Affiliated Managers Group Inc (AMG) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Affiliated Managers Group third quarter results conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during today's conference, please press the star followed by zero. As a reminder, this conference is being recorded today, Wednesday, October 25, 2006.

I would now like to turn the conference over to Ms. Brett Perryman, Vice President Corporate Communications. Please go ahead, ma'am.

Thank you. And thank you for joining Affiliated Managers Group to discuss our results for the third quarter of 2006 and our investment in Chicago Equity Partners, which we announced this morning. By now you should have received the press releases we issued. However, if anyone needs copies, please contact us at 617-747-3300 and we will fax them to you 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 which are deemed by AMG to be the appropriate benchmarks. AMG will provide on it's 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 Sean Healey, President and Chief Executive Officer, Nate Dalton, Executive Vice President in charge of Affiliate Development, Darrell Crate, Executive Vice President and Chief Financial Officer, and Seth Brennan, Executive Vice President in charge of New Investments. And now I would like to call over to the Sean Healey. Sean?

Thank you, Brett. And good morning everyone. I would like to begin today's call with a discussion of our operating results and the financial highlights for the third quarter. Nate will then provide additional details about the quarter, Nate and Darrell will provide additional details about the quarter, and we will then turn to Seth to talk more about our pending investment in Chicago Equity Partners, which we announced this morning. As always, we look forward to your questions at the end of the call.

AMG had a solid quarter with cash EPS of $1.34, that's a 14% increase over the third quarter of 2005. Our new business momentum remains strong, as positive net client cash flows during the quarter totaled 4.2 billion, contributing to overall organic growth of over 8 billion for the quarter. Year to date, our assets under management have grown by 26 billion, with 13 billion of net client cash flows and another 13 billion of investment performance.

Highlights of the third quarter included excellent investment performance in international and emerging markets equities, which contributed approximately 35% of our EBITDA. Both Tweedy, Browne and Genesis continue to generate strong returns for their clients over the near and long term. Tweedy's global value product outperformed its benchmark for the quarter and is almost 200 basis points ahead for the year to date. While Genesis had an outstanding quarter as well, as it's three largest products outperformed their respective benchmarks by approximately 200 basis points.

We continue to see exceptional growth from our affiliates that employ quantitative investment processes. Quantitatively managed products are among the fastest growing in the industry and are increasingly sought after by a wide array of channels and clients. From our perspective, an additional advantage of quantitative firms such as AQR and First Quadrant is that they and their investment processes are very scalable and adaptable. Looking ahead, we see excellent prospects for continued significant growth from these firms.

We're very pleased to broaden our participation in quantitative strategies through our pending investment in Chicago Equity Partners, an outstanding firm with over 11.4 billion in assets under management. Chicago Equity Partners has developed a disciplined investment process that combines quantitative analysis, with fundamental research, to construct equity and fixed income portfolios. The firm has an excellent track record of alpha generation across its product offerings and has produced outstanding growth in assets through investment performance and positive net client cash flows. We have known the principals at Chicago Equity Partners for over five years and have tremendous respect for the entrepreneurial culture of their firm and the impressive business they've built. Seth will talk more about the transaction in a moment but in sum, Chicago Equity Partners is an excellent investment for AMG and we look forward to working with our new partners.

In addition to our investment in Chicago Equity Partners, we have been very busy in the new investment area, and we continue to engage in ongoing dialogues with high quality firms in our target universe. We're very confident that we will continue to enhance our earnings growth through additional investments in new affiliates in the future.

Now, let me turn things over to Nate who will discuss our operating results for the quarter.

Thanks, Sean. Good morning, everyone. Let me begin with a few themes. First, with net flows of 4.2 billion in the quarter, and 13 billion year to date, the significant organic growth we've been experiencing for the past two years continues. Once again this past quarter while our affiliate group as a whole performed well, our largest affiliates in particular distinguished themselves. This remained true across value and growth, domestic and global, as well as quantitative and alternative strategies. Looking ahead, we see this growth continuing, as many of our largest affiliates have been gaining recognition, as being among the very best asset management [boutiques] really, worldwide, and as Sean noted several of them are extremely well positioned to participate in the significant trends in terms of how people are buying asset management products and services.

