Artisan Partners Asset Management Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Artisan Partners Asset Management Inc. is an investment management company that provides a range of value-added investment strategies to a diverse client base, relying on its investment talent and specialized expertise in various asset classes.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Artisan Partners Asset Management Inc. (APAM) operates in a very competitive industry, where their product is investment performance, as well as their sales and marketing capabilities. APAM’s revenue stream is derived from investment management fees, which are a percentage of assets under management (AUM). The financial performance is hence closely tied to the overall market conditions and their ability to attract and retain AUM. The following will dive into more details of all facets of the company.

Business Overview

  • Revenue Distribution: The company’s revenue is primarily generated from investment management fees. Performance-based fees also contribute when their strategies exceed specific benchmarks. The mix of equity, fixed income, and alternative investments all affect the overall revenue as they have different fee structures. Their diversified approach helps them weather different market conditions and offers avenues for growth.

  • Industry Trends: The asset management industry is heavily influenced by market fluctuations. Investors face more uncertainty and are increasingly cautious and have more options in their choice of asset managers. Trends also include a rising interest in specialized and customized investment solutions, along with ESG and alternative investments. The rise of passive and factor-based strategies creates pricing pressure for companies like APAM. Finally, the impact of AI on financial planning and advice is also a significant trend to watch.

  • Margins: Operating margins are generally good, typically above 30% but their recent results reflect lower performance fees, which has led to a significant drop in net margins. Also, compensation is a significant percentage of their costs and, therefore, fluctuations in the share price affect this. The company has been using buybacks to offset the dilutions related to their share based incentives.

  • Competitive Landscape: APAM faces a highly competitive market and some large institutions are moving to passive indexing or creating their own internal investment teams. There is a huge competition between traditional asset managers and those with lower fee passive models. Many hedge funds and private equity firms are also competing for the same type of clients. Companies such as Fidelity, Vanguard, and BlackRock, have a significant footprint and economies of scale are important in the industry as it allows them to provide higher-quality services at lower prices. As a result, there’s a continuous pressure on fees, impacting profit margins.

  • What makes APAM different: APAM’s differentiation lies in its investment talent and the specialized nature of its investment strategies, it focuses on strategies where active investing could provide a better outcome. It is a boutique asset manager that emphasizes the ability of its fund managers to do research, understand, and pick securities better than others and to understand investment nuances. It also offers a global platform to its clients and a wide range of products. Furthermore, the firm has a collaborative culture that it highlights in most reports and earnings calls, to attract new talent.

  • Recent Developments and Problems:

APAM has faced increased redemption pressures in the last few years, and they are trying to attract and retain clients.

Most of the growth in the company has come through its emerging market strategy, in contrast its U.S. equity strategy has performed worse than the market average in the last few years and has lost assets.

Their growth trajectory relies heavily on the performance of their emerging markets strategy and its ability to continue attracting assets.

The recent drop in fee income has caused the company to be under pressure. Also, some of the company’s larger clients are making strategic changes to their investment strategies, opting for internal management, and, therefore, are not relying as much on outside advisors like APAM.

In particular, 2022 was an exceptionally poor year for the company, primarily because of the poor performance and large drawdowns that occurred in growth stocks. The CEO believes that this is now a great value entry point.

However, the company has also hired and developed new talent, as well as put in place initiatives to reduce cost and diversify its offering to other asset classes.

The CEO has also mentioned that the company might pursue M&A opportunities, or explore launching more products.

  • Management view on challenges: The company is well aware of the current environment that is hurting their revenues. However, they are confident in their teams abilities to take advantages of opportunities and find new ways to create value and grow their business.

Financial Analysis

  • Revenue Trends: Over the past years the revenue growth has remained muted and more volatile. Their revenue growth and margins depend on market conditions and performance fees and could fluctuate substantially.

  • Profitability: Profitability as measured by net profit margins has also been impacted due to the factors discussed above.

  • Assets and Liabilities: The company’s balance sheet is healthy and has a good amount of cash available, with minimal debt. The company is not capital-intensive. Goodwill from past acquisitions is negligible and, therefore, does not pose a substantial write-off risk.

  • Return on Capital: While ROIC is generally strong, it has fallen to 14% levels due to the factors already mentioned. ROIC has an inverse relationship with volatility.

  • Cash flows: Free cash flow is consistent with profits which makes sense as the business is highly profitable.

  • Key Takeaways:

The stock has seen drastic volatility and price declines in the past few years, reflecting the concerns over slower growth and falling margins.

Though the company has made efforts to diversify and add new capabilities, the performance is still tied to market forces and their actively managed strategies.

Moat Rating: 2/5

  • Justification: APAM’s moat is considered weak as there’s very little barrier to entry. The business operates in a high competitive environment, the industry is susceptible to low cost players, as well as trends to bring down expenses. The firm has some differentiation through the expertise of its fund managers, however, such claims are often overstated. Even if APAM produces above-market returns, investors are still likely to leave for a competitor due to a better track record, or better communication from the competitor. There’s very little to keep clients from switching, and thus any advantages that the company has are not very sustainable in the long run.

Legitimate Risks that could harm the moat:

  1. Market Downturns: Economic recessions or substantial downturns can cause a decrease in assets under management, directly impacting the revenues and profitability.
  2. Performance Issues: In the very competitive environment, APAM’s returns might fail to beat competitors leading clients to withdraw their AUM. This would be particularly damaging for the company.
  3. Loss of Key Personnel: The loss of key portfolio managers or executives could cause clients to leave.
  4. Increased Competition: The investment management business is getting more crowded with more institutions entering the business. Also, passive and other low-cost options are becoming increasingly popular and, therefore, posing a threat to active asset managers.
  5. Regulatory Changes: Any changes to regulatory standards or client risk preferences could impact their revenues and operations.

Business Resilience:

While APAM faces a range of risks, its balance sheet health can help it during periods of lower revenues. The company also has a diversified client base and strategies which mitigate the impacts of the market cycle, as its fixed income strategy is less affected by the fluctuations. If their diversification efforts in the new asset classes become more successful, it will also help in the company’s sustainability. However, given the company’s reliance on the performance of the actively managed strategies, the company is likely to suffer heavily if markets perform poorly and clients withdraw assets as a result.

Understandability Rating: 2 / 5

  • Justification: While the core concepts of asset management are not too complex to understand, the nuances of APAM’s strategies and how they operate, requires a good knowledge of finance. The financial statements of asset managers are not easily comparable to those of other businesses, also making the process a bit difficult. The company’s revenue sources are also not very simple, and rely on many different factors. Furthermore, it can be hard to grasp all the intricacies of the market and its influence on the stock price. This, together, makes it slightly complex. Balance Sheet Health: 4 / 5

  • Justification: APAM has a strong balance sheet with limited debt and ample cash, which is an indication of its strong financial position. The company also has a high ROIC history, further signifying its good position and health, but the recent trend has been going down which warrants some concern. All of this implies that the balance sheet is sound, and in good condition, though the firm has been facing some headwinds lately.