Affiliated Managers Group Inc (AMG) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Affiliated Managers Group fourth-quarter 2010 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It's my pleasure to introduce your host, Alexandra Lynn, Vice President, Corporate Strategy and Investor Relations. Thank you, Ms. Lynn. You may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the fourth quarter and full year 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 web site at www.AMG.com a replay of the call and a copy of our announcement of our results for the quarter as well as a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures.

With us on the line to discuss the Company's results for the quarter are Sean Healey, Chairman and CEO, Nate Dalton, Chief Operating Officer, and Darrell Crate, Chief Financial Officer. Now, I'd like to turn the call over to Sean Healey.

Good morning, everyone, and welcome to AMG's conference call discussing our financial and operating results for the fourth quarter and full-year 2010. AMG reported Economic Earnings Per Share of $2.02 for the quarter, which is a 49% increase over the same period of 2009, and for the full year, Economic EPS of $6.09. Assets under management were approximately $320 billion at year-end, an increase of 54% over the past year. Our excellent results for the quarter and the year were driven by the outstanding investment performance and strong new business momentum of our affiliates as well as the addition of four new affiliates in 2010.

Our strategic focus on global and emerging markets equity and alternative products, which collectively account for approximately 73% of our EBITDA, continues to drive the growth of our business. Investor demand for our affiliates' industry-leading products in these areas is accelerating as evidenced by our strong net client cash flows in the past two quarters. In fact, in-flows to global and emerging markets equity and alternative products accounted for virtually all of our $4.7 billion of net client cash flows in the fourth quarter. In addition through the successful execution of our new investment strategy in 2010, we welcomed several new affiliates which further enhanced our exposure to these product areas, including global private equity fund to funds manager, Pantheon; UK retail specialist, Artemis; and, global and emerging markets equity manager, Trilogy. Our affiliates generated outstanding performance for the quarter and the year, particularly in global and emerging markets equity and alternative products. Highlights include Harding Loevner's Global Equity and International Equity Strategies, which both outperformed in every relevant time period, as did Tweedy, Browne's Global Value Fund and its international equity product. Tweedy was recently nominated again for international stock manager of the year by Morning Star.

Emerging markets equities contributed 12% of our earnings, and with approximately $40 billion of our AUM in this area, AMG has one of the largest emerging markets equity positions in the industry. Given the fundamental positioning of these economies and the ongoing increase in investor allocations to these markets, we see a very strong secular opportunity in this product area with the excellent performance of Emerging Market Specialist, Genesis, Harding Loevner, and Trilogy, which all produced excellent results in 2010, we're well-positioned to benefit from these trends. Finally, our alternative managers continued to produce strong, absolute, and relative returns in the fourth quarter, and we realized a material earnings contribution from performance fees driven by the outstanding performance of Value X Activist Value Strategies as well as AQR's Global Products and Blue Mountain's Credit Alternatives.

Against an industry backdrop of improving, but still muted, investor risk appetite our strong net client cash flows reflect our affiliates' outstanding investment performance in the industry's most attractive product areas as well as the success of our global distribution strategy, and we're in an excellent position for continued organic growth going forward. Investors are increasingly expanding their allocations to risk-oriented products, particularly investors outside the US. Over half of our EBITDA is already generated by non-US clients, and we expect that this client base will grow further, especially as we continue to expand the breadth and depth of our global distribution platform in key strategic markets around the world. Through this global platform, we're seeing increasing demands for the expertise of performance-oriented boutiques, combined with the resources and risk management of a global asset management company.

Turning to new investment, we were pleased to complete our investment at Trilogy during fourth quarter, our sixth investment in the past 18 months, and our new investment strategy continues to be an important element of our earnings growth. Given our excellent competitive position, strong and diverse pipeline, and a favorable transaction environment, we have substantial prospects for additional accretive investments in both traditional as well as alternative managers globally, and we're well-positioned to execute on this opportunity set.

Finally I'd like to discuss the executive appointments that we announced this morning. As you saw in our release, we've appointed Nate Dalton as President and Chief Operating Officer, Jay Horgan as Chief Financial Officer, and John Kingston as Vice Chairman and General Counsel, all effective as of our annual meeting on May 24. In addition, Darrell Crate will be retiring as of our annual meeting, but will remain in a senior advisory role with the Company. Darrell has been an invaluable partner since AMG's early days as a public company, and we're deeply grateful for his contributions and efforts over the past 13 years.

As you can see in our results, AMG is tremendously well-positioned on a global basis across all elements of our growth strategy. Most importantly, we have an outstanding management team and a deep bench of talent. The promotions we announced this morning, along with the advancement of a number of other key next-generation leaders who have been very important to our success over the years, reflect the ongoing growth and evolution of our Company and our management team. I'm very pleased to congratulate Nate, Jay, and John on their expanded roles, and together we look forward to continuing to execute our growth strategy and create additional shareholder value over the long term.

With that I'd like to turn to Nate to discuss our affiliates' results in more detail.

Thank You. Good morning, everyone. As Sean noted, performance across our affiliate group was strong for both the fourth quarter and full year. This was particularly evident among many of our largest affiliates, including AQR, Artemis, Genesis, Harding Loevner, and Tweedy, Browne. Also, as you saw in the release, net client cash flows were approximately $4.7 billion for the quarter, mainly driven by growing demand among institutional investors for strong performing global, emerging markets, and alternative products.

