Affiliated Managers Group Inc (AMG) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Affiliated Managers Group third quarter results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs operator assistance at any time during the conference, please press *0. As a reminder, this conference is being recorded today, Wednesday, October 27, 2004. I would now like to turn the conference over to Ms. Brett Perryman, Vice President of Corporate Communications. Please go ahead, ma'am.

Thank you for joining Affiliated Managers Group to discuss our results for the third quarter of 2004. By now you should have received the press release that we issued, however, if anyone needs a copy, please contact us at 617-747-3300 and we'll fax you one 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, including, but not limited to those referenced in the Company's Form 10K and other filings we made 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 benchmarks.

AMG will provide on its Web site 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 and the most directly comparable GAAP financial measure. 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. Now, I'd like to turn the call over to Bill Nutt.

Thank you, Brett. Good morning, everyone, and welcome to AMG's conference call discussing our financial and operating results for the third quarter of 2004. I hope you've all seen our release of yesterday afternoon as well as this morning.

Before we begin the discussion of our results for the quarter, let me turn to our announcement that, as of January 1, 2005, Sean will assume the title of Chief Executive Officer of AMG, while I remain Chairman. As Chairman, I will continue to be very active and committed to all aspects of AMG's business, working with Sean and the rest of our management team to plan and execute our growth strategy, focusing especially on efforts such as the ongoing cultivation of senior level relationships with perspective affiliates, both in the United States and internationally, where, over time, we have significant new investment opportunities. Additionally, I'll represent AMG more broadly across the industry through our Investor Relations efforts and be taking a more active in industry-wide initiatives.

As many of you know, Sean joined me shortly after I founded AMG when we had but a single affiliate and approximately $700 million in assets under management. Since that time we have worked together as partners to grow and develop our business to where it is today with 19 affiliates and over $100 billion in assets under management. While Sean and I have always worked in partnership, over the past several years he has taken an increasingly active role in the overall management of our business. In his capacity as President and Chief Operating Officer, Sean has proven his ability to lead AMG and to build shareholder value. He has been instrumental in developing and executing our corporate strategy, identifying important growth opportunities and in building the team that has contributed to our success.

Since the founding of AMG, we have established a unique position as the partner of choice for high-quality, mid-sized investment management firms seeking a succession planning solution which allows the firm partners to remain independent and retain substantial ongoing equity in their firms. As our business has grown, we have used our scale and resources to support individual and collective initiatives to enhance our affiliates growth and profitability. For the successful and disciplined execution of this strategy, we have built a broad and diverse organization with a demonstrated ability to produce consistent growth across a broad range of equity market environments. Since our initial public offering in 1997, AMG's cash earnings per share has grown by more than 240 percent, a rate which is 16 times higher than the growth of the S&P 500 over the same period. But, as strong as AMG's performance has been over the past decade, we believe our prospects for future growth are even brighter. I look forward to working with Sean and the entire management team as we continue to grow and expand our business and generate even greater value for shareholders.

With that and, as importantly, with my congratulations, I now turn it over to Sean.

Thank you very much, Bill. Of course, I'm very much looking forward to this opportunity and I'm grateful to Bill, the other members of our Board and to all of you for your confidence. As Bill mentioned, he and I have worked together as partners since I joined AMG in early 1995 and I look forward to Bill's continued involvement in all elements of the execution of our business strategy.

AMG has an exceptionally strong management team. The members of our senior group of executives have worked either for or with AMG from our very earliest days and each of senior executives, Seth Brennan, head of new investments, Darrell Crate, our Chief Financial Officer, Nate Dalton, head of affiliate development, and John Kingston, our General Counsel, have played a critical role in building the company and will be a key contributor to our continued success. AMG is a company with enormous opportunity and, as Bill said, we've created a strong platform and as we look to the future, our prospects for continued growth, both through the internal growth of existing affiliates as well as investments in new affiliates, are stronger than ever.

