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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, and thank you for standing by. My name is Steven, and I will be your conference operator today. [Operator Instructions] As a reminder, this conference call is being recorded.
At this time, I will turn the call over to Makela Taphorn, Director of Business Analytics and Reporting at Artisan Partners.
Thank you. Welcome to the Artisan Partners Asset Management business update earnings call. Today's call will include remarks from Eric Colson, Chairman and CEO, and C.J. Daley, CFO. Following these remarks, we will open the line for questions.
Before Eric begins, I would like to remind you that our earnings release and the related presentation materials are available on the Investor Relations section of our website. Also, the comments made on today's call and some of our responses to your questions may deal with forward-looking statements, which are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are presented in the earnings release and are detailed in our filings with the SEC. We undertake no obligation to revise these statements following the date of this conference call. In addition, some of our remarks made today will include references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in our earnings release.
I will now turn the call over to Eric Colson.
Thank you, Makela, and thank you, everyone for listening or reading the transcript. On the call today, I want to emphasize our commitment to high value-added investing. High value-added investing starts with talented people, working in a stable environment, consistently executing a stated investment philosophy and process. High value-added investing requires degrees of freedom, investment discipline, risk awareness and thoughtful management of investment capacity. Lastly, high value-added investing takes time, time to execute and time for benefits to materialize.
We believe that each Artisan investment strategy has delivered on our commitment to high value-added investing. Looking forward, we believe the work we have done to develop our investment franchises add degrees of freedom and place renewed emphasis on investment discipline and risk awareness will translate into successful client outcome for years to come. The benefits of a high value-added approach are more apparent in certain market environments.
Since 2009, we have experienced a bull market with low volatility and high correlation across asset classes and securities. We have seen unprecedented monetary expansion and cash flows into market cap-weighted index funds. It has been a difficult environment for active managers to differentiate themselves.
As shown on Slide 2. Over the last year or so, we have seen correlations declining, and more recently, we have seen increased volatility and rising interest rates. We may be returning to a world in which investment returns are not overwhelmed by central bank policy. We believe that's an environment in which asset allocators will place greater importance on high value-added investing and an environment in which value-added should be more apparent. Having said that, we believe that our investment track record during the bull market has been very compelling despite the challenging environment for the active management industry.
On Slide 3, the green portion of each bar is the average annual outperformance of the Artisan strategy since inception and after fees. 13 of the 15 strategies have generated alpha net of fees. 10 strategies have at least 10-year track record. Of those, 8 have generated alpha since inception, with average annual alpha ranging from 28 basis points to 513 basis points.
A couple of points about the U.S. Small-Cap Growth and Value Equity strategy. Since 2009, when the Small-Cap Growth team was merged into the current growth team, the Small-Cap Growth strategy has generated 228 basis points of average annual outperformance net of fees.
Regarding the Value Equity strategy, many clients measure its performance against the Russell 1000 value index. Measured against that index, the strategy has generated positive alpha since inception and after fees.
The 2 newest strategies on this page are both off to a strong start. The Global Discovery strategy, launched in September of last year, generated over 400 basis points of outperformance in its first 7 months of operation. The Thematic strategy, launched in May of 2017, generated over 2,000 basis points of outperformance in its first 11 months of performance.
Our business model has proven itself across 8 investment teams, each with unique alpha sources and each working independent of any centralized research. Our model has also worked across multiple asset classes and time periods.
As I mentioned earlier, returns are just one aspect of high value-added investing.
Each of Artisan's strategies is managed by a talented investment team, executing a stated investment philosophy and process. The talent on these teams has been stable over time, and we manage investment capacity to protect the integrity of the investment process and the ability to generate alpha. Currently, we have constrained flows into 7 of the strategies listed on this page.