Now to discuss our results in detail, I will begin with the institutional channel that had another great quarter. Net inflows for the quarter totaled approximately 5.2 billion. In a similar pattern to prior period, while flows are broad-based, we continue to see a significant number of large mandates at quantitative firms, AQR and First Quadrant, although I would again note these larger mandates often come with lower fees. Flows were also strong across other investment styles as value oriented Third Avenue and growth oriented Times Square and emerging market specialist Genesis, all attracted significant net new business during the quarter. Overall, in the institutional channel, I want to emphasize that we are very optimistic about our pipeline as our affiliates remain well positioned to attract new assets across a wide range of products, and the fourth quarter is off to a very good start.

Turning to the mutual fund channel. Outflows in the channel sold 1.1 billion, as a result of an affiliate unwinding one low fee sub advisory relationship. Subject to that, and the exceptions I will note with respect to closed products, AMG's flow trends in the channel largely mirrored those in the industry. Some items of note in the mutual fund channel, Tweedy, Browne had excellent performance during the quarter as the flag ship global value fund outperformed it's benchmark by 60 basis points. Flows in the quarter remain negative, however, as the funds remained closed to new investors. While the high cash levels that led them to close the funds have come down, we have not yet reached a level where they have decided to reopen the fund. One other Tweedy, Browne subject we would be remiss if we didn't mention is that Chris Browne has a new book out, The Little Book of Value Investing, which is a sequel to The Little Book That Beat the Market, and is out and in book stores now. It is a good read. The same flavor as our shareholder's letters. And has drawn great reviews.

Friess Associates had positive flows in what was a challenging quarter for growth stock funds, coming largely through our managers investment group retail perform, and generated solid performance for the quarter as it's brand new [inaudible] fund outperformed it's Morning Star peer catagory by over 100 basis points for the quarter and approximately 180 basis points for the year to date.

Third Avenue had positive flows as well. And continues to generate solid returns in its major be products. As much as we described with respect to Tweedy, Third Avenue's International and small cap products remain closed and some negative flows.

Now turning to the high net worth channel. We have net inflows of approximately 40 million, as withdrawals from high network separate accounts partially offset positive inflows through [AmeriTrade]. However this is our fifth straight quarter of positive flows in the channel as managers continue to drive growth for several affiliates. In the quarter the standout once again was Renaissance which continues to experience significant flows through the platform. With respect to managers more broadly, we are on track to achieve net flows of 2 billion for 2006, our second year of operations, there was an up from the 1.5 to 2 billion net flows we discussed last quarter, and looking ahead we would obviously affect our net flows in 2007 to be even greater. I should also note that with respect to the international distribution initiatives that we mentioned last quarter, Australia, we continue to make excellent progress and remain on track for a Q1 2007 launch.

With that I will turn it over to Darrell who will discuss our financials.

Thanks, Nate. Good morning, everyone. As you saw, we reported cash earnings per share of $1.34 for the third quarter. GAAP earnings per share were $0.87. As Sean mentioned, our organic growth momentum remained strong during the quarter with net client flows of 4.2 billion. These net client cash flows will contribute approximately 2.5 million to our annualized EBITDA.

Now, for some of the financial details. The ratio of our EBITDA contribution to end of period assets under management was 17.6 basis points in the third quarter. Slightly less than the second quarter. As a result of the timing of realization of net client cash flows. We expect this ratio to increase to approximately 19.5 basis points as a result of the additional earnings from performance fees recognized in the fourth quarter. Holding company expenses were 12 million for the quarter. And with regard to taxes, our tax rate was 37% for the third quarter. We expect our tax rate to remain at this level during the fourth quarter and increase to 38% in 2007. Intangible related deferred taxes were 7 million for the third quarter. We expect them to remain at this level for the fourth quarter.

Amortization for the quarter was 9.2 million, including 2.3 million of amortization from affiliates accounted for using the equity method. The earnings from the equity method affiliates which include [AGR] and two of our Canadian affiliates are included in the income from equity method investment fund on the income statement, all net of amortization. Depreciation for the quarter was 2.2 million, with 1.4 million of that amount attributable to affiliate depreciation. As you recall, affiliate depreciation is the noncash charge we include in cash net income as the replenishment of these depreciated assets is paid by the affiliates and not to AMG shareholders. Stockholder's equity was 535 million. Interest expense was 16.3 million for the third quarter, and we anticipate that our interest expense will remain at approximately this level for the fourth quarter.

One component of our growth strategy is disciplined capital management. In keeping with this objective, we repurchased 642,000 shares during the quarter. With respect to our pending investment in Chicago Equity Partners, we expect the transaction to close around year end. And the consideration will be financed primarily with cash generated by operations. The Chicago Equity transaction will be accretive to both GAAP and cash earnings per share. Pro forma for the investment in Chicago Equity leverage is measures by net debt divided which run rate EBITDA will be approximately 1.5 times, which is at the lower end of our target leverage range providing ample capacity for additional new investments while also enabling us to continue to opportunistically repurchase our common stock.

