Artisan Partners Asset Management Inc. Class A

Hello, and thank you for standing by. My name is Jamie, 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, today's conference call is being recorded. At this time, I'll turn the conference call over to Michaela Taphorn, Director of Investor Relations for Artisan Partners Asset Management. Ma'am, you may begin.

Thank you. Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Eric Holson, Chairman and CEO, and CJ Daly, CFO. Our latest results and investor presentation are available on the Investor Relations section of our website. Following these remarks, we will open the line for questions. Before we begin, I'd like to remind you that comments made on today's call, including responses to questions, may deal with forward-looking statements which are subject to risks and uncertainties that are presented in the earnings release and detailed in our filings with the SEC. We are not required to update or revise any of these statements following the 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 our earnings release. I will now turn the call over to Eric Holson.

Thank you, Michaela, and thank you everyone for joining the call or reading the transcript. Today I want to discuss the topic of thoughtful growth. After I finish, CJ will review our financial and business results. Thoughtful growth is one of the three pillars of our business philosophy. We have always been and remain a growth firm. Growth is important for our talent, for our clients, and for our owners. To recruit, develop, and motivate exceptional talent, we must provide resources, space, time, and guidance for people to grow. Professionally as investors and entrepreneurs, intellectually as curious, engaged people, personally as responsible members of diverse communities, and financially as accountable citizens. By facilitating all facets of growth, we maximize the probability that we can for entire lengthy careers, which increases the probability of long duration clients and positive long-term financial outcomes for owners. Over the last 10 years, we have grown the real assets of our business in a multitude of ways. We have increased our investment franchises from five to nine, diversifying our sources of alpha and future growth. We have increased our strategies from 10 to 17, diversifying our AUM, and creating a lineup that is relevant for a variety of asset allocations. And we have built technology, infrastructure, and operations to support greater degrees of investment freedom and the continued growth of our business. We have focused on multi-dimensional growth, strengthening and expanding our existing business while also adding new teams, strategies, and capabilities. Those investments in business growth have translated into financial growth. Our AUM has grown from $44.4 billion to $112.5 billion. Our run rate revenues have more than doubled. And throughout the past 10 years, we have maintained strong operating margins and distributed essentially 100% of our cash earnings. While growth is important, We constantly remind ourselves that growth is an outcome, not a strategy. We don't seek growth for the sake of growth. We don't try to engineer growth. We focus on what we can influence, what we do well, and what's consistent with who we are as a high-value-added investment firm. The items listed on slide two. We can recruit and develop great talent and maintain an ideal environment for our people. We can provide investment tools and flexibility to manage differentiated strategies and generate alpha. We can communicate openly with clients and deliver on commitments. We can manage capacity to prioritize investment returns. We can design new investment strategies for evolving asset allocations and distribute those strategies in an efficient, leveraged way, minimizing distractions for investment teams. We can operate a financial model that is transparent and predictable. We can operate with integrity, and we can remain patient. We cannot control the macro environment, market returns, client and investor sentiment, or the timing of client cash flows. Since we can't control those items, we try to avoid being distracted by them. Our patient approach results in a bumpy ride. We could try to smooth things and engineer short-term outcomes. We could launch whatever the latest hot product is, regardless of whether we have the right talent or edge. We could underprice alpha and limited capacity to boost short-term flows. We could massively spend on sales in an attempt to change buyer preferences, which would disrupt our investment-oriented culture. That's simply not our approach. It's not sustainable. It results in blow-ups that can fatally disrupt the long-term compounding process. We want to persist and thrive for talent, clients, and owners for the very long term, which requires that we remain disciplined and patient. Slide three shows the current outcome of our long-term approach. We have nine autonomous investment franchises, each with great leadership, stable talent, and outstanding investment performance. The nine franchises manage a diverse set of high-value added strategies for a range of asset allocation styles. All nine franchises want to grow, and we continue to invest in each of them, adding new talent, providing new technology and data, improving physical environments, and developing new strategies. The