Affiliated Managers Group Inc (AMG) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Affiliated Managers first quarter 2009 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded April 29, 2009. I would now like to turn the conference over to Alexandra Lynn. Please go ahead.

Thank you for joining Affiliated Managers Group to discuss our results for the first quarter of 2009. 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 send you one immediately following the call.

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

In this call, the investment performance of certain products will be discussed and the benchmarks are deemed by AMG to be the appropriate benchmarks. AMG will provide on its website a replay of the call and a copy of our announcement of our results for this quarter as well as a reconciliation of any non-GAAP financial projections to the most directly comparable GAAP financial measure. You can access this information at www.amg.com. With us on the line to discuss the Company's results for the quarter are Sean Healey, President and CEO, Nate Dalton, Chief Operating Officer, and Darrell Crate, Chief Financial Officer. And now I'd like to turn the call over to Sean Healey. Sean.

Thanks, Ally. Good morning, everyone and thank you for joining. In a quarter characterized by continued market volatility, AMG reported stable cash earnings per share of $0.94 as the strength of our business model and the performance of our Affiliate Group offset the market declines.

Notwithstanding the volatile environment, we were generally pleased with our Affiliates results across a broad away of products during the quarter including especially the performance of our largest Affiliates. As Nate will describe, the continued strong performance of our international product set was a major highlight with Affiliates such as Tweedy Browne, Third Avenue and AQR generating substantial out performance in the quarter.

We had similarly strong results across our domestic equity product range and while our alternative managers continue to be impacted by industry wide client volatility, investment performance generally remained quite strong. We are confident that the outstanding investment performance track records of our boutique Affiliates positions us for long organic growth once markets stabilize and investors reallocate to return oriented products. In the interim, given our limited exposure to fixed income and passive equity products, our head line flow numbers will be muted.

In the first quarter, our net flows were impacted by outflows in retail equity funds which reflect industry wide trends along with larger outflows in a number of alternative products, much of which were announced last year and took effect this quarter. As Nate will discuss, our alternative outflows reflect a broader client volatility in alternative products and with a strong investment performance of our affiliates in this area, we expect these flows to stabilize over the course of the year. While institutional search activity was limited in the first quarter, our non and our nonaffiliation -- our nonalternative international flows were flat. We're seeing early signs of a reallocation of equities by a number of institutional clients. And finally, one major bright spot in the quarter was our success in international distribution where our affiliates won nearly $1 billion in new business from nonUS clients.

Turning to new investments. As I mentioned last quarter, the transaction environment is increasingly favorable to us and our new investments team is extremely busy working on a range of opportunities. An increasing number of corporate sellers are restructuring their noncore business lines and looking to divest their asset management subsidiaries. Given our track record of successful investments and our reputation as an outstanding partner to our Affiliates, we are in an excellent position to selectively and opportunistically capitalize on this trend. Our investment structure is highly flexible and AMG has a unique appeal to both corporate parents and their subsidiaries management teams.

In addition, demographically driven succession issues remain an ongoing secular trend within the industry. And as markets improve, management at independent boutiques will again focus on addressing this issue. Over time, we're confident in our prospects for adding materially to our earnings growth through accretive investment and new affiliates.

In support of our new investment strategy, during the quarter, we continued to enhance the strength and flexibility of our capital structure. As Darrell will discuss in greater detail, we raised an additional $80 million in equity and although we decided to repay our bank term loan, we continue to maintain an undrawn bank revolver of approximately $800 million and have available cash resources of nearly $200 million.

While we're well positioned to take advantage of attractive new investment opportunities given ongoing market volatility and the possibility of further declines from here, we will continue to manage our capital structure and liquidity very carefully. In addition, as we continue to fund growth initiatives such as international distribution, we're also aggressively managing our holding Company cost structure.

Finally, we're confident that the strength of our business model, which limits our exposure to operating leverage while providing our Affiliates with long-term equity incentives, will continue to stabilize our earnings in periods of market volatility. And given the quality and performance of our Affiliates, we're well positioned for strong organic growth over time.

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

Thanks, Sean, good morning, everyone. Well markets have rebounded sharply from the lows at the beginning of March. The first quarter of 2009 continued an extremely challenging period for financial markets and investment management firms in general and for managers of return oriented assets in particular. The fact that we are performing reasonably well during this period is in part a testament to the structure of our business, but especially to the good relative performance of our Affiliates and the relationships that they have with their clients and the intermediaries who serve them.

While our Affiliates as a group had a good performance quarter, the key point to focus on in terms of the impact to AMG is the continued out performance of may of the largest, most financially important products. This good relative performance, especially from our largest and most profitable Affiliates positions us to capture significant flows in earnings growth when clients once again allocate to return oriented asset classes.

As we've discussed on prior calls while there is significant disruption today, clients across distribution channels all have liability and spending needs that can only be met by increasing their allocation to return oriented class asset managers. The question then becomes when will flows return to these asset classes. I'll walk through it in more detail as I get to the distribution channels. Broadly, we are starting to see the beginning signs of rebalancing, especially in the institutional channel.

First, I'll provide some detail on the performance of our products starting with global equities. The emerging markets index was the one broad equity index that was up for the quarter while MSCI World and [EFII] were down 1% and 14% respectively. Against this back drop, we had a good relative quarter versus benchmark and peers, across most of our global and international equity product, including those managed by Tweedy Browne, Third Avenue and AQR.

In the quarter, Tweedy's flag ship global value fund beat the hedge benchmark by 60 basis points and the unhedged benchmark by over 400 basis points. This placed the fund at the top quartile of its Morningstar category for the quarter and [topped FL] for the one and three-year periods. Third Avenue's international value fund continued to significantly outperform, beating its benchmark by 120 basis points for the quarter, which placed in the top third of its Morningstar category and top 15% for the one and three-year periods.

