Affiliated Managers Group Inc (AMG) 2005 Q2 法說會逐字稿

Ladies and gentleman, thank you for standing by and welcome to the Affiliated Managers Group Inc. second quarter results conference call.

[Operator's Instructions]

As a reminder, this conference is being recorded today, Wednesday, July 27, 2005. At this time, I would like to turn the conference over to Ms. Brett Perryman, Director of Corporations. Please go ahead.

Thank you and thank you for joining Affiliated Managers Group to discuss our results for the second quarter of 2005. By now, you should have received a press release we issued. However, if anyone needs a copy, please contact us at (617) 747-3300 and we will 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 10-K 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 announcements of our results for this quarter, as well as a reconciliation of any non-GAAP financial projections to 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, 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'd like to turn the call over to 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 2005. AMG had an excellent quarter as our affiliates produced strong investment performance and net client cash flows during the period of mixed results in the markets.

As you recall, the market declines of the first quarter continued into April, a trend that reversed itself, however, in May and June. The major domestic indices finished the quarter in positive territory, including the S&P 500, which ended up 1.4%, and the Russell 2000, which increased by 4.3%. While international markets fared less well with the EPA (ph) down approximately 1.1% for the quarter.

Against this backdrop, our affiliates' skill in managing their portfolio disciplines produced strong results for their clients and contributed to AMG's organic growth. With respect to client cash flows AMG's affiliates, particularly our largest affiliates, had substantial positive net flows during the second quarter, especially in the mutual fund and institutional channels. This is in contrast to industry-wide cash flows that were generally soft for the quarter, with flows into equity mutual fund products totaling approximately $28.4 billion during the second quarter, less than they were in the same quarter of last year, and only about half of what they were in the first quarter of 2005. Industry-wide institutional flows are more difficult to track, but our sense is that they too were down for the quarter.

With the broad diversity of our affiliates' product offerings, including their meaningful participation in international and domestic value equities, as well as alternative investments, these products contributing 30%, 19%, and 13% respectively of our EBITDA, we are well positioned to capture a significant share of client cash flows in some of the fastest-growing areas of the market during the second quarter.

But, it is important to note that our affiliates also have products with very strong relative performance in other styles and asset classes which are well positioned to capture flows as investors rotate to these areas. In sum, we are pleased with our accomplishments during the quarter and remain very well positioned to generate excellent results for the remainder of the year and beyond. With that overview, let me turn to Sean for a discussion of our results for the quarter.

Thank you, Bill. Good morning, everyone. We are pleased with our results for the quarter. The cash earnings per share grew 13% over the second quarter of last year, driven by strong investment performance and net client cash flows. Year-over-year, we generated organic growth in assets of $15.2 billion. Not counting our pending acquisition of First Asset, quarter-over-quarter, our assets grew by 4.5% or $5.9 billion, grew $2.6 billion in positive net client cash flows and $3.3 billion for positive investment performance. As you know, this growth was achieved in a period in which the S&P 500 grew just over 1%.

In terms of earnings contribution, the $2.6 billion of net client cash flows will result in an increase of approximately $3.8 million to our annualized EBITDA. Our strong internal growth this quarter reflects the quality of our affiliates' products, especially of our largest affiliates in terms of EBITDA contribution. For example, Tweedy's Global Value Fund, Third Avenue's Value Fund, and Friess' Brandywine Fund, all rank in the top decile of their respective Lipper categories year-to-date. In addition, emerging markets manager, Genesis, had outstanding performance in the quarter and alternative investment focus managers, First Quadrant and AQR, also had excellent results.

In addition to the quality of our affiliates, our internal growth record reflects the breath and diversity of our product mix. While we have excellent products in areas such as international equities and domestic value equities, which have attracted substantial client flows in the past few years, we also have a broad array of products in other areas, which have outstanding relative performance. This diversity provides us with stability in earnings through changing market environments as we saw in the difficult markets of 2001 and 2002. And we're confident that this diversity will also allow us to sustain meaningful organic growth going forward, even as product cycles change.

