Affiliated Managers Group Inc (AMG) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen, thank you so much for standing by and welcome to the Affiliated Managers Group Q1 2008 results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded today Wednesday the 23rd of April 2008. I will now turn the conference over to Miss Brett Perryman, Vice President of Corporate Communications. Please go ahead ma'am.

Thank you and thank you for joining Affiliated Managers Group to discuss our results for the first quarter of 2008. By now you should've received the press release we issued this morning. However, if anyone needs a copy please contact us at 617-747-3300 and we will 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 remake 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 investor performance of certain products will be discussed and benchmarks are deemed by AMG to be the appropriate benchmarks. AMG will provide on its website a replay of the call and a copy of our announcement of our results for this quarter as well as a reconciliation of any non-GAAP financial projections to the most directly comparable GAAP financial measure. You can access this information at www.AMG.com.

With us on the line to discuss the Company's results for the quarter are Sean Healey, President and Chief Executive Officer; Nate Dalton, Executive Vice President in charge of affiliate development; and Darrell Crate, Executive Vice President and Chief Financial Officer. Now I would like to turn the call over to Sean Healey. Sean?

Good morning everyone and thank you for joining. In the midst of a difficult equity market environment we were pleased to report stable earnings of $1.46 for the first-quarter 2008. That's a 2% increase compared to our first-quarter earnings last year. Although our overall results are inevitably impacted by declining equity markets and industry equity flows, our earnings reflect the diversity of our product mix and the relative strength of our investor performance of our affiliates especially in international and alternative products.

While we were obviously not happy with our net outflows as Nate will discuss all but about $1 billion of the flows were in quantitative products most of which carry very low margins. With a strong relative performance and excellent long-term track records of our largest affiliates, we're very confident that as markets stabilize and investors return to equity in alternative products we will continue to generate strong long-term growth.

During the quarter are we and our affiliates continued to invest in a number of growth initiatives especially in expanding our global distribution capability. As you know, non investors -- non-US investors already account for almost one-third of our total assets under management and we see tremendous opportunities to further increase the distribution of our affiliates products in international markets going forward.

Our boutique affiliates appeal to sophisticated investors around the world and building on the successful launch of our Australian marketing initiative in 2007 we recently opened an office in London to focus on sales and marketing efforts in the Middle East. As we continue to build out this initiative would have identified several key markets in other fast-growing regions and are actively pursuing these opportunities worldwide.

Finally turning to new investments, we began the year with a strong pipeline of potential transactions and with one exception continue to make good progress toward executing transactions. The exception is Cooke & Bieler where following declines in the firms assets level we and the management team of Cooke & Bieler mutually agreed mutually agreed to end discussions related to our transaction.

Looking ahead, while there are obvious challenges to moving transactions forward in a volatile market environment, the silver lining to difficult markets is that our competitive position is extremely strong and the opportunities in the market are numerous including several prospects where corporate owners are selling to raise capital. Given the opportunities in the market, and the strength of our current pipeline we're very confident in our ability to generate meaningful incremental earnings growth from new affiliate investments going forward.

Finally, more broadly, while none of us know when the equity markets will stabilize and industry equity flows will return I'm quite confident that at some point they will and I'm just as confident that given the strength of our business and the quality of our affiliates performance track records, we will continue to generate strong growth over the long-term. With that, I'll turn it to Nate to discuss our affiliates in more detail.

Thanks, Sean. Good morning everyone. Let me begin with a couple of themes that shaped the quarter. First, as Sean mentioned on a relative basis our affiliates generated strong performance across the board. Second, while we had outflows in the quarter these were largely concentrated in low margins quantitative products. Looking ahead as investors rotate away from cash management into actively managed products we're confident that our affiliates will generate strong growth.

Now in terms of how our overall business is positioned in this environment, this environment where volatility of returns is one where outstanding boutiques led by highly experienced asset managers should excel. And in fact if you look at the performance of our affiliates firmwide 60% of our product by AUM beat their benchmarks for the quarter.

More importantly, as you focus on our largest product the outperformance is even more impressive with 70% of them ahead of their benchmarks for the one and three-year periods and with 80% of our largest products now ahead of their five-year benchmarks. So, were very well-positioned for when investors reallocate to these strategies.

Also, I will speak more in a minute about what we're doing to make additional distribution resources available to our affiliates to take advantage of this opportunity.