On the emerging markets side, the Genesis flag ship product lagged its benchmark in the quarter, but their long term track record remains strong and they are one of our Affiliates that have seen a pickup in search activity in the last month. Moving to our domestic products and starting with value equity. Our Affiliates in general had good relative performance against the back drop of growth significantly outperforming value. For example, the Russell 1,000 growth outperformed the 1000 value by over 1250 basis points. While this good relative performance included Tweedy Browne and Third Avenue, Systematic in particular had an outstanding quarter with each of its products from small value to large value outperforming its benchmark by over 250 basis points.

Now, within our growth category, each of Frontier Capital Strategies outperformed its benchmark by over 150 basis points in the quarter. Similarly almost all of TimesSquare's products outperformed in the quarter. On the other hand, Friess Associates underperformed for the quarter, primarily due to the late March rally in securities that did not fit their investment style in the financial and industrial sectors.

Turning to our principle alternative products. At first quadrant, some lagged for the quarter including Global Macro and GTAA although they are coming off a strong 2008. While others such as their currency products had a good quarter. At Blue Mountain, their flag ship credit alternative fund had a very strong quarter as did a number of their other products. Finally, I would highlight AQR and its flag ship Absolute Return Fund, which was up over 8.5% for the quarter.

Now, moving from performance to flows and starting with the institutional channel. Last quarter we talked about two themes influencing institutional flows. First, outflows from alternative products largely driven by risk aversion as well as the liquidity needs of clients, especially fund to fund, and we saw this continue in the first quarter. And second, the decline in the awarding and funding of new institutional mandates.

In March and April, we started to see signs this is beginning to change. Institutional clients and their intermediaries are sorting through their longer term needs and their asset allocation models going forward, which is different from the earlier moves prompted by risk aversion and liquidity needs. This is a necessary first step as they move to replacement searches and rebound back to return in asset classes.

In the institutional channel, we had outflows of $2.6 billion for the quarter. The most significant components were a couple of sizable outflows at First Quadrant, combined with continued outflows at our hedge fund firms. The flows at FQ were significantly impacted by a couple of decisions, in particular, one by an intermediary and one by a significant institutional client to shut down the investment program they participated in.

These program level decisions came despite First Quadrant's good performance last year and came through institutional separate accounts with sizable asset levels relative to their fees and not from funds. Now, without trying to minimize the outflows in alternative products, I think it's important to note that if you back out alternatives, separate accounts at FQ as well as hedge fund, our institutional flows in the first quarter were essentially flat.

Turning to the mutual fund channel, we had negative flows of $1.2 billion during the quarter, which were obviously a challenging head line number represents a sequential improvement over the fourth quarter. The flows during the mutual fund channel continue to be overall risk aversion, combined with continued disruption in the intermediary business, especially the wire houses. Finally, in our high net worth channel, flows were a negative $640 million for the quarter, which was also a sequential improvement for us. The drivers here were hedge fund outflows as well as the overall risk aversion and ongoing changes at the broker dealer platform that we noted in connection with the mutual fund channel.

Now I'd also like to update you on the progress of our global distribution efforts in Australia, the Middle East and Europe. I just returned from a trip to Australia and am pleased with the progress over the last two years, particularly given the macro environment. In terms of attracting new business, Affiliates including Tweedy Browne and Genesis had wins in Australia totaling almost $1 billion. With respect to our other region, Sean was recently in the Middle East where we launched our distribution distribution initiative just over a year ago. We have made very good progress introducing AMG and our Affiliates, and building relationships with a number of the Sovereign Wealth funds and other significant institutional buyers in the region.

In addition our European platform which we launched at the end of last year is very well positioned and the search activities are already starting across several Affiliates. If fact, we're seeing a lot of opportunities simply from getting some of our boutique products in front of local consultants and institutions.

Finally a couple points on our operations in general. As we've discussed in previous quarters, we continue to work with our Affiliates to efficiently allocate resources to areas that have the best long-term opportunities. This includes cutting costs and rationalizing product lines.

Now, in addition to our work with Affiliates on the expense side, I also want to focus on our experience with some of the benefits of our model which Sean mentioned. While our revenue sharing structure insulates us from margin compression, equally important are that the retained equity and long term employment agreement components of our structure enhance the focus on long term growth opportunities. We and our Affiliates are reinvesting in the businesses in a broad way of ranges. Including the development of new product and launching distribution efforts. These will only serve to augment the core opportunities as assets flow back to return oriented investment strategies.

With that, I'll turn it over to Darrell to discuss our financials.

Thanks, Nate. Good morning, everyone. As affiliates produced strong relative performance during the quarter and they are well positioned for growth as markets ultimately recover and investors reallocate to return oriented product. As you saw AMG continues to generate stable earnings as our business model reduces operating leverage and we realize additional cost efficiencies across our operations.

As you saw in the release, we reported cash earnings per share of $0.94 for the quarter. On a GAAP basis we reported earnings of $0.15 for the quarter. Performance fees added about $0.01 to our cash earnings.

Now, turning to some modeling items. The ratio of our EBITDA contribution to end of period assets under management was about 15.6 basis points. We expect this ratio to be 14.5 basis points for the second quarter of 2009 and 15.8 basis points for the full year. Holding Company expenses decreased to $10.5 million for the quarter as we continued to implement additional Holding Company cost reductions. We expect them to remain at this level for the remainder of the year.

Our tax rate was 39% for the quarter and we expect it to remain at this level through 2009. Our tax provision includes an $8 million current income tax benefit for anticipated tax refunds. We expect no cash tax obligations during 2009 as the tax benefits of our intangible assets and convertible securities shelter virtually all of our income. Intangible related deferred taxes were $9.6 million for the quarter.

Amortization for the quarter was $16 million, including $7.9 million of amortization from Affiliates accounted for using the equity method. The earnings from equity method Affiliates are included in the income from the equity method investments line on the income statement all net of amortization. Depreciation for the quarter was $3.2 million, with $1.9 million of that amount attributable to Affiliate depreciation. We expect amortization and depreciation to remain at these levels for the remainder of 2009.

