Affiliated Managers Group Inc (AMG) 2009 Q2 法說會逐字稿

Welcome to the Affiliated Managers Group second quarter 2009 conference call. (Operator Instructions) This conference is being recorded today, Wednesday the 29th of July -- or June -- July, 2009.

I would now like to turn the conference over to Alexandra Lynn, Director of Corporate Strategy. Please go ahead.

Thank you for joining Affiliated Managers Group to discuss our results for the second quarter and first half of 2009. By now, you should have received the press release regarding our earnings as well as the press release regarding our pending investment in Harding Loevner. However, if anyone needs a copy, please contact us at 617-747-3300 and we will 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. Now I would like to turn the call over to Sean Healey. Sean?

Thank you, Ali. Good morning, everyone, and thank you for joining. In a strong market, AMG reported cash earnings per share of $1 reflecting our Affiliates outstanding investment performance as well as improving flow trends. Our Affiliates continue to outperform their peers and benchmarks across a diverse array of products generating strong performance in domestic equities as well as outstanding results in global and international equities and alternative strategies. For example, Genesis and Tweedy, Browne grew their assets under management by 43% and 22% during the quarter respectively as their largest emerging markets and global strategies outperformed peers and benchmarks for all time periods. While our alternative managers continue to be impacted by industry-wide client volatility, their investment performance generally remained quite strong in AQR, BlueMountain and [Value] (inaudible) generated excellent returns for the quarter and year to date.

Along with the recovery in the equity markets, we saw improving flow trends across our full range of products. In our alternative product set, we experienced continued but slowing outflows and we were pleased to see positive flows into our traditional products, especially global and international equities. More broadly, we're now seeing increasing signs of reallocations by retail and institutional investors back to equities and other return oriented products. As Nate will discuss in a moment, we are particularly pleased with our non-US client flows and pipeline which reflect both the outstanding performance of our affiliates as well as the impact of the international marketing and distribution resources which we have committed to Australia, Europe and the Middle East.

Turning to new investments, we are very pleased to announce today that we will complete our previously announced investment in Harding Loevner which, as you know, we had postponed in the face of extreme market volatility last year. With over $5 billion in assets under management, Harding Loevner is recognized as a leading global equity manager with an outstanding track record of outperformance relative to peers and benchmarks. The firm's global and international products are ranked in the top quartile of their [morning star] categories for the one, three, and five-year period. Harding Loevner has generated strong organic growth over time, including significant in flows year to date, and with its track record of generating excellent relative performance it's position outstanding long-term growth. Going forward, our new investments pipeline remain strong and we continue to make progress toward partnering with new affiliates from a broad universe of attractive prospects. In addition to the divestiture of asset management subsidiaries by corporate sellers, with the market recovery we are seeing increasing interest in succession oriented transactions from a number of independent boutique firms. While we remain extremely disciplined and highly selective in evaluating this diverse opportunity set, we are confident in our ability to add meaningfully to our earnings growth over time through accretive new investments.

Finally, during the quarter, we continue to enhance the strength and flexibility of our capital structure. As Darrell will discuss, with incremental capacity raised under our forward equity contract this quarter, our available cash resources are now $375 million and together with our credit facility of $770 million which is priced on extremely favorable terms and completely undrawn, we have significant capacity to finance our growth strategy. Looking ahead, we are well-positioned for strong earnings growth. Our organic growth prospects are excellent as our Affiliates continue to build on their long-term track records of outperformance across a diverse product set. In addition, with our outstanding competitive position and proven reputation for the successful execution of new investments, AMG offers a uniquely attractive opportunity for incremental earnings growth through creed investments in additional high quality boutique firms. With that, I'll turn to Nate to discuss our Affiliate results in more detail.

Thanks. Good morning, everyone. As Sean noted, the biggest driver of our growth during the second quarter was a significant rally in the equity market with our affiliates generating strong, absolute, and relative investment performance. In addition, we are seeing an acceleration of the move back to return oriented assets which result in a significant improvement in our flows despite continuing but slowing outflows in alternatives. The pick up in new business opportunities is accelerating. We are seeing this in the US and through our global distribution platform, and I'll talk more about this in the in a minute.

First, turning to our performance across product categories and starting with global equity. Emerging markets index is up 35% for the quarter while [MSCI World] and (inaudible) were both up over 20%. Against that background drop, we had had a very strong quarter for a number of our global and international equity products including those managed by Tweedy, Browne, AQR and Genesis. For example, Tweedy, Browne's flagship global value fund outperformed its hedged EP index and was 450 basis points in the quarter continuing their extraordinary long-term track record.

Among our other key global products, AQR's EP product made its benchmark in the quarter and is over 100 basis points ahead year to date while Third Avenue's international value fund underperformed in the quarter and remains behind its benchmark by 40 basis points year to date. On the emerging market side, every one of the products managed by Genesis beat its benchmark by a significant amount in the quarter, over 800 basis points, building on the firm's tremendous track record overall relevant time period. Finally, our Canadian affiliates, [B Tel Goodman] in particular, also posted strong returns in a number of their global equity and Canadian equity products.