Now, another area where we're working with our affiliates which we discussed a little last quarter is aligning both power and their resources with the best profit-generating opportunities. As a result, through the fourth quarter of last year and into the first quarter of this year we and our affiliates have made a number of decisions to redeploy assets. Some of this shows up in our numbers this quarter reflecting business lines and specific mandates being exited. Also as you would expect the impact of some of these decisions (inaudible) increase in the margins of our businesses which positions us and our affiliates for even more profitable growth.

Now, moving to our segment discussion and starting with the institutional channel we had outflows of $7.1 billion for the quarter. While we were obviously not pleased with the headline number, by far the largest component of our outflows in the first quarter was two mandates at one affiliate First Quadrant. Both of these were very large futures based mandates multiple billions of dollars that had very low effective fee rates.

As we discussed last quarter, these futures based mandates can get very large with corresponding increases in operational risks and costs that frankly may not make sense given the low pricing structure. In some cases especially the volatility across asset classes increased. The impact of these flows on EBITDA was negligible.

Now the remainder of the flows is coming from a combination of one, continuing challenges that quantitative managers experienced during the quarter; two, us and our affiliates exiting some business lines; and three, general risk aversion by investors which included investors worldwide but in our experience especially US investors trying to reduce risk by deferring new allocations in contributions and building up cash.

Looking at our quantitative managers, while we had outflows at FQ, AQR and Chicago Equity Partners most of our outflows in the quarter came from First Quadrant. That said, FQ's investment performance was very strong especially among the alternative products and their new business pipeline on both the alternative side as well as equities and extended equity side looks good as well.

In terms of AQR on the alternative side their performance was mixed with some of their funds performing very well and others having had a challenging quarter. The equity side of their business which is about a $23 billion (inaudible) business had a good quarter with nearly all of their products beating their benchmarks.

One additional highlight, BlueMountain had an extremely strong quarter with all of their significant products dramatically outperforming their benchmarks. They're seeing significant opportunities in this market to both continue to generate returns to their clients as well as raise additional capital (inaudible) to work.

So in sum, from an investment performance standpoint we really had a very good quarter across the institutional channel but especially with most of our largest products. And while it's obviously very early in the quarter, we've seen a pickup in the pipeline final (inaudible) etc. really starting in March and carrying into this quarter.

Now turning to the mutual fund channel, we also had good relative investment performance in this channel especially from a number of our global and international products. Tweedy Browne's new worldwide high dividend fund outperformed its benchmark by 600 basis points in the quarter placing it in the first percentile (inaudible) Morningstar category while the flagship global value fund outperformed its hedge (inaudible) benchmark by 580 basis points for the quarter.

Third Avenue's international value fund posted a very strong quarter outperforming its benchmark by 965 basis points and ranking as the top performing fund in its Morningstar category for both the quarter and one year period. In fact it was the only fund in its category to generate the positive return last quarter.

The quarter was more mixed for growth managers as Frees Associates family of funds lagged their benchmark during the quarter but each of the funds continued its strong long-term performance record. Brandywine Blue for example has topped their (inaudible) performance for one, three and five-year periods.

Also on the growth side, TimesSquare had a good relative performance quarter as their small-growth and mid-growth funds fund beat their benchmarks by 30 basis points and 260 basis points respectively. And the mid-growth fund ranked in the top decile in its Morningstar category for the quarter.

On the US value side, Tweedy Browne's value funds and Third Avenue's small cap fund outperformed while the Third Avenue value fund underperformed its benchmark. Fundamentally, however, deep value investors like Tweedy Browne and Third Avenue are finding lots of opportunities to put money to work in the current market environment.

While slows in the mutual fund channel were negative $1.2 billion this was against the backdrop of one of the worst flow quarters for equity funds in the past decade. Bright spots in terms of flows were the Brandywine fund family where our managers investment group platform had significant success getting additional distribution for their products and the flows remained strongly positive despite the industry trends.

Now turning to our high net worth channel. Outflows were $100 million for the quarter almost all of which is attributable to the risk reduction point I made earlier combined with seasonal outflows from individual investors. While our managers platform generated positive flows in the intermediary driven channels the pace of new allocations slowed there as well.

