Affiliated Managers Group Inc (AMG) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Affiliated Managers Group second quarter results conference call. [OPERATOR INSTRUCTIONS] I'd now like turn the conference over to Brett Perryman, Vice President of Corporate Communications. Please go ahead.

Thank you and thank you all for joining Affiliated Managers Group to discuss our results for the second quarter and first half of 2006. 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 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 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 result for the quarter are Sean Healey, President and Chief Executive Officer; Nate Dalton Executive Vice President in charge of affiliate development; and Darrell Crate, Executive President and Chief Financial Officer. And 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 to discuss our financial and operating results for the second quarter of 2006. In a challenging quarter for the equity markets, AMG achieved solid growth in cash earnings with positive net flows of $2.9 billion, making this another strong quarter of organic growth. Over the 12 months, we've generated internal growth in assets under management of over $40 billion. Our positive net flows drove earnings growth in the quarter with reported cash earnings per share of $1.30, up 15% over last year.

Our results reflect the diversity and strength of our affiliates. In a volatile quarter with most indices down, our diversity provided meaningful stability to our results. For example, we had broad participation in value equity products both domestic and international through firms such as Tweedy Browne and Third Avenue, as well as absolute return in quantitative strategies through AQR and First Quadrant. And both of these product categories delivered strong relative performance during the quarter.

Having said that, the most significant factor driving our results was the strong organic growth of our individual affiliates. AMG's affiliates are among the leading boutique managers in their respective disciplines. And in spite of the difficult equity market environment, they continued to perform well and generate strong net client cash flows. Even in disciplines which were out of favor such as emerging markets and domestic growth equities, the strong long-term track records of affiliates such as Genesis and Friess enabled them to attract positive net client cash flows in the quarter.

In addition to the strong organic growth produced by our individual affiliates, we seek to enhance our growth through AMG sponsored distribution initiatives. Our manager's platform produced excellent flows in the second quarter and we are on track to meet or exceed our goals for the year.

Looking forward, we see increasing opportunities to leverage the strengths of our individual affiliates through additional collective distribution arrangements, including an overseas market such as Australia, where our affiliates in aggregate manage 5 billion U.S. in local client assets. Nate will talk more about Australia and other distribution initiatives in just a moment.

We also continue to see significant growth opportunities from investments in new affiliates. With an established track record of successful investments, AMG is positioned as the succession planning alternative of choice for growing mid-sized asset management firms. While the timing of these succession oriented transactions is inherently difficult to predict or manage, we have a strong pipeline of relationships with high quality firms and remain confident in our ability to add meaningfully to our earnings growth through accretive new investments going forward. The strength of our results this quarter also demonstrates our focus on enhancing shareholder value through effective capital management.

In April, we issued $300 million of convertible trust preferred securities at a conversion price of $150 per share. We used the proceeds from this offering, along with the cash flow generated by our business, to repurchase our common stock. Bringing aggregate stock repurchases through the second quarter to 4 million shares. Given our strong balance sheet and recurring cash flow, we continue to have ample capacity to finance new investments while maximizing our return on capital.

In sum, we were pleased with our results for the quarter as we generated solid earnings growth despite down markets. We believe our ability to achieve consistent growth and cash EPS over time demonstrates the strength of the AMG model and the quality and diversity of our affiliates. And we are confident that we will continue to meaningfully enhance shareholder value over the long term. With that, I will turn the call over to Nate.

Thanks, Sean. Good morning, everyone. While I will discuss our result by distribution channel in a moment, I would like to reiterate a couple of broad themes. These themes have been present for a number of quarters now. First, as Sean mentioned, we continue to be pleased with ur organic growth, in particular in terms of the sustained positive net client cash flows. While flows were 2.9 billion in this past quarter, more importantly, looking back over the last four quarters; net positive flows were over 14 billion.

Second, we have consistently emphasized the benefits of diversity across our high quality affiliate group. And that diversity provided stability again this quarter. Third, a number of our largest affiliates continue to really distinguish themselves in their investment discipline and distribution channels. And remain very well positioned to continue gathering significant flows.

Now, to discuss our results in detail, I will begin with the institutional channel. We had another good quarter, with net inflows totaling approximately 2.2 billion. Flows were broadly based across the affiliate group but once again, both quantitative firms, such as AQR, and value oriented firms, such as Third Avenue, were strong contributors. I should note, that as we have discussed in the past, institutional flows are inherently lumpy and some of the mandates quite large.

