Our firm was founded in 1994 on the belief that exceptional investment results could be achieved by providing entrepreneurial investment talent with a home designed specifically for them. Nearly 30 years later, this belief remains the core of our business philosophy.
An ideal home for investment talent requires:
The primary responsibility of our senior management team is to deliver on those characteristics for our investment teams. This began when Andy and Carlene Ziegler founded Artisan in 1994. Carlene was a portfolio manager and understood what an ideal home for investment talent required. As our first CEO, Andy established our autonomous investment team operating model and investments-first culture. When I joined Artisan in 2005, I had specific responsibility for supporting the development of each of our investment teams, a responsibility I have retained during my 14 years as CEO.
As our firm has grown and the needs of our investment teams have evolved, we have expanded our senior management team to continue delivering for investment talent while minimizing bureaucracy. In 2016, we hired Jason Gottlieb, our current President, to further support the development of each of our investment teams. With more investment teams, expanding degrees of freedom across asset classes and security types, greater demand for resources, and an evolving distribution model, we have elevated a number of individuals to work with Jason, including Eileen Kwei, Chris Nicolaou, Keegan O'Brien, and Sam Sellers. With Jason at the helm, this group partners directly with our investment teams to maintain Artisan Partners as an ideal home for investment talent.
Data as of March 31, 2024. Sources: Artisan Partners/MSCI/Russell/ICE BofA. Tenure refers to years employed by Artisan Partners. Value added is the percentage by which the average annual net composite return of each strategy has outperformed or underperformed its respective benchmark since inception. Past performance is not indicative of future results. See Notes and Disclosures for more information about how we calculate our investment performance and the benchmarks used.
The effectiveness of our focused approach is reflected in the stability of our senior investment talent and the returns we have generated for clients over long periods. We value a trusted partnership and harness the power of compounding capital and business value over long periods. Ten of our 11 investment strategies with track records of more than ten years have generated returns in excess of their benchmarks, after fees. The average tenure of the portfolio managers on these 11 strategies is 21 years. Seven of the strategies continue to be managed by their founding portfolio manager.
Looking back on 2023 and more importantly looking forward, we have established an investment firm built and managed for investment talent, high value added investing, and long-term growth. In the remainder of this letter, I outline our core beliefs about maintaining an ideal home for investment talent as well as some recent highlights. Your time is valuable. Thank you for allocating it to us.
We describe our culture as "investments first." This culture originates from the belief systems of our investment talent, who must have a passionate conviction in their investment philosophy and process and a willingness to execute through thick and thin and over long periods of time. This waterfall of passion, philosophy, process, execution, and alignment flows into business operations and distribution, which we build and manage for our investment talent and investment capabilities, not the other way around.
This ordering and prioritization defines our investments first culture. At Artisan Partners, every single person prioritizes investments—from the board of directors to our newest associates and across all functional areas of the firm.
An example of this is our approach to scale. We have a broad, high-quality investment platform, but we will not force any investment team into a process, system, or technology that does not work well for them. In high value-added investing, meaningful scale is achieved through investment results and the business development that follows—not through standardization or operational synergies.
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Source: Artisan Partners
Another example is our hybrid distribution model. Each of our autonomous investment teams has a dedicated business leader who works with the team to develop a business aligned with the team's vision and priorities. A key responsibility of the business leader is to protect investment team time, as hours spent on sales, marketing, and service draw time and attention away from research and portfolio management.
Moreover, in our business model, investment leaders drive franchise strategy and development, with distribution executing and providing feedback. This stands in contrast to models in which the sales organization defines the culture and sets the agenda, resulting in the proliferation of product for the investment function to manage, whether they believe in it or not.
Over the last couple years, we have embarked on an evolution of our distribution model, migrating more client service to our dedicated distribution teams and emphasizing sales within our centralized distribution resources. This evolution is intended to further optimize the time of our investment talent, improve client service, and accelerate asset raising in new and differentiated strategies.