Lastly, we give the investment teams time. In that regard, I'd highlight our emerging markets team. Almost 12 years ago, Maria Negrete joined Artisan with 3 analysts. Maria and 2 of the 3 original analysts remain on the team today. That group has worked together for 18 consecutive years. The team's 3 additional analysts have all lived the emerging markets experience. The team's personal and professional experiences have instilled a resiliency and commitment to their investment process. They have remain focused and dedicated through some difficult performance and business periods. Artisan, as a firm, has remained committed to the team. We know the high value-added investing requires experience, judgment, continuity and ability to deliver in the future.
Over the last 5 years, the Artisan emerging markets team has outperformed the index by an average of nearly 200 basis points per year after fees. That performance has improved the team's since inception returns. Gross of fees, the team has outperformed the index by 61 basis points over the last 12 years. There are very few investment teams that have been investing in emerging markets for as long and as consistently as Maria and her team. We are very excited about their future.
Moving to Slide 4. As an investment-oriented firm, we want to communicate clearly about the long-term direction of our investment teams and strategy. As you know, we have been engaged in a long-term initiative to expand the degrees of freedom available to our investment teams. Degrees of freedom is one important long-term trend, another which I will discuss in a minute, is risk awareness and management.
Expanding degrees of freedom can mean a lot of things. It can be as simple as allowing a strategy to hold more cash or concentrate capital or more pronounced, such as in our Credit Opportunities and Thematic Long/Short strategies.
Our efforts to increase degrees of freedom include our first-generation strategies launched between 1995 and 2002. These strategies are designed for asset allocators looking for alpha within relatively narrow parameters, such as market capitalization and geographic constraints. Over the years, working with our clients, we have reduced these constraints, providing our teams with greater degrees of freedom.
Our global strategies, which we began launching in 2007, provide the investment teams with broad flexibility to invest across geographies. And our newest strategies, beginning with the High Income strategy in 2014, represents another step in the direction of degrees of freedom.
The ability to differentiate from indexes and peers is an important part of high value-added investing. Degrees in freedom enable differentiation. They also give our investment teams more tools for managing risks, the importance of which increases as explicit investment parameters are reduced. Using degrees of freedom and investing with discipline, we expect our investment teams to generate results, to have integrity and are not easily replicated by passive exposure products.
Turning to Slide 5. One aspect of high value-added investing is managing a business that allows clients, employees and owners to sleep soundly. We aim to compound results with integrity to benefit all of our constituents. Compounding and integrity requires discipline and awareness of a risk/reward trade-off. We use a centralized risk management process to manage business and operational risk across the firm. By managing business and operational risks centrally, we're able to provide each investment team, no matter its size or tenure, with a business and operational infrastructure befitting a large firm with decades of experience. This also creates scale for adding new teams and new investment strategies when we find the right fit.
Investment risk, on the other hand, is owned by each investment team and integrated into what each team does on a day-to-day basis. Our investment teams operate as honestly and have the freedom to take investment risk in the context of a well-defined process. We do not have a centralized investment committee. Management works with each investment team to appropriately match degrees of freedom, risk management and return expectations.
To give you a better idea of how some of our teams approach risk management and how the approaches vary across teams, let me briefly summarize the Global Value, Credit and Thematic approaches. While each is quite different, each is fundamental and integrated with the team's philosophy and process. These are not external or firm-wide approaches to investment risk management. This is about each team knowing its philosophy and process and applying a healthy and rigorous amount of skepticism. They're asking themselves what risks are we taking, what are our weaknesses, what are our biases. Let's make sure we understand these things, articulate them and monitor them. Let's also be transparent and talk to clients about them.
With our earlier teams that have more guidelines or category expectations, their risk management guards against philosophical or process risk. In most cases, the team is not trying to manage risk to an index. Instead, the team is trying to be aware of and open about the risks inherent in their investment approach and process. For example, with our Global Value team, they seem to protect against time value of money and business value volatility, 2 classic value traps.
With our Credit team and the launch of the Credit Opportunities strategy, the team manages more levels of risk. The team makes conservative financial projections and seeks investments that are effectively covered by an issuer's enterprise value. The team can also manage risk by moving up and down in issuer's capital structure to seek a better risk/reward trade-off. The team uses floating-rate loans and derivatives to manage duration risk.
