Affiliated Managers Group Inc (AMG) 2008 Q3 法說會逐字稿

Good morning, Ladies and Gentlemen. Thank you for standing by. Welcome to the Affiliated Managers Group Q3 2008 earnings results conference call. During today's presentation all parties will be in a listen own mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS). This Conference Call is being recorded today, Wednesday, October 22, 2008. I would now like to turn the conference over to Ms. Brett Perryman, VP of Corporate Communications. Please go ahead, ma'am.

Thank you and thank you for joining Affiliated Managers Group to discuss our results for the third quarter of 2008. By now you should have received the Press Release 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, including but not limited those referenced in the Company's form 10-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward looking statements made during this call. In this call the investment performance of certain products will be discussed and benchmarks are deemed by AMG to be the appropriate benchmarks. AMG will provide on its website a replay of the call and copy of our announcement for our results for this quarter, as well as reconciliation of any non-GAAP financial projections to the most directly come per an 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 are Sean Healey, President and Chief Executive Officer; Nate Dalton, Executive Vice President in charge of Affiliated Development, Darrell Crate, Executive Vice President and Chief Financial Officer. Now I'd like to turn the call over to Sean.

Thanks, Brett. Good morning everyone and thank you for joining. In the midst of an extraordinarily difficult market environment, AMG reported cash earnings per share of $1.31 for the third quarter. This was a decrease of 16% year-over-year, against declines of 22% in the S & P 500 and 30% in the EFA. Out flows were approximately $5.9 billion although I would note that half of our Top 10 affiliates have positive flows and the relative investment performance was generally strong across our Affiliated Group.

Let me begin by discussing how AMG is positioned to weather this challenging period in the market. Our affiliates are among the leaders and respective investment disciplines with excellent long term performance records, outstanding reputations and superior client service. They have highly focused investment processes and operating cultures and strong profitable businesses and as partners and equity owners in their firms, they have a very strong long term committment to their firms, which is is especially important in times like these.

Looking across our Affiliated Group, we have a very broad diversity in terms of products, investment styles and distribution channels by both geography and client type. Our affiliates offer products in all major domestic and international equity categories through firms such as Friess Associates, Tweedy Browne, Third Avenue and Genesis and we have a wide array of alternative products including the quantitative and credit alternative strategies managed by First Quadrant and Blue Mountain, which continue to perform well even in declining equity markets. Our diversity has provided balance to our growth over the years and in a difficult market environment is an important source of stability to our results.

Our affiliates have a proven ability to out perform in varying market cycles and our largest affiliates in particular have generated strong relative performance throughout the year. Among our international products, Genesis has significantly out performed its emerging markets benchmark for the year-to-date, while deep value managers Tweedy Browne and Third Avenue have excellent relative performance in their international fund products over the same period. In the domestic Growth Equities area, while they had a tough third quarter its Brandywine funds remain in the industries most highly regarded growth equity products and we continue to see strong performance at Time Square and Frontier.

Our alternative products have also generated strong returns this year particularly those managed by First Quadrant, Blue Mountain and Value Act. With their track records of performance and superior client service our affiliates have built strong and stable businesses. Our largest affiliates which represent approximately 80% of our EBITDA have grown their assets under Management at an average compound annual rate of 15%, since the time of our investments through the end of the third quarter. Their businesses continue to be highly profitable and as a result of their material equity ownership, our affiliates are true partners in their businesses and take a long term view to managing their continued growth and success.

Finally as you know, in the AMG investment structure, our affiliates routinely operate leverage in their firms which benefits our affiliate partners when margins expand with the growth of their firms, but in periods of declining markets our structure protects AMG from margin depression when revenues increase. As we look forward in addition to the strength of our affiliates and prospects for future growth the cash flow our business generates which is is supported by a strong, excuse me. Sorry.

Stepping back, obviously none of us know when markets are going to recover. But we do know that over time they will and when that happens, retail and institutional investors will focus again on the need to generate returns and reallocate to actively manage alpha generating products. Given the sharp declines in the markets, institutional allocations to equities are well below target benchmarks. Anecdotally we're already beginning to see some endowments come back into equities. Given our affiliates strong long term performance records we are in an excellent position to generate growth through net client cash flows as markets stabilize.

Focusing for a moment on the alternative investment area, it's been a very difficult year for many hedge fund firms and you hear talk of large number of firms going out of business, but our view is that strong, well managed firms will continue to be successful and that alternative firms like our affiliates, institutionalized businesses, that employ transparent, well articulated investment processes across diversified product sets for largely institutional client base are well positioned as this segment evolves.

As we look forward in addition to the strength of our affiliates and their prospects for continued grow, the cash flow our business generates which is supported by a strong and stable capital base provides an additional source of earnings growth. Other than long term convertible securities, we have no net debt, we're highly liquid, our business generates more than $200 million annually and we have $800 million of available capacity in a committed bank facility on very favorable terms. We remain focused on enhancing shareholder value by opportunistically repurchasing our stock and making accretive investments in additional affiliates. Over time, our prospects for enhancing our earnings through new affiliate investments are excellent, and as you've heard us say in previous calls, we have a strong pipeline and have made substantial progress with several very attractive potential investments; however given the extreme volatility in the markets, we've put these transactions on hold until markets stabilize.

