Affiliated Managers Group Inc (AMG) 2007 Q4 法說會逐字稿

Welcome to the Affiliated Managers Group Q4 2007 results conference call.

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

Thank you. And thank you all for joining Affiliated Managers Group to discuss our results for the fourth quarter and full year 2007.

By now, you should have received the press release we issued regarding our earnings. However, if anyone needs a copy, please contact us at (617)747-3300 and we'll fax you one immediately following the call. In this conference call certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors, including but not limited to those referenced in the company's Form 10-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward-looking statements made during this call.

In this call, the investment performance of certain products will be discussed and the benchmarks are deemed by AMG to be the appropriate benchmarks. AMG will provide on its Website a replay of the call and a copy our announcement of our results for this quarter as well as the reconciliation of any non-GAAP financial projections to the most directly comparably GAAP financial measure. You can access this information at www.amg.com.

With us on line to discuss the company's results for the quarter are Sean - - and year to date are Sean Healey, President and Chief Executive Officer, Nate Dalton, Executive Vice President in charge of Affiliated Development and Darrell Crate, Executive Vice President and Chief Financial Officer.

And now, I'd like to turn the call over to Sean Healey. Sean?

Thanks, Brett. Good morning, everyone and thank you for joining.

In a challenging market environment we were pleased to report strong earnings growth for both the quarter and the full year. Cash EPS was $2.15 for the fourth quarter, a 20% increase over the same period last year, and for the full year, cash EPS was $6.65, that's a 17% increase year-over-year. While we generated good earnings growth in the fourth quarter, we were disappointed with outflows of $7 billion in what was a tough quarter for quantitative strategies. And as Nate will discuss in a moment, this figure is also a bit misleading in that in almost half of these flows were related to a portfolio restructuring by one client. But more importantly, we feel very good with how our business is positioned for 2008 as you'll hear in our earnings guidance, we're confident in our ability to continue to generate strong earnings growth going forward.

Turning to a review of the quarter with a look ahead to 2008. As you know, we had substantial exposure to global and international equities which account for over 30% of AMG's EBITDA. We had strong results in most of our global and international products in 2007, and two of our largest managers, Tweedy, Browne and Third Avenue just reopened their highly regarded international equity products. We believe international equities will continue to benefit from strong long-term secular growth trends regardless of short-term market volatility. And that AMG's broad exposure to this product area offers a potential for meaningful earnings growth going forward.

We also are well-positioned in 2008 for strong results from our growth equity managers especially if the trend-favoring growth continues. Growth equity is one of the largest areas of our business in terms of EBITDA contribution and as a group, our affiliates had a terrific quarter and full year. Friess Associates was a finalist for Morningstar's Domestic-Stock Fund Manager of the Year award, and together with Times Square, Essex and Frontier, we have a broad array of outstanding growth equity products.

Turning to alternative investments, this is one of the most attractive and fastest growing segments of the industry, and we're pleased with the increasing breadth and diversity of our alternative product offerings. Despite a tough second half of 2007 for quantitative alternative products, we realized a material earnings contribution from the alternative area in the fourth quarter. And looking ahead, our affiliates manage a wide range of alternative investment products and strategies as diverse as emerging markets, distressed securities, quantitative global macro, active value and credit alternatives. Many of these strategies are relatively and correlate with the equity markets and indeed a number of these strategies should outperform in volatile market environments. We're confident that alternative products will continue to provide a substantial contribution to our earnings growth over time.

In addition to the earnings growth of our existing affiliates, as you all know, AMG has a unique opportunity to generate earnings growth from accretive investments in new affiliates. While earnings from new investments are not reflected in our guidance, we have a long and successful track record of executing attractive and accretive transactions across the full range of market environments. Looking at our 2007 transactions along with our current pipeline, I couldn't be more pleased with our market position and the range of opportunities available to us. The opportunities to partner with outstanding boutique firms have never been better, especially among alternative and international firms.

Our investments in ValueAct Capital and BlueMountain are representative of the high-quality opportunities that we're seeing. Both are premier alternative firms that have the potential to create returns that are in many respects uncorrelated with the equity market. For example, BlueMountain, a $5 billion credit alternatives manager, has consistently demonstrated an ability to capture outside investment returns during periods of volatility in the credit markets. ValueAct Capital, a $6 billion active value manager has a proven ability to find fundamentally undervalued firms, make substantial investments in these firms, and then actively work with management to implement strategies and unlock shareholder value.

More broadly in the new investments area, we continue to benefit from a growing recognition of AMG's track record of successful affiliate investments. The AMG partnership approach is highly regarded by boutique asset management firms and the universal potential affiliates both traditional and alternative continues to increase worldwide. With our substantial financial capacity, we're well-positioned to execute on this expanded universe of opportunity.

Finally, while none of us know what the equity markets will do in 2008, and obviously the markets are off to a tough start in January, I'm confident in our ability to weather a difficult equity market environment. We have a proven history of delivering stable earnings in downmarket periods, including the markets that we experienced from 2000 to 2003, and today AMG is a more balanced and stronger business than ever before with a broad and diverse array of outstanding investment products. We're proud of a track record of compounding cash earnings at more than 20% per annum, since our IPO in 1997, and we look forward to building on that track record in the years ahead.