Let me turn to the discussion of the quarter. I'll begin with an overview of our results and highlights and, then, Nate will discuss our affiliate's performance in greater detail. As you saw on the release, we reported cash earnings per share of 96 cents for the quarter. That's a 15 percent increase over the same period of 2003. While the equity markets were down in the quarter, many of our largest products by EBITDA contribution, particularly our value and emerging markets equity products, produced strong relative investment performance and client cash flows.

Our net outflows of $1.1 billion for the quarter, reflecting ongoing challenges at our affiliate, Rorer Asset Management. However, looking broadly across the remainder of our investment products, in-flows remain strong with a total of $2.3 billion in net flows for the year-to-date.

Highlights of the quarter included the announcement of our pending investments in the equity business of Times Square Capital Management, a leading investment manager of small and mid-cap growth equity securities. Times Square has an outstanding management team and an excellent long-term performance record and we're pleased to welcome our new partners. We expect to complete both our investment in Times Square and our previously announced acquisition of the Freemont Funds during the fourth quarter.

Finally, we are very pleased with our continued progress in executing accretive investments in high-quality new affiliated. With the expansion of our credit facility in August and our recently announced forward equity sale, we have the flexibility and capacity for financing substantial additional investments.

With that, I'll turn it over to Nate to discuss our operating results in greater detail.

Thank you, Sean. As Sean noted, we posted solid results for the quarter in a challenging period in the equity market. We continue to see good relative performance and net client cash flows across a wide range of products at our larger affiliates, including Tweedy, Browne, Friess Associates, Third Avenue and First Quadrant.

Taking a closer look at our affiliate' performance in each of our principle distribution channels, first, we had good results in the mutual fund channel with net inflows of approximately $475 million for the quarter. Industry-wide, mutual fund flows were concentrated in value and international products during the quarter and, with their continued good relative performance, our affiliates Third Avenue and Tweedy, Browne were well positioned to generate significant client cash flows.

Focusing on Third Avenue for a minute, they continue to generate strong growth and assets under management through excellent investment performance and net client cash flows. Each of the Third Avenue, Third Avenue Small-Cap and Third Avenue International Value Fund outperformed their peers and benchmarks for the quarter and the year-to-date. Each of these funds ranks in the top 10 percent of its respective categories for the same period. As I mentioned, Tweedy, Browne also had a solid quarter as their largest product, the Global Value Fund, generated positive client cash flows reflecting their continued strong performance. The Global Value Fund has outperformed the hedged (indiscernible) by approximately 100 basis points quarter-to-date and 700 basis points year-to-date and ranks in the top 10 percent of it's category.

In the institutional channel, we had net outflows of approximately $300 million in directly managed assets, more than 100 percent of which were attributable to institutional client withdrawals of Rorer. However, we have positive flows among a number of our higher margin affiliates, including Tweedy, Browne, Friess Associates and Third Avenue. In addition, our newest affiliate, Genesis Asset Manager, has generated strong growth in assets under management this quarter through both investment performance and net client cash flows.

In the high net worth channel, we had net negative flows of $1.2 billion, principally from continued outflows in the broker-sold channel and Rorer's Large Cap Relative Value products. As we discussed during the last several quarters, we have been working with Rorer's management on this product. Unfortunately, it has continued to under perform its benchmark and peers and unless performance improves, we expect Rorer's outflows to continue for several more quarters.

Turning to our affiliate development initiatives, this quarter we announced the launch of Managers Investment Group, an expanded platform to create, distribute and service institutional quality products offered by AMG affiliates into the broker-sold and other sponsor product channels. Managers Investment Group combines the products, distribution and operational expertise for the Managers Fund, Portfolio of Services Group and Fremont with the retail marketing and back office capabilities of Rorer and Advantage Outsourcing Solutions to create a single point of contact for banks, brokerage firms and other sponsored platforms to access investment products managed by our affiliates. Managers Investment Group leverages the momentum we've created with our startup, Portfolio Services Group, by expanding both the scope and scale, utilizing capabilities that already existed across the affiliate group. Managers Investment Group will offer investment product managed by more than 10 AMG affiliates through an experienced sales force with extensive relationships in the mutual fund and separate account distribution channels. We expect the combination to be completed by the end of the year and the early response in the marketplace, and among our affiliates, is extremely positive.