Turning to our new investments area, we expect to announce shortly the closing of our investments in six high-quality, mid-sized Canadian firms through the acquisition of Toronto-based First Asset Management. Through these new affiliates, AMG will further diversify our product offering to include an additional 100 Canadian, US and international investment products offered to a wide range of institutional investors and high net worth individuals across the Canadian marketplace.

First Asset's affiliate firms have excellent long and near-term performance records and they continue to produce solid results. Since we announced the transaction in April, these firms have grown their assets by over 5%. On the closing of the First Asset transaction, we will have put three quarters of $1 billion to work over the past year through investments in leading firms including Genesis, AQR and Times Square. Looking ahead, we continue to cultivate relationships with growing mid-sized investment management firms and remain confident in our ability to identify and execute further successful accretive investments.

In sum, our second-quarter results reflect the core strength of the AMG model. By partnering with high-quality, mid-sized firms through a structure that maintains the distinct entrepreneurial culture of each of these firms and provides meaningful incentives for continued growth, we're confident in our prospects for continued strong results and shareholder returns. Now I'd like to turn to Nate to discuss our affiliates' results in greater detail.

Thank you, Sean. Good morning, everyone. As Sean mentioned, we had positive investment performance across our affiliate groups with particularly good performance among some of our lager affiliates including Tweedy Brown, Friess, Third Avenue, First Quadrant and Genesis. This continuing trend was reflected in good growth from client cash flows in both the mutual funds and institutional channels. While in the high net worth channel, the growth from investment performance and positive flows from our manager's platform was offset by outflows from Rorer, although we saw significant improvement in the high net worth channel quarter-over-quarter.

Taking a closer look at our affiliates' performance in each of our principal distribution channels, starting with the mutual fund channel, once again we had good results with net inflows of approximately 2.1 billion for the quarter. With almost 80% of our fund assets in the top quartile of their respective Morningstar categories year-to-date, we continue to generate strong flows in this channel. In particular, given industry wide continued flows to value products, we continue to see that reflected in cash flows to the Third Avenue value family of funds.

Focusing on Third Avenue for a minute, each of the firms' four major funds carries a four or five star rating for Morningstar and International Value Fund ranks first in its Lipper category for the quarter and year-to-date. I would note that given the significant flows into their funds over the past year, this quarter, Third Avenue announced that two of their four funds, their real estate fund and their international fund, will be closed to new clients for a time while they put the cash raise to work.

Within the mutual fund channel, our growth-oriented products generated good investment performance in the second quarter. In particular, Friess Associates, Brandywine and Brandywine Blue Fund, both of which rank in the top quartile of the respective Lipper categories.

Looking at our growth fund line up, we feel increasingly well positioned for the time length flows into growth mutual funds accelerated. For example, our manager's distribution platform has begun selling the Brandywine Fund through various intermediaries opening up an entirely new series of distribution channels for these products. I would also note that during the quarter, one of our affiliates picked up a significant growth equity sub advisory mandate in the mutual fund channel as well.

Next, turning to the institutional channels, net client cash flows in the institutional channels totaled approximately $800 million for the quarter as the good, absolute and relative performance of several of our institutionally focused affiliates, such as First Quadrant, AQR, Times Square, and Genesis, resulted in positive flows.

From a product mix standpoint, these flows are coming largely in alternative international, equity and emerging markets product, as well as traditional US equity products. One other note, this quarter Genesis announced that they would be reopening their flagship of emerging markets investment product. This is a product that had been closed for a couple of quarters as they've now had a chance to put the cash they raised last year to work.

Next, in turning to the high net worth channel, in the high net worth channel we had net outflows of approximately $350 million as the inflows from our Managers' platform were offset by outflows of our asset management. Although, I should note that more outflows have significantly slowed and the investment performance in our flagship Large Cap product has been positive relative to benchmarks for the past two quarters.

Looking more broadly across the high net worth channel, several of our other affiliates generated solid positive flows during the quarter, including Renaissance, which had in excess of $225 million in positive retail flows through our Managers' investment group platform this past quarter.