Stepping back for a moment, our organic growth has accelerated over the past two quarters with over $10 billion in flows, giving us very strong momentum for 2011. As we've said before, there's both the trend component to our flows as well as the pure execution component. From a trend standpoint, we continue to believe that both institutions and individuals will continue to move up the risk spectrum in order to meet their projected liability, and as they do this, there will be increased flows from rotation, especially to return-oriented alternative products and global equities of various sorts, as home country biases also lessen.We've seen some signs this return to risk happening over the past 6 to 12 months, albeit interrupted by periods of volatility. In addition to this trend, from an execution standpoint, performance of our affiliates has been good, especially in global equities and many alternative products. This performance is, of course, attracting flows, but it is also something we and our affiliates are leveraging to extend their distribution into additional geographies and channels. We believe we are still at the very early stages of developing this opportunity.

Now, turning to investment performance for the quarter and year. In the global equity category, Tweedy, Browne's Flagship Global Value Fund outperformed its benchmark for both the quarter and full year and remains ahead for all of the relevant time periods. I'd like to also add my congratulations to the team there on their on their recent International Stock Manager of the Year nomination by Morning Star. AQR's EC and Third Avenue's Value Products generated strong performance against their benchmarks for the year, while Harding Loevner's Global and International Products also produced excellent performance. Our newest affiliate, Trilogy Global Advisors, also had a very strong quarter and full year across its product set. On the emerging market side, it was a more mixed quarter to end a fantastic relative performance year. Highlights in this area include Genesis, which outperformed its benchmark by 650 basis points for the year. In addition, each of Harding Loevner and Trilogy was well ahead of the benchmark for the year, as well.

Now, turning to our alternative products. Both short-term and long-term performance among most of our largest products continues to be very strong. In particular, AQR, Blue Mountain, Pantheon, and Value Act are very well-positioned heading into 2011 from both a performance and new business standpoint. While we had performance fees in a number of affiliates for the year, Value Act in particular delivered excellent performance and contributed significantly in terms of performance fees in the fourth quarter. Finally, our domestic US equity managers also had a very good quarter and full year. All the Friess Associate strategies outperformed their respective benchmarks in the quarter, with the Brandywine and Brandywine Blue Funds delivering particularly strong performance for the full year, as well. Similarly, Systematic had a very good quarter across their suite of value strategies with all major products remaining ahead of benchmarks for the quarter and full year. Frontier also had a very strong quarter, while Tweedy, Browne and Times Square missed their benchmarks for the quarter and year, but remained well ahead for the 3 and 5 year periods.

Next, turning to flows. We had positive net flows of approximately $4.7 billion for the quarter. Starting with the institutional channel, we had positive net flows of approximately $3.2 billion. Looking at the flows in greater detail, it was a quarter where we had a strong contribution across a large number of strategies, especially in global and emerging markets and alternative products. Notable contributions came from a very broad group including Harding Loevner, Genesis, First Quadrant, Systemic, Frontier, Beutel Goodman, and Pantheon.

Moving to the mutual fund channel, we had positive net flows of approximately $850 million in the quarter, driven especially by the growing demand for alternative products among mutual fund investors. For example, AQR's Managed Futures Fund, and the Diversified Arbitrage Fund and the Managers FQ Global Alternatives Fund continued to generate significant flows in the quarter. In addition, First Quadrant picked up a significant sub advisory currency mandate working through our US distribution platform. We also had positive flows from several of our global and emerging markets funds, including those managed by Harding Loevner, and among domestic funds, Astin's Mid-Cap Fund was also stand out.

In our high net worth channel, we had positive flows of approximately $600 million for the quarter, driven by GWK's municipal bond products, which continue to generate positive flows throughout the US platform despite (inaudible) trends.Harding Loevner and Beutel Goodman were also strong contributors in the high network channel in the quarter. There were a couple of unusual items impacting flows in the channel in the quarter, as well. One positive, one negative. We benefited in the quarter from one large in-flow where the purchaser of a book high net worth business retained an affiliate to manage these assets, and on the other side, there was some negative impact as performance fees were withdrawn from some accounts.

Now, I would like to spend a moment on global distribution. As we think about this initiative more broadly, we're very pleased with the tremendous progress we've made over the past year. As we announced a couple of weeks ago, we are now licensed in Hong Kong, which marks an important step in our overall efforts to expand the coverage we offer our affiliates. We now have fully operational businesses covering specific channels in Asia, Australia, Europe, and the Middle East, as well as in the US, all at different staged of maturity, but all with the goal of marketing and selling our affiliates' products in regions and channels where investors are actively seeking boutique firms with strong performance records. As we look at the level of search activity and the growing pipeline, we're seeing increasing breadth across affiliates and strategies, but again, we're still at the very early stages of developing these opportunities. As we head into 2011, we are extremely pleased with our affiliates' ability to build on their outstanding performance records and generate new business. Throughout our history, including periods of challenging markets, we have consistently focused on partnering with the best boutique firms which generate performance for their clients. As I said at the outset, we have affiliates with excellent performing products; those are the most highly sought after areas such as global equities and institutional quality alternative products, and we believe the pace of flows will remain strong across a wide range of products.

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

Thanks Nate. Good morning, everyone. Before I discuss our results, I'd like to say a couple words about my retirement from the Company, which will occur at the next annual meeting. I'm gratified to have been part of one of the strongest leadership teams in the asset management industry, Sean, Nate, Jay, and John have been outstanding partners over the past 13 years. It's been an honor and a pleasure to work with them, learn from them, and as we grew an idea to something with an enterprise value over $6 billion. I'm particularly grateful to Sean and the AMG Board and my colleagues for enabling me to make this transition at this time in my life. I'm comforted to depart at this time when the business is incredibly well-positioned with a deep team who will continue to create meaningful value. I'll miss working with my very talented colleagues on a daily basis both here at AMG and, of course, in the investor community, but look forward to my ongoing role as both an advisor to and meaningful equity owner of AMG. I could not be more confident in its future.