Now, moving toward domestic products and starting with value equity. Our Affiliates in general had strong relative performance. This includes Tweedy, Browne which had another good quarter with all of the firms ahead of their benchmark for the one, three, and five-year time period. At Third Avenue, their flagship value fund outperformed its benchmark by over 1500 basis points for the quarter and by 1400 basis points year to date. In addition, Third Avenue small cap value funds outperformed its benchmark by over 500 basis points in the quarter and year to day adding to its strong long-term track record. In our growth category we had a more challenging quarter as several of our growth managers hold higher quality stocks and trail during the junk stock rally from March until the middle of June, including Friess in particular, but also Times Square and Frontier. While Times Square strategies trail their benchmarks in the quarter they feature strong track records and continue to be ahead for the one, three, and five-year record. Frontier's performance was next. Just about half of their products ahead of benchmarks for the quarter but with all of their products remaining ahead for the one, three, and five-year period.

Turning to our alternative products, we had a very strong performance at a number of our key affiliates. The majority of AQR's alternative strategies produced outstanding results on both an absolute basis and relative to benchmark. For example, their flagship absolute return fund was up about 10% in the quarter. In addition, the firm's new diversified arbitrage mutual fund is off to a very good start, up approximately 5% since its launch in January. At BlueMountain, the firm's largest fund, credit alternative was up 12% for the quarter and that has produced positive absolute returns for all periods since inception. Similarly, [Value] had a very strong quarter with all of their products up between 15% and 35%. Finally, performance at first quadrant among their largest strategies, their GTAA projects beat their benchmark for quarter and positive absolute returns for the one, three, and five-year period while currency slightly trailed its benchmark for the quarter. Positive absolute returns for year to date in the one, three, and five-year periods. On the other hand, the global macro products had a more challenging quarter resulting in underperformance for the year to date.

Now, let me spend a minute walking through our flows. The main themes are, first, continued but slowing outflows and alternatives which I'll go over shortly and, second, allocations beginning to return to performance oriented strategy. Focusing on the second point. We are seeing a pickup in the institutional channel across both placement searches, some of which we also saw in the first quarter but also in balancing reflected both in increased commitments from existing clients as well as RFPs and searches for new mandates. In terms of RFPs, we saw pick up beginning last quarter, albeit it off of a low base and that continued in to this quarter. This pick up in our fees translate to a significant increase in a number of finals in the second quarter as well as mandates won but not yet funded. This includes building a pipeline across our global distribution platforms in Australia, Europe and the Middle East.

Now, turning to flows by channel and starting with the institutional channel where we had net outflows of $375 million for the quarter. The main driver of flows in this channel was simply continued outflows and alternative at AQR, BlueMountain and first quadrant partially offset by inflows in traditional product as institutions begin to increase our allocations to return oriented assets. Focusing on alternative products, we see the pace of these outflows flowing through the remainder of the year, especially given the very good performance many of these products are generating. Excluding alternative products, our institutional flows in the second quarter were positive by approximately $700 million. Range in the mutual fund channel, we had negative flows of $1.1 billion. I want to spend a minute unpacking this number for you.

This is the biggest piece of our mutual fund flows was the loss of single alternative subadvisory mandate by one of our Canadian affiliates as the funds shut down their external alternative platform. In addition, our Tweedy, Third Avenue and Friess mutual fund families have modest outflows which were partially offset by net inflows and our manager's platform and by the early success of the AQR diversified ARP fund. Finally, in our high net worth channel, flows were negative $110 million for the quarter which was a sequential improvement for us. The drivers here were continuing but much more modest hedge fund and SMA outflows partially offset by positive (inaudible) network flows, including our municipal bond manager at Gannett Welsh & Kotler.

Now, a couple points on our operations in general. Notwithstanding the rebound in equity markets, we continue to work with or affiliates to efficiently allocate resources to areas that we believe have the best long-term opportunities, this includes cutting costs and rationalizing product lines and, at the same time, we and our Affiliates are reinvesting in the businesses in a broad range of ways, including developing new products and expanding channels of distribution. In this regard, and finally as Sean noted, we are beginning to execute on the significant opportunities to attract assets outside the US through our global distribution platform. We saw strong flows from our three regions but, more importantly, as we look to the future we are building good pipelines in each region and we are also building up the client servicing and cross selling capabilities as well. Finally, given the success of these regions and the reception from both our Affiliates in the market place, we are actively working towards the launch of the next regional platform likely in Asia. With that, I'll turn it over to Darrell to discuss our financials.

Thank you, Nate. Good morning, everyone. Our affiliates produced strong returns for their clients during the quarter and continued to build on their long-term track record of outperformance relative to both peers and benchmarks. With highly rated investment products across the diverse array of styles and asset classes, AMG is well positioned for strong organic growth.

In addition, our new investment strategy gives us a unique opportunity for an additional source of earnings growth for accretive investments in new affiliates like Harding Loevner. I'm very excited about our partnership with Harding Loevner. They are an outstanding global equities manager and an excellent addition to our Affiliate Group. As you saw in the release, we reported cash earnings per share of $1 for the second quarter. On a GAAP basis we reported earnings of $0.26 for the quarter. Performance fees added about $0.03 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 14.7 basis points. We expect this ratio to be about 14.8 basis points for the third quarter of 2009. Holding company expenses were $10.5 million for the quarter and we expect them to increase to approximately $11.1 million in the third and fourth quarters as a result of transaction expenses as well as FAS 123R expenses related to recent equity grants. With regard to taxes, we do not expect to pay any cash taxes during 2009 as the tax benefits of our intangible assets and convertible securities shelter virtually all of our income. Although our effective GAAP tax rate for the year will be 39%, our actual quarterly rate will vary from quarter to quarter as a result of recently adopted Massachusetts tax regulations.