That's a good segue, I think, to updating everyone on the progress at Managers investment group, which is as you know, AMG's platform to distribute institutional quality products offered by our affiliates into the broker sold and other sponsored product channels, covering both mutual fund and separate account forums.

Now, six months following launch, the response among our affiliates as well as in the marketplace has been very positive. We continue signing up affiliate products to be distributed by the platform, as well as gaining additional distribution sponsorships for the products Managers represent. With the recent launch of a First Quadrant small cap value product on Merrill Lynch's SMA platform, Managers now has SMA products on every major platform and is selling our Managers branded and Brandywine Funds across all sponsors. Client cash flows at Managers continued to increase, and we are building a solid platform to further add to the organic growth rate of our affiliates. The success we've seen during the first two quarters since launch leaves us to be optimistic that Managers will be a strong contributor in 2006 and beyond. With that, I will turn it over to Darrell to discuss our financials for the quarter.

Thanks, Nate. Good morning everyone. As you saw in this morning's release, we reported cash earnings per share of $1.13 for the second quarter. GAAP earnings were $0.63 cents for the quarter. The ratio of our EBITDA contribution to end of period assets under management was 20.1 basis points in the second quarter, a slight decrease from the first, resulting from the timing of our second quarter flows and to a lesser degree, our investment in Managers. We expect this ratio to decrease to approximately 17.2 basis points during the third quarter, primarily as a result of the timing of our acquisition of First Asset Management and secondarily, from the final installment of our 2005 investment in Managers, which continues to develop consistently with our expectations.

Performance fees had a similar contribution to previous quarters and holding company expenses were $9.8 million for the quarter, which included a 2.5 million pro rata accrual for the annual equity based incentive compensation we anticipate awarding at the end of the year.

With regard to taxes, our tax rate declined to 37% for the second quarter, one quarter ahead of schedule, as a result of increased income contributions from affiliates in lower tax jurisdictions. We expect our tax rate to remain at 37% for the remainder of year due to lower GAAP tax rates associated with the First Asset transaction. Our cash rate was 17.1% for the second quarter. We expect this rate to increase into the low 20's over the remainder of the year, as we incorporate our recent investments and our business continues to grow.

Total deferred taxes were 8.3 million for the second quarter. Of this amount, we add back to cash earnings only the 7.4 million that is related to intangibles, as these will not reverse, but for sale or impairment. Of course, the additional 800,000 of deferred taxes in cash flow was also cash actually received by AMG. Before cash deferred taxes related to intangibles declined to 7.1 and 6.9 million for the third and fourth quarters, respectively, as a result of the closing of First Asset.

Amortization for the quarter was 7.7 million, including 2 million of AQR related amortization that was reported in the "investment in other income" line.

Depreciation for the quarter was 1.5 million with 1 million of that amount attributable to affiliate depreciation. As you recall, affiliate depreciation is the non-cash charge we include in cash net income as the replenishment of these depreciated assets is paid by the affiliates and not AMG shareholders.

Interest expense was 8.5 million for the second quarter. We anticipate that our interest expense will increase to approximately 10 million in the third quarter as a result of borrowings under our credit facility related to our acquisition of First Assets. In total consideration for the transaction is approximately $250 million, which will be funded with a combination of cash from our balance sheet, borrowings under our credit facility and the issuance of approximately 350,000 shares of AMG common stock. We anticipate that the total outstandings under our credit facility at the end of the third quarter will be approximately $230 million.

AMG will continue to have significant balance sheet capacity for new investments after the close. In addition to the over 200 million in annual cash flows we are currently generating, we will also have approximately 175 million of borrowing capacity under our credit facility. This capacity is available not only for new investments, but also to opportunistically repay existing indebtedness or to repurchase our stock.

During the second quarter, we repurchased about $10 million of outstanding senior notes. Stockholders' equity was 766 million.

