Affiliated Managers Group Inc (AMG) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Affiliated Managers Group fourth quarter results conference call. At this time, all participants are in a listen-only mode -- for the question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Wednesday, January 24th, 2007. I would now like to turn the call over to Brett Perryman, Vice President, Corporate Communications. Please go ahead.

Thank you. Thank you, and thank you for joining Affiliated Managers Group to discuss our results for the fourth quarter and full year 2006. By now, you should have received the press release we issued. However, if anyone needs a copy, please contact us at 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 made with the SEC from time to time. In this call, the investor 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 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 and the full year, are Sean Healy, President and Chief Executive Officer, Nate Dalton, Executive Vice President and Chief Operating Officer and Darrell Crate, Executive Vice President and Chief Financial Officer. I would like to turn the call over to Sean Healy. Sean?

Thank you, Brett. Good morning everyone and welcome to AMG's conference call discussing our financial and operating results for the fourth quarter and full-year 2006. AMG reported excellent results for both the quarter and the year driven by our Affiliates outstanding organic growth throughout the year. Our cash earnings per share for the quarter were $1.79, that's a 26% increase over the same period of 2005. Our strong new business momentum continued in the quarter with net flows of $6.6 billion bringing our total flows to over $19 billion for the year. Assets Under Management were $241 billion at year-end with organic growth contributing $46 billion or 25%. We were, of course, very pleased with our results in 2006 and looking back in what is now our 10th year as a public company, we're proud of our track record of earnings growth and Shareholder value creation.

In the past decades, we've had some favorable markets, but also some challenging markets and since our IPO in 1997, our cash earnings per share have grown at a compound annual rate of 21% compared to 4% for the S&P. How have we built this track record? When we started AMG, our strategy was quite simple. Partner with owner managers of high quality, mid-sized asset management firms and be disciplined in terms of our investment criteria. Quality of management first, investment processes that demonstrably add value over time, and an investment structure which closely aligns our interests with those of our Affiliate partners. We enhance this strategy by leveraging the scale and resources of AMG to increase revenues at our Affiliates in ways that is do not interfere with the qualities that attracted us to them in the first place. And we continue to see a tremendous amount of opportunity in this area.

Through the discipline execution of this strategy, we have built a diversified asset management company with Affiliates that include some of the highest quality boutiques in the world. While the asset management industry has changed a lot 10 years, we believe that outstanding firms which consistently generate output for their clients, will be increasingly successful going forward as clients of all types become ever more sophisticated and demanding. AMG's Affiliates are among the leaders in their respective investment disciplines with excellent long-term performance records and as a group, our Affiliates are positioned in some of the fastest-growing areas of the industry. For example, International Equity Products contributed over 35% of our earnings. We believe that strong secular trends favor the continued growth and outperformance of International Equities and with Affiliates like Tweedy Browne, Third Avenue, AQR, Genesis and our Canadian Affiliates, Foyston and [Beutel] we're confident in our prospects for continued strong growth in this area. Another product area where we continue to see exceptional growth is, Alternative Investments which contribute over 15% of AMG's EBITDA. AMG's Alternative Product offerings are broad based with high-quality products across a number of investment strategies. AQR and First Quadrant, two of the industry's most highly regarded quantitive managers offer products which are increasingly sought after by sophisticated institutional investors and are highly scalable and adaptable investment processes provide a substantial ongoing opportunity for growth.

Given the strong growth of our Affiliates Alternative Products in the past year, we have meaningfully increased the upside opportunity to AMG's earnings from performance fees products. While our earnings guidance includes only a limited contribution from performance fees, obviously there's an opportunity for substantial incremental earnings contribution in the future. Similarly, accretion from investments in new Affiliates provides a significant upside opportunity that is incremental to the growth of our base business. In the fourth quarter, you saw we invested in Chicago Equity Partners, a leading manager of quantitive equity and fixed income products with over $12 billion in assets under management. With a strong track record of successful investments and an established position as a preferred partner for leading midsize firms, our prospects for continued growth through new investments remain strong. And as our business has grown, the scale and scope of our investment opportunity set continues to expand.

Finally, AMG's attractiveness as a partner to prospective Affiliates has been enhanced over time with a development of a wide array of strategic support services, most importantly our multi-Affiliate distribution initiatives. Since its launch two years ago our retail distribution platform Managers Investment Group has generated over $2.5 billion in incremental net flows for our Affiliates. And with the opening of a client service and marketing office in Australia, which Nate will talk about in just a moment, we'll begin offering our Affiliates additional opportunities to enhance their growth from non U.S. clients. We believe that AMG's outstanding results reflect the strength of our business model and the success of our growth strategy. Through the organic growth of our Affiliates, our expanded distribution capabilities, and the strength of our position with respect to new investments, we're excited about our prospects going forward. With that, I'll turn the call over to Nate.

Thanks, Sean. Good morning, everyone. The overall themes of the fourth quarter continued those we have seen for the past several years. Excellent organic growth, $6.6 billion in net client cash flows in the quarter for a total of $19.4 billion for the year. Organic growth is broad-based with strong performance and substantial net client cash flows across our Affiliate group. Having said that, consistent with the longer-term trends, performance has been especially strong among our largest Affiliates. The final theme I would highlight, is the tremendous progress we made in the area of Affiliate growth initiatives. Some of these such as our retail distribution platform, have received a significant amount of attention. But there are a wide range of other areas in distribution, operation, even product development, where we are now accelerating the growth of Affiliates, improving the margins in Affiliate businesses and enhancing our operations. Now, two observations about these initiatives, first, in each case, we are focused on not interfering with the things that attracted us to these firms in the first place. We are not imposing services on our Affiliates. Second, consistent with the themes Sean spoke about, we have just begun to capitalize on these opportunities.

