Affiliated Managers Group Inc (AMG) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Affiliated Managers Group fourth 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 assistance at any time during the conference, please press the star followed by the zero on your touch tone phone and as a reminder this conference is being recorded today, Wednesday, January 26, of 2005. I would now like to turn the conference over to Ms. Brett Perryman with affiliated managers group. Please go ahead, ma'am.

Thank you. Thank you for joining Affiliated Managers Group to discuss our results for the fourth quarter and full year 2004. By now, you should have received the press release 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 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 benchmarks. 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 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 and year ended are Bill Nutt, Chairman. Sean Healey, President and Chief Executive Officer. Nate Dalton, Executive Vice President in charge of Affiliate Development and Darrell Crate, Executive Vice President and Chief Financial Officer. Now I would like to turn the call over to Sean Healey. Sean?

Thank you, Brett. Good morning, everyone and welcome to AMG's conference call discussing our financial and operating results for the fourth quarter and full year 2004. Before I discuss AMG's results for the quarter, Bill will provide an overview of the past year, Nate will provide additional details about AMG's operating results and Darrell will discuss AMG's financials. We will then open up the lines for questions. Bill?

Thanks, John. I would like to begin with some broad observations about our business in the 2004 year. And then discuss why we believe we are very well-positioned to continue to grow in 2005 and beyond. After a decade of successfully investing in high-quality, mid-size firms, we have assembled an outstanding group of affiliates that are highly diverse in their investment styles and distribution channels.

Many of our affiliates, especially those which are the largest contributors to our EBITDA are recognized leaders in their particular style of investing. Such as Tweedy, Browne, Third Avenue, Friess Associates, Genesis, First Quadrant, and AQR. We believe that the quality and breadth of our affiliate products was evident in our 2004 results and will allow AMG to generate strong, organic growth in the years ahead.

In addition to our affiliates' ability to generate internal growth, AMG has built a platform which provides an additional source of earnings growth through accretive investments in new affiliates. We have positioned AMG as the succession planning partner of choice for the best midsized firms. Now, with an established track record of serving as an innovative and helpful partner with our affiliates, AMG is recognized as the preferred alternative for those management teams who wish to remain independent and autonomous but realize some of the equity value they have created and solve the problem of securing future participation in the firm's ownership for their next generation.

After many years of calling upon midsize firms and with the reference of our existing affiliates, we continue to have an excellent pipeline of new investment opportunities. We demonstrated in 2004 the flexibility of our business model with our investments in Times Square and AQR as well as our first internationally-based affiliate, Genesis Asset Managers, and looking ahead, we expect to continue to do so in 2005 and beyond. Stepping back, it is also important to note that AMG is well-served, not only by our business model and the quality of our existing affiliates, but as importantly, our management team, which is one of our principle assets.

While our core group of Senior Executives have been with the Company from our earliest days, over time, we have continued to add depth and expertise to our management team. In 2004, for example, we brought on talented new professionals to our new investment, finance, affiliate development, and legal regulatory compliance groups. We also practiced what we preach. In terms of acting upon the principle of good succession planning as key to success for ourselves as well as for our affiliates as we announced in October on January 1, Sean became not only President but Chief Executive Officer. Recognizing his increasing responsibility for the overall management of our business.

While I remain fully active and committed to our business, particularly in areas of strategic planning, prospecting, and Investor Relations, Sean has assumed responsibility for executing our entire business plan. In sum, as we look to the future, AMG has built a strong foundation for growth across all areas of our business. We're extremely well-positioned to generate excellent results in 2005 and beyond. With that overview, let me turn to Sean for a review of our results for the quarter and the full year.

Thank you, Bill. Let me start by discussing AMG's results for the quarter and the full year 2004.

