Affiliated Managers Group Inc (AMG) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Affiliated Managers Group quarter two, 2008 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, July 23, 2008. Now, I would like to turn the conference over to Ms. Brett Perryman, Vice President Corporate Communications. Please go ahead, ma'am.

Thank you and thank you all for joining Affiliated Managers Group to discuss our results for the second quarter and first half of 2008, as well as our pending investments in Harding Loevner and Gannett Welsh & Kotler. By now you should have received the press release that we issued this morning; 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 included 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 see no obligation to update any forward-looking statements made during this call. In this call, the investment performance of certain products and the benchmarks are deemed by AMG to be the appropriate benchmarks. AMG will provide on its website a replay of the call and a copy of our announcement of our results for this quarter, as well as a reconciliation of any non-GAAP financial projections to the most directly comparable GAAP financial measure. You can access this information at www.amg.com.

With us on the line to discuss the Company's results for the quarter, as well as our new investments are Sean Healy, President and Chief Executive Officer; Nate Dalton, Executive Vice President and Chief Operating Officer; Darrell Crate, Executive Vice President and Chief Financial Officer; and Jay Horgen, Executive Vice President in charge of new investments. Now I would like to turn the call over to Sean Healy.

Thanks, Brett. Good morning everyone, and thank you for joining. In what has been, and, of course, continues to be a highly volatile period in the equity market environment, AMG produced solid results as we reported cash earnings of $1.43. Year-over-year our cash earnings are down 5.9% compared to the 13% decline in the S&P 500. While we had net outflows of $2.1 billion for the quarter, we were generally pleased with the strong relative investment performance across our affiliate group.

In the current environment, the vast majority of industry flows are obviously going to cash and short duration fixed income products. Past this period of extreme volatility, retail and institutional investors will focus again, on the need to generate returns and move their assets to performance oriented, alpha generating products and over the medium to long term with our boutique affiliated strong investment performance across a broad array of product areas, including domestic growth in value equities, global, international, emerging markets equities, as well as a range of alternative strategies, we are very well positioned for future growth.

Even during periods of market volatility the breadth and diversity of our product offerings provide consistency and stability to our earnings, as was the case in the 2000, to 2003 period when we had stable and growing earnings even as markets declined. Over the past five years, we have continued to broaden the diversity of our products and substantially increased our exposure to the international equity and alternative product categories. International equity and alternative products offer the potential for accelerated growth over time, given strong secular growth trends favoring these areas. Our investment in Harding Loevner obviously expands our participation in international investments to include global growth equities. Pro forma for the Harding Loevner investment, International and emerging markets equity products will generate approximately 35% of our EBITDA.

In addition to the general trends favoring the growth of international equity, the global distribution platform we are building allows us to further leverage our international products. Global and international products, including Harding and Loevner's global growth products have tremendous appeal to investors in Australia, the Middle East and many other markets around the world and we are actively pursuing additional distribution opportunities to expand on our affiliates global marketing capabilities.

Finally, in addition to the organic growth of our existing affiliates and the initiatives we sponsor to enhance that growth, our business strategy also provides an opportunity to generate incremental earnings growth through accretive investments in new affiliates. As you saw in the announcement of our investments in Harding Loevner, and Gannett Welsh & Kotler this morning, we continue to execute on our new investment strategy, even in a volatile market environment. Harding Loevner is a global growth equity manager, specializing in a range of global, international and emerging market equities with approximately $6 billion in assets under management. Harding Loevner had an outstanding year and long-term track record across its international product offerings, all of its major products are top quartile over time and its international equity mutual fund ranks in the top 1% of its Morningstar category for the year-to-date. Given the strength of its performance record and the desirability of its product set we believe the firm has tremendous growth potential, both in the U.S. and abroad.

Gannett Welsh & Kotler is a subsidiary of The Bank of New York Mellon and we will acquire the firm in partnership with management. GWK is a highly regarded investment boutique, specializing in municipal bonds, taxable bonds and equity portfolio management with more than $7 billion in assets under management. The firm is well-known for its highly personalized service and the attention to client needs, as well as its long history of successfully managing fixed-income and equity strategies that balance long-term growth of capital with prudent risk management. GWK is led by an excellent management team and this transaction further broadens our exposure to a range of high quality, strong performing, fixed-income strategies.

Looking ahead, our pipeline of perspective investments continues to be very strong. Our competitive position has never been better and as the universe of potential buyers or competing alternatives has diminished and we continue to benefit from our track record of successful investments and our reputation as the partner of choice for growing boutique firms we are very well positioned to generate meaningful incremental growth in earnings through additional accretive new investments. With that I will turn it to Nate to discuss our affiliate results in more detail.

Thanks, good morning, everyone. As Sean mentioned, there are several themes to focus on this quarter. First, we benefit from the diversity of our business, which adds stability to our short-term results. Second, over the medium to long term, the most important driver of our business is the ongoing strong investment performance generated by our affiliates. And third, while we continue to have good investment performance across the affiliate group we have a significant breadth of high quality products with very good long-term track records in areas that will continue to benefit from secular trends like the national product and alternative product. As you see, we continue to add to these areas.

