Affiliated Managers Group Inc (AMG) 2010 Q2 法說會逐字稿

Greetings and welcome to the Affiliated Managers Group, Inc. Second Quarter Earnings call.

(Operator Instructions)

It is now my pleasure to introduce your host, Alexandra Lynn, Vice President of Corporate Strategy and Investor Relations. Thank you, miss Lynn, you may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the second quarter and first half of 2010. 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 at www.amg.com, 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 measures to the most directly comparable GAAP financial measures.

We would like to call your attention to the fact that we have renamed our key performing metric from "Cash Earnings," and "Cash Earnings Per Share," to "Economic Earnings," and "Economic Earnings Per Share," respectively. This is a change in name only. Performance measures themselves are the same in every other respect.

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. I now would like to turn the call over to Sean Healey.

Thanks Ally. Good morning everyone. AMG reported Economic Earnings Per Share of $1.35 for the second quarter. This is an increase of 35% from the same period in 2009 driven by the ongoing success in executing our new affiliated investment strategy, the strong performance of our products, including alternative products generating performance fees, and positive client cash flows. We were pleased with our results for the quarter and especially that even with declining equity markets, we reported positive net flows.

Notwithstanding the difficult market environment, our Affiliates continued to deliver strong relative investment performance, particularly in global equity and alternative products, which together contribute over 65% of our earnings. Tweedy, Browne; Genesis; and Harding Loevner each produced outstanding results in their International and emerging markets products, without performance relative to peers and benchmarks across all-time periods, for nearly every product offered by these firms. As you a highlight, Tweedy's Global Value Fund ranked at the very top of its Morningstar category during the second quarter and as first of 377 funds in both the year-to-date and one-year period.

Turning to alternative managers, we are pleased with the increasing breadth and depth of our alternative product set, which spans multi-asset strategies from AQR, credit alternatives from BlueMountain and active value investing from ValueAct, as well as global private equity offerings from our newest Affiliate, Pantheon. First Quadrant's alternative products were a particular stand out this quarter and contributed meaningful performance fees. Looking ahead, our diverse portfolio of alternative products remains well-positioned to generate material performance fees through various stages of the market cycle.

Even in a challenging market environment our Affiliates' strong investment performance led to positive net client cash flows, while market volatility may have somewhat delayed broader investor reallocation to return-oriented assets, we continue to believe that this reallocation is inevitable, and given our outstanding array of alpha-generating products we are well-positioned for strong, organic growth over time.

Our concentration in global and emerging markets equity and alternative products is especially attractive to institutional investors outside of the US and we are seeing increasing demand for these products through our global distribution platform. As Nate will describe in a moment, we continue to make progress in expanding our global platform, and our Affiliates are involved in a growing number of searches in Europe, the Middle East and Australia, with good results. We have won a number of significant new mandates recently, and with our momentum continuing to build across all regions, we see numerous opportunities for continued organic growth ahead.

Turning to new investments, at the end of the second quarter we closed our investment in Pantheon, which is not only our fifth deal in the past year, but also our largest to date. We continue to be very busy with a strong pipeline of new investment prospects, and although recent volatilities had a modest impact on our progress, looking ahead we continue to see accelerating new investment opportunities. More broadly we believe that demographic trends along with the prospect of rising tax rates, will result in increasing transaction activity among independent firms through the rest of this year, and into 2011.

Finally, I would like to update you on a new initiative we're working on in the wealth management space. As you know, the wealth management sector is growing and evolving, and in the ultra high net worth segment there is a large and increasing number of teams and independent firms, which will require a transition and succession planning solution. We think that there is a great opportunity for us to adapt AMG's investment structure and approach to this area and to build a large-scale business in a subsidiary holding company over time. We recently made a couple of small investments in firms which provide infrastructure and support functions, and while it will be some time before this initiative is material to our overall earnings, we look forward to keeping you posted on our progress.

So in summary, we're pleased with our results for the quarter, particularly our Affiliates' strong investment performance and positive client cash flows in the face of market volatility. We're very optimistic about our forward prospects, and continue to be uniquely positioned to generate strong shareholder returns over the long-term through both the organic growth of our Affiliates and accretive investments and additional new Affiliates.

With that I will turn it over to Nate to discuss our results in more detail.

Good morning everyone.

As Sean noted, given the market volatility in the quarter, we were very pleased with the strength of our results. Most importantly, our investment performance continued to be good across most product categories and especially among global equities, emerging markets equities and alternatives.

We were also pleased to report positive flows for the quarter. I will talk more about it in a moment, but our US retail and global institutional platforms made significant contributions to our flows for the quarter and we continue to invest in these areas. Fundamentally, this combination of good relative performance and increasing distribution scale, makes us very optimistic, as we look forward.