At Artisan Partners, each investment team operates autonomously with respect to its investment philosophy, process, people, research, and decision-making. We do not have a Chief Investment Officer, investment committee, pooled research, or centralized investment risk function that overrides investment decision-making. We provide our investment leaders with the autonomy to build their teams and cultures in the way that best fits their investment philosophy and process.
Investment autonomy fosters entrepreneurialism, differentiation, and accountability. Independent thinkers do not want to be watered down with groupthink. They want to own their philosophy, process, and decision-making. They want to be different. And they want to be fully accountable for their performance.
That was the mind-set of Bryan Krug when he joined Artisan Partners in 2013 to establish our first fixed income investment team. Bryan had a successful investment and business record at his prior firm. But he wanted the freedom to build an investment franchise designed specifically for his philosophy and process. He wanted control over investment capacity, believing investments should be made based on market opportunity, not distribution demand. And he wanted his ideas implemented in strategies that he managed, knowing this was the best way to maximize alpha for clients.
Over the last decade, we have partnered with Bryan to methodically build a team, track record, and franchise. On April 1 of this year, the team celebrated the 10-year anniversary of the flagship Artisan High Income strategy. Since inception, the High Income strategy has generated average annual returns of 6.18%, after fees, compared to 4.36% for its benchmark—that is nearly 42% more return on average per year for 10 years. The strategy has generated cumulative net flows of over $9.2 billion from inception, including over $1.5 billion of net flows in 2023. At the end of the first quarter 2024, the Artisan Credit team managed a total of $10.6 billion across the High Income, Floating Rate, and Credit Opportunities strategies.
Looking towards the next decade, we expect to further develop the Credit team's alternative capabilities and business. In 2023, we closed on $130 million of commitments to a closed-end fund designed to opportunistically invest in dislocated credit markets. We continue to prioritize the business development of the Credit Opportunities strategy, which has generated average annual returns of 10.24%, net of fees, since inception in 2017. We are extremely excited about building these strategies, capabilities, and businesses over the next decade and believe we can achieve the same success we have had building the High Income strategy over the last decade.
We complement investment team autonomy with extensive resources and support. Our operational platform covers the entire investment lifecycle. We are regularly improving and broadening our capabilities across new asset classes, geographies, security types, clients, and fund structures.
In addition to operational support, we work with each investment team on the long-term process of establishing the characteristics we identify with a durable investment franchise: recognizable leadership, a grounded philosophy and process, proven results, depth and breadth of resources, economic alignment, a unique culture, and a distinctive brand.
Bringing these traits together—and maintaining them—is difficult and takes time. No two paths are the same, but the issues that arise along the way are often similar. In partnering with our investment teams, our senior management benefits from our focus on these issues and the repetitions we have experienced in helping multiple teams develop over time and through cycles.
| 2004 | 2014 | 2024 | |||
|---|---|---|---|---|---|
| Investment Teams | 4 | 6 | 11 | ||
| Investment Strategies | 7 | 14 | 25 | ||
| AUM | $40bn | $108bn | $160bn | ||
| Asset Classes | Public Equity | Public Equity High-Yield |
Public Equity High-Yield Long-Short Equity Long-Short Credit Public/Private Hybrid Emerging Markets Debt Global Macro |
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| Investment Instruments | Public Equity (Global) FX |
Public Equity (Global) FX U.S. Corporate Credit/Loans Derivatives |
Public Equity (Global) FX U.S. Corporate Credit/Loans Derivatives China A Shares Private Equity Global/Sovereign Credit |
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| Sponsored Vehicles | Mutual Funds Separate Accounts |
Mutual Funds Separate Accounts UCITS Funds Collective Investment Trusts |
Mutual Funds Separate Accounts UCITS Funds Collective Investment Trusts Open-Ended Private Funds Hybrid Private Fund Model Delivery |
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| Non-U.S. Client Relationships | 1 | 82 | 219 | ||
| # of Global Markets Open | 32 | 59 | 89 | ||
| # of Global Offices | 5 | 9 | 21 | ||
| Investments First Culture and Autonomous Team Operating Model | |||||
Data as of December 31, 2004 and 2014, and March 31, 2024. Source: Artisan Partners. Effective March 31, 2024, the International Small-Mid team, managing the Non-U.S. Small-Mid Growth strategy, became its own autonomous investment franchise.
