Artisan Partners Asset Management Inc. Class A

Hello, and thank you for standing by. My name is Rocco, 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 Artisan Partners Asset Management.

Thank you. Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Eric Coulson, CEO, and CJ Daly, CFO. Following these remarks, we'll open the line for questions. Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin, I would like to remind you that comments made on today's call, including responses to questions, may include forward-looking statements. These are subject to risks and certainties and 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 will include references to non-GAAP financial measures. You can find reconciliations to those measures to the most comparable GAAP measures in the earnings release. I will now turn it over to Eric Coulson.

Thank you, everyone, for joining the call or reading the transcript. Slide one summarizes our business philosophy and approach. Artisan Partners is a high-value-added investment firm designed for talent to thrive in a thoughtful growth environment. Thoughtful growth is core to who we are. Thoughtful growth is important for attracting new talent and retaining and stimulating existing talent. Investment degrees of freedom increase the probability that we can generate alpha and differentiate outcomes versus peers and indexes. In that way, Artisan's thoughtful growth directly benefits existing clients and existing strategies. Through thoughtful growth, we also grow and evolve our strategy lineup to align with evolving asset allocations. This allows us to reach new clients and increase our partnership with existing clients. Growth is important to our stockholders. Through growth, we extend the duration of existing talent and expand the number of investment decision makers. We diversify our business and sources of alpha. We offset natural attrition that occurs over time as we compound capital for long periods. And by increasing our capabilities and offerings, we increase the number of embedded options for growth. Thoughtful growth is careful, incremental, and disciplined, growth that is consistent with who we are as a high-value-added, talent-driven firm. Our commitment to thoughtful growth explains why we are not investing in passive investment strategies, a highly concentrated scale business, or why we don't invest in a large sales force to transact directly with retail and wealth clients. We do not have an edge in those areas. Our edge is as a home for investment talent and as a manager of high value added differentiated investment strategies. We invest behind that edge. We spend time and money on investment capabilities that enhance our high value added strategies, differentiate them from passive and exposure products, and evolve in the direction of alternative investment allocations. If we deliver, as we have in the past, there will be plenty of long-term demand for what we do and plenty of opportunity for top and bottom line growth. On last year's third quarter earnings call, I laid out long-term investments we are making in three areas to broaden into alternative-oriented strategies, differentiated credit, private investing, and China. Over the last 12 months, we have continued to incrementally invest in each of these areas. This is most apparent in differentiated credit. Over the last 12 months, we have successfully launched the Artisan Floating Rate Strategy, which invests in floating rate leveraged loans. The Artisan Emerging Markets Debt Opportunity Strategy, a blended currency emerging markets debt strategy. The Artisan Emerging Markets Local Opportunity Strategy, a local currency emerging market debt strategy. and the Artisan Global Unconstrained Strategy, a global macro portfolio. As shown on slide two, we now offer clients six differentiated credit strategies. Consistent with who we are, we have focused on high-value added asset classes characterized by attractive absolute return potential, large investment opportunity sets allowing for alpha and differentiation, long-term demand from sophisticated asset allocators, and attractive economics consistent with the value we can deliver. 2022 may appear to have been an inauspicious time to launch four fixed income-oriented strategies, but we have never attempted to time the market with new teams or new strategies. Our approach is thoughtful, methodical, and long-term. We start with the right talent, which is extremely rare, difficult to identify, and takes time to recruit. We identify long-term asset allocation trends that fit with our talent and high-value-added approach. We get the people, resources, and alignment in place. We launch when we are ready, not when we think a market is going to rip or client demand is going to soar. Once we launch, we are patient, maximizing the investment team's time spent investing, establishing a track record. We invest in dedicated distribution aligned with the investment team our long-term time horizon reduces the importance of short-term market and demand dynamics and places a premium on getting the foundation right. Slide 3 shows the outcome of our approach since Brian Krug joined Artisan in 2013 and established our Denver-based credit team. The team's high-income strategy has consistently outperformed the High Yield Index and peers. For the trailing five-year period, LIPR ranked the Artisan high-income fund out of 338 high-yield funds. Brian and his team have a differentiated philosophy and approach relative to rating agencies and other managers. The team focuses more on earnings and cash flow and less on the hard assets on borrowers' balance sheets. In addition, unlike many high-yield managers, the Artisan Credit Team invests The Artisan Credit Opportunity Strategy, which now has a five-year track record, provides the investment team additional degrees of freedom, greater concentration, more distressed and less liquid credits, shorting, and private investments. The team has used that flexibility to generate average annual returns of more than 8% since inception That's more than six percentage points per year greater than the high yield index. As an additional reference point, since 2017, we calculate the middle market's private lending has generated an average annual return of approximately 8% before fees with less liquidity. In order to provide clients access to the investment team's credit picking skills with minimal duration risk, we