Affiliated Managers Group Inc (AMG) 2004 Q2 法說會逐字稿

Good morning, ladies and gentleman, and welcome to the Affiliated Managers Group second quarter results conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be for the question and answer session. Anyone needs assistance at any time during the conference, please press star followed by zero on your push button phone. As a reminder this conference is being recorded today, Wednesday, July 28, 2004. I would now like to turn the conference over to Ms. Brett Perryman. Please go ahead, ma'am.

Thank you for joining Affiliated Managers Group to discuss our results for the second quarter and first half of 2004. By now you should have received the press release; however, if anyone needs a copy please contact us at 617-747-3300 and we'll fax a copy immediately following the call. In this conference call certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors included but not limited to those referenced in the Company's form 10K and other other filings we make with the SEC from time to time. In this call the investment performance of certain products will be discussed, and the benchmarks are deemed by AMG to be the appropriate benchmark. AMG will provide on its website a replay of the call and a copy of our announcement of our results for this quarter as well as a reconciliation of any non-GAAP financial projections to the most directly comparable GAAP financial measures. You can access this information at www.amg.com.

With us on the line to discuss the Company's results for the quarter are Bill Nutt, Chairman and CEO, Sean Healey, President and Chief Operating Officer, Darrell Crate, Executive Vice President and Chief Financial Officer, and Nate Dalton, Executive Vice President in charge of Affiliate Development. Bill will begin the call with on overview of AMG's results and highlights for the quarter. Sean will then provide additional details of AMG's operating results and Darrell will discuss AMG's financials. We will then open up the lines for questions. And now I'd like to turn the call over to Bill Nutt. Bill.

Thank you, Brett. Good morning, everyone, and welcome to AMG's conference call discussing our financial and operating results for the second quarter of 2004. Let me begin with on overview of our results and the highlights for the quarter. We are pleased with our results for the quarter, as we reported cash earnings per share of $1. As Sean will discuss in greater detail in a moment, our affiliates produced solid results in the quarter against a backdrop os essentially flat equity markets and relative declines in flows throughout the industry. Looking across our affiliate products, we again benefited in particular from strong performance and net client cash flows among our domestic and international value equity products and quantitative asset allocation products. Highlights for second quarter included the closing of investment in Genesis Asset Managers, a premier investment manager of emerging market's equity securities. Genesis has an outstanding management team and an excellent long term performance record, and we're pleased to welcome them as our newest partners. In addition, just after the end of the quarter we announced an agreement to acquire approximately $3 billion in mutual fund assets from Fremont Investment Advisors through our manager's funds platform. We will also discuss this in greater detail in a moment.

Looking ahead we continue to make very good progress in our new investment area. We are extremely pleased with the strength and quality of your pipeline of new investment opportunities. While you've heard us say in the past that precise timing of transactions is inherently difficult to predict, we remain confident of our ability to continue to add to our earnings growth through accretive new investments. With that I'll turn to Sean to discuss our operating results in greater detail.

Thank you, Bill. Good morning, everyone. As Bill noted we posted good results for the quarter especially given the uneven market environment. Beginning with our client cash flows, as you saw in the release, our net flows were essentially flat for quarter; however, given the favorable mix of flows of higher margin products, these net flows resulted in slight increase to our annualized EBITDA of approximately 300,000. Again we were pleased to see especially strong performance in net client cash flows in a number of our larger, higher-margin affiliates such as Tweedy Brown, Third Avenue and First Quadrant. Our largest products at Tweedy and Third Avenue significantly out performed their peers and benchmarks during quarter and First Quadrant continues to produce excellent investment results and substantial net client cash flows.

Taking a closer look at our affiliates' performance in each of our principal distribution channels. We had good results in the mutual fund channel, with net inflows of approximately 420 million for the quarter. Among our affiliates with products in the channel, Third Avenue and Tweedy Brown produced especially good results. Third Avenue continues to generate excellent investment performance in net client cash flows across its fund family. Third Avenue Value and Third Avenue Small Cap Value funds continued to produce strong relative and absolute investment performance, and each fund ranks in the top quintile for their peer group for the quarter and year-to-date. Tweedy Brown also had a strong quarter with their Global Value fund out performing the hedged EEFA by more than a hundred basis points. The fund out performed its peer group average by nearly 400 basis points for the quarter and approximately 900 basis points for the year-to-date placing in top five percent of its category for the same periods.

