Artisan Partners Asset Management Inc. Class A

Hello, and thank you for standing by. My name is Mike, 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 Ms. Michaela Taphorn, Director, Investor Relations for Artisan Partners Asset Management. Ms. Haporn, the floor is yours, ma'am.

Thank you. Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Eric Olson, 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 inter-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, the most comparable GAAP measures, in the earnings relief. And I will now turn the call over to Eric Coulson.

Thank you, Michaela. And thank you, everyone, for joining the call or reading the transcript. I hope you are well. First, a quick update on our operating environment. The health and safety of our people remains our highest priority. We continue to work mostly from home with some investment personnel back in the office. Despite the environment, we continue to operate well. Our investment teams have taken advantage of market volatility to invest opportunistically. Our distribution professionals have used technology to communicate with existing clients, prospects, and new relationships. and our operations professionals continue to support our mobile and flexible environment. At Artisan, we focus on people, investments, and trust. The pandemic and social unrest has resulted in more volatile and uncertain environment for people and investments. Responding well requires patience and trust, critical components of our thoughtful growth mentality. Our approach allows our teams to remain focused on their investments and utilize degrees of freedom to produce differentiated long-term performance. We allow our people to operate in trusted and autonomous working environments. And our patience and commitment to doing things right reassures clients and consultants. As we've always stated, the outcomes are lumpy over short periods. But over the long term, we compound capital for clients, create opportunities for our people, and grow business value for our shareholders. Slide two shows that we have consistently added value for clients for 25 years. Here today, 12 of 18 investment strategies have outperformed their benchmarks after fees. Across the firm, we have generated over 600 basis points of firm-wide gross alpha. That translates into approximately $7 billion of additional wealth for our clients. Our recent performance rivals that of any period in our history, except for around the TMT bubble, when we were a smaller, less diversified firm. Our performance over time demonstrates an ability to add value in all manner of markets. But in periods of heightened uncertainty, volatility, and dispersion, such as the TMT bubble, the great financial crisis, and most recently with the pandemic, Our investment teams have performed particularly well. In those times, experience, judgment, deep knowledge of company fundamentals, and the conviction to act through security selection make a big difference. And the value of Artisan Partners' active management clearly shows through. What we do works across investment teams and asset classes and through time and over market cycles. Turning to slide three, I want to recognize several recent milestones at Artisan Partners. First, we recently celebrated the fifth anniversary of Lewis Kauffman joining the firm and launching the Developing World Strategy. The Developing World team has outperformed their index by nearly 700% since inception after fees. The Artisan Developing World Fund is rated five stars by Morningstar ranks number two of 178 funds in its Morningstar category and has $5.4 billion in assets. Second, Chris Smith and the Thematic team recently passed their three-year mark at Artisan Partners. Since launch, the team's Thematic strategy has generated a cumulative return of 95% after fees compared to 39% for the S&P 500. The team's focus fund also has a five-star Morningstar rating and ranks in the top decile of its category. The thematic team also manages a long-biased private fund, which has performed well and has $747 million in AUM. Lastly, Reza Okanovic has now been with Artisan Partners for more than a year. Since inception, after fees, the Artisan International Small-Mid Growth Strategy has returned more than five times its index. Louis, Chris, and Rezzo are each unique investors. The portfolios they build are extremely differentiated from the index and from peers. What they do and what they produce cannot be replicated by an exposure or index-based strategy. We provide all of our investment teams with degrees of freedom in order to differentiate themselves, generate alpha, and manage risk. The teams use degrees of freedom in different ways. Some use cash more strategically. Others use market cap or geographical flexibility or concentration or new instruments or differentiated takes on ESG. It varies from team to team, but they are all using degrees of freedom and all doing so in pursuit of outstanding long-term outcomes for clients. Turning to slide four, the spectrum of business models in our industry continues to expand and evolve. Large integrated firms are evolving their structures into more segmented investment units. Cedar firms are developing more support functions and hedge fund platforms are growing their strategies and solutions. In this environment, we must communicate who we are and maintain an active dialogue with investment talent. Most importantly, We must continue to recognize that our greatest asset is