Looking ahead the transaction environment in general is increasingly favorable for us, as we see significantly fewer competitors and lower valuation levels. In addition, demographic trends are likely to lead to accelerated transaction activity as boutique firms and their founders seek a succession planning solution. We have established reputations with a large number of high quality firms and given our reputation the partner of choice for outstanding boutique firms we're in a strong position to execute on a range of accretive transactions including both succession oriented investments as well as potential transactions involving corporate owners of boutique firms.

With that I'll turn to Nate for a more detailed discussion of our affiliates.

Thanks, Sean. Good morning everyone. As Sean noted, during this very difficult period, we remain confident in how we position the business with the quality and diversity of our affiliates and stability of our structure as two key strengths at AMG. That said, the declining equity markets obviously create challenges and I'll talk through how out individual managers are performing in this environment in a moment. I'll also discuss ways in which we are working with our affiliate partners to insure we and they are allocating resources to most significant opportunities and there are both strategic and tactical elements for that.

Now, turning to our results for the quarter. While the discursion in results increased across affiliates as it did across active Management in general as a group our affiliates generated good relative performance this quarter. Starting with global products, we had a very good relative quarter across most of our products including all of the products managed by Tweedy Browne, our largest affiliate in terms of EBITDA contribution. To break Tweedy's performance down, I'll use the results of retail product. The flagship, Tweedy Browne Global Value, fund ranked in the top 2% in the quarter in its Morningstar category and top decile for the year-to-date and one year period, while Tweedy's newest fund, Worldwide High Dividend Yield Value Fund out performed the MSCI World by 735 basis points in the third quarter and by 611 year-to-date, placing the fund in the top decile of its Morningstar category for both time periods.

Staying with global and international. Almost all of the product the Canadian affiliates including both Canadian Equity and Global International Equity had good relative performance in the quarter. And finally Third Avenue's international product is having a good year on a relative basis. I wanted to quickly congratulate the funds manager, Amit Wadhwaney who was recently named a front runner for Morningstar's International Stock manager of the year.

In terms of emerging markets, Genesis had another good relative quarter and out performed the benchmark in most of the firms product and in fact are beating benchmarks for year-to-date one, three, and five year period.

Now, as many of you know, we have had a focus on building out our global equity capabilities and we believe it's a very strong relative performance across the group sets a great foundation to grow assets across distribution channels when investors come back to the equity markets. As we have discussed on prior calls, we specifically see significant opportunities to leverage these products through our global distribution platform.

Next, turning to the alternative product category where our affiliates offer a very diverse set of products. Performance across the group is mixed with strong absolute and relative returns across most product of First Quadrant and Blue Mountain, with some outperforming than other product vendors performing. Now while I talk about flows by channel in a minute, I do want to expand on a few points Sean just made about the alternative space. Most alternative assets under Management from institutional clients, although we have fund to funds and high networks. That significant institution component may make our experience in the data you're seeing for hedge funds generally, which is why we thought it was worth sharing. In the third quarter and beginning of the fourth quarter, we are seeing a balance of flows in and out among institutional clients in alternative products. We've gone out and spoken with a number of institutional pension consultants and now admittedly its just in front of the third quarter review meeting, but most are them are advising their clients to maintain alternative allocation programs. We do see elevated out flows from fund to fund clients and also the more retail end of net worth, but the ultra high net worth clients also seem to be holding.

Now, moving to our domestic product starting on the value side. Consistent with our global performance, Tweedy Browne posted strong relative performance in the domestic portfolios as well. The Tweedy Browne value fund beat its benchmark by 997 basis points in the third quarter and that fund also ranked in the top 1% for the quarter and top decile for year-to-date and one year period. Some of our other domestic value products at Third Avenue and Systematic for example, had more challenging quarters but the long term track records for each of them remain competitive.

Finally, turning to our growth product, there's another perfect example of the benefit of diversity within a product category, as Time Square and Frontier both had very strong relative quarters across their product line ups. All of Time Square's products out performed benchmark by more than 250 basis points in the third quarter and have very strong relative performance in relevant time periods. Frontier mid cap growth strategy posted good results in the quarter, outperforming its benchmark by over 800 basis points and like Time Square is outperforming across all relevant time periods. In addition, Frontier's research strategies also posted strong relative returns during quarter, outperforming their benchmarks by more than 225 basis points. Now on the other hand, Friess associates had its first tough quarter in some time across its products, but they are off to a very good start this quarter.

Now before I discuss flows by channel, I want to spend one minute of how we continue to work with our affiliates to ensure resources are allocated to areas that have the best long term opportunities. We, and our affiliates, continue to evaluate these opportunities and are making ongoing decisions to redeploy assets. You'll see some of this activity in our asset flow numbers, reflecting business lines and specific mandates having been exited. As I said at the outset, these evaluations have both strategic and tactical component. On an earlier call, I described a consistent long term framework applying to evaluate the returns associated with each affiliate and specific business activities. In a volatile environment like the one we find ourselves in, this discipline is tremendous help.