Now turning to this quarter's results, AMG finished 2010 with another very strong quarter with all aspect of our growth strategy contributing to our results. We generated meaningful net client cash flows for both the quarter and the year, and we also closed our investment in Trilogy during the fourth quarter. As you saw in the release, we reported economic earnings per share of $2.02 for the fourth quarter; on a GAAP basis, we reported earnings of $1.18 for the quarter. Performance fees contributed a net $0.46 to the fourth quarter economic earnings per share number.

Turning to more specific modeling items. The ratio of our EBITDA contribution to End-Of-Period Assets Under Management was about 21.9 basis points for the fourth quarter, reflecting the material contribution of performance fees. We expect this ratio to decline to a more normalized 16.8 basis points for the first quarter of 2011. For the full-year 2011, we expect this ratio to be about 17.6 basis points, which also includes a reasonable assumption for performance fees.

Holding company expenses were $23 million for the fourth quarter, an increase from the third quarter resulting primarily from year-end compensation and deal cost accruals. We expect holding company expenses to decline to approximately $20 million for the first quarter and to remain at approximately this level through 2011. With regard to taxes, our effective GAAP tax rate for the fourth quarter was 38%, and we expect it to decline to 36% for the first quarter of 2011, primarily as a result of favorable structuring related to our recent foreign investments. Our cash tax rate was about 26.3% for the fourth quarter with the increase over the third quarter primarily associated with the strong contribution of performance fees during the fourth quarter. We expect our cash rate to return to about 14% for the first quarter of 2011 and then to trend upward during the year with additional organic growth. Intangible related deferred taxes were $12.6 million for the fourth quarter, which we expected to modestly increase to approximately $12.9 million on a quarterly basis for 2011 as the result of our investment in Trilogy. Our amortization for the quarter was $26.2 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's line on the income statement, all net of amortization. We expect our amortization to be about $26.7 million per quarter in 2011.

Now, stopping for a moment on depreciation; as you know, historically we have adjusted our economic net income for the portion of our depreciation expense that's attributable to our affiliates. This amount was $2.7 million for the fourth quarter or about $0.05 of earnings. However, given our more integrated approach with several of our larger affiliates, and in particular with our largest investment to date, Pantheon, effective in this quarter and going forward, we will no longer add back affiliate depreciation to our economic net income. This revision to the definition of our economic net income will be reflected in the 2011 guidance that I'll give in a moment. We reported total interest expense of $25.1 million in the fourth quarter of which $7.7 million was non-cash imputed interest expense. We expect interest expense to be about $27.2 million in the first quarter, of which $7.6 million will be non-cash.

Turning to the balance sheet, at the beginning of the first quarter, we refinanced our bank facility with a new four-year, $750 million revolver. Together with the strong recurring cash flow generated by our business, we continue to have ample capacity to execute our growth strategy.

Now, turning to guidance. We expect our 2011 economic earnings per share to be in the range of $6.80 to $7.60. This guidance factors in actual markets so far this quarter with an assumption of 2% quarterly growth in markets for the remaining three quarters of 2011. We also assume a weighted average share count for the year of $53.4 million. The lower end of our 2011 guidance includes a base-level contribution from performance fees, while the upper end of the range assumes a more robust performance fee expectation in addition to performance from the business. These assumptions do not include earnings from future new investment activity and are based on the current expectations of affiliate growth rates, performance, and the mix of affiliate contributions to our earnings. Of course, substantial changes in the equity markets and the earnings contributions of our affiliates would impact these expectations.

Now, we'd be happy to answer your questions.

Ladies and gentlemen, we will now be conducting the question-and-answer session. (Operator Instructions)

Craig Seigenthaller with Credit Suisse.

First, on the organic growth rate, it's really picked up here. You're at a robust level in the second half, around 8%, and you gave us some further commentary, Nate did, in terms of investors moving further out the risk spectrum. Do you think these trends could help this rate accelerate from here, or do you think we're more or less at a good run rate to think about moving forward here?

Okay, this is Nate.

I think actually it could accelerate from here. I think the way we think about the organic growth rate, especially the flow component, and we really do think about it in these pieces, there's part of it which is, here are the trends that we should be participating in. We do think that trend is accelerating, right? So, that's the point you're focusing on.

Then I don't want to underestimate the fact that both our affiliates themselves and we, with the distribution platforms we're talking about, we are bringing more and more resources on line. We just talked about Hong Kong, but we're bringing more and more resources on line from the standpoint of new regions, but also within the regions we've already opened. That's all in addition to participating fairly in that trend that we're talking about. But, I think the trend could accelerate from here.

I would add that while we're pleased with our results, I think if you look across the industry, the return to risk assets is only at the relatively early stages in many markets, including the US market. As that trend accelerates, we're ideally positioned in product categories which we think investors will focus on.

Got it. Then just a follow up, maybe for Darrell or Jay, whoever is handling the guidance question. I real quickly ran the math, and it looks like the changing guidance minus the $0.20 we should adjust for the amortization is exactly equal to the appreciation for the fourth quarter in AUM, or the mark up. Is that roughly the simple math? Is there any moving pieces there besides removal of the amortization, performance fee guidance roughly flat?

No, the way we position guidance is it's early in the year. I think the big story from this quarter is that the performance fee opportunity, and as we go into 2011, is meaningfully better than when we were on this call the last time. From a performance fee perspective in 2010, 15 affiliates contributed. Again, that's more than we had expectation for. There's $0.67 of performance fees that were delivered this year. I think our expectations set for investors were around 50. And as we look at funds, we've had nearly $40 billion. That is 60% of our portfolio above high water mark.