Now, turning to investment performance for the quarter, and starting with global equities. All of Tweedy, Browne's major global equity products outperformed their benchmarks for the quarter and remained ahead for the one, three and five-year periods. Their flagship Global Value Fund ranks in the first percentile in its Morningstar category for the quarter year-to-date and trailing year and remains well ahead for all relevant time periods, including a truly impressive statistic. This fund ranks first in its Morningstar category for the 15 year period. All of Harding Loevner's major global and international products outperformed in the quarter and continue to have very strong long-term performance across their suite of investment strategies as well.

In addition, AQR's E/P and Third Avenue's international products outperformed their benchmarks for the quarter. Finally the four-star rated Artemis Income and Artemis special situations fund, outperformed their respective benchmarks by over 400 basis points in the quarter as well.

On the emerging market side, Genesis continued to deliver outstanding performance with their flagship emerging markets product, beating its benchmark by over 150 basis points in the quarter, and remains ahead of its benchmark for all relevant time periods. Harding Loevner's emerging markets product also outperformed its benchmark by over 40 basis points in the quarter and 150 basis points year-to-date.

We had strong relative performance in the domestic value category as well. Tweedy, Browne's Value Fund outperformed the S&P 500 by almost 300 basis points in the quarter, and over 200 basis points for year-to-date while Third Avenue's domestic value products also outperformed benchmarks in the quarter. Within our domestic growth category, all of Times Square strategies outperformed peers and benchmarks for the quarter, including the Firm's small-cap and mid-cap growth funds, which both carry a five-star rating by Morningstar. These funds outperformed by 200 and 150 basis points respectively.

On the other hand, Friess Associates performed below their benchmarks for the quarter across their family of mutual funds. That said, the valuation discipline and focus by Friess on companies with positive earnings growth, should position them to outperform over time, and especially if we get a low economic growth environment.

Frontier's largest growth equity products all beat their benchmarks in the quarter, and feature very good long-term performance records. In the quarter, Frontier landed its first mandate through our European institutional distributional platform, and we continue to broaden the geographies and channels in which Frontier strategies are available. You may recall that we added them to a second Vanguard fund through our subadvisory platform last quarter and late last year also launched a mutual fund for them, on our Manager's platform.

Next, turning to our alternative products, performance in our largest product was quite strong, with First Quadrant making a significant performance fee contribution in the quarter. Additional Affiliates with outstanding relative performance included AQR, BlueMountain and ValueAct. AQR's absolute return fund and global stock selection fund, posted positive returns in the quarter, as did their hedge fund data product. Similarly, BlueMountain's credit alternative fund, once again posted positive absolute returns in the quarter. Finally, all of ValueAct's major products outperformed their benchmarks for the quarter by 690 basis points.

Now, our largest alternative exposure is, of course, through our newest Affiliate, Pantheon. We are incredibly pleased to have the opportunity to partner with one of the world's leading PE fund-to-funds firms, and at every interaction they express how excited they are to once again be an independent firm. From a performance standpoint, they have a tremendous track record of long-term outperformance, and are looking at an array of attractive opportunities in the equity market today. They are also just beginning to market both an Asia fund and an emerging Asia fund and continuing to build on their very long-term track record as one of the best regarded PE investors in Asia.

Now turning to flows. The biggest drivers in the quarter were positive flows in both alternatives and global products, offset by outflows in domestic equities. Looking at it by geography, meaning where the clients are located, we had positive flows outside the US and outflows in the US. These trends existed in the institutional channels, where we saw overall positive flows of $120 million. Now, our global distribution platforms were significant contributors in the quarter, as each of Australia, which has been open for three years, the Middle East, which has been open for two years, and Europe, open for over a year, continues to execute well. The wins are increasing, the pipeline expanding, including one, but not funded mandates and the leverage across platforms, and across products, is beginning to take hold.

Now, it's very important to remember that all of these flows are incremental to what our Affiliates are doing on their own. In our high net worth channel, we have outflows of $30 million for the quarter, as we continue to have strong contributions from Gannett Welsh and Kotler, Beutel Goodman and Harding Loevner, offset by outflows of US equity products, especially in the SMA broker-sold channel.

Finally, in the mutual fund and high net worth channels, our manager's platforms generated good positive flows in the quarter, especially in the subadvisory area, and with the distribution of alternative strategies. The opportunity to sell an array of scalable alternative strategies, especially alternative (inaudible) strategies into this channel could be quite significant.

Now, as I said at the outset, while there is a significant amount of volatility in both markets and client behaviors, we were very pleased with our Affiliates' performance compared to peers and benchmarks, and believe they are in a good position to build over the long-term. Both as investors reallocate to return-oriented products, but also as together, we bring excellent performance oriented boutiques into more and more channels and geographies.

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

Thank you, Nate, good morning everyone.

As Sean and Nate mentioned, AMG had a strong second quarter as our Affiliates continued their long-term track records of excellent performance. We generated positive net client flows despite volatile markets and we closed our investment in Pantheon, which significantly enhanced the scale, stability and earnings power of our business. As you saw in the release, we reported Economic Earnings Per Share of $1.35 for the second quarter. On a GAAP basis, we reported earnings of $0.53.