Breaking our investment performance down and starting with global and international, a standout for us was AQR's flagship Easy project, which beat its benchmark by almost 750 basis points in the quarter and 680 basis points for the year-to-date. In addition, the emerging markets product at Genesis had another strong quarter remaining ahead of the benchmarks year to date by between 350 to 400 basis points.

Turning to alternative products, as you know we have a diverse set of alternative products across a wide range of affiliates. In these very volatile markets we had good performance broadly and I would highlight that AQR had a good quarter across its alternative products and First Quadrant also performed well. In particular, however, credit alternative firm BlueMountain continues to generate outstanding returns across its range of products.

Now moving to the value products both domestic and global, it needs to be thought of in two categories. Our more relative value managers such as Systematic had a very good quarter, with a majority of their strategy outperforming the benchmark by over 300 basis points during the quarter. On the other hand, our deep value managers had a difficult performance quarter relative to benchmarks as did the vast majority of our peers. The managers of Tweedy, Browne and Third Avenue have seen markets like these before and they are finding lots of opportunity to put money to work and building the base for the next period of outperformance. They have reopened all of their products and are telling their clients this is the time to invest.

Now, finally, our growth products had another very strong quarter. Friess continued their outstanding performance across our line-up with their all cap growth Brandywine fund beating its benchmark by 750 basis points during the quarter and their large cap Brandywine Blue Fund beating its benchmark by 660 basis points. In addition to Friess a number of our other growth managers had good quarters, especially Frontier, whose flagship small cap and small midcap products beat their benchmarks by 340 and 540 basis points respectively.

Turning to flows. In our experience, the overall theme is that risk aversion continues across distribution channels. This theme is expressed in money moving to cash and cash equivalent product and the money finance search cycle. Over time, pension plans, businesses and individuals will all need to allocate capital to higher return asset classes, in order to meet their liability streams or fund business activities or meet individual retirement and other needs.

In this environment, with the exception of some modest outflows in quantitative products, which I'll speak about in a minute, our flows were fairly flat which is not bad given the risk aversion in the marketplace. There's significant opportunity building across distribution channels for our performance oriented affiliates to generate growth through net client cash flows, as clients move assets back to higher return asset classes and as our affiliate distribution resources are augmented by the distribution platforms we are building, which I will talk more about in a moment.

Turning to our channel discussion. We had outflows of $1.8 billion for the quarter in the institutional channel. Similar to last quarter our outflows were largely from quantitative products at AQR, Chicago Equity and First Quadrant including low margin, futures based mandates of First Quadrant. With the exception of those, as I said, it was not a bad quarter given the environment. Looking to the pipeline for next quarter we continue to see weaker activity in some areas, large class activities for example, where we're seeing relatively strong pipelines for global and international class, as well as for small cap equities and alternatives.

Turning to the mutual fund channel, we had negative flows of $250 million and outflows at our deep value managers to (inaudible) and Third Avenue and outflows from some sub advisory mandates offset positive flows to growth manager at Friess Associates and value manager Systematic both of which are having success through our manager's retail distribution platform. In fact, if you look just at our fund families, Brandywine, Tweedy Browne, Third Avenue, and Managers, so excluding sub advisory, we had positive flows for the quarter.

Now, turning to our high net worth channel. Flows were negative $80 million for the quarter as outflows from ultra high net worth equity accounts due primarily to the overall risk aversion we described overshadowed the strong quarter in the intermediary space, especially for growth manager, Renaissance. Similar to the mutual fund channel, our manager's distribution platform has been very successful in getting shelf space Renaissance and other affiliates such as value manager Systematic. This increase in shelf space is resulting in positive flows given this very difficult environment.

Now, this was also a quarter of significant progress for our global distribution platform. Our offices in Sydney and now London are selling our affiliate products into the Australia and the Middle Eastern markets, markets that are very receptive to high-quality boutique managers. The size of our affiliates had road shows in Australia so far this year including AQR, BlueMountain and First Quadrant. And a robust pipeline has been build. Now, while our Middle East marketing effort has only been operational for five months we have already held 25 meetings with other wealth funds and other similar investors with and for our affiliate.

Finally, I want to focus everyone on the tremendous leverage that we are building between our new investment pipeline and our growing distribution platforms. Look at just the two investments we announced today. There are huge demand for global growth products and there are relativity few high quality managers with long, successful track records. Harding Loevner is a boutique, global growth equity manager with one of the very best track records for both the short and long term. There are significant opportunities for us to help them distribute their product in the Middle East and Australia, where we are already have teams in place as well as in some of the other places we have assets underway. The team of Harding Loevner also sees the opportunity to distribute their products globally but understand how difficult it will be for them to exploit it on their own. As a result, our global distribution platform was one of the things that attracted them to us.