Lastly, the Thematic team incorporates risk management into each stage of its investment process given its team's extensive degrees of freedom. The team evaluates multiple metrics, crowding, stress test, liquidity, factor analysis and macro drivers. These analysis help the team understand the risks they are taking and confirm that the risk/reward trade-offs make sense. The team also uses various derivatives in an effort to magnify alpha and minimize downside risks.
We believe that understanding who we are and how we think about investments, people and growth is critical for investing in Artisan. Our approach places investments, people and trust above manufactured products, scale distribution and factory-oriented structures. We are patient and remain disciplined, which often produces lumpy results. We believe in high value-added investing, outperforming benchmarks and peers, maintaining strategy and process disciplined, stable talent and thoughtful capacity management. And we are confident that sophisticated allocators will continue to see and experience the benefits of our approach.
I will now turn it over to C.J. to discuss our recent results.
Thanks, Eric. Financial results for the quarter are presented on Slide 7 and include both GAAP and adjusted results. I will focus my comments on adjusted results, which we, as management, utilize to evaluate our business operations.
Our first quarter results benefited greatly from the impacts of tax reform, which reduced our adjusted effective income tax rate to 23.5% from 37%. As a result, adjusted earnings per adjusted share rose 18% to $0.78 from $0.66 in the preceding quarter. The $0.14 benefit realized from the reduction in the effective income tax rate was offset in part by $0.04 of higher seasonal expenses that we incur in the first quarter of each calendar year. The adjusted operating margin was 37.7% in the current quarter compared to 38.6% last quarter and 35% from the same quarter last year.
Summary of our AUM is on Slide 8. The March quarter-end AUM was $114.8 billion, down less than 1% compared to the previous quarter and up 11% compared to a year ago. Markets were volatile during the quarter as intraquarter AUM rose above $120 billion in January and in part drove average AUM up 3% from the December quarter.
Global markets, however, ended the quarter down over 1%. Strong alpha generation from active management across most of our strategies offset the majority of the market declines during the quarter.
Net client cash outflows were $600 million, substantially improved from the previous 3 quarters as gross client inflows improved significantly across the firm. Our Global Value team had over $1 billion in net client cash inflows from U.S. and non-U.S. clients across its 2 strategies. And our newer teams, Developing World, Credit and Thematic, continued to attract new client money into their strategies. Balancing out these net client cash inflows, we continue to experienced net client cash outflows from defined contribution clients, primarily in our Mid-Cap strategies in both our fund and separate account vehicles.
In addition, we experienced net client cash outflows as our account clients balanced away from certain of our strategies after years of strong market returns.
We have also seen the allocation trend from active to passive improved from prior quarters. We continue to remain disciplined when accepting new business, and we will continue to diversify our client base in order to protect capacity and our ability to add value for clients.
Our financial results begin on Page 9. In the current quarter, revenues grew 1% from the previous quarter and 15% from the same quarter last year. Both were generally in line with the increases in average AUM for those periods after taking into account 2 less days in the current quarter compared to the December quarter. Our effective average fee rate remained at 73 basis points, reflecting our active equity, high value-add product mix.
Given the variable nature of our expenses, our operating expenses increased on higher revenues. The current quarter also included typical seasonal expenses.
Last quarter identified a number of strategic business reinvestment initiatives that we would expect to commence midyear of 2018. The cost for those technology and occupancy initiatives will begin to show up in the second quarter, and we expect our technology and occupancy expense line items will remain elevated in the third and fourth quarters as well.
Further details on our compensation and benefits expenses are presented on Slide 10. Seasonal compensation expenses are included in benefits and payroll tax line and include the annual reset of employer payroll tax obligations and funding of our employee health savings and 401(k) plans. Equity-based compensation expense increased in the current quarter from the employee equity grant we made earlier this year. As mentioned in last quarter's earnings call, we expect that equity-based compensation expense will peak at $15 million in the June 2018 quarter before declining to $13 million in the September quarter and $11 million in the December quarter. The level of future expenses in 2019 and beyond will be impacted by the grant date values of future equity awards.