So, as we look going forward, that opportunity has nothing that encumbers its significant growth. As we look at the guidance, as it's early in the year, the idea of getting too far out in guidance, given all the time that occurs between now and the end of the year, it's probably not a wise way to position the stock. But you're right, Craig, as you look at $6.80 to $7.60, that does have $0.20 removed from it that otherwise investors would have had in their expectations. But I think as we look at our guidance, we look at the way the business is positioned, we look at our growth rate relative to other asset management firms, then we're positioning the Company from a guidance perspective in a way that should please investors over time.

Yes. I would add, and I'll let you work with Darrell and Jay offline on the details, but this is not merely a reflection of increase in assets, this is increase in guidance based on higher expectations for growth.

Great. Thanks, Sean. Thanks, Darrell.

Mark Lane with William Blair.

Good morning, and first of all, congratulations, Darrell. It's been good working with you, and you've been a really great ambassador for AMG over the years.

Thank you, Mark, I really appreciate it.

My question is on deals. Last year was your most active year as a public company, well, as a company overall. So philosophically, how is that influencing your appetite this year as you look at the opportunities out there? Are there still opportunities to do some large or average sized deals, or do you want to be more conservative? What's your thought process?

We absolutely continues to have a very strong appetite and a high level of expectation for new investment activity this year and beyond. Last year was unusual in a number of ways. First, you had a very attractive, competitive environment where very few buyers were around, and we had emerged from the financial crisis in very good shape and were positioned to aggressively pursue opportunities. Second, there were a number of opportunity that were -- I don't want to say unique, because it will always occur, and there are some transactions of this form even today that we're working on. But there were, as we know, a number of diversified financial services companies that, for capital-raising reasons, were looking to sell excellent boutique asset management firms. They're also looking to sell ones that weren't excellent, but we focused on the excellent ones, and we were able to, as you saw, have a number of investments in those form of transactions.

Looking ahead, we still have a very strong and diverse pipeline. More global than it has been in the past, still very focused on these product areas where we see the strongest secular trends, global and emerging market equities and alternative products. We feel very, very comfortable with our prospects for additional accretive investments this year and beyond. The market environment, overall, has obviously changed a bit in the year, and I would say there are still fewer buyers than there were over the past decade or so on average, but there are more out there as you would expect given the market recovery.

I would say the IPO market is likely to be open. You all will judge how much risk you want to take with boutique asset management firms going public, because the results have been decidedly mixed. But I think that will be a factor. I think, prospectively, the big opportunity, which we're only beginning to see now in our current pipeline is the succession and transition transactions among independent firms. Where for three or four years, firms have been out of the market given market volatility. The change and the extension of the lower tax rates may have slowed a little bit the pace of those transactions, but I think over the next one to three years there will be a large number of succession-oriented transactions with independent firms, and we're ideally positioned ahead of that trend.

Is there any sense that because you've been extremely active last year that you want to take some time to absorb that large investment commitment? Or if the right opportunities develop, that you have no problem stepping up and doing a more unique deal like you did with the Pantheon, for example?

It's very much the ladder, plus. In other words, we are the most experienced investor in the asset management business among boutique asset management firms by a lot, and we've been doing this for a long time. We know what we're doing. So, the integration of an AMG affiliate is completely different than the integration of an acquisition into an integrated operating company. We don't have any of those kinds of issues which normally require a period of quote digesting the deal and consolidating operations.

For us, we have a very large ongoing appetite and ability to execute new investments. It is completely driven by the opportunities that -- again, we are very active, by far more active than any other entity in reaching out and developing relationships with outstanding boutique asset management firms around the world. We can't force those deals. We don't buy something just because it's for sale. Ahead of these trends, we see enormous opportunities and are not at all constrained by the level of activity that we've just been through.

I'm frightened to spend a little bit too much time on this, but just for some details, Pantheon was a firm that was brought out of Northwest Mutual. It needed help with its IT platform, with a lot of the infrastructure. All of that is done, completed, at best-practice level, was put into place, and I think Pantheon today is a company that is so much better positioned to grow, for their infrastructure, for their people, and for what they're doing.

That is something that we did in a very short period of time. I think we even learned some more about that. So, I think this last year being a year of lots of deals, to me, it's the knowledge and the capabilities of the firm are continuing to accelerate. So, our appetite not only to do those sorts of deals, but deals where we have to do a little bit more to make things work, I think we've got the capabilities and the team to execute very, very well.

Okay. Thanks for those thoughts.

Dan Fannon with Jefferies and Company.

If we could talk a bit about the flows some more and if we could get a sense for the quarter and, of the acquisitions that were made in 2010, what the contribution was from those, specifically Pantheon?Then, on a global distribution front, what that contributed in terms of contribution for flows in this quarter?

Yes. I would say the investments that were made were contributors, but -- and they were good contributors. Yes, maybe look at say 500 or so, something like that, so they were definitely contributors.

From a global distribution standpoint, it actually was not. We had positive flows. It was not a particularly strong quarter for fundings. Unlike the third quarter, which was a very strong quarter for fundings. We had a couple good sized pieces of business that slipped from the fourth quarter into this first quarter. The pipeline continues to grow from a global distribution standpoint -- both searches we're participating in, finds we're participating in, and one business in the contract stage. That all continues to grow, but actually from a funding standpoint, it was not a particularly strong quarter from a global distribution standpoint. Again, there were a few things that just slipped from the fourth quarter into this quarter.

And given the strong flows in light of what Nate just said, the strong flows that we did generate, we are quite optimistic about our prospects coming into --

It only means more good things for the quarter.

Great. That's helpful.

Then, if you could you walk us through the capital available today and the make-up between cash and the new debt facility and what you view as cash flow throughout the year as you think of what your draw down capacity is for new deals.