Before we address our earnings guidance for 2006-2007, let me update you on a pending change in our approach to equity-based compensation. While we used restricted stock grants as our long term equity compensation vehicle last year, we anticipate that given our corporate expectations, and objectives for continued substantial growth in earnings and shareholder value creation, we will resume the use of stock options as the equity incentive tool to best align long-term management incentives and shareholder interest. Obviously, post FAS 123, these options will be fully expensed over their vesting period. In addition, the issuance of options may result in a fourth quarter reversal of earlier accruals for planned restricted stock awards.

Now, turning to guidance for the remainder of 2006 and the full year 2007. Starting with 2006, we continue to expect cash earnings per share to be consistent with previous guidance and in the range of $5.55 to $5.65. As we've stated before, we expect our fourth quarter earnings to include performance fees from a number of affiliates including AQR and First Quadrant. Performance fee assets which totaled 18 million, at year-end 2005, continue to increase. The majority of these products are performing well, and are above their high water marks and beating their benchmarks, some of which are custom benchmarks. So the way the year is shaping up, however, the amount of performance fees we are looking at today is lower relative to the underlying assets than they were at the same time last year. In fact, at this point, the projected earnings impact is about the same as last year, or approximately $0.20.

Looking ahead to 2007, we expect our cash earnings per share to be in the range of $6.40 to $7.00. This assumes 2% quarterly growth in market, and a weighted average share count of 39.5 million. Our annual guidance also assumes an earnings pattern similar to the one you've seen from us in recent years when we recognized the majority of the earnings from alternative products, and performance fees in the fourth quarter. Primarily as a result of continued growth at AQR and First Quadrant, we expect the performance fees will be an increasingly meaningful contributor over time. More specifically, we would anticipate the assets under management and performance fee products to be approximately 30 billion by year-end 2007. We would expect these asset levels to generate approximately 9% of our 2007 earnings which would be be recognized in the fourth quarter of next year.

I would note that this assumes modest performance consistent with our other guidance assumptions. However, performance fees by their nature provide considerable upside opportunities. Our guidance does not include additional earnings from investments in new affiliates, other than Chicago Equity Partners, or the effects of repurchases of our stock, and it 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 of our affiliates would impact these expectations.

Now, I will turn things over to Seth to talk about our investment in Chicago Equity Partners.

Thank you, Darryl. And good morning, everyone. I will begin by welcoming the team at Chicago Equity Partners to AMG. Chicago Equity Partners is an outstanding firm with an excellent reputation of strong multigenerational management team and a very successful long term track record. Chicago Equity Partners is led by its founders James Miller, Chairman, Patrick Lynch, President, CIO David Coppinhour ,and Robert Kramer and David Johnson who founded the firm together 17 years ago. As Sean said, we have been cultivating our relationship with CEP for over five years and have come to know these individuals and their firm very well. We are very pleased that they chose AMG's partnership approach as the solution to their succession and transition planning needs, and we believe this will be an excellent transaction for CEP's principals, clients, and employees as well as for AMG.

To summarize the transaction, AMG has agreed to acquire an approximately 60% interest in Chicago Equity Partners with the remaining 40% of the equity ownership to be retained by a broad group of nonpartners, including the five founders. Importantly the four next generation partners will be increasing their ownership in the firm as a result of the transaction. As is typical with our transaction approach, the partners at CEP have agreed to long-term commitments to the firm as well. The purchase price is not disclosed, but I will note that the valuation is consistent with our previous investments, and our historical valuation discipline.

CEP is a rapidly growing firm with assets under management compounding at a rate of over 27% since 2002. Increasing from 4.6 billion to 11.4 billion today through strong investment performance and over 3.5 billion in net client cash flows. Including over 2 billion last year alone. Given the nature of their systematic investment process in large and mid cap products the firm has significant capacity to grow it's existing products as well as introduce new products based upon their proven investment approach.

Chicago Equity Partners success reflects the depth of expertise among the investment professionals and the strength of its investment process. The firm's investment philosophy is founded upon their core beliefs about the importance of business fundamentals and risk management, underpinning a structured investment process which uses quantitative research, coupled with fundamental analysis to achieve consistent alpha generation relative to a targeted index. In executing this process, CEP's team of five quantitative research specialists first employ a dynamic proprietary model to identify potential investment opportunities. The firm's team of 10 portfolio managers are industry specialists who then apply an overlay of bottom-up fundamental research to determine the most attractive investments of the firm's portfolio.