We reported total interest expense of $19.9 million for the first quarter, of which $3.4 million is a result of a recent FASB rule change that requires us to report additional noncash interest expense for three of our convertible securities. This noncash interest amount is calculated by bifurcating these convertibles into their theoretical debt and equity components and then accreting the debt portion on a quarterly basis. This incremental noncash interest charge has no actual effect on our cash or taxes and under no circumstances could it become a real cash obligation. And, therefore, we have added it back net of tax to our cash earnings. For the second quarter, we expect reported interest to decline to $19.6 million.

While our earnings have remained stable, despite current market volatility, we continue to strengthen our balance sheet. Let me talk about how we have positioned our capital structure and our financial capacity going forward. This quarter, we further enhanced our financial position by repaying our bank term loan of $230 million. We also supplemented our capital available for new investments by raising the remaining $80 million of equity under our forward equity sale agreement. The equity forward agreement has been an effective capital raising tool for AMG and we expect to enter into another such agreement in the near future.

With Holding Company cash of $175 million, available capacity of $770 million under our credit facility and no net debt other than convertible securities, we have a strong balance sheet and substantial capacity to execute our growth strategy of making accretive investments in outstanding boutique firms.

As you can see from our press release, our financial presentation reflects the adoption of several new accounting standards which took effect this quarter. These include FAS 160, the accounting for noncontrolling interest, FAS 141R, the revised business combination standard, and APB 14-1, the bifurcation of the debt and equity components of our convertible bonds. I'd be glad to answer a specific question about the effects of these rules on this call or separately, but let me outline some of the most significant changes in our presentation.

As you can see on both the balance sheet and income statement we've separated the presentation of controlling interest and noncontrolling interest which used to be called minority interest. Minority interest has moved into the equity accounts and there is a new mezzanine line item called redeemable noncontrolling interest, which represents an approximation of the cumulative value of Affiliate Management equity. These interests represent the accumulative Affiliate equity owned by our management partners today.

The other meaningful change in our balance sheet presentation is the reduced value of our convertible securities. The standard call for the book value of each of these convertible securities to be reduced to allow for future noncash interest expense charges to be accrued to return the book value to its face amount by maturity. While all of these standards lead to noticeable changes in the presentation of our GAAP results, obviously they do not reflect any changes in the substance of our business.

Now turning to guidance for the remainder of 2009. While the gains resulting from the equity market rally that began in late March have persisted, the markets remain sufficiently volatile that, for guidance purposes, we will continue to base our assumptions on a flat market from today. Both our guidance convention and range remain unchanged from last quarter with a lower end that assumes virtually no performance fees.

From this baseline, the upper end of the range also assumes a flat market from today, 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 42 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'll be happy to answer your questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Dan Fannon with Jefferies, please go ahead.

Good morning, gentlemen.

Good morning, Dan.

Quick question around the distribution. I think, Nate, you mentioned a few times the disruption amongst the broker channel. Can you talk about what's happening there as those networks kind of are either consolidated or in flux and what you think the opportunity or the concern is going forward as those things kind of -- as those networks consolidate?

Sure. So I think you -- you accurately characterized it, right? There's a set of changes happening both at the program level with the combinations and then obviously down as you get into the field, that the sort of SA level. And one place it's showing up is just reduced -- reduced sales. Obviously they're also working with their clients who have gone through, obviously a very challenging period. So all of those things stack up.

In terms of the opportunity prospectively, I think -- I'd break it into a couple of different pieces. One, our managers platform has good relationships with all of the major sponsors. So I think we feel good about the fact that this shouldn't impact us sort of at that level. I also think that in some ways it's a little bit like the institutional business in terms of the evolution and product needs. And as that's going on -- as well as -- sorry, as these platforms combine the set of replacement searches. All of those things should go to our benefit, right, which is a consistent theme as we always talk about, which is as we go into this, at the end of the day, good performance combined with appropriate distribution is the thing that should work. And we feel good about the performance that we're coming into this period with, so --

Okay. That's helpful. And then just in terms of investments, can you help us understand how you balance your conservatism with your balance sheet and then the long-term opportunity? I mean it seems to me that evaluations in terms of acquisitions have declined dramatically. Now is the time to be deploying capital if you have a longer term perspective with some of these managers. So can you just kind of help us with that dynamic?

Sure. It's obviously always a challenging balance. I think we are advantaged in the current environment in that, as you say, the supply/demand balance is tilted heavily in favor of buyers and so pricing is quite attractive. I think inevitably our approach is to be appropriately careful in insuring a margin of safety in the valuation levels that we're willing to pay.

I think over time the -- there's an -- a set of opportunities in the current environment that our corporate sellers divesting asset management subsidiaries and in the main -- those are probably not firms that we're interested in, but there's a subset that are very attractive boutique firms where, as we said earlier, we feel like we're very well positioned. Both to structure transaction -- structure and execute transactions, which get done, which is what corporate sellers are focused on, as well as to offer subsidiary management an opportunity to get direct equity in their firms in a structure and with a partner that's very attractive.

So both in these types of transactions, which obviously is the main source of opportunities in the immediate environment as well as in the more succession oriented transactions that were -- that are largely dormant now, but we're, of course, retaining relationships with those firms and over time that will continue to be a source of large number of new investment transactions. Inevitably the Affiliate partners and the managers of these firms are betting with us through their ownership of retained equity.

So that gives us a -- an attractive self selection in terms of principals that really believe in and are willing to bet on their long run future. As well as in the current environment very attractive pricing in the first place. So we're -- all of that, I think -- and I probably answered several kinds of questions about pipeline that folks have. But all of that boils down to an environment where, of course, we're being careful, but we do see an increasing number of very attractive opportunities. And we're certainly ready, willing and able to execute, notwithstanding market volatility.

Okay. Thank you very much.