Although, these larger mandates often come with lower fees. For example, this quarter our institutional flows included a single inflow of over 2 billion, partially offset by a single outflow of over $1 billion; as a client rebounds part of a mandate away from an affiliate. Overall, in the institutional channel, our affiliates remain well positioned to attract new assets across a wide range of products and the pipeline continues to look very strong.

Turning to the mutual fund channel, net positive flows in the quarter totaled 289 million. Some items of note in the mutual fund channel. tHird Avenue, all of the funds are four or five star rated, continued to have positive flows despite the fact that three of their four funds were closed to new clients throughout the second quarter. In that regard, I should note that the Third Avenue real estate fund re-opened on July 1, as recent market conditions provided the opportunity for them to put the cash in the fund to work. Similarly, the cash levels in the other two closed funds have come down. Although, not to the level that would lead them to open the funds. Now parenthetically, the high cash levels, obviously, contributed to the fund's relative performance during the market decline.

Turning to Friess Associates, all of whose brand funds are four or five star rated, they also had positive flows in what was a challenging quarter for the growth stock funds. With most of these positive mutual fund flows coming through our manager's distribution platform.

Tweedy, Browne's flows in the quarter remained negative, despite their flagship, global value fund, outperforming its benchmark by over 100 basis points. Now, the reason for the negative flow is simple. The funds are closed to new clients for much of the same reasons the Third Avenue funds were closed. The challenges the managers had to find suitable investments which, led to high cash level in the fund. Now, also like the Third Avenue funds I spoke about a moment ago, the high cash levels have come down. Although, not yet to level where they've had to re-open the fund.

Now, maybe that's a good segue to a bit of related news in the net worth channel. Where, in addition to putting cash to work, Tweedy, Browne launched a new product at the end of the first quarter, a global high dividend product. Now obviously, there is lots of demand for product like this. The pedigree of the investment process is fantastic and they have actually been running the product for 26 years for a couple of clients internally. So, there is a lot of confidence in the ability to produce value with this product.

Turning to the high net worth channel more broadly. We have net inflows of 404 million. Now, this our fourth straight quarter of positive net client cash flows in the channel and fifth quarter of sequential improvement, as our Managers investment group platform is driving increasing flows to several of our affiliates, most notably Renaissance. With respect to Managers more broadly, the platform continues to gain momentum. Last quarter we indicated that we expected net sales through Managers for the year, including affiliate mutual funds and separate accounts both, to be 1.5 to 2 billion. And we are still on track to achieve that goal, with the possibility that we may exceed it. In addition, we would expect our net flows in 2007 to continue to increase.

Finally, we are evaluating additional collective initiatives in areas where AMG can leverage scale on behalf of our affiliates. One area we've been looking at is global distribution. And as Sean mentioned, the project that is closest to launch is Australia. Not only because of the characteristics of the marketplace but also because of the pull from clients there. Today, five of our affiliates manage almost 5 billion U.S., for Australian clients. Given the nature of this market, we see opportunities to enhance sales, marketing and client service. In some ways, this is similar to the U.S. subadvisor marketing initiative we launched last year.

To be clear. Now, we are approaching these initiatives in much the same framework as we approached Managers prior to its launch 1.5 year ago. And we clearly see a path to investing modest amounts with readily ascertainable benefits to our affiliates and a return to our shareholders that is competitive to other alternatives. With that, I will turn it over to Darrell to discuss our financials.

Thanks, Nate. Good morning everyone. As Sean and Nate discussed, our ability to achieve consistent earnings growth through a challenging market environment, such as that of the second quarter, demonstrates the quality and diversity of our affiliates products and our effectiveness in managing our capital to enhance shareholder value. As you saw, we reported cash earnings per share of $1.30 for the second quarter. GAAP earnings per share was $0.86. As Sean mentioned, net client cash flows for the quarter were 2.9 billion. These flows added 4.6 million to our annualized EBITDA.

And now for some financial details. The ratio of our EBITDA contribution to end of period assets under management was 17.8 basis points in the second quarter, essentially unchanged from the first quarter. We expect this ratio to remain at a similar level for the next quarter as well. Holding Company expenses were 12 million for the quarter and we forecast a similar amount for the third and fourth quarters.

