Affiliated Managers Group Inc (AMG) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Affiliated Managers Group third quarter results conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Wednesday, October 26, 2005. 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; and thank you all for joining Affiliated Managers Group to discuss our results for the third quarter of 2005. 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 10-K and in 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 the reconciliation of any non-GAAP financial projections to the most directly comparable GAAP financial measure. You may access this information at www.amg.com. With us on the line to discuss the Company's results during 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. And now, I'd like to turn the call over to Bill Nutt. Bill?

Thank you, Brett. Good morning, everyone, and welcome to AMG's conference call discussing our financial and operating results for the third quarter of 2005. AMG had an excellent quarter, as our affiliates produced strong investment performance and net client cash flows. While markets so far in October have been challenging, potentially across the board. Looking back over the third quarter, the domestic equity markets were solidly positive, and international and emerging markets were very strong. By way of example, broad domestic indices like the S&P 500 and Russell 2000, gained 3.6% and 4.7%, respectively; while the major international indices such as the EAFE and MSCI Emerging Market indices rose 10.4% and 18.1%, respectively. Canadian markets also had a strong quarter, with the TSX up 11.6%.

Against this backdrop, our affiliates were well positioned, produced excellent results across their respective investment disciplines, managing both domestic and international securities. The strong relative performance of the international markets was reflected in industrywide client cash flows into international equity products, continuing a trend, since international markets and international equities in particular have remained a focus among U.S. investors since early 2004. Mutual fund flow data reflects this preference. For the third quarter, net flows were marginally positive, though they recently turned negative. Meanwhile, U.S. based investors continued to direct significant capital towards international equity funds, with almost $100 billion going to international equity mutual funds so far this year.

Industrywide institutional flows are harder to measure; but our sense is that they, too, reflect this trend. With a significant participation in international equities by AMG's affiliates, these products contributed 35% of our EBITDA. We were very well positioned to capitalize on the strong investment results and flows in this area of the market. In addition to these international equity products, however, our affiliates also managed a broad set of high quality domestic equity products, with investment styles ranging from deep value to aggressive growth. As you've seen in the past, and again in this quarter, these diverse product offerings provide stability to our earnings, while enabling us to participate in the fastest growing segments of the industry. With this overview, let me turn to Sean for a discussion of our results for the quarter.

Thank you, Bill. Good morning, everyone. We reported excellent results for the quarter, with cash earnings per share of $1.18. That's an increase of 23% compared to the same quarter of last year. Our results were driven by accretion from investments in new affiliates and strong organic growth from our existing affiliates. As you saw in the release, we had net client cash flows for the quarter of $1.2 billion, which brings our year to date cash flows to $4.4 billion. These net client cash flows resulted in an annualized growth in EBITDA of approximately 1 million for the quarter and 7 million for the year to date. Year over year, our affiliates have grown their assets from net client clash flows and investment performance by almost $29 billion.

We are confident in our ability to continue to generate strong internal growth, as our affiliates generally, and especially our largest affiliates, have outstanding absolute and relative performance records and strong new business momentum coming into the fourth quarter and next year. As Bill mentioned, our international products have been a major source of asset growth through both investment performance and net client cash flows. Our highly regarded products in this category include those of value-oriented firms such as Tweedy, Browne, and Third Avenue; but also emerging market firms -- sorry, emerging markets products managed by Genesis, quantitative international products offered by AQR and First Quadrant, and a range of Canadian equity products managed by our new Canadian affiliates. We have also had excellent relative performance and absolute performance in our affiliates' domestic equity products. While our value managers continue to perform very well, the prospects for growth oriented affiliates such as Friess, TimesSquare, Essex, and Renaissance, are outstanding.