With that, I'll turn it over to Darrell for a discussion of our financials.

Thank you, Nate. Good morning, everyone. As you saw in the release, we reported cash earnings per share of 96 cents for the third quarter. We reported GAAP earnings per share for the quarter of 55 cents. EBITDA was $42.7 million. Quarter to quarter, our margin of EBITDA contribution to end of period assets under management was 19.7 basis points, compared to 20.8 basis points in the second quarter. This largely reflects a full quarter of our investment in Genesis. In our guidance model, which assumes steady market growth of two percent each quarter, we expect this ratio to increase to 21.3 basis points in the fourth quarter, primarily as a result of our purchase of an additional 19 percent interest in Friess Associates at the end of October.

Performance fees added, roughly, a penny for the quarter. The holding company expenses were $7 million.

With regard to taxes, our tax rate was 40 percent for the third quarter and we expect this rate to remain at 40 percent for the rest of the year. Our cash tax rate for the quarter was 12 percent. This is a temporary decline as our actual annual tax payments were less than our accruals for the year. We expect our cash tax rate to return to 17 percent in the fourth quarter. For 2005, we expect this rate to increase to the low 20's as the before tax earnings from our internal growth will have a marginally cash tax rate of 38 percent. Our pending investments in Times Square and Fremont, which were priced very attractively, and, thus, have lower amortization, generate less of a shield for our taxes.

Total deferred taxes were $8 million for the third quarter. Of this amount, we only had back to cash earnings of $6.4 million that is related to intangibles and these will not reverse but for sale or impairment. I would note that, as many of you know, the additional $1.5 million was also cash actually received by AMG. Looking ahead, we expect our total deferred taxes to be about $8.2 million for the fourth quarter of which approximately $6.7 million will be intangible-related deferred taxes that we will add back to cash earnings.

Amortization for the quarter was $5 million. We expect this line item to continue to rise as we realize the full effect of our pending transactions. In 2005 we expect amortization for existing and impending transactions to be $22 million.

Appreciation for the quarter was $1.6 million, with $1.1 million of that amount attributable to affiliate depreciation. As you recall, affiliate depreciation is a non-cash charge we include in cash net income as a replenishment of these depreciated assets is paid by the affiliates and not AMG shareholders.

Interest expense was $8.2 million for the third quarter, reflecting the repurchase of $154 million of the senior debt component of our 2001 Pride, the remaining $76 million of notes having a November 2006 maturity and an interest rate of 5.4 percent. We forecast interest expense of $7 million in the fourth quarter. There was an additional $3.1 million of costs associated with the retirement of the 2001 Pride that's included in Investment and Other Income on our income statement that was previously included in our interest expense guidance.

Now, turning to the balance sheet, at the end of the third quarter we had $390 million available under our expanded credit facility and holding company cash of approximately $195 million, which, combined with our credit facility, remains available to fund additional growth initiatives and new investments as well as to opportunistically repurchase stock consistent with our past practices.

Earlier this month, we entered into a forward equity sale agreement under which we can elect at any time in the next 12 months to issue approximately 1.9 million shares of stock and receive proceeds of $100 million. The use of a forward sale agreement provides AMG with capital that is available on-demand and, thus, enables us to match our funding requirements with the share issuance, while also providing us with the flexibility to cancel the transaction at any time. Stockholders equity was $491.1 million.