Chicago Equity Partners has a superior long-term investment record across the 13 domestic equity products, three fixed income products, and balanced accounts. CEP's equity products cover the entire capitalization spectrum, and include large cap growth, value, and core products, as well as mid cap and some mid cap core. All of of the firm's products have strong investment track records. For example, in large cap, which accounts for about 60% of its AUM, CEP's flag ship large cap core product has outperformed its benchmark the S&P 500 by 80 basis points or more over the past 1, 3, 5 and 10-year period and since its inception in 1989.

Chicago Equity Partners experienced sales and marketing teams led by the firm's President, Patrick Lynch, and serves a high quality client base of over 120 leading institutions. Their relationships are well diversified throughout the institutional marketplace. With their products, investments, excellent investment performance record and a reputation for outstanding client service, CEP's sales and marketing team has been instrumental for the firm's continued growth, helping assets more than double over the last 3 1/2 years.

We initially identified Chicago Equity Partners as a promising potential AMG affiliate based upon their entrepreneurial culture, the outstanding quality and reputation of its management team and their shared understanding of the value of equity ownership as critical to the long term success of their firm. In turn CEP's partners appreciated AMG's model of implementing a succession planning solution that would provide independence and preservation of the firm's culture while offering the broader resources of a larger organization. Consistent with AMG's approach, the operations at CEP will remain unchanged and the firm will continue to function independently under the active direction of it's current management team. We are very excited about this investment and look forward to a successful partnership with our new partners at Chicago Equity. At this point we will be happy to answer your questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question is from Bill Katz with Buckingham Research.

Thank you. Good morning, guys.

Good morning, Bill.

You may have covered this already in your prepared remarks but I was just wondering if you could give us a little more color, if you look at the sequential change in revenues second to third quarter, versus the nice asset build is, it just timing and mix here? Is there anything else going on to be aware of?

I think -- this is Nate. I think there are a couple of things in there. I think it is a little bit of the timing and mix bit. There is also, especially if you focus on the mutual fund one, I'm not sure exactly which one you're focused on, but if you're focused on mutual funds you're also probably catching some of the movements of the markets during the quarter, so ending period assets versus the billing on daily assets.

And there is just the realization of flows. You know, the client flows -- to the end of the quarter.

I'm sorry.

No trends unique to the quarter. But that also said, when I say we look at AQR, First Quadrant, the strong growth in the quantitative businesses, that those will incrementally be attracting lower revenues consistent with institutional -- the institutional channel, and of course, that also -- associated with that is greater performance [fee], upside opportunity.

Okay. Just a point of clarification, in the-- can you size a sub advisory relationship that was run off this quarter?

Sure. The sub advisory relationship was slightly larger than the outflow number in that channel.

Okay. And this now comes to the guidance for next year which arguably you could drive a truck through, but is my math right, it is roughly $0.60 performance fees that would contribute versus $0.20 this year?

I think that certainly is close. I was saying just around 9%. So it is a little less than $0.60. In that range of 6.40 to $7.00 is consistent with the range that we provided last year. As you see, as we're more than a year out, we will continue to tighten that range as the year goes by.

Okay. So is there something that is changing dramatically? I appreciate the assets rising but to have a threefold increase in performance fees year on year, are there locks coming up or triggers coming up that allow for a disproportionate high level performance fees or are we now at sort of a new run rate of performance fees as we look out into '07?

I think there is a couple of things there. The ethic growth should not be diminished because you're going from 18 billion in 2005, moving strongly toward the end of the year here in 2006, and then in 2007, ending the year what we're saying is approximately 30 billion in assets under management. That accounts for a significant portion of that growth. I would also say that it is a diverse portfolio of performance fees, not only do we have significant performance fees at HR and First Quadrant, we also have performance fees across 10 affiliates and when we look at those products, many of them are above high water marks, beating benchmarks, and building a set of unaccrued performance fees that we think represent a substantial opportunity.

Okay. And then just finally, the strategic rationale for shifting back to options versus restricted stock?

I think it is a judgment by our compensation committee that, we're a growth company. And we think of ourselves as a growth company. The management thinks long term, and thinks about achieving long term growth. Restricted stock is great in some ways. But it is obviously more cash-like and not as aligned in terms of the structure of the incentive with long-term growth and value creation as options are. And historically, last year was the only year that we had issued restricted stock, so historically, options have served us well, as an important element of our management incentive structure.

