Affiliated Managers Group Inc (AMG) 2008 Q4 法說會逐字稿

Welcome to the Affiliated Managers Group fourth quarter 2008 conference call. All participants are in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

I'll turn the conference over to Ms. Brett Perryman.

Thank you for joining Affiliated Managers Group to discuss our results for the fourth quarter and full year 2008.

By now you should have received the press release we issued this morning. However, if anyone needs a copy, contact us at 617-747-3300 and we'll fax you one immediately following the call.

In this conference call certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors including but not limited to those referenced in the Company's Form 10-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward-looking statements made during this call.

In this call the investment performance of certain products will be discussed and the benchmarks are deemed by AMG to be the appropriate benchmarks. AMG will provide on its website a replay of the call and copy of announcement of the results and reconciliation of non-GAAP financial projections and most directly comparable GAAP financial measure, www AMG.com.

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

I'd like to turn it over to Sean Healey.

Good morning everyone and thank you for joining.

In an extremely difficult market environment AMG reported cash earnings per share of $1.30 for the fourth quarter and $5.49 for the full year. A decline of 17% year-over-year as compared to a 37% decline in the S&P 500.

As noted in the release we have several one time items in this quarter, including a gain and the repurchase of trust preferred securities and voluntary surrender of management stock options, the result of these two items was a net increase of $0.06 to our cash EPS for the fourth quarter. We also took $150 million non-cash charge reflecting the acceleration of amortization expense for investments we made in two alternative managers in late 2007. This non-cash amortization expense did not affect cash earnings or our deferred tax benefits but did result in a decrease and reported GAAP earnings. Darrell will discuss these items in more detail in just a moment.

As we all know, these are extraordinarily challenging times for Asset Management Firms. Our results obviously reflect the difficult environment but given that AMG has a product mix that is heavily weighted toward equities our business model and our affiliates are weathering the storm in the markets well and we're positioned to generate strong growth once markets stabilize. Our business model which is based on revenue share structure and retained equity by our affiliates is designed to provide relative stability to our earnings and periods of declining assets since we're not exposed to our affiliates operating leverage, while also ensuring our affiliate partners have a strong incentive to manage their business.

Our 10 largest affiliates which contribute 85% of EBITDA have been impacted by market declines but virtually all have generated considerable growth since our investment and even after the declines that we've experienced still have substantial excess operating cushion and of course they continue to be significant equity owners in their businesses. Although our business model enhances the consistency of our results over time our long term growth is based on the outstanding quality and diversity of our affiliates.

Our boutique affiliates are among the industry leaders and their respective investment disciplines with excellent long term performance records, outstanding reputations and superior client service. The quality of our affiliates was borne out by their results last year. For example Tweedy Browne our largest affiliate in terms of EBITDA contribution generated strong relative performance in each of the firms highly regarded deep value products. And in recognition of their outstanding performance Tweedy was nominated by Morningstar for both domestic and stock manager of the year awards. Third Avenue, also had outstanding relative performance in its international products and it, too, was nominated for international stock manager of the year.

In addition emerging markets equity market Genesis had strong relative performance in its largest products for the year and has an outstanding long term record.

Finally, Growth Managers, Friess Associates, TimesSquare Capital Management and Frontier Capital Management generated excellent relative performance and produced positive net client cash flows for the year. The diversity of our affiliates' products is itself a source of earnings growth and stability, while we do not have a material fixed income business a number of affiliates managed product strategies uncorrelated with equity markets.

As Nate will describe in more detail even with the volatility of the fourth quarter several affiliates, including First Quadrant and Blue Mountain generated meaningful performance fees in 2008. Over the medium to long term our affiliates' strong relative performance is the best indicator of forward client flows and we believe our affiliates are positioned when investors reallocate to return based assets, as they inevitably well.

In addition to benefiting from reallocation back to equities, many of our affiliates have an opportunity to gain market share as investors reallocate among equity managers and seek managers who perform well in 2008 and have superior long-term track records. As Nate will discuss further while we had net outflows in the fourth quarter on a relative basis our results were encouraging and the trends are positive as we look forward this year.

Now turning to our new investments area. As you saw in an earlier press release, we restructured our investment in Harding Loevner in light of extreme volatility of the fourth quarter. The essential elements of the investment remain consistent with our original agreement and provides that the management team to retain a substantial equity stake in the firm, revised agreement contemplates the completion of the transaction in the second half of this year, and the purchase price will be based on the firm's then current revenues and earnings.

Looking ahead, the transaction environment is increasingly favorable to us as we see far fewer competitors and lower valuation levels. There continues to be a large number of very attractive boutique firms basing demographically-driven succession issues and the range of transaction alternatives for these firms has diminished substantially. We also believe that there will be an increasing number of transaction opportunities involving corporate sellers of asset management firms. During our conversations with perspective affiliates, now more than ever, these firms are experiencing an experienced partner that offers an investment approach which provides incentives for long-term growth while at the same time maintaining the firm's unique culture.

Over the past 15 years AMG has invested in some of the industry's leading boutique firms and we have built a strong reputation as a helpful and supportive partner to our affiliates.