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

Hi, guys, good afternoon. Maybe just to follow up in terms of M&A, I understand there's still a lot of uncertainty out there in terms of valuations, but do you feel like once we see maybe a couple of deals being announced and the market kind of sets a clearing price, do you think that's when we see really a step up in the number of transactions getting done in relatively quick succession?

Well, I think what you say may be accurate in describing what will happen in the broader industry M&A environment. I think with respect to what is relevant for us, that is sales of high quality boutique firms, there are not that many of those out there as subsidiaries of banks or insurance companies. And so we're not really participating in most of the transactions that are -- that are being widely discussed. And I -- and I think, frankly, it's not really relevant to us whether -- whether transactions occur with those firms.

I would say with respect to the opportunities that are attractive to us and where we're very well positioned to be successful, it's this combination of, of course, corporate sellers that are looking to raise capital and divest noncore businesses. But also very high quality subsidiaries and boutique firms where the management of those firms are incredibly important to the future success of the business. Where they want an incentive structure that's probably more attractive, more equity oriented than they have in the current environment. And where they're looking for a long-term partner for their business.

So in those kinds of settings, which again, is a relatively small subset of the broader universe of corporate-owned asset management firms, in those kinds of situations, we're very well positioned, pricing is quite attractive. And, as I said, we're actively engaged in pursuing those opportunities. The timing is going to be situation specific and really not related to what you may see in the broader M&A environment.

And I'd add that we have a very keen sense of the types of firms that we're looking for that are embedded as subsidiaries. And I'd remind folks of two successful investments that we've made in First Quadrant, which came out of Xerox Financial and TimesSquare Capital Management which came out of Cigna.

Okay. That's helpful. And then maybe just turning to the existing Affiliate base. Now that kind of market conditions have improved to some extent, what kind of products do you think are best positioned to maybe generate the biggest step up in flows? And then maybe if you could segment that by distribution channel as well? Thanks.

Okay. Okay. In terms of the products where we see the most demand -- and, again, I -- just to set the stage for this, we've seen this turning, let's talk about institutional first, we've seen this step up in activity really in the last call it couple of months. So we're obviously extrapolating from a limited data set.

But where we're seeing lots of pickup in activity in the institutional channel, I'd probably put it in three of the buckets we talk about, right, so global equities. Quite clearly we're seeing lots of demand, our fees/final wins, right? Global equities, emerging markets, I mentioned that in the prepared remarks, we're seeing a pickup there as well. And I think on the alternative side, we're also seeing some good pickup as well and some of these are -- you know, are -- thinking of a specific example, things like currency products. If you think about our global distribution platform they're seeing a significant pickup in demand there.

But you know what, interestingly, it's still focusing on the institutional channel, we absolutely see a -- the searches are sort of breaking into two groups, right? There sort of the replacement searches and rebalancing searches. In the replacement category, we're seeing opportunities across the board. We've seen significant opportunities in the US growth equity area for example. So again, a number of those are replacements, so I think that's -- that's sort of there in the institutional channel.

And on the more retail side, we're seeing opportunities in global equities, in domestic equities. And obviously we're seeing some opportunities in even things like our municipal bond manager opportunities. So pretty broad opportunities on the retail side.

Some of that for us, frankly, is also getting -- I may be answering a little bit different question, but some of that for us is continuing this process we had talked about before of getting our products packaged and positioned with the distribution as we bring the distribution online. So some of the opportunity continues to be getting some of our excellent performing affiliate product just positioned right with the right amount of distribution resources, again, from -- and we've continued that process, it hasn't really changed. So I think that's a big part of it for us as well.

Okay. That's helpful. Thanks.

Thank you. Our next question comes from the line of William Katz with Buckingham Research. Please go ahead.

Thank you. Good morning, everyone.

Hi, Bill.

Darrell, a question for you, if I may. Just given some of the accounting changes that you highlighted to us earlier, sort of wondering if you could sort of put where your pro forma ratio -- where your leverage ratio is at the end of the March quarter? And how you're thinking about that as a target on a go forward basis?

Yes, I mean as I said in my comments, we have no net debt and the only components of liabilities on our capital structure are convertibles. And, as you know, the majority of those are junior capital, essentially equity. So we have one outstanding issue of senior convertibles and relative to the EBITDA of the Company, our leverage ratio is really between one and two times. So we have plenty of capacity. It may be just cutting to the -- the practical result, which is a deal of $0.5 billion given the capacity that we have and given the cash resources that we have is -- would keep us right in line with our target leverage ratios from where we stand today.

Okay. That's helpful. And sort of just curious, and maybe it's idiosyncratic to your commentary earlier, Sean. With the I shares transaction seemingly going for around ten times EBITDA, does that have any influence on pricing and/or acceleration of any kind of transactions?

No, I don't think so. I mean it's a relatively unique kind of property. And if you look broadly across the industry, what you see, as I said earlier, is a supply/demand dynamic where there are just very few buyers. I think most of the buyer universe today is private equity. So -- and that kind of transaction is obviously appropriate only for a subset of firms generally and for a very small subset of boutique firms.

And, I would say the -- in the current environment, as corporate sellers look to -- look to do transactions for whatever reasons, they're focused obviously on price. And I -- I think many of the transactions that are -- that are announced have different pricing than what may be talked about. If you actually look at the specific terms of the investment.

So they're focused on price, but they're also very focused on execution. And when you're trying to sell a boutique asset management firm in particular, it's extremely difficult to -- and especially in the current environment, difficult to accomplish that sale through an auction process. So we're very well positioned, we're having a series of proprietary discussions with firms that are looking to sell businesses which, in some cases, are actually very good businesses, very appropriate to the AMG Affiliates.

Okay. That's helpful. And then just one clarification. I thought I heard a little bit of a different message on the alternative business. Toward the beginning of the call I thought I heard it could be a little bit more of attrition, but then Nate you sort of suggested that at the margin the incremental mandates have been alternatives with a subset of that. Sort of curious if you could talk more about strategically how you view the alternative business and how you think the prospects are for that business overall?

Let me have Nate clarify the first part of your question and I'll answer the second.