Now, turning to our results by distribution channel, I'll begin with the institutional channel, where we had another great quarter. Net inflows totalled approximately $6.7 billion in the institutional channel while large mandates at quantitive Managers' First Quadrant and AQR grow significant flows for the quarter and the year we were very pleased with the breadth of products that attracted significant new business during both periods. With emerging market specialist Genesis, Growth Managers, TimesSquare and Frontier and value manager, Foyston, each generated strong asset growth in the institutional channel. In addition, Third Avenue and Friess continue to ramp their institutional businesses and both firms generated excellent results in this channel during the year.

Now, looking ahead to 2007, we are extremely well-positioned in the institutional channel as the global -- investment products, high quality boutique Managers continues to increase. As Sean noted, we have Affiliates with excellent performing products in some of the fastest growing, most highly sought after areas, global equities and institutional quality alternative products. So, overall, we would expect the pace of flows to remain strong across a wide range of products. Although we do expect it to be [lumpy], given the typical size of some of the mandates we have won as well as some that are in the pipeline, but fundamentally our Affiliates continue attract significant new assets in the institutional channel across a very wide range of strong performing products.

Now, turning to the mutual fund channel. Net flows in the channel sold $91 million for the quarter. While we continue to see strong net mutual fund flows at highly regarded firms such as, Third Avenue and Friess, the pace of flows in the channel remains moderated by the fact that a number of our Affiliates' larger products remain closed. Now, let me pause on this point for a second. 2006 was a year of great growth for AMG, including good flows in the mutual fund segment, even while while many of our highest quality products were closed all year. As we said on previous calls, in the main, these products were closed not for reasons of capacity but primarily so that the cash raised could be put to work in a prudent fashion. We look at this and see a tremendous opportunity embedded this channel when these products open, and they will. Some specific items of note in the mutual fund channel, Tweedy Browne had excellent performance during the quarter and for the full year 2006 as our flagship Global Value Fund outperformed its local currency benchmark by 100 basis points for the quarter and 320 basis points for the full year. Tweedy's mutual funds remain closed to new investors and while the high cash levels was [inaudible] funds have come down, they have not reached a level where they have decided to reopen the funds.

Now, their business continues to expand and they are seeing good results in the global high dividend product which they publicly launched in midyear. That product outperformed its benchmark by over 140 basis points for the quarter and 950 bases points for the full year. The global high dividend product is only currently available in the institutional and high net worth channels at this point. So, the sales cycles maybe a bit longer. We have very high hopes for the product. Brief Associates continues to generate solid, net client cash flows in its mutual fund product, each of which carry a four or five star rating by Morningstar with a significant portion of these flows coming to our Managers distribution platform. In terms of investment performance, Friess' four-star rated flagship Brandywine fund outperformed its benchmark by 80 basis points for the quarter and 160 basis points for the full year, while its five-star rated large cap fund, were a significant amount of the inflows are coming, underperformed for the quarter but also beat its benchmark by over 160 basis points for the year. Third Avenue also had positive flows for the quarter and full year, again, even with half its funds closed for the year and 75% of its funds closed for the first half of the year, and they continue to generate solid returns in their major products. Much as we described with respect to Tweedy, Third Avenue's closed products saw cash levels come down and while the real estate fund reopened earlier in the year, the cash flow was in the other closed products are not yet at levels that would cause Third Avenue to reopen them. Turning to the high net worth channel, we had net outflows of $240 million despite positive inflows through Managers. The largest components of these outflows was due to a decision at one of our Affiliates to free up product capacity from the -- channel that could be more profitably allocated to higher fee and certainly higher margin channels. A significant portion of these assets hit this quarter although additional assets will also be reflected in Q1. As an aside this was an Affiliate that was not accessing the -- channel through our Managers platform.

Now with respect to -- more broadly, as I said at the onset we made tremendous progress in 2006 and are carrying that momentum into 2007. Significantly, more than half of our Affiliates, including some of our large Affiliates, now use AMG as integral part of their product distribution strategy. A similar number use us on the operations side, most prominently through our centralized legal and compliance platform. Now, in addition to the direct benefits from increased revenue and enhanced operations, there are all sorts of additional benefits arising from our initiatives, in terms of broad relationships, as well as shared and increased opportunities that come out of these. Now, to update you on Managers specifically, as Sean noted, we generated incremental net flow for our Affiliates in excess of $2.5 billion in 2006, our second year of operation. Looking ahead, we expect Managers to generate flows in excess of that in 2007 with an increasing focus on optimizing mix, plus mutual funds, SMAs and sub-advisory mandates. In 2007, we also expect to be using Managers to work more closely with our Affiliates on product development. We began this initiative in 2006 with the launch of several products including the Managers FQ Global Alternatives fund, one of the first funds to bring institutional quality global macro capabilities to bear in the mutual fund.

Finally, as Sean mentioned, we are also just a few weeks away from the launch of our Australian distribution platform. This is the first step in a strategy to help our Affiliates broaden the international distribution of their product. Through our office, we'll provide single point of contact for those of our Affiliates that want access to the Australian investment management marketplace. Now, you've heard us summarize how attractive the Australian market is before, but briefly with over $800 billion in investable assets, significant organic growth, and a well-established institutional investment infrastructure, we think there is a significant opportunity for many of our Affiliates to leverage this platform. More to come in terms of extending this international distribution initiative we're off to a very good start. With that, I'll turn it over to Darrell to discuss our financial.

Thanks, Nate. Good morning, everyone. As you saw in the release, we reported cash earnings per share of $1.79 for the fourth quarter and $5.68 for the full year 2006. GAAP earnings per share were $1.21 for the quarter and $3.24 for the year. Net client cash flows totalled $6.6 billion for the quarter and $19.4 billion for the year. These net flows added $8.4 million for the quarter and $25.9 million for the year to AMG's annual EBITDA. During the fourth quarter, performance fees had a net contribution to cash earnings per share of approximately $0.30, about $0.10 higher than we had anticipated. As Sean mentioned, performance fees provide a significant upside potential to our earnings. We anticipate that these products will continue to make a meaningful contribution to our results going forward. In addition, to the seasonal increase in our quarterly results related to performance fees, our earnings in the fourth quarter included an additional $0.03 resulting from one-time events.