our current investment teams. And we must continue to partner and work with them to maintain healthy and growing investment franchises. We use the franchise development framework on this slide for all of our investment teams. But what a franchise ultimately looks like and how it gets there is different in each case, usually very different. Our approach is personalized and patient. We provide autonomy to develop a culture, structure, and environment owned by the investment team. We treat people as individuals and remain flexible. We know that people value and manage things differently, and their preferences and priorities change over time. And we have a long-term horizon, giving talented people resources and time to generate successful outcomes. Our approach to talent is different. Compared to starting your own firm, Our model offers the support of a business management team with deep experience developing and sustaining investment franchises. In addition, we offer a strong brand and long-term client relationships for business development. Compared to large integrated asset managers, we offer investment autonomy, no centralized research or CIO, no overarching firm philosophy about how money should be managed. And compared to the hedge fund platforms, we are more partnership driven with a longer term, more patient mindset. We attract investment leaders who want to build something special and unique over an entire career and leave a legacy that endures. Slide five shows all of the investment teams we have ever launched. In 2009, we merged our U.S. small cap growth team into the growth team. And in late 2018, we evolved the global value team into two separate teams, global value and international value. We have never shuttered an investment team. All of our teams have performed well for clients over the long term. We work with each team to continue building and maintaining the franchise characteristics necessary for sustainable success. Having discussed some shorter term milestones, Let me point out two longer-term ones. The Artisan Small Cap Growth Strategy recently passed the 25-year mark, a quarter century. It's the firm's first strategy, originally managed by firm co-founder, Carlene Ziegler. Lead Portfolio Manager, Craig Seppekanis, has been a leader on the strategy since 2004, and Lead Portfolio Manager since 2009. Over the trailing 10-year period, The strategy has compounded capital at an average annual rate of nearly 18% after fees. That's more than 700 basis points of outperformance per year relative to the broad benchmark and more than 500 basis points relative to the growth benchmark. Craig and the growth team have done a tremendous job. The other milestone to mention is the Global Equity Strategy's 10-year anniversary. Since inception, the strategy has outpaced the benchmark by 447 basis points per year after fees. Portfolio manager Mark Yockey is approaching his 25th anniversary with Artisan. He and his team are applying the same philosophy and process used on their flagship international strategy to the global universe, and they are doing it very well. Our growth and global equity franchises are very different. but they have both built, developed, and maintained franchise characteristics for 20 plus years. The combination of net of fee alpha and investment franchises shown on this slide is a scarce and powerful combination. In closing on slide six, I want to return to the subject of thoughtful growth. Over the years, our business expansion has occurred when we matched our talent-based high value added model with secular change in the industry. We usually talk about these expansions by reference to our investment strategies, but there is much more to it than that. We align investment strategies with asset allocation trends, distribution resources, the right investment vehicles, and operational support. For example, with our second generation business, we expanded into global-oriented strategies, leveraging global institutional consultants, and using USIT's pooled vehicles. More recently, with our third-generation business, we have built out operational support for greater degrees of investment freedom, tapped further into the high net worth channel, and used private fund structures. Today, similar to the interesting investment opportunities our investment teams are finding, We are seeing interesting opportunities to partner with new talent, launch new strategies, and further develop our business. As exciting as these opportunities are, we will remain patient and thoughtful about talent, our model, and long-term trends. We will keep the artisan talent bar very high with a goal that each additional artisan investor ratifies our model and strengthens our brand across the business. We will refrain from entering perpetual transaction mode. We will keep a healthy amount of spare capacity, which helps us function through volatile times and capitalize on the best opportunities whenever they arise. This patient, thoughtful, long-term approach is serving us well right now. We are doing much more than keeping our heads above water. We are executing. Our investment teams are performing well. We closed more new business in the second quarter than ever before in our history. We are actively working on new investment ideas and engaging with talented investors looking for a long-term home. We see lots of disruption and we are confident in our ability to capitalize. I will now turn it over to CJ to discuss our financial results.