Finally, in addition to the strength of our affiliates and their prospects for continued growth, the cash flow our business generates, which is supported by a strong and stable capital base, provides an additional source of earnings growth. We're confident in our ability over time to generate incremental returns by deploying our cash flow and stock repurchases at accretive investments in additional affiliates.

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

Thanks Sean, good morning everyone.

As we all know the asset management industry is experiencing an extremely challenging period in the fourth quarter it was one of the worst on record for all risk oriented asset. The fact we're performing reasonably well is a testament to the structure of our business especially to the performance of our affiliates and relationships they have with their clients as well as intermediaries who serve them.

As a group, our affiliates generate good relative investment performance with most outperforming bench marks in the quarter and for the full year. While this outperformance is good the key point to focus on is the significant relative outperformance of many of the largest most financially important products of AMG. As Sean noted, a perfect case in point is at Tweedy Browne, the largest contributor to AMG. Everyone of their products outperformed their benchmarks last year ranging from few hundred basis points to 1300 basis points. This outperformance was recognized with Tweedy being selected by Morningstar for both international manager of the year as well as domestic manager of the year.

The good relative performance of our affiliates and especially our largest and most profitable affiliates positions us to capture significant flows and earnings growth when clients allocate to return oriented asset classes. While as we know there is significant disruption today, pension plans, individuals and foundations have liability and spending needs based on generating returns on assets and without increasing allocations to return oriented asset classes and managers they can not meet these needs.

Now I'll provide details on the performance of our products starting with global equities. While MSCI World and EAFE were down about 40% for the year and 20% in the quarter, and MSCI Merging Markets were markets down even more. We had a good relative year versus benchmarks and peers across most of our global and international equity products, including those managed by Tweedy Browne, Third Avenue and Genesis. In fact each of Third Avenue and Tweedy Browne was nominated for Morningstar's stock manager of the year.

Tweedy global value funds beat by the hedge benchmark by 50 basis points in the quarter and 160 basis points for the year and unhedged benchmark by 190 in the quarter and 475 for the year, placing the 12th percentile in Morningstars category for the quarter and top decile for the year. Tweedy's world wide high dividend fund beat its benchmarked by 750 basis points and 1,000 basis points for the year and ranks in the top decile for both the quarter and year in the Morningstar category.

Third Avenue's international value fund continued to significantly outperform, beating its benchmark by 200 basis points for the quarter and 800 for the year, it also ranked in the top decile in it's Morningstar category. Now, while we generally quote Morningstar rankings it is worth noting that each of Tweedy Browne's worldwide high dividend fund and Third Avenue's international value fund ranked first in the respective categories for the year. On the emerging market side, the flagship emerging markets product managed by Genesis continued to build on outstanding long term track record, outperforming it's benchmark by 450 basis points for the year and placed in the 16 percentile among emerging market managers.

Moving toward domestic products and staring with value equity. Tweedy Browne's performance remains strong here as well, with the value fund outperforming S&P 500, and 640 basis points in the quarter and by 1265 basis points in the year ranking in the top decile in it's Morningstar Category. Third Avenue and Systematic had a more challenging quarter in some of their products, but they both had excellent long term track record.

Within our growth category, all of Time Square strategies outperformed their benchmark by over 385 basis in the fourth quarter and 570 basis points for the year. Frontier Strategies had a good quarter in general and mid-cap growth strategy and research strategies in particular performed well. Also, for Friess Associates performance rebounded strongly from the previous quarter and the firm posted solid relative performance. For example, Brandywine Blue, their large cap fund which caries a 4-star rating by Morningstar, outperformed it's benchmark by 590 basis points, earning top decile spot.

Finally, with respect to alternative products we're in a relatively good position as we have a number of products that are not correlated to either the equity markets or the credit markets. In 2008 uncorrelated products managed by several affiliates generated solid performance resulting in performance fees. Including Global Macro, Global TIA and Tactical Currency Strategies managed by First Quadrant and many of Blue Mountain's alternative strategies.

It may be worth stepping back and reviewing the composition of our alternatives business. As most of you know we have a very broad and diverse set of alternative products across half of our affiliates. The vast majority of our affiliates that manage alternative products are asset management firms with significant based fee only business lines. In fact, much of our alternative assets are not in hedge funds, but rather are in institutional separate accounts with tailored fee benchmarks. This insulates those assets from the spillover effects across clients.

That said , we do have two affiliates, Blue Mountain and Value Act which are primarily hedge fund firms. The management teams have done extraordinary job managing an in an unbelievably challenging environment. And while the traditional hedge fund client base is under pressure, we strongly believe in the management team and investment processes of these firms and they will successfully navigate changes occurring in the hedge fund business.

Now, moving from performance to flows. We all know how bad industry flows were basically outside of cash and cash equivalents. Notwithstanding extreme risk across client segments we had reasonable flows with sequential improvement against a significantly deteriorating industry back drop.