In the second quarter, these regulations have the effect of increasing our earnings by approximately $0.03 but will result in a reduction in cash earnings of an equal amount spread over the third and fourth quarters. The net impact of these GAAP tax rate changes will, as I said, be 39% rate for the full year. Intangible related deferred taxes were $9.5 million for the quarter. Amortization for the quarter was $16 million, including $8 million of amortization from Affiliates accounted for using the equity method. The earnings from equity method affiliates are included in the income from equity method investment line on the income statement all net of amortization. Depreciation for the quarter was $3.2 million with $2 million of that amount attributable to affiliate depreciation. We expect amortization and depreciation to remain at these levels for the third quarter.

We reported total interest expense of $19.2 million for the second quarter of which $3.4 million is noncash interest expense for three of our convertible securities. We expect interest expense to remain at about this level for the third quarter. While our business generates meaningful cash, we are focused on maintaining a strong balance sheet and enhancing our financial capacity. Given the substantial new investment opportunities that we see, during the quarter we sold an additional $200 million of equity through a (inaudible) agreement with BankAmerica. With this additional available capital, which is undrawn, we now have over $375 million of cash resources to support our new investment strategy. In addition, we also have $770 million available under our credit facility at very attractive pricing and we no net debt other than convertible securities.

Now turning to guidance for the remainder of 2009. While the market environment has clearly improved from the beginning of the year, volatility persists and so we'll continue to base our assumptions on a flat market from yesterday. Our guidance [convention] remains unchanged from last quarter with the lower end that assumes virtually no performance fees. From the space line, the upper end of the range also assumes a flat market from yesterday but includes reasonable assumptions regarding organic Affiliate growth as well as potential performance fee contribution. Additionally, we expect Harding Loevner to close by the end of the third quarter and contribute approximately $0.05 to 2009 cash earnings and approximately $0.20 on a run rate basis. Given this framework, we expect our earnings results for 2009 to be in the range of $4 to $4.50. We assume a weighted average share count for the year of $43 million. This is higher than previous share count guidance reflecting the increase in AMG stock price during the quarter. Our guidance is based on current expectations about Affiliated 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. And now we would be happy to answer your questions.

(Operator Instructions) Our first question comes from the line of William Katz with Buckingham Research. Please go ahead.

Okay. Thank you. Good morning. You guys came through a little low so I hope it's not on my end. It seems like the -- from a deal environment sort of two questions. One is it seems like the text in the press release seems a bit more specific than maybe in the past couple press releases. Obviously with the Harding transaction maybe things are are loosening up. I was wondering if you could comment sort of on that pipeline maybe a bit little more where you're seeing maybe the greatest opportunity particularly that you've sort of exercised the forward contract, and then I was doing some fast math here. Based on what Darrell was saying about the accretion, it would seem that these multiples are sort of toward the lower end than where you historically range. I was wondering if you would also comment on the pricing environment? Thank you.

Sure. I'm not aware that or we didn't design the comments in the release to be more specific than usual. I think the point we're making is that in addition to the corporate seller divestiture of asset management opportunity set that we have seen for a while, we are also with the market recovery seeing an increase in interest and discussions with independent boutique firms looking for solutions to succession issues. And, in a way, Harding represents one of those types of transactions. I would say, and this is beyond the scope of your question, but just to comment on the market, the recovery in the market have probably, on an overall basis -- overall industry basis, somewhat limited the level of activity that we expected last quarter. Simply, in many cases sellers don't feel the same financial imperative that they did three or four months ago. That said, we continue to have a number of those kinds of opportunities in our pipeline where larger financial services firms have decided that exiting the asset management business or selling a particular asset management subsidiary is the right strategic path. But we are, of course, very encouraged and the largest set of opportunities for us are succession oriented transactions and we're beginning to see more and more of that. The pricing environment remains quite attractive from a standpoint of a buyer with far fewer buyers than sellers in this environment. Obviously in every case it's going to depend based on the nature of the business and their product set. The Harding transaction is a little bit of an unusual case for us because you recall that the transaction was priced last year and when we modified the transaction and postponed it, we kept the same pricing and obviously applied it to the business' current run rate which has grown dramatically from the beginning of the year but it's still a bit lower than where the firm was at its peak last year. So that pricing I would say is still within the range of our other transactions, but probably at the high end.

Okay. My next question perhaps for Nate, you were going very quickly so I was trying to keep up. I apologize if this was in your prepared remarks. Could you give a little more disclosure or discussion maybe around you mentioned that you're very happy with some of your non-US initiatives. I was wondering if you can give an update maybe what's happening there, what kind of pipelines you're seeing?