Sure. So I think we do see some continued attrition in the hedge fund business on the base. We also do see opportunities for sales both of existing products and of new products. And a little bit maybe to the part that Sean is going to speak to. One of the things we're doing as we evolve the business lines to take advantage of the opportunities is this launch of new products to take advantage of the opportunities with clients.

And so you're seeing a lot of things in the credit area, credit dislocation fund of Blue Mountain, corporate loan fund of Blue Mountain, those kinds of products. As well as some really innovative products that are getting lots of attention like the hedge fund beta product that AQR has launched and is really very widely talked about. So on the one hand I do think we'll continue to see some attrition in the base, but sort of on a forward-looking basis, I do think there's a lot of different ways we can be participating in the evolution. And I think it's our view people will allocate to alternatives, institutional clients especially.

Stepping back more broadly, we for a number of years have said that we don't view alternative firms as being necessarily a different species. They're just a -- they have in most cases a very attractive revenue model. But in the main, if you actually look at these firms and understand how they operate and what they deliver to clients, they're boutique asset management firms where culture is very important, incentives are very important. And they're delivering, the best of them, are delivering unique, differentiated, alpha generating products to clients.

There is always going to be a demand for those kinds of firms and those kinds of products. And while the alternative industry is undergoing a large amount of volatility and -- in its client base, looking over the to the medium and long-term, our view is strongly that the best performing firms are going to continue to be successful and generate strong, long-term growth over time. We have some of them as our partners and we're working with them as they navigate through this period. And we're not -- in the midst of this volatility, we're not actively looking at alternative firms from a new investment standpoint, but we certainly will continue to over the medium to long term.

Okay. Thank you very much.

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

Thanks. Good morning, guys.

Good morning.

I have a question on the change in the calculating cash earnings, the accounting changes. I guess I'm a little confused by it, which shouldn't be a surprise, I guess. But to some degree, are you now including -- you've talked about in the past that the converts often gave you some tax benefit that you did not include in cash earnings. And one of the things that strikes me from the change here is that effectively you're now including it; is that correct?

Well, the answer is a half yes and no. Which is the way this accounting standard works is that it discounts the liability value of the convert on the balance sheet. And then the new noncash incremental charges will accrete every quarter so that the bond gets to its base amount by the -- by maturity. So the shield -- the tax shield, the value of that protection is embedded in our deferred taxes and embedded in our deferred tax liability line.

The book calculation for that interest expense roughly matches up with the tax now. But because there's a transfer of value from the balance sheet item to the deferred tax item, the economic value, the actual cash value to the shareholders remains the same with these definitional changes.

Okay. Well, I guess I'm still trying to figure out if I -- you restated Q1 2008 and I guess I'm -- with the accounting change, I'm not quite clear to me why would that actually go up versus what was originally reported? Since it's just an accounting change, it's not a change in cash.

Yes, I'd be happy to work that through with you. But, again, as we look back to Q1 2008, we had more convertible bonds outstanding at that time than we do today, which is why the add back is greater.

Okay. We can go through it after the call. So, yes, a question I had on the -- actually on the mutual fund front -- well, actually, this relates to AQR. I know they've rolled out a series of -- or are starting to roll out a series of funds. Are you guys at all involved in that or in any way shape or form going to be involved in the distribution of it?

So we -- we obviously worked with them at the time of the rollout. They've decided -- again, at this point they've really launched one fund, the diversified fund, off to a great start. They do have plans to roll out additional funds. I think have filed for a global equity and international equity and are talking about also some momentum oriented funds. Again, we continue to talk with them about what's the best way for those funds to get distributed. No decision has been made on working with them on the US retail distribution side. We do work with them on some of these strategies on the global distribution side right now.

Okay. Maybe a follow-up question on the fund business. If I look at a couple of the -- some of the mutual funds you do have there's the manager's Freemont bond fund, which is a five star fund and there's the EQ -- the First Quadrant global allocation fund, which I guess had a very strong 2008. And if you see where demand is, I mean it seems like two of the few places there was a lot of demand or is a lot of demand has been number one fixed income, particularly since that fund is managed by Bill Gross. And secondly for S allocations products that were able to put up flat or positive returns last year. And yet it doesn't seem that the asset flows into those have been particularly strong. Can you maybe talk about why, maybe we haven't seen the business flows into there or what changes you need to make to kind of jump start some of that?

Sure. We'll talk about -- I think the story on the fixed income side and the SQ global alternative fund are different. On the fixed income fund side, we do think there's opportunities and managers actually has a relatively strong suite of products, not just the Freemont bond one, but also the manager's bond fund which is managed by Dan Fox as well. So there's a suite fixed income product. I do think we are seeing good flows or okay flows, I guess, into those products.

The -- and some of it actually does come down to some of the packaging and channel stuff I talked about before, right, in terms of where is our distribution strongest? Because unlike the Tweedy, Third Avenue [brand of] funds where we have very strong, direct sort of manufacturer to consumer kinds of distribution, these other funds we don't have that component. So I think that's sort of one that off to one side.

On the First Quadrant global alternatives fund, that was a fund we launched just about three years ago. And I -- personally, I think it's a very exciting product, launched about three years ago, one of the first liquid alternative products. And a bunch of the challenge about getting from zero to 250 or 300 or wherever that fund is exactly today was channel education, right. It was very early with this idea of liquid alternatives in a mutual fund form. So that was part of it. A bit of it was making sure we also got the product priced right. And so you saw the flows kick up after we, I think, got -- made some good progress there.

But sort of step back for a second, that -- you're exactly right, that product and products like it should have, again, assuming we can get this lined up right, should have very good opportunities going forward. Because as you think about the alternative marketplace in some channels the bifurcation between sort of that which is truly liquid and that which isn't, the idea of having daily priced very liquid truly diversified sources of alpha, a little bit to the conversation Sean was having that -- these are just asset management firms.

