Affiliated Managers Group Inc (AMG) 2011 Q1 法說會逐字稿

Greetings. And welcome to the Affiliated Managers Group first quarter 2011 earnings call. (Operator Instructions.)It is now my pleasure to introduce your host, Alexandra Lynn. Thank you Ms. Lynn, you may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the first quarter of 2011. 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. 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.

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 incoming President, and Jay Horgen, incoming Chief Financial Officer. And now I'd like to turn the call over to Sean Healey.

Thanks, Ally. Good morning, everyone.

AMG reported economic earnings per share of $1.60 for the first quarter of 2011, which is a 40% increase over the same period of 2010. Our assets under management, now approximately $340 billion, grew by $107 billion or 46% in that period, driven by strong organic growth, the disciplined execution of our growth strategy and the continued strong business momentum of our affiliates.

We generated $6.5 billion of net client cash flows for the quarter, which reflected both the marketing efforts of our affiliates, as well as a meaningful contribution from our global distribution platform. Our distribution strategy is to provide global investors with access to best in class, boutique alpha generators in the product areas with the most attractive secular growth opportunities, combined with the scale, resources, and risk management of a global asset management partner. As you can see from our strong growth in net client cash flows over the past three quarters, this strategy is clearly working.

As Nate will describe in more detail, we believe that we're in the early stages of this opportunity, and we are making strategic investments to build on this success by continuing to expand our distribution capabilities with additional regional coverage and personnel.

With global and emerging market equity in alternative products generating over 70% of EBITDA, our product positioning is unique among global investment managers. These return oriented product areas are increasingly in demand by global clients and unlike more scale oriented product categories, such as fixed income or passive equity, in value added product categories like global and emerging market equities and alternatives, boutiques have a competitive advantage in generating excess returns and boutique firms, including our affiliates, are recognized as among the best managers in the world.

While global and emerging market equities under performed US equities in the first quarter, we continue to believe that these product areas will see higher organic growth over time. Recognizing that emerging markets will go through periods of volatility, given the long-term growth outlook for these regions, it is clear to us that investor allocations to these markets will inevitably increase. More broadly, we believe that the erosion of home country bias, including among US investors, will continue to drive stronger organic growth, to global equity products of all kinds, including emerging market equity strategies.

Alternative products are another area where boutique firms are clearly recognized as among the world's leading managers. As global investors, both institutional and retail, increasingly seek less correlated sources of alpha, we expect an acceleration of investor demand for these exposures over time. Alternatives now account for over 30% of our EBITDA, and our alternative product set includes global macro, quantitative multistrategy, tactical asset allocation, credit alternatives, active value equities, and private equity. Our alternative products generated strong performance in the first quarter, and while its still early in the year, we're optimistic about our prospects for meaningful performance fees in 2011.

Finally, rounding out our growth strategy, we continue to have strong momentum in our new investments area, as we engage discussions with outstanding prospects around the world. Our diverse pipeline includes both alternative and traditional managers, increasingly on a global basis. Given our outstanding competitive position and a transaction environment that remains highly favorable for us, we have excellent prospects to continue to create meaningful shareholder value through accretive investments and new affiliates.

With that I'll turn it to Nate to discuss our affiliates' results in further detail.

Good morning, everyone. As Sean noted, we had another quarter of strong performance, including positive net client cash flows of approximately $6.5 billion. I'll note that the themes behind those flows are consistent with prior quarters in terms of channel and client geography, as well as product areas.

As you saw in the release, a significant portion of our flows came from clients in the institutional channel and once again our global distribution platform was a significant contributing factor, adding to our affiliate-generated flows. From a product area standpoint, our flows are mainly in global emerging markets and alternative products. These are areas where we see significant positive secular demand trends, and our affiliates that specialize in these areas have very strong track records.

Now turning to investment performance by category for the quarter. In the global equity category, we had another good performance quarter overall. Each of Tweedy, Browne's Global Value Fund and Third Avenue's International Value Fund had another strong quarter. AQR's [Easy] Strategy remains well ahead of its benchmark across all time periods, and UK-based manager Artemis posted solid results in the quarter, with its largest funds featuring strong long-term performance records.

For example, the firm's four-star rated Special Situations Fund ranks in the top decile in its Morningstar category for the ten-year period. While we're pleased with our performance in the global and international equity category overall, a few of our products at affiliates Harding Loevner and Trilogy, had a challenging quarter. However, the vast majority of our products continue to have very strong long-term performance records.

On the emerging market side, it was a mixed quarter, especially given the volatility we saw during the quarter. While Genesis under performed its benchmark, the firm's flagship strategy remains significantly ahead for the one, three, and five year periods.

Now turning to our alternative products, where we had a particularly strong first quarter. With firms such as AQR FirstQuadrant, Value Act, and BlueMountain, outperforming across the major products. In recognition of their impressive performance, AQR, BlueMountain and ValueAct were each recently nominated for firm of the year in their relevant categories by the Institutional Investor Magazine.

Finally, our domestic equity managers generally had a good quarter. Systematic continued to deliver strong performance across their suite of value strategies, with all products remaining ahead of benchmarks for the quarter, one, three and five-year periods. Frontier also had a solid quarter among its largest strategies, while Tweedy, Browne in Times Square missed their benchmarks for the quarter, but remained well ahead for longer periods. Friess Associates' Brandywine Fund outperformed its benchmark by 300 basis points in the quarter. However, their large cap Brandywine Blue Fund under performed.