As you saw in the release, we reported cash earnings of $1.08 for the fourth quarter and 3.95 for the year. These results reflect strong performance across our affiliate group but especially among our largest affiliate by EBITDA contribution including Tweedy, Browne, Third Avenue, Genesis, Friess, and First Quadrant which all produced strong performance and positive net client cash flows in the quarter. Overall, our net client cash flows for the quarter were approximately 180 million. Of those, 100 million were indirectly managed assets. Given the favorable mix of our net flows to higher margin products, these net flows resulted in an increased or annualized EBITDA contribution of approximately 600,000. Excluding Rorer, inflows were strong in the fourth quarter and for the full year with a total of 1.6 billion in net flows for the quarter and$3.9 billion for the year-to-date.

Turning to our new investment area, the fourth quarter was highlighted by our investment in AQR capital management, a leading manager of both hedged funds and loan only equity portfolios. AQR has generated strong growth in assets since its inception in 1998 and our investment in AQR further diversifies the sources of AMG's EBITDA as the firm's hedge fund strategies have a low correlation with equity indices and their principle loan only product is focused on international equities. In addition to AQR, we also closed our investment in Times Square capital management in the fourth quarter.

As you recall, we bought the Times Square equity management business out of Cigna in partnership with Times Square's management team. With roughly 5.5 billion under management, they have an outstanding team and a great long-term record in managing small and mid cap growth equities. Our investments in AQR and Times Square are both off to good starts and Genesis which we closed in the second quarter of 2004 had a tremendous year. An emerging markets equity manager, Genesis has grown their assets by almost 50 percent since we made our investment.

After the quarter ended in the second week of January, we closed the acquisition -- our acquisition of the Fremont funds into our manager's funds mutual fund unit. Together with the acquisition of the Conseco funds earlier in 2004, we added over $3.3 billion of mutual fund assets to managers last year and we continue to see significant opportunities for additional attractive and accretive acquisitions of this type. As we look to 2005, we feel very good about our prospects for our existing business. Our affiliates include some of the highest quality midsize investment managers in the industry and with the number of leading mutual fund and institutional products in areas such as global and international equities, emerging markets equities and quantitative investment strategies, we are very well-positioned for strong internal growth through investment performance and client cash flow.

In addition to our expectations for our affiliate's growth as we have said, we remain confident in our ability to continue to make accretive investments in additional affiliates. We think that 2005 will be another strong year in our new investment area. Given our strong balance sheet and recurring cash flow, we're well-positioned to fund our new investment opportunities which, as you know, we believe are an especially attractive use of the cash our business generates. However, as we've done in the past and periods where we find ourselves without attractive new investment opportunities, we're committed to using our cash flow to create shareholder value, including through share repurchases. With that, I'll turn to Nate to discuss our affiliate's results in greater detail.

Thank you, Sean. Good morning, everyone. As Sean noted, looking across the affiliate group, we had good investment performance in net client cash flows, especially among of some of our larger affiliates including Third Avenue, Friess associates, Genesis, and First Quadrant. This was reflected in strong growth in both the mutual funds and institutional channels. While in the high net worth channel, the growth from investment performance was offset by the net outflows from the Rorer, large cap relative value product.

Taking a closer look at our affiliate's performance in each of our distribution channels, first, we had strong results in the mutual fund channel with net inflows of approximately 820 million for the quarter. Stepping back, across the industry, flows into mutual funds increased during the fourth quarter compared to the last couple of quarters. And as they have for much of the year, international, global and real estate mutual funds received disproportionate flows while in domestic equities value in equity income funds received significant flows. AMG was well positioned to participate in these trends and did so with significant client cash flows primarily through Third Avenue.

Focusing on Third Avenue for a moment, they continue to generate strong growth in assets under management through excellent investment performance and net client cash flows and the firm has more than doubled since the time of our investment. Looking ahead, Third Avenue's outstanding absolute and relative performance extends across their product line. And their business model is scalable across multiple distribution channels in which they have increasing momentum. As a result, we remain very enthusiastic about Third Avenue's growth potential. Tweedy, Browne had a solid quarter in this channel and a good quarter overall.

