Artisan Partners Asset Management Inc.
Q1 2013 Earnings Call Transcript

Published: 1 May 2013

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Artisan Partners Asset Management First Quarter 2013 Earnings Conference Call. My name is Frances, and I’ll be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from Artisan Partners Asset Management will conduct a question-and-answer session. Conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. At this time, I would turn the call over to Makela Taphorn, Artisan’s Director of Investor Relations. Please go ahead.

[Makela Taphorn:]

Good afternoon and thank you for joining our conference call to review Artisan Partners Asset Management's results for the first quarter of 2013. Opening the call today are Eric Colson, our President and Chief Executive Officer and C.J. Daley, our Executive Vice President, Chief Financial Officer and Treasurer. Before Eric begins, I would like to remind you that our first quarter earnings release and related supplemental presentation materials are available on the Investor Relations section of our website at www.artisanpartners.com. I would also like to remind that the comments made on today’s call and some of the responses to your questions may be our forward-looking statements relating to Artisan Partners and are subjects to risk and uncertainties. Factors that may cause our actual results to differ from expectations are listed under the caption forward-looking statements in earnings release and are detailed in our filings with the SEC. We undertake no obligations to revise these statements following the date of this conference call except as required by law. In addition, some of the company's remarks this morning includes references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release and exhibits, which are posted on the Investor Relations section of our website. With that I will now turn the call over to our President and Chief Financial Officer Eric Colson.

[Eric Colson:]