With regard to taxes, our tax rate was 34.3% for the second quarter. A decrease from the first quarter as we recorded a one-times deferred tax adjustment from a Canadian tax rate reduction enacted during the quarter. We expect our tax rate to return to 37% for the remainder of 2006. Our cash tax rate was unaffected by this one-time benefit but decreased to 22.2%, primarily as a result of the incremental tax shield provided by our convertible trust preferred security.

Intangible related deferred taxes were 5.7 million for the second quarter. As I mentioned, this amount is reduced by the one-time adjustment and should return to 7 million for the third and fourth quarters. Amortization for the quarter was 9.2 million, including a $2.3 million of amortization for 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 income from equity method investments line in the income statement, all net of amortization.

Depreciation for the quarter was 2.3 million, with 1.6 million of that 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. Stockholders' equity was 543 million. Interest expense was 15.1 million for the second quarter. We anticipate that our interest expense will increase to 15.5 million in the third and fourth quarter given the current interest rate environment.

As Sean mentioned, early in the quarter we issued 300 million of 30 year convertible trust preferred securities at an attractive coupon of 5.1%. And used the proceeds to repurchase our stock. Combined with additional repurchases during the quarter, we purchased a total of 3.3 million shares during the second quarter and 4 million during the first half of 2006. Also, as we announced separately this morning, our Board of Directors has approved a share repurchase authorization for an additional 5% of our shares outstanding.

This authorization ensures that we maintain the flexibility to opportunistically repurchase stock. While we have put a significant amount of capital to work repurchasing shares so far this year, AMG retains ample capital to execute our growth strategy. The strong recurring cash flow generated by our business, as well as the $550 million credit facility, provide a meaningful amount of capital to fund new investments and support collective growth initiatives; while continuing to repurchase our stock as appropriate.

Now, turning to guidance for the remainder of 2006. Despite market volatility during the second quarter, we are maintaining the guidance we gave last quarter and continue to expect that our cash earnings per share will be in the range of $5.50 to $5.75. As is typical for our forward guidance, we assume 2% quarterly growth in markets for the remainder of the year. Our annual guidance also assumes an earnings pattern similar to the one we experienced in 2005, where we recognized a meaningful of earnings from alternative products and performance fees in the fourth quarter.

Further, it also assumes a Treasury stock method share count of approximately 39 million for the year, which reflects the weighted average effect of our share purchases to date. Our guidance does not include additional earnings from investments in new affiliates. And is based on current expectations about affiliate growth rates, performance and the mix of affiliate contributions to our earnings. Of course, substantial changes in the equity markets and the earnings contributions from our affiliates would impact these expectations. Now, we'd be happy to answer any questions.

[OPERATOR INSTRUCTIONS] Our first question is from Laura Kaster with Sandler O'Neill.

Good morning. In addition to your press release, you obviously announced a 5% share buyback. Now, if we could think about that, maybe go at it from a different angle. You do generate about 200 million in free cash flow for the year, that is what I estimate. And you do have a lot of excess capacity on your balance sheet. But how should we think of this share buyback in terms of any acquisitions you would make for the back half of the year? Could we still expect or should we still expect to possibly to see a transaction in '06?

The way I would respond is that both share repurchases and investments in new affiliates are important ongoing elements of our earnings growth strategy. Obviously, we are pleased with the strength and consistency of our organic earnings growth and that really forms the basis for our earnings guidance as you know, which as Bill just said a moment ago, doesn't include the impact of accretive investments in new affiliates. But going forward, we certainly expect that over time we will continue to repurchase stock and to make additional affiliate investments.

During -- maybe to the pipeline part of your question. I would say there have been several banker driven auction transactions where 100% of the equity was sold that have been announced recently. But as you know, our focus is on succession oriented investments in growing mid-sized firms where the principals of those firms are committed to and believe in the future growth of their business and want to bet on that growth by having substantial retained equity as well as operating autonomy. And those kinds of transactions, while very attractive and representing a very real ongoing opportunity for us, are hard to predict. And the timing is not something that we can manage.

But we remain very confident in both the quality and consistency of our organic earnings, which I don't want to be lost in discussions of repurchase activity or new investment opportunities. But we will also continue to do both.

Okay. Do you still see a substantial amount of pipeline in firms that you could possibly acquire at 8 to 10 times EBITDA? There has been no real change in that type of metric in what you are looking at?

No.

Okay. Also, it looks like you had -- did you have any performance fees this quarter?

No. There were no performance fees in our results that materially contributed to the earnings.