Now, let me spend a minute on where we and our affiliates are redeploying assets or investing primarily in product development and distribution. Starting with product development, many of our affiliates see tremendous opportunities for investment in this period and we have worked with them to bring a number of new products online. Our affiliates launched or seeded more than 25 new products over the last six months in some cases taking advantage of market volatility such as some strategy at AQR, BlueMountain and First Quadrant while in other circumstances were moving to participate in fast-growing areas of the market.

For example three of our affiliates have launched 130-30 products with (inaudible) First Quadrant recently funding its first mandate with a multi-hundred million dollar win. So others are moving to take advantage of increasing distribution capabilities at AMG through managers investment group in the US or through our expanding global distribution platform.

In terms of global distribution, as Sean mentioned, last quarter we announced the opening of our London office to distribute and service affiliate products into the Middle East, this build on the successful launch of our Australian office last year. So far, the London office is off to a great start and we're actually having our first roadshow through the Middle East this week.

Looking ahead, given the significant outperformance of many of our affiliates during this period, we expect to build on the success of these first two offices and are actively working through our target market list. The core thesis that there are significant opportunities as well as economies of scale and bringing outstanding boutique managers to global investors is proving itself in the recent activity of affiliates but most importantly in the recent activity by institutional investors worldwide. With that, I'll turn it over to Darrell to discuss our financials.

Good morning everyone. As you heard Sean and Nate say while it was a difficult period in the market, we feel good about how we have positioned and continue to position our business. Our investment structure which allows for our affiliates to own the operating leverage in their firms provides consistent seed to our earnings in periods of declining markets such as the one we experienced in the first quarter and as it did in the negative market cycle of 2000-2003.

In addition, while we have a diverse range of investment products, our challenges in the current environment have been straightforward and none of our affiliates products carry a risk of impacting our balance sheet. As Nate noted, we've used this period as an opportunity to work with our affiliates to identify ways that we can strengthen and streamline our businesses both at AMG and at affiliate levels. We are also working closely with affiliates in administrative areas helping to make their businesses as efficient as possible while reducing expenses and improving the efficiency of their operations.

Now turning to some of the modeling items, during the quarter, we earned approximately $0.10 of performance fees principally at First Quadrant. These fees were offset by approximately $0.05 of onetime charges related to Cooke & Bieler deal costs and the resolution of the $600 million of convertible securities.

The ratio of EBITDA contribution to end of period assets under management was 17.4 basis points in the first quarter. You will notice that our earnings yield on AUM has increased year-over-year as the lowest fee rate assets were a meaningful part of the outflows this quarter. We expect this ratio to be 17 basis points in the second quarter.

Holding company expenses were reduced to $16.7 million for the quarter. We would expect holding company expenses to remain at this level for the balance of the year as we realize the benefit of expense reductions and lower compensation accruals at the holding company.

Our tax rate was 37% for the quarter and we expect it to remain at this level through 2008. Our cash tax rate was 25.7% in the first quarter and we forecast this cash tax rate of 23% in the second quarter and 26% for the full year.

Intangible related deferred taxes were $9 million for the first quarter and we expect them to remain at this level. Amortization for the quarter was $13.3 million including $5 million of amortization from affiliates accounted for using the equity method. The earnings from equity method affiliates are included in incomes from equity method investments line on the income statement all net of amortization.

Depreciation for the quarter was $2.8 million with $1.5 million of that amount attributable to affiliate depreciation. We expect depreciation to remain at these levels during 2008.

Interest expense was $21.3 million for the first quarter. Following the conversion of our $300 million senior floating rate and $300 million mandatory convertible in February we expect our interest expense to decrease to approximately $16.7 million in the second quarter and continue to decline as we use the cash flow from the business to repay indebtedness. As you recall, we do not include accretion from future new investments in our guidance although it would be our expectation that meaningful amounts of future free cash flow will be used for these accretive transactions.

Pausing for a moment let me talk about how we positioned our capital structure to execute upon growth opportunities. Our business generates strong recurring free cash flow of approximately $275 million a year. With the timely resyndication of our bank facility at the end of last year, and the issuance of $500 million of subordinated hybrid securities with a conversion price of $200, we have $1 billion of additional debt capacity in our balance sheet.

We are also very well-positioned from a liquidity perspective with our credit facility maturing in 2012 and our junior capital having a 30 year tenure. As you can see we have plenty of capital and are well-positioned to make new investments and repurchase our shares in an environment where both of these activities can be very productive in generating attractive long-term results for our shareholders.