nine existing franchises are a powerful platform for thoughtful growth. Through future investment performance, net flows, and additional investment strategies. Existing business, though, is not our only source for future growth. At any given time, Artisan as a firm is more than the sum of its existing parts. We have a repeatable and proven process for adding new franchises and strategies. Slide four summarizes our execution of that process in recent years. Since 2013, We have built three new investment franchises, launched six new strategies, recruited a new leader for and added degrees of freedom to our non-U.S. small-mid growth strategy, evolved our global value team into two distinct investment franchises, and invested in new people, infrastructure, and technology to support greater degrees of freedom in our increasingly global business. We have taken advantage of disruption in the talent marketplace. We have provided a home for proven investors who want an investment-centric firm that provides support, independence, and time to do things the right way. We have also taken advantage of the disruption to style box allocation. We have designed and launched global and third-generation strategies that fit asset allocation's evolving way evolving away from the traditional approach in both the institutional and wealth channels. These investments have significantly increased the diversification of our firm, adding new independent alpha sources, new asset classes, new capabilities, and new sources of growth. We are already seeing significant early returns as shown on slide five. we manage over $10 billion in the seven third-generation strategies developed since 2013. The strategies are growing through investment performance and new client demand. Year-to-date, they have raised a combined $3.3 billion in net inflows. They are experiencing demand at fee rates that reflect their high value-added nature and relatively limited capacity. And so far, the early adopters have gotten good value for money. The four publicly available third-generation strategies with track records of more than a year have outperformed their indexes by an average of 156, 523, 838, and 1,447 basis points annually since inception after fees. The third-generation strategies are continuing in the tradition of our first and second-generation strategies. Year-to-date, those strategies have generated collectively $2.8 billion and $1.3 billion of excess returns. The first- and second-generation strategies remain incredibly important to our clients and our business. In keeping with our multi-dimensional, holistic approach, we continue to spend the lion's share of our time and energy reinvesting back into the first and second generation. We have added and elevated talent, increased degrees of freedom, and thoughtfully managed capacity and business mix over time. Those efforts have paid off in the form of continued strong investment performance. Looking forward, we believe that a significant portion of the market will retain Stylebox components, which will drive long-term demand for our first-generation strategies. You can see that in the $6.2 billion of gross inflows into those strategies so far this year. Our second-generation strategies have multiple avenues for continued growth. They fit well into institutional OCIO programs, model delivery, sub-advisory, and the non-US wealth channel. These are relatively large capacity strategies that can be delivered to end clients in many formats. And we expect the third generation strategies to continue to draw demand from the U.S. wealth channel where advisors want to complement core positions with differentiated alpha generating satellites. Over time, with longer track records, we expect the third generation strategies will also increase their institutional separate account in non-U.S. businesses. If we continue to generate excess returns, we are confident in the long-term growth prospects of all three generations. Our diversified business can access growth with different types of clients, in different geographies, and through different vehicles. Clearly, our approach to growth is focused on generating investment returns for clients. Slide six shows an estimate of our excess returns over the last 11 years. over the entire period shown, the excess returns total nearly $15 billion. Generating excess returns lengthens the duration of our client relationships, earning us more time to compound client wealth and grow our AUM. We have been doing this for 25 years across multiple teams, strategies, asset classes, and time periods. We are focused on continuing to generate excess returns and growing our business alongside our clients' capital. We are not letting recent net outflows change anything fundamental about our long-term approach. If we are performing for clients, we are accomplishing our mission. We expect the ongoing disruption in client preferences, whether for asset classes, vehicle types, customization, or ESG, will create plenty of opportunities to connect our investment focus and expertise with clients' long-term needs. We are confident that investment performance will create a sufficient combination of flows, long-duration client relationships, and investment returns to generate a growth outcome for all our constituents. I will now turn it over to CJ to discuss our recent business and financial results.