Also as Ally noted, we had renamed our key performance metrics from "Cash Earnings," and "Cash Earnings Per Share," to "Economic Earnings," and "Economic Earnings Per Share," respectively. I would like to emphasize this is purely a change of names and there has been absolutely no change in the underlying methodology or calculations.

As you know, these non-GAAP measures adjust our net income primarily for intangible-related amortization, and the tax benefits derived from our new investment activities, and more accurately reflect the actual earnings that our business generates, and can be used for additional new investments, debt repayment or stock repurchases as appropriate.

Getting back to our results. Alternative products are an important component of our business, and excluding Pantheon accounts for 15% of our EBITDA contribution. We have a broad and diverse array of alternative strategies across 12 Affiliates. Performance fees from alternative products represent a very attractive, incremental opportunity for AMG and all market environments. This quarter, despite market volatility, our Affiliates' alternative products generated significant performance fees, contributing $0.15 to our earnings with First Quadrant providing the largest amount.

As we look at our earnings model, the ratio of EBITDA contribution to end-of-period assets under management was about 17.2 basis points for the second quarter, reflecting the strong contribution from performance fees, as well as the close of Pantheon at the very end of June. We expect this ratio to increase to about 17.8 basis points for the third quarter, reflecting the full contribution of our investment in Pantheon, as well as a more normalized performance fee assumption for the third quarter. Pausing for a moment on Pantheon, as Nate mentioned, we helped facilitate the smooth transition of the firm from Russell, and the Pantheon management team is excited to be operating on an independent platform. As Pantheon's revenues are generated by billing on committed capital, rather than invested capital, we appreciate the stable base earnings that Pantheon will provide AMG. In addition to attractive growth opportunities that their business has before it.

Holding company expenses were $25.6 million for the second quarter, with the increase over the prior quarter primarily related to expenses resulting from our new investment activities, and to a lesser degree, infrastructure spending on Pantheon and holding company compensation accruals. As I mentioned on our last call, new accounting rules now require us to recognize these transaction costs as they are incurred. We're expect holding company expenses to decrease to a more normalized level, approximately $18 million, for each of the third and fourth quarters. Which includes a quarterly assumption for transaction and global distribution expenses of approximately $3 million. With regard to taxes, our effective GAAP tax rate for the second quarter was 37% and we expect the rate to remain at this level for the third quarter as well. Our cash tax rate for the second quarter was about 13.4%, and we expect this rate to trend up in the third and fourth quarters with additional organic growth.

Intangible-related deferred taxes were $14.3 million for the second quarter with the increase over the first quarter related to new investments. We expect intangible related deferred taxes will decrease to a normalized $12.4 million for the each of third and fourth quarters.

Our amortization for the quarter was $17 million, including $8.1 million of amortization from Affiliates accounted for using the equity method. The earnings from equity method Affiliates are included in the income from equity method investments line, on the income statement, all net of amortization. We expect our amortization to increase to approximately $25.8 million, for the third quarter as we recognize the full effect of our recent investments.

Depreciation for the second quarter was $3.4 million, with $2.3 million of that amount attributable to Affiliate depreciation. Depreciation will increase to about $3.7 million in the third quarter.

We reported total interest expense of $22.7 million for the second quarter, of which $6.4 million was noncash interest expense related to the recent accounting changes. We expect interest expense to increase to about $23.6 million, of which $17.2 million will be cash, reflecting borrowings related to the closings of our new investments, primarily Pantheon.

Now turning to the balance sheet. Since our last call, we closed our investment in Pantheon at the very end of the quarter, a little later than we anticipated, using $600 million of borrowings under our bank revolver, and the issuance of approximately $100 million in common stock, from our forward equity arrangement. Separately, we converted the remaining $47 million of our zero coupon senior convertible security at the end of the quarter. And finally, early in the July, we drew down $200 million of additional equity under our forward, while net settling the remaining portion, and used the proceeds to repay our bank facility, which together with cash generated by our business, provides AMG with a little over $600 million of capacity through the remainder of the year. Following these capital activities, we have positioned our balance sheet with the flexibility to make additional new investments or repurchase stock, even in volatile markets.

Now turning to guidance, after adjusting for declines in equity markets since our last call, we expect our 2010 Economic Earnings Per Share to be in the range of $5.40 to $6. This guidance factors in actual markets through yesterday, and further assumes 2% quarterly growth in markets for the fourth quarter. We also assume a weighted average share count of the year of 49.1 million, which incorporates all the share-related activities I mentioned just a moment ago. As you'll see, this guidance range is narrower than priority quarters, to reflect the performance fees that were generated during the second quarter. Accordingly, and as with previous 2010 earnings guidance, the lower end of this new range will include no expectations for incremental performance fees, while the upper end will include expectations for additional performance fees, along with some positive assumptions for increasing flow trends.