For example, Friess's all cap Brandywine fund ranked in the top 2% of its Lipper category for the quarter and year to date, while its large cap Brandywine blue fund ranks in the top decile of its Lipper category over the same periods. Turning to our new investments area. In late July, we completed our investments in six high quality mid-sized Canadian firms through the acquisition of Canadian holding company, First Asset Management. We are pleased both with the strong results generated by our new Canadian affiliates during the quarter, as well as the efficiency of our integration of First Asset's holding company operations. While the past 18 months have been a very active period for us in terms of new investments, we are confident in our ability to continue to generate growth through accretive investments in additional affiliates going forward, and we're making excellent progress in cultivating relationships with the most attractive mid-size firms in our target universe. Finally, in addition to funding new investments, we remain committed to increasing free cash flow to opportunistically repurchase our stock or repay indebtedness as appropriate. 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 good investment performance across our affiliate groups, in particular at some of our larger affiliates, including Friess, Third Avenue, First Quadrant and Genesis. In addition, this past quarter, we had positive net client cash flow across all three of our distribution channels, with continuing strong flows in the mutual funds and institutional channels. Now, looking at our performance by distribution channel and starting with mutual funds, we had good investment performance in net client cash flows across most of our major mutual fund products, with net in-flows of approximately $800 million for the quarter in the channel. While the market environment favored international products, we also had good absolute and relative performance, as well as positive net client cash flows in some of our larger domestic value and growth products.

Within the mutual fund channel, we had particularly good relative performance in the quarter, including Friess's Brandywine family of growth funds -- Brandywine, Brandywine Blue and Brandywine Advisors -- each of which outperformed its benchmark by 500 basis points or more during the quarter; and, as Sean just pointed out, each of these funds also posted top decile performance within its Lipper category for the quarter, year to date and trailing one year, with Brandywine Advisors funds earning the number one rank for both the quarter and year to date. Third Avenue also had good performance in the quarter, as its value and small cap value funds outperformed their benchmarks by approximately 350 and 240 basis points, respectively; and Third Avenue value funds also earned top decile rankings within its Lipper categories for the year to date, as well as the prior one, three and five-year periods. In terms of flows within the channel, flows into the Brandywine funds have been increasing, while flows at Third Avenue remained strong during the quarter, although less than the prior quarter, as the firm announced in June that they would put a temporary hold on new clients into their international and real estate funds while they put the cash raised to work.

Next, turning to the institutional channel. We also had another strong quarter in the institutional channel, with net in-flows totaling approximately 290 million for the quarter. Much of these flows were concentrated in international and emerging markets equities and quantitative products at affiliates such as Genesis and AQR. In terms of quantitatively oriented firms, AQR and First Quadrant both continue to have very strong performance. We also had very good performance by several of our growth and value equity managers, with Friess on the growth side and Systematic on the value side deserving special mention. Friess had good in-flows in its institutional products -- small cap, mid-cap and large-cap growth. Each outperformed its benchmark by 200 basis points or more for the quarter and 800 basis points or more for the year to date.

In the value space, Systematic value products, small, mid and large, all had good performance, with most beating their benchmarks by over 250 basis points. One final observation I would make regarding the institutional channel is that flows can be significantly more lumpy than flows in the mutual funds and high net worth channel; and, while the flows this quarter were good, they really did understate the strength of new business momentum, as a number of mandates that were won during the quarter didn't find until after the quarter ended. Now, turning to the high net worth channel. We had net inflows of approximately 80 million, and the story here is basically positive flows for several affiliates through our managers' initiatives; most notably Renaissance, which had over 150 million in high net worth growth [TECHNICAL DIFFICULTY] for the quarter, offset by more modest outflows from Rorer. Rorer's outflows have significantly slowed as our flagship large cap product outperformed its benchmark for the third consecutive quarter.

In terms of a broader update on our retail distribution platform, Managers Investment Group, client cash flows at Managers continued to increase within each of their three segments -- FMA or [Rath], mutual funds, where we are increasing the focus on distribution of affiliate funds such as the Brandywine Fund; and subadvisory. You may recall that we discussed the launch of the subadvisory marketing initiative off of the Managers platform on our second quarter call, so we added a second subdvisory mandate one during the third quarter. Overall, we are building a solid platform which is starting to contribute to the organic growth rate of several of our affiliates. The success we've seen during the first three quarters since launch leads us to be optimistic that Managers will be a real contributor in 2006 and beyond. Now finally, with Managers up and running and contributing to the organic growth rate of several of our affiliates, we continue to explore other segments of the marketplace where we can provide our affiliates with the opportunity to participate in collective distribution.