Okay. Thank you, guys.

Sure.

Thank you. Our next question is from Jeff Hopson with A.G. Edwards.

Good morning. Just wanted to talk a little bit about MIG. It seems like they're doing very well, but the more direct channels of the affiliates have not done as well in the flow side. Is that fairly accurate? And in particular, on the high net worth business, what is the current challenge in that business right now?

I think -- again, I think the way I would -- and I think you framed up really the right way at the outset of your question, which is in the high net worth channel, do them one at a time, in the high net worth channel, managers and investment group continues to drive flows, and that is continuing to ramp, as you said. In this quarter, and I'm not sure I read too much into it, but in this quarter, there were, sort of high net worth outflows, not, sort of big ones at specific affiliate kind of thing but there were high net worth outflows across a range of firms. Again, I would be careful not to read too much into it. I think part of your question may also be focused on the mutual fund channel, and mutual fund channel managers is also, as I said, in the remarks, managers is driving flows for some of our affiliates there as well. And look, in the mutual fund channel, we have the thing that is exciting, we have lots an lots of opportunity with flows continuing to be pretty good, and that's against a backdrop of having a number of very strong really good long term track record products that are closed, not to the capacity problem, but really just pacing, wanting to make sure they get cash put to work for shareholders and, as I said on prior calls, I think they're doing exactly the right thing, and sort of imagine what this looks like as that cash gets put to work and those fund, those funds open. So I wouldn't read too much into it.

Okay. And then if I could ask on the [quant] business of some of your larger entities, you can talk a little bit about the diversity of product and/or flows that you're seeing there, any changes in where the activity is right now?

Sure. This is Nate. I will start with that one. So I think there are sort of two parts to it, which is how we're seeing it from maybe from a breadth standpoint. And I think, as Sean said in his remarks, one of the really exciting things about these businesses is their ability to evolve product and innovate. So the really -- and again I could spend a lot of time on this point, but the really interesting thing is seeing a good flows across a breadth of products, as well as some very interesting products coming online, and capturing strong initial flows and acceptance in the marketplace. So there is good breadth of flows today, across what are really pretty broad product lines already, but they also continuing to broaden and gain acceptance. So I hope that is responsive.

Maybe just to put a point on it, when you look at the flows in our institutional channel while of course the institutional channel has large mandates, there were many, many different clients giving us money in this quarter. So it is nice to see, not one large mandate dominating a strong flow quarter.

Okay. Great. Thanks.

Thank you. Our next question is from Mark Lane with William Blair & Company.

Good morning.

Hey, Mark.

Good morning.

Two questions for Darrell. First of all, just a clarification on the debt to EBITDA pro forma number you gave.

Yes.

Is that pro forma for the run rate for the fourth quarter?

It is pro forma for Chicago Equity, and the normalized run rate for the year.

For the year.

Yes.

The last 12 months.

Yes.

The second question is back to just the performance fee guidance, and trying to reconcile the fourth quarter guidance, so if you're at 5.55 to 5.65, that implies about a $1.60 for the fourth quarter at the midpoint. And if you have 20% -- I'm sorry, $1.70, closer to $1.70. So if you're at $1.34 this quarter and you add 20%, $0.20 of performance fees to $1.54 and you have some growth in the quarter, sequentially, I don't understand how you get to that number, the $1.70. What is the reversal of the accrual on the restricted stock?

We are -- our accruals through 2006 for equity-based compensation, where we're tracking to an annualized number of about $10 million. And as we -- as we look to change the primary vehicle for equity-based compensation, we currently have about $7.5 million that is accrued. How that is actually going to be formulated still is yet to be set. But in that fourth quarter, we could see the reversal of those prior period accruals.

The whole amount?

That's possible, yes.

Which is $7.5 million?

That's correct.

Okay. And then just comparing the -- just to clarify, so the $0.20 per share of performance fees is basically the performance fee cut that you believe is highly likely, but in fact it is very possible that there could be performance fees above and beyond that in the fourth quarter?

Yes. That's right. And as we have tried to be consistent in the way we frame our expectation for performance fees, but as we know they're inherently volatile but we would like to position the expectations such that we're better positioned for upside surprise.

And is there any reason why the performance fee contribution that you're expecting is not growing year-over-year?