In a similar way, we also have the opportunity to invest in Gannett Welsh & Kotler. A premier boutique municipal buying manager. There's significant opportunities for to us help them distribute their product through our managers distribution platform, and the opportunity to leverage that platform was one of the things that attracted GWK to us. In each case, our distribution platforms made us a more attractive partner for a prospective affiliate and having them as an affiliate creates significant additional leverage through the platforms we have already built. With that, I will turn it over to Darrell.

Thanks, Nate. Good morning, everyone. As you can see from our results this quarter, our business is positioned to generate stable earnings even during periods of declining markets. We have a diverse range of investment products and our investment structure which provides that our affiliates only operating leverage in their firm contributes an added level of support to our earnings. In addition, as you see in our new investment announcements today, our business model provides an additional source of earnings growth through accretive new investments.

Turning to some modeling items, during the quarter, we earned approximately $0.02 of performance fees, principally at First Quadrant. Despite a challenging market environment, a meaningful amount of First Quadrant's performance fee products are well positioned to make a strong contribution to performance fee revenue at the end of the year. As we mentioned on the last call, First Quadrant, in addition to BlueMountain a credit alternatives firm will likely be the largest contributors to earnings from performances this year, to additional contributions from several other firms including AQR, ValueAct and Covington. As we review the financial results, the ratio of EBITDA contribution to end of period assets under management was 17.2 basis points in the second quarter. This is higher than we forecast, principally because assets declined in the final weeks of the quarter. As we look to the third quarter we expect this ratio to be 16.2 basis points and we expect this ratio to increase in the fourth quarter as we realize the majority of our performance fees.

Given the operating environment we have trimmed holding company expenses from a forecast of $17 million to $15.2 million, and we would expect holding company expenses to remain at this level for the balance of the year, as we realize the benefits of expense reductions and lower compensation accruals at the holding company. Our tax rate was 37% in the quarter, and we expect it to increase to 38% for the remainder of the year as we realize the effect of recent state tax legislation. Our cash tax rate was 22.2% in the second quarter. We forecast a cash tax rate of 21.5% in the third quarter, and 24.8% for the full year.

Intangible related deferred taxes were $9 million for the second quarter and we expect these noncash charges to remain at this level. Amortization for the quarter was $13.5 million, including $4.9 million of amortization from affiliates accounted for using the equity method. The earnings from equity method affiliates are included in the income from equity method investments line on the income statement, all net of amortization. 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 $16.4 million for the second quarter, and we expect our interest expense to remain at this level for the rest of the year.

With regard to our two investments in new affiliates, Harding Loevner and Gannett Welsh & Kotler, these transactions will be financed with cash and borrowings under our bank revolver. We expect that these deals will add approximately $0.06 to our cash earnings in the fourth quarter and $0.35 on a run rate basis. While we are not disclosing the purchase price, the accretion for these deals is consistent with our pricing discipline. As always, these transactions are immediately accretive on both a cash EPS and GAAP EPS basis.

With respect to our financial capacity going forward, our business generates a strong, recurrent cash flow of approximately $275 million a year. In addition, we have a committed bank facility of proximately $1 billion of which a substantial portion will remain undrawn after the closing of our announced investments. We continue to remain opportunistic in seeking additional financing and feel comfortable that we have access to the necessary capital to continue to execute upon the perspective transactions in our pipeline.

As you also saw in the quarter, we entered into a forward equity sale agreement, under which we can elect at any time in the next 12 months to issue common shares of stock, and receive proceeds of up to $200 million. If this were executed today, the average issuance price would be approximately $95. The use of a forward sale agreement provides AMG with capital that's available on demand, and thus enables us to match our funding requirements with a share issuance, while also providing us with the flexibility to cancel the transaction at any time. In total, after these two transactions, we have approximately $1 billion of additional capacity in our balance sheet to make new investments and repurchase our shares.

We also have ample capacity for the continued purchase of affiliate puts which as you know are very accretive to AMG. As you recall, our put obligations from affiliate partners are staged over time with limits on the amounts that can be put to us by any individual or firm. As we look forward to 2009, we expect the impact from puts to the extent there are any to be accretive but not material to our overall results. We are excited by the opportunities to grow our business and will continue to be disciplined about how and when we deploy capital to generate attractive long-term results for our shareholders.

Turning to guidance for 2008. In keeping with our modeling convention, we assume 2% quarterly appreciation in markets in the third quarter and going forward. Using this assumption, and including a partial year accretion from the new investments that we announced today, we expect our cash earnings per share to be in the range of $6.40 to $7. Our guidance also assumes a weighted average share count of approximately 42 million shares for the third quarter. This guidance does not include earnings from additional new investments, and given the volatility in markets, we will give guidance on 2009 earnings on our next call. However, it is clear that we will be generating substantial earnings growth next year, as we realize the full impact of the deals that we closed this year, in addition to continuing to execute on our opportunities in the pipeline.

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 contribution of our affiliates would impact these expectations. And now we would be happy to answer any of your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Dan Fannon with Jefferies. Please go ahead.

Good morning. Thanks for taking my questions.