We've identified a number of these opportunities, both domestic and international, and in each case, we're looking at them from the standpoint of trying to leverage the infrastructure that we already have in marketing, sales, operations and systems, just as we are doing with the subadvisory initiative. Now, with that, I'll 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 $1.18 for the third quarter. GAAP earnings were $0.67. The ratio of EBITDA contribution to end of period assets under management was 17.3 basis points in the third quarter, a decrease from the second quarter, primarily as a result of the First Asset acquisition. We expect this ratio to increase to approximately 18.4 basis points during the fourth quarter, reflecting the full quarter results of the acquisition and the absence of certain non-recurring expenses across the based affiliate. Performance fees added approximately $0.01 for the quarter. Holding company expenses were 9.8 million for the quarter, which included a 2.5 million prorata accrual for the annual equity based incentive compensation we anticipate awarding at the end of the year.

With regard to taxes, our tax rate was 37% for the third quarter. We expect our tax rate to remain at this level for the remainder of the year. Our cash tax rate was 19.4%, a bit lower than expected. Total deferred taxes were 8 million for the third quarter. Of this amount, we add back to cash earnings only the 7 million that is related to intangibles, as these will not reverse for sale or impairment. I would note that the additional $1 million of deferred taxes related to the floating rate convertible securities was also cash actually received by AMG. We forecast deferred taxes related to intangibles to decline to 6.9 million for the fourth quarter. Amortization for the quarter was 8.7 million, including 2.2 million of amortization from affiliates accounted for using the equity method. The earnings from equity method affiliates, which include AQR and two of our Canadian affiliates, are included in the investment and other income line on the income statement, both -- all net of amortization.

Equity method amortization will increase to about 2.3 million in the fourth quarter. With a full quarter of earnings from First Asset, total amortization for the fourth quarter is expected to grow to 9.2 million. Depreciation for the quarter was $2 million, with 1.5 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 $10 million for the third quarter. We anticipate that our interest expense will increase to approximately 10.6 million in the fourth quarter, primarily as a result of borrowings under our credit facility related to our acquisition of First Asset. In mid September, we launched a new syndication of our bank facility. Although the new facility will not close until early November, based upon commitments we've received to date, we expect to close on the new facility at approximately $550 million, while retaining significant capacity to increase the size of the facility.

I should also mention that the new facility includes more favorable pricing terms. This new credit facility supplements the strong cash flow from AMG's operations and provides ample capacity, not only for new investments, but also to opportunistically replace existing indebtedness or to repurchase our stock. We did see several opportunistic periods in which to buy our stock during the quarter and repurchased 551,000 shares. Stockholders' equity was $811 million. Now I'd like to provide some earnings guidance for the remainder of 2005 as well as 2006. While we're not providing guidance on specific analyst estimates, assuming 2% quarterly growth in markets, we would expect our cash earnings per share to be in the range of $4.65 to $4.75 for 2005. That said, we observed that markets are down approximately 3% quarter to date as compared to our 2% market appreciation per quarter convention. Our 2005 guidance also assumes a weighted average share count of 38.8 million for the remainder of the year.

Turning to guidance for 2006, despite markets being down since our last call, we affirm our guidance and 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, any new affiliates, or the effects of repurchases of our stock, and is based on current expectations about affiliate growth rates, mix and affiliate contributions. The share count assumptions for both 2005 and 2006 are calculated using the treasury stock method to account for our convertible. Of course, substantial changes in the equity markets would impact these expectations. Now, we'd be happy to answer any questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. And our first question is from Bill Katz with Buckingham Research. Please go ahead.

Okay, thanks very much. I'm sorry, I joined the call about ten minutes late due to another conference call ending. You may have covered this -- I apologize, I'm sorry. Can you talk a little bit about on the flows, particularly on the institutional side. It looks like they slowed a little bit sequentially. Just sort of curious, was there anything there related to the distribution of your overlay assets in London? Was it just sort of some lumpiness? And what's sort of the outlook going forward? First question.