Okay, Darrell. And are you still -- I think last quarter, you said about $0.30 of EPS contribution from that. Is there any change to that guidance?

No, that sounds right for the -- and that's a contribution in the fourth quarter relative to the third quarter.

Great. That's right. You put a finer point on that.

And maybe just stepping back as we look through the products that generated those performance fees, we feel good about their performance and that is, of course, why we are reaffirming our guidance.

And then you spoke too, on your prepared remarks, that you had an inflow of $2 billion for one client and an outflow of $1 billion. Was that inflow corelated with AQR and their relationship with BT Financial? And could you tell me where the outflow was?

We generally don't go through the affiliate by affiliate details. The BT win is a public win and you can look at the magnitude of that, which was over 2 billion U.S.

And then I had one last question and then I will get out of line. In a modeling question, operating expenses were a little bit higher than I would have project in the quarter. Can you give us an idea what's going on there? It looks like on a percentage of revenues, they were flat from the prior quarter. Was there an increase in hiring of managers or what that might have been attributed to?

The holding Company and the expenses that we control were constant quarter to quarter. The change in expenses is related to the mix of firms. As you know, the operating allocations are different. And firms where there is revenue growth, where they keep a larger share of that revenue, leads to an increase in expenses in the income statement. But I don't think there are any changes that are significant enough to warrant a change in how folks are thinking about the ratios going forward with regard to assets under management or revenue or ultimately revenue to EBITDA.

Thanks for your help.

Thank you. Our next question is from Bill Katz from Buckingham Research.

Hi. You have 4.6 million of EBITDA contributions, I think I heard that right, based on net new business. That seems like a very high number, given some of your more recent quarters. I'm just sort of curious, if the incremental growth that you are getting is particularly high margin business given what you've said about AQR, Genesis and First Quadrant. And does that sort of maybe change the trajectory a little bit of EBITDA growth up to the holding Company going forward?

Well, there is no doubt that we have done very well in our institutional business, which tends to be lower fee. But as you look at flows, not only as Nate was talking about the strength in the flows relative to the industry in the quarter and the mutual fund segment, but also the strength of what we are doing with MIG leads the EBITDA contribution from this quarter flows to be roughly in line with our business prior to the new flows. So, as we look going forward. we believe that the EBITDA contribution from flows will be roughly consistent with the business that we currently have.

Okay. Which is consistent with what you just said before in your guidance. In terms of the other distribution strategies, I'm sort of curious, as you think about Australia, and then Sean, I think you may have -- you referenced there were other things that you are considering as well, I would be curious on that aspect. But relative to Australia, what's the advantages of build versus potentially buying something that might accelerate your opportunity there?

This is Nate. Let me do a little bit on how we are thinking about it and maybe a little bit of why Australia. But I should step back first. The starting place for all these is we believe very strongly in the autonomy model and that's the cornerstone of everything that we are looking at on the incremental distribution side. And then somewhat related to that, fundamentally, we believe that outstanding mid-sized firms like our affiliates have lots of advantages in marketing, sales and client service in many and maybe even most distribution channels. With that as a framework, we are looking around and I think you have seen us be disciplined in how we purchase. Looking around and seeing; Are there specific places where we can apply leverage on behalf of our affiliates?

And again, we have a broad group of affiliates with very high quality, competitive product at the international level. I also mentioned, and this is a little bit going to Australia, I also mentioned the pull point, which is we have actually have five affiliates just about 5 billion U.S. in Australia today. And so an element of this is client service as well as sales and marketing. Part is just as simple as geography, frankly. In terms the marketplace, it's a very attractive marketplace. The organic characteristics of the market in terms of its growth, sophistication in the market in terms of the products we're looking at and all that. So, there is a lot of attractive characteristics about that market in particular.

And, this is Darrell. I'd just last say that again when it talks about the construct or the lens, which we look at these initiatives, any capital that we put to work, we would be asking that capital have the same return as all of our other growth initiatives.

I think that's exactly right. Reiterate what I said in my remarks, which is it's; How do you deploy a modest amount of capital, who it benefits to affiliates? And then the return characteristics should be competitive for other uses for that capital.

One other thing I will just to hopefully answer the other piece of your question on what else are we are think about. That framework applies more broadly. Right? And applies more broadly from two standpoints. One, is how we look at various marketplaces, which is; Can you apply that model, which is on behalf of affiliates, a modest amount of capital with attractive returns.