With that, I'll turn it to Nate to discuss our results in more detail.

Thanks, Sean. Good morning everyone.

Before I begin a more detailed discussion of our operating results, I'd like to add some general themes. First, we had a good quarter from our growth equity managers, Friess, Times Square, Renaissance, Frontier really across the board, and we see significant opportunities to drive the growth of these products looking forward. We also had good investment performance from a number of our global and international products.

In terms of flows in this category, however, several of our products are closed so we're not able to capture flows there which are strong across the industry. Looking forward, we are very optimistic as Tweedy, Browne and Third Avenue reopen products at the end of the year and other affiliates launch their international products. I'll speak more about this in a minute.

Now, as Sean noted, quantitative products, which for us, includes products at a number of affiliates in both the equities and alternatives areas, had mixed performance and challenging flows, which I'll detail in our second breakdown. Focusing on alternatives broadly, we had mixed performance across both Quant and fundamental processes last quarter and even though the contribution from performance fees was meaningful, it was nowhere near what the potential is. Looking forward, we are especially optimistic about the increasing breadth of our alternative product set with two additional affiliates, BlueMountain and ValueAct being added to our already very diverse set of affiliates managing alternative fee products.

Now, moving to the channel discussion. Starting with the institutional channel with outflows of $6.4 billion for the quarter. While we're not happy with the flows in the institutional channel, the headline number overstates the impact on our earnings. By far, the biggest component of outflows in the quarter was one client restructuring their fund. While the effect of the restructuring was to very significantly reduce the assets managed by the [affiliate] for the fund while they will still manage assets for this client, it had a negligible impact on revenue and it significantly reduced the risk profile to the client. The mandate that was restructured was a futures-based mandate that had grown dramatically over the year and was very large relative to the revenues it produced and had out sized operational risk. As part of the restructuring, the level of assets in the mandate was significantly reduced but the pricing was also renegotiated.

I want to spend one more minute on the risk reduction point. We are very focused on growing our business and maximizing profitability but also minimizing risk. Especially given the volatility in the markets, we've been working with our affiliates to make sure we are appropriately capturing the profitability of products and the range of risks in operational as well as investment risks. And then, together, figuring out if changes are appropriate. Examples of this quarter included combining separate account clients in the commingled vehicles to reduce operational risks and standardizing risk levels across accounts and mandates, and these had some negative impacts on flows this quarter, as well.

Now, as I mentioned a moment ago, these changes are offset against the backdrop of a challenging quarter for quantitative equities and Quant methods alternatives and we had [outflows] in those areas. And finally, given that a number of our highest quality global and international products were closed, as I discussed a moment ago, we were unable to participate in the continuing strong industry flows there.

Looking ahead, however, we are much better positioned in global and international than we have we have been for a long while, with products reopening and new products coming online. Similarly, we are increasingly well-positioned in the alternative product area, having added two new high quality affiliates last quarter in BlueMountain and ValueAct, and with a number of our alternative products off to strong starts this year.

Now, to discuss the mutual fund channel. Performance on the growth side was very strong again this quarter. Friess Associates Family of Brandywine Funds continued the tremendous ran of excellent performance with another great quarter. All three strategies outperformed their benchmarks by at least 700 basis points in 2007. Each fund ranks in the top [quartile] in its respective [level] category for the quarter, year to date, one and three-year periods, and as Sean noted, Friess was the finalist for Morningstar Manager of the Year.

Times Square also had a great quarter with its flagships small cap growth fund outperforming its benchmark by almost 100 basis points for the quarter and over 400 basis point for the year.

On the value side, Tweedy, Browne had good performance during the quarter as their flagship Global Value Fund outperformed its hedged easy benchmark by 70 basis points for the quarter and over 350 basis points for the year, while their newly launched Worldwide High Dividend Fund outperformed MSC-CIA world benchmark by almost 150 basis points for the quarter.

Now, while we had outflows of approximately $500 million in the quarter, over $300 million of that was in the form of year-end distribution, net of reinvested portion of this distribution. Of the remainder, much of it can be attributed to the fact that several of our best known mutual fund products were closed in the quarter but reopened right around year-end. Third Avenue reopened its International Value Fund in December, while Tweedy, Browne reopened its flagship Global Value Fund in January.

In each case, Tweedy, Browne and Third Avenue believe the current market environment has produced an increasing number of new investment opportunities worldwide, a view that many legendary value investors have come to.

Now, turning to the high network channel, outflows were $300 million for the quarter, as positive flows at our manager's platform were offset by small outflows in high net worth accounts at several firms. Some of which can be attributed to year-end activity. Managers had good year overall with a shift in focus to higher margin product, and driving net flows of just under $3 billion for affiliates last year across both mutual fund and separate account products.

Finally, I wanted to update you on the progress of our global distribution initiative. Stepping back for a minute, there are two broad themes that work here. First, while over 25% of our assets under management are from non-U.S. clients, we see a significant opportunity to drive growth in a number of managed asset markets that are growing much faster than the U.S.

