Business Update(5)
– Four of the Company’s nine eligible mutual funds(6) were in the top quartile of Lipper performance rankings for the three-year period ended September 30, 2011
– Five of the Company’s nine eligible mutual funds(7) were in the top third of Lipper performance rankings for the five-year period ended September 30, 2011
– Net client cash outflows were $4.2 billion for the third quarter of 2011
Management Commentary
“The third quarter saw sharply lower equity markets and a return to heightened levels of volatility,” said Richard Pell, Chairman, Chief Executive Officer and Chief Investment Officer. “Against this market backdrop, it proved to be a challenging quarter for our International Equity strategies, although we were pleased to see some moderation in outflows from our open International Equity II strategy. We continue to have a high degree of conviction in our portfolio positioning, particularly around the rise of the emerging market consumer, taking a considered long-term approach even at the risk of short-term underperformance.”
“We are encouraged by the potential for growth within our fixed income strategies that will serve to diversify our business. During the third quarter, our High Grade Fixed Income strategy increased its asset base, and produced another quarter of strong performance relative to its peer group. After the recent sell-off, high yield is increasingly being viewed as under-priced, with industry fund flows swinging back to positive since quarter end. Given our strategy’s strong long-term performance, we believe that we are well-positioned to participate.”
“On the equity side, we also remain confident that our four US Equity strategies are well-positioned to generate inflows, given the strength of their three- and five-year track records. Although US investors currently lack focus on the asset class, we are encouraged by the early stage inquiries that we are seeing from European investors.”
“Additionally, we announced organizational changes during the third quarter designed to right-size our business and repurchased stock as part of our ongoing capital management.”
Third Quarter of 2011 Comparison with Third Quarter of 2010
Assets Under Management and Net Client Cash Flows
Assets under management were $34.3 billion as of September 30, 2011, down $19.6 billion, or 36%, from $53.9 billion as of September 30, 2010, due to net client cash outflows and market depreciation.
Net client cash outflows for the third quarter of 2011 were $4.2 billion, driven primarily by net client cash outflows from our International Equity I and II strategies, and our High Yield strategy.(8)
Revenues and Other Operating Income
Revenues and other operating income for the third quarter of 2011 totaled $63.8 million, down 21% from $80.9 million for the third quarter of 2010. The decrease was driven primarily by lower investment management fees of $65.6 million for the third quarter of 2011, down 18% from $80.2 million for the third quarter of 2010, due primarily to lower average assets under management.
Employee Compensation and Benefits
For the third quarter of 2011, adjusted employee compensation and benefits expenses were $17.7 million, down 20% from $22.2 million for the third quarter of 2010. The decrease was due primarily to lower incentive compensation accruals, partly offset by accruals related to the Company’s long-term incentive plan implemented in 2011.
GAAP employee compensation and benefits expenses for the third quarter of 2011 were $28.4 million, up 15% from $24.8 million for the third quarter of 2010, due primarily to the Compensation Charge, partly offset by the reasons noted above.
Shareholder Servicing and Marketing Expenses
Shareholder servicing and marketing expenses for the third quarter of 2011 were $4.7 million, down 6% from $5.0 million for the third quarter of 2010, driven primarily by lower marketing expenses and a decline in custody fees.
General and Administrative Expenses
General and administrative expenses for the third quarter of 2011 were $9.5 million, a decrease of 16% from $11.2 million for the third quarter of 2010, due primarily to a decline in client-related trading errors and lower professional fees.
Income Taxes
For the third quarter of 2011, the adjusted effective tax rate was 41.4%, 2.0 percentage points lower than the 43.4% adjusted effective tax rate for the third quarter of 2010. The decrease was due primarily to a lower apportionment of income for state and local tax purposes in the third quarter of 2011.
The GAAP effective tax rate was 64.9% for the third quarter of 2011, 17.5 percentage points higher than the 47.4% GAAP effective tax rate for the third quarter of 2010. The increase was due primarily to a larger impact in the third quarter of 2011 from the write-off of deferred tax assets related to the vesting of RSUs granted at the time of the IPO, at prices below their grant date fair value, and the inability to record a tax benefit on non-operating losses attributable to the non-controlling interests’ economic ownership in the Consolidated Investment Products.