But the other bit is those pull characteristics that I talked about with Australia, which is we have again some very high quality product across the wide range of boutique managers and that is attractive worldwide. Those same characteristics about clients in Australia pulling our affiliates in, are present elsewhere. So, there are other markets where exactly those characteristics exist. And we're also aided a little bit by the fact, or maybe more than a little bit by the fact that the consulting businesses are increasingly global also. And so, that pull characteristic is bringing us into a range of other countries in the Far East and so Europe. And so, we're going to again approach this in a disciplined way. But those characteristics exist in a wide range of places.

Okay. And just finally Darrell, your guidance, does that include any possible expenditure for this distribution this year or was that more of an '07 phenomenon?

That would be something in '07 and our guidance includes all of our growth strategy initiatives.

Thank you.

Thank you. Our next question is from Douglas Sipkin from Wachovia Securities.

Thank you. Just a quick question for Darrell. I really just -- I might have missed it on the call. You mentioned that you had available capacity on your credit line of 550 million or is that the total capacity.

Yes, that's the total capacity. And you say in this last quarter, even as we repurchased stock we paid down debt. So we have less than 200 million currently outstanding. So, we have $350 million of capacity. And I would also note that our leverage levels are reasonably low.

And then do you have any expectation -- obviously the mutual fund segment from a flow standpoint has slowed down, not surprising given some of the closures on the strategies and a tougher market. Obviously, it sounds like, at least on the real estate side, one of the products is going to be opened. Do you get a sense of maybe we can start to see a little bit more of an improvement there? Or your sense is really it's just market specific on the flow side from mutual funds because obviously the institutional segment has been pretty steady.

I think you're thinking about it exactly right. The cash levels and the number of the closed products are coming down again. Again, can't predict precisely when they will get down to a level that people are then comfortable taking on new clients. Because obviously, we saw the real estate product open. I should say this is backed up. Our view is the managers that are closing these products are doing exactly the right thing. They are thinking about their clients and paying attention to the long term performance of these products, first and foremost. With these closes being not capacity driven but they're really just availability of investments and high cash levels from inflows. So, they really are doing the right thing and taking care of their clients.

And I would add that I think relative to industry flows, even accounting for the fact that a number of our larger products are in the value space where they have been closed. Because obviously, overall flows in the mutual fund channel are going to be challenged. Even accounting for all those, I think our results stack up very well against what others have done. And after this quarter looking at what the ability was of some of those value managers to put money to work, I think we're much closer to reopening a number of those products without giving you any specific time line.

And then just expanding a little bit more on the buybacks, I believe and correct me if I'm wrong, you guys were pretty aggressive buyers right in the beginning of the second quarter when the stock was decent amount higher. So, is that to believe that you would probably get more aggressive with the buyback now because the stock is probably decent amount lower?

Well, the significant buybacks at the beginning of the quarter were related to the issuance of the trust preferred security, which you will recall we issued at 102. And we did buy back a substantial amount of stock in the high 90's. There is no doubt that we think the stock is attractively priced. And we will continue to manage our capital well, which includes reserving money for very accretive new investments but also repurchasing stock as appropriate.

Terrific. Thank you for taking all my questions.

Our next question is from Jeff Hopson with AG Edwards.

Two questions. It sounds like the mutual fund sales through the -- your platform have been better than maybe a direct mutual fund flow. And then, two, just can you run down kind of performance relative performance for some of the larger managers. It sounds like AQR performance has held up well? Can you confirm that?

Let me take those in order. The platform versus direct, I think -- I don't think you're wrong, although the reason for that is a lot of the direct -- a lot of the value product we were talking about is really direct sale product. So, that dynamic sort of creates what you described. So again, I don't think you are think being it wrong but that's the reason for it. If not something bigger trend of platform versus direct. It's really that point that those closed products were not platform driven -- or they were not sole platform driver, they are no load funds. The second bit, I think that broadly speaking and I think we said this in our prepared remarks, broadly speaking the performance across the group is quite good if you look at the numbers. And I think that the dynamic that I talked about as one of the themes that we highlighted' is that's especially true of our largest affiliates. And that actually, if you sort of hear our answers to all of these questions that sort of drives a number of these answers in terms opportunities, growth and flows.

Great. Thanks.

Thank you. Our next question is from Cynthia Mayer, with Merrill Lynch.