Now, turning to flows. As I noted earlier, we had positive net flows of approximately $6.5 billion for the quarter. As we've been saying, we believe we are in a good position to attract additional new business in large part due to the strong long-term investment performance of our affiliates, and the strategic positioning of our global and emerging markets equity and alternative products, combined with our focus on providing investors with access to leading products through our distribution platforms.

Starting with the institutional channel, we had positive flows of approximately $4.3 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 Harding Loevner, Genesis, AQR, BlueMountain, ValueAct and Frontier. We had modestly positive flows in our quantitative equities business, as positive flows in the global products offset outflows in US equity products. Looking ahead, while we know that institutional flows will be inherently lumpy with volatility around any given quarter, we continue to have significant positive momentum and the overall trends are very good.

Moving to the mutual fund channel. We had positive net flows of approximately $2.2 billion 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 continue to generate positive flows. We also had positive flows from several of our global and emerging markets funds, including those managed by Harding Loevner, and Tweedy, Browne and among domestic funds, Aston's Mid Cap Fund was a standout.

In our high net worth channel, flows were basically flat for the quarter. Positive flows into global equities and alternative products at firms such as Harding Loevner and UK-based manager Artemis were offset by outflows at some of our US equity and municipal bond products.

Now I'd like to spend a moment on our global distribution platform. As we continue to attract new business for our affiliates across geographies, we are also strategically expanding this effort. We have just added dedicated coverage to the Nordic region and Korea, good examples of the expansion of on the ground resources dedicated to selling affiliate products. We continue to gain significant transaction in Australia and the Middle East, and increasingly in Europe, with strong search activity and a growing pipeline. Finally, our Asia effort is off to a great start with the opening of our permanent office in Hong Kong this past quarter, and the Korea addition I mentioned earlier. Overall, we're pleased to see the investments we made in distribution over the last several years paying off and are continuing to invest in the growth and evolution of this platform for the long-term.

As Sean noted, fundamentally we believe we are still at the very early stages of the opportunity to bring the benefits of a global scale distribution platform to bear to add to our affiliates' own dedicated distribution teams. Now with that, I'll turn to Jay to discuss our financials.

Thank you, Nate. AMG began 2011 with another strong quarter of earnings growth and we were especially pleased with the $6.5 billion of net cash flows. These flows added an incremental 2% to our asset center management for the quarter and together with market performance, we entered the second quarter with $340 billion in AUM. The highest level in AMG history.

As you saw in the release, we reported economic earnings per share of $1.60 for the quarter. On a GAAP basis, we reported earnings of $0.74 per share. Performance fees contributed a net $0.03 to our economic earnings per share.

Turning to more specific modeling items, the ratio of our EBITDA contribution to end of period assets under management was about 16.3 basis points for the first quarter. We expect this ratio to increase to approximately 16.6 basis points for the second quarter. For the first full year 2011, this ratio is expected to increase to 17.1 basis points, which includes a reasonable assumption for performance fees.

Holding company expenses were approximately $20 million for the quarter. As Sean and Nate discussed, given our success in generating strong cash flows, we are making additional strategic investments in our global distribution platform, by adding personnel and operations, and as a result our holding company expenses are expected to increase to approximately $22 million per quarter for the remainder of 2011.

With regards to our taxes, our effective GAAP tax rate for the first quarter was 37.6%. This GAAP rate is distorted by flow-through items related to our investment in Pantheon. For modeling purposes, AMG's GAAP tax rate is expected to be 36% for the remainder of 2011, although minor distortions from flow-through items will continue.

Our cash tax rate was 21.5% for the quarter, and we expect this rate to average approximately 23% for the year as a result of further organic growth. Intangible-related deferred taxes increased modestly over the prior quarter to $12.9 million, reflecting the first full quarter impact of our investment in Trilogy.

Likewise, our total amortization increased modestly for the quarter to $27.1 million. Our total amortization included $8.4 million of amortization from affiliates accounted for under the equity method. The earnings from equity method affiliates, net of this amortization, are included in the line item income from equity method investments. We expect total amortization to decrease slightly to $26.9 million per quarter, and going forward.

We reported total interest expense of $27.7 million for the first quarter, which we expect to decline to approximately $26.8 million for the second quarter, primarily as a result of a lower average balance on our revolver, which in the first quarter was reduced from $460 million to $340 million using our free cash flow.

Our interest expense for the first quarter included approximately $8.3 million of non-cash interest expense. And we expect this increase -- we expect this to increase to $8.5 million for the second quarter.

Now turning to guidance. We are raising our 2011 guidance by $0.10 as we expect our economic earnings per share to be in the range of $6.90 to $7.70. This guidance reflects the increase in our assets under management, as well as the growing opportunity for additional performance fees. It also factors in actual markets so far this quarter, with an assumption of 2% quarterly growth in markets for the third and fourth quarters. We assume a weighted average share count for the year of 53.3 million. The lower end of our 2011 guidance includes a modest contribution from performance fees.

While the upper end of the range assumes a more robust performance fee expectation, in addition to elevated organic growth. These assumptions do not include earnings from future new investment activity and are based on our 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 contribution of our affiliates would impact these expectations.