But the idea of come being a truly diversifying very liquid, daily price, daily valued source of set of alternatives products is something that we think has a lot of opportunity, not just in the US mutual fund marketplace, but as the institutional. And also in some global markets, as those markets evolve, how they use alternative fund products, there should be for that product. Last thing, also as that thing gets its three-year track record, which it is coming up on, that should be something that is also very helpful.

All right. Great. And lastly, I'm sorry to -- just to clarify, your earnings guidance which I guess was unchanged from last quarter, so pretty much you're just assuming everything was flat from whenever it was you reported Q4 earnings, essentially?

That's correct. I mean while we look to the last conference call and certainly a lot has happened between now and then and we all feel a little bit older. That said, markets are up maybe a percent as you look at the blended index for our products. And what happened during the quarter, we -- we raised a little equity, we cut Holding Company expenses. So when you -- when you look through it -- in fact, keeping our guidance the same is kind of similar to raising our guidance by a percent, but essentially the same.

It certainly feels like it's been a lot more change than that. All right. Thanks, guys.

Thanks.

Thank you. Our next question comes from the line of Roger Smith with Fox-Pitt Kelton. Please go ahead.

Hi, good morning. Thanks a lot. And I guess my first question really comes on the income from the equity method investment line that was, I guess, $6.4 million this quarter. That seemed a little bit low. Is there something going on in that line item that I am not thinking about?

Yes. There's $2 million more of amortization in that line because remember that line is presented net of amortization for those firms.

Okay. And so really that's probably a better run rate, this $6.5 million to debit number?

Yes. I would take that number and project it out.

Okay. And then if we go to this new add back, the Affiliate equity expense in here, this net of the tax of $2 million. I believe when you guys talked about this new disclosure last quarter, this is really when with you guys are shifting around some of the ownership structure out to different Affiliates. And can you just give me an idea of what is really happening there? And I know that they have big put options to you guys, but that it's unlikely that they exercise those. Can you give us an idea of what you think those levels might be in 2009? And sort of what the affiliates that have these put options are sort of thinking about and talking about with you?

I think there are two separate questions there. One is as we look at Affiliate equity, this recent set of accounting changes that have looked at compensation and partial ownership of firms and noncontrolling and controlling interests. As you look through that, there's -- there are times where at Affiliates, for example, one partner sells equity to another partner. And that is a negotiated transaction, but it may be viewed as a transaction that happens below fair market value.

When those sorts of transactions happen, they lead to a compensation charge. Just like the depreciation charge on assets our Affiliates -- that our Affiliates own and that charge consolidates up, but as you can imagine that has no effect on AMG shareholders. And, of course, no effect on our cash earnings. So that is why we, that is why we of course add it back.

And then when we think about puts, of course, maybe just talk broadly about puts, which are a very important incentive component and help our equity -- our Affiliate partners focus on long term results aligned with the objectives of our shareholders. Those puts are part of the transaction when we purchase these firms and we look at the puts over the career of our Affiliate partners. And they hold this equity, they are allowed to sell portions of that equity along the way, most of it at retirement.

We have specific amounts of equity that we will buy from a firm at any one time. And as you've seen over our history, the amount of put activity that we've had has always been less than we forecast. For example, this year I think when we were talking about put guidance in the fourth quarter, we expected maybe $65 million, $70 million of puts for the year. And I'd say today that number's more around $40 million or $50 million for 2009 . And as we look forward to 2010, again, given that markets are closer to a bottom than a peak, we would end the -- looking at the demographics of our Affiliate partners, we would imagine that the put activity is roughly similar in 2010 as we see this year.

Great. Thanks. And then it sounded like you talked about interest in doing another one of these forward sale agreements on the equity side. And as we sort of talk about the markets being lower than they have been in the past or maybe than where we'd hoped they would be, why would you think about doing one of those now? Like what's really behind the thought process?

I think flexibility is the first thing that comes to mind, which is as you look across the credit markets and the equity markets, it's been challenging for companies to have access to capital. And as you've heard Sean say, I think this is a unique period where there are very few buyers, there's plenty of opportunities. And we just want to be prepared to make sure that we're able to capitalize on those opportunities. So as we -- as we look forward, again, having this access and as you can imagine our stock is an attractive currency in transactions, it just provides the opportunity for us to find the right leverage levels and the right capital structure so that we can look at a very wide range of opportunities.

Great. And then if we did end the year right here, what would be sort of the performance fees that we could think of that are sort of already in the numbers?

Yes. I mean as -- as I mentioned the guidance range has almost -- virtually no performance fees at this level and as you could see, this quarter we had $0.01of performance fees in our earnings. As we look at the business, as we said last quarter, we're essentially today in the same position we were, which is the opportunity is more concentrated among a couple of firms like the First Quadrant and Blue Mountain. The alternative business booked is, again, approximately $30 million. High water marks are essentially similar to those that we have been sharing with investors over time and that's principally the uncorrelated products.

So we -- we -- last year we generated $0.53, our affiliates generated $0.53 of earnings for us from performance fees. We look at those portfolios this year, we certainly believe there's opportunity as those products are right at or above high water mark for the second quarter, third quarter or fourth quarter for us to meet these same performance fee generations as we had last year. And that is sort of the best that you can do to forecast it from where we stand today.

Great. Thanks a lot.

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

Hi, good morning. You mentioned a couple of times that the changing landscape in distributors is impacting flows a little bit. And I was wondering, is this more in managed accounts or mutual funds? Are you actually losing slots on platforms? And just in general could you maybe give us the amount of money in managed accounts these days? And just remind -- remind us of which managers that is and what styles?

Yes. So I think as I noted, we're seeing -- let me make sure I get all of these questions in there. We're seeing it in both our managed accounts and mutual funds. I think one place we're seeing it -- or one thing we're attributing to it, maybe is a better way to say it, is a decrease in sales. Right. I think as you know a lot of these platforms haven't yet sorted out how the combinations are going to look. And so that makes it hard to answer some of the later questions.