Thank you, Makela. Good afternoon, everybody and welcome to the Artisan Partners Asset Management business update and quarterly earnings call. I’m Eric Colson, CEO and I’m joined today by C.J. Daley our CFO. As we stated on our road show, we are in a talent business. Our people are the essence of who we are and they define our business strategy. So, we know that time is a precious asset. We value time very highly, so I thank you for your time today and hope you find this discussion useful. I want to spend the first couple of minutes today reviewing the foundation of our business and who we are, mainly because it will set the tone for our communication. Then I will review our long-term business strategy and approach using the quarter as a backdrop. We have a business philosophy and framework for how we approach the invest management business and we want this review to reflect that. Once I am done, C.J. will take the lead on walking through our financials and our transition to a public company. Flipping the slide two, we have a basic set of business facts. The foundation to our business was 1994 by our founders Andy and Carlene Ziegler. At that time, two secular trends that were taking hold in the market shaped our growth strategy, free agency or talent movement and open architecture choice. When started the company, we had one team and vision shaped by these trends, and 18 years since our founding, the attraction of our business model has allowed us to selectively leverage talent movement. We now have five autonomous investment team highlighted on the lower left of the slide. Open architecture provided investors with choice and through our distribution network, we have grown to over 80 billion across multiple channels highlighted on the bottom right pie chart. The firm is managed by a dedicated business leadership team. Our business leadership team protects our investment culture and focus by managing time in the best interest of our investment teams. Everything we do is cautiously designed to create an investment culture that allows our talent to thrive. On page three of our presentation, you can see the three core principles that define who we are. We are a high value added investment firm designed for investment talent to thrive in a growth-oriented culture. Our principles have evolved over time and have been consistent since the firm was founded. As we discuss them, you will note a strong connection among the three and that's important, because any one of these principles can shape a view of our firm. Over the years, we have been known for our strategies, our people and our culture. However in our minds, we are the intersection of all three principles. The real importance of knowing and communicating who you are with the ability to set expectations and deliver on those expectations consistently, for example, when our investors look at our portfolio strategies, they want to understand the process and team to develop performance expectations. If the results don't match expectations, our clients lose trust in the process and people. In a people business like ours, we need to manage expectations and deliver a consistent business model. Because, if you change the game, you will create instability, we have all seen it happen. We manage our business with a similar mindset to our portfolio strategies. We believe strongly in the philosophy and approach that define who we are. We believe it should be well articulated and we manage through these principles consistently. In the end, our goal is to build a stable environment for everybody to thrive. Now, on slide four, I would like to take the discussion from our principles to a more specific discussion of how we approach business management at Artisan Partners and ultimately how that drivers our current strategy. The four guideposts noted on page help drive our tactics back to a long-term approach. I am going to hit on each of these in the context of the quarter, but let me quickly summarize. Our talent focus is the [life] of our business. As a result, we spend a lot of time on the development of our people assets both, externally and internally. Investment results are obviously one of the primary measuring tools for our business success, but our evaluation of success looks as much to the execution of the investment process as it does around numbers. We obviously look at numbers, but when we do, we look at them from a variety of perspectives. Asset diversification is related to how we grow and this is immensely important to us. We think that managing our asset mix is in a diversified way and restricts financial discipline is critical to long-term business health. We understand we operate in a highly fluid industry, but those guideposts provide strong context to our business strategy. I am going to come back to each of them on the coming slides, but I want to finish this page off by hitting on the trends driving our strategy. Our business strategy doesn't pivot off a short-term details they can be distracting. We use the detail to identify broad, sometimes obvious trends to drive strategy. Globalization, investment policy evolution and open architecture solutions are three such trends. Since the mid 2000s, our business and investment strategies have been impacted by globalization. From an investment standpoint, this trend has driven more degrees of freedom into our investment strategies by allowing our teams for losing geographical constraints. On the business side, it has pushed us to leverage our distribution with intermediaries and consultants around the world. While investment policy statements have tended to evolve over time to incorporate more diverse asset classes and risk inputs driven by events like the [TMT] bubble and the global credit crisis. With the acceptance of broader categories and new strategies within investment policy statements, we are seeing clients increasingly alter their asset allocation methodology away from the traditional main variance model using traditional asset classes to risk-based asset allocation using categories such as company-specific risk, liquidity, inflation, interest rate and other risk categories. This trend is extremely important to Artisan, because the newer categories are long-term, global and supportive of increased investment freedom, creating opportunities which we are happy to compete. Finally, open architecture platforms have