This is Nate. We did speak to it briefly. It is in fact lumpiness. We are -- if you look at the institutional pipeline, there's increasing momentum. It's a very strong pipeline, especially if you think about it in global international emerging markets, quantitative products. So the pipeline -- the [flow to] pipeline looks very strong.

Okay. Second question I have is for Darrell is you bought back 550,000 shares. I think that's the biggest buyback in quite some time. How should we think about the balance between potential for a deal versus for buyback? I know in prior conversations you've always said you get more bang for the buck, if you will, from a deal. But you still see me making a statement here about usage, so how should we be thinking about that?

Well, maybe -- it's Sean. I'll take a crack at that. I think indirectly your question goes to the quality of the pipeline, and I think that's something I want to address directly. The answer is that we have always, since we went public, been focused on buying shares back, as well as investing in additional affiliates. From time to time, one alternative seems more attractive than the other; but it can be misleading I think to try and read too much into how much repurchase activity you see in a given quarter. That said, given the scale of the business, the substantial and increasing free cash flow the business is generating, I think we've indicated in prior calls that we are increasingly focused; and I said this a bit in my remarks, increasingly focused on the importance of using our capital to buy shares back, and so we will do so.

What does that say about the quality of the pipeline? Not much. I also said in my remarks that I think we're very pleased with how our pipeline looks right now. As always, it's very difficult to forecast the timing and pace of new investments with much precision; but measured by the quality and number of high quality mid-sized firms that we are talking to, we are feeling great.

Okay. And then just sort of a final question. As we look out into '06, just sort of curious if you can talk a little bit about what you might see in terms of opportunities to -- you sort of talked about these other opportunities in the retail area. Sort of curious how should we be thinking about what might you be leveraging? Is it sort of manufacturing centric in terms of bringing more manufacturers into the Managers group, or is it beyond that in terms of just other distribution avenues for the entire franchise?

In my remarks, I was speaking more to the latter which is looking at other distribution opportunities again, I said domestic and international. Clearly, there will be some of both as we look into next year. There will also be the addition of additional product into the retail distribution that we've got in each of the areas that we've identified -- separately managed accounts, mutual funds and subadvisory -- so it's a bit of both. But what I was speaking to was, specifically, was the exploration of additional distribution opportunities, domestic and international.

Okay. And just one final clarity question here. In terms of -- what you're saying on guidance, you've raised the guidance for this year a little bit despite the market is down and you're affirming next year despite the market is down; is that what you're saying?

That is. I mean, remember, the convention that we use is a 2% appreciation for this quarter to get to that increased guidance range; but we feel very good about the business and certainly you'll hear all the opportunities that we have next year. We -- our confidence continues to increase in the prospects for 2006.

Okay, thanks. Again, I apologize for the redundant questions.

No problem.

Thank you. Our next question is from Mark Lane with William Blair. Please go ahead.

Good morning.

Good morning, Mark.

Two questions. First of all, on the flow side, can you be a little bit more specific about the development of MIG, and also the strength of the amount of mandates that have actually been funded within the institutional channel within the fourth quarter?

Okay, let me do those in order there. In terms of MIG, the overall rate of flows -- I think I sort of guided folks to about 100 million plus in gross load. That rate continues to ramp. And one important thing as we look out is it's continuing to ramp -- not just we're selling more [Rath] assets, which are sort of lower margin assets -- but it's ramping, importantly, in the mutual funds area which are sort of higher margin assets; so we're getting leverage from the sales force across different product lines through the same sponsor relationships. And that's important. But that flow base continues to grow. In terms of subadvisory one that we talked about last quarter, we got our -- we won our second mandate there. That will be lumpy, right? It's more like the institutional funds; that will be lumpy. But we continue to see, as we look ahead, good opportunities there.