Now I'd like to provide some earnings guidance for the remainder of 2005, as well as 2006. While we are not providing guidance on specific analyst estimates, assuming 2% quarterly growth in the markets, we would expect our cash earnings per share to be in the range of $4.60 to $4.70 for 2005. Our 2005 guidance assumes a weighted average share count of 38.8 million for the remainder of the year.

Turning to guidance for 2006, we expect our cash earnings per share to be in the range of $5.40 to $5.60. Our 2006 guidance assumes a weighted average share count of 39.5 million. Our guidance does not include additional earnings from performance fees, accretion from additional investments in new affiliates or the effect of repurchases of our stock and is based on current expectations about our affiliate growth rates and nicks (ph) in affiliate contribution.

The share count assumptions for both 2005 and 2006 are calculated using the treasury stock method to account for our convertibles. Of course, substantial changes in the equity markets would impact these expectations. Now we would be happy to answer any questions.

Thank you.

[Operator Instructions].

One moment, please, for the first question. Our first question comes from Bill Tanona with JP Morgan. Please go ahead.

Hi. Good morning, guys.

Good morning, Bill.

I guess the first question, knowing that this First Asset acquisition is going to come somewhere in the third quarter here, could you give us a sense of what a better run rate might be to use for EBITDA contribution to ending AUM to kind of eliminate what the timing would be outside of the third quarter?

Sure. I would and Bill tried to do that in the guidance with 17.2 basis points end of period assets and that anticipates the transaction closing next week.

I guess I was asking, what would that look like heading into the fourth quarter so we can take out of the consideration of the deal itself?

Sure, for the fourth quarter, I would look to 18.7 as probably the right run rate.

Okay. And then, when I look at your EBITDA contribution, it's amazing how high net worth has actually gone down to such a low percentage. I remember back in the days it used to be kind of a third, a third, a third, and so I know that essentially you guys don't look to target between individual channels specifically. But I guess I wonder, as you look out into your pipeline, where do you see the greatest potential within those three channels today?

It's Sean. I think, as we said before, we don't really target, first and foremost, by how a particular prospective affiliate would add to diversity, especially diversity by channel as opposed to product area where I think we have made considerable strides and really positioned the earnings mix in a very good place. I think the high net worth channel is an area where, in some cases, the ability to compete effectively depends on scale and brand and so, in that sense, I'm not sure that we see it as quite as many opportunities in pure high net worth as we do in the retail areas or the institutional areas.

That said, there's still a large number of really high quality investment counseling high net worth oriented firms that we have great relationships and continue to talk to, so it's in the mix. I would say that the probability is that it will-- that the percentage contribution to our earnings for high net worth will likely drift modestly lower over time as the other areas grow more rapidly. Nate, would you add anything to that?

The only thing I would add is that that is probably a less and until the Managers' initiative, which again is a way for our affiliates to participate again, as Sean described, being able to access the breadth of the product mix and build scale across the groups.

Yes, I think that is a good point. To some extent, the nomenclature we use may be different than what some other firms use. In other words, our high net worth includes pure high net worth, ultra high net worth families, and that's really what I was addressing. The high net worth is more retail oriented, affluent clients through broker-sold channels as well as direct. It is an area where I think we do see substantial growth and there is a healthy number of prospective affiliates that we're in discussions with.

Okay, that was very helpful. And then, I guess, lastly, in terms of the flows in the high net worth channel, it came in a little bit better than what we were looking for and kind of what we have seen in times passed. Can you give us a sense as to how much actually was Rorer's outflows this quarter, so we can kind of gauge what the other high net worth channel flows were? And if you could give us a sense as to why institutional, on the direct side, might have been a little bit weaker relative to say, the mutual fund side?

This is Nate. I think first on the Rorer's side, again, I do think we saw improvement in the channel in the quarter. Rorer flows were a bit over 500 out, just to give you a sense. In terms of the institutional flows question, we had -- I guess we had what, about 2.1 billion or something in Q1 and we had 800 million inflows in the institutional channel this quarter. So I think we look at that and feel pretty good about the pace of the flows in the institutional channel. It's obviously a little lumpier, especially when you think about some large mandates, but as we look at the pipeline, we feel very good about it.