Let me take a moment to update you on an upcoming change in the accounting rules that we've discussed before. As you will remember, the Emerging Issues Task Force of the Financial Accounting Standards Board recommended and the FASB adopted the elimination of the contingent convertible feature in the calculation of fully diluted shares. We expect this ruling to be effective by December 31, 2004. This action affects both our 120 million zero coupon convertible and our 300 million floating rate convertible. If we do nothing, we will include 7.9 million additional shares in our fully diluted share count in 2005. This stands in meaningful contrast to the true economic impact as reflected in the Treasury stock method of accounting which will result in a net share impact of only 225,000 shares at the current stock price.

Going forward, we intend to provide supplemental disclosure which presents earnings per share using both the Treasury method and the "if converted" method. In addition, we'll continue to explore our alternative. We'll remain hesitant to spend a material amount to modify these securities to solve an accounting issue. That being said, we're cognizant of the possible inefficiencies in the equity market and are committed to protecting shareholder value. As our long-term investors know, these securities have provided us with a very significant benefit since their origination saving us, accumulatively, in excess of $30 million after tax. We will continue to monitor the actions of others and the sentiment of investors as we decide our course of action.

Another change in accounting rules, which we have discussed in the past, is the implementation of FAS 123, the equity-based compensation standard. The timing and ultimate language of the rule, a change remains uncertain. Once that standard is clarified, we'll let you know the approach that we will take. Turning to guidance on 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 2004. While markets are obviously down thus far in the quarter, assuming a two percent quarterly growth in the indices from the beginning of the quarter until the end of the year, we expect cash earnings to be in the range of $3.90 to $4.00. To date, we have not given 2005 guidance and the current analyst estimate is $4.49. We observe that some of the expectations in individual estimates include the deployment of our cash. We are committed to putting our cash to use and, accordingly, we expect cash earnings per share to be between $4.50 and $4.60 next year. This expectation incorporates our traditional baseline assumption of two percent growth per quarter from the market. This also assumes no turn around in Rorer's results. Rorer has experienced a period of prolonged underperformance and we think it appropriate to be conservative in our forward guidance expectations.

We've also included in assumption for 2005 that we will invest approximately $5 million to continue to build out our distribution initiative in Managers Investment Group. It's off to a strong start and represents an attractive growth opportunity for AMG. As you'd expect, we will hold this deployment of capital to the same return standard that applies to all of our investments. That said, it will appear as an expense in addition to our holding company expenses. We have made no assumption about additional affiliate investments, but, as you have heard, we are optimistic about our new investment pipeline. Even with this optimism, transaction timing and completion is always uncertain and, if investments in new affiliates are delayed, we are committed to using our cash to repurchase our common stock.

Also embedded in guidance expectations are individual affiliate growth rates and mixes in affiliate contribution. Substantial changes in the equity markets, of course, impact these expectations.

Now, we'd be happy to answer any questions.

Ladies and gentlemen, at this time we will begin the question and answer session. (OPERATOR INSTRUCTIONS) Mark Constant, Lehman Brothers

Congratulations to Sean, although I think, maybe, more to Bill for getting a step closer to the door. The question I have for you is, first, Darrell, on your final comment, with respect to the Managers Investment Group holding company expenses next year, can you give us a general sense as to sort of timing progression of that expense through 2005 and is that something that you would expect to reoccur in 2006?

I think that, again, Managers Investment Group is just doing great and I would expect to see that $5 million deployed, probably, second, third, fourth quarter, more towards the end of the year. Nonetheless, and I said it but I can't emphasize enough, we have every expectation that those dollars are going to meet the same return threshold that all of our other investments do. There's a great group there and as that builds out I would only be more enthusiastic if we had the opportunity to continue to help it grow.

OK. With respect to Rorer, I think, Nate, you said something in your remarks about that you expect outflows for several more quarters. Obviously, they mathematically couldn't continue the pace of the second quarter for several more quarters. They wouldn't have assets left, I guess, if that was the case. Was there anything lumpy, for lack of a better term, a notable particular withdrawal this quarter or something that exaggerated the effect this quarter? Do you expect the outflow to slow and, therefore, be extended or is this still on sort of an accelerated mode?