Yes. A recurring cash flow stream, particularly with the organic growth and organic growth momentum, generates, nearly $400 million a year. With our current revolver at $750 million -- $750 million revolver at LIBOR-plus 200, which, again, is a very attractive level relative to our rating. We continue to have $300 million to $400 million that would be available under that revolver. We captured that revolver at $750 million, because that just seemed like a prudent amount of money for us to take.

I'd remind you that all the other markets continue to be very open for us in order to raise capital. So, as I think about deal opportunity, I think we should, going forward, be in a mind where we're bifurcating the deal opportunity with the actual amount of capital that we are holding on our balance sheet. We certainly have a substantial amount to get put to work, a substantial amount of cash flow that this business generates, but we've proven to be very opportunistic financiers of our assets, and that will continue to be the strategy of the Company.

So, to put a more direct point on the comment, we do not feel constrained at all in the pursuit of new investment opportunities by the cash that the business happens to generate in any given year or has on hand. The capital markets are very open, and we see lots of opportunities. So, the new investment activity level will be driven by the quality and pace of the new investment opportunities, not anything about the current position of the balance sheet.

Great. Thank you.

Sure.

Bill Katz with Citigroup.

Just a couple follow ups. On the new guidance of the spread of $0.80, how much is the upper end versus the lower end specific to performance fees? Another way to ask, is at base level, what are you assuming for organic growth for the low end of the range?

Well, I think the best way to look at the guidance is that we're expecting $0.15 to $0.20 of performance fees that are on the lower end of that range. As we look to the upper end of the range, clearly that's performance fees, but also as we have made some, at the low end of the range, very conservative estimates about flow trends and, essentially, steady state business. As we look at flow opportunities that are above the modest assumptions, that's how you can get to the upper end of the guidance range in addition to, as I said, the very strong opportunity that can come from performance fees.

Okay. That's helpful. Thank you.

Second question, a little bit of a picture, given all the management changes, I'm sort of curious, Sean, what you would weigh in. Any potential slowdown in the deal opportunity just given the management changes announced today?

No. Not at all. The new investment activity has always been pursued on a team basis. Jay has tremendous experience and obviously has led the team through the busiest period of our corporate history, but there are outstanding folks who work in the team. Especially Riz Jamal who has been with us for six years now and came from our respective alma mater, Goldman Sachs, and is tremendously talented. The execution of new investments will proceed apace, and we have the capability to execute a number of transactions equal to what we've done in the -- six in the last 18 months.

At the sourcing, the opportunity itself, as I said earlier, is really driven by perspective affiliates being ready. It's not responding to what's in the market, what's being auctioned. It's going out and building relationships; that's something that Nate and I are very involved in. Obviously, Jay has been and will continue to be very involved in along with other senior executives in addition to the folks in the new investment team.

We've built those relationships with something like 700 firms that are in the active universe, and that's part of what we do all the time. When out of that relationship set, firms indicate that it's for their own reasons the right time for them to consider a transaction, that's when we proceed. And we've established that relationship set and the opportunity to -- or when those opportunities present themselves, the ability to execute them is -- it remains very, very high.

Okay. That's helpful. Next question -- thank you for taking all my questions.

Next question, in terms of the potential hand off here which seems to be somewhere in the nascent stages between global versus domestic equity. You seem to be spending more time, strategically, on the global and the emerging market alternatives. I understand that. Could you talk a little about how you might be positioned on the domestic side? Should domestic become a bit more of a tactical opportunity? Then, maybe broadly from your conversations with clients, are they re-allocating back to domestic equity or is it still on some of the themes you talked about in your commentary?

Okay. I'll start.

We obviously have a strong broad set of US domestic equity managers like Tweedy and Systematic on the value side and obviously, Friess and Renaissance, others on the growth side, and Frontier and Times Square. We have very strong, diverse books of managers. We have been seeing flows. And while we are emphasizing and growing these other parts of the books, we're not ignoring the opportunity sets for US equities, and that's an opportunity both domestic US as well as globally.

Just to give you a sense, we're selling US equities globally. And have good wins, in Europe, in the Middle East, et cetera, for US equity managers, because the people moving away from home country buy, see this is happening everywhere.Yes, so feel like we're very well-positioned to have a good, diverse, strong set of affiliates and have them well-positioned with distribution both within the US as well as globally.

Another way to look at it is to say what has occurred is an historic level of retail and also institutional flows, especially in the US, to fixed income. And we have been saying for a while that doesn't make sense to us. Obviously, that's not part of our business, so we didn't benefit at all from that. We have virtually no fixed income, and so as investors move toward risk assets, we don't think that will be just toward US equities.

Of course US equities will benefit. We don't predict where one market will be versus another on a short-term basis. To the extent that US equities perform well with good market beta and good flows, we have some very strong significant affiliates in those product categories.

On a longer term basis, we have obviously made the bed, more than any of our competitors, on global and emerging market equities and alternative products. That's 73% of our EBITDA contribution, so our judgment is that what you're going to see in the US, retail, institutional, and we're already seeing outside the US, is a move toward risk assets, and we think that the product set that we have, US equities, but also the very strong global and emerging market equity and alternative product set are all going to benefit.

That's helpful. Just one housekeeping question. Can you give me what the level of Pantheon committed capital is and the alternative assets at the end of the quarter?

Alternative assets are just over $39 billion. And the committed capital I don't think we should be disclosing given where they are in their current fundraising.

Okay. Thank you.

But next quarter, I think -- we'll see as that evolves. We'll see if appropriate.

Thanks for taking all my questions. I appreciate it.

Sure.

Robert Lee with Keefe, Bruyette & Woods.