Now, for some of the financial details. The ratio of EBITDA contribution to end of period assets under management was 18.4 basis points in the fourth quarter reflecting the realization of performance fees. Experienced in 2006, we expected this ratio to return to approximately 15.9 basis points in the first quarter of 2007. We expect this ratio to remain at about that level through the third quarter of 2007 and then to increase in the fourth quarter as we again realize a significant portion of our performance fees. Holding company expenses were $5.4 million for the quarter, which includes the reversal of earlier accruals for equity-based compensation, partially offset by the increase in incentive compensation accruals as a result of our stronger than expected results for the quarter. As you know, our compensation philosophy for holding company management is designed to incent growth in cash earnings per share and our incentive compensation is highly variable, according to the performance of the business. As we look to next year, we expect holding company expenses to be approximately $13.7 million per quarter including a $1.6 million quarterly expense related to the vesting of equity-based incentive compensation awarded in late 2006. With regard to taxes, our tax rate was 37% for the fourth quarter. We expect our tax rate to increase to 38% in 2007, which reflects the strong organic growth of our business. Our cash tax rate was 23% in the fourth quarter. We expect this rate to increase to approximately 25% in the first quarter of 2007.

In tangible, related deferred taxes were $9 million for the fourth quarter as a result of one-time events. We expect them to return to levels of prior quarters at approximately $7 million per quarter in 2007. 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 equity method Affiliates, which include AQR and two of our Canadian Affiliates, are included in the income from equity method investments line on our income statement all net of amortization. With the completion of our investment in Chicago Equity Partners, we expect amortization to increase to $10.3 million in the first quarter. Depreciation for the quarter was $2.4 million with $1.5 million of that amount attributable to Affiliate depreciation. As you recall, Affiliate depreciation as the non-cash charge we include in cash net income as the replenishment of these depreciated assets is paid by the Affiliate and not AMG shareholders. We expect depreciation for the first quarter to be approximately $2.1 million. Stockholders equity was $499.2 million and interest expense was $16 million for the fourth quarter.

We anticipate that our interest expense will increase to approximately $17.1 million in the first quarter, primarily as a result of our recent investment in Chicago Equity Partners. Disciplined capital management is an important component of our growth strategy and in keeping with this objective, we repurchased 800,000 shares during the quarter for a total of 5.5 million shares for the year. Of note, we recently resyndicated our resolving credit facility and expect to close the new facility in early February at a meaningfully larger size and at a lower cost of borrowing than our current $550 million facility. Now, turning to guidance for 2007, we expect our cash earnings per share to be in the range of $6.50 to $7. This assumes 2% quarterly growth in markets and a weighted average share count of 37.5 million shares.

Our annual guidance also assumes an earnings pattern similar to the one you've seen from us in recent years, where we have earned the majority of the earnings from alternative products and performance fees in the fourth quarter. In addition to AQR and First Quadrant, eight Affiliates including Third Avenue and Tweedy Browne, offer performance fee products and as these products continue to grow we expect the performance fees will be an increasingly meaningful contributor over time. We would expect at these asset levels to generate approximately 10% of our 2007 results, which as I mentioned, would be primarily earned in the fourth quarter of next year. I would note that this assumes performance consistent with our other guidance assumption, however, performance fees, by their nature, provide considerable upside opportunity. Our guidance does not include additional earnings from investments and new Affiliates or the effects of repurchases of our stock, and is based on current expectations about Affiliate growth rates, performance the mix of Affiliate contributions to our earnings. Of course, substantial changes in the equity markets and earnings contributions of our Affiliates would impact these expectations. Now, we'll be happy to answer some questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [OPERATIONS INSTRUCTIONS] Our first question comes from Mark Lane with William Blair and Company, please go ahead.

Good morning, everyone.

Good morning, Mark.

A few questions. On performance fees, Nate or Sean, the expectation for performance fees at the beginning of the year was actually higher, even though the fourth quarter saw performance fees above the most recent guidance. Do you anticipate that impacting any net flow expectations, the fact that some of those products had performance below expectations, particularly on the hedge side?

Mark, it's Darrell. As we, when we look at the expectations in 2006 for performance fees, roughly the year ended in line with expectations. And as you know and as we try to communicate, our expectation for performance fees that is included in guidances is really a conservative estimate, and as you look at 2006 and the third quarter, we tried to bring expectations down. But as we worked through the fourth quarter, products performed very well. And that, that's why the earnings contribution for the fourth quarter is certainly higher than we gave guidance to.

And to the other part of your question, I think that sets things well up for 2007. And I would just, to the other part of your question, I think the, in terms of expectations for flows, I think the relevant point isn't really how it looks relative to what we were saying the beginning of the last year -- well, two big components -- competitors and then, overall, what is the demand in the marketplace for products that look like these, right? The demand for products that look like these, and I'm not just talking about the First Quadrant and AQR, but as both Sean and Darrell mentioned, wide range of Affiliates with performance fee products, the demand for products that look like the products we're talking about is very, very strong and the relative performance of these products against our competitors is good. So I think those are the things I'd look at in terms of expectation.

Just clarification on [mig]. I think Sean had said that $2.5 billion of net flows since inception, which goes back to, the summer of 2004, and I think Nate you said $2.5 billion of flows in '06. And you would expect flows to be better in '07. Could you just clarify what the contribution was in '06 versus..

It was in excess of $2.5 billion in net flows in 2006.

Just in 2006.

Correct.

Yes. And if I implied that it was since inception, that was wrong. It was $2.5 last year alone.

Okay, and then just two quick questions on guidance. Darrell, you said that guidance did not include any share repurchase, but the guidance you gave for average shares was $37.5 million which was lower than the fourth quarter.