Now we will be happy to answer your questions.

(Operator Instructions). Our first question is from the line of Dan Fannon with Jefferies. Please state your question.

Hi, good morning.

Good morning, Dan.

I guess in terms of the flows, good color on kind of where things sit today. I guess how would you characterize the backlog of the institutional channel today, versus where it sat a quarter or two quarters ago?

Okay. So I think by almost any metric you look at, whether it's sort of search activity that we're participating in, RFPs, finals, all of that, I think all of those metrics look positive and you see continued growth. And again just to sort of step back a little bit we're talking about this at two levels. One is the affiliate level of activity and then the other is sort of incremental activity from AMG distribution on top of that. So I think by almost any one of those metrics, things continue to sort of improve. And looking forward, again it sort of stands to reason especially on the AMG ones, as more and more regions and resources come online. The other thing I'd say, just the note of caution alongside it is, obviously in the institutional channel, which is what we're talking about, the flows will be lumpy and you saw some of that in this quarter, both positive and on outflows. And we'd expect that kind of lumpiness to continue as well. But all of the underlying metrics are very positive.

Okay. Great. That's helpful. And then on the distribution efforts that you guys are doing. Can you talk a little bit more about what the incremental investments are going to lead to and maybe update us -- you highlighted some new offices in regions. I guess how many salespeople do you have today and I guess with the incremental investments, where do you think those numbers can go to?

I'll begin and then let Nate fill in on some of the specifics about marketing and distribution personnel. Hopefully you can tell, the investments that we're making are part of a broader strategy. Broader strategy both in terms of actual AMG personnel and expanded regional coverage, but also in building the broader AMG brand. And in bringing the idea of focus performance-oriented boutiques, specializing in these high-value-added product areas, global and emerging market equities and alternatives, bringing that product set, managed by outstanding boutique asset management firms, combined with a global scale investment management firm, which has certainty around business stability, risk management, compliance, et cetera.

And in the case of AMG, we've been now public for -- we've been a Company for 17 years, public for 14 years. We've got a long track record with the largest clients and consultants around the world. And as we increasingly expand that strategy, we think we'll see more and more positive organic growth over time. So this is -- the traction that you're seeing, the success that you're seeing in the past three quarters, is all part of a strategy that we see continuing to generate organic growth over the long-term.

The other element that I would add to the broader reinvestment in the business is, it's partly salespeople,but it's also compliance personnel, operations personnel. It includes even -- which is a little bit separate, we can talk about --the building out of the wealth management platform that we described I think in the last call and we're about to announce a senior-level hire to run that strategy. All of these are investments in the business, which we think will pay off in the long run. And where we're already seeing success. Nate, do you want to talk about the specific?

Sure. The only thing I'd really add to that is, in terms of the specific sort of marketplace-facing bit of it, although it applies as well to the other areas Sean talked about. On some level the challenge, but also sort of the sort of unique opportunity we have, is we're working alongside, very high-quality experienced boutique, sales and marketing service client teams. And we're just needing to add, from the marketplace-facing piece -- we're really just needing to add that local -- in many cases that local market bit and some of that's simply geography. Some of it's culture and language. Some of it's just really deep experience in the marketplace. So the opportunities set for us, in what we've executed so far, is to add very senior experienced, very high quality sales and marketing client service professionals in these geographies. So we don't need to build all of the marketplace-facing bit because we're working -- we're sort of integrating ourselves into what our affiliates are doing. And whether that's an AQR, or a Tweedy, Browne or a Harding Loevner, or Genesis. We're integrating into all of those -- into their businesses. So what that means is that while we have to hire a certain kind of person and I think you've heard us talk in prior calls about finding the right person to open a region, the overall numbers of people that we actually have to put in market is just a couple per region at this point.

Great. Thank you.

Thank you. Our next question is from the line of Craig Siegenthaler of Credit Suisse. Please state your question.

Hey, thanks. Good morning, everyone.

Good morning, Craig.

First question. I just had a question on performance fees related to the guidance increase. How has AUM, relative to high water marks and benchmarks in your performance fee generating assets, how has it really trended over maybe the last few months and the last few quarters here?

Okay. Sure. So, Craig, as you heard Sean say, we do have good momentum in our performance fee opportunity. And it is early in the year. But given the performance and the inflows into those products, we are well positioned in 2011 and as part of the guidance. I think one thing we're looking to get away from here is reporting performance fee AUM and percentage of high water mark. As we've come through the financial crisis, we view the usefulness of this metric as its time has passed. And as our alternative business and our performance fee opportunity in long bias products continues to develop and grow, we will evolve our approach to performance fee guidance. But again for now we see performance fees could contribute up to 10% to our EPS in 2011.

Got it. And then just kind of a secondary question here on the M&A pipeline. It seems like over the last year or two, your interest level has gone more outside the US. When you think of your potential pipeline here and you think of here in the US, Europe, Asia, maybe even South America, how is the mix kind of distributed among kind of conversations and your interest level in those areas?

I think the degree to which we talk on a more global basis reflects two things. One, our view of where the forward opportunity set is and two, where we see some outstanding firms growing and developing. It has never been and will never be first about the kind of product or the geography of the firm. It's always about the quality of the firm and the excellence of their execution, their performance track record and most of all the people and the people we are partnering with. And we see still, as you understand, outstanding firms based in the US, outstanding firms running US equity products.