Second, in a number of these markets, there is increasing demand for high quality boutique managers. Over the last year and a half, we have worked through and prioritized all the major managed money markets and designed strategies for the highest priority markets. Just about a year ago, we entered our first market, Australia, by hiring GMO who has had a business development in Australia and opening an office in Sydney. Together we built out an offering of affiliate products, including Tweedy, Third Avenue, AQR, Friess and First Quadrant. In February, we will be launching our Middle East sales and marketing and client service effort, having hired the former head of Middle East marketing for ABN Amro and we are in the process of opening an office in London.

While we are integrating our affiliates into this global distribution platform, it is also proving to be an exceptional value in our prospect effort as high quality boutique managers clearly see the benefit of plugging into a platform that extends their marketing reach worldwide without impacting their autonomy and brand.

In terms of asset goals for the year, we're projecting $1.5 billion in net flows from Australia, and a modestly smaller amount from the Middle East as it will be our first year of operations there.

Now, with that, I'll turn it over to Darrell who will discuss our financials.

Thanks, Nate. Good morning, everyone.

As you saw in the release, we reported cash earnings per share of $2.15 for the fourth quarter and $6.65 for the full year 2007. GAAP earnings per share were $1.53 for the quarter and $4.58 for the year. And net client cash flows for the quarter resulted in an approximately $5 million decrease in EBITDA contribution for the quarter. Despite a challenging market environment for quantitative managers in the last five months of the year, performance fees made a material contribution to our earnings adding $0.63 to the fourth quarter, which represents approximately 10% of total earnings for the year.

The ratio of our EBITDA contribution to end of period assets under management was about 21 basis points in the fourth quarter, reflecting the fourth quarter recognition of most of our performance fee earnings. We expect this ratio to normalize to 16.7 basis points for the first quarter of 2008, which is higher than the third quarter, recognizing the low fee outflows in the quarter. Holding company expenses were $14 million for the quarter, we expect holding company expenses in 2008 to be approximately $17 million per quarter, as we continue to build our global distribution platform and incorporate additional noncash charges related to equity compensation.

Our tax rate was 37% for the quarter, and we expect it to remain at this level through 2008. Our cash tax rate was 28.6% for the fourth quarter, reflecting the fourth quarter increase in earnings related to performance fee realization. We expect this rate to decrease to about 17.5% in the first quarter, driven down by the tax benefits related to our new investment activity last quarter. Intangible related deferred taxes were $7.9 million for the fourth quarter, and will increase to $9.5 million in the first quarter of 2008 reflecting the completion of our investments in ValueAct and BlueMountain last quarter. We expect deferred taxes to be approximately $9.5 million a quarter for the remainder of 2008.

Amortization for the quarter was $11.3 million, including $3.4 million of amortization from affiliates accounted for using the equity method. The earnings from equity method affiliates which include AQR, Value Act, BlueMountain and two other Canadian affiliates are included in the income from equity method investments line on the income statement, all net of amortization. We expect amortization to increase to $13.3 in the first quarter, and to be at $13.5 million per quarter for the remainder of 2008.

Depreciation for the quarter was $2.9 million, with $1.7 million of that amount attributable to affiliate depreciation. We expect depreciation to remain at these levels during 2008.

Interest expense was $22.2 million for the fourth quarter, and we anticipate that our interest expense will remain at about this level for the first quarter of 2008. Following the previously announced conversion of our $300 million senior floating rate convertible and the conversion of our $300 million mandatory convertible, both of which will occur in late February, our run rate interest expense will decrease by more than $20 million annually.

Pausing here for a moment, let me talk about how we've positioned our capital structure to support the growth opportunities Sean and Nate have described. As you remember, in the fourth quarter, we increased our credit facility to $950 million, and raised an additional $500 million by issuing additional convertible trust-preferred securities. As we look to 2008, with this additional capacity, our modest balance sheet leverage, and more than $250 million of annual free cash flow that's generated by our business, we have significant capacity to execute our new investment strategy while also maintaining our ongoing commitment to consistent share repurchases, such as our repurchase of $3.6 million shares for the full year of 2007.

Now, turning to guidance for 2008, as you know, our convention for giving guidance assumes 2% quarterly growth in markets. However, with the major equity indices down a blended 15% since we last gave guidance, and down about 8% year-to-date, we have assumed that the markets will remain at current levels for the remainder of the first quarter, and then grow at a 2% quarterly rate for the remainder of the year. Using this assumption, we expect our cash earnings per share to be in the range of $7 to $7.70.

Our guidance for 2008 also assumes a weighted-average share count of $40.5 million shares. This guidance does not include earnings from additional new investments. We also expect to have an earnings pattern in 2008 that is similar to the one you have seen from us over the past several years, where we recognized the majority of performance fees from alternative products in the fourth quarter.