Thanks, Eric. Good morning, everyone. Just as Eric described our business model functioning well, Our financial model principles, which are on slide seven, has served us well during these uncertain times. Our P&L continues to act as intended, and our financial results for the quarter and year to date are in line with our expectations. Strong alpha generation led to meaningful increase in performance fees earned this quarter. In addition, our bottom line benefited from the variability of expenses that fluctuate with revenues as well as reduced expenses as our associates observed travel restrictions and predominantly worked from home. Our AUM is on slide eight. AUM ended the quarter at $120.6 billion, up 27% compared to last quarter and 6% compared to the June quarter of 2019. The change in AUM over the quarter reflected a recovery in global equity markets, and strong excess returns generated by our investment teams. In addition, we benefited from broad-based inflows across our investment teams and strategies. Net client cash inflows totaled 3.3 billion this quarter, representing a 14% annualized organic growth rate. For the first six months of the year, net client cash flows totaled 2.9 billion, or a 5% annualized organic growth rate. During the quarter, the volume of client activity drove record levels of gross inflows. These inflows were across a broad range of clients, strategies, and distribution channels, both in the US and outside the US. Our recent flows also include some sizable withdrawals from clients needing liquidity to navigate the COVID-19 crisis, including endowments and hospital operating pools. These withdrawals were also broad-based across strategies and distribution channels, although primarily from U.S. clients. Changes in AUM by generation are on slide 9. The net impact of client activity in the quarter resulted in net client cash inflows across all three generations of strategies. Our third-generation strategies continued to achieve impressive growth with 2.2 billion of net inflows during the quarter and 3.3 billion of net inflows for the first six months of 2020. Third generation strategies now account for 16.8 billion of total AUM, up from 12.1 billion at the start of the year. Average AUM is on slide 10. Average AUM was 109.3 billion for the quarter down 4% from the first quarter, reflecting the sharp decline in global markets during March. However, year-to-date average AUM is up 4% compared to the first half of 2019. Key financial metrics are presented on the next few slides. Our complete GAAP and adjusted results are presented in our earnings release. My comments will focus on adjusted results. Our financial results for the quarter compared to the prior quarter reflect 4% lower average AUM, higher performance fee revenue, and lower seasonal and travel-related expenses. Recurring revenues, which exclude performance fees, declined with average AUM, but the decline was more than offset by higher performance fees earned primarily from two separate account clients and our global equity and global opportunity strategies. Seasonal expenses primarily compensation-related, were lower compared to the first quarter. Travel costs were negligible and down $1.6 million as we observed travel restrictions. The resulting operating income for the quarter was up 8% from the prior quarter, and our operating margin was 37.8%. Adjusted net income of $55.9 million and adjusted net income per adjusted share of 71 cents were each up 8% from the prior quarter. Improved results relative to the second quarter of 2019 reflect higher revenues from performance fees, as well as lower operating expenses, which decreased primarily as a result of lower equity-based compensation expense, a decrease in travel expenses, and lower technology costs. The expense decreases were partially offset by higher incentive compensation expense related to increased revenues. As a result, our operating margin improved to 37.8% from 35.3%. Financial results year-to-date reflect higher revenues and flat operating expenses, resulting in 15% growth in operating income. Our year-to-date operating margin was 36.4%, an improvement over 33.2% for the same period last year. And adjusted net income per adjusted share was $1.37, up 12% compared to last year. Turning to slide 13, our balance sheet remains healthy. We maintain approximately 100 million of excess cash to fund operations, seed new products, and make continued investments in new teams, operational capabilities, and technology. In addition, We maintain an undrawn line of credit of $100 million. Debt of $200 million is supported by ample cash flow and EBITDA. Our leverage ratio is 0.6 times EBITDA and well below the limit specified in our covenants. As a result of our strength of cash flows and balance sheet, we remain committed to our dividend policy of distributing approximately 80% of the cash generated by the company each quarter in the form of a variable cash dividend. Our board of directors declared a cash given of 67 cents per share with respect to the second quarter of 2020. That concludes my comments. We look forward to your questions. I will now turn the call back to the operator.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speakerphone, Please pick up your handset before pressing the keys. If any time your question has been addressed and you'd like to withdraw your question, please press star then 2. As a courtesy, we'd please ask that you limit yourself to one question and a single follow-up. If you have further questions, you may re-enter the question queue. Again, it is star then 1 to ask a question. At this time, we'll just pause momentarily to a Samar roster. The first question we have will come from Dan Fannin of Jefferies.