influenced the design of Artisan since day one. Fundamentally, investors and market participants' preferred choice to allow a level playing field. To play and compete in this industry, the key is investment results. Our firm is designed to create an environment in which investment talent have the opportunity to deliver performance results. Today, solutions, page providers including target date funds, discretionary consult models and implemented broker dealer solutions, primarily used for tertiary products, similar to the define contribution marketplace in the late 90s and early 2000, we anticipate these solution based models to an open architecture environment, giving us again the environment in which we are happy to compete. Having cleared those pages, I want to use our guidepost as an outline for how developments in the quarter intersected with our current strategy beginning with our talent focus. Of process evaluates individual characteristics fit with our business model, long-term demand within the institutional framework and fit with our culture. Similar to our investment teams, we evaluate information and data based on [profitable lease] and process to provide consistent judgment and insights. One of our portfolio managers reminded us this quarter that data is information, not insight or knowledge. This quarter, our IPO provided us an enormous amount of data. We conducted approximately 50 one-on-one meetings and numerous group meetings that expanded investment professional network by 100 of individuals. 250 plus firms invested in our firm at the IPO. Post-IPO, we were amazed by the amount of information data that we gathered about investment professionals and investment firms. This information has expanded our network immensely. Over time, we plan to convert that data into insights to manage our firm towards our key priorities. Two of our key priorities are investment degrees of freedom and human capital. With respect to human capital, we promoted two individuals this quarter within the global equity team to portfolio manager, Andrew Euretig and Charles Hamker to portfolio manager on the global equity strategy. We also began planning for equity awards to recognize value creation within the firm and to align our interest for the long-term. We believe that economic alignment for value creation is critical to our business model and expect to grant equity each year. With regards to degrees of freedom, our business continues to globalize in operations and distribution as well as our client base. Artisan Partners has been investing globally since 1995 with the launch of our first international equity strategy with portfolio manager Mark Yockey. Today, globalization is making a line between U.S. and non-U.S. investing disappear. As I mentioned earlier, with the evolution of investment policy statements supporting diverse categories, we are interested in strategies of greater degrees of investment freedom and growth in emerging markets. Continued on slide six and seven, I want to talk about our investment results. As I mentioned earlier, we major investment success over a generally defined four market cycle. We focus on longer periods, because ultimately our teams invest in businesses, and business owners think about where they want to be in three, five or ten years. Owners don't run a business three months at a time. So, when we think about the performance success of our managers, we operate very similarly. Performance data over very short time periods often reflect liquidity, noise and market preference. We think long periods tend to be a better way machine to determine success. However, end point dependency must be taken into consideration. Our goal is to produce superior investment returns on an absolute and on a relative basis with integrity, so when we look at investment performance, we answer three questions. Have we've been faithful to a strategy stated investment philosophy and process? To us that's investing with integrity as the produce good absolute performance. Third, how does the strategies performance compare to the performance of its peers competitors and benchmark. As of March, 31st, 11 of our 12 investment strategies had added value relative to their broad performance benchmarks over the trailing 5-year and 10-year periods and since each strategy's inception. Our strategies have good absolute performance and follow their objectives with integrity. Slide seven further reinforces the impact of our performance philosophy across our asset base. Our teams run active portfolio with fairly high degrees of investment freedom. Each also adheres to a time-sensitive investment process, none have a process or incentives that place much value on very short timeframe, therefore the return patterns of all of our teams will be lumpy that is evidenced in our one-year returns, but each have proven the compound wall for clients and outperform the indices long-term. As indicated by nearly 100% of the asset outdistancing the benchmarks over the five-year 10-year and since inception timeframes and this obviously translates to peer ratings, but they are highlighted of the page. Our last side, before turning it over to C.J. is really just a summary of our distribution strategy. We focus on sophisticated investors with a long-term horizon, which makes for a more consistent asset base. We had delivered about allocating capacity to particular distribution channels to provide diversification in our asset base and we have a disciplined approach to fees, because it is critical to talent retention. Managed all together, we think these characteristics contribute to stability in our business mix and investment teams. In our view, the combination also creates a more consistent cash flow stream which yields a higher and more predictable present value. At the end of the first quarter, our assets under management exceeded 80 billion due to a strong combination of organic growth and market appreciation. Importantly, we had positive mix client cash flow in 10 off our 12 strategies, four of our five investment teams and four of our five distribution channels generated by claims failed in the U.S. and abroad. We think that these are the kind of short-term data points that we will push up towards our long-term business growth. Asset diversification by team, distribution channel, investment vehicle and geography. With that, I will turn it over to C.J.