We believe that our combination of investment autonomy, resources, and support is unique in the industry and a competitive advantage. In September 2021, we recruited Mike Cirami, Sarah Orvin, and Mike O'Brien to establish a new investment team at Artisan Partners called the EMsights Capital Group. Less than a year after joining the firm, the team comprised 13 individuals and managed three investment strategies with a new operating and technology stack designed specifically for the broad array of securities, loans, and derivatives in which the team invests across developed, emerging, and frontier markets.
The team's Global Unconstrained strategy recently passed its second anniversary, as will the Emerging Markets Debt Opportunities and Emerging Markets Local Opportunities strategies later this year. Since inception, the absolute return-oriented Global Unconstrained strategy has generated an average annual return of 10.52%, after fees, and a Sharpe Ratio of 2.35. Since inception, the Emerging Markets Debt Opportunities and Emerging Markets Local Opportunities strategies have generated 814 and 276 basis points of excess returns over their respective indices, after fees, respectively. After two years, the EMsights Capital Group manages approximately $1.2 billion across the three strategies, with strong business momentum into 2024.
With the establishment of the EMsights Capital Group, we further demonstrated our willingness and ability to deliver the resources and support needed by outstanding investment talent in new asset classes for us. Regardless of where they are located and in what asset classes they operate, we are confident in our ability to successfully support outstanding investment talent. We can and will partner with outstanding investment talent in any asset class and location when we believe we have the right combination of talent, cultural fit, and long-term asset allocation demand.
A vital part of an ideal home for investment talent is providing a critical mass of foundational capital for talent to manage. Foundational capital is necessary to execute a strategy, build a track record, and establish a foundation for future growth.
Our approach starts with seed capital from our balance sheet, founding portfolio managers, directors and employees. We supplement seed capital with early client adopters, oftentimes long-term clients or intermediaries who have experienced first-hand our success in identifying, recruiting, and launching new investment talent.
Early in the franchise development process, we seek to identify and recruit an experienced business leader to partner with the investment team to raise foundational capital and establish a long-term business plan, leveraging our brand and relationships, as well as those of the investment team and the business leader.
For the teams we have established since our IPO in 2013, assets under management after one, two, and three years is as follows:
| Team | First Launch Date | AUM After Y1 | AUM After Y2 | AUM After Y3 |
|---|---|---|---|---|
| Credit | April 2014 | $674M | $1.3B | $2.1B |
| Developing World | July 2015 | $723M | $1.5B | $2.5B |
| Antero Peak Group | May 2017 | $134M | $1.1B | $2.2B |
| International Small-Mid | January 2019 | $2.3B | $7.5B | $9.4B |
| EMsights Capital Group | April 2022 | $82M | $1.2B | n/a |
During 4Q 2018, Rezo Kanovich joined the Global Equity team and became the sole portfolio manager of the firm's Non-U.S. Small-Cap Growth strategy, which was re-named the Non-U.S. Small-Mid Growth strategy and given increased degrees of freedom to invest in both small and mid-cap companies. As a result of this change, the strategy’s prior composite was terminated, and a new composite began on January 1, 2019. Effective March 31, 2024, the International Small-Mid team, managing the Non-U.S. Small-Mid Growth strategy, became its own autonomous investment franchise.
We are not resting on these outcomes. We are actively working to evolve our distribution structure to ensure that we can continue to raise foundational capital for new teams and new strategies, especially in new or alternative asset classes. The shift in "active" asset allocation budgets to alternative asset classes has been a multi-year trend in the institutional channel and is still in the early stages in the wealth channel. We have a tremendous opportunity to leverage long-term, successful relationships with clients who know and trust Artisan Partners and who are looking for a trusted partner with whom they can thoughtfully expand into alternatives.
Like the rest of our firm, our economic model is built for investment talent. We pay investment teams 25% of management fee revenues and up to 60% of incentive fee revenues. Revenue sharing with our investment teams is transparent, objective, and predictable. It aligns our talent with our clients and shareholders. Long-term investment performance is the best way to maximize long-term revenue, which drives the value of revenue shares, as well as our cash flows, dividends, and business value.