All that being said, we are clearly spending much more of our time outside the US, where there are a number, an increasing number of really outstanding boutique asset management firms, which in increasing levels are approaching the point where they are considering succession and transition. Or in the case of alternative firms, considering the benefits of bringing in a permanent strategic partner and AMG has a unique position, a unique track record in that area.

So the opportunity set is very large and increasingly global, increasingly alternative. And I would say the current pipeline of opportunities that we're sorting through is substantially expanded even from a quarter ago. But we're always proceeding on a basis that is recognizing that first above all else, we only want to partner with really outstanding firms, outstanding people. And really good firms. Especially when you're in a succession and transition kind of opportunity, as opposed to banker-driven divestiture transactions, which were more of a theme in the last year and a half.

In the succession transition investments, inevitably good firms have lots of alternatives and lots of good things going on, including the value of just doing nothing for the moment is always attractive. So it requires a patient and thoughtful approach. Obviously we've got a long track record of making these kinds of investments. But it's harder to predict on a quarter-to-quarter railroad basis. And inevitably each individual transaction takes more time. But our market position and opportunity set continues to be extremely attractive.

Great. Sean, thank you for the color.

Thank you. Our next question is from the line of Bill Katz of Citigroup. Please state your question.

Thank you very much. Just coming back to performance fees for a second. Could you segment how much of that was embedded in the revenues through the individual line item, versus within the non-operating investment income line?

Yes. Are you saying the $0.03 for the quarter, Bill? Is that what you're --

Right.

Okay so it was mostly from our equity affiliates. But a small portion. So I don't know -- I'll have to look at the exact numbers. And I can follow up with you. But I'm going to say two-thirds was in our equity affiliate line -- equity method affiliates and the rest of it was in our revenue line.

Okay. That's helpful. Stepping back a little bit, in light of the step-up of strategic spending here, is there any shift in the economics with any of the affiliates that you're looking to leverage specifically in terms of revenue shares or the underlying economics of the business?

Not really. But Nate, why don't you --

No. There is an expense sharing element to some of the things we're doing, especially in distribution. If that's the nature of the question.

But our focus is always in making investments to build the broader capability and drive stronger organic growth for AMG and its affiliates, is to always have a primary focus on the partnership relationship. So our affiliates are the ones deciding which markets are most attractive for which of their products. And our affiliates are -- always understand that AMG makes money in partnership with our affiliates. And the kinds of sharing that we really describe are really just sharing of actual costs, not AMG taking profit margin from the affiliates.

Okay. That's helpful. Then just last one. And you may have covered this, I apologize. You mentioned your positioning in terms of the deal pipeline, and the pipeline itself, but can youtalk a little bit about pricing, in terms of what some of the trends you might be seeing between both the traditional and the alternatives in US and Non-US?

Sure. Why don't I let Jay do that.

So on the pricing front we're still seeing pricing for high-quality firms in the eight to ten times EBITDA range. I would say that maybe the trend, if noticeable, is trending upward, in part because of some of the -- either the speculation or some of the actual IPOs. [Apollo] went public, I guess. And so that allure is there. Having said that, we aren't finding any difficulty in pricing in the eight to ten times range. And as it relates to alternative versus traditional, there certainly is a mix of both firms in the market today. The alternative, the maturation of the alternative industry is occurring and some of those founders are starting to think about succession planning. So we are seeing more of the alternative managers in terms of supply. In terms of pricing, clearly the performance fee stream has to be thought about. We typically structure it, as you know, and for the highest quality firms, I think that eight to ten times range is where people are pricing alternative and traditional firms.

One thing I would add is that an aspect of the current environment that's different from the environment we had two years or a year and a half ago, is that divestitures tend to be run by bankers and so inevitably they're -- not always, but inevitably they're more likely to be auctions. And it's -- that presents its own challenges, including pricing challenges. But in the current environment, it is much more, which is our -- more of our historical pattern of investments, much more oriented toward individual, customized investments, not -- a banker might be involved, but it's not a transaction that arises out of an auction process.

Great. Just one last one. Thanks for taking all my questions. In terms of the pipeline for new business, obviously the theme here is global and alternatives. But to the extent that the allocations and you talked to consultants and notwithstanding the structural opportunity here, in a tactical sense, are allocations full-up at this point in time? Or is there still room for those allocations to move higher?Are you seeing a shift real-time to that?

Are you talking about client allocations or capacity in products? I think -- if it's the former --

Right.

Then I'll say this. If you look at emerging markets as a share of world market cap, world GDP relative to the allocations that institutional investors have, even after all of the talk, all of the growth in emerging market equity products, it is still way under where it should be, just to match those metrics. So we see ongoing growth and opportunities in emerging markets and as you heard us describe in the prepared remarks, we see as there's an erosion of home country bias. And an ongoing search for alpha, especially less correlated sources of alpha. We think global and emerging markets equities and alternatives will be increasingly favored, are being increasingly favored, by clients around the world, including the US and we think the re-risking of the US institutional and retail investor base offers a very large opportunity for our product set.

All right. Thanks for taking all my questions, guys.

Sure.

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

Hey, guys. Good morning.