[C.J. Daley:]

Thanks, Eric. Good afternoon. Slide 9 starts the review of our first quarter results. As of March 31, 2013, our company's assets under management were $83.2 billion, a 12% increase over AUM at December 31, 2012, and a 25% increase over AUM at March 31, 2012. The increase during the first quarter was achieved as a result of $2.2 billion of net client cash inflows, which equates to a 3% organic growth rate quarter and a 12% annualized growth rate as well as 9% market appreciation. The increase in AUM over the last 12 months was achieved as a result of 6.6 billion of net client cash inflows, a 10% annual organic growth rate and 15% of market depreciation. Average AUM for the first quarter was $79.2 billion, so our ending asset under management was 5% higher than average AUM in which recorded our revenues for the quarter. March 31, was the end of our first, but partial quarter as a public company and included numerous transactions related to our initial public offering. Our GAAP results includes significant charges related to the reorganization including mark to market expense of our pre-IPO partners equity and other compensation related charges incurred as a result of the IPO doing $476 million. The quarter also included a mark to market gain of $25 million on our contingent value right liability. In the previously disclosed charge for severance and cash retention awards that are ending 2013. We present adjusted earnings on adjusted shares, which represents our earnings adjusted primarily for pre-IPO compensation expenses, so on an adjusted basis earnings were $33.2 million or $0.47 per share for the quarter. Keep in mind that this figure includes a $0.09 reduction for the cash retention expenses and a first quarter severance charge. As a result of these items, our adjusted operating margin of 37% was negatively impacted by 630 basis points in the March quarter. The reconciliation of GAAP to non-GAAP results is on slide 16. The remainder of my comments will reflect our non-GAAP adjusted earnings on adjusted share results. We believe, our adjusted results are better representation of our results and it's what we as management use to assess business performance. We exclude the impact of pre-IPO income and expense and eliminate the larger non-controlling interesting by assuming that all limited interest in the partnership have been exchanged for shares of the public company, adjusted net income per adjusted share, represents our results a different partnership is 100% owned by the public company. Moving onto slide 10, AUM at March 2013, was a $83.2 billion. That's up 12% from December 31, 2012, and 5% higher than average AUM of $79.2 billion for the first quarter. AUM increased in the March quarter, primarily as a result of market appreciation of $27 million and net client inflows of $2.2 billion. Our inflows this quarter reflect the increased client activity, which is typical for the first quarter of each year as investors update investment allocations and assume 401(k) contributions. We benefitted from that increased activity as 10 of our 12 strategies and four of our five distribution channels saw positive flow activity generated by clients in the U.S. and abroad. We are pleased with the diversification of our growth this quarter. On slide 11, you can see that we are continuing to build our non-U.S. client base with assets from non-U.S. with assets from non-U.S. clients growing $1.3 billion in the quarter to $9.2 billion, or 11% of total AUM. Non-U.S. client inflows this quarter accounted for 30% of our net flows. Slide 12 shows our financial results for the first quarter, compared to both our preceding December quarter and the first quarter of 2012. For the March, 2013 quarter, revenues were $148 million and average AUM of $79.2 billion. That's an increase in revenues of 8% over the December 2012 quarter and 24% over the March 2012 quarter. The average management fee across all strategies and products were 76 basis points, flat from both the preceding and prior year's quarters. Adjusted operating income for the quarter, which excludes IPO-related compensation charges, was $54.9 million that translates to a 37% adjusted operating margin. Our adjusted margin this quarter is lower when compared to the December and the March 2012 quarters, due to increased cash retention and severance expenses in this year's March quarter. The impact of this increase to the current quarter margin was approximately 420 basis points when compared to the fourth quarter and first quarter of 2012. Adjusted net income of $32.2 million for the current quarter compared to $34.0 million in the December 2012 quarter. Our higher first quarter revenues were offset by higher operating expenses due to the increase of cash retention and severance expenses in the first quarter 2013, as we previously mentioned. Overall, the increase in cash retention and severance expenses in the current quarter negatively impacted net income by $4.1 million after taxes, or $0.06 per adjusted share when compared to the December 2012 quarter. On slide 13, I would like to spend some time explaining how we view our compensation ratio and our largest expense, compensation of benefits. As a result of the IPO related compensation, our compensation ratio significantly elevated compared to prior quarters. However, on a quarter expense basis, adjusting for the IPO-related compensation, severance, cash retention and seasonal effects, our compensation ratio has consistently been in the 41% to 42 range. When looking at run rate expense for future quarter and years, there are few items to keep in mind. First, the cash retention award amortization that is in this quarter lined at the end of the year. This is roughly $3 million, or 2% of revenues this quarter that will go away at the end of 2013. Second, seasonal benefits expenses will be higher in the first quarter of each year. The impact this quarter was $2.3 million, or 1.6% of revenues. Last, we expect to issue equity grants in the future. Over the next several years as we are host IPO equity awards which we will expect will be in the 2% range on average. We expect our compensation ratio will grow to the mid-40% range. Of course, the size of the equity grant each year and related expenses will vary based on the rate of sustainable growth actually achieved and our stock value, which impacts the amount of expense we will amortize over the five-year vesting period. The last slide on capital management highlights the strengthening of our balance sheet as a result of our IPO, new application the IPO proceeds. Cash ended the quarter at $199 million. Debt was reduced to $200 million and total equity is slightly positive at $6 million. Debt substantially improved from negative equity of $673 million at December 31, 2012. Our debt-to-leverage ratio is at 0.9 times leverage. In closing, the March quarter was a productive quarter from the business and capital management prospective. We completed a successful initial offering of our stock, which closed on March 12, enjoyed increasing levels of AUM in the quarter, healthy net client cash inflows, which annualized in an organic growth rate of 12 and continued strong performance in most of our strategies. These factors give us confidence that we are well positioned for the remainder of 2013.