Sure. To ground everybody, this is the global distribution platform we've been kind of building out over the last kind of 2-1/2 years, a little bit of it is the aging of them 2-1/2 years ago in Australia, London sort of 1-1/2 years ago to cover the Middle East and then expanding that to cover UK and starting into Europe this year. So with that back drop, the opportunity set is obviously very, very large and the [exercise] for us is prioritizing affiliates, prioritizing where in each of these countries and channels are we going to go, but the pipeline has begun to build very, very nicely and is now through the pipeline, right, so we're beginning to get the wins from the work that we've doing funding but the front end of that, maybe think of it as a funnel more than a pipeline, the front end of that is growing very rapidly and those are (inaudible) moving in to searches and finals and then wins. The opportunity set there for us is again very, very large. The receptivity across Affiliates has been great and the receptivity in the market place has been great as well and the guys are doing a good job just executing and now our challenge, and I was alluding to this a little in the prepared remarks, now our challenge is also while we're doing that is also building up the client servicing and the cross selling components of this to really take advantage of all these opportunities.

Okay. Thanks very much.

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

Thanks and good morning.

Good morning, Craig.

First, just on expenses it looks like the comp to revenue ratio ticked up a decent amount. I know some of it was offset by the SG&A ratio to revs which actually declines some but still on a net basis it look like the expenses of your subs, your boutiques ticked up relative to revenues. I'm just wondering if there was any driver there and if it was unusual if we can we expect that to normalize next quarter?

This is Darrell. If you look through the income statement from top to bottom from appreciation to the market to AUM to revenues and then to EBITDA contribution, the model of functions, they're very much the way we guided this last quarter and then the way we've tried to shape expectations about the model over the last year. When you look at the comp and benefits line, there is increased comp and benefits. That, of course, is where the excess operating cash flow resides, so as firms grow and affiliate managers have this increasing amount of cash, which is part of our structure which is the cash that they receive through the revenue share agreement that is not matched against a specific business expenses, that's excess operating allocation that creates a cushion in the financial -- creates a cushion in the financial model as you get to EBITDA. That cushion served us very well as markets were declining and now as markets are appreciating, you can see that cushion begin to build, so that's what's driving the comp and benefits line. You can see SG&A from quarter over quarter decline modestly, and so that is where the offset comes from because if you move from revenue down to our EBITDA contribution which is the cash flow we receive from Affiliates, that ratio is roughly in line. Changes quarter to quarter based on [nix], all the affiliates have a revenue share allocation, a revenue share agreement that's specific to their firm, their margin, the way their business is run, so as some firms grow faster than others, that ratio from revenue to EBITDA changes slightly, but in this quarter to your question, Craig, it is essentially that excess operating cash flow building as markets and our affiliates grow.

It sounds like the issue though as I'm looking at it on a GAAP basis, on a cash basis if I make all the adjustments it sounds like on that basis the expenses turn flat versus revenue.

I would say from the EBITDA contribution, we are right in line with revenues, within 100 basis points. If you look at holding company expenses, I think we've done a very good job containing holding company expenses this year and will continue to do that through the end of the year.

Got it. On the guidance for the share account, year end guidance was $43 million, I believe that was for your adjusted diluted share count number and that is versus kind of $42.3 million this quarter, 40, so it looks like we have a step up. Is that all the dilution from the equity forward sale and will that happen on the third quarter?

The way -- again, I wouldn't frame it this way, which is looking forward to the dilution from the equity forward, but that will only mean that our stock price is appreciating. Remember, the way the equity forward works is that we engaged in an agreement with Bank of America so that $200 million stands available to us. That is at a stock price that's around $57. If you look at how that works its way into our financial statements, we have not drawn down on that agreement. That -- as I said, that agreement stands available, so there's no shared dilution related to specific shares under that agreement. It's calculated using the treasury stock method. So for every $10 our stock appreciates, our share will grow by about 200,000 shares.

Got it. One more question if I may, just knowing that you just just closed the deal, Harding Loevner, or actually it will close I think the beginning of the fourth quarter, and your capital positions improved over the last six months, how confident can we be that you guys are looking at deals and maybe there could be another deal in the second half of this year?

You can be highly confident that we're looking at deals. We're not going nor do we ever forecast the precise timing of transactions. It would be impossible to do so in any event, so I think we have characterized the pipeline as strong, described the range of different kinds of opportunities that are within it and we are aggressively executing on that pipeline.

Great. Thanks for taking my questions.

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

Hi. Good morning, guys.

Good morning, DJ.

I just had a quick couple follow-up questions. Can you give us a sense of where performance fees or where your performance fee generating strategies are relative to high water mark? You talk about solid performance from a variety of different firms here but I just, relative I guess specifically to BlueMountain given high water mark from last year and the fee concessions had you to make in the fourth quarter.

Okay. Let me speak to performance fees broadly first. First, it's obviously still early in the year. We obviously have some that come earlier, but the main is in the fourth quarter. It's still early in the year. I say we have a wide range of opportunities and by that I mean there's an increasing number so that's a little bit of change, sort of an increasing number of these products that are sort of around their high water marks, at, above, a little bit above, a little bit below but sort of right around their high water marks. I'd say that's coming from an increasing number of firms, so that's also a little bit of an evolution so those are some of the observations I've make. On BlueMountain they have continued through this period, and just to be very clear they've continued through this period to have very strong investment performance, so it's not so much the sort of high water mark you're making. Maybe I wasn't exactly tracking that. They've continued to have good performance through the period.