Now, turning to flows. The theme of risk aversion continued in the quarter with investors pulling funds away from return oriented investments and new search activity having been very slow. Starting with the institutional channel, we had out flows of $4.7 billion for the quarter. Similar to last quarter, our net out flows were largely from our quantitative product at First Quadrant, AQR, and Chicago Equity partner. Turning to the Mutual Fund channel, we had negative flows of $951 million during the quarter, which were mainly from deep value managers Tweedy Browne and Third Avenue, while the Friess associates Brandywine funds continued to have positive flows to managers distribution platform. Now turning to high net worth channel, flows were negative $338 million for the quarter. This was a combination of out flows due to the risk aversion described above as well as turmoil in a number of the broker dealer platforms we distribute affiliate products through. There is certainly going to be changes as the distribution platforms merge and change and a significant number of the underlying Financial Advisors move as well. Now, however, the team at our platform manager investment group is doing an excellent job through this very challenging period.

Finally during these difficult times in the Asset Management industry, our affiliates are doing what they do best by remaining disciplined and applying their proven investment processes, providing high quality client service and managing their firms to generate long term growth. We have a long history of working alongside our affiliate partners during good times and bad and we remain confident in their prospects going forward. With that I'll turn it over to Joe.

Thank you, Nate. Good morning everyone. As Sean mentioned AMG is well positioned to generate stable earnings relative to markets even during challenging periods. Our affiliates are among the industries leading asset managers and their ability to generate out performance across the diverse range of investment products provides consistency to our results. Our investment structure, which leaves the operating leverage with affiliates is another important source of stability to our earnings especially in the current environment. Our business is supported by a strong capital structure and we have substantial financial capacity to continue to create long term value for our shareholders. As you saw in the release, we reported cash earnings per share of $1.31 for the third quarter. GAAP earnings per share were $0.69. Performance fees earned principally at First Quadrant contributed approximately $0.09 to cash earnings.

Moving to additional financial details, the ratio of EBITDA contribution to end of period assets under Management was 18.8 basis points in the third quarter. This was higher than we had forecast principally because of the market declines in the final weeks of the quarter, as well as the contribution from performance fees. As we look to the fourth quarter, we expect this ratio to increase to 23 basis points as the majority of our performance fee arrangements bill at the end of the year. Holding Company expenses were $14.8 million for the quarter. We continue to seek operational efficiencies across our business and reducing holding Company expenses including lower compensation accruals. As we've indicated in the past, incentive compensation accruals are highly variable and are primarily based upon cash earnings per share results. We expect holding Company expenses to decrease to $13.5 million in the fourth quarter.

Our cash tax rate for the third quarter was 17.2% and our GAAP tax rate was 48.8%. The GAAP tax rate included one-time reevaluation of our deferred tax liabilities as a result of the new Massachusetts tax legislation. This had a one-time effect of reducing cash earnings per share by $0.02 in the quarter. In the fourth quarter, the GAAP tax rate will be 38% and the cash tax rate is forecast to be 15.5%. Intangible related deferred taxes were $14 million for the third quarter including this one-time reevaluation. With the closing of Gannett, Welsh, and Kotler, we expect deferred tax the to be approximately $10 million in the fourth quarter. 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 $3 million, with $1.7 million of that amount attributable to affiliate depreciation. We expect depreciation to increase to $3.2 million in the fourth quarter with the completion of GWK with $2 million attributable to affiliate depreciation. Interest expense was $17.8 million for the third quarter. We expect our interest expense to increase to $19.8 million in the fourth quarter reflecting full quarter effect of the interest costs associated with our recently issued convertible security. Pausing here for a moment, as you saw during the quarter we issued $460 million of convertible securities and used the proceeds to pay down our revolving Credit Facility. The coupon is 3.95%, but after-tax benefits, these securities have a cash coupon of only 50 basis points. The conversion price for these securities is $126.

With respect to our capital structure and financial capacity going forward, as Sean mentioned we have substantial capital available. We currently have $190 million of holding Company cash and $770 million available under our committed bank facility. In addition, through Banc of America, we have sold $120 million of equity at an average price of $97 through a forward sale agreement. Under the terms of that agreement, we can draw on these funds at any time. Finally, as you know, our business generates strong, recurring free cash flow of approximately $200 million a year. We believe our capital structure is well positioned for the recent challenges in the market. Our leverage is low with senior bank out standing that are more than offset by available cash. While in this environment we believe that a lower target leverage ratio is appropriate, we are confident that we are well positioned to execute on our new investment opportunities in addition to repurchasing our stock.