In terms of acquisitions you mentioned auctions and I'm wondering if you are seeing your prospects go that route or the private equity route? And in general, are you just finding that for the mid-sized firm out there looking at selling there might be more options than there were a couple of years ago?

I think to your last point, no. Fewer options than there were a couple of years ago and the main private equity buyers are less well positioned for mid-sized firms than they are for much larger transactions because mid-sized firms are much less interested in follow-on sales in order to get the private equity investors their ultimate liquidity.

I think the universe of high quality mid-0sized firms -- well, let me say it this way. The universe of mid-sized firms includes a subset of firms. which are high quality, very focussed on continued growth and building long-term franchise value, wanting, as I said, to bet on their continued growth by having substantial retained equity. That subset is what we -- of the universe, is with a we focus on and where we work very hard to maintain relationships over time. Wanting to be in a good position when the firm's principals, for reasons that are entirely their own, decide to take the next step and find a solution to their succession plans.

We, of course, look at the businesses that are auctioned. But almost inevitably, the firm's that choose to sell 100% are, in our view, making a pretty clear bet on what they expect of their future growth. And while some of them may continue to prosper, it's not an approach that is at all appealing to us. So, our core prospects are firms that wouldn't have any interest in auctioning 100% of their equity and we see still quite a large number of those attractive prospects. And over time almost all of them, for demographically driven succession reasons, are going to seek some kind of solution and we think we're very well positioned to be there.

Great. I think earlier this year you said that you thought acquisitions would be back end loaded and I'm wondering if I shouldn't infer that there hasn't been any sort of shift to more early '07?

We have still a very attractive pipeline of relationships, active discussions with very high quality firms. It is just too hard to tell whether any of them are going to manifest into transactions in this quarter or the next. So, I wouldn't want to be any more precise than we were earlier in the year where we saw many more conversations at earlier stages. We are clearly making good progress but I can't say more than that.

Okay, great. And just to go over the guidance. Are you assuming 2% equity appreciation this quarter despite the markets? Or is it 2% from where we are today right now?

2% in the -- for the third quarter, 2% in the fourth quarter.

Okay, great.

As is our convention.

Right, that's what I thought. Thanks a lot.

Thank you. Our next question is from Robert Lee with KBW.

Just a real quick question and most are asked already. With regard to the Managers distribution platform, is there still an opportunity to convince more affiliates to participate in that platform? For example, is the new Tweedy, Browne product be offered through the Managers platform or do you pretty much have most of the products you're going to have on that?

The specific, I think it's unlikely the Tweedy, Browne product would. The general, absolutely, there's the opportunity to increase the number of affiliates participating in and for those affiliates participating, which products are on the platform. Some of it is the process of demonstrating success, which we have done and all of the affiliates are interested in that. Some of it is appropriateness of product and also the packaging of product for the sales force. And that's -- and then there is also a prioritization question which is; How do you approach it? So, the broad answer is, yes, there is absolutely opportunity.

I'm curious. To extent someone dosn't feel it's appropriate for them, is it more just because they don't want to have that type of product structure or just culturally they don't want to be intermediary channels? Is it possible to generalize in that sense?

Yes. It's hard to generalize the way you're -- to one thing.

Okay, thanks. Nice quarter, guys.

Our next question is from Laura Kaster with Sandler O'Neill.

Just a follow up modeling question, please. Can you please tell me, Brett, if you that in front of you, your ending share count from which we should base our buybacks?

I would say -- this is Darrell. 38.8 is probably the right share count to use for end of period.

Okay. And just to put finer point on that, your share guidance for the quarter is inclusive of your buyback -- or for the year, rather ?

Yes. The guidance for the year is 39 million and that's weighted average for each of the four quarters. And that includes the buyback activity that we've discussed today.

Great. Thank you.

Thank you. Our next question is from Marc Irizarry with Goldman Sachs.

Thanks, guys. I have a question on the international equity affiliates. Can you characterize a little bit maybe or differentiate the retail investors action post kind of the downturn in the emerging markets and the international markets versus maybe some of your more institutionally based affiliates?

I will answer that. I think generally speaking, the reaction from both retail and institutional investors has been good, calm. Not a lot of redemption activity even in the more retail oriented mutual funds. But the major part, or a very significant part, I should say, of our international equity product line is institutional.

