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Stock Strategist

Artio IPO Leaves Something to Be Desired

Though we like the asset management business in general, Artio has a much higher risk profile than many of its peers.

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In the midst of all the REITs coming to market, Artio Global Investors, an investment manager, will look to raise almost $600 million through an IPO Thursday. The firm will offer 23.4 million shares with a price range of $24-$26 per share. While Artio has a strong investment track record as well as a high concentration of institutional assets under management, we have a few issues with the firm. Morningstar equity analyst Gregg Warren expands below:

"Artio Global Investors (ART) plans to raise around $585 million through an initial public offering of common stock, using all of the proceeds to purchase shares from its parent company, Julius Baer Group, and its two principal officers, Richard Pell and Rudolph-Riad Younes. Artio provides investment management services to individual and institutional investors with a focus on international equity strategies, which account for an overwhelming majority of the firm's assets under management (AUM). We like the asset management business in general, but Artio is coming to market on the back of what has been an extremely strong run for the asset managers. The company also has a much higher risk profile than many of its peers, so our interest in this offering is low.

"While there are plenty of things to like about Artio, from its historical track record of market beating performance to its concentration of managed assets with institutional investors (which tend to be far stickier than individual retail investors), there are several issues that prevent us from being more interested in the firm. For starters, the company only recently changed its name to Artio Global Investors, leaving behind the strong brand image it had established with Julius Baer Americas. While the firm's investment track record has been impressive, with its International Equity I (BJBIX), Global Equity (BJGQX), and Total Return Bond (BJBGX) funds all beating their respective benchmarks handily since they were launched in 1995, performance through the first eight months of 2009 has been less stellar. Should this persist, Artio faces the prospect of losing some of the support it has traditionally had from institutional investors, which once lost are very difficult to bring back into the fold.

"With nearly all of its annual revenue coming from management fees earned on its AUM, dramatic market movements or changes in fund flows can have a significant impact on Artio's revenues and profits. The firm's investment portfolio is overwhelmingly tied to equity strategies, which ties the performance of its funds to the vagaries of the global stock markets. Artio's AUM is also concentrated in just two of its funds, International Equity I and International Equity II (JETAX), which accounted for 84% of the firm's AUM at the end of the second quarter of 2009. Therefore, the company's results are almost entirely dependent on the future under- or over-performance of just two funds. This high concentration creates significant risk, as the recent collapse of single-style manager W.P. Stewart & Company demonstrates. The firm's overseas focus further exposes investors in its funds to cultural, political, economic, and currency exchange risks.

"Like many asset management firms we cover, Artio's shareholder structure leaves much to be desired. Despite becoming a publicly-traded company, Artio will still be controlled by Julius Baer and the two principals. After the offering, Julius Baer will continue to hold a 47% economic interest in the firm, with 35% of the voting rights vested in its Class C shares. The two principals will have no economic interest, although they will receive $28 million each from the proceeds of the offering and will each retain 13% of the voting rights vested in their Class B Shares. This leaves Class A shareholders, which will hold a 53% economic interest, with just 39% of the voting rights."

Bill Buhr does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.