In the institutional channel we had outflows of $739 million for the quarter. Similar to last quarter our outflows from the channel were significantly impacted by alternative products. The other blunt theme in the fourth quarter was a decline in the awarding and funding of new institutional mandates. We are seeing some signs that this may be turning and that some of the mandates that have been won but not yet funded seem to be moving to funding. Fundamentally institutional clients and intermediaries are sorting through their needs and asset allocation models going forward.

We expect allocations to swing back to return oriented asset classes and ultimately contributions to pick up. Going to the mutual fund channel, we had negative flows of $1.7 billion during the quarter. The flows stored in the mutual funds channel was first, overall risk aversion in the move from equities to cash and money market fund, and second, disruption in the intermediary business as an unprecedented level of organizational change exacerbated the impact of the market volatility on the platform and financial advisors. A positive in this environment is that our managers distribution business has strong relationships with each of the major platforms who should be well positioned as they combine and evolve.

Also on the positive side, notwithstanding the environment we are seeing some good success from our sub advisory marketing efforts, most notably in the quarter we helped our affiliate Frontier win a large mandate from vanguard. Now, before we leave the mutual fund flows conversation, I want to provide a little color on the first quarter so far. While it is still in very early days, sales seem to be picking up a little. We're seeing a clear improvement in net flows.

Now, turning to our high net worth channel. Flows of negative $816 million for the quarter and the drivers were here were the same as in the mutual fund channel, namely risk aversion and the ongoing changes in the broker dealer platform. I'd also like to update you on progress of our global distribution efforts. during the quarter we hired a talented senior professional to head up our sales and marketing efforts in Europe, while it is still early in the process our meetings with consultants are going very well. One theme we continue to hear is the value of AMG's single point of contact model and it's ability to represent multiple affiliate brands through this structure.

As we have discussed in previous quarters, we continue to work with our affiliates to efficiently allocate resources to areas that are the best long term opportunities. This means cutting costs and rationalizing product lines in some areas, while in others we and our affiliates see growth opportunities in new product development and specific distribution channels. On earlier calls I described the consistent long term framework we are applying to evaluate returns with each affiliate and specific business activities. In the volatile environment we find ourselves in, having discipline and framework in place is a tremendous help.

Now, while I work with affiliates on the expense side is important I want to reiterate a point which is our business model amortization expense way revenue share structure and retained equity combined with significant growth of our largest affiliates, insulates us from the vast majority of the margin compression that asset management firms are experiencing.

Finally, It goes without saying this is a challenging time for AMG and our affiliate partners, however our ability to work together through this tough period speaks to the strength of our business model and the quality of our affiliates as true owners and partners in their firms our affiliates are focussed on proven investment disciplines and the management teams at each firms continue to run their businesses with a long term view. As leaders in their disciplines with strong relative performance, we are confident that our affiliates will build on their long term track records and as we've said capture flows and market share as investors move to return oriented assets.

With that I'll turn it over to

Thanks Nate, good morning everyone.

As Sean mentioned our business strategy provides stability to our earnings, particularly in challenging marketing environments such as the one we experienced in 2008. As you saw in the release, we reported cash earnings per share of $1.30 for the fourth quarter and $5.49 for the full-year 2008. On a GAAP basis, we reported a per share loss of $1.76 for the quarter, and earnings of $0.57 for the year, as a result of an accelerated amortization charge we booked in the fourth quarter related to recent equity method investments which I will discuss more in a moment. Our affiliates have excellent long term track records and they're strong relative performance across a diverse range of products provides consistent sey to our results and positions us well to when flows reallocate to return oriented products.

In addition, as a result of our participation in non-correlated investment strategies, including quantitative global tactical asset allocation and credit alternatives, performance fees made a material contribution to our earnings adding approximately $0.30 to the fourth quarter. These performance fees were principally generated by First Quadrant and Blue Mountain with additional contributions from AQR and several others. Our investment structure which provides affiliate managers with real equity ownership and long term growth while leaving the operating leverage at our affiliates, which in turn, enhances AMG's earning stability in volatile markets. Throughout the year our EBITDA margins stayed fairly consistent at about 30% notwithstanding major declines in the equity markets.

Our capital structure is strong and stable as a result the recurring free cash flow from our business provides additional financial capacity to continue to generate meaningful long term value for our shareholders over time. As I mentioned, we have three noteworthy one-time items this quarter, which I will discuss before turning to some modeling points. The first is a $43 million gain from the repurchase of approximately $70 million of junior convertible trust preferred securities. At $0.35 on the dollar, these were an attractive use for our cash.

This gain was offset by a second one-time event which was a non-cash charge of $39 million, from the acceleration of expenses related to management's voluntary forfeiture of stock options. This forfeiture was not accompanied by any new option grants and will have the effect of reducing our expected option-related charges by approximately $3 million per quarter going forward. Most of these items are included in cash earnings and had the net effect of increasing earnings by $0.06 in the quarter.

Lastly, we accelerated $150 million of amortization related to our recent equity method of affiliate investments principally Value Act. As you know, this is a non-cash book expense that does not impact our tax benefits or our cash earnings.