Moving to the second question, which is more sort of how do we see growth in the institutional channel looking ahead. We see, as each Sean and I said, we see increasing momentum. And a lot of it is, we have good visibility to that forward pipeline in terms of mandates won but not yet funded, and in terms of sort of mandates where we've won the finals and are working our way through to we're done and going forward. So we have very good visibility to a strong pipeline, especially, when we think about that pipeline, especially the areas we've mentioned -- international, global, quantitative strategies, both at First Quadrant and AQR and emerging markets. I mean, one other point maybe to emphasize is, you may recall, the Genesis, their flagship product, their emerging markets product, had been closed and just reopened October 1. They also parenthetically launched another sort of smaller company's emerging markets product that's also open. So in addition to the other things, there are those products that are now open that had been closed.

Well, last quarter on MIG what you had said was that on a gross basis and over the past couple quarters $100 million in the fourth quarter of '04, 110 million in the first quarter of '05. Last quarter, you said it was significantly higher than 110 million. So what was it in the third quarter?

The gross flow number in the third quarter was over 200 -- was over 200. Again, I think the right way to be thinking about it is looking out to 2006, it should be over 1 billion net is probably the right way to think about it conservatively.

And, Darrell, I'm just a little bit confused at your guidance in that last quarter my understanding was that you had changed the way that you were presenting your guidance with your market assumptions in that you were basing your guidance on prior quarters' ending asset levels and 2% market appreciation per quarter. Is that correct?

That's right. And that's what we are continuing to do.

So if the market was up so significantly in the third quarter and the guidance doesn't include any market weakness quarter to date, why is your guidance unchanged?

I mean, again, I think some of it is timing, given the different channels of when we recognize our revenues; but as I also mentioned in -- I think that, well, we had improvement in third quarter. If you look at what's happened in the fourth quarter, markets have been away a bit, and we are upping our guidance from the guidance that we gave on the last call. When we look at this quarter, in particular, there were a couple of small modest one-time charges that related to third quarter activity; but when we look to next quarter, I think we are forecasting strong growth [OVERLAPPING SPEAKERS].

No, but I'm talking about '06. I'm specifically referring to 2006.

With 2006, I think from the call last time to the call this time, markets are down and we're continuing to state a range that's constant.

So that's my -- my whole point is that your assumptions include 2% market appreciation per quarter; an, basically, the market was up quite significantly in the third quarter -- well above your 2% guidance range. And your new estimates don't include the market decline in the third quarter. So the question would be why isn't '06 going up?

Yes, I -- well, I think that when we look at 2005 to 2006 that we're forecasting very good growth. I think we've always tended to be very conservative about the assumptions that we make as we look at our business perspectively, and we feel very good about the opportunities. And so, when we look at a guidance range of 5.40 to 5.60, I think that we are producing strong results and we'll continue to deliver those and look for additional opportunities to grow.

Yes, I think -- Mark, I guess I would add that there's an element of artifice to -- as a convention of assuming constantly rising markets, especially where markets are down 3% already. So I think, clearly, if we end the year up 5% from where we are now, which is what our guidance convention would assume, obviously we'll be, all things being equal, at the upper end, or indeed raising our guidance. I think given the challenge of looking a whole year out, more than a whole year out right, where you're going to have a broad range of uncertainty anyway, we didn't think it appropriate, notwithstanding the markets having risen in the third quarter, to raise guidance since we know now that they're down.

Okay. I don't -- I thought the whole point of doing that was to remove the ambiguity of where the market was quarter to date. But --

It is in the current year. I think just looking out -- and obviously we'll -- we're striving for clarity here, not confusion. But looking -- in the current year, I think it's easier to do that. Looking out more than a year, it, I think, risks confusing others if we're forecasting when markets are in fact down relative to where they ended the quarter.

Okay. Thank you. Thank you. Our next question is from David Haas with Fox-Pitt Kelton. Please go ahead.

Good morning.

Good morning.

Just a quick question on the flows again. If you can be a little bit more concrete. Is there any way you can give us a sort of percentage of the affiliates that had positive flows versus percentages that had outflows in the quarter?

It's not guidance that we -- or information that we customarily or are comfortable providing. But generically, I would say just scanning a list, more than half. And clearly, what's important to understand, and a lot of the data you can get from the mutual fund firms, is that the largest affiliates which contribute the greatest share of our EBITDA contribution going forward, they are doing very well based on both performance as well as flows.

Okay. Okay.