In the institutional channel we had over 580 million in positive net flows led by First Quadrant, which had another good quarter. Tweedy Brown, Davis Hamilton, and Reese Associates also had a particularly good quarter. Our affiliates remain well positioned for continued growth in the institutional channel as many clients seek focused performance oriented boutique managers and these clients and consultants also increasingly recognize that by partnering with AMG, our affiliates have addressed their succession of transition planning issues while ensuring that current and future management are incented to continue to provide excellent investment performance and client service in future.

In the high net work channel, we had net negative flows of 1.1 billion principally from out flows in broker sold area and [INAUDIBLE] large cap value product. We did see during the quarter continuing positive flows in this channel from our portfolio services group platform for a number of affiliates. As you heard us say we see potential for future growth in brokers sold channel as our distribution platform PSG continues to expand now distributing more than 40 separate account and mutual fund products for 13 affiliates through more than 20 retail platforms, and we are beginning to expand this collective distribution platform to other segments of the retail marketplace.

Turning to another affiliate development initiative, as Bill mentioned we are further expanding the product offerings and distribution capabilities of the managers funds through the recently announced agreement to acquire 3 billion in mutual fund assets from Fremont Investment Advisors. This transaction, the third such acquisition we have made through the managers funds, increases managers scale and distribution capacity and provides meaningful margin enhancement. With a similar subadvised strategy Fremont is a very good fit with managers fund subadvisorty structure and the funds complement managers existing product offerings. As part of the transaction, managers funds will open a San Francisco office, which will expand their distribution capabilities and further strengthen their presence on the West Coast. As we've indicated, we expect the transaction to close at the end of the year. With that I'll turn it over the Darrell for a discussion of our financials.

Good morning everyone. As you saw in the release we reported cash earnings per share of a dollar for second quarter, two cents above First Call's consensus estimate. We reported GAAP earnings per share for quarter of 62 cents. EBITDA was 46.1 million for quarter. Quarter to quarter, our margin of EBITDA contribution to end of period assets under management decreased from 21.4 basis points in the first quarter to 20.8 basis points in the second quarter giving effect to our investment in Genesis at the end of the quarter. In our guidance model which assumes steady market growth of 2% each quarter we expect this ratio to be 20.9 basis points in the third quarter and approximately 21.9 basis points in the fourth quarter as a result of our purchase of an additional 19% interest of [INAUDIBLE] Associates at end of the quarter. Performance fees added roughly 2 cents for the quarter, holding company expenses were 7 million for the quarter. With regard to taxes, our tax rate decreased from 41% in the first quarter to 40% in second quarter. We expect this rate to remain at 40% for the remainder of year. Our cash tax rate for the quarter was 17.8%. Total deferred taxes were 7 million for the second quarter. Of this amount we only add back to cash earnings the 6.2 million that is related to intangibles as these will not reverse but for sale and impairment. I would note that as many of you know, the additional 800,000 is also cash actually received by AMG.

Looking ahead we expect total deferred taxes to be about 7.2 million for the third quarter of which approximately 6.4 million will be intangible related deferred taxes added back to cash earnings. Amortization for the quarter was 4.2 million. Depreciation for the quarter was 1.6 million with 1.1 million of that amount attributable to affiliate depreciation. As you recall affiliate depreciation is the noncash charge including cash net income as the replenishment of these depreciated assets is paid by the affiliates and not AMG shareholders. Interest expense was 8.8 million for the second quarter reflecting the additional interest expense related to the issuance of our 2004, $300 million mandatory convertible security. As you know we recently commenced a tender offer for the debt portion of our 2001, $230 million mandatory convertible. We forecast interest expense of $13.5 million in the third quarter, and that will decrease to 7 million in the fourth quarter. These estimates include our forecast for the tender related cost. Turning to balance sheet at the end of second quarter we had $250 million available under our credit facility and holding company cash of approximately 260 million. Which combined with the credit facility remains available to fund additional growth initiatives and new investments as well to opportunistically repurchase stock consistent with our past practices. Stockholders equity was 442.2 million.