Now, turning to some modeling items. The ratio of our EBITDA contribution to end of period assets under management was about 20.2 basis points, reflecting the fourth quarter recognition of most of our performance fee earnings. We expect this ratio to normalize to 15.7 basis points for the first quarter of 2009. Holding company expenses were $11.6 million for the quarter, a 22% decrease over the prior quarter. We expect holding company expenses to be approximately $11.5 million per quarter in 2009, as we continue to implement additional holding company cost reductions. Our tax rate was 38% for the quarter and we expect it to increase to 39% through 2009.

We would expect our cash taxes to be very low in 2009, as the tax benefits related to previous affiliate purchases offset the earnings from our affiliates. We expect intangible-related deferred taxes to be approximately $9.3 million a quarter in 2009. Excluding accelerated amortization charges, amortization for the quarter was $14.2 million, including $5.9 million of amortization from affiliates accounted for using the equity method.

The earnings from equity method affiliates which include AQR, Value Act, Blue Mountain and three of our Canadian affiliates are included in the income from equity method investments line on the income statement, all on the income statement. We expect amortization to be $16 million in each quarter of 2009. Depreciation for the quarter was $4.1 million, with $2.1 million of that amount attributable to affiliate depreciation. We expect depreciation to remain at these levels during 2009. Interest expense was $18.4 million for the fourth quarter, and we anticipate that it will decrease to approximately $17.1 million per quarter in 2009 before any adjustment for recent accounting rule changes that I will discuss in a moment.

Let me talk about how we've positioned our capital structure and our financial capacity going forward. We've a strong balance sheet with available cash of $320 million. We also continue to be well-positioned from a liquidity perspective with all of our long-term liabilities maturing in 2012 and beyond. We expect affiliate obligations to be modest, consistent with prior years, which we expect to total approximately $50 million in 2009. As we've said before, the repurchase of these obligations is accretive to earnings.

In 2009, there are several new accounting rules that will affect the presentation of our results. As a result of these changes, we will add back two additional items to cash earnings, so that these earnings continue to represent the true economic earnings of our business. The first, APB14-1 will require us to report the interest expense for 3 of our convertible securities using the theoretical rate of interest based on the implied debt component of the convertible, instead of the actual interest expense that we owe.

These incremental non-cash interest charges have no actual effect on our cash or taxes and under no circumstances can become real cash expenditures. For example, in 2009, we expect our actual cash interest expense related to convertible securities to be $55.2 million. Our book interest expense, however, is likely to be approximately $70 million in 2009. Going forward, we will add back the non-cash amount of interest expense related to the calculation to our cash earnings all net of tax.

The second item is related to the treatment of affiliate equity exchanges under FAS 141R and FAS 160. As you know, we are constantly engaged in equity transactions among our affiliate partners. Certain of these transactions give rise to non-cash expenses, with no corresponding cash expenditure. Going forward we will add back these non-cash affiliate equity expenses net of tax to our cash earnings.

In 2008 we had approximately $0.15 of affiliate equity expense and we expect affiliate equity expense to remain at this level in 2009. A third accounting change, which will not cause a change in our cash earnings definition, is also under FAS 141R and will require us to expense professional fees incurred when we make new investments. Prior to 2009, legal, due diligence and other deal-related expenses are capitalized as part of the purchase price for new investment. Because these are real cash costs, going forward we will expense them in the period they are incurred and reflect them in the income statement for that period. We forecast approximately $2 million of transaction-related expenses in 2009 as we work through our existing pipeline of opportunities.

Now, turning to guidance for 2009, it is particularly challenging to give earnings guidance when equity markets continue to be volatile. We observe that there is a range of assumptions for market growth that are used by the analysts' community. In order to provide the most helpful guidance, we are taking an approach that is different than our previous convention of assuming consistent market growth of 8% throughout the year. Instead, our approach will be to guide to a range that on the lower end assumes flat markets from today until the end of the year, and virtually no performance fees.

From this conservative baseline, the upper end of the range will also assume a flat market from today through the end of the year, but includes reasonable assumptions regarding organic affiliate growth, as well as potential performance fee contribution. Given this framework, we expect our earnings results for 2009 to be in the range of $3.75 to $4.30. We assume a weighted average share count for the year of 40.9 million. Our guidance is based on current expectations about affiliate growth rates, performance and the mix of affiliate contributions to our earnings. Of course, substantial changes in the equity markets and the earnings contributions of our affiliates would impact these expectations.

Now we would be happy to open it up for questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Our first question is from the line of William Katz with Buckingham Research, please go ahead.

Good morning, I have three questions. The first one is in the order of writing them down. Nate, I was sort of curious when you mentioned the early part of January in your commentary, are you in a positive flow mode or simply less negative? And what are some of the drivers behind that?

It's much closer to flat just to be clear we're talking in the comments about the mutual fund channels where I was focussed where we're seeing the flow data. It is much closer to flat and most of the change that we're seeing is coming from a significantly better picture on the outflow side.

So reduction and redemptions.

Correct.