I don't think we break out specifically the -- the separate accounts on managed accounts platforms. And part of that is, some of the definition, right, which means some of it is on true wrap programs, some of it is dual account stuff and some of it is things that even look more institutional for the FA broker that has a very high net worth book or the RA guys that has a very high network or even institutional book. But and again, the main point is we think that we do have participation on all of these platforms. We think managers has good coverage of all of these platforms. And as they sort out, the slots the answer to some of your other questions will get clearer.

Yes, would I say just to make sure that it's crystal clear, we view the current dislocation in the channel as something that we just have to live through, but coming out of it, given our relative positioning, we're actually quite optimistic. We think that the channel will increasingly favor institutional quality firms with outstanding long term track records. And as there are new searches and consolidation and changes in the mix at the various large distributors, we think we're going to come out ahead. And our managers investment group platform already has all of the relationships with the key distributors. So from the standpoint of service and distribution, we're also very well positioned.

Let me just amplify one point. Sean makes a good point. Which is especially for us on the mutual fund side, we have a number of very high quality products that have not historically been distributed in these channels. And this is providing us as those channels are looking around, this is providing us with an opportunity to get those firms into that channel and leverage the distribution we have in place. So that's definitely a new opportunity for us.

Okay. And, Sean, on potential acquisitions, it sounds like the opportunities are -- you're pursuing are a little under the radar. And then there aren't that many competitors and the sellers are motivated, so I'm just wondering what are the limiting factors, then in terms of actually getting a deal done?

Well, under the radar implies small or may imply small and that wouldn't necessarily be accurate. I think the challenges in getting transactions done are the same in -- or similar in transactions involving corporate sellers of asset management subsidiaries as they are with succession oriented transactions involving independent boutiques. In some ways maybe it's even more challenging because you might have a willing seller in the case of the corporate parent, but the -- with boutique firms, again, which is a subset of the universe of transaction activity generally. With boutique firms, the management partners or the management teams of the subsidiary have an incredibly important say inevitably in what happens. And so they end up being three handed transactions.

But we're -- we're -- all of the dynamics are in place. We're, as I said, actively working on a number of opportunities which aren't the opportunities that folks may be reading about. We're going to continue to be highly disciplined. And our guidance as everybody knows doesn't include any contribution from new investments. But we're pretty confident that out of this we'll -- we'll find some attractive opportunities.

Okay. Great. Just one last question which is just on the 2.5 billion in AUM in closed products. Can you explain what those were? And I know they're not material really to earnings, you say, so I'm not interested from that point of view, I'm just curious if you'll continue to do that and should we just expect that for a few quarters there will be a few closed products like that bringing AUM down?

Yes, I would -- I'd say that we are through the bulk of it, although I do think -- again, as we've said for a couple of quarters we are really working through with all our Affiliates. Where are the places there will be opportunities prospectively and especially in this time? Let's make sure that we have our resources focused where those opportunities are. So again I think the bulk of it is through, but I do think we'll continue to see -- again, assuming the environment looks like it does, right, we'll continue to see some continuing and we do continue to scrub everything with all of them, so --

And what were those products?

It's a broader -- it's a broad range of products.

Okay.

Set of equity products, some small alternative products --

And to Nate's point, I mean we -- again, the exercise of making sure operations are as efficient as possible. Many of these are very tiny equity products that were started and didn't really seem to ultimately grow. And so we just need to clean them up, not service them and to move forward. And as you put, the -- all of those AUM have no effect on our earnings.

Great. Thank you.

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

Great, thanks. Just in terms of the billion dollars in international mandates that you took in or new wins that you had in the quarter, I know you guys won a piece of Australian business through Tweedy. Is that in that number, is that funded yet? And then also just any color on the pipeline of institutional business would be helpful.

Okay. So first, it is in the number. And the bulk of that billion -- what we're talking about coming through our global distribution, again, just to orient everybody, Australia has been on for about two years, Middle East for about a year and Europe beginning of this year. The bulk of that is coming through or did come through -- that billion dollars did come through Australia. The others are coming on.

As you look at -- the second part of your question as you look at institutional flows for us more broadly, I think -- so maybe it's a little bit of a backwards looking, forward looking. Sort of backwards looking, except for the alternatives which we talked through those were essentially flat. And also as we unpack the reasons for the terminations and redemptions, a lot of it was, as we talked about, programs being shut down or liquidity needs or those sorts of things rather than performance of Affiliates.

As you look forward, I think we're in this process right where clients are -- have moved from the very, very short-term stuff to sorting through their longer term needs, sorting through what intermediaries they're going to work with. And you're seeing a bunch of changes in that area as you know. And obviously working through their long-term spending needs and requirements. And as they do that, they're adjusting their asset allocation models and frame works.

As Sean said before about the retail side, we feel very well positioned as those things happen, right, because performance is good. And we get to combine our Affiliates own distribution, augment it with our global distribution as well as some of what managers is doing as we're subdividing marketing, especially what we talked about that sort of looks like institutional. So we feel good about all of that stuff over the long run.

From a short-term perspective, we are -- we're definitely -- we saw a pickup in activity, sort of Q1 versus Q4, albeit off of a very low base. So RF fees, finals, all those things were picking up Q1 over Q4. We see that continue, so -- yes, so feel good about the direction, good about the way things are evolving, again, albeit off of from a new search activity and an extremely low base.

And are you more inspired by replacement activity than sort of the rebalancing and reallocation activity?

So it feels like -- and again, a lot of this is hard to document and so a bunch of it is anecdotal. It feels like a lot of what we have right now from the new client activity is obviously replacement searches. So we're seeing a bunch of that. We are also starting to see the rebalance activity showing up as subscriptions to existing managers, right? We haven't seen as much of that yet as we're confident and, again, I don't think it's -- it's an extreme view, maybe not unanimous, but I don't think we've seen as much of that obviously as we expect. We expect there will be a lot of this rebalance activity back. So maybe by volume at this point I'd characterize it as more replacement than rebalance, but we are seeing the rebalance things start as well.