[Eric Colson:]

Thanks, C.J. In closing, we are proud of our business model and investment results and we appreciate our success in the IPO and the competency shown in us by becoming shareholders. We will communicate to you about our business in a way that we think about it and we will provide information for your insights and knowledge. We appreciate your time and your interest. We will now open the call for questions.

[Operator:]

Thank you. (Operator Instructions) Your first question comes from the line of Bill Katz from Citigroup. You may proceed.

[Bill Katz:]

Thanks so much. Actually I have one quick small question and a couple of bigger picture questions. C.J., when you said your mid-40s on the comp ratio is that before or after the equity bids?

[C.J. Daley:]

That's after the equity grab. As we grow and issue more equity and the equity starts to amortize on a fully loaded basis in five years, we'll have four quarters worth of amortization and a growth on the upside.

[Bill Katz:]

Thank you. Eric, you mentioned some constrained mild if you will and does the allocation go anywhere? How constrained if at all are you by having sort of an equity centricity and has that shift you thinking of free cash flow usage from the team perspective. Then maybe you could triangulate what you are seeing outside the United States given the 30% annualized growth rate in new business there?

[Eric Colson:]

Yes. So, we've seen the equity flows have been fairly positive here. I think it hasn't changed what we look at for new investment teams or what to invest in the business. And, outside the U.S., it's been fairly strong for us on the flow coming in a little weaker than the U.S., but when you look at our pipeline, it looks quite strong 50% coming in from outside from the U.S. Did I answer your question, Bill?

[Bill Katz:]

Part of it, I guess, the question is in terms of, you talked about asset allocation being important point differentiation for your franchise and when you look at some of your other competitors, they have a bit more of diversification. Of course that asset allocation including alternatives, fixed income, if you will, obviously doing well on the equity side, so I just was wondering where you are into the evolution you are thinking in terms of other teams at this point in time or is there just enough momentum in the core business now that's still more of a selective approach?

[Eric Colson:]

Certainly. My reference to the asset allocation was really addressing the seasonality effect that's occurring in the marketplace right now that we've seen in our view more investors be disciplined within asset allocation this year using their target and reallocating and rebalancing back to equity, so that asset allocation effect has been beneficial for us as opposed to us trying to diversify across other asset classes. If we find a good asset allocation team or macro team or team that can play the asset allocations spectrum, we are open to that and adding them, but my comment in the opening remarks was really around the seasonality effect and the increase in equity assets.

[Bill Katz:]

Okay. And, just one last one for me and thanks for taking my questions. If you add back the severance charge of $9.3 million to your adjusted operating income you get adjusted margin about 43%, and so was curious as you think about go-forward, is that a reasonable run rate to reinvest back in the business. I think, during the road show, you had mentioned that you think can get it to mid-40s, but you've governed that just given the need to reinvest. So, the question is do we get there fast-forward and we are sort of stopping from here, or is there more upside from here?

[Eric Colson:]

Bill, I think it's a combination of offsetting that growth. The growth will take the margin up, but we have to start layering in the equity comp, so I think this quarter with the strong growth in both, the market and organic growth, you saw that spike, but we'll be layering in some equity compensation expense over the next coming quarters as we're doing our first public equity grant. So, our thinking really hasn't changed around that mid-40s over the next couple of years.

[Bill Katz:]

Okay. Thanks a lot, guys.

[Operator:]

Your next question comes from the line of Michael Kim from Sandler O'Neill. You may proceed.

[Michael Kim:]

Good afternoon. First, can you just talk about RFP activity in the pipeline in the institutional channel in terms of some of the moving parts that you may be seeing across the various teams and then related to that, what's the feedback you are getting from consultants as it relates to kind of rebalancing the replacing activity?

[Eric Colson:]

Hi, Michael. It's Eric. The institutional client base and even the intermediary channel was very disciplined this year in our minds. We've seen past year's where groups were more tactical or they would maintain their fixed income allocation despite their asset allocations they didn't issue rebalance back their equities or other asset classes. This year, we've seen more discipline in rebalancing, so we saw a quite a bit of activity in the intermediary channel and that's also helped our pipeline and our fee activity and we look year-over-year, we've improved on the activity with more search opportunities, more RFPs and a broader allocation across our strategies.