And Genesis specifically, where emerging markets, obviously, were down dramatically in the quarter was -- had a very good client reception. Clients actually gave them net new money and their were conversations with their client group were quite positive. Clients who had been with them for a long time had obviously been very well served by the firm over that time. And clients who were sophisticated and understood that certain product categories are more volatile inherently.

So overall, we feel very good about client reaction notwithstanding volatility in the quarter. And prospectively, given the significance of the institutional presence, I think that we are insulated from client volatility relative to some other firms perhaps. Nate, would you add to that at all?

The only thing I would add to it -- I think that's spot on. The only thing to add to is on the retail side. Again, I think we were not exactly the right firm to look at us to be a mirror for the broad market. In large part because the largest -- where you saw internationally equity flows sort of had been dramatically positive roll over, our product didn't have those characteristics. In part, the way they are sold and who they are sold to. But also in part, again, to a point we made earlier, they has been closed and so not experiencing we think that kind of hot money.

Great. And then Sean, on the acquisition pipeline, if you think about some of the transactions maybe that did not happen, either in the first half of this year, what are some of the reasons why potential affiliates walk away? And also, are the public valuations that have come in a good deal since May, is that changing at all? Maybe the psychology on the other side of the table?

To your second question first, no. Public market valuations do not affect, certainly not our psychology. I don't think they affect the psychology of prospective sellers either. We don't really have firms that walk away. There are certainly firms that meet us, find out about that retained equity thing and the commitment to long-term growth and decide; we would rather just sell 100% to bank XYZ and they go hire an investment banker and go do that. And so we don't have a lot of continued discussions.

Firms that are oriented toward our approach believing in long-term franchise value, retained equity, et cetera, sometimes will -- oftentimes will meet us or in the product, at this point, of an ongoing relationship tell us that now is not the right time. But that's very different than saying never. And for our part, we often walk away from opportunities for a whole range of reasons. And I think while it's a hard story to tell, it's the story you don't see. We feel that we are extremely selective. Believe that we have the opportunity, given our track record and position, to be very selective. And are quite focused on not making a mistake in the new investment area. And that will absolutely continue going forward.

Great, thanks.

Thank you. Our next question is from David Chamberlain with Timco.

Two quick questions, actually just one. On the fee margin, it looks like it dropped a little bit on the institutional part of the business. Is there anything going on there in particular or was that just an issue of kind of end of period assets jumping and you not earning any money on them until a little bit farther down the road?

A little bit asset calculation and a little mix. But nothing indicative in the fee rate that should change anyone's -- the way they think about their forecast.

Great. Thank you.

Thank you. Our next question is from Bill Katz with Buckingham Research.

Just a follow-up to the question. Darrell, could you go over a footnote I and put this in layman's terms and is there any go forward impact as I think about the P&L?

Sure, I'd be happy to look at the line.

I read it a couple times.

Footnote I is essentially an accounting change where you can see on -- this incredibly boring. But if you look at the press release, you can see that we have to include the hedge funds that we -- our affiliates or general partners and they have substantial ownership. And I would -- to fully answer this question, I would direct folks first to the income statement. And there is a line under "nonoperating expense," which is investment and income lost from affiliate investment partnerships. And that is offset by a line minority interest and affiliate investment partnerships. And you can see there is a very small difference between those two and that difference represents AMG's earnings in our investments in those partnerships. And now turning to the balance sheet, which is the other place where this has an affect, you can see that there are -- as I get to that page, two line items and they are -- where is this.

As you're looking for that, Darrell, the basic walk was is that there is no inflation of your earnings per share based on the --?

No, not at all. These are just in assets and affiliate investments and partnerships, which is $115 million. And down in the balance sheet, a minority interest in affiliate investment partnerships of $109 million. So,it's -- both of them are just an offsetting entries in asset and liabilities and income and expense.

Thank you. Sorry again for the detail there.

All right for all the detail.

Thank you. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the call back to management for additional remarks.

Thank you. In conclusion, thank you again for joining us this morning. We were very pleased with the strength of our results especially in light of the market environment in the quarter and confident in our ability to continue executing our growth strategy and to generate excellent returns for our shareholders. Thank you.

Thank you, sir. Ladies and gentlemen this concludes the Affiliated Managers Group second quarter results conference call. If you like to listen to a replay of today's conference, please dial 1-800-405-2236 or internationally at 303-590-3000 with access number 11066244 followed by the pound sign. Once again, if you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 with access number 11066244 followed by the pound sign. Thank you.