Given the current run rate of our business is substantially is higher than our 2010 guidance range, we thought it would be helpful to provide preliminary earnings guidance for 2011. As we look forward to 2011, we use our normal guidance convention and assume a 2% quarterly growth in markets. We also assume a weighted average share count of 52.8 million. Given these assumptions, we expect to report Economic Earnings Per Share in the range of $6.15 to $7 for the year. Similarly to our 2010 earnings guidance, the lower-end of this new range includes very modest expectations for performance fees while the upper-end includes more robust expectations for performance fees, along with positive assumptions for increasing flow trends. Neither our 2010, nor our 2011 guidance includes earnings from future new investment activity.

In addition, earnings guidance for both 2010 and 2011 is based on current expectations about Affiliate growth rates, performance and the mix of Affiliate contribution tours 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 questions.

Thank you.

(Operator Instructions)

Thank you, our first question is from the line of Bill Katz, of Citigroup. Please proceed with your question.

Thanks. Good morning everybody.

Good morning, Bill.

Starting with the guidance, just so I understand the dynamics here, your -- the share unit is spiking up here because of the draw downs on the equity. I presume that is probably in anticipation of potential transactions. So just thinking about the timing of this. Because it seems like on one hand you are penalizing shareholders for the share count, but there is nothing in there for the possible transactions. Am I thinking about that right or is there something I am missing?

We're clearly positioning the balance sheet to increase capacity. As we look at the pipeline and we look at our set of activities, we think positioned today with a little over $600 million of capacity to make new investments is going to be the right way to create shareholder value. Also, as we drew down $200 million of equity under the forward, but we also net share settled the remaining portion, which was another 1.5 million shares which obviously would accrue to the treasury stock method over time. So by clearing out that forward, I think we have right-sized the forward too and used those proceeds to build our balance sheet to a place where we can very comfortably seize the new involvement opportunities and again, in a way that we think is going to create the most value over time.

Okay. Second question is Nate, you mentioned that you feel pretty good about the pipeline. If you could maybe dimension maybe the size of it today, versus where we were year-ago, last quarter, excuse me, or other dynamics, to give us a sense of some of that momentum?

Sure, from a year-ago?

Just to be clear, that would be many, many, many, many better.

From last quarter, I think the pipeline of significant wins and so this is mostly the institutional pipeline is the way to think about it is probably up on an asset basis, probably up about 75%. So the pipeline really is growing. The pipeline really is growing quite significantly. Now again the usual caveats. This is institutional, there were some very large mandates in that, the timing will be very uncertain, very "Lumpy" is the term we use. So, the pipeline has grown significantly, but again, the timing of when it all comes through, obviously hard to predict.

Can you quantify the 75% and put some numbers around to give us a sense of magnitude?

I don't think we have been doing the exact -- yes I think that is sort of the way the.

Just one last (inaudible) question then. Can you break out where the performance fees showed up through the P&L? I'm just trying to get a sense of the normalized fee rate for the Company.

Yes, I would say principally through First Quadrant, and as you look at revenues assume about $28 million of performance fee revenue went to our revenue line.

Okay. That is helpful. Thank you, guys.

Our next question is from the line of Michael Kim with Sandler O'Neill. Please proceed with your question.

Hi guys. Good morning.

Good morning.

Just maybe first a question for Nate. Where are you in terms of opening up the Hong Kong office and would you expect to see kind of the same type of growth rates that you have seen after opening some of your other overseas offices?

Yes. So in terms of opening Hong Kong, we have now hired the managing director to run that office and we're in the licensing process. I would expect that office will be up and running sort of end of the summer or so. We're also working with the first Affiliates to get them on board. So call it end of summer. Then just to maybe step back for a second.

Australia sort of opened since '07. That is the one that is the most mature in terms of growth at this point. And Europe obviously growing. So I think that kind of pipeline of the first year or two and then really growing significantly thereafter is the right way to think about it. So we should see wins coming online. But they're really getting the brand known broadly and getting the Affiliates known broadly and getting us into searches and all of those sorts of things sort of takes a little bit of time.

The other thing, again, we said it during our prepared remarks, but just to remind, this is incremental what the Affiliates are already doing on their own. And we are already seeing -- just with the preliminary process of opening the offices -- we are already seeing some leverage in those efforts as we're helping affiliates that already have processes in place to win mandates.

Okay. That's helpful.

And in terms of performance fees, it seems like you've got pretty good momentum, particularly on the non-correlated side. So looking out to next year, and assuming cooperative markets generally speaking, do you think we can get back to kind of a performance fee contribution level closer to something like a dollar, just given some of the momentum that you have had more recently?