Let me now take a moment to discuss a potential accounting change under discussion by the Emerging Issues task force of the FASB that could relate to two contingent convertible issues on our balance sheet, $123 million zero convertible and the 300 million floating rate convertible. In a meeting earlier this month, the EITF discussed changing the accounting for contingent convertible securities to require the use of the if converted method in our share calculations. The effect of the proposed change in accounting would require issuers to include in their earnings per share calculations all of the shares which could potentially be issued under their contingent convertible securities even if the issuer's stock price has not reached applicable level. Should this accounting rule change occur, it is important to keep in mind that this involves an accounting rule change only and does not represent any any change in economic value. We issued these securities on favorable terms and they continue to represent an attractive component of our capital structure with low cash costs, attractive tax benefits and high conversion premiums. At this point we have no way of knowing whether or when the EITF will mandate a change in the securities. The EITF has solicited comments prior to their next meeting on September 29, but to the extent there is a change in the accounting, we will consider any alternative approaches but we'll remain focused on maintaining the attractive economic features of the securities and not achieving accounting effects.

Turning to guidance and future earnings while we are not providing specific guidance on individual analyst's estimates, we'd like to provide some guidance on earnings for the remainder of the year. While markets are obviously down thus far in quarter, assuming 2% quarterly growth in the indices from the beginning of quarter until the end of year, we expect cash earnings to be in range of $3.90 to $4.00. This range does does not include additional earnings from performance fees, accretion from additional investments in new affiliates or additional repurchases of our stock, and are not based on current expectations about our affiliate growth rates and the mix in affiliate contributions, substantial changes in the equity markets would of course impact those expectations. Now we'll be happy to answer any questions.

At this time we will begin question and answer session. If you have a question please press star followed by one on your touch-tone phone. If you would like to pull away press star followed by two. You will hear a 3 tone prompt. Questions will be polled in order received. You will need to lift hand set before pressing number. First comes from Bill Katz with Buckingham Research.

Good morning guys. Doing okay? Just back to guidance make sure I understood that correctly. $3.90 to $4.00 assuming 2% point to point move each quarter. Are you suggest it is lower considering markets have tumbled.

Markets are down the quarter but we're trying to stick to that consistent methodology of 2% growth in each quarter so June 30 to September 30 we assume 2% and September 30 to December 31 expect 2% growth.

Out flows on the high network side at this point are there steps we should be think about this terms to cure out flows or is this a style issue at this point.

Let me ask Nate to address generally.

First to warn everybody we are talking ROAR large cap relative value product. This is a product basically sold in broker sold RAP channel. While it is relatively large product given fee rates and margins in that channel is effect of those flows have been limited on AMG. Focusing on specific and this product in particular. We obviously spent time looking at this product with them over the last year, year and a half or so and we belief the recent underperformance is not a problem with the process but rat it has been and issue be mentation of stock selection within the process and both we and they are working hard on addressing this why it has occurred et cetera. To illustrate about fundamental process the mid cap product using same process out performed its benchmark and both products have very good long term track records. Focusing on at least part of the problem is that the large cap product is principally in the rap channel a that is characterized by volatility and flows both in and out and we benefited when the product is hot. In terms of other action, prospectively we believe there are lots of opportunity to leverage breadth of the product into the channel off a single distribution force that is service group did well as it gets to scale that should reduce volatility.

That's fine thank you.

Bill, I would add to that the guidance we're putting forward does not involve any change in this product so all that Nate said is incorporated in looking forward so no change in trend in short term.

Second question is you have been talking about reconfiguring the third party distribution strategy or enhancing it to complement or tie in to managers group any anything to think about going forward.

They have been working together we've begun portfolio services group as we mentioned in last quarter but we begun having portfolio services group that is for managers funds but also other larger high margin quality names third avenue funds and the brandy wine funds are sold in broke channels on platforms by portfolio services group. If increasing places where those managers funds and AMG are working together. We are also beginning to take that outside of what you think of brokerage channel component of it. Other sponsored platforms earlier this month we announced a launch at LPL which is bringing all of those mutual funds managers funds brandy wine funds et cetera as well as separate account product including a range of the multi affiliate products to private ledger. This is a road trip on that right now for launch of entire product line. This is the first time we have been able to rule out entire product line against a sponsor in this way. There are a lot of developments there.

Thank you last question maybe for Darrell looking at balance sheet capacity you adjust or the the tender of the mandatory. And cash flow will go down next cupful of months or the incremental buy out of frees in November curious if there is less liquidity on balance sheet than June 30 numbers say.

Absolutely not we have positioned the balance sheet in order to take advantage of all of your opportunities. The tender is something that can be separately financed and is not something that would at effect the strategic on objective of the company.