So it is more timing than anything else. Can you just remind us what the size of the Rorer large cap product is now?

The Rorer large cap product is about 1.4 billion for the large cap product, and Rorer in total is a little over 2 billion.

Great. Thanks guys.

The next question comes from Mark Constant with Lehman Brothers. Please go ahead.

Hi. I just wanted to clarify and confirm a couple of things. One, the 2% quarterly appreciation in your guidance assumption, that's from June 30. Is that right?

That's correct, Mark.

Okay. And did I hear you correctly when you said 2.9 million of RSU amortization included in the 9.8 of holding company expense?

The amortization, we had $7.7 million of amortization.

I'm sorry, the RSU amortization in the holding company.

In the holding company expense, there is 2.5 million of equity-based compensation. That's part of the restricted stock program that's new this year, as we are no longer issuing options as part of our equity-based compensation program.

Okay. But you're still expecting that to be 2.5 for the balance of the year and something in the ballpark of 9.7, 9.8 total holding company expense?

9.7, 9.8 on a quarterly basis, and yes, that is approximately 10 million for the year.

Okay. Similarly, and I apologize if I had missed this -- the pace of your roughly 5 million MIG investment for '05. My notes, I think, you did something a little less than a million in the first quarter. You were expecting 2 or 3 in the second quarter, a little lower in the third and into the fourth. Is that still accurate?

Yeah. I would say, if anything, there will be a little bit more expense in the third quarter and we will see some of the benefits of that investment in the fourth quarter.

Okay. But was there less than the 2 to 3 million in the second quarter, or did it end up getting deferred a little bit or --?

It was closer to a little over $2 million in the second quarter and so we'll see something that approaches 3 in the third quarter.

Okay. Thank you.

The next question comes from Bill Katz with Buckingham Research Group. Please go ahead.

Okay, thanks very much. Good morning. Brett, welcome back. A question for you on the Canadian acquisition. I was wondering if you could talk a little bit about the 5% growth, how much of that was net new business versus market impact?

You know Bill, I don't have that at my fingertips. I think it was close to half and half. The Canadian market and some of it was the dollar as well, I think performed roughly in line with US markets. But that is a guess.

And, of course, I can't say enough that as markets have appreciated there and firms have grown nicely from flows, we are paying a bit less for it than we had originally discussed when we announced the transaction.

The overall flows continue to be positive and healthy and we're excited about prospects going forward.

Okay. How should we think about the thought of Third Avenue -- was it Third Avenue where it's closing and the reopening of the emerging market fund? How should we think about the temporal pace of flows of both of those? Could there be an offset there, so you don't really have an impact, or would you expect to see sort of a deceleration of organic growth and then maybe as you remarket, the emerging market fund, pick up in the fourth quarter?

Yeah, I don't think we can sort of forecast it that way, but I don't think that we'd expect to see a deceleration from the combination of closings and openings. We are seeing very good flows across, as we mentioned, some of the other firms that are having good flows. Third Avenue continues to have good flows in its products that are open, including its flagship product, and so we're not forecasting deceleration. Genesis has continued to have good flows, even during this period that that flagship large product was closed. And obviously, there is demand for that product, so I don't think -- we have not really been thinking about this oh, okay, a remarketing kind of thing is necessary.

Okay. And then maybe Sean, I'm sort of curious it just sounds like from the qualitative discussion on the pipeline that it seems more sort of sourcing new type of affiliates rather than anything that might be more immediate. Am I reading too much into your commentary or do you still feel as strong about the deal pipeline today as three months ago?

Do you want to start?

Let me do it. First of all, we put about, as Sean said, $750 million to work in the last year with the four transactions closing when First Asset closes. We feel very good about that level of activity and still feel quite good about the pipeline. We have ongoing discussions, some of them are being initiated, but more of them are discussions that we have had over a period of quarters and indeed years, as firms decide whether now is an appropriate time to go forward or not. There is less activity in the auction or investment banker driven arena than there are those that we have initiated ourselves or those that have come to us as a consequence of talking with our other affiliates. But the pipeline is good.