Yes, that's right. And I think it's our expectation that we will, we have the three contracts that are related to the convertibles that kick in in the second, third and fourth quarters of this year. And those contracts are meaningfully in the money. And we would anticipate proceeds from those contracts being used to repurchase shares.

The contracts we're talking about the forward contracts that you entered into to mitigate the delusion of the stock price went higher? Is that what you're saying?

Yes. Yes. And if you recall, we entered into those contracts a little over a year ago and there are three sets of contracts for second quarter, third quarter and fourth quarter of this year. And as you can imagine, the stock price has appreciated that those will enable us to reduce our share count.

And last quick one. You mentioned some sort of one-time event being $.03 per share in the fourth quarter?

If you notice on the income statement in the intangibles related to deferred taxes, as we reorganized you a couple of smaller Affiliates and teams, we were accelerating the deferred tax benefit of those transactions into this quarter.

I see, okay.

That accounts for the $0.03 in these results.

Perfect. Thanks a lot.

Thanks, Mark.

Thank you, our next question comes from Bill Katz with Buckingham Research.

Thank you, good morning, everyone.

Hi, Bill.

Sean, I'll start with you. This is the first time in a while, maybe I'm just not remembering correctly, you're particularly effusive on the positions of the franchise, is this sort of a year end recap phenomena , am I reading too much into it or do you, like, the business is strategically much more sound, say, than ever before. I'm sort of curious. I guess basic question is, are you sort of thinking that the EPS trajectory can ramp from here?

Well, I'm not sure how to gauge my prior effusiveness. But I think our business is in terrific position and has very strong momentum going forward, both in the new business area but also with respect to the new investment opportunity. I think, the end of the year, and indeed the 10th anniversary of being a public company are appropriate times to step back for a moment and reflect. And obviously we think that our track record, through good and bad markets, over time in executing a very large number of new investments and working with a group of very high-quality partners over time is meaningful. And we hope is indicative of continued success in the future.

Okay. Nate, sort of curious. Have a sense of when you might see some of these retail funds reopen? You mentioned the area that the cash levels are building, markets have been running, sort of curious, you've seen retail volumes elsewhere in the industry, at what point could we see a more decisive upturn?

I think you're seeing just maybe -- cash levels are coming down, right? In these funds. So that's a sign of them putting money to work, obviously one fund did reopen this year. The real estate fund. But, look, these guys are doing exactly the right thing for the long-term franchise. They're thinking about the long-term growth of their business. And so, I can't say exactly when they're going to open. These are not closed because of capacity problems. They're closed because they need to put the cash to work and they're focused on putting the cash to work and they want to open these funds consistent with being prudent to their shareholders. So everybody's heart is in the right place in trying to do the right thing.

And again, I think the point that we want to emphasize is that the organic growth rate in an absolute sense and proportionate as well, was very good. Was without the contribution of, in some cases, some of our largest Affiliates and their largest products even being open. So prospectively in terms of forward opportunities, we're optimistic.

One final question, Sean. In the press release and your commentary again you talk very strongly about your positions in the deals and acquisition and so forth. Just sort of curious, conceptually, given the size of the assets and the management and the earnings base you are managing to now, should we expect that the deal size now should start to be a bit bigger than sort of the Chicago Equity Partner-type deals and if that's the case, is there any change in metrics to which you're pricing these transactions?

I would say we feel that we're in a great position, where we have the scale to execute larger investments, but are not so large that the smaller investments within our target universe can't meaningfully add to our earnings. So, I think the scope and breadth of our opportunity set as I said, it's better than ever. I don't think that it means anything about our pricing metrics. We have a long track record of disciplined pricing. Obviously, we have paid different prices for different investments and where we see substantial growth opportunities. We'll pay at the higher end of a range, and lower for others. But our track record is, I think speaks for itself.

One final question. And I apologize, just play devil's advocate to your 20 some-odd percent compound growth rates since you've gone IPO. If you look at the last three to five years, I believe the growth rate is a bit lower than that. And I guess the question is, if were you to do incremental acquisitions, how should we think about the financing vehicle for those deals?

Well, it's Darrell. I mean, I'd say as we up this, the bank facility, we'll have more than $500 million of capacity. We continue today to generate more cash than ever in the firm's history. So the opportunity to use inexpensive bank debt plus, all the cash that comes out of the business leads to meaningful accretion relative to even our 2007 guidance. But as you well know over the years, we've built many constituencies who are willing to provide us capital, most recently with the preferred securities, so we feel like we are in a position today, where they are, we have a very, very wide range of opportunity of deals that we can look to that will have an opportunity to grow our earnings over these next couple years in a way that is I think consistent with the track record that we've assembled in the past. And I can't resist. A little bit saying the growth rate may not be exactly what it is since our IPO, but it is still a very attractive growth rate over a three and five-year period. We happily stack it up against our public and private peers. And the business is in a position now, as I said, where we're large enough to have more and more opportunities the business generates, very substantial excess cash, but also we're not so large that the opportunity set has been dramatically narrowed.

Okay. Thank you.

Sure.

Thank you. Our next question comes from Jeff Hopson with A.G. Edwards Please go ahead.

Okay. Thanks. Two questions just so I have the numbers right. You have the $0.03 benefit you had originally a $0.10 benefit for the reversal, but part of that was reduced by the increased incentive comp. Do I have that right?

Yes. So the net amount of the reversal for are the quarter was $0.08.

Okay, and then, in Australia, can you tell us initially, I think we're aware of some of who is operating there, but who will be, I guess, participating in your efforts there?