Okay. Related to that, can you give us a little bit more color around the $2.1 billion of kind of closed strategies within the quarter, and I guess thinking about that relative to Darrell's guidance on the effective basis point of effective revenue yield on EBITDA which I thought would kind of tick up all else equal. Are those higher feed strategies, alternative strategies? What's the dynamic working there?

So the closed strategy is, as we said in the remarks, we keep going through with our affiliates and reviewing where they should be allocating their resources among existing products as well as new product opportunities, existing new channels, so that's the exercise we're continuing through. In this quarter, those numbers were largely -- remaining, the elimination of the remaining sort of pieces of passive overlay business that exists, so those were very low fee strategies. And a little bit of a thought around this just at a very high level is that very low fee strategies and in a higher volatility environment increasing execution costs again are going to take margins on those businesses down to negative, so this quarter those are low fee.

DJ, your intuition is right about the basis points fee. The way our guidance includes Harding Loevner closing very near the end of the quarter in the third quarter so all of their assets are included in that ratio but, of course, the contribution from Harding Loevner is not.

Okay. Got it. Thanks for taking my questions.

Our next question comes from the line of Dan Fannon. Please go ahead.

Thanks for taking my questions.

Hi Dan.

You guys have always stated to have a constant dialogue with a large number of potential portfolio companies. I wonder if you could give us a sense of how that pipeline has changed over the past 12 months in terms of companies that you continue dialogue with, guys that have fallen out and new companies that have come in?

Sure. I answered a version of this question earlier, so I'll not go into too much repetition, but if I look back over time, obviously for the last part of 2008 and the first three months of this year, there was not a lot of activity, obviously. In the -- at the beginning of the second quarter and some beginning earlier, there was a notable increase in corporate sellers looking to divest asset management businesses because they were sub scale or needed to raise capital or no longer a fit with their own corporate strategy. Those kinds of opportunities are still out there. Some transactions broadly in the market will get done, some won't. We are still working on several of those kinds of opportunities and hopeful that we'll get those done.

In addition, as you would have expected in the midst of highly volatile declining markets, there was much less of the succession driven kinds of opportunities. There are, of course, the main focus of our new investment activity. With the market recovery, we're seeing a noticeable increase in our conversations and activity with independent firms looking for a succession solution. Looking ahead, without trying to time it precisely, we are very optimistic about our prospects for earnings contribution from new investments because of the size of that opportunity set, the number of outstanding boutique firms that we'll look for a succession solution and our relative position in the market is very, very strong, so that's a broad answer to your question.

That's helpful. I guess just to follow up, so on the succession plan type of investments are there a lot of people that you historically weren't talking to that are now open to dialogue?

Yes. And, as you know, our strategy and approach for now over a decade has been to systematically develop and maintain relationships with the best boutique firms really around the world, and we have worked even in the midst of extreme market volatility to maintain those relationships knowing that openly over time inevitably for demographic reasons, firms and their principals will seek some kind of succession solution and, of course, through this period the other thing that has occurred is there has been a great sorting process where we're able to see which firms manage their businesses and performed in a way that allowed them to endure and succeed and grow coming out of it.

Great, thank you.

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

Hi. Good morning.

Good morning.

Just in terms of your ability to do acquisitions, you mentioned $375 million in available cash and your undrawn credit facility of $730 million. I'm just wondering are there any constraints from the ratings agencies from spending that or any other constraints in terms of need for working capital or could you actually put all of that use?

This is Darrell. Of course, what we are trying to do, as we support our growth strategy, is create a -- continue to have a strong balance sheet and have prudent access to capital so that we can fund transactions in a way where we keep our leverage ratios with target leverage that's in that 1 to 2 times range. We can use a substantial portion of the bank facility because as every new investment generates its own cash flow to support that debt, we can put almost all of that to use in a way that keeps our leverage ratios within a range that is consistent with what we've done in the past. As you can see, we put this mechanism in place for the forward sale of equity. Again, if you look over the last year, I think there's been dramatic changes in the credit market, changes in the equity market, so I think that's part of our layers of prudence to make sure that we can get the lowest weighted average cost of capital that we can obtain for our shareholders to support these deals but also make sure we have access to plenty of capital so that we can make sure that we remain consistent with our overall strong balance sheet and with our target leverage ratio. So we certainly have the availability under the equity fault. In addition, I think we can use a considerable amount of the bank facility but we will, I'm sure as the year moves forward what I'm grateful for is we are positioned well to take advantage of these new investment opportunities and our -- to a significant degree insulated from the volatility of the market and how it would influence our ability to execute these transactions.

Okay. Thanks. And just a couple questions on asset mix. I'm just wondering with the addition of Harding Loevner if you have a sense of how much of your assets are now global and separately how much are emerging markets and also within the net flows it sounds like the net flows from outside the US are picking up and I'm wondering if you could give us a sense of what percentage of the flows are from outside the US and when you look at your institutional pipeline, how much of that is from outside the US?