The global value fund had a challenging quarter on a relative basis given that Tweedy, Browne hedges its position to the dollar and most of its competitors do not. I should note, however, that Tweedy's stock selection remains excellent as they outperformed the hedge index by approximately 60 basis points for the quarter and 800 basis points for the year. In addition, our larger growth oriented mutual fund products including the Brandywine funds generated strong investment performance in the fourth quarter as the Brandywine fund outperformed the S&P by more than 300 basis points for the quarter and 200 basis points for the full year while Brandywine Blue, their large cap offering outperformed the S&P by more than 300 basis points for the quarter and 800 basis points for the full year.

Turning to the institutional channel, net client cash flows totaled approximately 765 million for the quarter. In addition to significant client cash flows from some of our larger institutionally-focused affiliates such as Genesis and First Quadrant, we had increasing flows from several affiliates that have become more active in marketing their products in the institutional area since becoming AMG affiliates such as Friess associates and Third Avenue. In addition, our newest affiliate AQR, generated growth in assets under management this quarter through both investment performance and client cash flows. In the high net worth channel, we had outflows of approximately 1.4 billion. Again driven by Rorer asset managements large cap relative value product which underperformed its benchmark.

As we said on our last conference call, our expectations for Rorer's results are very conservative and we have not assumed any earnings contribution from the firm in 2005. That said, following an in-depth review, they began implementing enhancements to their investment process in Q4 that seem to be adding value. We continue to have confidence in the basic process and philosophy and the team that oversees it.

Looking more broadly across the high net worth channel, results were basically flat although several of our affiliates generated solid positive flows during the quarter including Friess, Renaissance, and Tweedy, Browne.

In addition, we have just completed the scheduled launch of Managers Investment Group which is AMG's expanded platform to create, distribute and service institutional products offered by AMG affiliates into the brokers sold and other sponsored product channels in both mutual fund and separate account forms. The early response among our affiliates as well as in the marketplace has been positive.

We continue to add additional affiliate products to the Managers product line as well as gain additional sponsorships for the affiliate products the Managers represent. A few recent examples of how Managers is already helping our institutional affiliates penetrate both the bank and brokerage channels with separate accounts in mutual in the bank channel, HSBC recently launched a new wrap program using 14 different managers. Managers Investment Group secured three of the slots for Essex, Systematic, and Hartwell. In the brokerage channel, we just added Essex large cap growth under Morgan Stanley's wrap platform. Where we also recently launched the Renaissance small cap growth product. Those are separate examples but we're also selling mutual funds in these channels.

For example the Managers bond fund that was just mutual added into UBSs pace model multimanager portfolios. Managers is now supporting that fund with a combined sales force as well. Since the January 1, launch, Managers has generated gross sales in S&As and mutual funds combined at a rate approaching 100 million a month. We expect this to continue to ramp up as the sales force gets more familiar with the breadth of product and as the support systems and value added materials come on-line. With that, I'll turn it over to Darrell for a discussion of our financials.

Thanks, Nate. Good morning, everyone. As you saw in the release, we reported cash earnings per share of $1.08 for the fourth quarter and $3.95 for the full year 2004. We reported GAAP earnings per share of $0.58 cents for the quarter and $2.02 for the year. EBITDA was 53.8 million for the quarter.

Quarter to quarter, our margin of EBITDA contribution to end of period assets under management was 19 basis points in line with our third quarter ratio primarily as a result of our mid quarter investments in Times Square and AQR. In our guidance model which assumed steady market growth of 2 percent each quarter, we expect this ratio to be 20.6 basis points in the first quarter of 2005. As we realize the results of these new investments for a full period. Performance fees added roughly a penny for the quarter. Holding Company expenses were 7.9 million for the quarter. A modest increase over the third quarter due to a higher incentive compensation accrual in the fourth quarter resulting from our meeting set of earnings growth objectives for the year, established by our compensation committee at the beginning of 2004.

We expect holding Company expenses to be approximately 9.75 million per quarter during 2005. This figure includes all equity-based incentive compensation consistent with our early adoption of FAS 123. As we indicated on our most recent conference call, our Board of Directors has determined that we'll use a form of restricted stock rather than options as our equity-based incentive compensation for senior management for 2005. With regard to taxes, our tax rate was 40 percent for the fourth quarter.