Please go ahead. Hey, good afternoon. This is actually James Steele filling in for Dan. So my question is just on kind of the cadence of flows throughout the quarter. It looked like they were predominantly occurred in April and June and May was a little bit later. So I was just curious if there's any explanation for why that might have been the case and then Just hope for any color that you might give on July flows to the extent possible. Thanks.

Hi, James. It's Eric. I think in our remarks we've said over the years and reinforced this quarter that the lumpiness of flows will persist going forward just as they've done in the past. It's very hard to pinpoint why a single month or a single quarter or even a given year when you look at how the institutional due diligence process works. The clients that we go after tend to take a long time evaluating and doing quite a bit of due diligence on us. In essence, we like having a high bar and a long process because it eliminates a lot of the competition. It allows us to get sophisticated clients, and it typically extends the duration of the type of client we get. So through years or even months of work, why the flow occurred in a given month to us is irrelevant. And we think that on a go-forward basis, given our – our performance and given the current environment we're working in, we're having good dialogue with a broad base of clients that have done due diligence and know us well, and we still have quite a bit of active dialogue going on with the client base as well as interested parties.

Got it. Thank you.

Next, we have Bill Katz with Citigroup.

Okay, thank you very much for taking the questions this afternoon. Just coming back to the three teams that you highlighted in your prepared commentary, how large of an opportunity do you think collectively those three teams can get to? And then relatedly, you had mentioned that you're getting some pretty robust opportunities here just given sort of the migration into Gen 3. Can you talk a little bit about where you see the incremental opportunity from there?

Certainly. I think it's very hard to predict how large a given team or strategy could become or what they could look like. Some of the teams we highlighted in the long run, if you went all the way back to U.S. small cap growth, I think back then we really thought it would be amazing to get a billion dollars in small cap growth or in mid cap growth. We would have been wowed by three to four billion and Now you look at the combination of the growth platform and the breadth and size. It's expanded to a variety of areas up and down the market cap and also geographically. And so when we look at our new teams, we don't really look at the mindset of what could the size of this single strategy become. We work with each of the leaders to envision a franchise that can develop with multiple strategies, with multiple decision makers, and have a robust group of clients that make this sustainable. So while any of these single strategies may be limited in some form, you have to think much bigger than that, that we're going to develop talent and strategies from this. And I think all three that we've highlighted with regards to how the developing world thinks about the emerging markets outcome or how thematic thinks about various themes and segments they can apply their process to could expand quite nicely. So it's very hard for me to come up with an exact number or forecast for that of how large those could become.

Okay, that's all for here. Thank you. Just a follow up for CJ. CJ, just on the cost side, could you sort of maybe update thinking on some of the maybe the discretionary items and how you sort of see that playing through in the second half of the year? I certainly appreciate the fluidity of the backdrop that we're all operating in, but any sense on what may be structurally different versus more transitional in terms of benefit?

Yeah, I mean, I would say obviously, the majority of the declines in expenses are related from our current work from home situation. And that's driven, you know, the majority of the savings. And so I think, you know, the outlook for the rest of the year really remains, you know, as to how long we're working from home. So, you know, I would expect, you know, in the current environment, you would see a similar type of run rate for the year. But as, you know, as we get back into the office and travel picks up, you'll see that that will gradually increase. So I'd work from where we were this quarter. And, you know, based on the environment, depends on, you know, where that expense goes.

Okay, Trevor, thank you.

Next, we have Kenneth Lee with RBC Capital Markets.

Hi, good afternoon, and thanks for taking my question. Very interesting slide, slide number four in terms of franchise development. Wondering if you could just share with us some of your thoughts on, you know, where in terms of the progression of development are the three investment teams that you highlighted? Where are they currently? And perhaps wondering if there's any kind of related thoughts in terms of progression in terms of organic growth for those teams as well. Thanks.