As Sean mentioned, we further diversified our performance fee assets during 2007 with our investments in alternative firms ValueAct and BlueMountain. Each of these firms' products have little correlation to our existing portfolio of performance fee product. We assume that performance fee earnings from this portfolio will account for approximately 14% of our expected 2008 earnings. However, these products offer the potential for significant additional contribution to our earnings beyond this level, and as we continue to build and diversify this portfolio, the certainty of additional material performance fees increases.

Our guidance 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.

And now we'll be happy to answer some questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) One moment, please, for our first question. And our first question is from the line of William Katz with Buckingham Research. Please go ahead.

Okay. Thank you very much. I just want to sort of start with, Darrell, where you left off on the guidance. I guess not that surprising, given what's been happening in the marketplace since, but nevertheless, somewhat eye-opening. So, how do you balance - - with that as sort of backdrop, how do you balance more deals versus where the stock is trading right now on implied earnings? And it just seems like the market has sharply already discounted this outcome, but where do you get the better bang for the buck right now?

Well, as we look to 2008, I think we feel very optimistic about our growth prospects and what I tried to outline in our prepared remarks is that we have prepared our balance sheet, so that we now have billion dollars of capacity and in quite frankly an environment that is very attractive for us to make new investments. New investments that enhance the diversity of our existing portfolio and just on their base are our strong investments to make for shareholders. So, as we look forward, as you know, we don't include new investment activity in our guidance range, and so any expectations for the execution on the robust pipeline would be incremental to the range that we shared.

So, as we sit today, one, you can see in our guidance range, we're very comfortable with the earnings power that our business has in 2008 as compared to 2007, and then you add to that the opportunities of new investments. And as I also said, with regard to performance fees, we have made a conservative estimate, as we always do, for the amount of performance fees that would be included in our earnings, but that opportunity has a material upside which is also not factored into our guidance range.

Okay. Second question, maybe for Nate, I was somewhat intrigued by your commentary that some of these global initiatives seem to be unlocking doors of opportunity for acquisition. I'm just sort of wondering if you could expand on where you're seeing some of those opportunities?

Yes. Actually, Bill, it's Sean, I think I'll take that one. The answer is two fold. We are seeing significant number of opportunities to invest in non-US firms. Obviously, we have a significant global and international exposure, impart from non-US firms like Genesis and Canadian affiliates, but also from US-based affiliates like Tweedy and Third Avenue.

But we obviously see the benefits of incremental diversification from investments in non-US affiliates in Europe, Australia, Asia, we're seeing opportunities in all of those places. And then the additional advantage, which is what I think what Nate was referring to in his remarks, of our global distribution initiative, is that the opportunity to enhance distribution and marketing in far flung markets, especially like Australia, is very attractive and an additional selling feature to prospective affiliates of all types, whether they're U.S.-based or non-U.S.

Okay. And then, just in terms of flows, I was wondering if you could talk a little about it about the experience with Tweedy, Browne or Third Avenue in the past, in terms of the incremental opportunity when you reopen something, like you've reopened on the international side. And then conversely, I was also wondering if you could talk a little bit in the institutional channel, what you're seeing for just general appetite for Quant given what seems to be a bad year for Quant overall, not just for AMG oriented affiliates.

Sure. Well, first starting on Tweedy, Browne and Third Avenue, I think these are both firms with very, very long distinguished track records. And I think their -- let me do it in two parts, their track record of relative outperformance as well as significant absolute performance after periods when they say, you know what, we've been closed for a while but it's time to open, because now we see things are getting attractive. That track record is extraordinary. I think they have had backlogs of clients. Obviously, the [product] has been closed and so they've been able to have outflows and not been able to have inflows. They have backlogs of client, literally available to come in to the product. Now, the relative size and the pace and all that, hard to nail. But those two things together give you just enormous confidence that -- and these are very well-known products, getting lots and lots of media attention. And so the opportunities (inaudible) to significantly grow these products is huge. Lots of upside there. And then, also we shouldn't forget, Tweedy, Browne also launched a new product after incubating it for a long time, launched a new product which has itself a very long track record and has got very wide appeal. You know, it's a worldwide high dividend product and that's off to a great start, getting really good attention, getting lots of looks both on the retail side and on the institutional side. So, lots of opportunity there.

In terms of -- moving to the second part of your question on what we see in terms of appetite for Quant. As you know, we have several managers in this base and it's interesting what we're seeing there in the institutional channel. We are seeing outflows, as we mentioned in our prepared remarks, but we're also seeing some very large, very sophisticated clients adding additional money in the quantitative strategies, and we're seeing lots of people sort of look at how they're using quantitative strategies in the institutional space.

So I think, and our view is these are great firms and could there be, whatever for a little bit? Sure, but they're great firms, great investors. The underlying premise is sound, and that view is buttressed by the fact that we're seeing some of these larger and most sophisticated investors worldwide really looking at adding to their position.

I would just add, Bill, it was a tough five months for quant products. I don't know. Nobody knows if it's going to be a tough year for quant products, in some ways they're better positioned for outperformance than ever. We certainly, on a long-term basis are very happy with our exposure to those products through various affiliates.

Okay. Thank you.

Thank you. Our next question comes from the line of D.J. Neiman with William Blair & Company. Please go ahead.

Hi, good morning.