Good morning, everyone, and Darrell, good luck on your new endeavor.

Thanks a lot, Rob.

As you build out your global distribution footprint, as a number of affiliates with international products has expanded, at what point do you start running into some potential conflict? You have Trilogy and Genesis both do emerging markets. I understand that each manager that you invest in, you want to be able to stand alone on its own, but do you start getting to a point where there's competition for distribution shelf space from managers who do similar things? In any way does that start to inform how you think of deals going forward even if they're quality shops? Are you less interested in an emerging markets manager than you would have been pre-Trilogy?

Why don't I start? We get that question periodically. I think we got a question like that last quarter, and I appreciate the opportunity to clarify and demystify a little bit the way things work. We think about the exposure that our affiliates have and describe it as all of one emerging markets, global equities, et cetera, but if you look from a client standpoint, these firms are actually quite different. Our client is going to think about an emerging markets equity manager and say, okay, I like this top-down approach, I like this approach that's more growth-oriented or I like this approach that's more growth at a reasonable price oriented, et cetera. Different managers have different country exposures, et cetera. Lots of differences that at the client level are very manifest, very clear, so we don't have that problem.

Another way to look at it is, when we think of US equities and you say, okay, deep value equities. Well, we have two of the very best in the world. They also have, parenthetically, happily, very strong global products. But, Tweedy, Browne and Third Avenue; 10 years ago people would say, wow, you have those 2, do they run into each other? Is that a problem? Actually, it's not a problem, because to clients they look different, and the clients will chooses one versus the other. To some extent we would say glibly, we're very happy when they compete, because that means we're going to win either way. So, it isn't an issue.

I think there is a practical constraint to focus on emerging markets for a moment. There are only a finite number of scaled, experienced, very high-quality institutional emerging markets equity managers in the world, and we've got three of the best already, and AQR has a product. So, we already have a very strong position, and if we do nothing, we've got a stronger position than our competitors and prospects for tremendous growth.

I won't say that we're not going to ever make another emerging markets equity manager investment. If a great one comes along tomorrow, we will, but we already have very good penetration in that area. So, I don't think it's something that we necessarily worry about. Would you add anything to that, Nate?

No, I think that's things we've talked about. I think the opportunity set certainly someday the theoretical problem could emerge, but given the opportunities that we're looking at right now and the pace of us bringing on distribution and the relative contribution of us and the relative set of opportunity, it's just not an issue now.

Great. That was actually it, thank you very much.

Thanks.

Michael Kim with Sandler O'Neill.

A couple of quick questions. First, to take a different angle on the previous question in terms of the global distribution platform. It still seems like you're in the very early stages, here, with more clients coming on board. You're opening additional offices in other regions, and starting to sell more products across different affiliates. Can you give more color in terms of how big you think the platform can be over time, as you leverage the greater distribution?

I appreciate the question. Sitting here today, the opportunity set-- again, you don't want to overstate it, but the opportunity that really is just enormous for us to build this. To think about it in pieces, what we've been doing so far is going into regions, bringing on distribution resources, beginning to bring affiliates into region and that path is now pretty well developed. And we've done that across a couple different regions, continue to bring new ones on.

At the same time, in each region we're bringing on additional expertise, and in some cases additional specialization by subregions and channels. Within Asia we're focusing on, for example, how do you add Korea to what's really a greater China strategy?Within Europe, sort of focusing on how do you add focused places on places, the Nordic, et cetera.As we're bringing on new regions, we're also, at the same time, bringing on additional resources to exploit the places we see opportunities within the region.

And then the other things that are just starting to take hold, and they're really just starting to take hold are -- as we get into client relationships, it's not just sales, it's client services, as well. As we get into the client service bit, we're now able to begin the cross-sell opportunity, which, again, is something that's entirely new, and we're also able to begin getting leverage across these regions. We're facing off against -- whether it's global organizations or global pension consulting firms where we can now start leveraging the progress we're making in one region to another. And again, as you put it exactly right, we're at the very, very early stages of these things, so as we look at all the steps that we can take and the return on those steps, the opportunities-- that just seems very, very large.

Yes. I would add that we are very pleased with the level of organic growth that we're generating. But that is at, we're saying the early stage of development of this global platform, compared to entities that have a wide range of products and are already in all of these markets, we're generating stronger growth. So, as we think about taking the outstanding affiliate products that we have and extending and broadening the distribution platform, the opportunity is very exciting.

Okay. That's helpful.

Just to follow up on performance fees. It seems like at the high end of your guidance range you're building in roughly $0.80 for this year which isn't all that much of a step up from the $0.67 that you did last year. I understand you don't want to be too aggressive early in the year, but just wondering what return assumptions you are building in for this year as it relates specifically to performance fees? Then, are you assuming additional portfolios surpass their high water marks over the next 12 months? Thanks.

In the guidance range, we really are thinking just about $0.60 is what's included in our guidance range. As you move to the upper end of the range, it of course includes that set of performance fees. Plus, if we have some incremental flow growth and additional out performance, you clearly get to the upper end of the range. And as I said, that performance fee opportunity, the story of the quarter, is that we have a more diverse group contributing to it, and as we look going forward, there's very much a clean slate for people to generate performance fees and that to fall to AMG's bottom line.

When we look at a $0.60 number for 2011, that has some very modest performance expectations. I would say if all products were to grow at around 4%, you'd be getting close to those levels, but again, the way this portfolio works is it doesn't all move together. It's the diversified opportunity. There will be, as we get to 2011, one or two of those folks that make a very significant contribution. But the reason we are comfortable at the lower end of the range, including a very modest amount of performance fees, is just the number of folks out there with products that are very well-positioned. So, the consistency of performance fee production going forward is -- we're seeing evidence that is going to be a more consistent contributor over time.