Good morning, Dan.

Can you let us know what percentage of your assets are currently above their high watermark in terms of performance fees and then also update us what the actual AUM levels are for your performance fee generating managers?

Sure. When we look -- as I said in my comments, we think that -- as we look at our performance fee guidance for the year, we remain comfortable with that contribution to earnings for 2008, and principally, that contribution -- the contributions, performance fees will come from First Quadrant, BlueMountain and several other affiliates that I mentioned. When we look to the performance fee assets, at First Quadrant and others that we contribute materially, we see about 40% of the AUM at its high watermark and as we look at the entire portfolio, it's about $40 billion. And as you recall, those contracts are based on both an absolute basis as well as relative to benchmark, so we feel like the portfolio is in a position to again, be consistent with our guidance this year and we look to next year and feel that that portfolio has a meaningful opportunity for even additional performance fee contribution.

Okay. That's helpful. And then you guys have been bullish on your pipeline for a long time and you announced two deals today. As you talk to your potential partners, is there an urgency amongst them in terms of getting deals done sooner than later, given the potential tax law changes that are out there, with the change in the White House -- potential change, I should say?

That's a good question. I can't say that anybody ever identifies that as a consideration. But I'm sure it's in the back of -- in the back of the minds of some sellers, especially in succession-oriented situations or in our minority investments in alternative firms. I would say there's also a different kind of urgency to the extent that a number of our opportunities in our forward pipeline include the comparable investments in firms that our subsidiaries, the larger diversified financial services companies which are selling to raise capital. So we see in general when -- I would say in general, when sellers pursue transactions with us, once you get past a certain stage, it's in everybody's interest to move quickly and we are certainly experienced and positioned to do so.

Okay. That's helpful. Thank you very much.

Thanks, Dan.

Thank you. Our next question is from the line of William Katz from Buckingham Research.

Good morning.

Good morning, Bill.

A few questions, if I may. The first one, Darrell, on the guidance. I'm doing the fast math. I apologize if my math was not keeping up; you guys were going so quick. If you look at your prior guidance, and the new guidance it's down in the mid point level about 5%, despite the $0.06 of accretion from the deals. I'm just sort of curious. Your assets were only down about 1% sequentially. So I'm just trying to understand why it's such a deep reset on those numbers, particularly with what you just said in terms of the guidance on performance fees being relatively static. Is it just a mix of assets, particularly on the mutual fund side that's driving EBITDA yield in the second half of the year or is there something else I'm missing here?

I think if you thought about guidance and hopefully this shines through in our comments, the only reason that we are bringing guidance down is the market. We feel very good about how the business is positioned and you saw performance at our affiliates was strong relative to benchmark. But the market had a substantial influence. And when we looked at last quarter and looked at what happens to the market, particularly with the declines in the market happening at the end of the second quarter, we revised guidance down solely based on market. I think your point about the mutual fund channel is well taken and is a component, but the material driver of guidance is only market and no other business factor that is unique to AMG.

Okay. That's helpful. The second question I have is just in terms of the deal pricing, it seems like you've got a little more sort of EPS bang for your buck so to speak on these combined transactions. I wonder if you could talk about that in the concept of -- it seems like more supply is coming onto the market and less competition. Do you continue to see that? And then I guess the second part of it is -- and there's an article today in the Wall Street Journal about this, where are you relative to some of these big box financial opportunities and some things going on, non-U.S. like Artemis. And now some of these higher banks that these capital costs potentially needing more capital, if you could talk a little bit about that as well in your comments? Thanks.

Sure. Thanks, Bill. The general answer to your question is that the -- that our competitive position, as I said is stronger than ever. The supply/demand balance coupled with our track record and reputation among the universe of boutique firms is very favorable and we are, as hopefully you can tell, quite optimistic about our continued prospects for new investments. The universe of new investments includes succession-oriented opportunities, like Harding Loevner, especially where firms are positioned in product categories that are continuing to grow and are relatively less affected by the market. As well, we have a number of opportunities to invest in outstanding alternative managers, similar in structure to our investments in AQR, ValueAct and BlueMountain.

And then finally as I noted and without commenting on specific names, we certainly do see opportunities to invest in partnership with the firm's management in businesses that are subsidiaries of larger financial services firms where those parent companies are selling, not because there's anything wrong with the firms, but rather they are looking to raise capital. Our approach is extremely attractive to the managers of boutique firms which -- especially those which anticipate strong organic growth going forward and that's a subset of the universe of these firms that are subsidiaries of the big banks and insurance companies. Included in the opportunity set, though less of a focus for us are opportunities that are more consolidating acquisitions of, for example, mutual fund businesses that we would -- that we would consolidate into managers. Our preference and focus is on the pure boutiques with strong organic growth prospects and outstanding performance.