Hey, D.J.

Good morning, D.J.

Hi. I was wondering if you guys could provide a few more comments on the performance fees outlook for '08. It doesn't seem to me like this has come down that much relative to kind of expectations coming into the quarter, and I was wondering if you could kind of give what is the AUM base that can generate performance fees now?

Sure, DJ, and you're just right, which is our 2008 guidance for performance fees is roughly similar to the guidance that we've given in the past. What has changed, as compared to 2007, is the total amount of assets under management that have exposure to performance fees. And that number today is approximately $45 billion; $25 billion of that is in hedge product and another $20 billion is in long-only mandates that have a performance fee component. And as you can see, that $45 billion is about 15% of our total assets under management. And as you can see in our guidance, we're saying that total earnings performance fee products should contribute about 14%. So, we're taking a pretty conservative view because again if you believe in the performance of the affiliates and how these contracts are structured, generally performance fee arrangements can be quite profitable in an environment of strong performance.

So, as we look at the total AUM, that's derived across a whole series of affiliates with AQR, First Quadrant, BlueMountain, ValueAct, Genesis, Third Avenue, all having over a billion dollars of performance fee exposure. And eight other affiliates that total about $5 billion of that exposure that also have generated performance fees in 2007 and we can have an expectation in 2008 that's not at all unreasonable.

And I'll just, also just take a moment to run through some very simple math, which is if you look at that $45 billion and imagine that all of those assets outperform either the benchmarks that they must exceed or just absolute performance, which is quite frankly the way many of these contracts are structured, well, that 4% outperformance then leads you to a billion and eight in performance and then a portion of that becomes eight as the performance fee, which as you can see is hundreds of millions of dollars, $300 to $400 million.

And then, we have different ownership levels for each of those firms. But you can see how that could -- again, I think that's a good case. But that could easily translate into not the dollar that we're talking about in our guidance by $2 of earnings for our shareholders. So, hopefully that gives you some context about the way we see the opportunity. I don't think having a material contribution from performance fees one of these years is going to be at all surprising. I think as we look over at the portfolio in 2006 and 2007, it's grown very nicely. And you remember it was close to $22 billion to $32 billion now it's at $45 billion. And we've had very nice growth, we've had increased diversification. And in each of those years, we just haven't gotten lucky with performance. Quantitative managers this last year, the year before, I think our performance fee exposure wasn't in the areas that were appreciating most. So again, we're conservative about what we're including in our guidance but we're very optimistic about the earnings generation power of that portion of our business.

Yeah, I would just underscore that on a long-term basis, if we are assuming, let's say, a dollar of earnings per share from performance fees products this year, the opportunity for incremental performance fees above that is very substantial, another dollar or even more on top of that and that's every year. And our exposure is growing, and becoming more diverse. The other thing I would say is - - and I think folks are aware of this, but just to highlight the point, when we make our investments in these alternative firms, the last two that I mentioned, BlueMountain and ValueAct and obviously AQR, and I've indicated that we see ongoing opportunities with -- to make investments in other high-quality alternative firms. When we make these investments, we structure in, and it varies from firm to firm, but we structure in a level of guarantee of the performance fees. And so, in the dollar that we're giving you, a large portion of that is actually guaranteed, so not at risk. In fact, more certain and more stable than asset based fees.

That's not the entirety, but it's a big part of it. And so, we feel that we've been very conservative in the amount of performance fees that we've included in our earnings estimate, and have substantial upside opportunity, not just this year, but on an ongoing basis.

And maybe just to add-in for a little more thinking about how we model it. Given, as you think about what our guarantee is, and when you think about what we've included in our guidance, if you were to strip away the earned performance fee and just include the guarantee in our guidance, you'd get roughly close to the bottom end of our guidance range.

Okay, okay. That's very helpful. Just a couple more quick ones on that. I mean, so thinking about what percentage of that $45 billion is under water right now, I think that was one of the concerns coming into the quarter with AQR or coming into '08 with AQR being under water, I mean has that changed since year end? Could you peg X percent of that as under water right now?

I'll let Nate speak to the specifics at the affiliates, but as I would say, AQR was a contributor as you can certainly see in the earnings to performance fees in the fourth quarter. So, Nate looking forward.

Sure, let me add just to echo that point, which is AQR is a broad diverse range of products and last year's some up, and some not, but they've been contributors to us.

In terms of looking forward, at about the end of the year, roughly 60% of the performance fee accounts that we're talking about were sort of at or in the money. And the reason I say sort of in the money is there are some that are -- as you have seen, some that are not year end pay, right? So, they were above their high water marks. And there were some not earned yet performance fees, but some performance fees that's sort of already in there that would pay at the end of the first or second or third quarter. So, hopefully that gives you a sense.

Yes, no, no. If I can just get one more, thanks for taking all my questions. Just on a relative basis, thinking about the 60 -- well, $0.63 of performance fees this year versus roughly $0.30 last year, can you just provide kind of a rough mix of where that came from on a relative basis?