launched the Artisan We also further developed the team's leadership, promoting Seth Yeager to co-portfolio manager of the floating rate strategy. Since establishing the Artisan Credit Team eight years ago, we have consistently grown the team's business over time, raising almost $7 billion in cumulative net flows. Early growth was almost entirely from the wealth channel, as the team became more established and separate accounts, which remains a focus. The weighted average fee across the team's AUM is 64 basis points, reflecting the team's value production for clients and demand for scarce alpha. Looking forward, we believe the Artisan Credit Team has the leadership, breadth and depth of talent, resources, and ambition to become a multi-dimensional credit franchise. managing an array of high-value added strategies, vehicles, and investments. Future strategies may offer amplified participation in a particular theme or a subset of investments, such as a dedicated distressed or dislocation strategy or co-investment opportunities. The team also has the capability to expand further into private investing which would expand their client base into insurance and bank balance sheets. We are pleased with how the Artisan Credit franchise has developed so far, but we believe we are still in the early stages of building out a premier credit platform. Slide four summarizes the three strategies managed by our second fixed income team, the MSITES Capital Group. Early performance has been strong. Since inception on May 1st, emerging market Since inception on April 1st, Artisan Global Unconstrained has generated a 2.51% return after fees, a positive absolute return during a period in which most global markets have declined significantly. In addition to strong absolute and index relative performance, both strategies have performed well relative to peak. both in and outside the United States. The FT reports that $70 billion has flowed out of EM bond funds this year, the most ever on record. That creates opportunity for us, money looking for a home with a proven manager in an asset class we believe has long-term staying power. We are excited by this opportunity and are in the late stage discussions with early institutional capital. We are still very early with generate differentiated returns and build a high quality sizable business. Our build out of differentiated credit capabilities is similar to the development of our global strategies and distribution between 2005 and 2013 and our high degree of freedom strategies beginning in 2014 and continuing to today. The strategies we launched during our globalization phase account for approximately $42 billion of our current AUM and run rate revenues of approximately $234 million. The strategies we have launched since 2014 account for approximately $23 billion in AUM and run rate revenues of approximately $185 million. These are successful growth outcomes as a result of the methodical execution of our thoughtful growth approach. We believe we will see similar long-term outcomes with the differentiated credit businesses we are building today. Once we invest behind new talent and strategies, we're disciplined in seeing these investments through with operational and distribution alignment. As shown on slide five, since 2012, we have grown from five to 10 investment teams, from 12 to 25 investment strategies, and from only public equity to now include Long short equity, high yield credit, long short credit, public-private hybrid, emerging markets debt, and global macro. The investments we make in our business take time to pay off. Because of our build-not-buy approach, all of our investments run through our income statement, reducing short-term profitability. The P&L impact of current investments has been amplified by the market drawdown. pushing our adjusted operating margin from 45 a year ago to 33% for the prior period. We are extremely mindful of the margin decline. 2022 has been a historically bad year in markets. Rarely have both equity and fixed income valuation declined to such an extent at the same time. Through the third quarter, the 60-40 portfolio is down We feel the impact of these declines as do our clients and employees. We have built our business and financial including the vast majority of investment team compensation. This creates transparency, predictability, and stability for our people. We also have experience. We have been through these periods before, our investment teams, our management team, our board of directors. We have a well-communicated, long-term mindset and confidence in who we are and the investments we are making. Before turning it over to CJ, I want to spend a minute on slide six, which is a slide we used last quarter as well. I think the perspective and history on slide six warrants repeating. Sharp market sell-offs occur more frequently than many people think. And Artisan Partners has a history of taking advantage of these periods for the benefit of clients and ultimately stockholders. Since our founding in 1995, there have been 12 calendar years 10%. In eight of 11 12-month periods following a 10% drawdown, our firm-wide asset weighted performance has exceeded benchmark performance. Across the 11 periods, Alpha averages 297 basis points. The three periods in which we underperformed were particularly sharp recoveries, with clients and our firm benefiting from absolute returns of 31%, 23%, and 59%. Our underperformance across these three periods averaged approximately 380 basis points. If you extend the time horizon and look at the following three-year periods, we have outperformed eight of 10 times, with outperformance averaging 308 basis points. If you reduce the drawdown trigger to 5%, there have been 23 such quarters since our founding, including all three quarters of 2022. We have outperformed in 13 of 20 subsequent 12-month periods and in 16 of 19 subsequent three-year periods, with outperformance averaging 391 basis points. Our investment teams have been able to take advantage of sell-offs in the past, and we believe they will have the ability to do so again. We are well positioned as a firm to take advantage of opportunities clients seeking a more stable partner. Our business is resilient and working. We are confident in our ability to execute through this period, come out stronger, and continue to thoughtfully grow the firm over the long term. I will now turn it to CJ to discuss recent financial results.