I would hope that it wouldn't accelerate, but why don't I, in answering your question, first, step back and remind people what we're talking about is one product, a large cap relative value product at Rorer Asset Management, and this is a product that is principally sold in the broker-dealer channel. Both the institutional assets, most of which are sourced through broker-dealers as well as the high net worth assets, so both of those components you saw this quarter. As you know, the broker-dealer channel is an inherently more volatile channel in terms of flows, both up and down.

As I said last quarter, we and Rorer spent a lot of time looking at the product, both ourselves and with outside consultants, and that review process is ongoing. There are, clearly, areas that can be improved - maybe I'll spend a moment on that, too - as well as, honestly, just from bad luck. Remember, this is a fairly concentrated 35 ISH (ph) stock portfolio and we continue to have confidence in the basic process. In terms of the areas of improvement, there are some areas of implementation - we talked a little bit about this last quarter - meaning, specifically, stock selection that can and are being improved, as well as some particular evolutions of the process that will likely be implemented. Recall that this is a process that has both quantitative and fundamental components. While the performance has been very disappointing for a while here, putting it in context, again, the long term track of this investment team, and this is the same investment team that has been there all along, obviously, well pre-dating our investment in this product and is still good. As I pointed out last quarter, the investment performance of their mid-cap product remains good using substantially the same investment process and analyst team. It's also a smaller asset base.

Maybe, to follow on to that and also a little bit getting at your question about what could be happening here, spending a moment on what the asset base looks like. They have about $4 billion in large cap assets, which is this product we've been talking about, about a $1.5 billion in balanced and a couple hundred million in mid-cap and fixed. We would be hopeful, obviously, that performance improves, outflows slow, not only because of the mass that you pointed out, but also because we do believe, fundamentally, in that investment team that has been there all along. We do think they have talented people in the sales and service environment, so, hopefully, for all of those reasons, as well as the mass and the flow.

Mark, just to, again, ground that in the guidance and forward expectations, we're being very conservative about a turnaround at Rorer and only in that. If you look at it, a couple of quarters ago on this call, I sincerely felt that it had to turn and that we needed a little reversion to the mean. They've had nine straight quarters of just modestly underperforming. As Nate said, the components, the folks who are doing it, the process, there just isn't a reason other than bad luck that that happens. Nonetheless, we're being very conservative with the guidance. I want to remind everyone that it is a low-fee product and, as you can see, has a far lower impact on our earnings. Then, also, stepping back, when we looked at Rorer, I'm very pleased with this investment. Back in 1999, we bought the firm. As it grew, we had all of our capital returned to us. Even if today, Rorer were to go to zero, by the end of this year, in just a couple of months, we would still have an internal rate of return on our capital that is around 15 percent. It's been strong. I know that when we sit here and talk about what its future is like, where it's going, but, again, no matter what happens, it's been a great investment for us. I think where you're going with your question is just right, we're being very conservative about our assumptions, but, again, it can't go below zero.

Is it really just that $4 billion of large cap that's even experiencing the outflows or is that balanced, mid-cap and fixed stuff stable at this point?

The other parts of business, balanced is much more stable and these outflows you're seeing are principally that large cap product, yes.

Final question on the topic, at what point on that asset base would they begin to have to absorb a revenue split from owner's allocation cushion standpoint? Would they be experiencing issues related to having this sort of cut their costs and might you be inclined to sort of step in and help them absorb some of the negative operating leverage? Have you had that conversation with them?