Well, it is easier to get down into the detail of it, in many respects our performance fees are growing because when you look back to the fourth quarter of last year, a component of that was a guarantee that we had with AQR, and when we look at our performance fees this year, it is all the performance fee generation is based on the performance of that larger asset base, and when we sit here today at the end of October, and look at it, if we closed business today, what is the unaccrued performance fee that we have, that of course tempers our judgment relative to our previous communication about performance fee expectation. And -- but we feel very good about those product, the way they're structured, how they're positioned with clients, and that is why we give guidance with similar orientation as we approach 2007.

But just to clarify, the reversal of the accrual, is that in your guidance for the fourth quarter?

Yes, it is.

Okay. Thank you.

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

Thank you. Good morning, guys. Good quarter. Most of my questions have been asked. Sean, could you just comment, please, on the cash flows and the mutual funds, and those that are closed? Last quarter I think Third Avenue had three out of their four funds closed and the [crossovers] had come down. Can you just give us any type of visibility on when those could be opened?

I wish I could, Laura. But we don't talk to our affiliates about the specifics of what their plans are going to be in terms of when they will open funds. Obviously, they're highly incented for long-term growth in assets and performance for their clients, and so it is not as if they're going to wait longer than they need to, but I think we're comfortable being patient, and, the way Nate said it is I think just right, we've had a number of our largest and very best performing mutual funds closed for most or all of this year, and so we can't say necessarily that some or all of them are going to open at the beginning of next year, but at some point they will, and so the ongoing opportunity is obviously all upside.

Okay. Great. And then I guess for Australia, last quarter, you had about 5 billion in AUM within your affiliates. Is that about the same this quarter?

It is about the same, yes.

Okay. Great. Thank you.

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

Thanks. Good morning.

Good morning.

Just wanted to hone in a little bit more on the performance fees first from a strategic standpoint of -- it just feels like from a diversity standpoint you guys are becoming more exposed to performance fees, and I guess, obviously given the success of AQR and some of your other quantitative managers, just from a modeling standpoint, how I can get comfortable, I think you mentioned Darrell, as a high $0.50 number for next year, and how much of that is guaranteed? Because ie; the nature of performance fees they're driven a lot more by performance, so I'm just trying to get a sense of how much of that roughly 55 to $0.60 is a guaranteed number?

I would say it is inappropriate to call them guaranteed and especially as we stand a year away to speak about some component of that estimate being certain versus a component being uncertain. We sit and look at the strong growth in the absolute amount of assets under management, look at $30 billion, think about how the -- make some conservative assumptions about performance, and then we see how those products are positioned and look at the historical track record. And ultimately generate some sense of estimate of how that will be. But again, our position on performance fees is to leave more upside on the opportunity.

Okay. That's helpful. I think. And that's probably the right way to go about it. And then just some color around the share count. I know you guys bought back stock and diluted share count before the convertibles came down. Didn't come down as much, including the convertibles. Can you provide any color on that? Is it just a function of the maturity of the convertibles being being part of the capital structure longer?

I'm sorry, I'm not quite clear on the question.

Sure. The share count, I guess you guys used diluted to calculate cash EPS, I think was down, like 2.5% sequentially. The cash share count -- I guess the share count, adding the converts, I'm just trying to get a sense of how should I be thinking about the modeling the convertible piece in your GAAP EPS calculation?

Sure. Sure. Sure. That of course is the GAAP share count is related to the maximum number of shares that can be converted in the -- for the security, given the current stock price. For this quarter, relative to last, the stock price was probably on an average basis, $1.50 less than it was last quarter, so that was certainly a factor, and as you know, we repurchased 1 million shares last quarter. The full effect of that repurchase was in this quarter's number, plus the partial effect of the 642,000 shares that we purchased in the third quarter, will be realized in the fourth quarter results.

Well, okay. Yes, no, that is fair. But when I think about trying to model, and I know it is not the number we focus on, but the convertible piece of that diluted share count, is it fair to assume slowly but surely it will slowly continue to tick up?

Well, I think as the stock price increases, the share count should increase, but as I shared either last conference call or a couple of conference calls ago, as we look out to 2007, we see the treasury stock share count between 40 and 41 million, as a peak, for a total share count, and in fact, we're forecasting 39.5 million shares for 2007, and that accounts for, I think, stock price appreciation that would make investors pleased.

Okay. And then just finally, just a little color on the open end mutual fund business, I know you guys mentioned the trends minus the one -- well pretty much in line with -- any sense if we're seeing any improvement in October, it doesn't look like the quarter, the third quarter was a terrific quarter for open end mutual fund flows for the industry, and I'm just trying to get a sense with the better market tone, moving into October, and any improvement in that dynamic just from an industry standpoint that you guys are seeing as of yet?