Well, I think the beauty of portfolio theory, and why we really are very much trying to amplify the increased diversification in the portfolio is truthfully in 2006 versus 2007, they came from different places. I mean, again, you know, AQR has been a contributor, First Quadrant's been a contributor, but that's all consistent with assets under management. But we've had real contribution from Genesis, managing a couple billion dollars of emerging markets, you know performance fee assets.

ValueAct and BlueMountain, now added to the stable, particularly BlueMountain, it's done very well in challenging credit markets. I think this could be quite a year for them. Third Avenue, over a billion dollars of these sorts of products as well. And their performance has been very good.

So, all of those firms, there were 13 firms that contributed to earnings. This year, a little less than a dozen, last year and the year before that, nine or 10. So there's -- all of the firms that manage these sorts of assets are a contributor to our performance fee earnings.

Great. Very helpful. Thanks for taking my questions.

Thank you. Our next question comes from the line of Dan Fannon with Jefferies & Company. Please go ahead.

Good morning. And thanks for taking my questions.

Hi Dan.

Can you talk about what's really driving the improved strength in your investment pipeline? You talked about, quoted as saying this is somewhat of a record in terms of how you guys are looking at your pipeline. And then, also kind of discuss what the expectations are from some of the people you're talking to in these types of volatile markets and in terms of valuations and/or looking at their businesses?

Sure. If you think about how markets generally work, you have a relatively large supply of investment opportunities that maybe somewhat counter intuitively has actually been expanding. Of course, we still have numerous opportunities among succession-oriented traditional firms, mostly U.S. domestic equity. But there have been an increasing number of opportunities in the alternative space and among international managers. From a demand or buy side standpoint, there are far fewer opportunities now for outstanding boutique asset managers to pursue transactions. The IPO market is not attractive to many managers, however, appealing the market environment and currently it's obviously not a very attractive market for firms considering an IPO.

And as well, just changes more broadly in the financial services sector have led to kind of beginning in the last half of last year, and certainly continuing. Just fewer competitors for us, of all types. Obviously, what we do is unique, and we offer a certain kind of investment. But I think in general, we see a large number of opportunities. Our reputation and track record has never been better. We have substantial capacity to fund new investments, and we feel very optimistic about our prospects both in the near term as well as over time.

Okay. That's helpful. And then talking a bit about fund flows, kind of your expectations as you look out from an institutional perspective, and then how you think kind of building on a previous question in terms of the quant strategies, how you think in terms of your guidance, what you guys are assuming for fund flows for that segment?

Okay. Well, first looking at the institutional channel broadly. Look we're very, very optimistic about it, which as you look across our affiliate group, the pipelines are generally good, which coming off of a good performance quarter and year is sort of not a surprising thing to see, right. So if you look closer to the group, most of the products did well in the year, lots of outperformance, strong pipelines when you sort of go through it.

We also have, as I said before, some high quality products that were closed, opening, and very, very optimistic about that. Additional affiliates added to the mix with very strong products that are working very well in this environment. So when you look across the group, we're very, very optimistic about flows in institutional channels for the year.

Focusing specifically on quant, look, I think we said in response to the question, we're very optimistic about these firms, think very highly of these processes over longer periods of time. As you said, these products -- some of these products, that's an important point -- some of these products, not all of these products. Some of these products have been under pressure and would you be surprised to see some more outflows? Yes, maybe, sure. But again, it sounds that as you look at these firms, and the way they're performing now, frankly, we're optimistic that these firms will be continuing to grow. And I guess one other point I should make in there, which is also these firms are coming off the very strong growth periods. So, all of these together, not surprising, I guess terribly to see some outflows in the last quarter and could that continue? Yeah, sure, but very optimistic about these firms.

Okay, great. Thank you.

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

Hi, good morning.

Hi there, Cynthia.

Just wondering in a declining market, how should we think about the -- or just in general, how should we think about the affiliates' puts these days? What is your thinking in terms of the patterns you've seen on those, and are they still at a really attractive whatever it was, seven times EBITDA? And how do you feel about -- do you feel you need to set aside cash for that?

Let me speak to that question, this is Nate. When you look out, and again, one thing you should understand is all of these have long notice provisions in them so there's a high degree of confidence in this field. We're not seeing any increased activity. If anything, we're seeing decreased activity. And, again, in the context of these are guys who really care deeply about these businesses and are trying to drive long-term growth, right? You wouldn't expect to see them react to short-term inputs. So that's the experience we're seeing. And I think as a result, I don't think there's any special we need to be --

I'd just say from a capital planning perspective, of course we're aware of the accumulative amount, but as you mentioned, Cynthia, the multiple at which these puts transact that are very attractive, and many of the puts can be resolved with stock. And even at these lower EBITDA multiples, had AMG traded at today, these are very accretive transactions. So we don't think in any respect that that billion dollars of capacity has some reserve or carve-out for affiliate puts.

Sorry, and then the last thing, is there's obviously also structurally, there are limits to how this stuff, how these puts can come, right. So--

Only a small amount, at any given point.

Right, right. And then just a follow-up on the previous question on alternative flows, is there any seasonality, any restrictions in terms of when clients can take their money out overall when you look at the alternatives? Would you expect, for instance, that you get another spike in redemption from the first quarter just because that's the moment when clients could take their money out or would that be more fourth quarter?