Now turning to guidance for 2008. As you know, our convention for giving guidance assumes 2% quarterly appreciation in markets. Using this assumption, we expect our cash earnings per share to be in the range of $6.70 to $7.40. Our guidance also assumes a weighted average share count of approximately 41 million shares for both the second quarter and the full year. This guidance does not include earnings from additional new investments.

We also expect to recognize the majority of performance fees from alternative products in the fourth quarter. As you know our business generates performance fees across a wide range of investment products. While the market environment has been challenging for some of these strategies, others are performing quite well and we continue to assume that performance fee earnings from this portfolio will account for approximately 14% of our expected 2008 earnings.

Our guidance is based on current expectations about affiliate growth rates, performance and the mix of affiliate contribution to our earnings. Of course substantial changes in the equity markets and the earnings contribution of our affiliates would impact these expectations. Now we would be happy to answer any questions.

(OPERATOR INSTRUCTIONS) Bill Katz, Buckingham Research Group.

Just a couple of questions I guess. (inaudible) pick up where you left off, Darrell, in terms of the guidance and I promised myself I wasn't going to ask those questions but I have to ask it anyhow. So I am looking at the midpoint of your new guidance and it's $7.05. And I think the street (inaudible) %7.05 already. And (inaudible) question -- does this new guidance include or exclude the impact of Cooke & Bieler? And then given the fact that equity markets generally up 5% plus quarter to date are you potentially a little low here or have you taken that into consideration already?

This new guidance that we're giving today assumes that we're not going to do Cooke & Bieler as we have terminated the transaction. So while consensus may be at $7.05 and our new midpoint at $7.05 you can see that we are optimistic about the business.

As you also know our convention for giving guidance is a 2% market growth and that is our convention. And so as we look ahead and we think about how the market will impact us obviously a stronger market and a market that appreciates faster would lead to greater earnings growth.

So given the dynamics that the underlying base earnings were around $1.41 versus the street being $1.46 and not that much movement in the guidance if you will ex the impact of Cooke & Bieler, where is the relative strength all else being equal as we look out into the second half of the year? Is it just that you get more bang for your buck in terms of the repositionings or is there some other driver here to earnings that offsets some of the short-term shortfall in Q1?

Yeah, I think it's a bit of all of it and as we look at this quarter and obviously are influenced by the market we continue to be very disciplined about how we want to manage our business and on many friends we worked to find ways to generate earnings from cutting some holding company expenses to streamlining businesses to again making sure that we have our best resources aligned with our best opportunities. When you put that all together in this environment and you look through our guidance that is how we are confident that given a base business of $1.41, continued growth and affirming our view on performance fees for the year, we get to a range of $6.70 to $7.40.

Okay and then just sort of stepping back on the deal front, I guess with Cooke & Bieler going by the boards, you continue to say the deal pipeline continues to be quite strong but you have been saying that for a while now and I know you've done a couple of deals late last year. But it is April now and now this deal's off the table. How should we think about the deployment of that billion dollars? Is that something that can be more imminent or is this a little bit more longer lived in light of what's going on in terms of market volatility?

As I said we do feel confident in our pipeline and would not want anyone to think that we expect necessarily a deal a quarter although there were two as you know in the fourth quarter of last year. And we feel looking at the environment, looking at our pipeline, looking at the substantial financial capacity we have that the opportunity for our new investment effort to make a significant contribution is very real and very attractive. I am not as I never do going to though give you -- there will be a deal in May and then one again in July etc. It's impossible to predict but our competitive position, our pipeline, our ability to execute the transactions that we have before us is as good or better than it has ever been.

Okay and then just one final one. I didn't hear any commentary on buyback this particular quarter. Just sort of wondering how we should think about that relative to the deal pipeline.

Our buyback this quarter was very modest. Obviously given our optimism for the business the share repurchase is something that we're focused on. But given the strength of our deal pipeline and how we view the opportunities that exist in that pipeline, we are conserving our cash and positioning ourselves well for the opportunities ahead.

Dan Fannon, Jefferies & Co.

You know, just in talking about the pipeline a little bit can you give a little bit of color about how the discussions with potential affiliates have changed really over the last six months given the volatility in the market? Has the pipeline expanded at all? Have you seen companies fall out? Could you just give us a little more context around that?