Good morning.

Just a couple of questions. Just, first, a follow-up on kind of the deal front. I realize timing of transactions is inherently lumpy. But anything here that suggests the environment is maybe becoming a bit less favorable, just given maybe more competitors out there, perhaps some affiliates, some potential affiliates are still somewhat reluctant to do a deal, just given kind of ongoing market volatility. And then just related to that, the pay down of the credit facility this quarter. Should we read anything into that, as it relates to maybe your near-term prospects?

I would say, first, on the question about pipeline, no. The opportunity set remains extremely robust and our competitive position is stronger than ever. Yes, the market as a whole is changing. There will be some IPOs. There's some new entrants and maybe pricing on an overall basis has ticked up a bit. But it's always been the case that really good firms, as I said earlier, have a number of options. And you're not going to successfully make investments without paying a fair price, as well as being very focused on a customized solution to their particular succession and transition issues.

And it's really -- it always has been and now it's returning to a market, where AMG's track record and our very successful set of historical partnerships with existing affiliates, our approach, which is very experienced and very customized to the needs and opportunities that each firm has. Those will be -- are and will continue to be the primary bases on which the very best boutique management firms choose their partner. And on that basis, we continue to be extraordinarily well positioned and I would say the scarcity of the opportunities are really just driven by the timing of when the very best firms, with whom, most of whom we've developed strong relationships over time, when they decide that now is the right time for them to proceed. And that's inevitably driven by idiosyncratic considerations at each firm. But we continue to be very optimistic and you'll see it on a medium-term basis looking backward. You won't see it quarter-to-quarter and you're exactly right, the deals are inherently lumpy.

Yes. Just on the pay down of the credit facility, Michael. So I would characterize it as really just de-levering from the tick-up in the Pantheon transaction, which we moved up a little bit on the leverage, not a lot. We're just really getting ourselves back to a normalized level on the leverage scale. It also should be said that by doing that, it does enhance our capacity, because we can obviously take down additional revolver and I guess the way we see our balance sheet today, is that we're positioning it conservatively for the continued opportunity to execute on our new investment pipeline.

Okay. And then, maybe, Sean, if you can just give us an update on, in terms of the traction you seem to be gaining as it relates to kind of sovereign wealth funds and other sophisticated pools of capital. Just seems like you present a pretty unique proposition for those types of investors. So maybe where do you think you are in terms of kind of fully leveraging that opportunity?

I appreciate the question. And I think we do present a very unique and attractive opportunity, that's a mix of performance-oriented boutiques and global scale asset management partner. And it's not a story that everybody has heard or fully understood. And I think there's an ongoing opportunity for building, as I said earlier, the AMG brand. And in addition to the -- and it all starts, we always understand, with the outstanding performance and long-term performance track records of our affiliates.

So in addition to -- and I should -- I'll stop and put an exclamation point on that. Because for all of our conversation, in the industry generally about strategies and distribution and brands and all that I think we should all understand that, especially when we're talking about alpha generating products, it always begins and ends with performance. And we've got that in -- our affiliates are ideally positioned to continue to generate that strong performance.

So that being said, the broader opportunity in building the brand, building the understanding of the broader opportunity and offering, requires a combination of excellent work by our affiliates, marketing and distribution teams. The expanding regional coverage and penetration and relationship building by our AMG distribution team. And then it also requires AMG senior management going out and building relationships, especially with sovereign wealth funds, where building a high-level strategic relationship is just as important as offering the most attractive product and having a great relationship with the team that builds the portfolio. So that senior level relationship building is -- has been underway for a number of years. But we're still a young Company with lots of opportunity ahead of us. And really all three of us spend an enormous amount of our time on the road, building client relationships. Would you add anything to that?

No, I think that's perfect. I do think we're still -- this came through in all the things Sean said, we're still in the pretty early stages of executing on the opportunity.

Okay. Thanks for taking my questions.

Sure.

Our next is from the line of Roger Smith with Macquarie. Please state your question.

Thanks. I just wanted to dig in a little on the institutional business on the sales and the redemptions here. Out of those net client inflows, can you give us an idea of what percentage really did come from your distribution efforts? And then if you can further bifurcate that, what, where -- how much of that really came from Australia, versus the Middle East?

All right. Let me take those in reverse order, if that's okay. So the -- well, I'm -- so of the flows in institutional this quarter, I'd say something around a quarter, maybe a little bit less, is sort of what came through our distribution. Now again let pause here and I'll make exactly the same point that Sean did, which is when I say something came through our distribution, all I really mean there is our sales, marketing, client service professionals played a material role in winning that mandate, right?The vast majority of the work and the reason that we have the mandate is all the affiliate, right? And so the affiliates are doing most of the work, they're doing all of the work from the investment side and even in the sales, marketing, client service process,a lot of that is them, right?So all of this is really affiliates. But that's sort of one way to look at it, and the measure is where our guys are playing a material role.

In terms of this particular quarter, and I'll make a point here and go back over last few. This particular quarter the biggest contributor, by far from a regional standpoint, was the Middle East. If you look, for example, at our pipeline in terms of next quarter, I would say the two regions that I think -- looking at it right now, that are likely to be the biggest contributors are probably Australia and Europe. And I think if you went back a quarter ago, I think Australia was the biggest contributor. And I'll make a couple of points here. So one is, it's still the early days point, right.