I think, one thing to understand is that through the establishment of Managers Investment Group which, in part, took on the sales, marketing and administrative infrastructure of Rorer, coupled with other of our affiliate businesses, to create something which we think is a very attractive growth opportunity. One of the by-products of the establishment of Managers Investment Group is that, in effect, the shouldering of those costs, which prior to this time had been absorbed principally by the single product, is now spread across multiple products through the strategy that we've described. This is still a firm, which by nearly $6 billion, is very profitable. Of course, we can all forecast very conservative scenarios, but there are optimistic scenarios as well. In our guidance we've given what we think to be the most conservative scenarios which involve sustained and continued outflows and, obviously, we still think that we're expecting very good growth overall, notwithstanding what might happen at Rorer.

Thank you.

David Hass (ph), Fox-Pitt Kelton

Just a quick follow-up on the guidance that you gave for 2005, the $4.50 to $4.60, and that doesn't include on your end any affiliate acquisitions, but, Darrell, did you mention that the $4.49 that's out there currently, you think, does include?

No, not the $4.49, but there are individual estimates. What I was really speaking to and when I look at the estimates for next year I see a very wide range. I think, certainly, what accounts for some of that range is both looking at the cash that's been on our balance sheet throughout the year and understanding, as we've articulated our optimism for our pipeline, that we're going to get that put to use. When we look at $4.50 to $4.60, what I'm trying to say is that we're, again, very optimistic, but even if we did not make any new investments, we are comfortable that our earnings for next year will get into that range.

We're going to put the cash to use is the answer.

OK. Next question, just on some of your channels, to drill down, mutual fund inflows look pretty decent, these would be the other channels. How are you thinking about acquisition opportunities going forward? Are you starting to think that, maybe, the mutual fund business is a better one to acquire than institutional or, then, high net worth or are you still looking at each of the segments equally? A follow-up to that, on the mutual fund side, we've heard a couple of other companies make statements about scale issues and smaller mutual fund businesses and can you talk about how the scale and distribution of your mutual fund businesses ranks today and if anything needs to improve there?

The pipeline, as Sean said in his remarks, is excellent. We have so far, as you know, closed our Genesis Merging Markets investment; Times Square and Fremont are to close in the fourth quarter; the Friess additional investment of 19 percent of that firm closes at the end of this month, so, a lot of activity. There's still, frankly, plenty of time left in this year. I think it's fair to say that while we simply can't announce something until we have the definitive sign, and we're working very hard towards that end. With regard to the mutual fund area, I'd turn to Nate to comment on that.

I guess, maybe, before we get to the mutual fund area, the other piece of your question, David, is one area more attractive than another to us given changes in the industry, etc. and the answer is not really. When we step back and say, "OK. What's an appropriate or attractive affiliate investment?", first, it has always been and remains first and foremost about the people. We will invest in high-quality management teams that run a great firm whether or not it is diversifying or in what people might perceive as the trendiest area. It really is all about just investing in what we perceive to be the best firms with the best management teams. No area of specific focus. Nate, why don't you talk more from the standpoint of consolidating transactions.

We do see people out there talking about the scale issues in mutual funds and, frankly, that's been a real opportunity for us. If you look at some of the things we've done, we have actually acquired three mutual fund families, the Smith-Redden (ph) Funds, the Conseco Funds, and now we obviously have Fremont in process through a platform that we bought, the Managers Fund. That platform is pro forma for that acquisition that is going to be an $8 billion kind of fund family. The other thing I'd say is that we're also finding opportunities to work with our affiliates across both that platform, plus those other affiliates in some of the areas where you're hearing people talk about these scale things, compliance and all those sorts of things. We're finding a lot of leverage across the broad group. We're finding these scale issues to be opportunities for us to buy small fund families and, also, opportunities for us to add value to mid-size firms that have mutual funds.

OK. Just one final question, Sean, in your comments you made a statement that internal growth of new affiliates is stronger than ever today, I guess, for the Managers Investment Group that would be one of the positives. Is there anything other than that initiative that you see is different today for internal growth versus before?