Okay. Let me try and unpack those and get through them. If I miss one, obviously let me catch it. I think pro forma for Harding it's going to be roughly a third or so of global. Is that -- I think I got that right. The -- so that's -- in terms of where flows are, yes, the ex-US flows are increasing. The ex-US flows are increasing as a proportion but we also, again, any (inaudible) is lumpiness of point before, right, so some of it is also the ex-US portion of new clients. Let me say it this way, the ex US portion of new clients is absolutely increasing. There are really two dynamics in the institutional flows in this past quarter and we sort of talked about this in the script. One is the new client component. The other is the rebalancing and in the rebalancing a big part of our pickup in flows is also coming from sort of increased contributions, sort of net contributions versus withdrawals. So one way to think about that is a number of managers were sources of liquidating and instead of being sources of liquidity are now getting the benefit of the rebalancing back. So where that's happening you have to sort of pull that out of the sort of what's the contribution, again, thinking about it from a channel development you have to pull that out of what the contribution of global flows to -- of the global platform to flows. Does that make sense? So it's increasing portion certainly as new client fees but, again, you have to separate out the net contribution thing from the existing clients as well. We're -- obviously since we don't have those clients, they're not participating in that.

Cynthia, this is Darrell. On an EBITDA basis, the international contributes about 40% of our pro forma for Harding Loevner.

40%, okay. Great. Thanks. And last question just on the alternative outflow, sounds like you're expecting those to continue to decline but you still have outflows through the rest of the year. I'm just wondering what do you think is driving the outflows at this point given the performance has picked up? Is it that there's a lag in terms of people putting in notice or is it that people just still need liquidity?

I think it's -- yes, I think it's -- you've got it exactly right. As we look ahead, the notice provision -- our alternatives book has some that are in separate (inaudible). Many of those very liquid have shorter provisions but there's significant parts of the book that have relatively long provisions sort of 30 to 90-day periods of time. So some of it is that, which is people have notices in and have liquidity. One interesting thing and, again, I don't want to make too much of it, but one interesting thing you actually saw a little bit of people taking back those notices. We started seeing some that have start to happen, so it may be ending up a little better than sort of if you just look at the notices that we know are in the pipeline. I think you've got it exactly right. A lot of it is that. I think it's more that than people still needing liquidity, although you still do obviously hear people talking about that.

And industry-wide there continues to be alternative outflows. I think what is attractive from our standpoint is that the trend is favorable and, importantly, our alternative affiliates' performance is quite strong, so as you look ahead I think our view is that that there won't continue to be alternative outflows in perpetuity. It will turn back around and our affiliates are well-positioned when things begin to grow again.

Great. Thanks a lot.

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

Hi, guys. Good afternoon.

Hi, Michael.

First, can you just quantify the sub advisory loss in the mutual fund channel this quarter?

Okay, so the sub advisory loss in the mutual fund channel this quarter was -- I want to say that was roughly -- let me just look at this for a second, I think it was roughly 500 to 600 -- as I mentioned, it was a Canadian line. I'm trying to do a little bit of currency stuff in my ahead. I might not have that precisely right, but that's about right.

Okay. That's great. Kind of more broadly in terms of the institutional channel, curious if you're seeing any difference in kind of client sentiment or product demand as you look across your overseas client base relative to the clients here in the US?

Yes, well I think one big difference is there is significant demand for global product and sort of contrast global with international so lots of demand for global products. Lots of demand for currency products. I think that's another area where we have some very strong product and seeing very strong ex-US demand, so I think those would be probably the two main ones.

Harding, for example, has had, as we noted, very strong inflows year to date and that has been primarily driven by non-US clients.

Okay. Then just to follow up on performance fees, I think you said kind of the number of affiliates that are positioned to generate fees might broaden out this year and so if that's the case, does that kind of imply that your performance fee concentration risk for lack of a better term is kind of declining as we go forward?

Yes, this is Darrell. You're just right, which is, again, I think we're moving back toward the -- towards 2006, 2007 profile for performance fee generation. We went through a period last year where performance fees were driven by BlueMountain and First Quadrant. We look to the beginning of this year and we are really looking to those two firms who are uncorrelated to the equity market to be generators of these. Well, what's happened since then is we've had significant appreciation in the equity markets. Those firms have done just fine, BlueMountain very well. You can see First Quadrant continues to be below their high water mark but again well-positioned and we have other firms like Genesis, AQR, and Third Avenue who are coming in to position where they can generate performance fees. So we're in a transition from equity from firms that were uncorrelated to the equity market being our sole generators to equity market firms looking like they could make a contribution. As I said, especially in this environment, six months is forever, and as we look forward, I could imagine that the complexion and composition of the type of performance fees that we generate to the end of year will see the change. But I think as we take what is happening now and extrapolate it over the next couple of years the ability for a performance fee portfolio to generate material earnings is getting better.

Okay. That's helpful. Thanks for taking my questions.

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

Great. Thanks. Sean, if you take a look at your pipeline of potential deals and think about the probability of them getting done by type of transaction and by type of asset class, is there anything that stands out there?

I think that's a -- an artful way of asking a version of the same question which is what do we predict for the remainder of the year and into next year in terms of new investment activity. I would tell you, we have opportunities in our pipeline of all different types that is investments in corporate subsidiaries, corporate asset management subsidiaries as I said in increasing number of succession-driven transactions involving independent firms. We have a strategic focus and, in fact, are experiencing a proportionate increase in opportunities that are outside the US, but I can't design or won't in this setting try to assign probabilities to -- or timelines to getting them done. We'll keep you as apprised as we can of broad directions, but are going to resist for reasons which I hope you understand getting in to the business of forward projections of deals.