Our compensation ratio rose slightly to 49.6% from 48.4% in the previous quarter.
Our adjusted operating margin shown on Page 11 was 37.7% in the current quarter, down from 38.6% last quarter due to the higher seasonal expenses and equity-based compensation costs in the current quarter. Adjusted operating margin was up compared to the same quarter last year, primarily due to higher revenues.
The adjusted tax rate in the current quarter was 23.5% compared to 37% in the previous quarter and the same quarter last year due to tax reform, which resulted in an additional $0.14 per share of adjusted earnings in the current quarter.
Earnings per adjusted share were $0.78, up $0.12 or 18% from the previous quarter.
Our strong dividend history is shown on Slide 12. Last week, we announced that our Board of Directors declared a quarterly dividend of $0.60 per share. Supporting our quarterly dividend, with healthy cash generation during the quarter, adding back equity-based compensation expense, the largest noncash expense to adjusted earnings, we generated in excess of $0.90 per share in the current quarter.
As I mentioned in last quarter's earnings call, over the course of this year, we will assess our capital management policy, including the levels of our current quarterly and special annual dividend.
While we are not currently reconsidering our fundamental policy of distributing the majority or if not all of the cash we generate each year, we are considering revising the way in which we distribute that cash during the year. The current $0.60 quarterly fixed dividend is set at a level that should enable us to weather considerable market volatility without the need to majorly cut the fixed payout.
We believe transitioning to a policy that sets our quarterly dividend rate at 80% of the cash generated each quarter would result in a more timely and consistent payout over the course of the year and in line with our fundamental payout policy.
For instance, this quarter's dividend would have been substantially higher under the 80% variable quarterly policy than the current fixed policy.
We will continue to assess our policy and expect to make a decision later this year after digesting the impact of tax reform and feedback from our shareholders.
Our balance sheet metrics are on Page 13 and remain strong.
Our cash position is healthy and leverage remains modest.
Our leverage ratios have improved slightly from prior periods due to increased levels of earnings.
That concludes my comments, and we look forward to your questions. I will now turn the call back to the operator.
[Operator Instructions] And our first question comes from Robert Lee with KBW.
Maybe my first question, just kind of maybe to drill down into sales and flows a little bit. I mean, it looks like, particularly in your funds business, you had a pretty meaningful jump in gross sales in the quarter. I know maybe there is some seasonality in that. But can you maybe give us some color? And maybe there was some large fundings or is this some evidence of what you've kind of talked a little bit about seeing a little bit more active demand? And maybe also how that kind of progressed through the quarter would be helpful.
Robert, it's Eric. And clearly, first quarter does have the seasonality. We've seen that back through time. So that does elevate the flow numbers. I think the active environment is a slight positive, but I wouldn't read too much into that in the first quarter given that we're still in the early innings of that effect. I think we have seen some of our clients, especially in the intermediary platforms and a few larger accounts in the mutual funds, rebalance, and we saw some of that in the Global Value strategies where the global value is open to pooled assets and international value is also open to existing accounts that rebalance. So I think you just saw some first quarter rebalancing occur there than any trend that we would want to highlight.
Great. I appreciate that. And then maybe C.J. going to capital management, appreciate the -- some additional color and your thoughts around, I guess, quarterly payout ratio. But I guess, particularly just valuation on the stock that's come in, can you maybe update us on thinking about at what point does maybe share repurchase become part -- more of the mix? I mean -- and I think since your IPO, I think the share count is up about 9%, at least fully diluted share count. And I mean, so what point do you start thinking, gee, maybe that of the 20%, we should start buying back stock? Just kind of the latest thoughts there?