Thank you. Second question I have is , just curious, Sean or Darrell on this one, your previous acquisition strategy is tilted toward global and alternatives. I was wondering giving the outcome of the last year or so of markets plus some of these impairments you've taken into this quarter, is your appetite shifting to maybe quote unquote traditional players or not at all. I'm curious on your thoughts

I would say that our interest is still as always focussed first above all else on partnering with outstanding boutique firms regardless of their investment strategy or distribution channel. Obviously there is significant disruption in parts of the alternative channel and while I wouldn't say if an outstanding opportunity presented itself that we wouldn't proceed, I would say given that volatility, it's more likely that we will be pursuing investments in more traditional affiliates, and I would say including international firms.

Okay. And then just sort of the final question, just a conceptual one, it seems like within financial services generally that many firms are reducing their leverage overall. I'm just curious, should we think about the balance sheet leverage on a go-forward basis without any changes, or could we envision that you might be considering using less leverage or other means of capital to potentially fund new deals?

Well, our business or capital structure currently has other than convertible securities which have no covenants, and no near term maturity s has no net debt and the business generates substantial free cash flow. So we will continue to invest that free cash flow. Obviously we see opportunity we will finance to the extent that those opportunities exceed the amount of available free cash flow, we'll look to finance appropriately, particularly in this environment using equity in transactions.

Okay. Thank you.

All right . Thank you. Michael Kim with Sandler

Just for clarification, does the $2 million in projected fees related to new investments that Darrell you mentioned, does that refer to Harding Loevner?

No, it does not. As you can imagine we have a pipeline that we continue to work on and the $2 million is projecting new work that we would do with potential new investment.

Got you. And then, I know you touched on this earlier, but in terms of your forecast for performance fees this year, maybe if you could just give us some color in terms offer the general assumptions you're making both from return perspective, as well as kind of perspective redemptions going forward.

Well, as we think about performance fees broadly as you know, in 2008, we had just over $0.50 of performance fees, from our portfolio products that earned performance fees, and the guidance range that we gave, again, to repeat, had flat markets at the lower end and the upper end from today to the end of the year, and then ranging from that $3.75 to $4.30 includes what we think is a very reasonable assumption for performance fee generation, and also some opportunities that we're seeing that both Sean and Nate referred to as we look at affiliate organic growth.

At the upper end?

At the upper end. So as we look at these at the performance fee opportunity, again all of the products to be very well positioned so that we look at any market environment these non-correlated products continue to make a strong contribution.

I think given the market and given the construct, it's not useful to predict a return relative to an earnings number, but hopefully each of those observations gives you some sense on our approach, and as you know, in the beginning of every year, when we make estimates about performance fees, they tend to be very conservative relative to what we think the real bounds are for what performance fees can earn.

Yeah, I would add to that, that the return assumption is difficult because we had a broad array of uncorrelated products, which in many cases, as Nate underscored, are not in hedge fund form. They're separate accounts with custom-tailored benchmarks. We also have, of course, a significant opportunity that is not in any of our guidance related to performance-fee products which did not contribute last year, but where we still have substantial assets and substantial opportunities run by outstanding firms.

Okay. That's helpful. And then just finally from a deal flow perspective, not that this would change your model, per se, but I'm just wondering if you think we could see a step-up in the number of boutique managers that opt to sell 100% of their firms as opposed to kind of retaining a significant amount of equity just given the ongoing uncertainty in the markets?

I would think not. Obviously over time there are always firms which decide for their own reasons that the best alternative for them is to sell all of their equity. I would say parenthetically there are far fewer buyers or alternatives generally, meaning the public market, that are available for firms such as those. Those firms have never been in our pipeline, and if you take a step back and think about even given the difficult environment we're in, there are still a very large number of outstanding boutique firms which have generated strong growth and outstanding performance over time, where the principals do not need to do anything.

These are excellent businesses with outstanding prospects, and because they want a solution which provides ongoing entrepreneurial opportunity for the founding partners and the next-generation partners, and they value, and their clients value, retained autonomy in their investment and operating culture, those kinds of firms, regardless of the environment, are not going to prefer to sell 100% even if they could. Those are precisely the kind of firms that are attracted to us and vice versa, and I would say the best of those firms, including our affiliates, who distinguish themselves in this very difficult period have even better opportunities going forward.

Okay. Thanks for taking all my questions.

Your next question from the line of Craig Siegenthaler with Credit Suisse, please go ahead.

Thanks, good morning.

Good morning.

I was looking for more detail around the sequential change in flows in the traditional channel which were pretty good improvement this quarter. Which boutiques are responsible for that drive? It also looks like it is definitely function of lower redemptions as sales didn't improve. Maybe you can provide a little more color there.

Yeah, I think the good news here is that it came -- actually relatively broadly across the group, and the other thing I would say is that happened even with some of this alternative outflows that we talked about. So, yeah, it was broadly spread.

If you look forward to the other dynamic which, is an encouraging dynamic, is sort of after we had that sort of big shock early in the quarter and then clients really sort of slowed down and froze and said -- we saw buildup in the pipeline which is, businesses that had been won but not yet funded, things that were close, but not yet won, and that pipeline seems to be starting to move. So that is another sort of very encouraging sign as we look at it now.

