this area, though it remains quite limited in an institutional sense. The strategy is designed to take advantage of the expanding opportunities in the marketplace and to stay ahead of trends. It is a crossover fund that includes private companies. Our non-U.S. distribution has expanded, particularly in Europe, Australia, and the Middle East, which will also allow us to gain insights into Asia, specifically China. Our operations are well-prepared to handle the crossover funds, positioning us to expand in various ways, not just through this team or strategy, but across the organization. As I mentioned earlier, while it's not a new concept, many people tend to jump in when China is growing and develop products led by distribution. We aim to balance all these elements and believe this is the right time to move forward with the post-venture fund we are establishing. I hope this provides more context for you.

Yes, that helps, Eric. Will some of your other teams also be launching strategies that invest in private companies?

Certainly, I think the way we've been broadening out the organization with various teams that do add degrees of freedom provides the opportunity for all the investment teams to leverage those degrees because the company has built the infrastructure to handle that. And there's definitely a growing interest in private debt, whether private equity. You've seen a little bit more interest around the use of derivatives when we brought in the Antero Peak team. And as each team comes in, we broaden out the firm. It goes across the entire organization and can be leveraged across each individual team and the organization. So, we would expect a greater use of privates across many of our teams.

The next question comes from Kenneth Lee of RBC Capital Markets. Please go ahead.

Thanks for taking my question. Just one on Franchise Capital. Aside from the direct impact of cash for the Franchise Capital awards, wondering if you could just share with us any longer-term implications for the dividend policy down the line?

Yes, our philosophy remains unchanged. Franchise Capital simply replaces the use of APAM equity, resulting in less dilution but also less cash. There are no additional implications; the accounting remains the same, and all forfeiture investing provisions are unchanged, making it just a different security.

Got you. And just one quick follow-up, if I may. What's sort of like the current outlook for potentially adding new investment teams over that near term? Thanks.

Yes. There's clearly an uptick around our teams that we talk to and are interested in. And usually, that happens around bringing on a new group. It happened when we brought in the credit team and many individuals didn't think we would go into the credit markets to bringing in Antero Peak and launching a long short and clearly bringing in Tiffany and launching a crossover fund that's focused in China, which brought in interest from individuals that may operate in Asia to individuals that are thinking about crossover strategies. So, the new team and each new step on that broadens the pool of candidates that we talk to, but there's no new groups or teams that were willing to talk about or in the near-term here.

This concludes both the question-and-answer session and today's Artisan Partners Asset Management business update and earnings call conference. Thank you for attending today's presentation. You may now disconnect.