Thanks, Eric. Our earnings release includes both GAAP and adjusted results. On our call today, I will focus my comments on adjusted results, which we utilize to evaluate our business and operations. Financial results begin on slide seven. We ended the quarter with AUM of 112.5 billion, down 1% from last quarter, and down 4% year over year. Year to date, AUM was up 17%. September 2019 quarter AUM declined resulted from approximately 700 million of client cash outflows and market depreciation of approximately 600 million. Outperformance across most of our strategies positively impacted AUM in the quarter. Many of our strategies are growing, and in particular, our third-generation strategies have had strong organic growth in both the quarter and year-to-date periods. Overall, 10 of our strategies had aggregate net inflows of $1.1 billion during the quarter, These net inflows were offset by $1.8 billion in aggregate net outflows in earlier generation strategies, principally our non-U.S. growth, global value, and U.S. mid-cap strategies. As a reminder, next quarter flows will include the impact of artisans' funds, annual income, and capital gains distributions. Based on our current estimates, we expect this year's distributions to result in approximately $450 million of net client cash outflows from investors who choose not to reinvest their dividends. Average AUM and revenues are on slide eight. In the quarter, average AUM was up 3% to $113 billion from June. Revenues grew only 1% as the June quarter included $4 million of performance fees. Compared to the prior year's quarter, average AUM was down 3% and revenues were down 5% as the average fee rate was down slightly due to a decline in assets managed and higher fee pooled vehicles. Average AUM for the year-to-date period was $109.4 billion, down 6% compared to the same period last year due to significantly lower AUM heading into 2019. Revenues were 7% lower in the current year-to-date period, primarily due to lower average AUM and lower average management fee, excluding performance fees. Operating expenses are presented on slide nine. Operating expenses declined in the quarter and year-to-date largely due to the variable expense components in our P&O model adjusting to the lower level of revenues and lower equity-based compensation expense as higher-valued grants fully amortized in the quarter. Compared to the quarter and year-to-date 2018, expense related to investment team relocations and increases in salary and benefits costs related to additional full-time employees in 2019. Operating margin and adjusted per share earnings are on slide 10. Our operating margin increased to 37.2% this quarter from 35.3% in the June quarter, reflecting the impact of slightly higher revenues along with the decline in equity-based compensation expense. Compared to the same quarter a year ago, the operating margin declined from 38.5% to 37.2%, primarily due to lower average AUM and revenues. For the nine-month period, the operating margin was 34.6% compared to 37.8%, also as a result of lower average AUM and revenues and the expense items I explained earlier. The adjusted effective tax rate increased in the quarter due to higher state income tax expense. We expect the full year adjusted effective tax rate to be 24.1% in 2019 and further increase in 2020 to between 24.5% to 25%. As a result of the change in our deferred income tax rate, our deferred tax assets and amounts payable under tax receivable agreements were also remeasured. Deferred tax assets increased by $23 million with a corresponding decrease to the provision for income taxes. Amounts payable under tax receivable agreements increased by $19.6 million. Revaluation of deferred income taxes and the related payables under tax receivable agreements did not impact our adjusted results. Adjusted net income was $54.8 million, $0.70 per adjusted share, in the September 2019 and down $0.09 compared to the September 2018 quarter. Year-to-date, adjusted net income was $149.5 million, or $1.92 per adjusted share. Capital management discussion begins on slide 11. Companies' board of directors declared a variable quarterly dividend of $0.65 per share of Class A common stock with respect to the September 2019 quarter. This variable quarterly dividend represents approximately 80% of the cash generated in the September 2019 quarter. Subject to Board approval, we currently expect to pay a quarterly dividend of approximately 80% of the cash the company generates each quarter. After the end of the year, our Board will consider payment of a special dividend. Finally, our balance sheet summary is on the last slide. Our balance sheet disposition has remained relatively consistent position is healthy and leverage remains modest. That concludes my comments, and we look forward to your questions. I will now turn the call back to the operator.

Ladies and gentlemen, at this time we'll begin the question and answer session. If you would like to ask a question, please press star and then 1 using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handsets before pressing the keys. To ajar your questions, you may press star and two. We do please ask that you limit yourselves to two questions to allow time for all questioners. And at this time, we will pause momentarily to assemble the roster. Our first question today comes from Bill Katz from Citi. Please go ahead with your question.