In addition to our revenue share, we make annual long-term incentive grants, the vast majority of which are allocated to investment professionals. Our long-term grants have varied over the years as we have evolved from a startup, to a multi-team going concern, to a public company, and now to a diversified investment platform with 11 autonomous teams. As we have grown, we have leaned further into our revenue-sharing economics with the flexibility to upsize outcomes for strong investment and business performance.
Sources: Industry Median - Casey Quirk Deloitte/McLagan Performance Intelligence Study; Artisan - Artisan Partners.
The majority of our 2023 long-term incentive grant (awarded in the first quarter of 2024) consisted of franchise capital awards, which provide economic exposure to the investment strategies managed by the teams. This year, the baseline franchise capital grant for investment teams receiving an award was 2% of trailing annual revenues with the potential for an additional 4% based on objective investment and business performance metrics. Nearly half of these awards have "career" vesting terms, meaning that with certain exceptions, they do not vest until the recipient has a structured retirement from the firm. We also layer in grants of APAM restricted stock with similar vesting provisions. The result is a total economic package to investment teams that is large, within their control, long duration, and aligned with clients and shareholders.
In addition to investment team compensation, we are disciplined to ensure that our operating expenditures and long-term investments are focused on investments. Using industry allocation methods, we estimate that, as a percentage of our revenues net of third party distribution expenses, we spend approximately 37% directly on investment management functions, compared to an industry median of 23%. Another example of our commitment to investments first, while maintaining alignment with clients through investment performance and shareholders through attractive operating margins and free cash flow generation.
"The big money is not in the buying and the selling but in the waiting." - Charlie Munger
Building an enduring investment franchise takes time. It is a multi-decade process that requires a solid foundation of people, process, culture, and results. It also requires thoughtful growth, managing the paramount obligation to existing clients while developing additional capacity for the further growth of individuals, investments, and businesses. Difficult periods are inevitable. It is critical that investment teams know they will have the opportunity to work through these periods. It is highly unlikely that someone can design and execute an investment process for long-term performance if the individual is operating in an environment where short-term missteps are fatal.
David Samra joined Artisan Partners in 2002 with the goal of establishing a premier value investing franchise. For over 22 years now, we have worked with David to build a team, a culture, a track record, a business, and a brand. Since inception, the Artisan International Value strategy has generated average annual returns of 10.77%, after fees through the first quarter of 2024. Those returns have outpaced the MSCI EAFE index by more than 450 basis points on average per year for 22 years. We estimate the outperformance has generated approximately $10.7 billion in excess returns for clients since inception. In 2023, the strategy generated $7.3 billion in investment returns, including approximately $1.7 billion in returns in excess of its benchmark. It also generated $3.6 billion of net inflows, resulting in total AUM growth of $10.9 billion during the year.
When we partner with an investment leader, we enter into a long-term relationship that ideally lasts until the end of the person's professional career. We have established only 11 investment teams over nearly 30 years. We never attempt to time markets or play to short-term allocation trends. We search for investment leaders who are passionate, differentiated, and willing to bet on themselves. If there is cultural fit and long-term asset allocation opportunity, we proceed—for the long-term.
Source: Artisan Partners
In this letter, I have featured three of our investment teams. Our newest investment team, the EMsights Capital Group. Our first fixed income team launched ten years ago, the Credit team. And the International Value team, launched over 20 years ago in 2002. Like our other investment teams, each of these teams has its own outstanding leadership, its own unique investment philosophy and process, and its own culture. Yet all three have found a common home at Artisan Partners, a home designed specifically for investment talent.
For our senior management team and everyone else at Artisan Partners, our job is to maintain, evolve, and improve this home—for our existing investment teams and for future investment teams. We will continue to work each and every day to do just that. In so doing, we fully expect to continue generating successful outcomes for investment talent, clients, and shareholders long into the future.
Sincerely,
Eric Colson
Chief Executive Officer
Artisan Partners