Yeah, again, I think the answer is there's a wide range, right. So, many of these firms do have multiyear lockups and all those kind of things. And could you see, as I said, all the answers I gave before, where you see products are challenged, could you see it? Yes, sure, I don't think we've seen anything specific like that.

And the quant firms had redemption openings. So you would assume that anybody who had sort of thrown in the towel on quant strategies would have done it at the end of the year. I mean, we can't predict what's going to happen next quarter but it's not like there's been a buildup of people wanting to get out.

Okay. And in your dollar performance fee guidance, are you including the firms that have high-water mark issues now, or are you just looking past them for now?

No, I mean, I wouldn't characterize anyone with issues. I think in any portfolio, there are going to be times where folks are above high water mark, below high water mark. We believe a dollar, in our guidance, we believe again, a conservative estimate for performance fees, the amount that we'd be willing to include in expectations for investors is a dollar. And that's looking at the whole $45 billion portfolio and again making assessments, building up from what our guarantee is to some modest expectations.

But as I ran through that math, you can see as we look at that whole portfolio, the idea of having outperformance, especially even in the context of Nate's data, if we were to assume that we, right now, that we had no performance fees from those that aren't above high-water mark, which I think is in no way true. That would still have a very good opportunity to exceed our expectations that we're including in guidance.

Right. Because the base has grown so much.

The base has grown. We had a guarantee. The other thing, on the flip side of firms that are below high-water marks, there's a whole bunch that are well in the money, above high-water marks by a bunch.

And again, we were forecasting growth in performance fees from 2007 to 2008. That's certainly less than the group we forecasted from 2006 to 2007. And I think if you characterize the environment for alternatives firms in 2007 and said, you know, would you be doubling performance fees in your earnings? I'm not folks would have had that expectation.

Right. Okay. And just a question on the $40.5 million shares, what kind of pattern in shares are you expecting for that?

With regard to the share account?

Share account, yes.

Our expectation is to, again, convert the two convertibles, the $300 million senior floating rate convertible and the $300 million mandatory convertible where we will be issuing shares and converting those two securities. That will take share count from where you see in the press release today to just over $40 million. I think our guidance says $40.5 million shares on a weighted-average basis through the year.

Okay. Thank you.

Thank you. Our next question comes from the line of Robert Lee with KBW. Please go ahead.

Thanks. Good morning, everyone.

Good morning.

Good morning.

A couple of quick questions for you, I just wanted to make sure I understood some of the numbers you threw out. First, just on the guidance, just to make sure we're on the same page, assuming -- we're basically assuming that assets that are down 8% because of the market action, correct?

Yeah, we're taking asset levels at current markets today and they are going to be flat through the first quarter, and then each of the third quarter, fourth quarter -- I'm sorry, second quarter, third quarter and fourth quarter that assets grow at 2% per quarter.

Okay. And assets today you're assuming are down 8%.

Yes, year-to-date, down 8%.

Okay. And I missed some of the guidance you gave relating to some of the amortization, you know, the adjustments for cash earnings. Could I -- could you indulge me, maybe just run through those again quickly?

Sure, sure, sure. Amortization this quarter was $11.3 million, and going forward in 2008, that should be about $13.5 million. And from depreciation, we expect to remain at about $2.9 million per quarter in 2008. And then as you look at deferred taxes, that should also be at about $9.5 million per quarter.

Okay. All right, great. I have a question for Nate. I just -- could you maybe, I'd like to understand a little bit better when you talked about sort of managing risk down in some different portfolios. You cited one or two kind of quick examples. Could you maybe flush that out a little bit more, maybe how you reduced risk and in what way those changes moderates it?

Sure, absolutely. I'll give you a couple of examples. And again, just to be clear, this is us working very closely in partnership with the affiliates and I think everybody's of the same mind-set, right which is given - - especially given the volatility markets, we should all be looking at our businesses. And, you know, the -- first of all, part of it is just profitability, and we can be helpful there in reviewing the businesses and obviously the goal over time is to grow this business in a profitable way but also focused on the risks.

To give you a couple of specific examples, you know, one affiliate this quarter was running some separate accounts in roughly similar strategies, it was some alternative fee products, and relatively complicated operationally. Worked with them to get those things commingled and put them on a literally consistent investment basis. So that's two things, right? Reduce the operational risk from having these sets of differences that they needed to build processes to address. Also, reduce just simply the costs needed to process all this, right? Much easier to just give consistent operational, consistent reporting, all that stuff, off of (inaudible) comingle product rather than multiple separate accounts.

Sort of another quick example would be where you might have a bunch of clients who are trying to get exposure to an investment process, maybe at different risk levels, for example. And instead of customizing the way you're approaching each client, maybe getting to a consistent, so some people at 3% risk and some people 4%. You know getting people to a more standard sets of products that then you then implement in a more consistent way getting them to their risk profile rather than doing it at an account by account (inaudible).