Okay. Thank you very much.

Sure.

The next question comes from David Haas with Fox-Pitt Kelton. Please go ahead.

Good morning. Just a quick question on the guidance and looking at some of the run rates that you have in there. I know there is obviously the acquisition coming on, but if we're looking at levels next quarter, you are looking at around a 1.17 per quarter run rate and then as you get out to '06, just taking the midpoint, you are looking a fair swing higher than that. I was wondering if there was any timing of things you are looking for between the latter part of '05 and the beginning of '06?

Maybe just to -- I think that, stepping back, when we look at where analysts' estimates are today for 2006, we are clearly more optimistic about the business than what's been forecast by analysts. And so, when we look at our guidance of $5.40 to $5.60, we're clearly making that statement. When we think about how markets should appreciate, again, 2% a quarter seems like a reasonable assumption and a fine way to give guidance. But again, I think this quarter was an outstanding quarter. You can see some real momentum in our organic growth, and that's giving us confidence for next year.

Okay. Thanks. I guess next question, also in you’re your guidance, you have a bit of a step up in share count, not very much from the remainder of the year until next year, but it seems as you guys get a little bit more flexible and the balance sheet gets a little stronger, you are thinking a little bit more about buybacks and dividends. Can you give us your latest thoughts on the capital you are generating and how you'd use that for buybacks and dividends going forward?

Sure. As I mentioned, we are generating more than $200 million of cash, which is substantial on a quarterly basis, so, as we look at the balance sheet, look at the capital that we have and look at our pipeline, which we feel very good about, notwithstanding, I think, that there are periods where we certainly have extra cash and we have never been shy about repurchasing the stock, and we've clearly shown, over time, and I think consistent in our comments, that the flexibility that share repurchase affords us, relative to a dividend is how we would like to think about returning capital to shareholders.

Okay and just a last quick question, in light of the closings at Third Avenue. Are there any other funds there that are sort of at risk or getting closer to closure?

It's Sean. I wouldn't say that any of them are at risk. I wouldn't use that phrasing.

That's fair.

No expectation of additional soft closes. Remember these are soft closes, not complete closings. And the other thing that Nate said is that it really is just a pause while they invest the cash balance, given the level of growth. And from our standpoint, this is really evidence of the folks at Third Avenue and our other affiliates are thinking the same way, thinking about long-term franchise value, and not thinking about how do we get the most money in the current period, but rather, thinking prudently about maintaining the outstanding performance record over the long-term. And we applaud them for that, and are very optimistic about their prospects looking out into the future.

Okay, great. And just the last question on some of the other affiliates. Clearly, Third Avenue has been driving much of the flows. Are there any other sort of initiatives at any of the other affiliates that are sort of newer besides the Managers platform to get them out there to boost their organic growth?

I feel that the way you phrased the question, I feel bad saying no. I think we were pleased with the organic growth this quarter and the trends going forward, there is nothing. Nate, anything that you'd add to this?

No, although I would say there are other affiliates that are experiencing pretty significant flows as well and I do think the pipeline, as I think I described before, looks pretty good, so--

We had one, I guess, just to give you one small example, we've got a nascent sub-advisory initiative going at Managers, which as Nate mentioned, one of the big flows came from that. So that's an example of things that we're looking at and that we have underway.

Okay, great. Thanks.

Sure.

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

Good morning, everyone.

Hi. Good morning, Mark.

A few questions. First of all, Nate, can you give us some more details or just some details on the production at MIG. I think in the fourth quarter, you said that gross sales were about $100 million a month. Last quarter, you said gross sales were greater than $100 million per month, maybe about 110. Where were they this quarter?

Well, gross sales this quarter were significantly higher in part because of the subadvisory mandate that Sean described, which I don't think you should extrapolate from. But gross sales are running, continue to ramp. We are seeing them not only in the separate accounting area, which is running at around that rate, maybe a little ahead of that rate. But also in the mutual fund area, I think I mentioned, they are selling not only the Managers brand of product but also the brand new unbranded product, through these intermediary channels and are seeing good growth there ramping as well.