The, obviously, as we launch it, it will be with a couple Affiliates initially and then in just as we did with Managers, the first instance and the [sub-advised] platform the second, we expect to start with a few, establish success, and then grow that. Maybe just a [inaudible] as I said, we're a couple weeks away from opening the office. We've identified the person, we've actually hired a great, great person to run the office. It's not public yet and all that. But identified a great, great person to head up that office. In terms of the product mix that we're going to be bringing to market, we're focused on, and this is all consistent with the stuff that we've all been talking about, we'll be focused on bringing some global equities, as well as very high-quality institutional alternative products. Some of our Affiliates already do have clients in the market that are going to take advantage of this, firms like a Third Avenue, Tweedy Browne, a First Quadrant, those kinds of firms. So that's where we're headed.

Okay. And then in terms of some of the new money you've brought in more recently, is the revenue rate or fee rate on that, how would that compare to the historical fee rates on the entire institutional [feedline]?

Again, it's hard, it's very hard to generalize, right, especially with some of these very, very large mandates. So it again, hard to generalize. I think the asset-based fees, if you looked at it and really did try to generalize across the group, could you look at the asset-based fees and say, yes, that's a little bit lower. There is an increasing proportion again consistent with all the stuff we've been talking about, increasing proportion of performance fee components to some of these mandates. So again, hard to generalize, on kind of a blended, all an effective rate.

Okay. Other than the nonperformance quarters might be a also bit lower, that could catch up later, is that fair?

This is Darrell. I would say as we look at the largest mandates from what are sophisticated buyers of these services, they try to use performance fees as a way to make sure they're paying a fair price for what we do. And luckily, we have a group of Affiliates that we think are outstanding and been outstanding and will continue to be outstanding. So from an expected value basis, I think that we will over time, realize very attractive rates on those large mandates relative to our peers.

Okay. Very good. Thank you.

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

Hi, good morning.

Hi, Cynthia. How are you?

Good. I'm just wondering if you could tell us what percent of your AUM now is subject to performance fees now, roughly.

About 12 to 14%.

Okay. And what's your typical, if there is such a thing, performance fee for a 1 through 3Q? It used to be like a cent.

We've had, second quarter has been a quarter where we think in this last year recognized $0.02 or $0.03. We've had around a penny in prior quarters. And as, stepping back the way we are positioning performance fees in our guidances to assume that they're going to be realized in the fourth quarter. And our intent as we proceed through 2007, and realize those performance fees in early quarters, would be of course for those earnings to be recognized. And for it to reduce our expectation of performance fees that we would realize in the fourth quarter. But again, the majority, the super majority of performance fees would be, will be continued to be realized in the fourth quarter in 2007.

Right. And can you talk a little about the tax rate? Why would the cash tax rate be going up? Is that something you expect to continue into '08?

Well, it's a function of the organic growth of the company, because as we grow internally, which of course is the least expensive way to grow, nonetheless, the marginal tax rate on those businesses is between 40 and 45%, depending upon the jurisdiction which the revenues are raised. Why we're able to have a cash tax rate that is so much lower than our peers is that as we purchase firms, we create a tax shield not only from the way we structure the transaction but also from the way we finance the transaction. So as we, as you've seen, as we make new investments, it continues to grow the tax shield. But when we have years with strong organic growth, which we all hope for, that's on the margin, blends in a higher effective tax rate.

Right, okay. I got it. So, if you were to make a bunch of large acquisitions, it could go back down again and it's also a function of the organic growth? There's a silver lining there?

Yes, it is.

A big silver lining.

A big silver lining, right.

Yes.

And then, seems like that EBITDA contribution is going down and I guess maybe that's just the same observation that somebody else made on fees. Is that a function of the asset management?

It's the same theme line of thinking. Most of the growth has been in the institutional channel. And in addition with the Chicago Equity Partners being in our results, our full results for the year, for the first quarter, there again, it's a reduction in that number.

Okay.

And remember, that ratio that we give is not an indication of margin or business prospects, but it's way for us to communicate to you our views on the mix of Affiliates and enable analysts and investors to forecast our revenues and show what that will mean with regard to our operating earnings.

Okay. Just a couple more questions. I guess you said that sounds like the money's coming in pretty fast to AQR and First Quadrant. And I'm wondering other than the products you have closed, whether you see any capacity constraints on anything coming up.

In terms of the products, we are seeing significant flow. Let me back up. We're seeing significant flows across a wide range of Affiliates, a wide range of products. Are there products in that mix? Of course. But in the main, looking across [inaudible] seeing significant flows in the firms. We're not thinking about the capacity as a problem. In fact, there's another nuance on that and Sean touched on this. Some of the firms will receive significant flows, have investment processes that are also and portable is not the right word, but able to evolve and grow as well. And so the other bit of this is the new products coming online and there's significant opportunity from the products coming online including firms like Tweedy Browne where again, we launched a new product in this past year, had tremendous performance and starting to see flow. So, lots of opportunity from new product as well.

Okay, great. And then last question is, can you go over once again what you said about outflows from SMAs maybe reappearing in another channel? I didn't quite get that.

Sure. One Affiliate took capacity they had been allocated in to the SMA channel and this is a very small part of their business. And they're just reallocating that to other channels. And made that decision, business decision. Some of that hit this quarter, some its going to hit next quarter in terms of asset flows.

So you mean there would be more outflows next quarter or -- equal from the high net worth channels?

No, just from this one specific Affiliate in this one specific piece of high net work channel so I wouldn't, it's not material and I wouldn't read too much into it.

Moved over into the other channel. So it's not a --

you'd be seeing offsetting inflows, however.

Okay. All right. Thank you.

Sure.

Thank you. Our next question comes from Laura Kaster with Sandler O'Neill. Please go ahead.

Yes, just a question on the compensation expense line, obviously it was a little bit lower than I had projected due to the move from restricted stock to options. Where should we think about modeling that going forward in '07 maybe as a percentage of revenues?

Yes. I would, the holding company expenses will be, will be approximately $14 million. And as we look across the complex again getting to EBITDA of the 15.9 basis point figure, you'll continue to see a flux between compensation benefit expense and a SG&A in a way that will result in that ratio of EBITDA end of period under management.