And as we indicated on our last call, we expect this rate to decrease to 38 percent beginning in the first quarter of 2005. Our cash tax rate for the quarter was 17.8 percent. Over 2005, we expect this rate to increase into the low 20s over the course of the year. Federal deferred taxes were $8.6 million for the fourth quarter. Of this amount, we only add back to cash earnings the $7.1 million that is related to intangibles as these will not reverse but for sale or impairment. I would note that as many of you know, the additional 1.5 million of deferred taxes primarily related to the convertible securities was also cash, actually received by AMG.

Looking ahead, we expect our total intangible related deterred taxes to be 29.5 million for 2005. Amortization for the quarter was 6 million. Including 900,000 of AQR amortization that is reported in investment and other income. We expect amortization to rise as we realize the full effect of our recent transactions. In 2005, we expect amortization including AQR to be approximately $31 million. Pausing for a moment as we mentioned on our conference call announcing our investment in AQR, our operating results from AQR will not be consolidated in our revenues and expenses.

But instead, will be reflected in the investment in other income line of our income statement consistent with our minority ownership in the firm. Depreciation for the quarter was 1.6 million with 1.1 million of that attributable to affiliate depreciation. As you recall, affiliate depreciation is the noncash charge we include in cash net income as the replenishment of these depreciated assets is paid by the affiliates and not AMG. Interest expense was 7.4 million for the fourth quarter. We forecast interest expense of 8.3 million for the first quarter of 2005. You will recall that our Cobra security incurs interest at a floating rate of LIBOR less 50 basis points. We have entered into interest free swaps for half of that $300 million issue at a blended fixed interest rate of approximately 3.3 percent. These swaps are effective in February, 2005 and mature in February of 2008.

Turning to the balance sheet, at the end of the fourth quarter, we had $350 million available under our expanded credit facility and holding Company cash of approximately $40 million. Stockholder's equity was $708 million. As we discussed on the last call, EITF 0408 which applies to both our $124 million zero coupon convertible and our $300 million floating rate convertible became effective in the fourth quarter of 2004.

This standard calls for use of the if converted method, whereby the fully diluted share count includes all shares that could be issued as if these securities had already been converted while still requiring us to reflect the liability on our balance sheet. Since these convertible issues continue to be very attractive from an economic standpoint, we decided that we would not spend money to revise or repurchase these securities to avoid this accounting effect. Instead, in addition to reporting EPS using its converted method, we will, as we told you on our last call, also present our cash earnings per share using a treasury stock method which we believe better represents the economic effect of these securities.

Turning to guidance on future earnings, while we are not providing specific guidance on individual analysts' estimates, we would like to provide some guidance for earnings on 2005. While markets are obviously down thus far in the quarter, assuming 8 percent annual growth in markets for the year, we expect cash earnings to be in the range of $4.65 to $4.75 and most probably at the upper end of that range. Our guidance does not include additional earnings from performance fees, accretion from additional investments in new affiliates or the effect of repurchases on our stocks and is based on current expectations about our stock price, affiliate growth rates, and mix in affiliate contributions. Substantial changes in the equity markets would of course impact those expectations and now we'll be happy to answer any questions.

Thank you, sir. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have a question, please press the star followed by the 1 on your push button phone. If you would like to decline from the polling process, press the star followed by the 2. You will hear a three tone prompt acknowledging your selection. Your questions will be polled in the order that they're received. If you are using speaker equipment, you'll need to lift the handset before pressing the numbers. One moment please for our first question. Our first question comes from Bill Tanona with J.P. Morgan. Please go ahead with your question.

Good morning.

Hey, just on the high net worth, the revenues. If you look at it as a percentage of average AUM, we saw a pretty significant uptick in terms of it's contribution. Can you let us know what was going on there? Was there performance fees related in the high net worth channel as well?

The uptick in high net worth -- I think it is a couple of things. One, you're look quarter after quarter and I think last quarter there were some questions about this in general. We had some incremental investment. I think the answer to the question was in the portfolio services group and transition to Managers which wasn't in this quarter so I think it is more of that. I don't think there's any other performance fees or anything like that in there.