Now let's talk about guidance for the remainder of the year. The most significant variables are what will happen with the markets broadly and what will happen with our performance fee generating products. While no one can predict what will happen in the markets in the near term for modeling purposes, we will assume that markets remain flat from here. With respect to performance fees, we expect modest performance fee contributions from a number of affiliates in the quarter; however there are two firms, First Quadrant and Blue Mountain that are particularly well positioned and have strong prospects for earning material performance fees in the fourth quarter. As I mentioned, First Quadrant contributed approximately $0.09 to earnings in the third quarter from performance fees as they continue to perform well in this environment. That said, the extreme volatility in the markets makes the magnitude of total performance fee contribution for the coming quarter inherently difficult to predict, even for products that are not correlated to the equity markets. Accordingly, our range of expectations for fourth quarter earnings is wider than in past years, largely due to the variability and performance fees. With these assumptions, we expect fourth quarter cash earnings per share to be within a range of $1.05 to $1.75. Our guidance assumes a weighted average share count of approximately 41 million shares in the fourth quarter. Normally in this quarter we would give 2009 earnings guidance; however given the extraordinary volatility in the equity markets, it's virtually impossible to establish a baseline from which to build a useful forecast and we will instead look to provide guidance on the fourth quarter call when as we can all hope markets have stabilized. Now we'll be happy to answer any questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Your first question comes from the line of William Katz with Buckingham Research. Please go ahead.

Okay, thank you, and good morning everyone.

Good morning, Bill.

Number of questions, if I may. Just staying on the discussion on intangibles for a moment, just given the decline in the markets to date, sort of wondering how we should think about any kind of potential impairment and then sort of taking that to a second level, how much further can markets go down before some of these revenue sharing arrangements start to get a little pressured?

Well, this is Darrell. I'll address the impairment and then Nate can talk a little bit about the revenue share agreements and their structure. From an impairment perspective we just completed all of our impairment tests at the end of the third quarter, so as things stand today, we are not thinking about any impairment charges or looking at our balance sheet and imagining that we would have to alter any of the carrying values in any way. And with regard to revenue shares?

Sure. So obviously, we're working closely with all of our affiliates. The good news in this is the vast majority of them including all of the large affiliates are fine and I think the only point that I'd also make relative to that is we are also working with them as we said earlier, we are also working with them and where are the opportunities in this, not just where are the challenges and so might that mean we work with them to pursue things, sure, absolutely.

And I would just say from a revenue share perspective, again, I can't emphasize enough that it's one of the components that's a real strength of our business model. As you look at markets declined in the third quarter and again as they've also declined in this quarter, as revenues have gone down our expenses have gone down roughly in line with those declines and I think that that of course as we talked for the last 10 years about how the stability of our structure provides an opportunity for stability in earnings relative to markets, and those all those statements hold in this environment.

And I would make one more general comment in response to your question, Bill. As you can imagine, we always but especially in the midst of the very difficult market environment, are very careful and prudent in how we manage the business. We look at sensitivity cases that are down sharply from even where we are today and we feel comfortable about very comfortable about how the business is positioned, even with further declines. I think the other point which I mentioned in my prepared remarks that's important to bear in mind is that for the largest affiliates which contribute the vast majority of our earnings, importantly, they enjoyed tremendous growth over the year since our investment which in some cases is over a decade and in others is as short as a few years, so an average of even through the end of September, and average still of 15% compound annual growth in revenues and because of the way our structure works, a much larger increase in the available cash flow for affiliate partners so that cushion that was built up over the years is available to provide stability and support for their businesses even given the level of market decline.

That's helpful. Just sort of coming to the discussion of capital management, I guess so to listen to what you said about selling forward some of your stock north of $125 or so, where the stock is now and certainly appreciate earnings have compressed because of what's happening in the marketplace. But can you help me understand why not just get more aggressive on buyback and leave deals to the side? It would seem like just based on your growth potential of your existing base that there would be some nice return from a buyback perspective that might at these levels be comparable to the economics of a deal? Just help me understand the balancing act there?

Well I would say in the midst of this extreme volatility, our view as I said is that a more prudent cautious approach is appropriate for the time being but we have a long track record of using our cash appropriately to increase shareholder value and that includes repurchasing our stock which we've done in a substantial way over time as well as making new investments, sitting here today we have and looking forward, we have - - I guess a silver lines of the very difficult environment is that we have very attractive opportunity to repurchase our stock and we also have a number of very attractive new investment opportunities which are available. So what you see in the immediate aftermath of these steep declines I think is not what you should expect as we look forward to the rest of this quarter and next year.

And just one last question. So you've mentioned before that you haven't really seen any change yet in the institutional consultant appetite for alternatives. Just sort of wondering when you have the conversation with that channel and what is any more of the more recent thinking maybe going now that we're deeper into October?

Yeah. Those conversations you were referencing were just in the last week or two, and so I think that's still what we think is obviously there's lots of volatility and as we said that's right ahead of them going out and having their third quarter review meetings with clients, but that's where they were all indicating they were headed.

Okay, thank you, guys.

Thank you. Our next question comes from the line of Matthew Heinz with Jefferies & Company.

Good morning. Thank you for taking my questions. Has your appetite for acquiring alternative managers changed at all given the current issues in the hedge fund world and also given your previously stated desire to kind of increase capital allocations to this space?