Well, I wouldn't put a specific set of pennies on it. I would say, as we have shared before, you know, the $0.19 that was contributed last year feels very low relative to that opportunity. I think if you look to this year, my sense is that the performance fees that investors have put into expectations feels about right for this year. That said, given this strong performance fee I think we can feel a far greater degree of certainty around the performance fee contribution for 2010.

As we look to next year, clearly our expectations in a market that is growing with the 12 Affiliates that provide performance fees, I think this we can see performance fee contributions that are greater than that year. How markets evolve and what effect that has is a long way away, but again, we feel very good about the opportunity and we're seeing those products perform in a way that we think is going to make it an attractive incremental contributor to our earnings growth.

Okay, just finally, we haven't really heard you talk about kind of the whole process of reallocating resources away from maybe some noneconomic products more recently. Are you pretty much through that process at this point or still areas or products that you may be still looking at?

I think there are still some things that we're looking at. Again, let me just remind folks, this is a collaborative process that we go through with our Affiliates, we obviously have cleared out the vast majority of what we thought what was there, but again, the world keeps evolving.

Again, I will also note it's not just, as we said, it's not just the working to get resources away from certain things that aren't working, but the allocation of resources to new opportunities and areas. That is something that we absolutely are doing. And I think we talked about some of that, but that is alternative product, new alternative products, new product development more broadly, bringing products, including alternative products, into distribution channels, mutual funds, subadvisory, all of that. So there are a number of areas where we think there is real opportunity for the Affiliates and their performance products to bring them into new channels, and obviously global is another whole area where we are allocating significant resources now, to bring those products into markets where they haven't really had resources behind them before.

Okay. Thanks for taking my questions.

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

Great, morning everyone. Darrell, you kind of reason through some of the numbers reasonably quickly. Could I bother you to maybe update some of the balance sheet items and particularly where things were kind of post-end of the quarter?

Yes. At the end of the quarter, we drew down $200 million of additional equity as we closed out our equity forward. That is the only activity that was post-closed of quarter. Prior to the end of the quarter, we converted the LYONS, that $47 million stub of that zero coupon convertible. We used all of the cash proceeds from these transactions to paydown our bank facility.

Okay.

So the bank facility is now around $400 millionish, give or take?

A little bit less. We have a little over $400 million of capacity under our bank facility. So that, plus the additional cash that we'll generate, plus additional tax refunds, gets us to a little over $600 million of capacity for new investments.

Great.

One of the questions I had was maybe a little more conceptual, but obviously you guys are feeling very good about your pipeline, a lot of your various products. As you look out ahead and understanding that it has been tough to find fixed income managers that would kind of work under your revenue-share structure. Do you feel that somehow you are a little disadvantaged institutionally or otherwise by not having larger fixed-income presence with some of your Affiliates or is there a desire to maybe find managers with maybe more credit skills, even if it's not plain vanilla stuff?

I would say that the lack of significant fixed-income business is something that we felt over the last few years, obviously. It's been a tough period for equities and alternatives.

Looking ahead, we are extremely happy with how we're positioned. As you heard a very broad array of outstanding global and emerging markets equity products and, again, a very broad array of high-performing alternative products.

In our view, institutional investors and then over time, retail investors, especially outside of the US, but again, over time the US market will come to favor these product as well. These kinds of products, which can provide differentiated alpha over time are, in our view, the most attractive place to be in the market. And we think that boutique managers, like our Affiliates, are especially well-positioned to provide these products, and in many markets, especially institutional markets outside of the US, actually favored. So it's not as if, when somebody is deciding whether to hire Genesis that they say gosh, obviously premier emerging markets equity managers, it's not as if they're saying gosh I really wish you had some core fixed-income, too. That is not how it works.

So we're very happy how we're positioned, and obviously we have an outstanding exposure to a credit alternative manager in BlueMountain, and of course, we would look for other similar kinds of opportunities. But on terms of getting a much more significant contribution from fixed-income generally, it's not what we're looking for.

Okay.

One question I had and I know you don't like to comment too often on specific managers, but I did notice that talking a lot more about Frontier lately and I am just curious. Here is a Affiliate you have owned for many years now and in the past hasn't really come up too much in conversation, yet all of a sudden it seems like they are getting new mandates. Is it just performance or is this an example of that as management maybe has transitioned, you have new management more focused on growing the business? I'm just curious if there is any kind of dynamic like that.

No.

Well, I think the main sort of change, if you will, is the capability we have to work with them. So they are a tremendous boutique manager, US equities primarily, and have been. Their long-term track record is tremendous. They have not been or are not and have not been a sales and marketing-focused organization, nor necessarily should they be. I mean they have a very strong culture and it is an investment focused culture.

It's a good example of the opportunities that we can bring to these firms and provide incremental growth. So some of their growth is coming through us helping them into distribution channels, where they would never have gone on their own, self-advisory, marketing, Vanguard has hired them now for two mandates through our distribution platform. As I said, launched a mutual fund for them, taken them into geographies. They would not have done those things on their own. It's a sort of perfect example of the kind of leverage we can provide to an outstanding boutique firm. And on their own they are an outstanding boutique firm even if we did none of these things. But it's just an opportunity for us to bring them into channels and geographies.