Okay. It was up to about 67 basis points from 62. But you're right. Last quarter was a little bit low on a sequential basis. You know, in terms of Rorer, can you give us a sense as to how much you guys have left there in assets and if you look at the 1.4 billion in outflows, how much of that was -- or if it exceeded it, how much was Rorer and how much did you see in total from all your other high net worth affiliates?

Okay. Couple of questions. Let me make sure I get them all. First on Rorer, let me just step back for everybody. What we're talking about is mostly the Rorer large cap relative value product and as I said, we've taken a very conservative approach in our guidance with respect to this firm and we've assumed no contribution from Rorer in 2005. Having said that, the firm has still about 4.5 billion in assets. Again, as I said in -- earlier, we continue to have confidence in the team which is the same team that's been there all along since the time we made our investment and the basic process.

I think I also mentioned we've begun to see some -- I don't want to overstate this but we've begun to see some signs of improvement in their relative performance but again, we should expect continued outflows in the product and again, I would say most importantly, remember we've assumed no contribution from them in 2005. In terms of assets in the product, the large cap product is still over 3 billion in assets and it is by far the biggest product. That is where we continue to see the bulk of these outflows.

Turning to the question about the channel more broadly, the channel more broadly, the way I characterize it was basically just flat. Across the group. Some flows begun to be seen through the Manager's Investment Group platform which again, we launched right at the end of the year. But basically, I would say it was flat other than Rorer.

Okay. That was helpful. And you know, when I think about the institutional channel, obviously you're starting to group the assets under management into the institutional channel there. And I'm wondering whether or not it probably makes sense to break that out individually. As to give us kind of a pure look at the institutional channel because we saw that, the revenues per AUM there, drop about 10 basis points sequentially and considering the revenues are in -- the equity and other line, probably comparing apples to oranges there. So, just a suggestion on that front. In terms of --.

Sorry. The big change there and correct me if I go wrong, but the big change there, I think was transaction.

Yes. And that's a change of the compensation -- composition of the mix as we acquired AQR.

Yes.

As well as Times Square.

Bill, we're sensitive to your interest in wanting to know more and at a more granular level of detail but I think for now we're comfortable with a division into high net worth, institutional and mutual fund as a reasonable breakdown of our business. We'll try to give you more specific feedback. I think in color and I think we did that today. But we hear you and we'll keep up the effort.

Okay. Yes, I guess not necessarily for the disclosure point of view but if you look at the institutional revenues that you report, and the income statement, clearly that doesn't match up to what you report in the full institutional segment here now. So, to get a sense as to what the institutional business is doing traditionally, I think it would be helpful.

Other than the addition of new affiliates which depending on the channel is inevitably going to distort quarter over quarter or year-over-year comparisons, I'm not sure we're tracking your point. I would suggest you sort of take --.

I would be happy to. I think again -- because some of what may be that gap is AQR given that it's a minority investment. There is a set of financial information about them that's located geographically in a different place in the disclosure. I would be happy to walk through it with you.

Yes. That's it. We'll take that off line. Just lastly, in terms of the pipeline, I know you guys obviously still have capacity. You still have the flexible equity financing available as well. If you could just give us an update as to what the pipeline is looking like over the next 6 to 12 months.

I think you heard Bill and I each say that we are optimistic about our pipeline and expect 2005 to be another good year. I think I'll probably leave it at that.

Okay. I was actually on another call so I didn't hear your earlier comments.

We affirmed our continued optimism without -- as you understand, quantifying or giving a timetable.

Okay. Thanks.

Thank you.

Thank you. Our next question comes from Mark Constant with Lehman Brothers. Please go ahead with your question.

Good morning, everyone.

Good morning, Mark.

Just two things left. One, I hate to harp on the bad news, if you will but that's what we do for a living here. The Rorer 3 billion in assets, relative to the 1.4, just from a sort of negative operating leverage, I know that that's generally designed to -- if it happens to accrue to Rorer. Is there a point structurally where it would make sense for either you or for them -- let's say you had, for example, two more quarters of a 1.4 billion and a 3 billion base and that product is coming out, is there a point where you would merge or otherwise do something with that affiliate? I know you're not counting anything in the guidance from that but just from an operating standpoint if that pace continued, what would make sense for you to do?