There's always some flux and perhaps there's a bit more in periods of volatile markets. But I would say in the main the firms that we have been working with continue to be performing well. Obviously in times of great market volatility there's an understandable slowing of transaction discussions because people are focusing on their business and managing through volatile markets.

But from a competitive standpoint there are far few buyers out there as you would expect and in addition to the range of opportunities that we have been working with and that we sort of normally will see, there are as I note opportunities that market volatility and dislocations themselves create where you have corporate sellers looking to divest assets that are performing themselves, asset management businesses that are performing themselves very very well. And it's a time to be opportunistic.

So we wrap all that together and as I said are quite optimistic without being able to time things precisely. I guess the other thing I would say is that our pipeline and indeed some of the opportunities that are presenting themselves along the way is more focused on international firms -- both firms that manage international products as well as firms that are based outside of the US and also on alternative firms many of which have strategies that are less correlated with equity markets and which are having very good years. Hopefully that gives you some context.

That's helpful. And then just in terms of the guidance for performance fees, last quarter was characterized -- you guys characterized it as being conservative. Given the exclusion now of Cooke & Bieler and going through the first quarter is that still a conservative metric as you look at the 14% number right now?

Well obviously as we look at our guidance and as the year moves on it becomes more realistic in how we think about what the portfolio can deliver. As I compare how we think about our performance fee guidance today versus when we were on the call last quarter, it's very clear the products that will be -- that should be making material contribution to our earnings.

You look at First Quadrant that delivered some performance fees this quarter but it's very well-positioned. You look at firms like BlueMountain where they are having outstanding performance and in this environment it's one where they can do what they do well. And we look at a group of other affiliates that have strong performance and can be a producer -- produces their performance fees. When we look at that portfolio and from here we are in April, we feel very good about the performance fee guidance we're giving and the amount that we are including in our 2008 earnings.

Okay, great. And then lastly, how many of your alternative or fee generating products are currently above their high watermark?

When you look at the alternative business, just about 40 to 45% of the firms are at their high watermark.

Craig Siegenthaler, Credit Suisse.

Good morning, two questions on the fee rate. Can you walk us through the fee rate improvement in the mutual fund channel sequentially and even compare to the fourth quarter? And really the second question is when you look at the asset repositioning that went on in the first quarter and it looks like a lot of that was probably First Quadrant which is improving your EBITDA yield per asset, how can we think about that in terms of fee rate improvement sequentially into the second quarter?

I would say as you look at the mutual fund channel there are -- again mixes is probably the most significant driver as you think about what will happen in that channel. As I would forecast forward I would see the average mutual fund fee rate would be closer to 91 or 92 basis points and you are just right with regard to First Quadrant and how you -- and their contribution ultimately to the institutional channel margins.

But most broadly as you can see in our guidance forecasting around 17 basis points of our EBITDA contribution to assets under management reflects the not only the assests at First Quadrant but the broad efforts that we are engaged in with affiliates to streamline our businesses. And clearly going forward at those levels are most appropriate.

I missed what you said on holding company expenses. Was it about $15 million?

$16.7 million is our holding company expense for this quarter and that's what we see for the remainder of the year.

Okay, per quarter, okay. I was wondering also in terms of your major hedge funds that maybe are experiencing some redemptions now. Is there any gate limitations on your hedge fund products that could be preventing a certain level of investors from redeeming (inaudible) not just investor wanting to redeem six months from now and having a duration restriction but in terms of the actual quantity an investor can redeem. Would that be occurring right now in any of your hedge funds?

I think again -- remember when you're talking about our hedge fund products right? So we are thinking about alternative products. It's a very wide array of products across a number of affiliates. So are there products that have these kinds of characteristics? Yes there are but I don't think the application of any of those kinds of things is really anything we're looking at.

Got it, got it. Another question just real quick on your performance fees I'm wondering when you look at you said 14% of estimates or your guidance is coming from performance fees what part of that 14% which maybe is a little less than $1.00 comes from guarantees from some of your affiliates? So if everything kind of went poorly where is the kind of the support there in terms of performance fees?

What we would be hesitant to do is sort of parse through all of the performance fee arrangements. But it is fair to say that from where we stand today and we look at both guarantee and we look at the opportunity that is presented given the assets under management, the current performance and on a crude levels of performance fees in the system that the guidance of just around $1.00 of performance fees feels just right to us.