Ok, great. And in most of my questions have been answered. But for Chicago Equity Partners I think last quarter you had indicated that that might contribute $0.10 to EPS in '07 and is that still the case?

That seems just right. As we continue to get to know them, we only have better thoughts about the business and its prospects and so we look forward to our partnership with them continuing to grow.

Okay. Are your assets in Australia still around $5 billion?

Up a tiny bit, but that's about right.

Okay. And I guess maybe just a generic question on the competitive environment, markets are really, we're on a tear in the past quarter. Can you just give us an outlook, I know the pipeline, the Jess station period is five to seven years so it's almost not even words asking -- more competitors going after those companies alongside of you?

Not really, no. I think markets are dynamic and there are different competitors that move in and out. I think within the midsize universe, maybe I'd even say fewer competitors. Obviously at the upper end of the midsize universe, larger boutique firms have a wider set of alternatives and a wider set of potential partner acquires, but no. I think we feel very good about our forward prospects, including our relative competitive position.

Okay. And then I guess one final question to follow up on what Cynthia had asked. For the outflows for the high net worth, was any component of that seasonal?

Yes. Some of it is again, back up for a second. The high net worth channel for us has got two main components. There's a retail, mass retail kind of separate account businesses, but then also sort of the ultra high net worth investment counseling kinds of businesses and I suspect there's now in both segments know that there's some of the ultra high network component to it. So, that's where I think we are.

Okay. Thank you.

Thank you. Our next question comes from Douglas Sipkin with Wachovia. Please go ahead.

Hi, good morning. Just a question, a follow-up really on the last one, on the outlook for the acquisition environment. I guess more specifically by channel, you know, I'd be curious to hear your thoughts on maybe the mutual fund business given some of the pressure there that values might be improving there on the acquisition channel conversely on the alternative side, some competitors aggressively bidding up hedge fund managers, has that changed the pricing dynamics and the opportunities the grow in organically in that channel?

I would say first with respect to mutual fund firms the dynamic isn't so much mutual fund versus institutional, I think it's rather midsize firms versus much larger firms. Much larger firms have obviously public market alternatives, private equity firms are more interested in their investment approach is more appropriate there. But midsize firms have a different and, at least these days, more limited set of alternatives, I don't think the, really good firms command higher prices and that hasn't changed. But I think the competitive dynamics are basically the same as what I described earlier. It's a little more complicated for alternative firms. But again, big difference between much larger alternative firms, which we'll see soon, may have a public market alternative and certainly have a broader set of potential strategic requires. Although, if you think about it, there aren't that many transactions, there have not been that many transactions in the alternative space. We think that our approach, which is a partnership, partial investment approach, obviously, the kind of investment we made in AQR, is relatively unique. We are uniquely well positioned to execute those kinds of transactions and we're the kind of partner that we believe many of the highest-quality alternative firms are looking for when they're seeking that kind of a transaction. And so that, that kind of competitive dynamic, I think, is still favors us. We don't see a lot of new entrants pursuing that kind of investment.

Okay. Just to follow up on that, so basically what you're saying then is some of the acquisitions we've seen, the potential IPO of one of the larger ones, it doesn't really impact, hasn't really impacted your ability to make those transactions happen one way or another?

That's right. Or the alternative firm that says, gosh, the right thing for us is to sell 80% to a bank. You know, first there aren't that many of them. There haven't been that many such transactions, but those aren't really relevant for us. That's a different kind of investment than one we would pursue.

Okay, great. Thanks for taking the question.

Sure.

Thank you. Our next question comes from Mark -- Goldman Sachs. Please go ahead.

Okay. Great. Thanks. Sean, this is a question kind of following onto that if you will. How big do you think the alternative piece of your affiliate network will be, you know, or could be maybe five years out and how much of that do you think will be in kind of minority stakes versus the current form of your kind of core acquisition? Thanks.

A couple of dynamics and I encourage my colleagues here to chime in. I think, first, the other parts of our business, while alternatives is a rapidly growing part of our business, the other portion of our business, including domestic equity, which recently hasn't been growing as much, but obviously feel like a number of our affiliates are very well positioned to continue to generate strong growth. So the overall size of the pie is expanding rapidly and we are hopeful and optimistic that it will continue to do so, therefore, the, even as alternatives grow rapidly the relative portion that they're consuming, or contributing is not going to change that much. I think it will continue to be a significant minority, will it be more than 15% in five years? Obviously, I don't know. But I wouldn't be surprised if it was. That's one. The second dynamic that is occurring which is very important to understand, is that our view is that the largest alternative firms are increasingly viewing themselves as asset managers first and not as alternative versus traditional. If you look at AQR, they've been tremendously successful across their business including of course in the alternative products. But they also have a very strong, very rapidly growing traditional business. And we expect that other high-quality alternative firms will continue to migrate their business and in turn, quote, traditional Affiliates and traditional firms generally, will move their business as you see, for example, in Third Avenue and Genesis, which we mentioned had very strong performance fee performance last year. As those firms are doing. So I think there will be a convergence which will a little bit blur the definition between alternative and traditional.

Okay. With that in mine, would you also consider kind of private equity firms as well as obviously that's converging I think to a certain extent also.

Yes, we would. I think it would have to be obviously the right kind of firm, the right kind of setting, the right kind of incentive structure. But we have talked to private equity firms in the past, and I suspect we'll continue to do so in the future.

Okay, great. And then just in terms of your profitability and I guess the overall EBITDA contribution if you will, the institutional channel has been or is more profitable than the other two and the EBITDA, on a totally EBITDA margin, and that's where the flows have been coming into at a more rapid pace over the last two quarters, at least. So how should I think about the overall margin of the business, you know X-ing out the holding level? Like why wouldn't we see an acceleration your margins if your highest margin channel has grown fastest? Thanks.