How did the sub-advisory mandate come through MIG? I thought this is kind of traditional wholesaling to --?

Sure. We have added, at Managers Investment Group, an initiative to sell to third party subadvisors. A number of the attributes -- well, let me step back. Both on the infrastructure standpoint, we have obviously built with this investment in Managers, we've built infrastructure to drive up data, portfolio level data, be also turn that into sales, market and client service materials from all of our affiliates through a central point. And there's obviously an investment there. And we are leveraging that across a range of intermediary channels. We have talked a lot about it, and the main focus of the investments we have made to date there at that platform have been sort of broker-dealers, banks, those sort of intermediaries are the ones we have talked the most about.

That platform is also leverageable elsewhere and one initiative that we started off that platform was to market select affiliate products to other purchasers, sub-advised purchasers of those products. Another level of it is the sub-advisory buyers of product probably break into two groups, one that looks much more like an institutional sale and one that, in many respects, looks much very similar to sort of a platform retail sale because they could require field sales support, for example. We have, again not only the operational platform in infrastructure, but we also have now that field sales force that can support the product there as well. We saw this as another, as Sean described, another area we could leverage some of the investments we've been making.

So how many salespeople were at MIG at the end of June compared to the end of 2004?

The total number of salespeople at the end of June -- well, I'll break it into two categories. There are sort of two categories, sort of outside field sales and inside sales desk. I think the sort of sum total of all that is probably in the 30-ish kind of range. Let me just to put a finer point on that, this sub-advise initiative, the incremental head count to pursue that sub-advise initiative was literally one person. So, this is not the kind of thing where it required sort of a big ramp up. It was literally the hire of an expert person, so -- I don't know if that's helpful.

Okay.

Mark, I'd say, when we look at this, at the Managers effort from how we communicated it towards the end of 2004 and what we envisioned, and of course in not having any contribution in 2005 in our expectations, but then looking to 2006, where we would have a more meaningful contribution, we are right on track. And Nate has done just a fantastic job with the folks there in building, reorganizing, honing, finding the right channels and right efforts in order to make that effort come together and work for our affiliates in a way that makes a lot of sense.

What is the average stock price that is incorporated in your second half guidance and the '06 guidance?

We look at, towards the end of the year, an average stock price that's in the high 70's. When we look to 2006, it's an average price that's in the low 80's.

So if I look at the guidance that you provided last quarter, which was a range of $455 to $470 that incorporated flat equity market performance from the time that you reported first quarter earnings through the end of the second quarter, and the market did significantly better than what you were assuming, and your guidance now is just a tighter range of 460 to 470, but your average share count went up. So on an apples-to-apples basis for a similar share count, a 455 to 470 range would translate into what?

I would say the statements that we're making obviously in tightening the range towards the upper end is that, through the strong organic growth and how the business is performing, that we're moving the 2005 guidance up a little bit. Of course, stronger markets have helped. Organic flows have certainly helped. But, as we have all seen, the share price has appreciated which of course has increased share count a little bit, which has muted our expectations for 2005. When I focus on 2006, again, when we look to the growth that we're anticipating achieving, and a higher stock price, I think we're producing a consistent growth in our cash earnings per share, as compared to previous years.

Okay. Thanks.

Okay.

Your next question comes from Cynthia Mayer with Merrill Lynch. Please go ahead.

Hi, good morning. Most of my questions have been answered, but just to get a little color on Third Avenue's closing. Do they also close to new institutional money in those styles and would they consider any kind of new products?

The mutual funds are what had the soft closes. I don't believe that they've closed -- no, they have not closed the styles [to] institutions.

Okay. Would they consider any new, basically new products, new funds? Is there anything in the pipeline for them?

They do have new products, not mutual fund products. But new products that they have launched relatively recently and they're seeing good flows there as well. These were both in the high net worth and institutional areas.

I think with an imminent roll out.

Okay. In terms of style preference, obviously, retail flows are still going to value. But are you seeing any switch over in terms of institutional? It sounds like you have got a growth mandate.