I think, just to be clear, I was speaking generally and I said our prospects for continued growth are stronger than ever. I wasn't trying to measure this quarter against others. I do believe our prospects for continued growth, both from new investments which we've talked a bit about and, as Bill said, there's a limited amount that we say, but also through the internal growth of existing affiliates. Our largest affiliates, by EBITDA contribution, firms like Tweedy, Browne, Third Avenue, Friess Associates, all have put up great numbers. They've got a lot of capacity in their products, have had very solid inflows, etc. and those are the meaningful contributors. If I look broadly across our affiliate group, even this quarter, the substantial majority of affiliates either have positive or, at least, flat flows. The underlying investment performance has been strong. I gave you the year-to-date flow numbers, ex Rorer, $2.3 billion year-to-date. We feel, not only that the performance, ex Rorer, has been very strong in a choppy market, but also, importantly, prospectively, we feel great about the opportunity for growth and the Managers Investment Group initiative is one where there's not really any contribution except for the cost embedded in our forward guidance. I think even next year and, certainly, in future years, it's going to be a meaningful contributor.

OK. Thanks. That's great.

Bill Catz (ph), Buckingham Research Group

Congratulations, Sean. I'm curious, I'm hearing around from some of the other asset managers that the M&A environment is starting to heat up a little bit. I was just sort of curious if that's having any kind of impact on your ability to either affect a deal or even on pricing of deals?

I would agree with the general statement that it's heating up a little. I would say, though, more at the earlier stage although there are a few transactions that are being discussed in the rumor mill that we may see that, obviously, people have been working on, but not all those end up happening for a bunch of reasons. I would say this, our existing pipeline represents transactions that are in the main sell source and we've been working on for quite some time. I think the forward pipeline, meaning what we call "our prospecting activity", has heated up a bit and I think we are optimistic about the opportunities for us to make new investments, but also, I think, for a resurgence or rebound in overall M&A activity. It has been a much quieter year in terms of M&A activity than we, frankly, expected. Happily, we've managed to stay pretty busy and are still busy. I don't think any of those industry trends really say anything about either our current or future pipeline, which we feel good about regardless.

Just a follow-up on that, that's great color, when you say your forward prospect, the forward pipeline is picking up a little bit, what, historically, has been the lead lag between a prospect moving to an actual? Is a six-month window, a one-year window, what's the general sense?

I think the shortest period has been probably, I don't know, Bill, four or five months and, then, often it's more than a year. If you recall, Bill, our Genesis investment, for example, we began talking to them in 1996. That's fairly traditional, but I will tell you that the issue is more when does the moment come when the partners agree that now is the time to go forward with an AMG structured investment. That can come at almost any time. The shortest would be four to six months, longest could be several years, but the reason that we do take a long time in many instances is that is the best form of due diligence. You go back to a firm over a period of time and see that they do exactly what they say they're going to do, that's reason for us to go forward.

Just to add one last bit to that, while there is an inherent lumpiness to new investment activity for us or for anybody, we work very, very hard, and it's probably not so visible to our investors, but even while we're busily working to execute transactions where we've been in discussions and are negotiating a specific investment, we work very, very hard to still be out meeting new firms, developing, maintaining relationships. Bill talked a little bit about this in terms of things he's going to especially focus on. The prospecting activity in telling the story and maintaining relationships is a key part of our strategy.

Separate questions. I'm trying to understand sort of "box the concept" that your larger best of growth, higher margin affiliates are having very good performance and client cash flows versus the discussion on Rorer and sort of align that with the disclosure in the quarter that you had about a $1 million annualized reduction in EBITDA contribution, whereas, the last few quarters it has been the other way. How do I reconcile that your better more lucrative affiliates are doing well and low-margin contributor, Rorer, is doing poorly, but your free cash flow went down incrementally?

I'll speak directly to the reduction in cash flow, which is, again, that reallocation of the 2001 Prides charges that is in Other Investment Income out of Interest Expense. It's allocated to EBITDA so there's about $3 million that is bringing those numbers down.

