Affiliated Managers Group Inc (AMG) 2011 Q3 法說會逐字稿

Greetings and welcome to the Affiliated Managers Group Third Quarter of 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexandra Lynn, Vice President of Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you. Ms. Lynn, you may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the third quarter 2011. 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 the quarter, as well as a reconciliation of any non-GAAP financial measures to the mostly 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, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer. Now I would like to turn the call over to Sean Healy.

Thanks. Good morning everyone. In a quarter marked by extreme volatility and market declines, AMG generated strong results including a sixth consecutive quarter of meaningfully positive net client cash flows and Economic Earnings Per Share of $1.55.

In the face of double-digit declines in global indices over the past 12 months, we've produced year-over-year earnings growth through the excellent relative performance of our affiliates as well as strong execution across all aspects of our growth strategy. We were very pleased with our net client cash flows of nearly $5 billion this quarter against the backdrop of the very challenging market environment. With nearly $25 billion of net client cash flows over the past year, our flows continue to be positive across all channels and all major regions reflecting the quality of our boutique affiliates, the impact of our strategic focus and highly attractive product areas, and the ongoing success of our global distribution strategy.

While global and emerging market equities saw sharper declines during the quarter than US equities, we remain confident that these areas along with alternative products will continue to generate stronger growth over time as clients worldwide inevitably increase their allocations to return-oriented strategies.

With global and emerging market equity managers such as Tweedy, Browne; Genesis; and Harding Loevner; and alternative firms like Pantheon, AQR, BlueMountain and ValueAct, our affiliates are among the world's leaders in their respective investment disciplines.

Our global distribution strategy, which combines senior-level AMG distribution professionals based in key global markets with dedicated marketing and client distribution personnel at the affiliate level, continues to generate industry-leading net client cash flows. Sophisticated global institutional clients are increasingly attracted to the combination of focused, performance-oriented boutiques backed by the scale and risk management of a global asset management firm. And we have seen a growing impact for the marketing and distribution resources that we have built in Australia, the Middle East and Continental Europe.

Finally, we also expect strong results over time from regions just coming online such as greater China, Korea and the Nordics. Given our success so far, we're continuing to invest in our global platform, adding new regions and channels as well as incremental resources in the existing regions. And we believe this strategy will continue to drive strong organic growth over the long-term.

Turning to new investments, we have an outstanding ongoing opportunity to create shareholder value through partnerships with new affiliates. Although recent volatility has obviously had a short-term impact on our progress with independent firms seeking succession planning solutions, challenging market environments can also create unique transaction opportunities as evidenced by the six investments that we made in 2009 and 2010.

We're seeing an increasing number of corporate sellers, particularly in Europe, restructuring their non-core business lines and looking to divest asset management subsidiaries. Given our track record of successful investments over the past 17 years through varying markets, as well as our reputation as an outstanding partner to our affiliates, we are in an excellent position to capitalize on this trend.

In addition, demographically driven succession planning remains an ongoing secular need in the industry. And as markets improve, independent, traditional and alternative boutiques around the world will again focus on addressing this issue.

As always, we will be disciplined and highly selective in evaluating this diverse opportunity set. We're committed to reinvesting the strong recurring cash flow generated by our business and we're well-positioned to fund growth initiatives such as our global distribution platform and our new investment strategy.

While the market environment has been challenging, given the strength of our business model, the quality of our affiliates and our outstanding competitive position as the partner of choice to boutique managers worldwide, we are confident in our ability to continue to generate strong, long-term returns for our shareholders.

With that, I will turn it to Nate for a more detailed discussion of our affiliates' results.

Thanks. Good morning everyone. Clearly, the third quarter was an extremely challenging period with global markets experiencing sharp declines, including a 19% decline in the [e-fee] and a 22% drop in MSCI emerging markets.

As Sean said, however, AMG's proven ability to deliver stable earnings results during the very volatile periods is a testament to the strength and structure of our business.

In addition, notwithstanding the market environment, this quarter we raised nearly $5 billion in net client cash flows. With six straight quarters of strong positive client cash flows, we've done a good job executing our distribution strategy, combining the benefits of a scaled global organization with the benefits of focused affiliate teams. Our affiliates, as you know, include some of the best managers within areas we believe have good secular growth opportunities, including global and emerging markets equities and alternative products.

Now, from the standpoint of adding scale distribution, we've been targeting regions and channels which have strong growth characteristics and where the high-quality, performance-oriented products managed by our affiliates are in demand. The distribution teams we've been investing in over the last three or four years are doing a very good job building up their territories and bringing our affiliates to new markets. At the same time, our affiliates continue to do an exceptional job of sales and marketing, but most importantly in these volatile times, in client service.

As Sean said, we are continuing to carefully add additional resources to our distribution platforms and I will discuss some of the details in a moment. But first, turning to investment performance for the quarter.

In the global equity category we had another quarter of very strong relative performance especially from Artemis, Harding Loevner and Tweedy Browne. All of Tweedy's global strategies outperformed on a relative basis during the quarter and remained well ahead of benchmarks across all relevant time periods.

Similarly, all of Harding Loevner's global equity strategies outperformed during the third quarter and for the year-to-date. Notably, Tweedy and Harding Loevner recently won mutual fund awards from S&P for their performance over the last year.