Got it. And then just one question on the balance sheet. Because there is a few moving pieces this quarter. When I look at your cash balance, which I think now is a little under $400 million, I'm wondering what's the break-out of kind of holding Company unrestricted cash, restricted cash, and then also, is any part of the forward sale now in that number?

There is about $200 million that is AMG holding Company cash and an additional $120 million that is part of the forward. And that is a very similar number to the last call in this quarter we did repurchase TruPS and had tax payments and some other items, and then we have not received, of course, the fourth quarter earnings, from our affiliates which you received in the first quarter.

Which TruPS did you pay down? Was it the earlier one or later one. I think there is two series.

Earlier TruPS.

Great. Thanks for taking my questions .

Thank you, Dan Fannon with Jeffries, please go ahead.

Can you give us the AUM levels for performance fee generating assets and then, what component of those are at or near high water marks at this point?

I mean, I think as we look at the portfolio we could certainly move through those numbers. I just don't think that it's helpful to people trying to figure it out, because we have many, many, many products that all have different fee arrangements, so it would be unfair to say, hey, there is this amount and this is what they earn and this is what it translates into performance fees.

That all said, as we look broadly to high water marks, I would just give some broad color which is compared to last quarter and the quarter before, our high water marks are roughly in the same place I would say the non-correlated assets, in these none volatility markets or equity markets that continue to be challenged, those are the products where we will continue to see fees and fee generation. As you saw in the last year, generating $0.50 a performance fees, I think that as very strong showing given how the year unfolded and I think as we look to this year, we are well positioned with all of those products that generated fees, and they'll also continue to be other products where in any market environment where we see some growth they could be well positioned to make also material contribution.

Okay. And then can you give us a sense of, how much cushion there when you look at your other affiliates, when we think about other impairments going forward, there is between the purchase price and growth of assets you've seen over time and how close we are to what the market would need to do for us to see additional charges.

I mean, clearly this was a quarter where we looked again at all our intangibles, if you recall in the third quarter we did a series of tests on four types of intangibles, method equity investments, but again it made only sense given the events of the fourth quarter to look at all of those tests again, and I would say that there is plenty of cushion in all of our segment testing, as well as we look at our definite live to definite live intangibles, where we look to the fourth quarter, as you know, equity method investments are judged investment by investment.

When we were making judgements about impairment, this standard is of course looking at the market values and what has happened in the market in addition to business performance. This is a quarter where if a firm that we made a new investment in, continued to operate to plan as an example you look at Blue Mountain, where assets under management continue to be higher than when we shook hands on the deal. Although we can all observe observe in the market multiples are lower.

So thats what generated our impairment, I think as we look at the market we made judgments around where multiples are and I think that we are quite conservative about it. And as we look at business performance, all of these teams are well-positioned going forward, so you will not hear us talking about impairment charges, in the coming call.

I think it's worth underscoring, not that we like to see accounting impairment charges, but and we certainly recognize the degree to which the accounting only works one way, and nobody is coming to us to write up the value of Tweedy, for example.

But from an economic standpoint from the standpoint of running the business and the cash generation prospects of the business going forward, the thing to underscore and what we view as most significant, is that the underlying performance of our affiliates, and the integrity of our business model, even after all of the declines that we've experienced, is very strong with stable margins, as Darrell described, and intact revenue share structures with ongoing substantial equity interest held by our management partners, and that fact, which belies I think a common misconception about exposure to operating leverage and the relative strength and stability of outstanding boutique firms relative to larger integrated firms, is one that we're anxious to clarify.

Thank you. Thanks helpful

Thank you , next question is from the line of Robert Lee with

Morning, Rob.

Two quick questions, Darrell, just to clarify on the guidance, when you say flat from here, you're assuming down 7% month to date and then from there flat.

Down 8% is our assumption but that is as of last night. Right to the end of the year.

And that is helpful. I guess second question I had, I guess, if I look at the revenue-sharing arrangements, I'm assuming you kind of hinted at this, you don't feel for any of the larger affiliates aer getting any place, to a point where, the revenue-sharing kind of breaks down a little bit where, their revenues are under so much pressure that they're forced to dip into your share a little bit. Are you close on any larger affiliates.

That's correct. We feel very good about the largest group of affiliates, and you have only to look at the asset levels today relative to where they were when we made our investment, which in virtually all cases is materially higher, as well as, the ongoing direct equity ownership, equity ownership in term of annual distributions, as well as implied equity value over time. For the other 15% of our business, in terms of EBITDA contribution, we have said and continue to say, that the amount of potential exposure, even where we are today, is immaterial.

Okay. And I just have a question with the affiliates and using kind of the your resources, and my understanding is historically it is very much up to the affiliates to choose whether they wanted to participate or use some of the distribution resources you make available, whether it is the Sidney office, or London or redistribution platform. Are you seeing any change among the affiliates that have chosen not to use it in this environment that, hey we need to step up our rate of asset-gathering?

In particular I'm thinking of Tweedy Browne. My impression is that they haven't necessarily used some of our resources particularly on the retail side. Have you seen any change in behavior there?