Again, hard to do the industry comment, and obviously, still very, very early in the quarter. Looking at our fund families, we're seeing -- we've actually seen some sub advisory wins, and coming already, not sure exactly when they fund and all that kind of stuff, but that is a positive, obviously. And we have seen some better -- but again, look, it is very, very early in the quarter.

Sure. Okay. I'm just looking to get a sense, because given the market strength, I would have thought just for the industry the flows are better but maybe I'm figuring it is running on a lag as investors sort of play catch-up but, okay, thank you very much. Thanks for taking all of my questions.

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

Hi, good morning.

Good morning.

Hey, Cynthia.

Can you spin any color on how much of the guidance for '07 is attributable to CEP?

I think as we look at the -- I would say just a little less than $0.10.

Okay. And is the growth in AUM with performance fees in any way influenced the types of investments you're looking to make? Is there an upper limit to the proportion of AUM with performance fees, you would be willing to go to?

I suppose there is some theoretical upper limit. But we're not near there yet. And if you think about the firms that have performance fee products, obviously the quantitative managers are the most visible, but as Darrell said earlier, there is a wide array of affiliates with performance fee products, and if you look at the entire breadth and range of those products, there is a -- an extremely large and diverse exposure and in going forward, not all correlated with each other, so going forward, we will absolutely continue to look for, and are looking for additional opportunities to invest in firms which have performance fee exposure. But probably not seeking firms that are exactly the same as some of the affiliates we have.

Okay. And I guess just finally, on the guidance, it sounded like you're saying that the guidance is similar to what you've given in the past, but the performance fee component is going up, and you just made an acquisition. So doesn't that argue that something is going down then, within that calculation?

I don't know. I mean I look at the growth from 2006 to our guidance in 2007, and I think that there is an attractive growth rate that is implied in the guidance that we're giving. And when we talk about performance fees, I'm talking about our orientation and the way we're trying to characterize performance fees relative to the guidance which I think is taking a conservative orientation.

And a percentage range is not that -- but it is on a bigger base. It is not really any broader than we've done historically.

Okay. So you're really talking about the proportion due to performance fees as opposed to the total.

Yes.

And just last thing, is can you tell us what, if any, there were in the way of performance fees this quarter?

Just a little less than a penny in the current, in the third quarter results.

Great. Thank you.

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

Thanks. Good morning.

Good morning, Rob.

Most of my questions have been asked, but I did have sort of a strategic question, while your competitors are seeing a pretty hefty amount of growth from outside the U.S., and clearly that's why some of the big transactions have been done in the space, and notwithstanding the business in Australia and Genesis, I mean do you feel that that's something you have to consider building some type of distribution platform for your affiliates, because I have to imagine given their size, it is tough for many of them to really be able to afford to expand globally too much or is that not an issue? I mean how do you think of that?

I guess the first thing I would say is that proportionate to our size, I believe that we are growing faster than -- I'm certain we're growing faster than the average pure company, and I would be happy to stack our internal growth against anyone's. So that said, you're absolutely right. There is an exciting opportunity to enhance the international distribution of our affiliates' products. We talked about the Australian initiative, but as Nate has said earlier, we see a number of other markets where we can play a very helpful role in enhancing the capability and efficiency of our affiliates distribution of their products, and we think that as international markets become increasingly mature, and sophisticated, very high quality boutique managers with high alpha products are going to be ever more attractive. So, I guess what I would say is we feel like the internal growth that we're putting up is very good now, and are optimistic about our prospects to continue, but do think that incrementally, above that, there is yet more.

I mean do you think that would -- that you will have to build the managers, like platform, to help facilitate that for outside --

Sure. I think if probably -- let me say a couple of things. I think it probably doesn't look exactly like managers. And I would also say it is very, very hard to generalize across all of these markets. And so the right way to approach Australia is probably not exactly the right way to approach Singapore or Tokyo. The way we go after each of these markets is probably going to have some differences.

Now, again, as Sean said, that said, you're absolutely focused on an opportunity for significant growth. Some growth, we are seeing there, but there is absolutely an opportunity for significant growth. And as Sean said, it is a place where we're going to be able to work with, and help our affiliates. One thing that is consistent with the way that we pursued managers, and I think we talked about this in the last call, is we're going to pursue each of these things in the way that is calculated to drive good returns for our shareholders. And so that means being conscious of the capital we're deploying in each of these markets and the opportunities that are there, and again, Australia is certainly not the last thing you're going to see. But it is one where we have gotten comfortable and we can do that. So I hope that answers the question.