Thank you.

Thank you Bill.

Next question comes from Mark Constant with Lehman Brothers please go ahead, sir.

Good morning couple of things. The third avenue in first quarter you guys talked about them declining resigning from a subadvisory mandate to free up capacity have they started replacing that yet how far along are they if they have.

Yes. Good flows in the quarter.

They effectively replaced it or is it getting the process.

Well there flows have been and the incremental above it the answer is they are on a very very good trend line so I think you'd assume yes they probably haven't completely filled it but we feel good about their position and prospects for continues growth along the product line actually.

Two kind of questions number one if you look at free month in a lift out role up transactions where you are consolidating actually within the affiliate that have been the exception of the rule but very very financially regarding to franchise do you look at that at historical multiples saying gee you look at a 20-30% cash shield and fantastic IRR the street looks at organic growth rates while that may be a great IRR unless you do wonders it is unlikely to contribute to organic growth rate given the nature of the situation. How do are you balance the the situations from a financial standpoint versus this depresses the intermediate term growth rate.

It is a good question Mark, I think there is subtlety to it. I think we would say this, we are first fundamentally going to be driven by financial returns and not by the appearance of certain figures including abouts affects so obviously we per per her to avoid out flows to the extent that they occur in the Fremont transaction you should assume they are fully priced into and anticipated in the way the deal was structured. So continuing with hypothetical, if they were of a magnitude that was really noticeable we will separately break them out and disclose them so people have a sense of what the on going, in effect internally driven growth rates are. I think we are not going to we're certainly not going to turn down attractive accretive high IRR opportunities because of a short term negative appearance.

Got it. Okay last question I guess I kind of had the on opposite perception of what Bill was implying a minute ago I wanted to run things buy you to get your thoughts and make make sure I understood it. My understanding was that the tender is actually only a temporary on the revolver then the bottoms go away do so it done effectively or long range credit me I'm wrong on that front presuming that is the case, I look at 250 million or so holding company cash 250 still unused revolver or only temporarily temporarily draw down revolver other say 60 million second second half free cash flow 200 million of underutilized leverage or borrowing capacity and when I back out free month I see more than 600 million cash in existing unused borrowing capacity you are not tapping yet no share repurchases this quarter. You guys seem financial astute to me the only implication is I here the optimism in our voice am I missing something here. Is 600 million the presumption I walk away with you have 600 plus million dollars fair or other reason you wouldn't be buying back stock here?

That a a fair reading that is powder kept dry. As I said in my remarks, both with the investment number opportunities we are enthusiastic. I think I said and I will say again until until you can have a definitive agreement signed and the transaction publicly announced we can't discuss specifics of anything we are working on yes that that is a fair reading.

To be crystal clear we are acknowledging and confirming our enthusiasm about the pipeline but not in position to confirm specific dollar figure of potential new investments again as you understand specific time line but you are absolutely correctly gauging our enthusiasm about investment prospects.

Didn't mean to put you in specifics thank you.

Next question is Mark Lane with William Blair and Company please go ahead, sir.

Yes good morning first question on flows. Were there any big institutional mandates there were one in the quarter as yet unfunded as of June 30th?

The answer is yes, again, a couple quarters ago we gave a strong signal as to the magnitude I don't think it is in that same category but yes, the answer is yes.

And what were the assets of PSG as of 6/30 versus 3/31.

The asset flow flow at PSG now is running about 10 million positive a week. So you can sort of extrapolate from that part is market and mix within the quarter. But the asset level was up sort of in line with that flow number that is about a good run run rate a week.

Ten million dollar net positive flow per week.

Yes.

Then on ROAR can we given this has been a discussion point for last several quarters and it continues to impact the stock, can you be a little more specific in how much exactly is in that product one wrap channel. What is the size of it? and did they actually get removed from any major platforms in the second quarter cause it seems like the level of out flows on an absolute basis was worse this quarter.

Why don't you.

Sure, first let me say this with respect to your question on relationships with sponsors, their relationships look obviously the continues under performed relative under performance is creating a and issue for them with sponsors but relative to sort of how their performance looks their relationships with sponsors at home office level and field is stronger than you expect given performance level. That is the the backdrop. Is it an issue? Sure given the flow you can work your way back ward from the flow number. It mean it is brokers in the field are having and on going issue as you know how that roles back to the sponsor level. Its still substantial size product. It is a significant product for the sponsors and I think they have a loyal clientele across a number of the sponsors.