Okay. Then just in terms of your performance and flows, obviously performance you've got a number of affiliates that are having some strong performance with some products but then maybe spotty in some other places and you're still sort of in outflow territory. I guess this is a two-fold question. One, do you see, A, some signs of that changing so far on a quarter basis? And then, 2, is that at all an impediment to getting deals done?

Let me address the flows piece first. This is Nate. So the short answer is yes. The trend, I think we tried to indicate this, the trend outside of the alternatives area has been positive. Within the alternatives area, we're continuing to see this trend of outflows slowing, so both of those trends have continued into this quarter, obviously early in the quarter and all that, but both of those trends have continued in to this quarter so, yes, it continues to look better and better.

And ironically, as we noted, the recovery in the market has made a category of sellers that is corporate sellers looking to divest themselves of asset management subsidiaries. Generically less interested in the market as a whole there are fewer such transactions being talked about. As I said, the subset of those kinds of opportunities that are in our pipeline have not been affected because corporations are making decisions that are in many cases beyond just immediate financial need. There's a change in their strategy. I would say that dynamic is on an overall basis more than offset by the number of independent firms that are experiencing organic growth and again refocusing on the inevitable succession solutions that will be required for demographic reasons. Very large number of independent boutique firms in the market in the US, outside the US and inevitably very large number of those firms for demographic reasons will require a solution to succession and transition needs and, if you will, the difficult markets didn't change the demographics, right? People still got closer and closer to retirement age and so there is a bit of a backlog building. People don't have to do anything immediatly but as markets recover, there will be an increasing number of those kinds of opportunities in the market generally, and especially for us.

Okay, great. Thanks.

Thank you. Our next question comes from the line of Robert Lee with Keefe, Bruyette & Woods. Please go ahead.

Thanks. Good, I guess, still morning. Good morning, everyone.

Good morning.

I apologize if you answered this before, but if we go back and look at I guess over the last almost a year it seems like every quarter there's some type of other affiliated transaction that's kind of a couple billion outflow and I know you've been rationalizing products of different affiliates, maybe some affiliates even left to fold, but can you maybe talk a little bit about what's driving that this quarter and should we expect that kind of outflow is going to continue for a while?

Okay, so I don't think I would say outflow will continue for a while. I think we do continue to work through -- as I said, I think we continue to work through with our affiliates both here, products and product lines and, as you said, one of the things we should be exiting at the same time obviously continuing to invest in new products and channels, we did earlier, and maybe you did miss this, we did earlier sort of say very clearly here's what's in the number in the quarter which is we exited the last of the [overlay] businesses that we had and we also sort of explain the reasoning, which is those are very low fee businesses and with the increased volatility we had, as you say, been exiting those businesses for a while. This is the last of that, but we're going to keep working with our affiliates and making sure we allocate our resources to the things that are going to generate the best return.

This is Darrell. If you look over time at that rationalization process, I think it has had a favorable result as you look at cash that is generated from the business relative to the capital that's deployed and as we look at assets under management relative to cash flow, I think that ratio seems to stay in a very good range. So there are these products that, as we mentioned, have high asset number but ultimately a very low impact on AMG shareholders and making sure we are not diluting our best resources on those products as one of our principal objectives.

Okay. Maybe just a follow-up question on the income statement. The investment in other, I guess it's income this quarter, was about $7 million and, again, I apologize if you went through this earlier, but what was it that kind of drove that, it seemed like a pretty high relative to where it's been?

There's one principal driver. Let's recall, what goes through that line is ownership in investment partnerships and it's the mark to market on the ownership in those partnerships. The -- I say the steady state level if we were forecasting, is about a $1.4 million. That is AMG earnings and that is our investments, our ownership in the GPs of investment partnerships that are out there and it also includes the interest income that we earn on our cash. The driver this quarter, there's a little over $5 million that went through that line which was the appreciation of Third Avenue's deferred compensation program and if you look down at minority interest, which now in the new financial statement world is called net income from non-controlling interest, that number, which was our old minority interest is a little higher relative to revenue since then, so that number on our income statement is about $30.671 million. If you take the $5 million out of that, you'll see that the minority interest relative to revenue comes more in line and so the folks at Third Avenue, as you know, their performance is very strong. The deferred compensation plan is invested in their assets and that's what you're seeing in that line item. In addition, given the strong performance at folks at AQR, Genesis and others, that added another $600,000 this quarter above what we would forecast as our run rate but, again, evidence of strong performance with a bunch of folks that have ability to contribute materially to performance fees as equity markets continue to improve.

Okay. Maybe one other geography question on the P & L. Income taxes kind of the other deferred where I'm assuming maybe that's where some of that one-time tax benefit from the Massachusetts tax flowed through.