So we have -- if you look back, so we've been in Australia, maybe just to set the stage, we've been in Australia now for just over four years, Middle East for three, Europe for two. You know, these pipelines are building. It is still -- they are still lumpy. We talk about the institutional channel overall being lumpy. It's especially lumpy in terms of what we're doing in adding distribution in these regions, because it's still relatively early days. So the pipelines in each region are building, the mandate sizes are large, and there is still not the level of consistency that there will be as these get more and more mature. This year, I think, is the first year where Europe will be a mature -- a more mature, maybe I'll say it that way, it still won't be really mature, but a more mature market for us just in terms of more regular contribution, and again it just took a couple of years to build the pipeline. We have to go in there, as Sean said, it's not the story that everyone has heard. So it's adding resources -- we still have relatively few resources in Europe. I mean, you saw again we're adding more to Nordics just now. And I think there's another probable add in terms of dedicated regional coverage later in this quarter and next. So it's building. But anyway, sorry. So the specific answer to your question, this quarter Middle East was the biggest contributor. Again as I look to next quarter, I think it will be a different story, just the way the pipeline looks.

Okay. Thanks. And then can you tell us -- to me I kind of think about that then as the sales of about $13 billion, about $3 billion were, come from you guys as the introduction. $10 billion were done by the affiliates themselves. Where was the $10 billion source from? Can you give us an idea on that, geographically?

All right, let me back up. So, okay, you're going to do this -- if you're doing it at the gross level, I think the way to think about it, it's easier for me off the top of my head to do it on a net basis. But maybe I'll answer high level there and maybe I'll throw some detail around it. So at a high level, this quarter on a net basis, it was actually relatively evenly split, kind of domestic versus global. And that was driven by some very lumpy -- some lumpiness on the outflow side, frankly. If you look at the inflows, the majority of it is coming non-US. I can't exactly size that for you off the top of my head, exactly what it is in percentage terms. Definitely the majority of it I'd (inaudible) off the top off my head.

Okay. And then was there anything that did -- was -- I guess you did just talk about the redemption levels being a little bit high here. Was there some kind of one-off and I know it's the institutional channel. So presumably everything is one-off?

Yes. And, look, you make -- that's exactly the right point, right, which is yes, if you look at the growth outflows in the institutional channels this quarter, it was elevated. There was -- the lumpiness comes both ways. It's both the timing of and when the large inflows come as well. Because we have some of these very large mandates, there will be lumpiness around the outflows. There was some of that in this quarter. And look, stepping back, that's not surprising, right. That will happen. There will be quarters where that happens.

But I think the point I made in answer to a prior question is really the one that you should ultimately sort of be focusing on, which is okay, there are some underlying metrics that sit underneath the opportunity set in the channel. And those are -- what does the pace look like in terms of search activity and RFP activity and finals activity -- what do all of those look like and those trends. If you look forward over the medium to long-term, those are the things that are going to lead to positive organic flows. In fact, if you sort of look back, we were sort of pointing to those even during periods where we had much, much less good sort of headline flow numbers. And so, as you want to say, look, there will be lumpiness and there will be surprises both positive and negative. But if you look at the things that are going to drive the long-term organic flow trend, it's back to those underlying metrics and on those measures things look good and trends are positive, as we said in an answer to an earlier question.

Okay. I guess just my last question is on the mutual fund business. Can you comment on some of the managers or the products that are doing well in there, that aren't necessarily in the data that we can see on the -- from a monthly point of view. So I guess is there some non-US products that are in there or stuff that's sourced out of the US that we don't see and you can comment on?

Okay. Okay. I'll take a shot at it. I'm not sure exactly -- I'm going to make some assumptions about what data you're accessing. I'd say there's probably -- given your point about domestic non-US. So, yes, I think one thing that -- I think this data, some of it may be accessible. One, I think Artemis, for example, which is as people may recall, a very successful UK-based manager. Very well known brand. Has equities in the name, but also some income products and some alternative products. They are having -- they had a good quarter and that may be some of it. The other piece of it, which is probably harder to unpack, is the subadvisory mandates that are sitting in the mutual fund channel. And the broad theme I would say there is, or maybe themes plural, are really consistent with what we said in our prepared remarks which is, in the first instance there is a trend toward the use of alternative products, alternative products in retail products. Using product two different ways there. So that's one broad trend. Again we are very well positioned with several affiliates, especially AQR and FirstQuadrant to gather flows there. And that's happening in that sub-advisory channel. And then the other thing I'd say is again, the emerging markets and global equities trend, we do have some affiliates, for example Harding Loevner, who have some very long-standing, sizeable sub-advisory relationships that are successfully raising assets. So those are probably -- those may be some of the pieces that would help, but the themes that sit behind them are entirely consistent with the ones we flagged for the proprietary funds.

Great. Thanks very much.

Thank you. Our next question is from Cynthia Mayer of Bank of America. Please state your question.

Thank you and good morning. This is Adam [Bea] in for Cynthia. Just a follow-up on the mutual fund flows. I'd like to get your thoughts on, in addition to the obviously good response to the products and performance on offer, as you look across the affiliates, do you feel as though there's been kind of a broad-based re-risking on the part of the retail investor?