It's stuff like that where we've got a bunch of good learning at AMG, a bunch of learning from the affiliate and we can work with getting operational risks down, also obviously trying to help them improve profitability.

Okay. Thank you, that was it. Thanks guys.

Thank you. Our next question comes from the line of Marc Irizarry, please go ahead.

I think that's me. It's Marc Irizarry of Goldman Sachs.

Hi, Marc.

Hi, Marc.

My question, Sean, for you, just in terms of the deal, the deal pipeline, the composition of it, have you seen any notable shifts by, I don't know, maybe type of deal or the classification of the deal, be it sort of succession planning versus maybe sellers who maybe have more lofty expectations heading in? And then also, what's your appetite for doing a larger sized deal at this point in time?

I'm not sure if I was completely tracking one piece of your question, so let me respond and then if I've missed a piece, you'll tell me. The market set is our opportunity set for us is quite broad and includes all types of investment opportunities. I would say on a proportionate basis, relative to the past, we're seeing more alternative and more international, both U.S. firms that manage international equities, as well as non-U.S. firms. And that's -- and we've said that those are areas that we have a strategic interest in continuing to build. So that's attractive for us.

The pricing, I would say, you know, our story is that our pricing has been very consistent over time, and it remains so. I think contextually, we're impacted by the overall M&A environment and pricing, and I would say always to some extent. And I would say today the environment is favorable for buyers. Pricing is relatively lower. That's not, again, I don't want folks to think that we're expecting much lower multiples, they're very much in the same range which is very attractive to us and we see lots and lots of those kinds of opportunities.

I don't -- I'm not sure if your question was something about, you know, peoples' expectations having changed dramatically. The folks that we have been in conversations with and are today, their expectations are very much in line with what we would hope and expect, and we're not having any problems with people looking back a year and saying, you know, can you pay me what I was worth then? I would say the environment is quite attractive.

Your last question was -- the last piece of your question was on larger opportunities. We are always willing to be opportunistic in talking to firms that are boutique managers, but at the large end of boutique, without quantifying a specific upper limit. I would say, however, that we are always focused on managing the portfolio of our exposure to products and firms and geographies. And so I wouldn't expect that we -- I wouldn't want our shareholders to expect that we're going to reach for a very large transaction. In the current environment, we simply don't need to. We have a very large number of very attractive opportunities of firms that are large enough to be meaningful, but not so large to seem disproportionate.

Great. Darrell, if you can just remind me again, I may have missed this, just in terms of the total capacity that you have right now and just your capital priorities, your capacity for acquisitions and your capital priorities?

Sure. We have a billion dollars that's available to us for new investments and share repurchase. We are as you can hear the pipeline is robust, and we should make sure that we have all the capital we need to execute on that opportunity. But we're also, as we've always said, committed to share repurchases over time because we understand that that is, of course, another meaningful way that we can add value to shareholders.

Great, thanks.

Thank you. (OPERATOR INSTRUCTIONS) We do have a follow-up question from the line of William Katz with Buckingham Research. Please go ahead.

Okay, thanks. First question is just Darrell on that exact point. Can you walk me through how you get to the billion dollars, where is it coming from? And then I have a follow-on question.

Yes, when you look -- after the conversions we have leverage that's a little less than one time. So, the idea of taking on incremental leverage and maintaining our BBB minus rating gives us the opportunity to borrow close to another billion dollars. The components of that would be of course we recently refinanced our bank facility, which is not coincidently about a billion dollars, and that's very inexpensive capital with folks who we've known a very long time. And there will be a little bit more than a half billion dollars of availability there. And then the cash flow from our business, we'll be generating between $250 million and $300 million of cash flow from the firm. And we believe access to investors in the bond market is not lost on us, that some of the longer-dated paper out there is quite cheap and we can certainly do a good job with that, so that as we execute on our pipeline, access to that market is something that we feel very, very comfortable with.

Okay. And then an unrelated question, but just sort of from the Q&A going back and forth, your guidance reduction is linear with the market decline, which I think is somewhat of an advantage versus some of your peers, which sort of speaks to the viability of manager managed amounts. At what point, though, is it a possibility where some of the owners versus the operating allocations starts to get affected and that you might have some clawback issues with some of these affiliates?

Nate, why don't you handle that.

Sure. Well, again, as you look across the group, the good news is, our affiliates have been doing a very, very good job for a period of years here and the [cushions] that are in these -- that are built up in these businesses are significant. So, as we look across the group, we feel good.

Where we are today, even if there were a significant decline in the market, we still wouldn't have any of those issues.

Okay. Terrific. Thank you.

Thank you. And at this time, there are no additional questions. I'll turn it back to management for any closing remarks.

Thank you again for joining us this morning. We're confident in the strength of our business model, the diversity of our affiliates, and our ability to generate outstanding long-term growth and earnings. Thanks very much for joining.

Ladies and gentlemen, this concludes the Affiliated Managers Group Q4 2007 results conference call. If you'd like to listen to a replay of today's conference, please dial (800)405-2236, or (303)590-3000 using the access code of 11107395 followed by the pound key. ACT would like to thank you for your participation. You may now disconnect.