It's also, Frontier is also an outstanding example of a long term partnership that has really worked and working with the management partners over time, the Frontier team has effected transition among the -- from the senior team, that was there when we originally partnered with the firm and now the next generation is running the firm and as you can hear, they're doing a fantastic job. So really Frontier is a great example in many respects.

Alright great. Thank you very much.

Sure.

Your next question is from Dan Fannon with Jefferies, please proceed with your question.

Good afternoon. Can you guys talk a bit or Darrell, can you plan out what the core run rate was if you can x out some of the transaction costs?

Well if you look at the -- Maybe the best way to look at it is perspectively for the incremental investments that we are going to make in the global distribution going forward and the addition of Pantheon. Somewhere between $1.42 and $1.45 is the right run rate for the base business.

Really the reason we gave early 2011 guidance is precisely to provide a forward-view of run rate. Obviously there is imbedded growth into 2011 in our guidance, but it's a much closer approximation of run rate of the business, given the recent new investments, than the 2010 guidance is, for example.

Okay. That's helpful.

And then, just talking about the backlog for transactions. Wondering if there has been any change in terms of who you're targeting or what is out there? Is it still mainly going to be the management transition type of acquisition or investment or are there other opportunities out there still?

Yes, I would say, a slight falloff in activity in our pipeline given the negative equity returns in the last quarter. But it's still a very strong pipeline with some residual divestiture activity. But as you suggest, concentrated in, and I think will be increasingly dominated by, succession-oriented transactions with independent firms. We continue to find outstanding firms that have global and emerging markets equity products and alternative products, which as you understand is an ongoing strategic focus for us. But as well, see terrific firms with US equity businesses and we -- I would say relative to a few years ago, have also an increasingly international cast to our new investment pipeline and prospecting. International in the sense not only of products, but non-US firms.

Okay. That's helpful.

Lastly, if you could maybe comment on the FCC release last week with regard to 12b-1 fees and how that might impact your mutual funds?

It's a trivial impact. Nate do you want to?

Sure. For us, it's really trivial. That is the only word for it. The vast majority of our funds -- The exceptions -- There's a few things that came through funded options, very small things. So, maybe on the margins it could actually be a positive in terms of leveling the field. But again, early days obviously.

Thank you.

Sure.

Our next question is from the line of Cynthia Mayer of Bank of America Merrill Lynch. Please proceed with your question.

Hi, good morning.

Good morning.

Good morning.

In terms of the 2011 guidance, could you maybe talk about what kinds of assumptions underlie the performance fee aspects of the guidance? Like what percentage of the performance fee aspects you are thinking of contributing, and also if you are assuming 2% per quarter in market appreciation for the loan-only business, are you also assuming that for the alternative managers? And then maybe you could just update us on where the performance fee assets are right now in terms of percentage above high-water marks? Thanks.

Sure. As we look to 2011, the guidance that we gave at the end of the lower-end of the range does not include an assumption for performance fees. As we look over past years, as I said last year, we contributed -- performance fees contributed about $0.19. The year before that was $0.15, and again, there is a set of assumptions which folks have made this year clearly delivering a little over $0.15 in the first half of the year. There is a strong contribution and we have a greater opportunity as we look to the end of the year.

So the guidance range that we have presented for next year is $0.85. The significant portion of that is accounted for this range of performance fees. Again, the opportunity for performance fees can be significant, but we feel looking at the historical production of performance fees and trying to keep expectations within reasonable range, that is a fair assessment for 2011.

And we have never made it a practice to talk about unaccrued performance fees as we look towards the end of the year. With that said, we feel really good about the expectations that have been incorporated in the current analyst guidance within our range and clearly the production of performance fees in the second quarter is a validation of that.

And how many of the performance fee assets are above high-water marks at this point?

Roughly the portfolio is unchanged as compared to prior quarters.

Okay. All right. Just maybe --

Sorry, just to interrupt, the percentage we have said roughly 50%.

Obviously generally speaking, its been a good period and so firms have -- Some firms are still below their high-water marks are much closer to their high-water marks. It's a nuance conversation and obviously one where the complexity and breadth of our alternative product set makes it very difficult to give easy algorithms, and as hopefully you can tell, we have relative to the magnitude of the opportunity, we have been and continue to be in our 2011 guidance quite conservative about what the upside opportunity is.

Right. I am gathering that, if you are looking back at the last few years in performance fees as a guide.

Okay. Let's see, maybe could you talk a little bit about the new products from some of the hedge funds, the hedge fund Affiliates. Seems like there were pretty decent inflows to AQR's mutual funds and I'm just wondering if you think this is a trend in terms of alternative Affiliates introducing mutual funds which will continue, both for you guys and for the industry? And whether does that in some way dilute their overall fees or do you think it's really additive?