I was speaking more specifically to your disclosure that, based on the free cash flows of incremental net client cash flows. Am I mixing up two different issues within the press release?

There's margin in the businesses and then there's the client cash flow components.

Maybe I'll circle back on that off-line.

(Multiple Speakers)

Sean was saying this earlier, but if you go down that list of the largest contributors, Tweedy, Browne, Third Avenue, Friess, First Quadrant, those firms, everyone of them is putting up good performance which is being reflected in client cash flows, certainly in the mutual fund channel where you saw that this quarter and, institutionally, it is a little lumpier, but very optimistic about the flows in that channel as well.

I hate to beat a dead horse here a little bit, but it comes back to Rorer. Is this a function where they're underperforming benchmark or are they also underperforming relative to peers?

It is both and the relevant peer group for them here is the competitive universe in the channels that they're in, so the answer is they are in the underperforming benchmark in peers.

I know you guys are hesitant to make managerial changes and you're talking very competently about the management squad. As discussed, you're, again, down to the point where you're almost down to zero, but at what point do you look to reposition the platform a little bit? Say that there is a recovery in that platform or that style that they're still not going to displaced by other names that have been in performance?

Two important questions in there. One, you said, and I know you're sort of doing it off-hand, hey, almost down to zero. As I've said before, they still have sort of $5+ billion in assets so there is still a firm there. The other thing, second point, absolutely and we are very focused on making sure that, as we work with them, reposition, was the word that you used, but as we work on the investment process, as we work with them on their products other than this large cap product, we are absolutely trying to make sure that the assets, meaning distribution assets here, not dollars, but distribution assets, the sales and service forces, are still there and focused on distributing those products into the channels they've been in historically as well as - and I think this is part of your question - as well as into other channels of distribution, so, absolutely.

Darrell, just one last question for you, you add together Friess, Times Square disclosure, which I think was about 13 cents of accretion, and also Fremont, which, loosely, might be another nickel, can you give us a general sense of what the run rate accretion will be from the deals that have been announced, including Friess on January 1?

We haven't given guidance on specific accretion numbers, but I think the numbers that have been out there, broadly, among the analysts are pretty accurate.

Just so I understand it, the range of guidance being (indiscernible) by consensus, is inclusive of the tax rate differential and the step up in the distribution and, then, sort of net of the accretion from deals that you've closed?

Yes, along with assumptions for mix and growth and all those other things.

Sure. This does not include the impact from the COCO (ph) accounting?

That's correct.

OK. Thanks very much, guys.

Robert Lee, Keefe, Bruyette & Woods

I apologize if you went over this because I did get to the call a little bit late, but just sort of a mechanical question, I guess, but in the quarter with the interest expense, I'm just curious why the reclassification of about $3 million that was previously in your guidance? Even with the $3 million, I think your guidance was about 13 and change versus about the 11 or so - - ?

About 11.5. The last part first, we were able to save a little bit on our guidance because we used our cash to fund the remarketing efforts. The GAAP just tells us that any accelerated interest payments or other components that are resolved in extinguishing those securities go into that line item as opposed to interest expense.

Great. Just a simple question of the cash you're showing on the balance sheet, could you go over how much of that was actually at the holding company and available?

As of the end of the third quarter, there's $195 million that is holding company cash.

Great. That was it. Thanks a lot, guys.

We have no further questions at this time. I'd like to turn it back over to Mr. Nutt. Please go ahead, sir.

Thanks for participating this morning and for your questions. It was a solid quarter for our affiliates and there are still a couple of months left in 2004, but we also look forward to 2005. Thank you very much.

Ladies and gentlemen, this concludes the Affiliated Managers third quarter results conference call. If you'd like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 and enter the pin code of 11009627. This conference call will be available today after 1:00 P.M. Eastern time. We thank you for your participation. You may now disconnect.