Yeah, so I think you understand the approach exactly right which, is we build these platforms and allow them pick and choose how they participate and where they anticipate. I would say most of our affiliates at this point, more than half, are working with us in one or more platforms, Tweedy Browne is working with us on global distribution platforms.

I think we are seeing greater acceptance, or greater participation. I would frame that in a couple of ways. One, the environment plays some role in it, in part as some channels change themselves, all right? So that the environment is forcing changes in the channels, forcing changes at firms, and those are maybe edging them towards us.

The long term trend that started long before any of this, as we build relationships, as we broaden those relationships, as we do an excellent job doing those things, yeah, the affiliates continue to participate in more and more of these things. So as the team and managers are doing excellent job in the retail redistribution platform, with that said, a lot of affiliates in global distribution and the best references are the affiliates themselves. The acceptance themselves is definitely inclusive.

I would emphasize our view has always been that successful enhancements to distribution and marketing are -- it's fine for us or any other entity to create these platforms, but just because you create the platform and allocate resources to distribution, doesn't mean you're going to sell product.

What is ultimately and always most important is of course the performance of the underlying firms and their products, and what is terrific for us, as you heard us go through, especially in areas like international emerging markets equities we have outstanding products with very good relative performance over the near and long-term, and the interest and ability to sell those products, whether it's in the US or in Australia or somewhere else in the world, is obviously highly correlated to the attractiveness of the product. And so we're seeing and expect to continue to see affiliates who are increasingly interested in participating because they've got products that they know will be attractive to the end client.

Great. Thank you very much.

Thank you, DJ Neiman with William Blair, please go ahead with your question.

How are you, DJ?

Okay, thanks. Just a quick follow-up. I don't think I caught this, on the cash, the holding Company level, did you actually pull in the forward equity sale?

No, well, when I give the cash resources number of $320 million, that includes the $120 million of the forward. We have not drawn down any of those proceeds, but they stand ready for us and, in fact, accrete at a fed funds plus a spread.

Is that dilution included in your share count.

No, it is not, the 40.9 does not anticipate drawing down the forward.

Can you just expand on that?

Yes, take down the $120 million of cash, we would issue 1.2 million shares of stock.

And your -- what would--

And that would now be at a price that's around -- that implies a price of around $95.

Okay. Okay. So that's the think of that as deal capacity when deals come back, if deals come back?

It's a cash resource and I think we will deploy our capital wisely and that can be new investment s that can be opportunities that we see among other capital or just repaid indebtedness.

Okay. So then in the quarter , share counts kind of -- there is a lot going on there, but did you do any share repurchasing in the

No.

No.

Nothing material.

Okay. Last question, just quickly, on in the AUM go forward and the other section, footnote F, in terms of these products that were closed, 1.8 billion, how do we think about that? Is that products under water they are not going to come back? Any detail there?

Sure, the way to think about the product sitting there, it is across a bunch of places. In a disciplined way we are allocating resources to products to where there are long term opportunities, both new products and closing and exiting business lines. It is really places where we didn't see the opportunity for to continue managing those products in a profitable manner. So the financial impact on us should be negligible or in some cases positive.

Okay. Great. Nate, while I got you real quick, I saw AQR is launching mutual funds. I was wondering if you had any thoughts you could share with us on that. It should help transparency broadly speaking, but any expectations there?

Look, I think they had some very interesting ideas that they're work on in product development and distribution channel development, and I think we can paint a pretty optimistic picture of some of the things they're doing to broad segments of the retail market. So I think it is an exciting development and has, lots of work to be done but it has potential.

Great. Thanks, guys.

Our next question is from the line of Marc Irizarry with Goldman Sachs.

I imagine that seller's expectations have come in a little bit but we haven't seen much in the way of deals particularly from banks as you cited as a potential source of deal activity. What do you think we need to see for some of these transactions to start to happen here?

Well, with respect to the opportunities that are interesting to us, I think it's a measure of stability in the underlying businesses, seeing through the volatility and making sure that whatever is happening at the parent Company level, that their asset management subsidiaries are still performing well with excellent prospects. And, in some cases a recognition by the corporate seller of where valuation levels are now, in other words, just setting a clearing price, I think in general the M&A markets are relatively frozen partly because of issues around the firms themselves, but also because demand has completely evaporated among respective buyers.

We are actively working on a number of opportunities, I would say, in the current environment, weighted heavily toward more opportunistic situations with corporate sellers, but over time, and I don't think I'm talking years, but months, there will continue to be an ongoing, and I think a large number of attractive demographically-driven succession investments that we can make, while we're ideally positioned. So we're ready to go, and we're waiting for the right opportunities to present themselves.

And just as curious how you're viewing opportunities in acquisitions of fixed income, and in passive or quantitatively oriented strategies?

I think our view generally is that if we had a magic time machine and we could have gone back a year or two ago, and had exposure to those areas, that that would have been great. But given where we are now, we look forward not back in the rear-view mirror to what has worked and our view is that now is precisely the time, as difficult as it is to say it, given what's happened to equity markets, now is precisely the time that we are happy for an exposure to outstanding alpha generating boutique equity firms, and we look forward to investing in precisely such firms going forward. We believe that that's where opportunities lay, and that's where client flows will increasingly go, not to money market funds.