And I would say that your just initial observation that there's more accretion on the cash basis and a GAAP basis in these transactions than you have seen in the past is certainly true and that's what falls out of Sean's comments being, the competitive environment being what it is, and the opportunity for AMG to be creative in how we are structuring these investments as they come out of large financial services firms. And as you saw our accretion, as we in the past have put $100 million to work, that's tended to generate around $0.10 of accretion. Certainly in this case, that's approaching sort of $0.13 to $0.15 of accretion as we get money put to work, and as we look forward at our pipeline, given the magnitude of a number of transactions that are in it, and the opportunities in this environment, I -- I feel confident that we're entering a period that as deals get done, we will be in a more favorable range for shareholders as we announce these transactions.

Okay. That's terrific perspective. And last question is on sort of where are we on the run on design runoff at First Quadrant and given your commentary around both the relative forms of AQR and the fact that they might be part of the year-end performance fee contribution. Where do you think you are in the cycle of potential attrition from that franchise?

I think First Quadrant and AQR both have good quarters and AQR in particular really across the range, both their long equity products, as well as across their range of alternative products. So I feel very good about that. The runoff point at First Quadrant, again, I think we've worked our way through the vast majority of that. I wouldn't expect to see a lot more.

Okay. Thank you very much.

Thanks, Bill.

Our next question is from Craig Siegenthaler with Credit Suisse.

Just another question following Bill's last question there on the improved net flows. Can you comment on the levels of net flows at your three large quant subs sequentially? Basically I'm wondering how much came from low redemptions on the quant side and what came from stronger flows in the non-quant subs? And also if you could share your outlook for quantitative flows in the second half?

Let me do this in order then. So when you look quarter over quarter, the biggest change by far was reduced outflows. So remember what we talked about last quarter, there were some outflows at very low margins. So reduction was a big, big piece of it. Looking forward, look, could there still be some continuing fallout from the quantitative managers, sure, but these are great franchises. Good enough in performance. Again, this quarter is a perfect example. Good enough performance, great client service, loyal client bases. Again, I don't want to say, hey there will never be any more thought from it. Looking ahead, we feel pretty good about it.

Got it.

As we look at flows broadly, and again, in the last two calls we talked about low margin being a product at First Quadrant. I think as we frame flows and expectations around flows and you heard it in Sean's comments and Nate's comments we are in an environment where folks are not seeking risk in one lonely product. I think what that means for us is that we are in an environment where flows will be generally flat. And the conversation that you will hear from us will not be punctuated by large low margin outflows that sort of change the -- or distract from the optics of the story. I think we are in a flat flow environment until money starts returning. Our products are very well positioned so that we should get more than our fair share of flows when money starts to flow into loan equity. So I would say that the quantitative outflow story is not going to be a material part of how we talk about our earnings going forward.

Got it. And then just on the fee rate then. I don't know if we really saw strong impact from the First Quadrant outflows, to me the first or second quarter fell kind of flat, but I'm wondering about the fourth quarter, when both the GWK and the Harding Loevner deals closed. I'm wondering what the fee rate probably does there because it sounds like the emerging markets business is a higher fee rate. So should we anticipate either in the fourth quarter or the first quarter an improved fee rate on your core business?

Yes. We'll address all of that specifically as we give 2009 guidance. What you did hear is the EBITDA contribution to assets under management at 16.2. I think you are just right that that moves up into the 20s as we recognize performance fees in the fourth quarter. And then as we move into next year, given these deals, Harding Loevner will certainly move that margin up. Gannett Welsh and Kotler will move that down a little bit as that muni business is a lower margin business. But that said, we will see an improving margin trend as these deals are integrated into our financials.

Great. Thanks for taking my questions.

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

Thank you. Good morning, everyone.

Good morning, Rob.

I'm curious, I have seen talk of or at least mention a little bit more today than I seem to recall in past conference calls about the recycling of the various put agreements. Is there any change or alteration in your thoughts about recycling some of those, the managers of different affiliates and maybe thinking that over time we may actually see ownership in some affiliates creep up some?

There's no change in how we think about the put obligations. I did include it in some of our early remarks. Not only because we have received some questions as we have been out with investors just to understand as AMG continues to progress, what do those puts mean and what is the impact? And wanted to just be very clear that we don't expect there to be significant puts but we are meaningfully recycling equity at firms among many partners on an ongoing basis. That's part of what we do. And that those puts when they do come back are materially accretive to us. But we do not see -- as I said, a substantial amount of puts coming back to us any time soon.

Okay. In the press release on GWK, I don't think you mentioned that this is going to be your kind of traditional 60/40 ownership split. Is it going to be that? Or is it really something different? Is it smaller proportion or larger?

Yes, I think if you -- if you think about it, it looks like a normal deal in many respects. You go back a couple of years ago to like Times Square or something where we are buying something that is really owned by another business. We are working through that transition and how we describe it. The other thing I'd say, when you say let's focus on some differences -- and I tried to get at this in the remarks, I think there's also more opportunity. If you look at their books, a significant portion of it is concentrated in a couple of distribution relationships and so there's more opportunity here for us to work with them with managers and, again, I was trying to get to my remarks as we have been building managers this is -- this is now a bigger part of that going in conversation than it has been historically. So there are actually some additional leverage points in here.