Just one more and thanks a lot for taking my questions. What was the adjusted dilutive share count balance at quarter end? Not the average and I'm just wondering if -- it looks like there wasn't a lot of buyback in the quarter. I'm wondering to hit your assumption for 40 and change in the second quarter what type of buyback activity has to go on?

Yes, about 40.8 million is the ending number. So for the 41 million shares next quarter and on assumes no buyback. Of course, buyback as well as getting capital deployed and our new investment opportunity both of those activities would lead to accretion for our guidance.

And is kind of excess cash to do deals and also through averaging up about $1 billion even with the Cooke & Bieler deal closed?

Yes, yes, yes. Clearly the termination of Cooke & Bieler frees up capital to deploy into other activities and even with markets declining we still see our balance sheet having $1 billion of cash flow and solidly being a BBB- company.

Great, thanks a lot.

D.J. Neiman, William Blair & Co.

Good morning, most of mine have been asked except for a couple of quick ones here. On the large outflows at FQ how much more do you think there is to go there or do you feel like it's largely complete now in terms of the restructuring?

I think there's a couple billion of it left again to reiterate very, very low margin business and negligible impact even if you would but we definitely do not expect (inaudible) at all.

And then total performance fee AUM has got to be -- can you put some -- a range around that right now then?

It still stands at around $40 billion of both hedge fund product and long-only product that carries a performance fee arrangement.

Last one. I understand it's a sensitive topic but can you just touch on how discussions are going with prospective firms and how the Cooke & Bieler terminating that deal plays into that and how you're dealing with addressing the concerns that new prospects may have?

You know, we have been doing it for a long time. The Cooke & Bieler termination was very firm specific and will have zero impact on prospective discussions and the form and protections that we built into our agreements have not changed in more than a decade and won't change going forward.

And the forward discussions that we have -- the ongoing discussions that we have and the forward transaction opportunities are to the extent that affiliates -- prospective affiliates look to referencing AMG where they go as they've always gone is to talk to our extant affiliate group and there the very successful track record of our affiliates and of AMG is our biggest asset.

So no, it is -- we are every bit as confident going forward in the Cooke & Bieler transaction has no effect. I would even say further we have a lot of respect for the Cooke & Bieler folks and it wouldn't surprise me and wouldn't be the first time even that at some point in the future with good reengage in discussions with them.

Okay, great, just last one real quick, Darrell, on the holding company expenses you mentioned there are about $0.05 per share of onetime expenses related to the closing of -- or terminating the deal. Is there some leverage on that holding company expense line item or would you say that you're being conservative?

No, I mean we're -- sort of 16 7 is the run rate for the holding company operations which includes all that we do and distribution efforts and the like. The onetime stuff is just onetime stocks and it really is related to transaction costs related to Cooke & Bieler as well as the $600 million of convertibles to make sure that goes smoothly and it did.

Marc Irizary, Goldman Sachs.

Great, thanks. Just a question on the asset repositioning. I guess number one, why now? Two, how many dollars of affiliate assets under management are we sort of talking about here? Is this something that is sort of new in terms of the way you operate with affiliates and do you think this'll have any impact on future deals in terms of what AMG also brings to the table? Thanks.

Maybe starting with the last bit, we have a very consistent framework for the way we interact with our affiliates and so the decisions we're talking about that are taking place over the last couple of quarters are both us and them and us working with them. Again the framework is consistent in terms of how we try to generate good returns on our assets and help them generate good returns on theirs.

To the component of your question which is sort of why now, look at the environment over the last kind of five, six months is changing and things that made sense looking at the world six months ago it's not that the framework is different it's just that the input are moving. So I don't think it's a different thing or a different way of interacting with them it's just -- and they find this I think incredibly useful and helpful and that is the way to talk to us. (inaudible) just something that we bring to (inaudible) to help them.

There's also a piece of your question which is (inaudible) to what are some of the kinds of things? We talked a little bit about some of them last quarter. We talked about consolidating strategies or products that are similar. We talked about maybe consistency of packaging of products, things that are running at different risk levels, maybe simplifying from an operational standpoint and putting in easier ways from an operational perspective to run. But it is also exiting products or product lines that we (inaudible) and/or our affiliates (inaudible) to be competitive and that are taking resources away from more productive opportunities. We're simply working with them to make the best use of our and their resources.