Great, thanks.

Cynthia Mayer with Merrill Lynch, please go ahead with your question.

Morning.

Good morning Cynthia.

Just a follow up for what you might be interested in buying. Sorry for the cold. How important do you think performance in 2008 will be to you in terms of what you want to buy and more broadly in term of firms' abilities to sell? Do you think investors will be able to forgive under performance due to black swans or do you think that firms like Tweedy that did outperform, this will really be a defining moment and you would want to buy more like that?

I think more of the latter, Cynthia. Obviously you would have to look on a case by case base but in general, I don't think clients will or should ignore what happened last year, and I think they'll look to firms and favor firm which generated strong relative performance, sticking to their disciplines, of course, strong relative performance in 2008, coupled with obviously outstanding long-term track records, and our view is those are the kinds of firms, generally speaking, which clients will reallocate toward, and which will benefit most as clients reallocate back toward equities and return assets, generally.

Okay. And then just in terms of the 1Q, do you guys expect any continued outflows from alternatives, because some of the cash went out January 1st, or as gates came down, or anything like that?

Yeah, I think we would expect to see some continued outflows in the first quarter, probably not along the same lines industrywide things we've seen, but I think you would expect to see outflows continued.

And a lot is related to news already in the market about firms that have put their gates down, et cetera. I don't think we see a dramatic acceleration, by any means.

So were you expecting then gates for your affiliates to come back up, or?

So stepping back, we had one plod duct at one affiliate that put a gate down. And actually what they really did, sort of is to -- what they did was go after the client base and ask folks to commit to longer duration and the vast majority of their clients did. So it is less the at our affiliates with the exception of that one product, they didn't put gates down.

William Katz, what's your follow-up question?

Just another conceptual question. One of your competitors made the notion that consolidation of distribution on retail side at least would potentially crowd out some of the smaller players. Just sort of wondering if you would give us your views of how you see the shifting distribution and the impact on your model?

I think what what will always matter most, no matter how much anyone may want to argue otherwise, is performance. And outstanding firms that have generated excellent performance, both in the near-term and long-term, are going to be best positioned. Now, obviously you nide to have appropriate access and sales and marketing resources to penetrate the channel. We are very confident that we already have that and if anything we're going to be among the firms that would benefit from consolidation among distributors.

Okay. Thanks so much.

Sure .

Glenn Sussman with Lapides Asset Management, please go ahead.

Quick question on the accounting for the forfeited options. Why is that a charge? Shouldn't it have been a reversal of what had already been amortized?

I think it is a great question and intuitively that would be the right answer. But the way it works is that, and I think you have the substance of the transaction just right, which is management gave up, it's less to option grants back to the Company, with no other, commitment for additional option grants and but the way the accounting works is that there were $39 million of charges related to those two grants that we would have taken over that vesting period, and the way the accounting rules work is that you need to accelerate those charges into the current period.

What line item is that on, on the income statement?

It is right in the comp and benefits line.

Okay. Thanks.

Thank you and John Boland with Maple Capital Management.

Great. Thank you for taking the call. Just to fully flesh out the revenue model, could you give us any color on pricing trends that you might be seeing? Are you seeing any push-back in fees in the marketplace, requests for fee concessions at the affiliate level, anything like that?

Yeah, I don't think we're seeing the kinds of things you just described. I do think on the margin we are seeing, maybe more fee structures that include some performance fee components on a broader set of strategies. So seeing some of those sorts of things.

So you're saying greater percentage of the fees from performance and less from a fixed?

Yeah, again, very much on the margin, very much on the margin.

And that would be just to be clear among traditional firms where they're willing to accept a more hybrid fee structures. But it is very anecdotal I would say. Generally speaking we're not seeing that across our affiliate base.

Okay. Great. And are you able to pull up any information from the affiliate level on market trends as far as number of new RFPs, are mandates being shopped more aggressively, or are you seeing fewer mandates coming up for the bid over the past couple of months? Is there a change in the tone of the market?

Yes, so first, yes, we do look at that data. Look, I think the -- and you have to -- varies by segment right? But the markets are in a state of flux I think the things we said earlier on the call which I sort of emphasize are, that the market went through a very extreme event and then I think clients, in the institutional market in lots of product categories, were really frozen except for this move to cash, to sort of, dump everything else.

I do think going to see, looking forward, a lot of money in motion and I think we are seeing that sort of thought begin to thaw because we're seeing as I said earlier, it is anecdotal, we're seeing mandates moving that were sort of in final stages to contracts and things that were contracts that seem to be moving towards funding, a lot of things that were in the pipeline sort of funding sort of got pushed out.

Okay. Thank you.

Thank you , management, there are no further questions at this time. Please continue with any closing

Thank you for your interest. We appreciate your support as we all weather this difficult environment, and we look forward to speaking to you next quarter.

Thank you, ladies and gentlemen, this concludes the Affiliated Managers fourth quarter 2008 conference call.