Rob, I think as we consider the payout policy on the cash dividend, that's why we've evolved our thinking a little bit on our thoughts on moving to a variable and using 80% as the level at which we would distribute the quarterly saving that 20% for other type of decisions and absent doing something else, we pay out the special annual. We continue to favor the cash dividend. We like the consistency, the transparency, especially in a people-based business. We like avoiding mistakes, which happen in share repurchase program. We think that in a high cash-generating business, the dividend is an important element to the value to our current shareholders. So I think in a prolonged period of depressed valuation of stock price that is evident, we would, under the new policy, consider that, but we haven't made any firm decisions on moving firmly in that direction.
Our next question comes from Bill Katz with Citigroup.
So Eric, I was thinking about -- so what you were talking about in terms of your footprint, how it's evolved over time. And I guess, the question is, I don't mean to be so crass or blunt with it, but does it matter, right? So what's happening on the LP side? Is there a migration back to appreciation for higher Active Share platforms? Or is it still -- so you said it is getting a little bit better versus passive. But are you seeing any decisive change in allocation or even selections or like RFP rating. So help us sort of seeing any kind of momentum change that might lead to a sort of a better flow picture. And then sort of corollary to that, you have a lot of funds that are still closed with outstanding performance as you highlighted, where are you in terms of capacity opportunity reopening any of those funds?
Yes, certainly, Bill. From a high Active Share and then evolving into the alternative space or hedge fund space, which we've labeled degrees of freedom because of that spectrum of unable to specifically define what a hedge fund is, we believe that space is very robust. I think we're over $3 trillion in just the hedge fund space alone. So I don't think we're looking at it as a momentum of assets as much as a reshuffling of assets. If we can compete and deliver a high value-add result, which is to us stable investment team, integrity of process, capacity control and delivering talent that I think differentiates in the marketplace, we can win a fair amount of assets in that category. We also look at the high value-added Active Share category and there's quite a bit of assets there. So our mindset is competing on market share there as opposed to forecasting a trend away from the current momentum of asset, which is in ETF and passive exposure. And we clearly don't want to compete there because we're competing on scale and fees. And I think there is plenty of players in that marketplace. So we'll continue to migrate and shift our mix of strategies more and more into the higher degree of freedom.
So what was your second question on that? There was a second component.
I'm sorry for the messy question. Just in terms of the capacity opportunity, and obviously your slide with the excess alpha is rather high and sort of obviously a lot of those have been either soft close or hard close and so you're just slowly getting the impact of redemptions now on gross sales. Is there any opportunity to reopen any of those funds? Where do you sort of stand on that scope?
We don't plan to reopen those. We will continue to manage the exchange of kicks, and that's what I was referring to the earlier question with regard to the rebalancing. So if we get a higher attrition rate or no redemptions coming in the future, we'll manage that capacity within close strategies or soft close strategies. So one quarter might be a little elevated and the next quarter might be down a little bit because we're looking out and just trying to managing the rebalancing of the capacity-constrained strategies. But of the ones listed there, we are not contemplating opening those up in the near term here.
Our next question comes from Alex Blostein with Goldman Sachs.
So follow up to Bill's question, I guess, around capacity, just, I guess, on the other end, anything on your radar that's starting kind of flash yellow saying that look, there might be some incremental capacity constraints that we should be thinking about on any of the products that are open right now?
We've mentioned in the previous calls just on the Global Opportunities strategy that we have been managing the pipeline of Global Opportunities. It's $16 billion under management. We have a healthy pipeline, but we want to make sure we glide into the -- a reasonable capacity numbers. That's one strategy that we've been managing a bit. And probably that's the only one that's coming up that would be yellow.
Got it. And then C.J., just one for you around your commentary on the expenses. So it sounds like tech, occupancy you highlighted will pick up a little bit in the second quarter and progress through the rest of the year. Just again remind us on the magnitude of the increase you expect in the next quarter and through the rest of the year. And is it just a 2018 phenomenon as you guys kind of step up incremental investments? Or do you expect some of that spill over into 2019 as well?