Third Quarter of 2011 Comparison with Second Quarter of 2011
Assets Under Management
Assets under management were $34.3 billion as of September 30, 2011, a decrease of $12.6 billion, or 27%, from $46.8 billion as of June 30, 2011, due to market depreciation of $8.4 billion and net client cash outflows of $4.2 billion.
Revenues and Other Operating Income
Revenues and other operating income for the third quarter of 2011 totaled $63.8 million, down 18% from $78.2 million for the second quarter of 2011, driven primarily by lower investment management fees. Investment management fees were $65.6 million for the third quarter of 2011, down 16% from $78.2 million for the second quarter of 2011, due primarily to a decrease in average assets under management.
Employee Compensation and Benefits
For the third quarter of 2011, adjusted employee compensation and benefits expenses were $17.7 million, down 24% from $23.2 million for the second quarter of 2011, due primarily to a decrease in incentive compensation accruals.
GAAP employee compensation and benefits expenses for the third quarter of 2011 were $28.4 million, up 10% from $25.8 million for the second quarter of 2011, due primarily to the Compensation Charge, partly offset by the reason noted above.
Shareholder Servicing and Marketing Expenses
Shareholder servicing and marketing expenses for the third quarter of 2011 were $4.7 million, a decrease of 9% from $5.2 million for the second quarter of 2011, due primarily to a decrease in marketing expenses.
General and Administrative Expenses
General and administrative expenses were $9.5 million for the third quarter of 2011, a decrease of 9% from $10.4 million for the second quarter of 2011, due primarily to lower professional fees.
Income Taxes
For the third quarter of 2011, the adjusted effective tax rate was 41.4%, 0.5 percentage points higher than the 40.9% adjusted effective tax rate for the second quarter of 2011.
The GAAP effective tax rate was 64.9% for the third quarter of 2011, 24.3 percentage points higher than the 40.6% GAAP effective tax rate for the second quarter of 2011, due primarily to the write-off of deferred tax assets related to the vesting of RSUs granted at the time of the IPO, at a price below their grant date fair value, and the inability to record a tax benefit on non-operating losses attributable to the non-controlling interests’ economic ownership in the Consolidated Investment Products.
Liquidity and Capital
As of September 30, 2011, the Company had cash and cash equivalents (excluding amounts held in consolidated investment products) of $89.2 million, investments held for deferred compensation of $9.8 million and an undrawn $100.0 million committed revolving credit facility. During the third quarter of 2011, in accordance with the terms of the credit agreement, the Company repaid $4.5 million of its term debt facility, reducing the outstanding balance to $42.0 million.
Total stockholders’ equity on the Statement of Financial Position was $153.7 million as of September 30, 2011, compared to $103.6 million as of December 31, 2010.
Share Repurchase
During the third quarter of 2011 the Company repurchased and retired 773,939 shares of Class A common stock at an average cost of $8.77 in connection with the 3,000,000 share repurchase program previously announced. As of September 30, 2011, the Company retains authorization to repurchase 2,226,061 shares of its common stock through December 31, 2013.
As of September 30, 2011, the total number of shares of Class A and Class B common stock outstanding was 59,251,113.
On September 29, 2011, in accordance with the Company’s certificate of incorporation, 16,755,844 shares of Class C common stock held by our former sole stockholder, GAM Holding AG, were converted to an equal amount of shares of Class A common stock.
For purposes of calculating adjusted earnings per diluted share, the Principals’ New Class A Units, held in the intermediate holding company as of the beginning of the period are assumed to have been fully exchanged into shares of Class A common stock on the first day of the period.
On October 24, 2011, the Board of Directors declared a dividend of $0.06 per share on the Class A common stock for the third quarter of 2011, which is payable on November 22, 2011, to stockholders of record as of the close of business on November 9, 2011.