So I would say -- again if I were going to pick a trend, I would say there is a broad-based trend towards the inclusion of alternatives as a way to get returns into the portfolios. That's -- I would definitely say. I think -- there again, so that one we have confidence in. I think there is re-risking in part because of that. And we're seeing that. Again looking at our data -- I'm just sort of trying to answer it relative to our data rather than the industry stuff we all look at . So I think that is definitely true. I think more broadly people are looking for return, they ultimately have to. So maybe

I would say as you look at the opportunity for US ambassadors and I'll include institutional with retail, because in some respects, they behave similarly. So if you look at what happened a year -- or go back two years, through almost to the beginning of this year, what you saw were extraordinary levels of flows into fixed income products. And one can ask the question, parenthetically, whether anything, look at history, inevitably these -- when flows spike to these levels, they end up coming back out to some extent as the cycle evolves. I think one can also ask the question, which, of course, many are asking in the industry, was that the right time? Were all of these investors, and there are still some doing it, are they going into fixed income at the right time and for the right reasons. And we all understand the risks that those products and those investors will bear to the extent that rates rise dramatically. We don't have -- we didn't have any of that product set to get inflows. And so two years ago, our flows were nothing like what they are now. Now as investors re-risk, I think what you'll see in the industry is outflows from fixed income products, which will not affect us. We didn't get the benefit, but we're also not going to suffer as those products are dragged going forward.

Right.

And I think as investors move into risk products, it will be into equity categories that include passive, but those passive products are much less of a challenge. And much less attractive in areas like global and emerging market equities and alternatives. And so I think we will be relatively protected from ETFs and index funds. And as Nate was describing, as we've said earlier, our view is that the re-risking this time will look different from past periods, where the US equities saw very high levels of inflows. I think there will be, of course, high levels of flows as the cycle reverses. But we believe that a larger percentage of the flows than historically occurred, will be into non-US equity products and into alternatives. We're still early days. But that -- anecdotally that's what we're seeing and obviously that's how we're positioned.

Great. Thank you very much. Really appreciate that. Also just turning to emerging markets. Obviously your acquisitions of affiliates and emerging markets is a long-term strategy. Just, if I could, get your high-level take on the near-term, maybe within the year, outlook for emerging markets. Are you concerned about the level of investment returns there at all?

Our view is that in the near term, and I would say even through the balance of this year, it's extraordinarily difficult for anybody to predict with any precision what's going to happen. And it's definitely not something that frankly we spend a lot of time thinking about. It's not something we can control. And our view is that there will inevitably be volatility. We've seen volatility, even in the first bit of this year. And over time we're positioned to deal with that. And part of our approach is to have diversity of exposure. So the way in which, even in the emerging markets category, we experience that, is going to be more muted than it would be or might be for a firm that has a product with a particular focus. That said we are sure -- the only thing we're sure of is that there will be change and there will be volatility, maybe in the balance of this year. Certainly over time. But if we look point to point, we're convinced that a decade from now, 20 years from now, these markets will be much, much larger. And the underlying fundamentals that will drive growth are very strong and very much still in place. And that will lead to organic growth opportunity, both beta as well as client flows.

Got it. Thank you very much. That's all I had today.

Sure.

Thank you. Our final question is from Robert Lee of KBW. Please proceed with your question.

Great. Thank you. Good morning, everyone.

Good morning.

Actually I have a couple of questions and I'll try not to [winger] too much. First thing is I'm just curious if the global distribution platform, since its kind of at the affiliates option I guess, whether they want to make use of it, can you talk a little bit about how that's changed, now that you've got some track record of gathering assets? Are you seeing more affiliates talk to you about making use of the platform and being interested in it and to what extent does that play into your outlook for really leveraging that platform going forward?

Yes. Okay. So I think, first, I think there has been very good acceptance by our affiliate group. Really going back. I mean obviously we had to really explain to them what we're doing. But this is all being done in the context of sort of a basic AMG partnership business model, where we have really, we think, very strong, deep relationships with these firms. So I think that's the foundation of it. And we're sort of honored that they let us go into the marketplace and work with them to broaden their geography. So that's the first thing I would sayObviously as we've -- that's sort of step one. As we've done a good job for them and with them as you say, it certainly gets easier as we go. But I would say the biggest difference and I think this is responsive to your question, but I think the biggest difference is the evolution it's had, if you just go back over the last four, five years, in how it's evolved the AMG brand in the marketplace, with boutique managers as an example. So as we go out, and as we're talking about what AMG is like as an institutional partner in the boutique asset management firm, this is just an added component to it. Again the core, the foundation of everything we're doing is the same thing that we've been doing, again as Sean said, all these years, but there is this added element to it. If firms choose to use it. And again most firms, the vast majority of our affiliates now are using in some form or another. We've built it in a flexible way, so that it's not you have to use it -- if you opt in, you have to use it everywhere and in every way. We can really design something that knits into the fabric of what each affiliate is doing.