[Michael Kim:]

Okay. Then maybe question for C.J. just to kind of follow-up on. On the margin discussion, it does seems like there could be some pressure on fee rates is maybe the mix shift towards separate accounts in new strategies and then also a fair amount of your expenses are variable, so just wondering where you kind of see the incremental leverage in the model beyond compensation. Are there further efficiencies in G&A or occupancy that you can kind of move the needle, if you will?

[C.J. Daley:]

Yes. I mean, there are just efficiencies built in our model. Approximately 65% of our expenses are variable. That leaves 35% that there's leverage just by the nature of our business, then our assets can grow to some point without us having that additional infrastructure. So, there's natural leverage in our model. And as we look out to next couple of years, we see as we continue to grow, we see our margin increasing, but being offset by the luring the equity compensation expense.

[Michael Kim:]

Got it. And, then just one clarification, the cash retention expense going forward, did you say you expect an incremental $3 million of related cost in the second quarter and then what's the outlook beyond that? Is there any further cost in the second half of the year? Thanks.

[C.J. Daley:]

Yes. That was a retention award that was issued in 2011. As we were thinking about our initial transition from a partnership to a public company and that amortization in a $2 million to $3 million range ends in December of 2013, so you will see $2 million to $3 million of expense each of the next three quarters and that will cease to exist.

[Michael Kim:]

Got it. Thanks for taking my questions.

[C.J. Daley:]

Thanks.

[Operator:]

Your next question will come from the line of Marc Irizarry from Goldman Sachs. You may proceed.

[Marc Irizarry:]

First question, just on the fee rate, I think you said 76 basis points flattish. What impact if any did the day count have on that? Does that pressure it? Then also you said 30% of your client inflows are coming from non-U.S. clients, so I am just curious as you grow that business, what sort of fee compression if any should we expect to see from that?

[C.J. Daley:]

Yes. Hi. Marc. How are you? So, I think, what we saw this year was at least in this quarter we had fair amount of activity in our pooled vehicles, whereas in last year we saw a fair amount of growth in a separate accounts and the major impact to our fee rate is going to be which channel we add assets. So, this year we were seeing a trend towards the pooled vehicles, which has helped our fee rate, but as we've discussed we see over the next several years as we continue to build our assets overseas which are more through separate accounts, we'll see that start to trend down a couple of basis points as we grow.

[Marc Irizarry:]

Okay. Then, Eric, Any update on talent acquisitions and just maybe this gets back to sort of the business mix in terms of your assets. You said you've had a lot of conversations throughout the road show process. How should we be thinking about talent acquisitions in terms of timing and bring new teams up?

[Eric Colson:]

Certainly, Marc. There is no set timing that we can pinpoint and say that we are going to do one or two teams every year. Comments earlier were around the amount of information and data that's coming through the public process provided us more exposure into the marketplace, so our networks expanded. We will continue to come through those networks and we will continue to work with individuals and teams to see if they are fit with our organization, but as of today, we have a few teams that we are looking at and talking to, but no specifics on any on boarding.

[Marc Irizarry:]

Okay. And, then just in terms of flows, can you give us some color on flows by strategy, I guess, and also particularly for strategies like global equity that just hit the three-year number. Are you starting to see a pick up there, so maybe just a little bit more color on maybe capacity by strategy and also global equity now?