Yeah, certainly if using slide four, we bring individuals into the mix. So there's a whole courtship period before the whole development of bringing an individual or a group of individuals in. Usually it takes three, four, five years to really build the correct foundation of the team, the resources, a foundational group of clients. Most consultants and intermediaries and advisors like to see a three- to five-year track record to occur. So I would say that the developing world now with a five-year track record is moved out of the development phase and into a growth phase and thinking about the the franchise, the breadth of their franchise, which would include the mix of clients, the mix of fee rates, the breadth of the business. At the three-year mark, where thematic is at, is clearly in the midst of the development stage, and it'll probably stay at least there until the five-year. When you operate in a U.S. equity strategy with an S&P benchmark. There's quite a bit of competition, both active and passive. With that big of supply, you have to expect a little bit longer gestation period there until you really hit a real good growth curve, but we've had good movement in that strategy. And then, clearly, Rezo, with only less than two years, is in The development, his asset gathering has been very strong, though. But with regard to the rest of the business and how we think about teams, he's in the development phase. He's squarely in that development phase. And as we think about these franchises, when you hit those milestones, whether it's a performance track record, the breadth of AUM, or you know, additional strategies, that really gets into the heart of the curve of what we say is business management and franchise development. Hopefully that helps you. Very helpful.

And just one quick follow-up, if I may, and this is just following up on your prepared remarks. I'm wondering if you could just further expand on some comments you mentioned on striving to maintain spare capacity.

Thanks.

Certainly, we've always stated that we try not to be all things to all people. We try not to just bring in every opportunity we can, because then you're stretching the business out to a level that it's very hard to take advantage of unforeseen opportunities, whether it's a new team that we never really thought about that came to us and we felt that this is a no-brainer opportunity and you need either to drop a few things to move on that new team or what we've occurred right now during the pandemic that we had spare capacity in the operations and distribution to be able to pivot, focus on more of a digital distribution model. We launched a blog, which we've called Artisan Canvas. We've upped our video and podcast content to market in this environment. And you need some spare capacity in the system to be able to have the leverage to take advantage of those unforeseen situations versus trying to push the model too fast and too broadly. not allowing you to execute at the level you want.

Very helpful. Thanks again.

And next we have Robert Lee with KB Dev.

Hey, thanks. Good afternoon, or good morning, in case may be. Thanks for taking my questions. I guess the first one is, you know, one of the things that stood out, I think, in the quarter was the level of inflows into know, what you categorize as funds, so which have been in kind of steady outflow for a while. So and you've talked in the past about investments you've made in various types of intermediary distribution capabilities, relationships you've been building. So is there this quarter any – well, maybe there's two – an A and B question here. You said maybe there was some kind of inflection point you reached with some of these initiatives that's starting to pay off in better sales, and or maybe was there kind of a couple of outsized platform wins that kind of came on board that you should also think of helping future growth sales?

Yeah, I do think that our long-term relationships and the reputation we've built with Many of our intermediary partners in the broker-dealer, the bank trust, and even some larger advisors has paid off more recently. Given the breadth of success across the entire platform, I'd say broadly we've been successful on an array of clients and opportunities. We did have – One good outsized win with our mid-cap growth strategy was an existing intermediary partnership. And that helped out the mid-cap growth strategy. But if you look at the rest of the strategies, it's just been solid blocking and tackling. And I think with the environment we're in and leaning on you know, partners that you've already done due diligence with, that you have a history with and are performing, we've just seen broad success with those intermediary partnerships.

You know, and maybe my follow-up, maybe this leverages that response, but, you know, how often do you see clients utilizing multiple strategies, understanding they have to do their separate due diligence and investment team, but kind of once you have the relationship, and this is both intermediary and institutional, once you have that relationship, do you find that oftentimes those clients may end up investing in another team strategy? Just trying to get a sense of how much you kind of leverage the arts and brands, so to speak, in that sense.

Yeah, during... During this shelter-in-place, I would say that the activity of existing clients, whether large-scale clients with multiple strategies or even small-scale clients with just one strategy, have been broadening their interest in the artisan brand. And we've seen an uptick in... clients looking at multiple strategies, and we've been benefiting during this period of many clients increasing the dialogue with us, and in some cases acting on newer strategies or increasing their allocation to the existing strategies. So I think most people would call that a cross-sell opportunity. Those opportunities have increased.