The guidance that we've given again with the 15.9 basis points, EBITDA to assets under management gives you a sense of our mix. And remembering that a big part of our business is a revenue share structure, where those revenues, regardless of growth, all the operating leverage is with the management teams. So you're not, the margin analysis of each of the segments is, cannot be done the same way as it would be for comparable firms, where it's a series of profit-based businesses.

Obviously, I guess this is implicit on what Darrell said, to the extent that there are incremental profits which are shared in some cases more with our affiliates through their ownership, if you will, the operating leverage, that ultimately [rebounds] to our benefit to the extent that the firms are more profitable generally, and can invest more in their business, have great retention incentive, et cetera, et cetera.

The only thing would I add to that is as we're looking at it, we see high-margin opportunities within each of these segments in the business. Right? So it can be a little bit hard to generalize by these channels.

Okay, great. And then just one last question maybe for you, Darrell. I was a little surprised, I guess, in terms of the level of the performance fees, given some of the data that that we've seen from AQR perhaps. How much, can you kind of just parse out a little bit the variation in performance there and what we should expect from kind of AQR versus First Quadrant? I know it's a little granular, but any help could you give would be great.

It would be inappropriate to parse through each firm and how they're doing. That said, you can see in our equity method line that we had a little less than two-thirds of our performance fee from equity method Affiliates. As I was also trying to communicate, we had eight Affiliates that provided performance fees in this fourth quarter. And the strong performance in the fourth quarter, whether that AQR was at First Quadrant, was it in any of these other affiliates? And that positions us well for 2007.

Great. Thanks.

Thank you. Our next question comes from Robert Lee with Keefe, Bruyette & Woods, please go ahead.

Thank you, good morning, everyone.

Good morning, Rob.

Most of my questions were asked. But I did want to ask you about your nine U.S. business, understanding that 35% of variance are coming from international equity products, is it possible to get a better feel for what proportion of assets are actually being sourced from non-U.S. investors and aside from the Australia platform, are you thinking at all about needing to build a distribution platform, you know, more globally to tap into some of the opportunities you see outside the U.S.?

The, I think the let me take those in order. In the first bid, I think our institutional, one dynamic that's occuring and this ties into some of the comment that is Sean made earlier. One dynamic that's occurring is global demand at the large institutional level and that sits in a bunch of different places. And acceptance or embracing boutique asset managers such as our Affiliates. That global demand is increasing. So if you look at our institutional channel, we're seeing good flows, good global flows. When you sort of think about it, and I think we may have talked about this a bit last call. When you think about what we're doing with Australia and as that extends into other markets, what we're doing is we've got sort of a top down, we're looking at these markets and making judgments about them, component to it.

But the other thing that's happening, and Australia is a good example. The other thing that's happening is our Affiliates are getting mandates in these markets and then the question becomes, what is the best way for midsize asset management firm to serve as crossout market. Sort of maybe in that order, in these markets. And so what we're offering our Affiliates is an opportunity to capitalize on demand that is already there, that they're already experiencing. And then leverage that and grow it. So we are absolutely seeing demand globally, especially at the high end institutional [inaudible]. And again what we're doing with Australia and as we extend that beyond is capitalizing on the demand that's already there.

And then, this is Darrell, as we look at these opportunities, and they're all opportunities that arise as our scale grows, as the scale of our individual firms grow. And they're competing on a broader platform, we continue to adhere to the philosophy on which you've seen some success over the last decade, which is to be very frugal with our capital. You look at, as we built the distribution platform at [mig], we spent $5 million to $10 million to build the platform that today is going to generate over $2 billion to $3 million, and I think that return on investment is outstanding and we'll continue to make is that your the dollars that we put into all of these initiatives, carry the same sort of thresholds for return that are new investment activities, that we demand from our new investment activities.

Not to pile on, but to emphasize the point implicit in what Darrell said, and your question we said, do we need to do this? We absolutely don't think that we need to. We are very pleased with the organic growth momentum of our Affiliates, both with domestic clients, as well as non-U.S. clients. We view these opportunities as incremental, as driving growth at even higher levels going forward.

Okay. And just wanted two follow-ups. And I apologize, you may have gone over this already. But the share assumption in your guidance, just to clarify, you are assuming cash flow from the four contracts will be used for share repurchases but not additional cash generation for share repurchases, is that correct?

Yes, that's right.

Okay. And last thing, I don't know if you had mentioned it earlier, I may have missed it. But in your guidance, did you also include a range for your performance fee assumptions?

We did say that a little over 10% of our forward guidance is accounted for by performance fee earnings and those would be recognized in the fourth quarter.

All right, great. Thank you very much, guys.

Thank you, Rob.

Thank you. Our next question comes from [James -- with Seacliff], please go ahead.

Yes, I was hoping you might be able to give us a little bit of detail as to how the -- Act of 2006 might be affecting your business. Are there any places in your institutional business or retail business where you're seeing an increase in flows or interest because of these changes?

I think, with the cautionary note that it's still early to tell and one of the biggest questions is going to be how, how plans react especially, but we're having, there's a wide range of very interesting conversations with a couple of our Affiliates in terms of how to maybe, exploit is too strong, but some of the opportunity that is come out it in terms of how people end up managing products, absolutely should be opportunities that out of it.

As I under it, there are some hedge fund risk rules that will be lifted or made more flexibly so that some funds can take on a large -- sources. Is that an area where you might be able to take in more additional assets?

Sure. That's the component of it. But more what I was speaking to, and the thing that really, one of the things that gets very interesting is how plans end up managing their assets, right? And some of the opportunities that we have working with Affiliates with their investment products might be very adaptable to the way it's focused on managing assets. So, there should be, so the opportunity you're describing is certainly a component of it but the real exciting thing or interesting thing is how to do a good job, working with some of these plans and meeting their needs that come out of this.