Okay, that's helpful. Thanks for taking my questions.

Sure.

Cynthia Mayer, Bank of America Merrill Lynch.

One more on performance fees. I'm sorry.

You mentioned that 60% of the $40 billion portfolios above the high water mark. I think it's up 10% or something from last quarter. Just in terms of thinking about the remaining 40%, how much of that just goes over high water marks assuming beta, 10% up markets? And how much of it is really dependent on alpha, so you can't actually predict it?

Why don't you start, Nate?

I think it's actually -- the last bit of the what you said is really the important point to focus on, and Darrell said this. This is a very diverse book of business, and the characteristics of it -- it's not like it's all specific funds or concentrated numbers to specific funds. It's a number of separate institutional accounts with customized performance fee congratulations that are set. There's a bunch of it that's long biased; there is some that's short biased; there's some of it that has no market beta component at all; some of it has hurdles, and all the rest of it. It's a very complicated book to do the simplistic here's what the market beta of x, assuming that it was across all markets, would result in y. It's hard to do it that way.

I'd say when we say over 60% is above high watermark, that's a very strong number, because there were some leveraged products back in 2007, 2008, that were down dramatically. I would say 15% of that book was -- we had no expectation for that to get to high watermarks within our forecast period. I mean to say that this diversified book is, again, very well-positioned. While we want to be conservative in how we position the performance fee opportunity, because, as you all know, we've spent a bunch of quarters just trying to not over include in estimates the amount of performance fees. This book does have an opportunity to materially outperform if the right things happen for the right firms and the right products.

And we appreciate that it's more challenging for analysts and investors to see through and understand the magnitude of the opportunity than it would be if we had just a few large, visible funds, that you could look at and gather performance results from on a regular basis. I think that challenge aside, from our standpoint, it really is a more valuable and much more diversified opportunity set. Think of Blue Mountain, Value Act, AQR, all of the quote - - traditional affiliates, - - Genesis, Third Avenue, et cetera, 15, as Darrell said, who contributed.

I think we're now at a place where, independent of what market beta is, we could have very strong performance fees. With diversity you get -- there's no guarantee, but you get, obviously, the expectation of more stable returns over time. Of course, finally, the nature of performance fees is such that while we give upper end to our guidance, there is the possibility, as we have seen in prior years, of much higher levels of performance fee revenues. We feel much better than we did a year ago, even if our guidance is only a little bit higher, about the strength and stability and long-term earnings contribution potential from this book.

Great.

Just in terms of the growth of the performance fee assets, is that chunk of assets growing faster? As you look for a new affiliates, do you care whether they come with performance fee assets as opposed to not?

We want to have diversity across our set of affiliate investments. So, you will typically find, not in every case, but typically you'll find that there is some tradeoff. That alternative firms, which generate performance fees, don't raise their asset level at the time pace as long-only managers. It's not true in every case, but generally speaking, that's true.

You wouldn't want too much of one or too much of the other, and I think we have a nice balance of firms which have product sets that are very highly scalable where you see, we're generating very strong net client cash flows. We also have firms where the products are going to grow, but they're not going to grow as rapidly, but instead of the growth they're going to give us performance fees.

Got it. All right. Thanks a lot.

Sure.

Alec Blaustein with Goldman Sachs.

Great. It's Mark Irizarry, Goldman Sachs.

Just on the alternative pipeline for deals, Sean, can you comment on how alternatives as a percentage of the total pipeline look? Also, how are you thinking about paying for performance fees at this point in the cycle? The fact that maybe there's greater market expectations out there, how are you thinking about pricing performance fees at this point?

I'm not sure I can give you a percentage of our pipeline. It is more than in the past, so I think about the active projects this we're working on and the projects that are a little bit further down, earlier stage of the pipeline, I guess, not to mix metaphors. I'd say the opportunity set is more alternative than it has been which is somewhat reflecting our preference in the firms that we look to build relationships with, and it is also simultaneously more global. And, we're, of course, looking for diversifying alternative products. All of that is part of what we're seeking.

With respect to the pricing, it really is no different. We have an approach, which we've employed in a number of investment in alternative firms, and as you know, generally speaking, we'll look to create stabilizing features to the performance fee revenue that we get from our investments in alternative firms. That allows us to pay more attractive prices, and we've got more experience doing that than anybody else. So, I think we'll continue to be viewed positively in terms of our ability to custom tailor and be flexible in the way that we structure investments. I think the go-forward opportunity, in the alternative category is, for us, very, very positive.

Okay.

And then you also mentioned having some scalable asset classes, as well. What's the view on passive or ETF, some opportunities for AMG?

I appreciate the question, because it's important to understand that we think we are very good at partnering with outstanding alpha-generating firms and partners who have built and run those firms. If you look at our product set, we are way up at the high end in terms of specialization and alpha generation and further away in our product set from the kinds of products, think index-hugging US equities. We don't really have any of that. And there is a set of products which I think are vulnerable, increasingly vulnerable to ETFs and index funds, and we want to be and are away from that.

I think we're not worried that in any medium or even long-term future that the kind of specialized alternative products, global and emerging market equity products, that we have are going to be crowded out by ETFs. It's just the nature of alpha-generating products, and that's why clients are choosing our affiliates. So, that being said, you will not see us -- we've of course had lots of opportunities, you will not see us participating in passive or ETF areas. And, same with core fixed income. Those scale businesses, we think, will lead to other people who have very different business models and are good at different things. It's not what we're good at, but given where we are, given how the world has evolved, we wouldn't trade positions with anybody.

Great.

Then can Nate share the percentage of the flows this quarter and compare it to this year that have come from clients outside the US?