So I would say we do have a number of alternative products that are going into different channels, retail channel among them. Both First Quadrant with the manager's global alternative fund, which has been out, three or four years and AQR with the diversified arbitrage fund and a few other funds that are launching. I do think that there is a trend there and I think it's both the -- using it -- There is an opportunity in what is showing up in some mutual fund channels in the subadvisory space, insurance companies and what not, wrapping it and especially the multi-strategy product.

I think the strategy, the capability - let me say it this way. The capability they are using in these products are extraordinarily scalable capabilities. So it's different from a manager that has a couple hundred million dollars of capacity and using it in the retail channel. I think the strategies that we're talking about are really pretty scalable, and so I'm not sure that there is -- That is why I think there would be more of an issue than the kind of dilution point. So I hope that's -- I do think there is a trend with others doing it. We have seen other products come in, competitor products come in.

Kind of a sub-point here is that as you can hear from Nate's description, our quantitative Affiliates are actually doing extremely well and are finding in large portions of their product set, lots of opportunities, retail in the US and also global opportunities.

Right.

I guess maybe last question is, I think, some private equity firms have noted that they think financing is tight. I'm wondering if you wanted to finance a large acquisition, beyond the capacity that you have, how would you finance it and how capable do you feel to sort of increase your capacity?

I would first say that with the capacity that we have in our balance sheet, that, that provides any meaningful opportunity for new investment and harvesting a material amount of incremental earnings out of our new investment activities. The markets remain open as we look to refinance a portion of our bank facility going forward, we feel very good about where that market is for us.

And also, as we look at the junior capital that we have accessed in the past, that market continues to be strong. So if we were to need to build incremental capacity, those would be the areas we'd look.

But as I say, now we feel very good about where our balance sheet is, and that gives us the opportunity to, again, harvest new investment opportunity, to repurchase stock, to repay indebtedness with a significant amount of cash flow that will be generated through the end of the year and certainly to have a balance sheet that is very well positioned for the type of volatility that we have been seeing over the past couple of quarters.

I would just add that you asked a question about financing that had imbedded within it a fundamental strategic question and I would say that while we are always going to be opportunistic and if we find outstanding firms that are larger than the norm of our boutique Affiliates, we'll pursue an investment. But if you step back and say where have we been with five transactions in the last year? We have been relative to the industry, by far the busiest in terms of transactions, and from our own standpoint, making very meaningful contributions to the scale and profitability and growth potential of our business and you see that imbedded in our forward guidance. So we continue to have a strong pipeline, but you know, we aren't necessarily feeling like we need to find the next giant transaction, you know? We have come a long way and we're quite optimistic about the forward prospects, but it doesn't have to happen all at once.

Great. Thanks a lot.

Sure.

Our next question is from the line of Roger Smith with MacQuarie, please proceed with your question.

Hi, yes.

Sean, I think when you started your remarks you talked about the wealth management opportunity going forward, and I know maybe we're still early in that. Can you just give us a little bit more information about what you are talking about there? Is it more create or acquiring or making investments on the distribution side that controls that money, or is if wealth managers that are actually investing for their clients?

I think large teams at the premier banks and brokerage houses or independent firms, which manage assets for clients -- This is an arbitrary number, but let's say $20 million and above -- Those firms that, obviously there is a range, but we're talking about the firms that focus on managing their clients' wealth by allocating the assets to different investment managers. There are a very large number of those teams and firms in the market. There is no great solution for the transition and succession planning of those firms, and they are close cousins to the institutional boutique Affiliates that -- or firms that we would invest in as Affiliates.

So the concept is that we establish a holding company that's a subsidiary of AMG, that provides some resources at the holding company level, but in the main is focused on identifying and partnering with a broad array of these outstanding firms using an approach, which again borrows heavily from our basic AMG approach of operating autonomy and direct equity in their own firm.

You know, we think over time we can build quite a scaled business, and there is finally an ancillary benefit that is not the dominant aspect of the opportunity, but for sure it's there. That if we were to have a large high-net worth business we could introduce our Affiliates' products, to those firms and to those clients, and generate incremental manufacturing profit along the way. But that's an incremental opportunity and not the driving rationale itself.

Okay.

And then would you need to establish a broker-dealer there or could you really in that holding company just utilize somebody else's platform for that component?

Many of these very successful, independent boutiques don't have their own broker-dealer. Over time, if we built a large business, we probably would establish one, but there is no need to start with one.

Okay.