The way I would answer that question is -- we talked about this a little bit last quarter, is we've taken a lot of the challenge there out of the Rorer system, if you think about the way we now have them on a variable pricing relationship with Managers Investment Group on a number of the things that are otherwise thought of as fixed costs for a firm so as the marketing kind of served as all of the operational infrastructure is really on a variable cost basis for them. I think we're still pretty far away from having to face that kind of a question.

It is really just the investment professionals then, their cost structure at this point?

Yes and Mark maybe just some reference. When we purchased Rorer, it was 4.4 billion. It is roughly that size today. But what is far different is that all of the infrastructure is -- has been moved to this new entity and is being leveraged for other affiliates. It is just the investment professionals. They're managing the products that they have, doing what they've always done.

I would say, Mark, you should think about the Rorer issue in 2005 as -- is there any upside beyond the very conservative guidance that we have given you. At some point, we are way, way, way away from that. Of course, if -- if the assets decline to a very low level, then they would face that negative operating margin. But as I said, we're a long, long way away from that and do not see that occurring in '05.

There is no incremental news that we will share about Rorer that would negatively impact our earnings. And if we got there in future periods, it is not going to be material.

Got it. Okay. And then just one simple question for Darrell. I'm sure you'll know why I ask this from a modeling standpoint. But just wondering why he has a cash balance and revolver balance were both up at the end of the year.

Good point. Again, we had some -- some revolver balance that we needed to have outstanding.

Needed to have it just from the way the facility works stand point?

Yes. Exactly. More of just a administerial requirement.

That would normalize going forward?

No. We will adhere to our very strong practice of trying to take every speck of cash we have and pay down our liabilities as quickly as we can.

Got it. Thank you.

Thank you. Our next question comes from Cynthia Mayer with Merrill Lynch. Please go ahead with your question.

Hi, good morning.

Good morning. How are you?

Good, good. Just wondering if you could break out the flows from AQR since that's a minority position.

No, I don't think so.

Again, it was positive but -- the fact that it is a minority investment doesn't make it different from other affiliates and where it's not disclosed publicly elsewhere, we're not going to be comfortable giving you more than just general guidance on a specific affiliate.

Okay. And just looking at the minority interest, is there any special reason that went up?

Again, that's directly related to the new investment. That we closed during the quarter. Times Square. And others.

Okay. And I guess Friess didn't completely offset that.

No.

Okay. And just generally, when you look at the acquisition possibilities, do you have any preference in terms of spending for add on AUM versus more stand alone affiliates? In terms of near term?

No. I think clearly we're investing in quality management teams particularly those that manage assets in areas where we think the potential for growth is very high. You saw that with Genesis and emerging markets. You saw it with AQR and hedge fund in long only. So, those are the kinds of areas but no, we don't target. We think we're very well-positioned across really every investment style and distribution channel today. That's not to say there aren't opportunities and we keep looking for them.

Cynthia, I would answer it this way. We're interested in both. We did it last year and we're going to keep trying to do it.

Okay. So, the order is really -- sounds like it really depends on -- it is a really opportunistic thing.

It is not either or. We have ample resources both financial and human to execute both aspects of the strategy.

Okay. Great. Thanks a lot.

Sure.

Thank you. Our next question comes from Bill Katz with Buckingham Research. Please go ahead with your question.

Thank you. Good morning, everybody.

Good morning, Bill.

Curious, in your press release and also Bill in your opening comments talked about adding significantly to head count in the holding Company this past year. Just sort of curious, two things. Does that in any way sort of accelerate your capacity to do sort of multiple prong deals going forward and at the same time are there chances for some of these affiliates to further outsource some of their infrastructure that might enhance the free cash flow up to a holding Company?

Bill, I think it is fair to say that yes, we did add to our head count but it was in terms of -- I would say quality not quantity of people. We added some investment professionals both in the new investment area in the finance area and in the affiliate development area but it is not a huge number of people. It is rather filling in where we see the need.