Yes, that's exactly where it is. There's a little over $1.5 million that we needed to reverse through the deferred tax line related to that regulation and then that will be, even though we reversed it, it will be re-reversed through the tax line over these next couple of quarters. I would say broadly taxes are difficult to forecast as municipalities, states all having challenges. As we work through our taxes, we continue to be sending in cash to the authorities and we're accumulating refunds that will get paid. I think it was a moment when we opened up an envelope last week and we have a big check that's an IOU from California that we look forward to cashing in October, but as we look to our GAAP rate 39% for this year makes sense. We can imaging that stepping up a percent as we get to next year, but that's some of the exciting information for future calls. But as we think about taxes this year, no cash taxes, all offset by the tax shields that we have in place from both our -- the way we purchase firms on a taxable basis and our convertible. So there will be a little noise but I think it's easy to forecast zero around the number that matters the most.

Okay. One last modeling question. The guidance on the share account, was that $43 million average for the year or kind of ending the year at $43 million?

That's $43 million for the year.

Okay. That was it. Thanks a lot, guys.

Thanks, Robert.

Next question is from Roger Smith with FPK. Please go ahead.

Thanks. I just have a question on the deal environment. There's a big change in what we're looking at here with financial institutions and stuff, but what's really the change in the buyers out there? What are you kind of seeing out there and the expectation of them? Is there more of a thought that they need to get deals done and that that could be increasing the pricing environment and making things more competitive or as the markets are kind of moving up here is causing them to shy away or has that sort of changing. Or are you running up against more people than you might have in the past?

You've asked several questions. Some of them, many of them relate to the broader merger market and I'll try to answer but I want to make sure that everybody understands that most of that is completely irrelevant to us and how we look at our opportunities and what our competitors are, so within the world of boutique firms, first, that matters, there are far fewer of alternatives. Think of the quote strategic acquire is the US and foreign banks and insurance companies that have for the last decade plus been acquireers of boutique assets firms. Those entities have completely exited the market. US asset management or -- not only US but public asset management companies primarily in the US still remain acquireers, but they are more so active and it's only a subset of the public firms that are in a position and have a strategy to make acquisitions of boutique firms and then the private equity world has, that continues to be around but private equity investments in boutique firms as distinguished from larger firms have never been a great fit. Of course, there have been some transactions but inevitably the senior partners of successful, independent boutiques are looking for a transaction where they're the ones that anticipate future growth and are attracted to a model that involves retained ownership. They like the idea of getting a measure of liquidity and diversification for themselves as they look toward retirement age, but they're very focused on maintaining direct equity exposure for themselves and, importantly, for their next generation partners. The thing they're really not interested in is going become to their clients multiple times to explain why they're doing serial transactions to get the private equity firm an exit from their investment. We don't see them that much really at all in the boutique space.

A year ago, two years ago, we had a fair amount of competition at the upper end of the boutique size range from the public market. And I leave you to draw your conclusions about the availability and attractiveness of that alternative. Suffice to say, it's not something that we hear a lot of firms talking about even in the long-term as something that they think they'll go back to. So that's the universe that's relevant to us. To opine briefly on the broader market, I think in certain kinds of products and in certain kinds of firm settings, and the UK is different than the US, you will still some competitive processes and that is driven as it always is by a sense of a relative few firms that they want to fill a need, there's a unique opportunity for them to make an acquisition. So that -- there have been and I'm sure probably will be some more high profile transactions involving larger firms, but what is very attractive to us is that the market dynamics of independent boutique firms both in the US and outside the US is completely different and there we feel very, very confident about our competitive position.

Great. Thanks a lot. And then on the guidance that you gave, on the low end of the guidance I guess zero performance fees and on the top end of the guidance there's some performance fees in there. I know you said the managers are near or above high water marks now. If everybody closed at the end of the year where they are today, could you give us an idea of how much performance fee earnings you might have in the full year?

Yes, sadly the answer is no as we don't want to get in the business of disclosing what's unaccrued. There are performance fees out there but, again, we don't want to get in the position where we're reporting performance of affiliates in order to try to get some visibility.

It's analogous to our reluctance, again, hopefully understandable by investors to not opine on the probability of new investment transactions getting done. The new investment transactions aren't done until we announce them and the performance fees aren't earned until they're actually earned and we want to be careful and conservative in how we describe our future prospects.

Fair enough. Then just lastly on the holding company expenses I guess it looks like it's up about $2.5 million a year and you said it was due to acquisition costs as well as new equity grants. Can you split that out and the acquisition cost expense that is in there, is that a function of Harding Loevner or is there stuff that is just going on as the normal course of the business of doing what you do?

As we described it's both, but under the new accounting regimen, as the new investment guys work, the meter rings and we pay the bill, so that increase is obviously related to more deal activity than we had forecast in addition to some of the additional equity grants.

Just to be clear, the meter runs with outside counsel and outside advisors and consultants. We're in the in the main big use users of investment banking firms and when we are, we try not to pay a mandatory fee but still there is some incremental expense. None of that is the direct cost of the folks here at AMG who are already in the compensation line.

Great. Thanks very much.

Thank you. There are no further questions. Please go ahead with any closing statements.

Thank you again for joining us this morning. As we discussed during the call, we are pleased with our results for this quarter and confident in our long-term growth prospects. Thank you.

Ladies and gentlemen this concludes the Affiliated Managers Group second quarter 2009 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 with the pass code 4116590. AT&T would like to thank you for your participation. You may now disconnect.