From a net flow standpoint, certainly the majority of the flows were from clients outside the US. I think that's the best way to do it.

They were all in global and emerging market equities and alternatives. All in those products, and then in terms of the client --

You're saying clients (multiple speakers)--

Clients, the majority, and I think we see that continuing.

Yes. I think that's right.

Okay, great. Thank you.

Sure.

Last question, Peter Suss who is a private investor.

Yes, I'm with Surveyor Capital.

Two quick questions. One, I was hoping you guys could give a little more color with respect to your relative performance positioning rights now compared to how it's been in the past. It sounds like it was strong, but if you could help to frame it?For example, I was thinking you could compare your current relative performance to the 2005, 2006 period when you had strong organic growth.

Yes, so relative performance -- let me think about the right way to frame this. Relative performance right now is certainly -- we feel good about where it is. Overall, I'm going to try to give you high-level top end measures, so very good overall. It was a very good year, which you heard us say.

I think one way to think about it is I think something like 40% of -- I'll use mutual funds because they are publicly available stuff -- something like 40% of our funds, by number of funds, were top quartile funds, and something in the mid- to high 30s in terms of assets in our funds were top quartile funds, which is a good, high-level way to think about it. Performance was good with the significant amount from a number of products and significant number, by assets where our largest products are, in the top quartile.

Relative to the 2004, 2005 timeframe, I think the -- to be honest, I'm not sure I can do it exactly in the same quantitative way. I think the overall performance -- one, I'd say significantly broader, a significantly larger, and this is, I think, an important point, a significantly larger number of very good performing products with significant distribution resources behind them. So, the opportunity sets are if you think about where we are looking at it saying there are lots of different ways for us to win from a growth standpoint. We feel better about that, certainly, than we ever have really is probably the best way to think about that.

Yes. I would say it's a good question, but it's a hard one for us to give a specific answer to, because we're not a mutual fund company where we can give you a figure. Nate gave you a mutual fund figure that was by analogy, but obviously firms like Genesis are not in the mutual fund business. What I would say is if you say 70% of our earnings are global and emerging market equities and alternative products, and you say how do our firms in those product categories stack up? They're at the very highest end.

The three emerging market equities firms starting with Genesis, Harding Loevner, and Trilogy, and AQR has a great product; their performance was outstanding. Same with global products. Tweedy, one of our biggest affiliates by earnings contribution, nominated for International Stock Manager Of The Year, and they have other institutional products, as well. In those product categories, we're tremendously well-positioned, so the judgment I think for you to make is where do you think industry flows? If you think generally to risk assets and these -- and erosion of home country bias continues and then I think we're very, very well-positioned.

And then in the alternative category, AQR had a fantastic year. First Quadrant is very, very well-positioned and great long-term record. Firms like Blue Mountain, Value Act, outstanding results. And, then a whole host of the other affiliates like Third Avenue has a great credit product and Genesis has a suite of performance fee funds. Across the system, I think we're in a very good place.

I would say trying to wrap that up, to answer your questions specifically, that while there's no guarantee, of course, that we'll have the same percentage growth. I would say we are from the positioning of our affiliates' performance perspective, we're as good as it's ever been.

Okay. That's helpful.

And that actually ties into my next question which is just -- the company has grown significantly, and I think historically the model has been 5% growth from acquisitions, and maybe 1% to 2% from organic growth. Then, obviously, the markets help you grow, as well. The question is, given your current size, do you think you can still sustain the 5% growth from acquisitions? And the 1% to 2% organic growth, do you think that could improve, or is that still a reasonable long-term assumption?

Well, those aren't numbers that we've given. I think they might be right if you take an average, but it's a funny average, because we've been through, saving last year, the years before were, of course, around the financial crisis. And in the last two and a half, three years, as you know, all of the flows have been first to cash, then to fixed income, virtually all. A little bit toward the end of the year industry-wide to international equities. So, we've been generating growth in the midst of a challenging period for equities managers.

I think the go forward opportunity -- Well, I'll say one more thing. If you look back in time before the financial crisis, we grew -- our organic growth was much stronger than the numbers you gave. I think the organic growth opportunity is potentially much larger. It depends on your underlying assumptions about investor appetite and flow trends for the industry as a whole. If you think about how we're positioned, I think we obviously are suggesting we expect to grow faster than the industry organically.

Then, from the standpoint of the contribution from new investments, we're at a size range which is big enough so that we have the scale to invest globally in the distribution platform and other resources that will benefit our affiliates and have them grow faster and be more profitable, but we're not so big that we can't meaningfully add to our earnings from new investments. If we invested $1.5 billion last year, the last 18 months, as I look forward, I'm not sure we're going to do that every 18 months, but I think that over the next five years the opportunity is very large for us. And, both in terms of the absolute sense, in an absolute sense, but also that it will be meaningful to us.

There will be a time 10 years from now, maybe -- as the firm grows and we have $1 billion or $1.5 billion in EBITDA, obviously doing $1.5 billion of new investments is not going to be as meaningful, not going to be as accretive in percentage terms. But, we've got a great run to get there, and I think we're obviously building out a set of capabilities to continue to generate very strong organic growth. Over the next five years, if markets are at least benign, I think given trends that we see in an investor appetite, we believe we're in for a period of strong organic growth and the ability to also generate very strong, meaningful percentage growth from new investments.

That's very helpful, thank you. Darrell, good luck to you, thanks.

Thanks, Peter.

Seeing as there are no further questions, I'll now turn the floor back over to Sean Healey for closing comments.

Well, thank you again for joining us. We were pleased with our results for the quarter and confident in our prospects going forward. We look forward to speaking to you again in April. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.