Okay, thank you very much. And thank you for the added slides and slide deck, very helpful. So I want to start there if I could. maybe tying together some of the commentary in your head marks as well as maybe slides five and six. On six, I'm sort of intrigued by what do you think would sort of recouple the excess return and the flows? And then within that on page five, you had mentioned that you expect that the first generation flow story could get a little bit better. I was sort of wondering, you know, what would suggest that maybe the back book of the platform could start to see some better growth, all else being equal?

Sure, Bill. Thanks for the questions. The more mature strategies that tend to be in the style box categories have seen some outflows, which we've talked about, primarily in the mid-cap space. Some of those outflows have been ramped up a little bit in the international growth strategy, which had some you know, difficult performance for one year. And over the last two years, the performance has ramped up. You know, that performance is going to mitigate some of the outflows there that should give us a lift in that first-generation group. So it gives us confidence there. And we also see some stickiness to the style categorization in the equity allocations. We've I believe that most asset allocators will continue to diversify by philosophy or process or a general term for that is style. No one's going to hire three managers that all do dividend discount modeling. Some are going to look for earnings growth. Some are going to look for a valuation approach. those trends give us confidence that that's on the road to stabilization.

Okay, just a follow-up question. Maybe I'll get back in the queue. So maybe if you were to, CJ, just as you think about the incremental sort of scale of the business from here, where are you on your spending cycle? Or maybe another way to sort of ask about it, to the extent that assets just sort of continue to migrate up, assuming market dynamics decide for a moment, having about the spend against that or maybe the incremental margin associated with that growth?

Yeah, Bill. I would say that absent any new teams or new initiatives which aren't on the docket right now, we're looking at probably mid-single-digit growth, sort of a little bit more than inflationary. We'll spend a little bit more on on technology, but the occupancy costs that you saw creep up this year due to some relocations will subside and stabilize, and tech should level out, although it would be up probably mid-single digits. So I think, you know, incremental dollars, we should see some nice margin leverage.

Okay, thank you.

Our next question comes from Robert Lee from KBW. Please go ahead with your question.

Great. Thanks. Excuse me. Thanks for taking my question. Maybe talk a little bit about it. I mean, in previous earnings calls, you know, you've talked about how changing retail landscape, you know, may provide some opportunities for you. And maybe that's evident in the third-generation success in wealth management. Can you maybe update us on maybe what kind of investments or new opportunities you're seeing there and maybe how you've started to try to take advantage of them?

Sure, Rob. The third-generation strategies have a – currently a higher tilt towards the intermediary or wealth management segment, which is more skewed to that group than our first and second generation, which the second generation has a bit higher allocation to some global allocation and obviously the first on style in the institutional space. With regards to the intermediary and the wealth management, we all are seeing disruption in that space with regards to how these models are operating, how the fees are being generated to support these models, the vehicles that will be used, or whether there's going to be a holdings-based, and how customization flows through. This disruption has lowered the number of strategies or managers that operate in this platform. And as the change occurs, we believe that the intermediaries and wealth managers are going to put a higher weight on alpha delivery since they've already increased their passive weight. And given our performance and the strategies that fit into that asset allocation, we're quite optimistic that we can work with a variety of different solutions, vehicles, or customization, and the demand is going to be towards strategies that we deliver.

Maybe as a follow-up, thanks for that. I mean, oftentimes getting newer strategies on different platforms and through different channels, but certainly different platforms can take time as different wealth managers go through their due diligence process. If you think of your third generation, obviously credit's already been around for like three years or so, but if you think of thematic and maybe developing world, which are maybe not quite there yet, do you feel like there's a lot more opportunity in wealth management as you have, let's call it a pipeline of new wealth managers who are going through the process of vetting them that could accelerate some of the demand there?