Along those lines are you also altering your interest in any particular products as well?

Not at a product level the way you're thinking about. These are all happening within the framework of the relationships we have with our affiliates.

Got ya. And then on Cooke & Bieler obviously you spent a lot of time last year getting sort of your pencils sharpened and finally executing on some deals in the fourth quarter. I guess, Sean, this quarter is for you. You know if you think about the pipeline of types of deals that you want to do going forward international and alternatives, are you sort of rethinking long-only deals in this environment?

No, not at all. The international and alternative areas have been areas where first of all there is a lot of growth and in many cases excellent performance. Strategically we have been and continue to seek to position the business with a proportionately greater exposure to those areas where we see on an ongoing basis greater secular growth relative to domestic equity products.

And it's an environment where many or most domestic equity products obviously are not performing as well as they would have historically and industry equity flows especially into domestic equities are at lower levels. So you expect that proportionately within our pipeline of new investment prospects this would be a time where they would be a little less of the domestic equity. But outstanding boutique managers that specialize in long equities -- long domestic equity strategies are still out there and in the future they will absolutely be part of our new investment activity.

Great, and then just on the alternatives front obviously there is -- it seems like there's a new stack almost everyday. How do you see that sort of competitive landscape shaping out in terms of the alternative deals?

We don't see the SPAC market affecting us. Firms that want to go public and want to go public via a SPAC are not interested in the kind of permanent partnership that we offer. From a pricing standpoint there are inherent limits to the pricing of SPACs delays and executing transactions etc. I don't mean to say that some SPACs won't be successful going forward but they won't be -- if they are successful it won't be in settings where we would have or could have had an opportunity.

Cynthia Mayer, Merrill Lynch.

Good morning, just a follow-up. Just to clarify on the First Quadrant outflows when you say those were low-fee products are those products that have the opportunity for performance fees?

In the main the products that were lost -- actually it's not in main. The products that we're talking about don't have performance fee components.

Okay, same with the -- I think you said there's about $2 billion remaining?

Correct. These are not performance fees. The way to about these are just very large features based kind of risk management kinds of products with very large institutional clients.

That's why your performance fee asset base hasn't really gone down that much?

That's right.

And I think -- not to go over the guidance again and again. But last quarter I think you said that a lot of the performance fees you expect are actually guaranteed because that's how you tend to structure your investments in alternatives firms and I think you said that if you included only the guaranteed portion you would get close to $7.00 or close to the bottom of your range is what you said. So should I make the assumption that if you're reducing your guidance by what is it -- $0.030 that that would carry over to sort of that analysis too that if you included only the guaranteed portion you be at whatever -- $6.70 or something?

Well maybe to just refresh where we are today which is I think the changing guidance for this quarter is driven by what's gone on in the market and then offset by some of the things we are doing to continue to manage the business for earnings growth. From a performance fee perspective the amount of performance fees that we include has a meaningful portion that is guaranteed but it does require positive good performance by products in order for us to achieve our guidance number.

That said, we have always included performance fee earnings in our guidance. That comes from a very conservative orientation. As you can imagine on a portfolio of $40 billion of performance assets in an environment that is -- where markets are all up and positive returns abound, we could generate several dollars or more of performance fee earnings.

In this environment and given the portfolio and as I mentioned First Quadrant has generated some performance fees this quarter. BlueMountain is very good performance and a group of other firms are very well-positioned in this environment that all makes sense as we see the true performance of firms and products unfold as the year progresses. So from where we are here in April and we look at our guaranteed plus the position of these products we still feel confident in the amount of performance fees we are including in guidance and that has the same sort of orientation and level of confidence around how it will work through earnings in the fourth quarter.

Okay. I guess just a couple of other questions. I think you said you're interested in reducing debt and interest expense and I'm not used to hearing you say that you're using cash flow to reduce debt. I'm just wondering what is driving that. Is that ratings agency driven or is it that you have some cash flow piling up as you're waiting to get deals done and how far down do you want to drive that?

Yes, no sure. We do have revolvers that are outstanding and my description of it was not to evidence a business strategy but it was more just evidence of modeling convention. So the way we came up with our guidance was using all of the cash flow to repay our revolving credit and trying to get some numbers around that so everyone has a sense of how our balance sheet is adding to our earnings generation.