What is the the size of it, the product product?

This product in that channel is in the 5 billion range.

My understanding that roar is on the list for several relationships one the brokers sold rep business.

That's right.

That done imply that they that's one step away from being bombed this performance done improve, correct? that is a five billion aggregate that you are saying is in a that channel right now.

Mark, we have over the years substantial experience in this channel. As we all know but to make sure everybody on the call knows, it is a channel that exhibits more volatility both ways in the flows. This is still, this has still been a tremendous investment for us. Roar is still ahead of where they were when we made the investment. There are other affiliates and we talked about them and talked about our distribution platform again broadens the number of affiliate exposed to this channel. We think over time they are going to be as we've had in past quarters where we have a lot of good flow data total net flow someday that that coming in from this channel you but we clearly are prepared to absorb periods where that isn't the case. I think it would be naive to assume and we are not assuming that the out flows are going to abate in the very short term, but I think it would also be unreasonably pessimistic to assume that a fine product run by a great firm with a long term record is going to go to zero because it has been put on watch. We have a lot of experience with firms under performing then coming back. Obvious investors in channel that that experience as well. We are not going to endorse your judgment about whether roar out flows at one 150 products is somehow having a big effect on stock price. That is a matter of perception. We actually think if you look at overall flows, including those flows you know must the math is they can't continue for a long time at this magnitude. If you look at it on and overall basis including outflows given market compared to peers but on relative basis we feel okay and good about position going forward.

I'd add to to that stepping back with roar this is a business we bought several years ago with assets under management at 4 billion. It is a fickle channel that can grow quickly and shrink quickly. We experienced strong growth there with this product. As Sean said, the long term track record in product is good. This is of course a substantial amount of product that has come in in last 24 months 3 years that is probably in most jeopardy. That is a couple billion that has been around for a while. The performance on those assets is good. Putting it in a financial context our cash on cash return for the roar investment is strong, when we look at billion dollars of out flows in that one product while it is a large product it has a low margin we share less in that relative margin than other businesses so we look at the ultimate cash earnings impact of a billion dollars in next quarter being a penny or penny and a half. There are many or initiatives that happen at firms like Managers or Tweedy did where we own a far more substantial portion of the firm that can more than out weight any sort of impact in this one product.

Okay. Just a follow up to the discussion on contingent convertibles I understand it is an if and when but there is a proposal out there pretty unambiguous to what it says, if it was that was approved today, in that current form what sort of impact would that have on your EPS given the structure of current debt?

When you maybe just taking a step back and seeing where we've been that is and accounting issue that hasn't yet been debated it did receive notoriety in Wall Street Journal early on there is a comment period of issuers from now to September. When we look at each securities there is about 5 million shares in 300 million cobra and 2 2 million shares in alliance that this proposal could be added to fully diluted number that doesn't make a lot of sense when you step back particularly when stock is trading at 20% discount to conversion premium. When you think about it on a treasury stock method which is I think the accounting most consistent with economic value transfer of this, let's say at 60 dollars which is above conversion price that would lead to just about a million shares of delusion on what will be approximately 35 million share base. So, we can see that the true impact is relatively small. I maybe just take take another second of folks time to say when orignal accounting was put together for for convertible it was focused when convertibles were financing companies that didn't have other financing alternative to the method was to over allocate to shares but things have developed since then hedge funds have come in market and strong appetite to purchase volatility and the other folks out there who issues those over the last four or five years have a little bit of different financial profile. Such as when we have a 300 million liability on balance sheet that is an investment grade liability. The idea to have and additional penalty to include shares in fully diluted number is double counting. The accounting does need to progress and evolve in a way consistent with economics out there. That is exactly what the -- what has been the mission since it engaged probably 18 months ago, in looking at relevance of accounting statements.

Okay thank you.

Thank you Mark.

Thank you Next question comes from Jamie Elsman with [INAUDIBLE]. Please go ahead, sir.

Good morning. Could you please comment on your thoughts about share repurchase versus acquisitions? With the price to assets under management heading down to one percent with PE on stock so slow why would you not access capital to repurchase stock rather to buy asset managers. . A question would be if you were to look at additional deals that would mean they are particularly attractive than buying your own company stock back back.