Teleconference and Webcast Details
The Company will host a conference call for analysts and investors to review third quarter 2011 results, today, October 27, 2011, beginning at 8:00 a.m. (Eastern Time). The call will be open to the public and can be accessed by dialing +1-888-680-0860 (inside the United States) or +1-617-213-4852 (outside the United States). The number should be dialed at least ten minutes prior to the start of the call. The passcode for the call will be 15606585. A simultaneous webcast of the call (on a listen-only basis), as well as an audio replay, will be available at www.ir.ArtioGlobal.com .
About Us
Artio Global Investors is the indirect holding company of Artio Global Management LLC (“Artio Global”), a registered investment adviser that actively invests in global equity and fixed income markets, primarily for institutional and intermediary clients. Headquartered in New York, Artio Global has offices in Los Angeles, Toronto, London and Sydney.
Best known for International Equity, Artio Global also offers a select group of other equity and fixed income investment strategies, including Global Equity, a series of US Equity strategies, High Grade Fixed Income, High Yield and Local Emerging Markets Debt. Access to these strategies is offered through a variety of investment vehicles including separate accounts, commingled funds and mutual funds.
Since 1995 our investment professionals have built a successful long-term track record by taking an unconventional approach to investing. Based on a philosophy of style-agnostic investing across a broad range of opportunities, we have consistently pursued a global approach that we believe provides critical insights, thereby adding value for clients over the long term.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this news release may, and the related remarks do, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the intrinsic value of our common stock, investor behavior, net client cash flows, our compensation costs and adjusted compensation ratio, future tax rate, use of our free cash flow, potential share repurchases and declaration of dividends. These forward-looking statements are based on the Company’s current assumptions, expectations and projections about future events. Words like “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, and similar expressions are used to identify forward-looking statements, although not all forward-looking statements contain these words. These forward-looking statements discuss matters that necessarily involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements.
Among the factors that could cause actual results to differ from those expressed or implied by a forward-looking statement are those described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s report on Form 10-K (File No. 001-34457) filed with the Securities and Exchange Commission on February 25, 2011. Other unknown or unpredictable factors also could have material adverse effects on the Company’s future results, performance, or achievements.
Any forward-looking statements in this news release and the related remarks speak only as of the date of this news release. The related remarks may contain information about the Company subsequent to September 30, 2011. The Company is not under any obligation and does not intend to make publicly available any update or other revisions to any forward-looking statements to reflect circumstances existing after the date of this release or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.
Fund Performance and Other Disclaimers
Lipper rankings are for Class I mutual fund shares with three- and five-year track records only. Other classes may have different performance characteristics. Lipper, a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments including mutual funds, retirement funds, hedge funds and fund fees and expenses to the asset management and media communities. Lipper ranks the performance of mutual funds within a classification of funds that have similar investment objectives. Rankings are historical with capital gains and dividends reinvested and do not include the effect of loads. If an expense waiver was in effect, it may have had a material effect on the total return or yield for the period.
Morningstar rankings are for Class I mutual fund shares with a minimum three-year track record. For each mutual fund with at least a three-year history, Morningstar calculates a Morningstar Rating(TM) based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating for a mutual fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. A fund’s independent Morningstar Rating metric is then compared against the mutual fund universe breakpoints to determine its hypothetical rating.
Data presented reflect past performance, which is no guarantee of future results. (C) 2011 Morningstar, Inc. All Rights Reserved.
This news release is not, and should not be considered, sales material and is not an offer or a solicitation for any securities.
(1) See Exhibits 3 – 5 of this news release for a reconciliation of the Company’s U.S. GAAP results to its non-GAAP adjusted results (“adjusted”).
(2) Effective fee rate is defined as annualized investment management fees (based on the number of days in the period) divided by the average assets under management for the period.
(3) Richard Pell, Chairman, Chief Executive Officer and Chief Investment Officer, and Rudolph-Riad Younes, Head of International and Global Equities, are collectively referred to as the “Principals”.
(4)Represents total revenues and other operating income.
(5) See section entitled “Fund Performance and Other Disclaimers” and Exhibit 8 of this news release for further information about Lipper and Morningstar rankings.
(6) Class I mutual fund shares with a three-year track record; other classes may have different performance characteristics.
(7) Class I mutual fund shares with a five-year track record; other classes may have different performance characteristics.
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