And I guess the other thing I would say is that there is no affiliate where we see real trouble; although, obviously, there's a range of business performance among affiliates, but no one who is facing severe challenges in their business.

Okay, thanks. And then the second, a follow-up on the pipeline which it seems like you feel comfortable with as well. And I know you've built out your international focus, and I'm sort of asking this question ex-Canada, but in terms of international managers and the acquisition environment and the pipeline there, does it seem like it's getting a little bit more difficult as investors sort of flock to overseas investments and other types of international type strategies?

Well, I would say a couple of things. First, I think we've had a focus and happily been able to identify and develop relationships and consummate partnerships with a group of very high quality international firms. And with 35% of our EBITDA from international products, I think we feel very good about how that stacks up in terms of proportionate share of earnings relative to others. Obviously, it's an ongoing challenge. We are continuing to look for great international firms, as well as great domestic firms. I would distinguish between firms that are based outside of the U.S. and may be manage international assets and firms that are -- that may be in the U.S. and manage international assets.

In other words, you -- there's a particular challenge in making investments outside of the U.S., although we've in the last year done a number, and I think feel good about our prospects there. So I would say there are a number of great international managers here and outside the U.S. We feel very good about our prospects to continue to get our share of investments in that area; but it's very difficult to sort of quantify on a period to period basis.

Okay, good. And then last question, just sort of on the balance sheet and then financing going forward. New credit facility being outlined, and feels like the balance sheet is strengthening. Any sort of new views on how the CoCo bonds sit, some of the convertible bonds sit on the balance sheet and actions around them?

Yes, David. When we're looking -- obviously, we're cognizant of the convertibles, and we want to be opportunistic about getting them out of the balance sheet as appropriate. We have done that in the past with Alliance by buying back half of the issue. We will continue to work to simplify the balance sheet, and I think that we'll continue to make that an objective.

Okay. Thanks very much.

Thank you. The next question is from Cynthia Mayer with Merrill Lynch. Please go ahead.

Good morning.

Good morning, Cynthia.

Just to beat a dead horse on the guidance. I just want to come back to it one more time. Would it be fair to say that even though you're holding the '06 guidance steady, that it isn't a reflection of any assumption in increased cost or lower flows or anything fundamental like that; it's more just a reflection that you don't necessarily want to adjust far out guidance every time the markets move?

Yes, that's correct, Cynthia. I mean, we look forward -- and again, we want to be -- the farther into the future that we're giving guidance, the more conservative we want to be, and we'd like to take volatility out of how we communicate the prospects of the business.

Okay. Just wanted to clarify that. And then, I think last quarter you said something like 12% of EBITDA was from alternative investments. I'm wondering if you can tell us what that is this quarter, and also are you expecting higher performance fees from alternative investments in the fourth quarter? Kind of a seasonal effect?

I think when we look at performance fees, there are a meaningful set of assets that do have performance fee contracts. Again, we would not recognize those earnings until those contracts settle at the end of the year. However, as we do position the business to have exposure to alternatives, not only the end of this year but in 2006 and beyond, I would imagine that we increase our opportunity to benefit from performance fees. So I think it's too early to tell; and, again, we don't want to get in the business of trying to forecast perspective performance fees.

Right. But there is some weighting of those in the fourth quarter?

Yes, yes.

Okay. And is the 12% for this quarter still about the same, do you think?

It's 14.

14.

And, again, it's hard to -- I wouldn't encourage you to use that percentage as a way to try to calibrate exposure to performance fees because the relationships are more complicated. But I think you've grasped the one essential point, which is that to the extent there's seasonality, the fourth quarter will be where we see more of it.

Okay. And then you indicated Third Avenue closes were temporary. Do you have any read on when they will have put that money to work and could reopen?

We don't have a specific read on when they'd open the products. The cash levels in those products are coming down, they are putting the money to work; but I don't have a specific read on when they'd reopen them.

Okay. And I guess just a Rorer update. Can you give us a sense of AUM and the net flows for the quarter?