The answer in this question has of course come come up over the years and seems inevitably to come up when stock is trading at a relative low point, I think here's what we have said and I'll say again. We philosophically are oriented toward growing our business obviously through internal growth of existing affiliates and also through investments and additional affiliate and we think the growth through new affiliate investments not only provides incremental earnings on its own but benefits a business by adding incremental scale and diversification. The other thing to bear in mind in a real world sense is we make a substantial investment in new investment area in terms of amount of senior management time and effort involved in getting transactions to a point where the relationships has developed and a transaction is ready to be executed. The lead time is long term investors will know is literally years in the making. So what we don't do is say at any given point, we have an attractive new investment opportunity before we which we've been working on lets say years before we sign we are going to take a check to see whether our stock is trading at implied EBITDA multiple slightly below what we are paying it can't work that way. Obviously on a broad basis, we if we see a relative lack of attractive investment opportunities in pipeline and attractive includes not only high quality mid sized firms but also our ability to continue as we have in the past to price investments on and attractive accretive high return basis. If we see a relative lack of such attractive opportunities in pipe line and we have excess cash we will look to repurchase stock which we have done in the past over the years numerous time and will continue to do that. I think other folks on the call and shareholders have figured out that obviously we are expressing optimism about our new investment pipeline while cautioning that the inherent nature of new investment activity makes it impossible to disclose in advance or predict what is going to happen. As we said and I'll say again with that optimism regarding new investments going forward we're planning to execute on those new investments if we reach a point now or in the future where as I said the pipeline is less attractive and our stock is trading a level where it makes more sense to repurchase stock, then we'll do that.

Thank you very much.

Sure.

Next question is Robert Lee with Keefe, Bruyette and Woods.

Thank you good morning everyone. Just most of my questions have been asked couple of quick ones. With role out of PSG in mutual funds I'm assuming this is mainly through registered investment advisers there is no intention to build out a family of different share classes in some cases may become more capital intensive for the affiliates.

That is correct it is taking no load mutual funds into that exist today into the mutual fund wrap no load channel.

Maybe trying to get more color on Genesis sort of what their more near term trends or flows have been like. Obviously I think when you announce it had transaction assets are about 7 billion at the end of Q1 they ramped up to 8 when the deal closed it closed at about 7.2 knowing what emerging markets did in that period of time in terms of color on flows how did their flows been like in the last quarter or so or did they have any pipeline going out that is particularly robust or whatnot.

I can't quote you a specific figure or year- to-date flows but they have been substantially positive and the pipeline of new business opportunities at Genesis remains very strong. Obviously as you note the volatility in there assets under management as has been primarily driven by moves in the emerging markets. But we feel good about how they are positioned anything you want to add?

That is about flows have been good relative performance has been good asset class has moved down and been volatility.

Thank you.

Thank you next question is from John Hall with Prudential Investment Group please go ahead, sir.

Good morning.

Good morning John.

Point of clarity on guidance Darrell does that range include investment for freeze.

Yes it does.

You have already contemplated that what is the fact timing there of.

That will happen at the end of object.

Okay also Darrell could you in our comments about the contingent convertible securities I seem to be hearing you say you are willing to take dilution as imposed to incur what are the cash cost you finance would be if it comes to that is is that a correct interpretation.

It seems like this call seems to be migrating back to our philosophies. Getting from the very beginning we are looking to generate strong returns for shareholders we do that by making investments in strong mid size firms and get cost of capital as low as possible and properly plan our taxes. We are not going to be numb to surrounded and practical sentiment in market with that said we tend to be more allergic to to paying money to fix an accounting problem than what is our disposition which is we issued some securities that have some very strong strong benefits provide very low cost of capital and ultimately resolve themselves in a way that I think is attractive to shareholders. So the idea of spending real capital we can put into our strong investment investment pipeline in order to fix accounting presentation to effect us for short term seems silly.

So my statement holds.

I would also say there is a long way to go between here and there.

His statement holds.

I'm sticking with mine.

Sean, I hear what you are saying about repurchasing and the like, but, when you guys do deals your stock has a tendency to respond positively to those deals what is wrong with buying low and selling high?

I'm not sure I'm tracking.

Bring your shares back --

We use capital in both both circumstances if we are doing a deal or buying back stock and look we treat our capital dearly we are positioning ourselves in order order make the company -- we want the stock price to be as as high as it can be one year two year three years from now. That is our goal. We are simple in how we think about measuring ourselves and how we articulate cash earnings as that measure. We are straight forward in our approach.