[Eric Colson:]

Certainly. We had a good quarter. The Global Value team continued to do well. The Global Value strategy was a very diverse asset mix coming from both separate account and pooled vehicles. Now there is more assets coming in the pooled vehicles in a separate account and had a good mix of clients coming outside the U.S. That strategy will slowdown, or that team will slowdown its assets, because you know we have soft close on our international value strategy and we've closed the separate accounts on Global Value. The other teams, clearly, the global equity team has done well with the international equity strategy. And, as you mentioned the global equity has hit its three-year track record and has been rated five stars by Morningstar, and you see the pipeline building nicely and the global equity for the international growth strategy and global equity, so we think that will balance out our flows more in line over the next year. Currently, we are seeing quite a bit of a continued demand for our growth team with the global opportunities strategy, but the team overall had nice flows and it has quite a bit of capacity with global opportunity and some capacity lap in small cap growth. Our U.S. value team has performed quite well in the midcap value over the last couple of quarters and small cap value has been off to market bid and value equity is starting to show a nice pipeline for us and we've had obviously a lot of wind in our back with regards to the emerging markets asset class. The emerging market's performance long-term has been 100 or so basis points behind the index since inception. We lost a significant piece of business there, but we also gained a large account around $200 million in emerging market, so there's still quite a bit of opportunity in [EM] and we continue to look for opportunities there.

[Marc Irizarry:]

Okay. Then just quickly on EM. Did you in the pipeline any redemptions that you see coming from EM or sort you sort of stem the tide there?

[C.J. Daley:]

We have some clients that were watching, but there is no clients that has indicated to us that we see assets leaving. I mean, we've seen a very healthy pipeline there and we are the nice diversifier to many of the assets and assets allocated into ETFs. I mean, if you look at the emerging market's ETF, it's one of the largest funds in the marketplace and I think the March quarter is the first time you saw some ETF flows go negative and it was in the bottom-five versus December and January had an extraordinary flows into the ETF. And, those flows that are leaving are looking for products that will diversify against that large market cap orientation. So, we continue to see quite a bit opportunity there, but we are cautious on the clients given the performance lag.

[Marc Irizarry:]

Okay. Great. Thanks.

[Operator:]

(Operator Instructions) Your next question is from the line of Robert Lee from KBW. You may proceed.

[Robert Lee:]

Thanks. Good afternoon and congratulations on your first earnings call. Let's see, a couple of quick questions. Most of mine have been asked, but you clearly have a strategy from time-to-time opening and closing products, maybe capacity, but it flows and what not ebb and flow. I mean, can you maybe update us? Are there any products right now where maybe you are seeing a pretty strong flows or you are thinking there maybe need for at least the temporary closure or conversely any product that maybe are close, but even if they are still getting flows, you are thinking you have capacity now to open more broadly.

[Eric Colson:]

What we do is spend quite a bit of time on the mix of assets, where we think it's extremely important to manage the fee rate and further diversification. At times you see strategies go out of favor or performance slide and we've opened for a limited capacity. At this point, we don't have any strategy that we are opening for capacity and growth or just philosophy of assets and to manage our mix. The area that we continue to focus is the Global Value team and we are closed in the international value strategy and we have closed the separate accounts in Global Value by maintain an open position in our pooled vehicles and we saw a nice flow in both, our mutual fund and our usage for Global Value that outpaced our separate accounts, so the management of that mix is going well and that's the only strategies that we are watching the mix.

[Robert Lee:]

Okay. And maybe looking at the new business pipeline, Eric, you did mention that you are seeing pretty good activity or good about your pipeline. Is it possible in any way to maybe you know get some kind of quantification or color around that? I don't know if there is a dollar amount of one, but not funded mandates kind of out there or some color on RFP activity up 10% year-over-year. Any given, we can kind of put our arms around a little bit?

[Eric Colson:]

Yes. I did mention that the overall activity is up year-over-year, so we would clearly have seen more assets and a number of searches when we look over the same time period that last year have a specific number on that. It's up at least 10% if not greater on that number. From a unfunded wins, we've been tracking that and for the second quarter that looks like currently in the second quarter we are approximately around $1 billion of unfunded.

[Robert Lee:]

Great. It's very helpful. One last question for C.J. and I apologize. There's been a long day for all of us, so this is probably obvious but when I look your comp and other $9 million of severance retention understanding that the retention is going to continue through the rest of the year, but when you talk about the $0.06 from the severance, you are not talking about that. That's how much earnings this quarter reduced by. That's just the relative to the Q4. Should be obvious.