[OVERLAPPING SPEAKERS] by observing it. It still has -- we're still assuming zero contributions. We continue to assume zero contributions. They did, as I mentioned, have a third straight quarter of good relative performance in their flagship large cap product. The assets are up a little over $2 billion in the firm at the end of the third quarter, and the large cap product, I think, was a little bit over 1.3. So just to anticipate, that is a reduced level of outflows offset by positive investment performance in the third quarter. And as I said, that sort of -- that benchmark flopped because they did outperform in the third quarter.

Okay. And last net flow question, you mentioned wins that haven't yet been funded. Can you quantify those?

I don't think we want to get in the business of quantifying [OVERLAPPING SPEAKERS]. But substantial relative to our flows in that channel -- to our typical flows in that channel already. So we're trying to convey general optimism about the new business momentum across the affiliate group, but especially in the institutional channel. But would rather not get in the business of interquarter quantification.

Okay. Thanks a lot.

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

Good morning, guys.

Good morning.

Just a couple of things I wanted to clarify. One, I understand the EBITDA was just presented [INAUDIBLE], it goes up any time you have an interquarter new investment. But I think you also mentioned, Darrell, something -- you said something about third quarter non-recurring expenses in profit based affiliates. Can you give us order of magnitude sense of what those were? And then one guidance clarification question.

Yes. Some of the expenses were related to our Canadian affiliates in the integration, and some of it was just a little -- it's just a -- just some little things across some of the profit based affiliates. I think we're talking 1 million to $2 million; and so I think as we have the Canadian affiliates for the full fourth quarter, we continue to realize efficiencies there in the fourth quarter and into next year. That's how you'll see that ratio continue to grow.

So with that million to 2 million of extra nonrecurring stuff, a portion of that we'll still see in the fourth quarter, but then gone by '06?

That's right. And we continued also in the third quarter to make some investments in the Managers Investment Group; and as that grows, that subsidy will also go away as that business continues to scale.

Okay. All right. And then I think -- I mean, the way that I was looking at -- my notes as you were talking about the guidance, I think you said something, and we are affirming our 5.40 to 5.60 despite recent market declines. Just trying to sort of reconcile that against the 2% convention. I looked up quickly and the S&P is down like 2.3% since your conference call last quarter. So I kind of viewed that as if you are saying and despite recent market declines that that's indicative of a neutral to positive sort of core earnings run rate -- or am I reading it wrong? Should I really be thinking about it as vis-a-vis the starting points of assets?

No, I think you're getting the message, which is, we feel more positive on this conference call than we did the last about our prospects for 2006, and we tried to describe that. We also observed that since our last conference call markets are down. And so while we are maintaining our guidance for 2006 at 5.40 to 5.60, we believe that stronger business prospects are what enable us to achieve that and have the opportunity to get to the upper end of that range. But as Sean said earlier we, again, a year is a long time and as we look out into the future we want to make sure that we are describing the growth opportunity in a way that doesn't have a whole lot of volatility in it.

Okay. Thank you.

Thank you. Our next question is from Wayne Archambo with BlackRock. Please go ahead.

Yes, could you just give us some update on both asset flows as well as personnel at Essex, where that stands, what the state of Essex is?

Sure. This is Nate. First, Essex from a performance standpoint had a good quarter. And in terms of the flow picture there, they had -- I'm trying to do this from the top of my head -- but they had a very good subadvisory win. Actually, the subadvisory win I mentioned before was them picking up subadvisory mandate there; so some of their products have good traction. That was especially micro cap and small cap products. So they've been doing a good job there. There has been some turnover in the analyst team, but nothing -- they've been sort of reorganizing that around the [PM]. So it was a good performance and is improving.

And could you quantify the personnel turnover and also the amount of net outflows there?

Well, as Sean said earlier, we are not going to do the affiliate by affiliate, so don't feel comfortable with that and actually can't talk off the top of my head to do the number of -- I just don't have that number.

Yes, but Wayne, I would say from our standpoint the business is healthy. There's some level of turnover that firms can experience on an ordinary course basis, and they are, we think, well positioned perspectively, given relative and absolute investment performance and an expectation that the flows to growth will pick up. Very pleased with what their micro cap product has done. And so it's not a situation where we are particularly concerned, although it's of course an important affiliate and we are anxious to work with the partners to build their business and increase their assets as best we can.