All right, then. One second area of questions in just a couple would be on the performance fee issue. Obviously it's one that analysts are very interested in asking most of your questions today. It seems that there's a real concern on the street that performance fees income should not generate the same sort of [p.e.] on a stock for your stock as would be just straight management fees. I would imagine that those of you your individual managers that have performance fee assets would much prefer to have more performance-fee assets than straight fee asset. How should we think about the value of performance fee oriented business, going forward versus the more traditional business?

There are two things. One just to reiterate something that I said earlier, which is performance fee clients tend to be the more sophisticated clients and for us, the opportunity, given that we have strong firms with outstanding performance, we believe that there's a greater return, greater profit in performance fee accounts for us and for our firms than there would be in a flat fee environment. So we feel good about that opportunity. And then lastly, as I've tried to characterize our guidance around performance fees for a couple of years now, we are making a very prudent judgment with regard to the amount of performance fees that we include in our forward guidance. What I've also tried to say a couple of times is that while we think 10% of our earnings contribution 2007 is a very reasonable amount for performance fees, the assets that we manage that have performance fee contracts, have grown considerably over these last couple of years. And the performance fee opportunity could be meaningfully higher in any sort of environment where these products are performing well. So, I hope, that's helpful as you think about them. But we have, we try to have guidance to investors that we feel strongly can be achieved.

I'm sorry, go ahead.

I would just add that the way we look at performance fees in the main is like, and I analogize it to our new investment opportunity, where we spend a lot of money and a lot of time and have a very good track record and very attractive forward prospects, but none of the incremental accretion opportunity is in our forward guidance. So, the opportunity, there's of course some level of volatility in the amount of performance fees that we've included in our guidance. But that is minimal relative to the size of the potential opportunity, which is, of course, uncapped in the way performance fees work. And remember, it's not like an investment bank, where we've got capital at risk. There's only upside volatility over time. The last thing I would say is, look, this is an emerging issue.

I think we are at a very conservative, in a very conservative position in the way we think about performance fees, not withstanding, that we have relative to other entities, a much broader and more diversified exposure to performance fees, whether it's emerging markets equities or distressed or a whole array of quantitative styles at different quantitative firms. So lots of breadth and diversity which lends a measure of stability. But all that being said, it's an emerging issue and, obviously, we all know there's a large alternative firm that's seeking to go public. So, I think it will be an interesting dynamic to watch and to the extend that the market looks forward and revalues or rethinks how it values performance fees, it's for your collective judgment, of course, but I think we see that as a good thing for us and a potential opportunity.

But currently the street seems to be assuming or valuing a dollar of earnings coming from performance fees as being worth less than a dollar of earnings coming from a more traditional and slower growth area of business, which would almost imply that you should be not accepting performance-based business and only going after traditional business. I take it that you would disagree with that?

Well, I think I would leave it to the professionals to value stocks and figure out how they're going to value businesses. You know, it's clearly our judgment that we are growing our businesses in a way that we believe provides maximum value for our shareholders. And we'll continue to do that.

Great. Thanks for the time.

Thank you.

Thank you. Our next question comes from [Amick Kamar] with [FAS] Advisors, please go ahead.

Congratulations on a great quarter.

Thank you.

The question I had, was on sourcing new Affiliates and look, since you are 35% of your, I guess your revenues are coming from international sources and you think that maybe alternate investments could be up to 15%. Then when you're doing the sourcing initiatives, do you put in more effort into international fund managers and also on the same token, the alternative investment or everybody is put in the same bucket and that's how you source it?

That's a very good question. Just again to ground everybody in the numbers, currently 35% of our earnings come from international equities, which is equities managed for U.S. as well as international clients. And 15% of our earnings come from alternative products. The universe of midsize firms includes obviously a large number of international firms, large number of firms which manager international equities as well as alternative tern tiff firms. But it is predominantly still domestic equity Managers. What I would say is that in our prospecting effort generally, our term for, our efforts to develop and maintain relationships with prospective affiliates over time, we absolutely prioritize our efforts on firms that we believe are the highest-quality firms within our target universe and offer the best growth prospects.

Now, to the extent that we think international equities and alternative products in general are areas that and alternative products in general are areas that we believe will grow relatively faster in the future probably there's a slight disproportional allocate of our time toward building and maintaining relationships with such firms. But also it should be said, a very large number of -- terrific equity Managers to we have longstanding relationships with and hope to form partnerships with. So it's kind of both.

Thank you.

Thanks.

Thank you. Our next question comes from [Paul -- with -- Capital Management]. Please go ahead.

On the cash flow statement is there anything special you would say about cash flow from operations for full year 2006, anything you'd want to guide us to there?

Nothing in particular, other than it's more cash than the business has ever generated before. And we feel very good about the ability for the business to generate a meaningful capital.

And just to remind me, on that line, distributions received from equity method investments, is that cash dividends to AMG?

Those are the earnings from our equity method Affiliates and, as I mentioned, there's AQR and two of our Canadian Affiliates that are in that line item.

And the other adjustments line of $10 million?

There's nothing, nothing unique in that line item.

All right. Thanks very much.

Sure.

Thank you. Ladies and gentlemen, if there are any additional questions please press the star followed by the one at this time. As a reminder, if you're using speaker equipment, please lift the handset while pressing the numbers. One moment, please, for our next question. Our next question comes from [Diego] -- please go ahead.

Hi, guys. I have a question. When you took the contracts related to the convertibles that are going through the fourth quarter of '07 are you analyzing expanding these contracts through '08 to minimize [evolution].

No. The answer is no. The first quarter of 2008, the convertibles are convertible. So, we have a wider range of ability to resolve the convertibles at the time.

Okay. Thank you.

Thank you. One moment, please, for our next question. At this time, we have no further questions. Do you have any closing remarks?

Yes, I do. Thank you all once again for joining us this morning. We appreciate your support and look forward to a great year in 2007.

Thank you. Ladies and gentlemen, this concludes the Affiliated Managers Group fourth quarter results conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000. Enter access number 11082463. Once again, for a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 and enter access number 11082463. Thank you for your participation. You may now disconnect.