It is not a dramatic increase in the holding Company expense. What was the second part of your question, Bill?

I was just kind of curious, with the step up in people. It really wasn't a function of the expense side more into capacity to do multiple things. Are you able to sort of perhaps take some of the back office responsibilities, whether it be sort of processing or compliance away from some of the affiliates, bring them in on board, if you will. I know you have a central compliance officer now. I thought last time we had you guys you were talking about perhaps centralizing some of the financial aspects of these affiliates. If that's the case, does that enhance your free cash flow from any of these affiliates?

Why don't I ask Nate to respond to that.

I think there are, in fact, areas where we can create leverage across the group and compliance is certainly one of them. We have done others on a more modest basis.

Also with Managers Investment Group, we're looking at the distribution component. As well as all of the operations associated with sort of the more retail oriented and platform oriented parts of the distribution channel. So, those opportunities certainly exist. The way that we think about it though in terms of -- I'm not sure I would say -- put increasing free cash flow to AMG first on that list though. Again, a lot of it is increasing quality and increasing growth rates at these firms.

But I would say that the degree to which there has been incremental head count or we built in a -- more folks to execute these functions, they -- the cost has been borne by the affiliates and not the holding Companies.

Second question I have a little bit unrelated is still wondering how you balance your appetite for more deals versus your leverage ratio and would you be willing to maybe push beyond your typical two and a half target leverage ratio if there were a number of deals that might come to fruition simultaneously or conversely, would you look to perhaps execute the trade you have on with Merrill Lynch?

I would say we are very interested in continuing to execute attractive new investment opportunities and we recognize that they don't come along on a regular predictable basis so to the extent that there are more opportunities than we can execute and still stay within a -- a targeted leverage ratio, we would pursue them. Now, obviously, there are limits. Which I don't think we need to get into because they're at high levels and it would be a high-quality problem. Certainly looking at the current pipe line of opportunities, we're very comfortable that we have ample capacity to execute them without -- without doing anything differently than we've already done.

Okay. Thanks. And final question. Sort of curious as you market Tweedy, Browne, how cognizant are the respected distribution channels of the absolute performance versus the ETHA (ph) hedge fund versus just sort of comparing their international platform versus let's say a Franklin which doesn't hedge and has had no significantly better relative performance. Does that hinder flows in '05 or will there actually be an opportunity to grow flows even though some of the performance that may be somewhat weak?

Yes, I think one observation I make is -- this is certainly one that folks at Tweedy would make which is the relative performance between the hedge and unhedged. That dynamic that you're describing is a recent dynamic and not a long-term sort of systemic dynamic. Their marketing and flows on the global fund -- you think about the way in which their product is marketed, it tends not to be -- when you say we're marketing, it is not sort of us out that there marketing but their client base is very understanding of it. They continue to see good flows and lots of demand for their product. The Hedge Global product in each of the channels that we talk about for the institutional high net worth and mutual funds. So, I don't think that there is an issue.

Okay. Thank you.

Thanks, Bill.

Our next question comes from Mark Lane with William Blair and Company. Please go ahead with your question.

Good morning.

Good morning.

Two questions. First, just to clarify the guidance, the 4.65 to 4.75 range. That's presuming the treasury method for contingent converts. What is the average stock price that you're assuming or a range that you're assuming on that or is it a static stock price given where the stock is today?

I think we certainly feel very good about our prospects for growth and we would also be optimistic about the stock price. When we look to the guidance, we look more at average stock levels that are similar to where we began the year which is in the -- in the high 60s.

Is there any way to give the guidance in terms of net after tax cash flow, the absolute numbers versus an EPS number given that diluted share count is going to kind of move around depending on where the stock price is?

I think that would make sense. We'll take a look at that for the next call.

Okay. And on Rorer, last quarter, you had said that you had broke down the assets that the large capital or the value product was a $4 billion product. And you lost 1,5 billion. Rorer lost 1,5 billion in the fourth quarter. And there was some strong market appreciation in the fourth quarter and so now the product is over 3 billion. So, did that mean that they're losing assets in the other products as well as the large cap product? Or were those numbers just kind of approximations?