Okay. Maybe if it's possible to just get a tiny bit of more color on the two acquisitions. I know in the press release, you mentioned that Harding has a very strong asset growth, last five or six years. Any color around what their business trends have been like more recently, kind of similar to yours, in terms of kind of flattish or how should we think of that?

I think I will ask Jay Horgen who is head of new investments for us and sitting in on the call to give a little more color on the two investments.

Thanks, Sean. With respect to Harding, the flow trend has been strong through the last several years and even year-to-date. They do have positive flows through the first six months this year. I think the other important indicators, their performance, each of their three largest products, their international funds, the international strategy, their emerging strategy, emerging market strategy, and their global growth strategy, each of those strategies has leading performance both near term and long term. So we do expect to see additional positive flows in the future.

And GWK?

And on GWK, again, as Nate had said in his remarks, very strong performance in the fixed-income segment, particularly the muni bonds area for its clients, primarily high net worth clients. So in this segment we see continued trends, market trends towards municipal bonds, fixed income management, risk management, as it relates to these high net worth individuals. We do see additional positive growth there, setting aside the opportunities that we have on the distribution side to continue to introduce them to new relationships and new distribution channels.

And as we mentioned when we talk about deal accretion, and run rate accretion of $0.35 for these deals, the accretion that we are including in our run rate calculation is really just based on the deal but what you are certainly hearing in both instances with the strength of Harding Loevner's products being global growth equity and its opportunity to leverage off of our global distribution platform, in the case of GWK, where, again we are providing diversity to the franchise with a strong fixed income manager, but also able to distribute that through managers. Both of those opportunities are not included in our accretion, and something that we are looking forward to realizing in our earnings in 2009. And you heard Nate talk about the strength of our distribution effort. As we look to next year, as we heard in the past, we talked about $3 billion in flows, but as we look at next year, I would say, $5 million or more is not an inappropriate level of flows to come from that growing platform, where we have seen lots of success to date, and we'll see much more success in the future.

All right. Great. Thanks a lot.

Thank you. Our next question comes from the line of Michael Kim with Sadler O'Neil. Please go ahead.

Hey, guys, good morning.

Good morning.

Hey, good morning, Michael.

First, just a follow-up with the guidance discussion. It doesn't sound like there was any kind of material change in terms of your performance fee assumptions for this year. Should I think about that in terms of the absolute dollar amount or as it relates to kind of the percentage of total earnings, which I think was something in the neighborhood of 14% last quarter?

That's right. I think we look to performance fees on an amount absolute dollar amount to be the same. We see the opportunity and, again, as I said, the way we looked at performance fees, the portfolio where it was relative to high watermarks and where it was in the year, on the last conference call, it is essentially similar to how we look at the opportunity today. There's a meaningful amount of that portfolio that is at its high watermark, there are firms that will be contributors that are well positioned. They have demonstrated the ability to generate attractive results during this volatile time and given that there's six months less we have a strong level of optimism that our conservative guidance can be achieved.

Okay. And then a couple of questions on the deal front. First, specifically as it relates to the GW&K deal, it seems like this is a bit different than some of your prior deals just because there's a material fixed income component here. Should we read anything into that in terms of potential future acquisitions?

I would say no. GWK is an attractive boutique manager with a broad product set, including products which are diversifying for us, and also synergistic with our distribution platform. A great team. An opportunity to buy the firm and publish it with management out of the parent Company, which as Darrell noted, we have done before, TimesSquare, out of [Signet] is the most recent but several others in the past. As I indicated, other opportunities like that in prospects.

Okay. And then I know you talked a bit about this earlier, but it sounds like, your scale, both in terms of distribution and kind of on the operations side was really a big selling point in terms of the two deals announced today. Do you think your value proposition is really higher today, just given the ongoing market volatility and the rising importance of scale more generally, and is this really something that could meaningfully step up deals going forward?

I think it is -- it's a good question. It certainly is an increasingly important element in the partnership opportunity that AMG brings. Fundamentally it's our reputation and track record as a supportive partner in this environment. We are very well positioned, obviously with ample capacity to fund new investments and more experienced than any other entity in executing investments. So I think we have tremendous opportunities and prospects and the strength and increasing attractiveness, especially for international managers and alternative managers of our distribution efforts is -- is just a -- I won't say icing on the cake, but it is -- it's incremental to what we already offer. I do think that as we think about the new investments in areas like global growth equities not that we price them into the transactions but the opportunity for incremental growth, on top of strong organic growth of these products that the firms are going to experience anyway, is obviously another plus for us.

Okay. And then just finally, can you give me the end of period share count and let us know if there were any buybacks during the quarter?

Yes, we expect for next quarter 42 million shares to be the right number. And we did purchase a couple hundred thousand shares during the quarter. Again, as we look at how we are going to use the capital, we are very excited about our pipeline. We are hesitant to repurchase shares because we -- the outstanding opportunities is getting capital deployed in the many opportunities that are in the pipeline. That said, there were points during the last quarter, where it was so compelling to repurchase shares that we -- we did buy back a couple hundred thousand.