But as you've heard our prospect for deals in this environment is very strong. We are husbanding our cash so that we can have it ready to take advantage of that opportunity and in our guidance we don't include accretion from prospective new investments nor do we include accretion from repurchases. So again with the repayment of debt it is just evidence of the modeling convention.

Douglas Sipkin, Wachovia.

Thanks. All of my questions have been answered. Thanks.

Roger Smith, Fox-Pitt Kelton.

Yes, can you give us a breakdown of what is the minority AUM versus in the consolidated AUM and then how much of the performance fees would be in that bucket rather than the consolidated bucket?

The minority affiliates are AQR, they're BlueMountain, they're ValueAct, [Viewtel] and some smaller minority investments. But as we -- I don't have a precise number for minority AUM but it is roughly $55 billion -- 50 to $60 billion of minority AUM. As we think of performance fee affiliates AQR and BlueMountain, ValueAct those are all firms that have been performance fee generators and are in that portfolio. And First Quadrant in the majority based affiliates is probably the most significant provider of performance fees in addition to Genesis, Third Avenue, Tweedy Browne, Frontier and some other firms have made contributions in the past.

Okay and then -- perfect. On the performance fee guidance it now looks like it's 14%. I think when the last guidance was there it was closer to 10. Does that percentage really increase strictly because the base fee assumptions are coming down?

It was tentative in 2007 but as we look to 2008 and again the addition of BlueMountain which I can't say enough has had very, very strong performance and ValueAct. As we look to 2008 our guidance is always been right around -- 14% of our 2008 earnings being derived from performance fees. So 2007 to 2008 we certainly feel better about our performance fee opportunity again given diversity of portfolio and just the absolute level of assets under management.

Great and then the last question I want to talk about really is of these corporate sellers that we're really hearing more companies talk about the consolidation in the asset management industry coming from businesses or financial institutions that might look to sell their asset management operations and I know, Sean, you just mentioned that yourself here. As this new group comes as potential affiliates how does AMG kind of compete against the other managers in there or acquirers in there and what is it that you would do or what is AMG's strategy or advantage to making that work and how would it really work with incenting the next generation of manager?

Well there are a subset of these opportunities which are true consolidation transactions where the greatest value and the nature of the business is in a transaction where the business being sold is combined with another business. We have limited opportunities for those kinds of consolidating transactions principally into mutual fund firms and to our managers investment fund complex.

In the main what is most attractive for us and for again a subset of these corporate dispositions are firms where -- or businesses where the subsidiaries have been left often just through benign neglect relatively untouched by their corporate parents i.e. not integrated into the rest of let's say a larger financial services firm. In those cases -- and again it's a subset because in the main most of these businesses are not that attractive.

But for the subset that have really been allowed to run autonomously where the management team through real or phantom equity ownership has a real stake in the business and where they have generated outstanding performance and have a defined culture and a commitment to maintaining that culture and autonomy that is important to their partners, their employees and most importantly their clients those kinds of businesses are a perfect fit for us, not a very good fit for the firms that are consolidating and control oriented. And we have over the years made a number of investments in such situations.

If I look back a few years TimesSquare was an outstanding firm that we acquired in partnership with management out of CIGNA. Looking even further back First Quadrant was a subsidiary of [Talogen], the Xerox insurance business. And obviously it was a gem that had just been left untouched and we were able again to partner with management in buying that business.

So those kinds of opportunities are the ones that we're focused on. It's certainly not every situation that involves corporate sellers disposing of assets but there are some attractive opportunities and we feel like in the current environment especially relative to the opportunities private equity firms or the challenges private equity firms are having we are a very, very attractive alternative for the partners of those businesses.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time. Mr. Healey, please continue with any closing comments.

Thank you again for joining us this morning. As we discussed during the call given the market environment we're very pleased with our results this quarter and confident in the long-term growth prospects of AMG and our affiliates. Thank you.

All right. Thank you ladies and gentlemen. This does conclude the Affiliated Managers Group Q1 2008 results conference call. If you'd like to listen to a replay of today's conference you can do so by dialing 1-800-405-2236 or 303-590-3000 and put the access code 111-12949. (OPERATOR INSTRUCTIONS). (inaudible) would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.