John, the real way to answer your question is not -- I think think you are not suggesting dramatic moves in repurchases and large subsequent reissuances, I mean there is a practical boundary to all of this. I think the the substantive answer is we are relatively conservative in the way we position balance sheet ahead of new investment opportunities. So to the extent one wants to criticize our capital planning and cash management it really relates more to that in other words one could say well go sign him up and try to finance them later that is now how we run the business.

It goes to philosophy from the earliest days that is we've always tried to finance and do not one transaction or one larger transaction but multiple ones if we needed to do so.

Thanks John.

Thank you next question comes from McKeko Cokely with Endeavor Capital.

High thank you last time we met I remember you were saying you had about one billion of pipeline for potential deals that can get done potential redone. Is the size of pipeline still is same or larger?

I was in the meeting the we wouldn't put a cap on size of the investment universe we think of the universe most most broadly in terms of very attractive mid size firms that are potential investments then a pipeline of opportunities that were currently working on looking toward affiliate investments. The billion dollar figure came out as a illustration by Darrell of what the magnitude of the impact of new investment investment opportunities executed could be to our cash earnings. And we think it is very substantial I'm sure Darrell would be happy to repeat that now. We try to illustrate the opportunity from earnings growth from accretion because as you know it is not in any of the analyst expectations I think and certainly not in our guidance numbers.

Just a billion dollar number I have said from internal cash generation how we are positioned we can get a billion dollars of deals done in next 3 to 5 years. What you are hearing on this call is that 3 to 5 years is a conservative estimate in how we are able to execute pipeline.

And if we have as we hope we do, opportunities in excess of that level which is an arbitrary number for illustration we will not hesitate to execute them. We have a long way to go in terms of when we'd have to go back for incremental financing but if we're at levels in other words I think our shareholders would be quite happy if number is materially higher than a billion over three to five years.

We are disciplined of contemplation of equity issuance of course we model our deals to be accretive and be very accretive to shareholders.

In the scenario the accounting treatment tends to convert method would that capacity to fund acquisitions?

It is one we are clearly paying attention to we are involved in conversation but it has effect on our firms value you or prospects going forward.

Accretion was it 8% for 400 million can you remind me.

What is this for.

One there like a rule of thumb for hundred million acquisition to be accretive to?

I will let folks make their own models but the illustrative deal we think about is a ten times transaction. You can see what our financing cost are redo these things in a taxable structure for for amortization of purchase price given fixed rates are low. Historically bought these things in a range of 8-10 times every hundred million dollars leads to meaningful accretion that has been our track record over time I believe that is helpful.

Thank you very much.

Thank you.

Thank you next question comes from William Tanona with J.P. Morgan please go ahead, sir.

Good afternoon guys. Just one quick on on the Reporter: On the high net worth assets seems like it has been trending down but given affect of out flows out of wrap channel I would have thought we would have seen that number moving opposite direction given low return on those type of assets can you help me understand that better?

I do think the answer to the question ends up the mix across the channel not only coming from there but think about the fat of in throws we mentioned some in coming from PSG as well. And in fact PSG initiative is in reinvestment phase with respect to that business so the margin on those assets is very very low that is a business that is really reinvesting as it grows.

Sure.

I think over time Bill you are directionally correct which is you should see or high net worth margin improve modestly by the subtraction of lower margin business. To be clear during this period obviously as we grow the business the margin will expand to be clear we are putting on high net worth assets even lower margin in a temporary period as that business wraps up than the your rate assets.

I would have thought given with how much out flows would have occurred you would have seen that move up near term is there anything performance related in other channel as well.

The other thing, I know you know but it is our own way of categorizing these things we're including fairly low margin broker sold products sold to absolute investors so broker sold separate acan'ts with high met worth products in same channel that have very high margin but exhibit more stability less volatility either way and that obviously is going to factor into mix as well.

Okay thank you.

Thank you Bill.

Thank you at this time we have no further questions I'd like to turn the conference call back over to William Nutt for concluding contents.

I think in short we're pleased with the results for the quarter and the year-to-date and we are confident in prospects for a affiliate future per performance and our ability to execute investments in new affiliate thank you very much.

Ladies and gentleman this concludes Affiliated Managers Group second quarter results conference call. [OPERATOR INSTRUCTIONS] Once again we thank you for participating in today's conference call at this time you may now disconnect