We did. I don't -- honestly, we're not seeing it much yet. But one would anticipate that at some point it will occur, which is why we were careful to point out that we've got lots of other fine products that are not in this basis, that have been attracting flows recently.

Okay, great. I think everything else has been answered. Thanks a lot.

Okay.

Our next question comes from Robert Lee with KBW. Please go ahead.

Good morning, everyone.

Good morning, Rob.

Just a quick follow-up question to a question on the balance sheet. Looking at your cash flow and additional borrowing capacity, still clearly have some room to do some transactions. But I guess in the context of having put 750 million to work over the past year, it would seem like if you find one or two decent-sized transactions to do, you would pretty much run up against the limit there. What are you thinking about in terms of looking to move things around in the balance sheet or increase your flexibility over the coming year in acknowledgment that the pipeline still seems to be pretty robust?

Well, maybe I will just start off and Rob, as I look it at it, especially in the context of putting $750 million to work, that we have $0.5 billion of capacity now between the end of the year, as I mentioned. We have an EBITDA that is clearly approaching a quarter of $1 billion. Those are substantial resources to get transactions done, and in the context of not only the strong track record that our affiliates have in our organic growth, if we were to put another $1 billion to work in the next three years, that would add quite meaningfully to our cash earnings growth over the period. So we feel like we have ample capacity to continue to make a difference as we execute our new investment strategy.

Okay. Fair enough and just one last question. I'm curious about the -- maybe the complexion a little bit of what you see in the pipeline, more specifically in the last fall, you made the investment in AQR. You have talked about looking at other alternative Managers potentially. But do you really, from where you're sitting now -- there seems to be so much interest out there among people looking to do acquisitions [and] alternative managers [inaudible]. Do you see that there is actually much opportunity there? Is AQR going to end up being a little bit more of a one off or do you think there is more to be done in that space?

I think there are a lot of opportunities out there now, which makes us frankly hesitant, and as careful and skeptical as we would always be, and maybe a bit more so, especially in certain styles where you have seen lots and lots of capacity come into the style broadly. So that said, we continue to meet and develop relationships with outstanding alternative firms that are thinking for the long term and look in terms of how they manage their business and sent their employees and junior partners very much like our best affiliates. And so that kind of an interest is going to continue. I won't predict how many alternative firm investments we will make in the next short period of time, but over the medium to long-term, I absolutely think we will make additional investments in this area.

Great. Thank you very much.

Our next question is a follow-up from Mark Constant. Please go ahead.

Mark Constant. Hi, guys. Just thinking about a recent question here in the context of your discussion of the share count and assumed prices and looking back to when you issued some of those converts, when terms were obviously extremely favorable and we had an incredible robust convertible securities markets and aggressive new issue buyers. Fortunes have obviously turned for the convertibles market. I am wondering how close we may be to a point where you may be able to take advantage of that in the other direction and potentially use some of that potential acquisition capacity to instead maybe retire some of these complicated converts at relatively favorable terms, so that you don't have EPS going down simply because your stock went up?

Mark, I think that is an astute observation. As you heard and we sort of flipped in the opportunistically repurchasing outstanding debt is one of the things --

Mark Constant. You're referring to converts as well as --?

Yes, I mean because you quite well sort of articulated what the landscape is, and you're just right. There will be, and we imagine, over the next year that there will be opportunities to present themselves with convertibles and also just how we think about the balance sheet. I think we were glad to take advantage of the convertibles, and that was a certain time in the capital markets' environment. But this is a different time, and there are different opportunities and we're generating a tremendous amount of cash. So I think we are very cognizant of how those work and also very focused on trying to make sure we are creating as much shareholder value as we can, and how we think about our capital structure and deploying our capital to maximize our earnings.

Great. Thanks.

Okay, management, I'm showing we do not have any more audio questions. I will turn the call back over to you.

Thank you all once again for joining us. As you've heard us say, we are very pleased with our results for this quarter and confident in our prospects going forward. Thanks very much.

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