Great. Thanks for taking my questions.

And next we have Chris Shuttler of William Blair.

Hey, guys. Good afternoon. A couple of questions. First, can you talk about the institutional pipeline? And second, the investment performance at Artisan has obviously been tremendous. So how – How do you look at the potential, or what are you hearing from clients around the potential for some rebalancing decisions over the near to medium term, just given how strong things have been?

Yeah, I guess two parts there. First is the institutional pipeline. We have a fluid dialogue with many institutional clients and consultants. I think the idea of a pipeline is very hard. There's not a widespread list of people just saying they have searches going on and there's a big pipeline. But there is a very active dialogue with our clients of how to work with this in a broader manner. It's hard to translate that to any number and give you a sense of what pipeline is, but we are having robust conversation with a broad array of clients. With regards to performance, we've had some very strong performance in many of our strategies. So the amount of rebalancing has been a little bit more elevated with us probably than a few other firms out there. And we saw outsized gross inflows and outflows. Some of the outflows were clearly around rebalancing some strategies that have just performed extremely well. And, you know, that's elevated our numbers. So that would be my comments on the performance and rebalancing.

Okay. And then this one may be a bit tricky to answer, but I'll ask anyway. Looking at the strategies in totality across Artisan, many of them, most of them outperformed in the first quarter when markets were weak and then outperformed again when markets rebounded in the second quarter. Usually we don't see that happen quite that way. So I guess is there anything you would call out in terms of how your teams or why your teams feel like they pivoted so well and then as you look across the firm today i know you're cognizant of like factor exposures and things like that is there anything you you see here that you want to talk about that that you're just wary of with everything performing so well at the same time i i feel like that you know we're a little bit more into a normal market in the sense that there's ups and downs and that you can you know act on you know

the volatility, you can act on a lower cross-sectional correlation among individual securities that allow active managers to showcase the process and skill set that's embedded there. So I think from a performance standpoint, it's what we should be doing is participating and up markets and protecting and down, and it's nice to see some movement there versus the 10-year run we've had where a single factor was dominating to bring up factors that was clearly fueled by cheap money, and it was fueled by government action, and it was fueled by a massive amount of index perpetuating a long one-way market. We did quite well during that period, and now that we're in an environment with a little bit more activity, we're showcasing why active management works, and more importantly, why it works at Artisan. I don't want to defend all of active managers. It's hard to do that, but I can certainly defend the active management at Artisan Partners, and that's why we showcased that 25-year history. producing alpha, and we're showcasing it again right now across the entire platform.

All right. Thanks, Eric.

Next, we have Ryan Bailey with Goldman Sachs.

Good afternoon, and thank you for taking our questions. Maybe a question for CJ to begin with. On the separate account fee rate, we saw, you know, quite a strong improvement there. I was wondering if you could decompose some of the puts and takes in this, and did you see any sustainability in, you know, a positive trend? I'm assuming it's from the generational shifts, but if there was anything else underlying that, maybe losses of, you know, losses of mandates from low fee rates or anything else, that'd be very helpful.

Yeah, sure, Ryan. Good question. It's actually really more of a function of the fact that the first quarter was a little abnormally low because we had, you know, such a low quarter-ending AUM point, as well as, you know, at the end of March, you know, very low average balances. And so the billing, it's really a billing cycle issue that the first quarter was low because those clients that are billed on quarter-end assets had very low AUM, and the clients that were billed at the end of this past quarter, you know, were higher than normal. So, you know, I would say if, you know, this quarter was a little more closer to normal than last quarter, which was a bit low.

Okay. And maybe kind of shifting gears a little bit, a question on sort of new talent. We've, I guess, worked through the initial shock of work from home. And at the same time, we've seen some of your larger competitors face some sort of platform challenges. So I guess I was just wondering if there's been any change to the pace or the number of conversations you've had with potential new talent.