Yeah, there's certainly the asset allocation and manager structure that goes on in various platforms are certainly not as homogenous as they used to be. So not everybody's lining up just to do a mid-cap growth or value, which occurred in the late 90s, early 2000s. And you have various disruption and people are looking for differentiated satellite managers. And so certainly, as we increase the number of differentiated strategies, it gives us more opportunity to work with a variety of platforms that operate with different asset allocation and manager structure. I think that our – Success in bringing new teams and strategies to the market are being recognized by the research analysts and in these platforms that give us a leg up to have earlier success given our repeatability of strategies that we've delivered and the returns that have come with that. It clearly is a competitive marketplace, and we're hoping that our brand, our proven success, and the history of teams and strategies being launched are recognized, and that's what we consistently say about thoughtful growth, as opposed to launching as many strategies as we can and hoping one works.

Great. Thanks for taking my questions.

Our next question comes from Dan Fannin from Jefferies and Company. Please go ahead with your question.

Thanks. I guess a follow-up also on just kind of the third-generation strategies, and I think you mentioned in your comments, Eric, about, you know, over time getting more SMA and more institutional contribution. So can you talk about if that's more at you're kind of managing that capacity now and, you know, as you want, you'll open it. I guess trying to think about the timing of when that might open up to, you know, kind of broader mandates on the institutional side, if that's a PM decision, if that's a firm decision, or just kind of an evolution that just might, you know, have other factors associated with it.

It's, Dan, it's all three of those. You know, clearly the marketplace has to evolve with regards to the SMA business, and technology is certainly moving to that direction. There are or a growing number of providers that I think are advancing in technology and the efficiency of getting lower minimum separate accounts into the wealth management space. If there is a leveraged model that we could tap and operate effectively with the right strategies, and myself and the investment team are in agreement that is the right road forward, then we will triangulate on that. And we do think all three are coming together. We're not going to force it or try to jump the gun on it. And I think there's still some development in the marketplace that needs to happen, as well as the adoption of the technology into the intermediary and wealth platforms. I mean, we're going to see that with the active ETF as well. But these new developments take time to work into the ecosystem.

Okay. And then just as a follow-up with regards to kind of talent acquisition and kind of the environment today and Maybe if you could just kind of characterize what your, you know, the opportunity set that you see today versus other periods in terms of talent that's out there that you're, you know, potentially, you know, looking at.

Yeah, we believe right now it's a phenomenal time to look at talent. We go back to, you know, why Artisan was launched, and it was launched because, you There was talent at large organizations that didn't want to be embedded into a house view or centralized research. And you see that today in many of the hedge funds where it's a structured environment philosophically or from a risk point of view. And then on the flip side, a lot of these individuals did not want to start their own firm and deal with running a business. And I think we all agree that the regulatory environment, the distribution environment, and the ease of starting your own business is much harder today. And I go back to our success of bringing talent on, and as we've brought on our thematic team and entered into the equity long short, as we've broadened out our credit into a a long, short, or alternative-oriented strategy. And the success we've had overseas, we've become a very interesting home for proven talent. And the number of opportunities for that talent is abundant. But, you know, the best talent out there, I think we're getting a good look at.

Great. Thank you. Our next question comes from Mike Carrier from Bank of America. Please go ahead with your question.

Hi, guys. This is actually Sean Kalman on for Mike. We just had a couple questions on flows. So first, over the last couple of quarters, non-U.S. client flows have been better than U.S. flows, but it looks like that trend reversed this quarter, so we're just wondering what you think may have driven that.

Yeah, hi, Sean. It's Eric. You know, the primary driver we've seen – And our global value and global opportunities, a bit of rebalancing. They are both fairly mature strategies when you look at the total assets under management. And we had a bit of rebalancing in some of those relationships. And given the size and the success of those two strategies and the minimal net flows, those were offset.

Okay, and then there was also a slowdown in sales for global equity products quarter over quarter. So we just wanted to know if that was driven by lower sales in the non-U.S. small mid-growth strategy, which were relatively strong last quarter, and if so, what you think drove that.