I think the answer is that obviously, in this environment whether you're talking about traditional or alternative firms, it's more important than ever to be highly selective in choosing the firms that you want to partner with. I think the competitive dynamics, again both for traditional and alternative firms, the competitive dynamics in the merger market have tilted very much in the favor of buyers and we think we're especially well positioned. And then with respect to the alternative area, generally, Nate and I each commented in our earlier remarks and while there is tremendous turmoil and I'm sure there will be some hedge funds that go out of business, it is absolutely the case and happily our affiliates are among them that strong well managed alternative firms will continue to do well going forward and so we're going to make sure that they're the kind of firms that I described, institutionally oriented, in their client base, diversity of products and institutionalized well managed business, but there is still a very good opportunity set of firms like that that looking forward, we would like to partner with.

Okay, thank you. That's very helpful, and then secondly, has the makeup of your pipeline or the size of your pipeline changed over the last three months given what's occurred in the market and I guess has any candidates fallen out due to valuation or performance fees or I'm sorry, performance issues?

I would say the pipeline is very different than it's ever been before. These are extraordinary times. As I've mentioned, we had several opportunities that were very far along with outstanding firms. They haven't gone away. We and they have agreed in the midst of this tremendous volatility that it's appropriate to suspend our discussions for the moment. There are other firms that we were in earlier stages of discussions with and a broad array of firms that we have relationships with which over time, not probably in the immediate forward time but over time, for demographic reasons as I mentioned earlier, will need to find some succession solution and we think we're very very well positioned for those, and while markets are volatile, the business realities and the human realities of folks getting near a retirement age is inevitable and there's still a large number of traditional and alternative firms which represent very attractive targets for us.

Okay, thank you very much.

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

Thank you, guys, good morning.

Good morning.

Just in terms of performance fees, just so I'm understanding this correctly, there's still a component that is guaranteed into next year; correct? And then maybe taking that a step further, is it an absolute dollar amount that is guaranteed or is it based on kind of a percentage of related assets?

Yeah. No, there is a component of performance fees that are guaranteed. Of course, the way it's not an absolute dollar. It's not like a bank loan, as firms have asset decline that guarantee also unit declines as well, but as we look out to next year, we certainly will have some performance fees under the guarantee. As we look past it at this year, we've already reported $0.21 of performance fees and maybe just to give a little bit more color around the guidance that we're giving for next quarter at the low end of a range of $1.05, that assumes almost no incremental performance fees, which I don't think is realistic but again, is prudent given the sort of volatility that we see in the market. The upper end of the range is the $1.75 is also equally realistic but as we look into the market over this last quarter, even with the $0.09 of performance fees that we recorded from First Quadrant in the third quarter, the volatility was significant and again, we will only know if those performance fees are on December 31st, but the opportunity that we have continues to be significant as we look at our portfolio of performance fee assets and we look at the high watermarks in those assets, it's roughly similar to the way it's been for each of the last quarters that we've been on these calls. Thankfully, it's a diverse portfolio and many of those products are not correlated with the equity markets and that has certainly been to our benefit and I think will continue to be to our benefit in the years to come, but sadly, or unfortunately, all of the volatility makes it very difficult to predict week to week, month to month, quarter to quarter exactly when we will realize those fees.

Okay, that's helpful and then just the total AUM that has performance fee structures at this point.

It is just about $35 billion.

Okay. And then kind of moving on to the pipeline, I understand from your perspective the outlook continues to build longer term but as you said with kind of activity on hold here across the industry, is there an incremental focus on kind of enhancing growth at existing affiliates by either leveraging your scale or perhaps opening up new distribution channels?

The answer is not trying to be glib, we're doing both and we have been doing both, and I think the important thing to understand about our pipeline as I just mentioned is that while I feel very good about long term prospects, it is the case that we have very substantial and well progressed transactions that are in our pipeline which are on hold. It doesn't mean that, and I would be very surprised if they all went away. It just means that they're on hold until markets reach some level of stability.

Okay, so no kind of incremental focus on, focusing on the existing affiliate base and then kind of driving new distribution channels perhaps?

Yeah. This is Nate. There absolutely are. As Sean said we're doing both, so given all of the things going on in the marketplace we have a platform that has lots of option value if you will throughout it and we're absolutely working with our affiliates to figure out the best way to take advantage of the specific opportunities, so both on the product development side, using existing resources, product development side bringing additional resources, distribution side using the platforms we've already built as well as looking at other things, so absolutely.

Okay, and then just finally, can you let me know what the end of period share count was and if there was any buybacks during the quarter? I know you kind of spoke to that a bit earlier.

Yeah, we bought back several 100,000 shares and end of period share count is around 41 million. Okay, that's helpful. Thanks.

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

Thanks. Good morning everyone.

Good morning.

Just a couple quick questions. I mean, just to clarify, Darrell, when you gave your guidance , you're basically assuming down 20% quarter to date and then flat from

That is correct.

Okay. And then I guess you still have one outstanding I believe acquisition left to close. Is there any reason we should expect that that, the closing of that is going to get extended or there may be some issues around that given the market volatility?

Yes. The transaction you're referring to is Harding Loevner. They are in the midst of their client approval process which is normal, ordinary for transactions. As they near the conclusion of that process, obviously, in cooperation, coordination with the Harding Loevner folks, we're going to look at the effects of the market declines on their business and we would make whatever adjustments are appropriate to the investment structure terms at that point.

And when do you expect that client approval? Are you really looking at this as a Q1 potential close?

You know, I would hope that we can still do it this year.