I would say those numbers were broadly approximations. They did have some outflows in that balance product that uses that large cap product as the equity component so there were outflows there so it is a combination of both of those.

Okay. And then real quickly on the first point on Darrell's broad guidance, the 20.6 basis points, so, despite the lower economics from AQRs, if you consolidate that within AUM, it doesn't have the material -- that material of an impact on the average fee level so you're actually including AQR within that guidance?

Yes. That's just right. When we -- you're absolutely correct. It would have an effect of decreasing net ratio. But the offsetting positive effects are growth in the business, the Times Square transaction and Friess.

Okay. Great. Thank you.

Thank you.

Our next question comes from John Hall with Prudential. Please go ahead with your question.

Thanks very much. Good morning.

Good morning.

Darrell, I was wondering if you could just run through the investment in other income line again. I sort of missed what you had said. There's AQR in there. Is that the sole difference from the previous quarter to this quarter?

That is. That is certainly the most meaningful difference. And the one that I want to make sure folks are very clear on.

When we look at the other components of that though, particularly in the fourth quarter of every year, there are partnerships that are run of course by -- across a broad set of our affiliates. And we have -- we share in those revenues just as we share in the revenues of the other components of their business. In particular, Third Avenue. But among many affiliates, there was some appreciation in the partnership interests in the fourth quarter.

So, if we're trying to gauge what the economic impact of the AQR was during the fourth quarter, --?

I would look at the cash flow statement and there is a line entitled other adjustments. And if you look there, it would give you a reasonable sense as to what that line item is.

Fantastic. And question on the Managers Group. I was wondering if you could sort of frame the opportunity. We're seeing a lot of activity on the part of yourself and others buying smaller mutual funds. What is the size of the small bank owned or other financial services owned mutual funds out there that you think might be in play?

I'm not sure that we've quantified the absolute size or number of the target universe. I think it's substantial. New investments a year, 3 billion. I'm looking at Nate. I think continuing at that pace seems very achievable. Obviously not on a regular predictable basis.

But there are also some other opportunities out there that are larger. And in aggregate, it would be noticeable. These tend to be very attractively priced. So, they are accretive to us out of proportion to their relative size. Nate, would you answer that?

I would say -- we have a pipeline where we're actively looking at some. The dynamic that's adjusting a little bit for us is we really rounded out our -- the mutual fund line-up that we have with some of the transactions we did last year. And so the dynamic is changing from -- we now have a lot more resources and are able to -- where we see opportunity, bring on funds and grow them. We can increase, if you will, even from what it was this year and they were very attractive this year. But to increase even from the level of attractiveness from this year.

Especially where we consolidate funds into existing funds. So the dynamic for us is changing a little bit. We have a pretty full line-up of funds. There's still opportunity to add to it. But also where we find good fits or where we merge fund families, sort of picking the best of both worlds and all of those kinds of things, given the scope and scale of the platform we have now, it can be even more attractive.

Just refresh me. Given your ownership structure of the Manager's Group, is it -- is the new dollar of AUM more attractive economically going there than elsewhere?

Yes.

It is effectively a wholly owned subsidiary.

Thank you very much.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 at this time. As a reminder if you're using speaker equipment, you will need to lift the handset before pressing the numbers. Mr. Healey, there are no further questions at this time. Please continue.

Thank you all once again for joining us this morning. We're looking forward to 2005 and are confident in our prospects for the strong internal growth of our affiliates including through the expanded distribution capabilities of our Managers platform and we also remain optimistic about our ability to continue invest, to execute investments in new affiliates. Thanks again.

Thank you. Ladies and gentlemen, this concludes the Affiliated Managers Group fourth quarter results conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 or 1-800-405-2236 followed by the pass code 11020828.

Once again, if you would like to listen to a replay of today's conference call please dial 303-590-3000 or 1-800-405-2236 followed by the pass code 11020828. You may now disconnect and thank you for using AT&T teleconferencing.