And then just shifting back tost guidance and making sure that I can sort of reconcile some of the old stuff. You might have given this number, but I don't know. I guess the new investments that you are going to have in the distribution, did you quantify those? Because when I sort of look at the new guidance of $5.40 to $6, I guess, if I think the deals had been done at the beginning of the year, the pro forma would have added $0.50 last quarter. So we could trim that down a little bit and then there were $0.15 of deal costs so that would have said that the pro forma 2010 would have been somewhere around $6.05 to $6.75. So when I think about that relative to the 2011 guidance that's set at $6.15 to $7, did I really on that $0.50 piece am I adding too much in, or is it really that we're having a decent amount in the distribution initiative that will sort of offset some of the growth that might be imbedded in the business?

If we look at and maybe just sort of review the bidding. This past quarter the blend for our products, if you look at markets, we're down just between 10% and 11%. So that is, of course, a significant factor.

As we look at the holding company expenses for third quarter, fourth quarter and then extrapolate into 2011, roughly $18 million this year migrating into $19 million next year, incorporates $3 million a quarter for global distribution and another $1 million a quarter this year for building infrastructure.

As I mentioned, we had the smooth transition from Pantheon from Russell and we have been building some subsistence and platforms in order to make -- bring that firm to be as progressive as it can be in its infrastructure and what it needs to do and ultimately some of those investments will benefit other Affiliates over time. As you factor that -- those issues together -- and then with the capital transactions, in order to position the balance sheet for more capacity, that should get you right to that $5.40 to $6 range.

Great. Thanks very much.

Thank you. Our next question is a follow-up from the line of Dan Fannon of Jefferies. Please proceed with your question.

Yes. Darrell, if you could give us what the average AUM was in the quarter, would help us, I think for a modeling perspective.

The billable AUM, where that matters most is in the mutual fund channel. I don't have that specific number and so Dan, I'll get back to you.

Okay. And then based on kind of the backlog and how things are tracking, as you look at inflows, should we think about building upon this positive inflow from second quarter into the Q3 outside of markets getting materially worse from here? I mean, I guess trying to get some comfort level that this is maybe the start of positive flows for a period of time.

I think we don't want to get in the business of forecasting specific flows, but hopefully when you have heard from all of our comments, and Nate's review of the flow pipeline is a lot of optimism. Obviously, depending on what markets do, we'll have more or less of an acceleration of this reallocation. But, especially outside of the US and especially with institutional clients now, we believe it will occur more broadly, looking ahead to next year, we really do see this reallocation to return-oriented products and we think our product set is positioned just right for that.

Great. Thank you.

Thank you. Our final question is from the line of Marc Irizarry with Goldman Sachs.

Great, thanks. Sean, could you just give a little color, I think you termed it, "A moderation of the old activities," and discussions that you saw, maybe a little bit of a slowdown, it sounded like in some of the conversations. What sort of current case now, given the last couple of week have been maybe a little better and what are you seeing in terms ever pricing?

I would say it continues to be a very favorable environment for us, far fewer buyers than sellers. And the relative falloff in the last quarter, I meant to apply both to the industry, as well as to our pipeline, but as we said, our pipeline continues to be strong. If you think about it, firms that have performed well, and are continuing to get inflows, and they have begun a process, they'll continue that process. Entities which have been more effected by declining equity market in a quarter are more likely to say -- let's sort of put things on hold for a while. There was some of that, but as I said, that's just a subset of our pipeline and we continue to see lots of great opportunities and continue to work with firms at all stages of our pipeline.

One other aspect of the activity, this is very nuance, but it's worth commenting on, because we had mentioned it earlier. Obviously, the -- I don't know what we call it -- because it's maybe it's a deferral or maybe the whole carried-interest tax has gone away forever, but there was a state of activity among alternative firms, including discussions with us, but more broadly, who in anticipation of the change in that tax, we're looking to do a transaction this year. So that has fallen off in the quarter. But as we look ahead, and who knows what equity markets are going to do in the short-term? None of us do. But if you assume markets are within a range or generally positive over time, the overall environment is favorable. The demographics of finders of independent firms, changes in tax rates, et cetera and as I said, a continued very favorable competitive environment for us.

So we don't want to get in the business of forecasting transaction activity quarter to quarter, but if we look through the balance of this year and into 2011, we are quite optimistic.

Okay, great. Darrell, could you just talk about the Pantheon AUM. I know there is a few different ways that the private equity guys can present their AUM. Are you including committed capital in the AUM number? And also, how does it work with flows in terms of when the distributions versus capital commitments are called?

Yes. We are including in these press release tables and going forward, the committed capital that is at Pantheon. It relates to the amount in which fees are being charged, and as long as fees are being charged on that committed capital, that committed capital will be included in our assets under management and to the degree it's not, you will see that. You will see that number change.

And you're exactly right. It wouldn't necessarily always track AUM that might get reported in other settings.

Okay. Great thanks.

Sure.

Thank you. There are no further questions at this time. I will now turn the call back over to management for closing comments.

Thank you all again for joining us this morning. As you have heard, we're pleased with our results for the quarter and our prospects for strong growth ahead. We look forward to speaking with you again next quarter. Thanks a lot.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.