Okay. And just to follow-up to Bill's earlier question, understanding that you did your intangible testing at the end of September, that obviously continue pretty big drawdowns in the market since then, is it quarterly you do the intangible testing, annually? How do you feel kind of where we are today?

Yeah, maybe more than you want to know but our most scrutinized intangible test happens at the end of the third quarter every year and that's one that's very comprehensive and thankfully is we're in the fourth quarter and there have been significant declines, we are having just gone through the exercise, it's very easy for us to refresh our sensibilities about how those numbers look, and I would also say if we were to do that test today, we would be in the same position as we were at the end of the third quarter.

All right, great. That was it. Thank you very much.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse. Please go ahead.

Hi, good morning.

Good morning, Craig.

I just had some questions on the deal math. If these two asset, GWK and Harding Loevner close in the fourth quarter, I'm wondering how we should think about capital on the balance sheet being redeployed and thinking of AUM popping up in the Mutual Fund, institutional, private wealth distribution channels and then also which one of these has gone above the line and which one goes inequity investment?

The answer is that GQK has already closed and Harding Loevner is a traditional investment.

Which will go above the line in consolidated as well and from an asset perspective they would be roughly split between Mutual Fund and institutional.

Wasn't one going in the private wealth bucket?

Maybe a portion of GWK.

Some retail distribution, separate accounts broker dealer retail distribution as well.

Okay, and that will not go in the private wealth bucket then?

Some of it will.

I think it will be split among them.

And the GWK numbers is that in the Q3 results or will it show up in the fourth quarter results?

it will just be in the fourth quarter results.

Got it. And just sounds like from your last comment and last question, the Harding Loevner deal, that price is not fixed yet. Can that still change?

The price is fixed in the contract but obviously the contract provides for adjustments in certain circumstances and as I said when we get to the appropriate point, we'll look at where we are and talk to the Harding folks about appropriate adjustments.

Got it. And then just my final question, if I think of compensation and really SG&A as a percentage of revenue, it held up very very well this quarter. In further market weakness can I think about those ratios holding up as well or is there any trigger or anything which allow some sort of margin benefit to your subsidiaries?

No. I think you can say that it roughly holds and that's what I was trying to communicate in my earlier comments in that the absence of operating leverage in our model certainly provides stability in these environments.

Okay. And actually I'm sorry. I just had one more question. In this environment, I think you communicated on prior calls there's a level of ownership interest from your subsidiaries that can get put back to AMG every year. What's the maximum that level could be at any given year in terms of capital needed and also how are the conversations going with the boutiques?

Starting with the conversations, they've been sort of very much normal course which is not surprising for a couple reasons, that one these are sort of long term conversations, these are people putting back small portions of their equity over time as they move through their careers at these businesses so these are not in terms of how the conversation is going these are all sort of in the normal course in the context of long term conversations so there's nothing we haven't seen any sort of dramatic changes in that or anything.

And I think from capital allocation perspective as we look to next year, it's again normal course and we look to $50 million to $70 million is what seems to be a reasonable amount to allocate.

I think it's important to understand and appreciate how it's hard to get visibility to this from the outside but the demographics among our affiliate partners and the tenure of our relationships with almost all of our largest affiliates is such that the amount of equity that can be put back in any given period is quite limited. It really is only when folks have reached the designated optional retirement date which is years to come for the vast bulk of our affiliates that the puts are more than a small percentage for any individual partner or even any individual firm.

Great. Thanks a lot for taking my questions.

Thanks, Craig.

Thank you. Our next question comes from the line of Marc Irizarry with Goldman Sachs. Please go ahead.

Great. Sean, you mentioned the word demographics as it relates to the owners of your affiliates, but those same demographics I think are having implications for traditional Asset Management and obviously alternatives may be on the midst of a bit of a change. When we do get back into the deal making or better deal making environment, do you think that the business has changed in terms of really the ability to look longer term at each of the secular opportunities or has something really changed in terms of the longer term opportunities for you to do deals?

I think there's no doubt that in many ways, especially in some of the distribution channels there have been significant changes. I think in general, we're well positioned to address any such changes in the environment. If your comment about demographics is oriented toward the people are nearing retirement, investors that is are nearing retirement and there will be fewer allocations through equity, I think there may be that kind of effect but folks ability to forecast on either side in my experience has been pretty limited in its predictability. I think given the level of declines and both for individuals and especially for institutions looking forward, I see, we see, allocations to equity being as I mentioned substantially below benchmark levels and going forward, past this immediate period of extreme volatility, we see more demand than ever for focused performance oriented boutique firms that can generate alpha consistently over time for their clients. So it's the same kind of opportunity set that we focused on for years. I think looking ahead we're going to have fewer competitors out there going after these firms and we'll have an opportunity and will no doubt be continue to be extremely selective in the firms that we choose to partner with.

And you're seeing out flows in high net worth. How have distribution changes to get product demands on high net worth folks how has that sort of changed and how is the business position going forward in terms of potential consolidation among distributors to high net worth?