Reallocation of it.

Yes.

And Sean, just on that point are your Affiliates are you helping work more closely with them and incubating maybe new fixed income or credit oriented product? And is that a role that you sort of foresee AMG having to fulfill more, given the more narrow focus of the existing Affiliates?

I guess I'd challenge the premise of the question a little bit. We, of course, work with our Affiliates and Nate gave some examples in the credit area which -- where Blue Mountain is doing some innovative things and we've talked about AQR and some of their innovative product developments. But in the main, our focus is on -- and our Affiliates' focus is on executing extremely well over the long term in their particular investment discipline. So we don't actually think about the -- I wouldn't describe it as a need for, let's say, a boutique Affiliate to develop a fixed income capability.

I think we are very happy with the -- with the product set that we have across our Affiliate Group. Obviously it's performance oriented, boutique managers, predominantly equity and alternative. The kind of products which may be not -- a little bit now, but not in the midst of this market volatility are going to be the most attractive to clients. But if you look over the long term as we've said, we think inevitably those are precisely the kind of clients -- the kind of products that clients, both institutional and retail, will want. And so fixed income and other kinds of products, passive equity products which are invoked now, some of that will be able to develop within the Affiliate Group. We've done some of that in the managers investment group platform.

Some of that kind of product capability we will acquire over time, probably in niche oriented areas of fixed income, for example. But in the main we are what we are, we've sort of been through a very tough period for our product set. I think we've generated strong and stable earnings through all of that, partly as a function of our business model. But as we look forward, we are quite optimistic and not spending -- spending a lot more time on forward opportunities, developing, enhancing what we're already doing as opposed to kind of back filling based on what -- what's been working in the recent past.

And I'd just remind folks as we gave earnings guidance last quarter and as we look forward today, all the information as we think about flows and how we evolved through this environment and how our products are positioned and how we have expectations for ultimately for a return back to risk-based products, that that's all baked into the guidance that we gave last quarter. And we sit here today, while markets have not moved very much and we're giving the exact same guidance. And so we feel very comfortable about the way products are positioned and the way clients are reacting and the way our Affiliates are reacting. And we're doing what we have expected us to do in this first quarter in order to generate the results and meet the shareholder expectations.

Great. Thanks a lot.

Thank you.

Thank you. Our next question comes from the line of [Jill Baker with Advent Capital Management]. Please go ahead.

Hi, I just wanted to clarify your balance sheet cash number and how much you are planning to do, what size in terms of the forward sale of equity? I show the cash and cash equivalents of $237 million. And I wondered if you were counting some proceeds from the prior forward sales? And did you discuss those being 250?

No, no, no. The -- you're right about the balance sheet cash number. And what we have in a stub portion from our prior forward plus Holding Company cash is roughly this $200 million number of cash that we could use for deals. And then going forward we're going to basically put up a facility to I guess raise another $200 million, but that's just an amount that will be out there for this facility and to file a prospectus. There's a big difference between what we actually take down and having a facility in place in order to raise the equity. As I said, the primary purpose of re-upping this forward is just it's an effective tool in this environment. And we want to have a very strong balance sheet and have the most flexibility to raise capital in every way we can to take advantage of our opportunities.

That's great. And then the hold co expenses came down a little bit. Did you say that we should use that as a run rate or do you think they could come down even further?

Yes. I mean we've been through an extensive exercise for the last handful of months to find expense saves at the Holding Company and at Affiliates and in our distribution system. And, yet the expenses came down $1 million per quarter on a run rate basis. We think that $10.5 million is the right run rate for where we are now. We clearly have a list of other expense saves that we can make as a going forward and we feel very prepared for whatever evolves in the market that we will be able to provide stability to earnings and to our shareholders.

Thank you.

Thank you. Our next question comes from the line of [Nicholas Singer with Standard General]. Please go ahead.

Good morning. It's actually [Shawn Grant]. I wanted to ask on your SG&A costs which came down pretty dramatically quarter over quarter, is -- I guess $32 million is good run rate, although it had been kind of in the low 50s over the last couple of years?

Yes. No, that's the right number. Again, there's been a lot of hard work at the Holding Company and Affiliates to right size almost every expense item. And, again, one of the beauties of our model and we try to take every opportunity that we can to make it clear, that our revenue share model really insulates us from significant operating leverages as compared to our peers. And what you can see in our results and our results last quarter and our results through this period is that, again, that very limited operating leverage in a volatile market environment.

Okay. So SG&A for a full year should be like $130 million as opposed to the $200 million it's been over the last three years?

That is about right. And what you'll see, if there's increases if SG&A, you may see some decreases in compensation. But roughly those two line items together will move in relation to revenues.

So -- okay. So the sum of the two should be -- what's the right number for the sum, maybe 500 for both SG&A combined with comp whereas it's been kind of 700 historically?

Yes, no, that's right. And both of those -- those numbers as a sum roughly move in line with revenues. Because, remember, the way our revenue share agreement works is that every dollar that comes into Affiliate is split between an owner's allocation and an operating allocation. What you're seeing in the comp and benefits line in SG&A is primarily the -- that operating allocation.

Okay. So just to double-check that, what would you say is the right sort of number as a percentage of total revenues for the combined SG&A?

I think the results that you see in this first quarter are a very -- are an accurate representation of business model. And also the other income statement items below operating expenses are the right numbers to extrapolate into future quarters.

Okay. So it's about 65% or so. Okay. Thanks very much.

Thank you. We show no further questions at this time. I would now like it turn it back to management for any closing remarks. Please go ahead.

Thank you again for joining us this morning. As we discussed in the call given the market environment, we're pleased with our results for the quarter and confident in the long-term prospects of AMG and our Affiliates. We look forward to speaking to you next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes the Affiliated Managers first quarter 2009 conference call. If you'd like to listen to the replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 using the access code 406-0354. Thank you for your participation, you may now disconnect.