Okay. That's helpful. Thanks.

Thank you. Our next question comes from the line of [Douglas Sipkin] with AMG. Please go ahead. Actually, he just dequeued. So we have the next question from the line of Marc Irizarry with Goldman Sachs. Please go ahead.

Oh, great. Thanks.

Good morning, Marc.

Just to beat the dead horse a little bit further here on the performance fees. So what is the sort of amount implied in the guidance here, Darrell? I know it's a little nitpicky but if you look at the range of your guidance, it looks like you are taking the top end down a bit more here. If you can just maybe speak about the setting, resetting the range of expectations.

As we move through the quarters we tend to narrow the range. What we are talking about with regard to performance fee contribution, the sort of one-time recognition in the fourth quarter is approximately $0.90. As you have seen through the year have consistently been generating little bits of performance fee. Which of course indicate a larger opportunity in the fourth quarter. When we -- as we decided to narrow the guidance again, we have a $40 billion portfolio performance fee. That can generate and be a very substantial contributor to earnings, as we look at the year and how it shapes up, we give conservative performance fee guidance and that guidance has been met in prior years. And so as we look to the remainder of the year, and, again, tend to be more conservative in how we want to communicate with investors, we think holding the -- the $0.90 guidance is appropriate and accordingly, as you look to narrowing the range, the $6.40 to $7 feels right to us.

Okay. And is any -- is any percentage of that $0.90 contractually due to you in any way, i.e. your confidence level on achieving a portion of that is very high?

Yes, of course. And as we look to the end of the year, given that we are halfway through the year, and seeing what the unaccrued level of performance fees are, we are comfortable that we are further along in unimproved performance fees and performance fees that are guaranteed relative to where we are in the calendar. And that's certainly a source of why we have confidence in the guidance that we're giving for the fourth quarter realization.

Then just in terms of your assumptions behind the lower range, you -- you said you are still sticking with the 2% market expectations in the back half, yet your holding Company expenses are coming down and you will have $0.06 of accretion here from -- from the new acquisitions. Can you just put a little bit more context around taking the range down relative to what would appear to be some helpful items?

Yes. I mean, I don't know how else to say it other than we look at our guidance and we came up with a guidance range it was driven by market and market performance. So as we narrowed the range, that's about narrowing the range and centering on what we believe the earnings power to be of the business in 2008.

Okay. And then with that out of the way, Sean, a question for you. You mentioned the competition might be lessening a little bit for some deals out there. Can you just talk about what's standing in the way potentially of an accelerated pace of deal making, not just for you guys but more broadly? Is it seller's expectations or what is standing in the way of an accelerated pace of deals in the back half?

Time. We announced two this morning. So we think that's -- that's an acceleration. I won't speak to other buyers. I know that our opportunity set and our competitive position is stronger than ever. And we have been bullish on our pipeline throughout the year and obviously, to some extent the transactions are even in great environments are inherently lumpy but we -- we can't be more optimistic than we are given that until the transactions are signed and executed, you can't announce them. The pipeline, as I said earlier includes a full range of succession-oriented transactions. The alternative universe we are -- it is, of course, broader than it's ever been and we are uniquely well positioned to make investments in this minority investment structure that we've used with our alternative investments. And if you think about the buyer universe, just in that segment, obviously there's been an enormous decrease in competition from other buyers or other alternatives meaning the public markets.

Opportunities outside the U.S. are increasingly important for us, both for the -- the diversity of client base, which non-U.S. firms inevitably have, as well as for the product set that includes more international and global products where we see strong growth and synergies with our international distribution. The reference to -- there's a story in the Journal today about some banks that might be selling their money management units. We certainly see all of that, but we also see other opportunities that are more unique and so our view is that notwithstanding, extreme market volatility, we are very very well positioned.

Great. Thanks.

Thank you. Our next question comes from the line of Douglas Sipkin with AMG. Please go ahead.

Yes, thank you. I will try again. Good morning, guys.

That would be Douglas Sipkin with Wachovia.

Yes. You guys just hire me? Just a couple quick questions. First off, I know you guys have highlighted Harding and their strong track record. How big is the mutual fund product? I think it's an international equity and I would imagine obviously there's not too many capacity constraints, just looking for the AUM amount on the mutual fund?

The AUM mutual fund AUM is approximately 50%.

Okay.

There is another, maybe 7% that's in incentivized products. I guess if you take those two together, it's a little over 50%.

Okay. Great. You guys mentioned you have had about 25 meetings with sovereign wealth funds I guess in your UK office. Any color on any mandate wins or is that just really just a several meeting process for that stuff to play out? Because it does seem like you are pretty well positioned there and some of your boutique managers have an opportunity to capitalize on. I am just curious if you've been awarded anything yet from sovereign wealth funds?