Yeah, I think the disruption and work from home, we've had a fair amount of inquiries. Let's say that The pace of inquiries and the outgoing reach out that we do has been pretty consistent. I would say maybe a few more individuals that we're interested in that we're spending more time with than normal. And I would point to there's a decent amount of activity out there. We lift it out in our prepared remarks, the different firms, whether it's the larger integrated firms all the way down to the hedge fund platforms. If you saw some of the activity around some of those hedge fund platforms, there is quite a bit of movement of talent inside of those. There are people out there interested in making a move during this environment. There's a decent amount of conversations going on. I don't I wouldn't describe it as really out of the norm or abnormal in any which way on either direction. But, you know, clearly we have time. And, you know, with individuals working from home, you have more time. You have people, you know, privately looking at, you know, making some different moves. So slightly elevated, I guess I would say.

Great. Thank you.

The next question we have will come from Mike Carrier, Bank of America.

Good afternoon. Thanks for taking the questions. Just given the strength and diversity of flows, I just have a question on, like, the sustainability. You guys mentioned, you know, the mid-cap growth win, a lot of blocking and tackling. You've got the performance and, you know, the differences in strategies. The third-generation funds are more weighted, you know, to the intermediary channel. Like, have you been added to any new platforms or portfolios that could be more, you know, like recurring in nature, you know, or has it been more, you know, driven by other kind of decision makers or on the institutional side?

With the Generation 3 strategies, we definitely had a tilted mix towards the intermediary, tilted towards the U.S., and tilted towards pooled vehicles. And we're starting to broaden that interest out with some institutional dialogue and looking at the breadth of that client base, the mix of that client base with many of the Generation 3. And the reason for hitting those milestones, it does introduce other client types into the discussion and brings up opportunities. we would expect that we'd be able to broaden out the mix in those strategies on a go-forward basis. Got it. Okay. I mean, CJ, just a quick one.

Just given the elevated performance piece in the quarter, how does that, like, tend to impact, you know, the comp ratio? It seemed, you know, fairly straightforward, but you want to make sure, you know, there's no nuances there. And then should we expect – you know, more of that ahead. I think there's still, you know, not much that generates performance fees, but just want to make sure that hasn't shifted too much.

Yeah, no. Obviously, it did impact the comp ratio. We have a higher payout on performance fees than we do on, you know, recurring management fees. So, you know, there was some extra comp in the P&L for performance fees this quarter. And, you know, we're still running, you know, around 3% of AUM, 2% to 3%, a little under $3 billion of AUM that's subject to performance fees. And that's really, as we've said, it's, you know, spread over, you know, a number of quarters with June and December being the largest opportunities for performance fees. And, you know, given... you know, the performance that you've seen this year, it would, you know, it's no surprise that, you know, the performance fee numbers spiked a bit this quarter.

Got it. All right. Thanks a lot.

The next question we have is a follow-up from Bill Katz of Citigroup.

Okay. Thanks very much. Just tying up a couple of things. Just in terms of the In and out, you had mentioned a few lumpy outflows, rebalancing. Any way to sort of size how much pressure, maybe incremental pressure you might have experienced just given some of that need to draw down the cash? And then any commentary around sort of July trends?

Yeah, the elevated flows, and we talked a bit about the success of a variety of strategies of people just wanting to rebalance. Given the strong performance, I think if we continue to perform, you'll see some natural rebalancing that occurs, especially in the more sophisticated institutional clients that have a strong investment policy statement, strong oversight, and sticking to their asset allocation. That's going to be natural. You have a little bit of structural outflow going on. In the intermediary space, we saw elevated outflow in the international space, so both international growth, international value. Saw a little bit higher outflow as you saw some of the intermediaries bring in some path of exposure strategies into the asset allocation and balance that mix of passive and active. So that happened across both the strategies. that would probably persist a bit. I'd call that a little bit more secular as people weave in the active-passive mix into the international space. And so I think on a go forward, I think the situation still and the environment still the same, and I think that our brand and reputation, and that's why we focused on really sticking to who we are and building trust is going to shine through on a go-forward basis right now. But I would clearly think, as I mentioned, on the month-to-month, it's very hard to say any given month or any given quarter that we can give you any outlook with any accuracy

given our client base. Thank you.

Well, this will conclude our question and answer session and today's conference call. We would like to thank the management team for their time today and thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a great day.