Yup. Well look, I think obviously, this past quarter and into October, there's been sort of extreme change and a little bit, what's it going to look like on the other side, we have views and we're positioning -- beginning to position business to take advantage of it but you look at our position in those sort of scale retail markets, we're really helping provide product which is menus to package, right? That sort of fundamental thing hasn't changed and I think picking up on what Sean was just saying, he said we can bring very high quality performance oriented product into that market and get the leverage that marketplace still brings, in addition to the core growth of our affiliates which again you have to remember that's the way we're building our platform. That can be a powerful additional source of growth for our affiliates and we are seeing that we started to see that really over the last couple years.

Great. And then just in terms of First Quadrant, if you look at some of the performance obviously has been good. I guess there's one question in terms of how many different products are comprising the performance fees that you're generating and then also why aren't the flows or what are you seeing in terms of flows at First Quadrant as performances have sort of improved on a relative basis? It looks like you're certainly seeing something on the quad side. Maybe you can just reflect on flows of First Quadrant.

Sure. The products that are performing well, it is across a range of products. The thing you have to be careful on on the flow is they have a very diverse business and we've talked about some of the different product categories that really range from sort of product with traditional hedge fund like 1 in 22 kinds of products up to large institutional mandates with low basis point fee product structures and so when we talk about as $1 in one is not equal to $1 in the other. and so we are seeing some, you're seeing some rotation within there, within that product mix towards higher fee and higher margin product, but that again when we talk about out flows at the asset level that I think is probably not exactly the right way to look at this. It's a growing strength of their business and performance fee profile.

So how many products have the performance fees are you generating how many products have generated those fees? It just one or two out of --

I think as we look to the fourth quarter there are five products that we look to that provide opportunity for performance fee, and again, there's, these are products that have performed well not only over this period but over the medium term and again, our only question and level of any question about performance fee generation is all driven by the volatility of these products and as they Bill four days a year.

The only nuance I'd put on what Joe just said is when you use that you're really talking about strategies which might be several institutional accounts plus a fund kind of thing. Each of those strategies and those may have modest, not to get too in the weeds but they may have modestly different billing cycles or benchmarks or fee structures so some of those where we build, you saw some in the third quarter, some of those same products may not build until the fourth quarter so again, it's not, it's hard to simplify the same way you'd think like a five fund business. It's not really like that.

That's exactly right.

And then in terms of Times Square, obviously the performance has been strong there as well but are there some products that are closed there and is the intention to sort of open some of those products up?

There are some products that are closed. They have, let me just back up a second. They have very good performance across the product line up. They have some of the small end of it that are closed, and again, I think as we've said before about other products we can't really get out in front of them in the way they talk about what is appropriate to open and all of that, so really nothing to report there.

Okay, great. Thanks.

Thank you. Our next question comes from the line of DJ Nieman with William Blair. Please go ahead.

Good morning guys.

Good morning DJ.

A couple of quick follow-ups to other questions. Darrell, can you be more specific on the percent of alternative strategies that are at or above high watermark? I think in the past you said roughly 30%. Is that roughly the number you're talking about still?

From an AUM perspective, it's right in that 30% to 40% range.

Okay, and then looking more towards '09 performance fees can you provide some sort of measure?

It really varies. We have very small set of products that were levered that are meaningful double digits below their high watermark, but again, that's a very small percentage of assets under Management. And then there's a set of products that you find from 200- 600 basis points below the high watermark and again, given the volatility, that doesn't feel that far away from a high watermark and as we look over this last quarter, there are many products that if I was on this call, when I was on this call, came to mind as being below high watermark and I had very low expectation for performance fee generation which today, stand above their high watermark, so I don't mean to provide information and for it to seem more confusing. But I look ahead to 2009 and some of what I've said is that the portfolio while may be 10% or 12% smaller than when we sat here a year ago, when you look at high watermarks and you look at products we look at that opportunity and it feels roughly similar to and has many similar characteristics to how we looked at it a year ago.

Okay so the $35 billion total book is still, you would say in striking distance of producing performance fees in '09 ?

No. There's a portion of it as I mentioned that is not but again , as I said close to 40% of that of those assets are at high watermark and they again dependent upon performance can contribute very materially to our revenues and our

Okay. Just real quickly, can you provide some detail on the crystallization periods for performance fees? It seems like we're getting performance fees here and there that are unexpected. Can you say what percentage of accounts generate performance fees on Q1-Q2?

There are so many clients and as Nate puts it that many of the institutional clients have a tailored contract on how those arrangements are constructed. Some bill quarterly. Some bill annually, and it is, there's no way to give information that would be helpful in forecasting how those performance will materialize. We look at the overall portfolio and look at the opportunity and again, can make some assessments over 12 month period what we think is a reasonable amount. As I said we have certainly, we've billed already at $0.21 of those performance fees occur but again as we look to and as I've said in my prepared comments, as we get to the fourth quarter, the majority of those arrangements bill at the end of the year.

Okay. Turning to one other topic, there was some talk earlier this summer about Third Avenue raising distressed fund at some point in the next year. Do you think that's still on the table and would that have the same economic to AMG as the rest of their business?

Third Avenue is definitely still pursuing and working on that fund. They haven't sort of gone to market and said that here is the terms and the structure and that nor sort of finalized all of the details but they are still working on it.