Yes, Alex, so on the last call, I indicated that both occupancy and tech spend would pick up in 2018. The occupancy spend is related to 3 investment team moves, which are scheduled to happen late third quarter or early fourth quarter and there's going to be -- currently, we're estimating about $3 million of onetime charges related to sort of sublease charges for vacating the space and accelerated depreciation, and those will happen when we actually vacate the space. So it's hard for me to give exact timing on whether it will be the third quarter or the fourth quarter because the moves are primarily happening around quarter-end. And then on an ongoing run rate expense, we'd expect fully loaded that we'd have about $2 million more of expense on an annual run rate basis, but that's going to be start of -- back end of the year and thinking more about 2019. And then on the technology side, we talked about increased expenditures there and we expect that to pick up in the second quarter here. And for the rest of this year, our average -- our quarterly run rate, we would expect to be around close to the $10 million a quarter versus the current $8 million and change and then we would expect that to decline a bit for 2019 because we have a number of projects that we don't anticipate replacing next year with other projects.
Our next question comes from Kenneth Lee with RBC Capital Markets.
Thanks again for the updated thinking on the variable quarterly dividend. I'm wondering if there are any initial thoughts on potential floors or caps on that variable dividend. Just trying to see if there is any kind of flexibility within that 80% payout ratio that you guys are thinking of.
No. Thanks, Ken, for the question. We are still evolving our thinking, but at this point, if we were to move to something like that, we'd want it to be transparent and consistent. So we indicated it would be 80% of the cash generated. We would want to stick to that and use that other 20% as sort of the variable piece that we would decide at the end of the year.
Got you. And then one follow-up. In terms of the outflows within the separate accounts, wonder if you could highlight any specific drivers for those flows, either key strategies or certain sets of clients that might have contributed somewhat elevated outflows.
Sure, Ken. I can't think of any large separate accounts or terminations that drove the number. It's primarily just a variety of clients rebalancing.
Our next question comes from Chris Shutler with William Blair.
You mentioned the emerging markets team has beaten the index pretty substantially over the last 5 years. Can you just talk about where you stand regarding marketing efforts around that team and the pipeline?
Sure, Chris. We highlighted the Emerging Markets. Primarily, last year, you saw the index up about 25%. You see a quite a few clients below their asset allocation targets in EM, and you're finally starting to get to 3- and 5-year numbers that are attractive versus other regions of the world. On top of that, our emerging markets team led by Maria Negrete has a differentiated approach looking at primarily a local perspective as well as a more diverse team. And we feel that the 3 and 5 years are quite strong. We echo those comments for Developing World as well. Again, it's a differentiated and Emerging Markets outcome, and we think both those strategies, given the backdrop of last year and continued into this year, will be of interest. From a pipeline standpoint, we are seeing more inquiries, but I think we're still in the early stages this quarter and next quarter and we're hoping to see more in the back end.
All right. That helps. And then just, Eric, how do you feel about fee rates right now? Are there any areas, any particular funds that, I mean, you might need to reassess? Or how are you thinking about fee structures at this point?
That's primarily why we highlighted on our deck in the Slide 3 with regard to our performance and that performance is net of fees. We believe our clients look at performance net of fees. They also look at the stability and the integrity of the strategy. In a lot of cases, you look back and look the performance and the portfolio management team has changed over a couple of times over a decade, and that's why we highlighted the strategies that we did that have decade-long track record. We also have controlled the capacity of these strategies and that capacity warrants a fee rate. And so when we say a high value-added outcome, we're looking at that in totality and the returns speak for themselves on that page. With that, we are obviously aware that fees are a big topic of discussion. The one area that we do see more fee discussion around is in the larger scale platforms that we're talking to, and you do see a mindset around either a separate account for subadvisory or other vehicles that you can play into for those platforms. And what I find more interesting now that these platforms have been around and have come around to an institutional oriented mindset, which is having research teams, having gatekeepers and having groups that can extend the duration of our relationship, not relying on a retail investor that may have 2-year duration in a fund, these platforms are showcasing the longer duration relationship and those warrant a slightly lower fee because the present value is high. And that's how we think of the fee context as: one, quality of services; and two, the total present value of the relationship. And we'll keep those 2 mindsets in place when we look at fees. But at this point, we feel confident across our fee schedule.