The primary was the global strategies, but the non-U.S. small mid- growth strategy has remained fairly strong. We see quite a bit of interest in that strategy. The performance has outpaced the benchmark and has outpaced most, if not all, of the relevant peers.

Our next question comes from Alex from Goldman Sachs. Please go ahead with your question.

Good morning. This is Ryan Bailey on for Alex. I wanted to piggyback off the last question of the prior question on talent acquisition. And kind of we go back to slide four. Clearly, APM has a differentiated skill set in identifying talent that can both scale AUM and generate alpha. And I appreciate that you brought in a PM recently. But if we look back, the last team that you brought in was in 17. But you've mentioned that it's a phenomenal time to be looking at talent. So I guess my question is, why haven't we seen you guys bring in more teams recently?

Well, one, over 25 years we've had nine teams. So the standard in the bar that we have is quite high. And the fit into our organization, we take quite a bit of time to – ensure a strong fit so that we have the outcome that we've created on page three, which is the performance page. My comments on the phenomenal timing right now or phenomenal point in the market is that we see an uptick in the number of talent, and we're starting to vet numerous opportunities. But we don't think that there's an abundance of talent perfect fit for our model and for where we want to attack in the distribution cycle. So the opportunity set is growing, and we think that is a plus for looking at another group to bring in or team to bring in.

Got it. And maybe one turning to the fee rate. It looks like on the institutional side or the separate account side, the fee rate has trended down over the last couple of quarters. I know historically you've been very protective on maintaining that fee rate because you deserve to get paid for alpha. Has anything changed in your strategy there, or is it a mix shift dynamic that's going on that's leading to the lower fee rate?

Primarily you're seeing the mix shift that's bringing down the fee rate. Yeah, I will say that the last couple of years, we've seen fees come down for clients because obviously clients are using a lot more passive. Clients are also looking for the most appropriate vehicle or separate account, and that's brought down their fees. And we've seen many of our competitors in the marketplace say, drive down fees to manage a one-dimensional mindset towards growth, which is find flows at all costs. And over the last couple of years, this disruption and noise in the marketplace has changed, I think, the overall fee structure. I think fees will come down slightly, but our strategy was to be patient and see how the market's changing and what does it mean for high-value added managers. With that, I do think that you'll see separate account fees come down slightly, but we will always manage that based on the alpha and the capacity, which I think you see in the third-generation strategies.

Thank you.

Our next question comes from Chris Shutler from William Blair. Please go ahead with your question.

Hey, guys. Good morning. Eric, you talked about exploring areas such as customization, tax optimization, ESG, maybe more performance fee-related pricing over time. Would you mind just getting a little more specific and give us your latest thinking around each of those areas? I'm just kind of wondering what efforts might be underway behind the scenes to address those. Thank you.

Certainly, probably the most prolific is the ESG. As we've grown our presence in Europe and outside the U.S., ESG has to be addressed across all the investment teams with regards to how we're conducting research and embedding that into each team's philosophy and process. And each of our teams are taking that at different rates. And in some cases, you're seeing a lot more separate accounts come in that have some restrictions or negative screening. You're starting to see that show up more and more in demands that we implement that into our broader vehicles, which we're, you know, giving some thought to that if it's not changing the overall strategy and the output of the portfolio is following certain rules, then why not incorporate that into the vehicles, especially in Europe? With regards to the customization, which would take into effect the tax, as well as ESG preferences, those are early stages, Chris. We're really exploring various partners, various groups that we can work with to package that up. So there's not much details on those changes as we wait for better discussions in the marketplace.

Okay, and then anything new, Eric, on performance fee pricing and whether that's something that we'll see increase noticeably over the next few years?

Certainly, we're having more discussions. We have adjusted a couple relationships into performance-based fees going forward here. I think that will be an active dialogue, and we've always been open to those type of discussions. And I think you will see an uptick there. Will it be meaningful? Probably not in the next year, but it could be. that could occur in two to three years out pending the behavior of institutional clients.

Okay. Thank you.