There's one but not yet funded mandate. Now, admittedly that was a conversation that had started, again just to back up. This office has been opened for five months and in the main it's been introducing first AMG to these folks and then introducing specific AMG affiliates and their products. That is sort of a couple meeting process. But we have had one but not yet funded mandate and a little bit of background. The affiliate had already had a little bit of the conversation but was unable to sort of proceed or get the mandate, because they wanted to be able to service it themselves. Again, boutique manager they said (inaudible) sort of challenging. And so because we wouldn't sign this initiative they embarked on our conversation and so there's one but I'm not sure it's fully ours if you will.

Okay. Great. And then just a question for Darrell. You mentioned, I believe that you still had about $1 billion of capacity for transactions. I just want to be clear, that assumes that incremental $200 million on a potential stock offering, because I would imagine--?

It actually doesn't. And the $1 billion is essentially the leverage that our BBB minus status allows us. As I said, we're very comfortable in finding that $1 billion, and as you can imagine, given the robustness of the pipeline, that's why we are putting some of these provisions in place to have additional equity available at an attractive price should we need that in order to continue to execute on these transactions.

So--.

So the ability to produce $1.2 billion of consideration for deals is well within our reach.

So just so I'm clear, and I could be wrong. I remember last quarter, you guys said you had about $1 billion in capacity for transactions. I'm thinking through that you have two transactions here, which are going to close, I would imagine within the next quarter. So is that incremental, I guess just cash flow that filled that void?

Yes, that's right. A cash flow that's been generated and the way we -- yes.

Okay. So just so I am clear, $1.2 billion basically capacity all in right now?

Correct.

Okay. And then just finally, just in terms of philosophy, I think it is actually a pretty powerful trend what's going on with the banks and if I'm citing that Wall Street Journal article, it makes absolute sense. How is your philosophy going to be -- and you might have answered this already so I apologize, but a lot of these are sort of just like steady Eddie, offshoot mutual funds businesses which maybe not have that much room for growth. But maybe could be accretive for you guys given the pricing, but sort of after that, what happens? How are you guys thinking about those potential deals? Do they make sense to you even if they are sort of just like accretive day one, but not too much growth thereafter, or if you think that it maximizes shareholder value, even in the short term you would consider them?

I commented briefly earlier, but happy to expand. We certainly do look at those kinds of opportunities. We think of them in the main in a different way than we would investments in stand alone boutiques with strong organic growth prospects and outstanding investment performance. The typical banks, mutual fund subsidiary, I think you characterized the dynamics of those businesses well and the typical opportunity is one that is consolidating, that involves consolidating the business into our Managers Investment Group mutual fund platform. And we have a relatively small way made several acquisitions of the just that sort. So we probably would be sensitive about how much capital we would put to use in those kinds of opportunities relative to the other kinds of opportunities that I described where we see larger organic growth prospects but we certainly look at those investments and are very disciplined in that and how we think about them but we will execute them if we think it's a good fit with our business.

Okay. Great. Thanks.

Thank you. Our final question comes from the line of Roger Smith, FPK. Please go ahead.

Oh, great. Thanks a lot. I just want to talk about the flow expectation here. And really when I know you said it's a weak environment. What kind of organic growth rates should we be thinking about in 2009, relative to the traditional distribution channels that the managers use as well as the new distribution efforts that AMG is putting together? How much can we think on from either one of those channels?

Obviously this comes with the open caveat that Sean spoke about before, which is in this environment. You have to make a big assumption about what goes on with the environment. But assuming that people returned allocating assets to higher returning products, I think you should see us return our affiliate growth rates at least where they were before, right? So that's -- I don't know the exact -- so we're generating a couple percent from organic growth flows themselves, and I think the -- then the manager's platform, which, Darrel spoke about before is we had said $3 billion for this year and looking to next year, that $5 billion number that he used feels like a good number. And then we should see these -- these global distribution platforms, platforms coming to mind. Some of this is a question of timing obviously. That's what we are doing in Australia, what we're doing in the Middle East, beginning to leverage what we have done in London, into opening up more European distribution, and we're looking at some stuff in Asia as well. So part of this is talking about the incremental flow growth from AMG distribution platforms. The managers want someone that we have the best visibility to. These others it is partly a question of the market environment and then obviously a question of how fast we ramp things. So I hope that's helpful.

Thanks very much.

Thank you. I would now like to turn this call back to management for any closing remarks.

Thank you. In the midst of a challenging equity market environment, it's often difficult to look beyond the current volatility and appreciate the opportunities for growth in the medium to long term. Our affiliates remain focused on adhering to their investment disciplines, maintaining their outstanding performance records and in addition as we've discussed we continue to focus on identifying opportunities to enhance the growth of our affiliates businesses and to ensure that we participate broadly in the growth areas of the industry. And finally to underscore, even in difficult markets, we have a unique opportunity to continue to generate incremental earnings growth through additional investments in outstanding boutique firms. Thank you all very much for joining us.

Thank you, ladies and gentlemen. This concludes the Affiliated Managers Group quarter two, 2008 results conference. We thank you for your participation and you may now disconnect. Have a great day.