Our next question comes from Michael Carrier with Bank of America.
Maybe first one just on regarding the open strategies, particularly some of the new ones. When we look at the track record, it's been impressive, you've seen the inflows. Just trying to gain some understanding when you look at the clients, whether it's U.S. versus non-U.S., like could you accept like more money at a faster pace? And when you do get pushed back, is it on the strategies that have more degrees of freedom and some of the clients not used to that? Or is it on fees? Like what tends to maybe get the pushback versus where you're seeing more traction?
Sure, Michael, it's Eric. I think the real delta for early flows or start-up strategies is how much time you put on the investment team, take it on the road and sell. And we have said over the years that we limit this and try to spend most of our time getting the resources, the investment team, the process and the foundation work in so that we have the opportunity in the long run to deliver to clients. And if we wanted to increase flow, I think we would have to demand more time from our investment team, clearly our portfolio managers and get them on the road so that investors could look across the table, especially early investors and spend time and do due diligence. And that's a time-consuming process for your most talented investors, and we have opted to pace that in years 1 and 2. And as we get into years 2, 3 and 4, that gets elevated up, and we manage that cycle. So the one way we really couldn't increase it is just push the investment teams to get on the road, get out and just sell. And we have opted not to do that.
Okay. Got it. And then just a quick one, like the long-term performance remained strong, I think just on the 1 year, there is a bit of a pullback. I don't know if there was anything specifically that was driving that across the strategies or if it's more just a cycle, but just any comments on that.
It was more cycle, I think just more of the quarter that the cause may be a slight pullback, but it really could have been around a product or 2 and it could have been around what happened in that index and probably that the key one is around the Global Value team for the quarter had a slight pullback. But I think their long-term record and their ratings speak for themselves.
Our next question is a follow-up from Bill Katz with Citigroup.
For C.J., just as we look at the 2019 on the stock-based comp, if the stock were to hold here, so it's a two-part question, one is what will be sort of the incremental savings in terms of the amortization? And then more conceptually, would you look to potentially increase the grant rate as an offset to the foregone value?
I'll answer the second one first. No, that's not how we think about granting equity. The stock price and the grant date value are just sort of what they are. So our level of grant -- size of the grant would not change based on where the stock price would be. And I think the guidance I gave for the fourth quarter, I think, was at $11 million. It probably would hold consistent to sort of that fourth quarter guidance that I gave of $11 million.
Our next question comes from Alex Blostein with Goldman Sachs.
Sorry, another follow-up. Eric, this one is for you. Just wanted to go back to the point you made earlier around larger intermediary partners. So I guess, the wirehouses exploring ways to migrate more out of commingled funds into separate accounts, et cetera. Again, it's something that would just kind of yield them a lower fee and totally get the NPV argument, given the longer duration of capital there. But is that something we are just starting to see now or has that been happening for you guys for a while? And I guess, do you anticipate to see a larger migration of assets from mutual funds to separate accounts if this kind of continues to unfold? Just something I don't think you guys talked a ton about in the past.
Yes, sure, Alex. The migration has been occurring over the last few years, and we've been more confident with some of our partners and how they think and we can measure the duration of relationship. It's also been occurring just as you look at the classic institutional business of defined benefit and even the migration of DC moving out of direct mutual fund allocations into target-date funds or some type of solution. The nature of those relationships has evolved our traditional separate account business that would have been more direct. And you're seeing that attrition in the older institutional business of a defined benefit moving to an LDI type program, and we've been seeing a slower shift going into other programs. But net-net, you're swapping one long duration lower fee for another. And so I think you haven't seen the overall mix change much because it really is just a shift there.
This concludes our question-and-answer session for today. This also concludes our conference call today. Ladies and gentlemen, thank you for attending today's presentation. You may now disconnect your lines.