And we would expect to share as partners obviously the different nature of fund vehicles can involve different forms of compensation, shares of carry, etc. All of that still being worked out but we would be in the same position as the Third Avenue partners.

Okay, great. Thanks.

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

Hi there.

Good morning.

Still here. Just very quickly on the capital I'm just wondering if in terms of the capital if you wanted to in some way if the market is stabilizing you wanted to take advantage and make a much larger acquisition than usual, do you think you could find the capital to do that and secondly just in terms of the capital you named that you have like the committed bank facility, if the market were to fall further, do you see would that in any way impede your access to the capital, to the facility?

I'll start with respect to the potential for a large investment. I would say in the immediate environment the prospects for a large investment are low. Looking forward, we are going to even in a period of relative market stability, we will continue to be prudent in how we manage our capital and I think the availability of capital is, it will likely improve over time, but our orientation is much more in the kinds of investments that we have made historically both in traditional and alternative firms. I would say that we are certainly as always opportunistic in how we look at transaction opportunities but the bar is set very high in terms of return levels that we're seeking and we will continue to be as I said quite prudent in how we think about managing our capital.

The other thing from an availability perspective, I hear of course there is less capital available in the world and it is challenging to raise capital. That said in this last quarter we added an additional $55 million of commitments to our bank facility. That full bank facility is available to us today and I think we've always been opportunistic as with deals and finding good deals that create long term value for shareholders over time. We've been opportunistic in finding capital so that we make sure that all of the good work that we've done over these last 15 years to position the business are in a place where we can execute on those opportunities in a way that's good for shareholders.

Okay. And just a couple other follow-ups. Nate, I think you mentioned that you'd evaluated products that the affiliates found some that sounded like they are phased out. Can you size those for us in terms of the AUM or fee time and give a sense of timing?

Hard to give a sense of timing. It's something that we're obviously still working through with them so also hard to be very specific. I think the place to focus will be clearly very small, sort of financial impact to us and the affiliates. That doesn't necessarily speak directly to the asset level, speaks maybe more to the fee level in the margins in some cases, but the important thing and sort of a piece of the question is it's not just hey, here are things we should stop doing. It's much more, there are some real significant opportunities out there right now. Let's make sure we're focused on the right thing, right? And so at the same time, you'll see some of those kind office changes coming through, you also see us pursuing new opportunities and that can be as I said, that can be in the product development using existing resources, product development using new resources, there's lots of opportunity to do new things there, as well as pursuing things in the distribution areas. There's some real significant opportunities associated with some of the turmoil here.

I'm just trying to gauge whether we're going to see like a 5% drop in AUM because you've discontinued some product. It sounds like you're expecting it to net out?

Well again, from a financial standpoint, we're not just expecting to net out. We're expecting to grow it.

Right.

Absolutely.

Okay. And then just finally follow-up on the high watermarks. Are there any high watermarks which reset after a year or did they all carry forward indefinitely?

We have some that reset, we have some that again let me just go through. We have some performance fee products where the performance fee calculation resets, absolutely but most of them are sort of the more typical sort of carry forward but we do have some resets.

Okay. Great. Thanks.

Thank you. Our next question is a follow-up from the line of William Katz of Buckingham Research. Please go ahead.

Great thanks. Actually two follow-ups. Number one is just on the Harding Loevner transaction, are the economics still the same in terms of the incremental accretion being sort of review of the guidance there? And then number two, if the quarter were to end today since your guidance now assumes a flat market, what's the most likely performance fee outcome?

Okay.

I'll bet Darrell is not going to answer that second question because we said what we'll say about the range. And with respect to the accretion from Harding Loevner, I think I can't give you an answer on that either. Obviously, it will depend on where they are when we sit down and talk to them and obviously what kind of adjustments we make to the terms and structure of the deal.

And again, with performance fees, again, we've articulated a range for next quarter. Clearly if we were to close it right now, we would be somewhere in that range but again, the volatility has been significant and I'd again wouldn't want to give specific information that is inappropriate to extrapolate.

And Bill, I think you know, we've over time given and tried to always give guidance even on performance fees which has a level of precision. The current environment is unbelievably volatile and these products which as Darrell noted are not correlated with the equity markets are not themselves, given overall market effects enormously volatile, and it is because of that volatility that the range is so wide and we certainly are hoping and our affiliates are hoping and expecting a very good result and that's really all we can say at this point.

Okay, thank you.

Sure.

Thank you. Management there are no further questions. I'll turn it back to you for closing comments.

Thank you. Despite continued market volatility in the fourth quarter, AMG's well positioned to weather this extraordinarily difficult time. Our affiliates are some of the most highly regarded boutique managers with established investment discipline and long term track records of out performance. We focus on building a diverse business that supported by a strong capital structure and we remain committed to executing our business strategy in order to continue to create long term value for our shareholders. Thank you very much.

Thank you. Ladies and Gentlemen, that will conclude today's teleconference. If you'd like to listen to a replay of today's call please dial 303-590-3000 or 1-800-405-2236 and enter access code of 11120725 followed by pound. We thank you again for your participation .