So it's -- some affiliates have an opportunity -- some of it because of the marketplace, right? Which is our view combined with our sales and marketing client service professionals, is there is an opportunity in a place or not. There's some places where the affiliates would like to participate if we found an opportunity, we just haven't found the opportunity. But where we think there is an opportunity and the affiliate doesn't already have, when they come to us, their own distribution. So, for example, we wouldn't be saying, let's do a UK distribution for a UK-based firm. But where we see an opportunity and the firm is -- the firm has product and capacity and isn't there themselves, it's pretty easy for them to want to work with us. So, sort of a long answer to the question. But we think it's really broadened the AMG brand in the marketplace, as we're talking to boutique firms. Obviously it's also helpful with our existing affiliates.

In maybe the follow-up question, as you expand globally, get much larger in size, the different tasks or services that you've made available to affiliates has expanded obviously. The global distribution is one. But you've talked about compliance functions and maybe some -- leverage some buying power. I believe at Pantheon you may do their IT infrastructure. Where do you see kind of the services you're providing to affiliates more broadly. Where is that going? Where's it expanding and how do you make sure that you don't get saddled with costs through that, that somehow impact the AMG shareholders?

Well, this is all part of a continuum, for 17 years we've been successfully partnering with outstanding boutique asset management firms. And over time we have gradually found various opportunities for us to bring the benefits of economies of scale and sometimes that's just best practices in a given area, to outstanding firms, which are already by definition we wouldn't have chosen them and wanted to be their partners, if they weren't successful. And they weren't complete firms. So it's a very different approach from others where what they're trying to do is leverage some infrastructure that they already have. And sort of fit products in to fill out some kind of matrix. Or to expand and get synergies through the acquisition of incremental businesses. In all of those cases, a much bigger part of the discussion is around how you get the leverage from the cost savings or how you get the leverage from more and more entities making use of an infrastructure that you've built.

Now we have some of that to be sure. But it's always opportunistic. It's never where we're making investments or trying to encourage affiliates to participate, so that we're somehow getting the benefits of scaling the infrastructure. It really is just the opposite. What we start with is the affiliates themselves, and their opportunity set, and their needs and issues as firms and what their ambitions are.

And if you start that way, and you've got a set of great partners and you've got a set of products and obviously our product focus is very different from other firms of our scale, and then you can deliver those products in a way that is obviously continuing what has already worked well, with affiliate-driven distribution. But also expanding, especially to global institutional clients, this -- the opportunities with features that are inherently challenging for individual firms to provide, in market client service, global-scale compliance, risk management, et cetera. So the expansion of services will be on an ongoing basis, opportunistic. And never the basis for our growth and profitability. It's going to be incremental.

Now when you add incremental capability to growth that is already strong, and where you've -- we believe positioned the business and the product set ahead of very attractive secular trends, that incremental benefit can be very substantial. So we see that going ahead over time and are not concerned that we're going to ever be in a position where somehow we're replacing what affiliates are providing. It will always be augmenting and enhancing what they're already doing.

Great. That's helpful. If I could, maybe just one last question and Sean, since you opened the door, I guess about an hour ago, may as well step through it with the wealth management platform. Can you maybe update us on you know what that is. What the strategy is there, how you expect that to kind of unfold? You talked about having a senior-level hire possibly soon. I mean what should we be thinking about? Or just what the business model will be.

Well, we talked a little bit about this in the past. So I'll keep my comments brief and we can follow up in more detail if you'd like. The wealth management universe is -- especially at the ultra-high end -- is a close cousin to the institutional boutique asset management firms that we have a long standing business of investing in. And the universe of those businesses, and I say businesses because some of them are currently within larger entities and are looking for a way to separate. But many are already independent. Those businesses at the highest end, and it's a subset to be sure of the broader universal wealth management firms. Those businesses are interested in the same kinds of partnership relationship and investment structure expertise that we've brought to bear in all of our other investments.

So there's a large opportunity in our view to make a series of investments in outstanding wealth management businesses. Obviously you need to do it in slightly different ways. And we've adapted our structure in concept to address those differences. There are a number of different strategic capabilities related to scale and certain aspects of the business, which you have to think about. Broadly speaking we think there's a very large opportunity to invest in a number of high-quality wealth management businesses. entirely incremental to what we're doing.

So having absolutely no impact on what we believe is a very successful business, with outstanding organic and new investment growth prospects. So this is entirely separate from that and incremental.

But if you look over the medium to long-term, we believe that we're ideally positioned and we think we've got the right team, which we'll announce shortly, to execute this strategy to build a scaled business and that scaled business would, among other things, in addition to being successful and profitable in its own right, among other elements of that business, we would be able to provide a uniquely attractive mix of alpha generating products in global and emerging market equities and alternatives from our affiliates and the -- and we don't use this word that often, but the synergy that could exist between those elements of our business, is quite attractive to think about. Obviously it would have to be done carefully and only in a way that was in the best interests of the underlying wealth management clients.

But that said, there's certainly that opportunity, because that's one of the things that these wealth management firms tell us they're looking for, is that kind of access to outstanding independent products.

So that's the idea. I guess I did it in more than a brief way. There's some other businesses out there that have launched to try and address this market opportunity. But we believe, given our track record and scale and experience, that we've got a very good opportunity for success. So that's the idea. Again, off to the side, incremental to what we're doing. But kind of an attractive low-hanging fruit that we're going to see if we can execute on.

Great. Well thanks for your patience and thanks for taking my questions.

Sure. Happy to.

Thank you. There are no further questions at this time. I'd like to turn the floor back to Mr. Healey for closing comments.

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

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