[C.J. Daley:]

Yes. That's the delta between this quarter and the prior quarters. In total, the impact just to this quarter would have been $0.09.

[Robert Lee:]

Great. All right. Just wanted to confirm. Thanks for taking my questions, guys.

[Operator:]

Your next question is from the line of Cynthia Mayer from Bank of America/Merrill Lynch. You may proceed. Cynthia Mayer - Bank of America/Merrill Lynch Hi. Thanks a lot. I guess, since you mentioned rebalancing, do you see any seasonality in the first quarter flows or is there anything in there that you think might not repeat?

[Eric Colson:]

Hi. Cynthia, It's Eric. I do see quite a bit of just seasonality. If you back out and we ask ourselves, we see any change in people investment policy statements or asset allocation, where they have uptick allocation to public equities and we certainly haven't seen changes in the policies or asset allocation. I think, we've seen as I mentioned, people be more disciplined and strategic in their asset allocation through rebalancing as opposed to tactical asset allocation and that tactical asset allocation went against public equities a year and I think that probably muted the seasonality last year in 2012 and 2011, and people were more disciplined back to their strategic asset allocation. We also from a management structure standpoint, which is the mix of people allocate within an asset class. For example, equities, you managed the mix between passive and active, you managed the mix by [box] or by geography and we see more people looking at active strategy than balancing the mix given the explosion in passive assets. I think, you've seen a little bit balancing there. When you add that all together, it's hard to add that up and say that there is a real sustainable mindset that people are just hoping their equity allocations and it seemed more seasonal and more disciplined than years past. Cynthia Mayer - Bank of America/Merrill Lynch When you've seen that pattern in the past, would you expect that to persist a little bit into second quarter just in terms of people making decisions, but then maybe putting the assets in later or taking longer to make the decision, so I am just trying to gauge looking at the flows, they are pretty good. Is there anything that we should assume doesn't continue into the second quarter simply because this is more of a first quarter activity?

[Eric Colson:]

I would state that this amount of activity is clearly a first quarter activity and that should decrease over the next couple of quarters and you see a little bit of uptick back in the fourth quarter and you will see more of a institutional and clients rebalance over time, but what the asset they came in, in the first quarter was primarily through the intermediary channels and more seasonal and I wouldn't extend those to second quarter. Cynthia Mayer - Bank of America/Merrill Lynch Okay. And then, I guess, just to clarify something on the equity awards. Those are layering over five years, right? So, those are expenses of fixed amount, right? Not variable and?

[C.J. Daley:]

Yes. That's correct. We plan to grant our annual equity in July of each year and we'll have five-year testing periods and typically what happens as you for accounting rule as you price them at the date of grant and amortize those pro rata over the five years. Cynthia Mayer - Bank of America/Merrill Lynch Right. So, if for instance the market were to sell off, those would still be expense at the higher amount, because your based on our price of the stock at that time?

[C.J. Daley:]

Right. Correct. Cynthia Mayer - Bank of America/Merrill Lynch Okay. Then, maybe last one a little bit on, can you give us a little color on the process of searching for teams and evaluating them? Is there anybody focused on that full time? Who is most involved in evaluating them? Are the founders still involved in it?

[Eric Colson:]

Hi. Cynthia. It's Eric on that question. It is primarily comes to my desk, but we obviously have our analysts and our portfolio managers out talking to individuals and in many cases they give me names of people that impress them. Our founder Andy Ziegler is a strong founding board for ideas and if the name does come across, he would certainly pass along to myself and that new team, but new idea generation of Andy is limited. It's more of a sounding board and it's really the idea that come from a network. There's a strong group head hunters to bankers to peers that recollect ideas and bring to my desk and then we have a group that evaluates the opportunity. Cynthia Mayer - Bank of America/Merrill Lynch Great. All right. Thanks a lot.

[Operator:]

At this time, we have no other questions. I would like to turn the call back over to Mr. Eric Colson for your final remarks.

[Eric Colson:]

Great. Thank you very much. We know it was a long day for all of you and truly appreciate your time and we are very pleased with the IPO and the results and I want to thank you for your time today.

[Operator:]

And, ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.