Our next question comes from Kenneth Lee from RBC Capital Markets. Please go with your question.

Hi. Thanks for taking my question. Wondering if you could just expand further upon your efforts to further reinvest in the first and second generation strategies. We've obviously seen some team changes, but just wondering if there's any other efforts that you'd like to highlight.

No, we've been very transparent about our evolution there of bringing talent in, evolving teams where appropriate, bringing more degrees of freedom into those strategies so that we provide an opportunity to outperform teams. So as we work with each team and each strategy, we've been very open and transparent. So nothing new to bring up there.

Gotcha. And just one follow-up, if I may. On a broader level, and presumably the firm's solid track record in generating excess returns is resonating well with clients in the current environment, but just wondering if there's any other factors involved And just wondering, Jen, if you could just give us a little bit more color as to what's resonating with clients right now. Thanks.

Our conversations with clients have been a focus on increasing their passive, increasing opportunities potentially to work in an outsourced manner or an OCIO that they may work with a consultant or a provider in a different way? Are they in the right vehicles? And, you know, those have been the discussions. I think it's dominated the industry and has, you know, gotten many of our clients and investors to just shore up their plans and they'll be refocusing back on You know, the stable and trustworthy and consistent value-added managers, that's not going away. There have been other conversations over the last year or two, and that happens from time to time, and that's why we consistently say this is a lumpy ride. And if you force that conversation, you know, you're going to have to bend on other areas as which is probably not, you know, needed in the long term.

Gotcha. Very helpful. Thank you very much.

Our next question is a follow-up from Bill Katz from Citi. Please go ahead with your follow-up.

Okay. Thanks very much. Just a couple of them. Number one, can you talk a little, Eric, about where you stand today in terms of within your total asset pool that's in the high net worth channel?

Total asset pools, probably right around 30% that we would deem in the intermediary space.

And then within that, is there any exposure? You were talking a little bit about sort of the shifting nature of the SMA platform. I don't know if that was more institutional or retail, but there's certainly been a lot of discussion about the implications coming off of what UBS is doing on their own sort of platform and whether or not that is a knock-on effect for some of their competitors. Can you talk about a little bit about what you have on the retail intermediary side in terms of SMA and if pricing changes, what's the playthrough, how that might filter down to what it might mean for APAM?

Yes, certainly. We don't have any SMA business in these retail platforms. Historically, there's the technology, the impact on your trading desk, and the probability of errors on implementing the old technology and old arrangements we have stayed away from. So as that develops and we have the right strategies, we're very open to get into that discussion. You know, the newer strategies that tend to be in the third generation tend to have a high degree of freedom. They operate well in pooled vehicles. They might be a bit difficult to move into a SMA platform. However, our second generation strategies are, you know, of interest, especially the larger global equity, global value, global opportunities, and looking at global intermediaries, it could be a nice fit. To answer your question, we don't have any exposure right now to the SMA inside of an intermediary platform.

Just one last one. Thanks for your patience in answering all the questions. So you'd mentioned some conversation with clients on terms of moving performance fees. So is that more of a flex fee product a la what Fidelity is doing outside the United States and what Alliance is trying to do in the United States, number one, or is it just more traditional 2 and 20 type model? And then the second part of that is I'm surprised that you'd say it's more on the institutional side than the retail side. Can you sort of talk about your views and how you see it potentially developing on the retail channel?

Sure. We have not incorporated a performance-based fee in a publicly traded vehicle, such as a mutual fund or a USIT. So we have not incorporated that into our publicly traded vehicles. With regards to my comments on performance-based fees, it's been around our traditional strategies in the institutional separate account business. And those fees tend to fulcrum around our current separate account fee level. With regards to your comment on the 2 and 20, we do not have 2 and 20 space. Our strategies tend to be more directional in the hedge fund space and are not looking to replicate, I think, the older hedge fund structure.

Okay. Thanks for taking all the questions.

And, ladies and gentlemen, with that, we'll end today's question and answer session. And today's conference call, we do thank you for joining. You may now disconnect your lines.