It does. Thanks. That was my only question. Thank you.

Thanks, Rob.

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

Great. Thanks, guys. My question actually is on your cash flow and your balance sheet, if you look at your cash flow for the first nine months of the year here versus last year, I mean clearly, you're taking in more cash from operating activities in a big way, up 27% net income alone. And you haven't done that many deals so far. Yet your balance sheet is pretty under-levered, I guess, relative to what it could support. Could you just help me understand how you're going to, on a go forward basis, think about the use of the balance sheet? Thanks.

I think we're in the strong position, that is as we look at the capacity in our balance sheet, we could execute between now and the end of 2007, close to half a billion dollars of new investment while also continuing to repurchase our stock in a manner that is consistent with prior quarters. And it is our intention to continue to do both as we execute a strategy, which is a disciplined capital management.

Great. Just one follow-up, if I may. Sean, maybe this is one for you. But clearly, this year, there is -- I think there were less deals done than maybe you would have closed historically. Has anything changed in terms of the willingness for some of your new or pending affiliates to negotiate over the last couple of months here? Thanks.

No, it really hasn't changed. And I think our market position and reputation within our target universe is as good or indeed better than it has ever been. And with markets doing reasonably well this year, I think looking ahead, we continue to be quite optimistic. Inevitably, there is going to be some volatility in the timing of new investment activity, and I think if you look back historically, you will see that there are periods where we don't make any new investments, we're still working real hard, and developing and maintaining relationships with great mid-sized firms, but no transactions result. And then other periods, where, for whatever reason, there is a big spike in investment activity. So I think again, if you look over the sort of medium term, we're doing just fine, and looking ahead, we continue as I said to be quite optimistic.

Great. Thanks a lot.

Thank you. Our next question is from David Chamberlain with Oppenheimer Capital.

Hi, guys. Just a quick question on the Chicago Equity deal. Am I of the understanding that they would also be a performance fee generator for you?

Not materially. They have principally asset-based fee accounts, maybe one or two relationships that have a performance element, but it is not material.

Okay. And then just on the asset, the management fee basis, is it fair to say that it is competitive with the market and the institutional channel?

Yes, I think the way to think about their effective fee rate is, they're essentially an enhanced index manager, and they have a concentration of predominantly institutional clients, and a concentration of predominantly large mid cap accounts. So if you think about larger client size, that product set, they tend to be more in the sort of 25 to 35 basis points range for what what they charge as a fee of asset center management.

Okay. Great. Thanks.

Thank you. Our next question is from [Jerry Brunnee] with JB [Brunnee] & Company.

My question has already been asked.

Thank you. Our next question is from Wayne Archombo with Black Rock.

Yes, good afternoon. Is there an explosion of ETF funds this year, I believe upwards of $50 billion in new assets in ETFs? The question is, could you just share with us any plans you have to develop such products, or are you -- have you looked at any managers that specialize in those products?

No, to the second question, Wayne. And no to the first. I mean if you think about it, there are many areas of the investment management world, core fixed income is another easy example, where our approach is, is not going to play as well. Where scale is more important, and capital investment is more important, it is -- it is not as good a fit. I think -- I think the strength and sophistication and quality of our quantitative managers allows for the -- especially on an institutional level, the evolution of products that are, maybe cousins of ETF, actively managed ETF's, et cetera, and I'm sure they're working on variants of that.

But our focus is really on the very highest quality boutique firms, working to generate alpha and whatever their investment strategies are. And that's happily for us, that is a really big market, and we think we got lots of growth there. But it is necessarily inherently going to preclude some other areas, which, which may be growing.

Thank you.

Thanks.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by one at this time. As a reminder, if you are using speaker phone equipment, you will need to lift the handset before pressing the numbers. At this time, I would like to turn the call back to Mr. Sean Healey for additional remarks.

Thank you. Once again for joining us this morning, we're pleased with our results for the quarter, competent in our prospects for strong internal growth as well as in our ongoing opportunity to enhance our growth with accretive investments and additional affiliates. Thank you all once again.

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, please dial 1-800-405-2236 or Internationally at 303-590-3000. With access number 11073618, followed by the pound sign. Once again, if you would like to list ton a replay of today's conference call, please dial 1-800-405-2236, or 303-590-3000 with access number 11073618 followed by the pound sign. Thank you so much for your participation. And have a pleasant day. You may now disconnect.