Thank you.

Thank you. The next question is from Robert Lee with KBW. Please go ahead.

Thank you. Good morning, everyone. These may have been asked already, and I apologize as I got on the call a bit late like some others. But I'm just curious, can you talk a little bit maybe about the competition from managers out there, if it's -- if you've seen any change in the landscape of the people you're competing against? And then I just had one follow-up question.

Yes, I would say and I'll start but ask Bill to jump in from his perspective. I don't know if you heard this bit, but I said that we feel very good about our pipeline and prospects generally in the new investment area. The market as a whole, in the merger market in the mid-size base, I would say, remains quieter than I would have expected. There are definitely fewer buyers of all types out there, but still a very large number of terrific firms; and measured by the quality and quantity of the firms that we are in discussions with, we feel optimistic looking ahead with again the usual caveat about not wanting to get in the game of predicting quarter to quarter activity. Bill, would you add anything to that?

No, I really echo, Rob, what Sean just said. I think if I look back over the past maybe four or five years where we were in terms of competitors. I don't think we've ever felt better in terms of our position. Fewer competitors -- particularly fewer international banks looking at U.S. managers; indeed, even looking at other domestic managers in their own markets. So we don't feel a lot of competition there. One relatively new entrant, although they've always been here to some extent, but I think you're seeing a little bit more, are some of the private equity firms who've made bids for asset managers. Those are kind of different transactions; they're not looking to doing a lot of transactions. They're relative few, and they always then when they make that investment are looking to get out after a period of time, so that isn't always as attractive to either the management team or particularly the clients of those firms. But broadly speaking, we feel very, very good about the market, and particularly as a consequence of the reputation of our existing affiliates and how well they've done after the investment.

Okay, thanks. And one follow-up question. As a number of our affiliates have grown and I guess including First Asset is somewhere I guess around mid-20s. Can you talk a little bit about how you've had to change the way you communicate and deal with the affiliates and to what extent does it put -- and do you have to change your own infrastructure, whether it's adding people or what not to make sure you have the right level of communication and interaction with everyone. Is it becoming increasingly difficult, or how do you think about that?

I appreciate the question. I think one of the untold difficult to tell stories, which is why I'm going to ask Nate to do it in a second, is the degree to which we've added some terrific people; but more importantly, systematized the management and information processes that we use in managing our relationships with our affiliates in all aspects of the relationships. And why don't I stop there, Nate, and you can elaborate.

Sure. The -- we really have put a lot of time and effort into this ability to scale the -- scale customized relationships, and that's really the way to think about it. Our relationships with these firms are very much partnership-like; so in that way it really hasn't changed since the earliest days. Our orientation in relationship to these firms, that partnership orientation which has been useful in a whole range of settings, that hasn't changed. But absolutely, we've had to build a level of infrastructure, a scalable level of infrastructure, that allows us to deliver that customized relationship with all of the risk management and all of those things, as well as identifying opportunities and challenges. All of those things, as Sean said, in a systematic way, something that we spent a bunch of time on and again continues to evolve. But the fact that we were able to sort of pull in the additional affiliates really and all of that and just bring them into that relationship management process. And then there's a great team of people here sort of executing on that.

Great. Thank you very much.

Thank you. Management, there are no further questions at this time. Please continue with any closing remarks.

Thank you all once again for joining us this morning. In sum, we are very pleased with our results for the quarter; and as we look ahead to the remainder of the fourth quarter and beyond, we are confident that with the quality of our affiliate investments products and our participation in some of the fastest growing segments of the asset management industry, that we are well positioned to continue to generate excellent returns for our shareholders. Thank you.

Thank you. Ladies and gentlemen, this concludes the Affiliated Managers Group third quarter results conference call. If you would like to listen to a replay of today's conference call, please dial 800-405-2236 or 303-590-3000, and access code 11041920. Once again, if you would like to listen to a replay of today's conference call, please dial 800-405-2236 or 303-590-3000 with access code 11041920. You may now disconnect, and thank you for using AT&T teleconferencing.