The largest product at UK manager, Artemis, had strong performance in the quarter and their highly-rated Income Fund and Special Situations Fund remain ahead of their benchmarks for most long-term periods.

Among our emerging markets products, it was a good quarter with strong relative performance. The flagship strategy at Genesis continued to post excellent results and is significantly ahead of its benchmark for the year-to-date one-, three- and five-year period.

The Emerging Markets product at Harding Loevner and Trilogy performed well in the quarter. And in fact, Trilogy was recently named Emerging Markets Manager of the Year by the UK's Financial News.

Now, turning to our alternative products, as you know, we have a very broad and diverse set of alternative products across a number of affiliates. While it was an extraordinarily volatile quarter, given this breadth, we had good performance across a range of products including especially strong relative performance at ValueAct and BlueMountain.

In addition, Pantheon continues to perform well, adding to their excellent long-term track record. As you know, Pantheon's revenue is largely based on committed capital with no short-term market data exposure which, given recent market volatility, is an important component of our stability.

Finally, turning to our US equity products. Against the backdrop of a very challenging period for many US equity managers, the diversity and quality of our affiliates in the category is a significant advantage. A number of our affiliates continue to perform well, with highlights including Tweedy Browne's US Value Strategy which outperformed for the quarter and remains ahead for the year-to-date and longer periods, and Times Square, which delivered very strong relative performance across their suite of growth strategies.

On the other hand, in a very difficult environment for quality growth managers, Friess Associates continued to face performance challenges while Frontier has mixed performance in the quarter, but remains well ahead over a longer time period.

To emphasize the point about breadth and quality however, while industrywide US equities had one of the worst quarters in the past 24 years from a flow standpoint, AMG actually had a strong positive quarter in net flows in the US equities, as we were able to win significant replacement [searches] in this out-of-favor area.

Now looking at flows more broadly, as I said, we had another quarter of good growth with $4.9 billion in positive net client cash flows. Flows in the quarter came from our participation in some of the most attractive product areas in the industry, such as high-quality institutional emerging markets products and alternative strategies, especially liquid alternatives. As I just mentioned, flows in the quarter also confirm our affiliates being able to win replacement mandates in the areas such as US equities.

Finally, we continued to benefit significantly from the distribution platforms we've built for our affiliates with meaningful contributions in the quarter from the Middle East, Australia, Europe and our US subadvisory platform.

Now, let me describe the flows for the quarter by channel. Starting with the institutional channel, we had positive flows of approximately $1.7 billion. Looking at the flows in greater detail, there was a quarter where we had significant flows in global and emerging markets products and alternative strategies.

Notable contributions came from Genesis, Harding Loevner, Trilogy, BlueMountain and ValueAct. As we always say, flows in the institutional channel are inherently lumpy. However, the long-term trends remain very favorable.

Moving to the mutual fund channel, we had positive flows of $2.9 billion, continuing the strong momentum we have had over the past several quarters. From a product category standpoint, we had strong flows into alternative strategies, and consistent with industry trends, outflows at many of our domestic equity funds. The flows this quarter included very strong flows in the subadvisory channel which, in many ways, acts like the institutional channel and can be just as lumpy. As I said, our subadvisory distribution platform here in the US has done a fantastic job at generating new business for our affiliates.

In our high net worth channel, flows were about $300 million for the quarter. We had positive flows in the global equities at Harding Loevner and municipal bonds at Gannett Welsh & Kotler, which continues to attract flows for our US retail distribution platform. Fees were offset by outflows in other [SMA] products including US equities.

Finally, turning to our overall global distribution efforts. As John said, we're continuing to build on the success we're having by adding resources to capitalize on the opportunities we see helping our affiliates in some of the most attractive markets and channels around the world. Last quarter we added a new head of global distribution to help us accelerate the growth within the regions and channels we're covering as well as bring additional resources online.

In the quarter we also made good progress on a number of other fronts including integrating our new Nordics head, and also moving our Middle East coverage which is currently based in London to Dubai. And we expect our office to be launched there early next year.

Importantly, we're beginning to get leverage across regions and channels with global intermediaries as well as large global end clients. Looking past the short-term volatility, our strategic focus in areas of the market which are positioned for long-term secular growth such as global, emerging markets and alternatives where performance-oriented boutiques can add meaningful value, combined with our increasing distribution resources positions AMG for continued growth going forward.

With that, I will turn it to Jay.

Thank you. As Sean and Nate discussed, despite a difficult market environment AMG produced strong net client cash flows of $4.9 billion for the quarter. And with our revenue-sharing partnership structure and diverse product offering, we continue to produce stable earnings through periods of significant volatility.

As you saw in the release, we reported Economic Earnings Per Share of $1.55 for the third quarter including $0.02 of performance fees. On a GAAP basis we reported earnings of $0.76 per share.

Turning to more specific modeling items, the ratio of our EBITDA contribution to end-of-period assets under management was about 17.2 basis points for the third quarter. We expect it to be approximately 17.4 basis points for the fourth quarter, which includes a reasonable assumption for performance fees. For 2012 we expect this ratio to be approximately 16.5 basis points.

In the third quarter we reduced holding Company expenses to approximately $19 million and we expect these expenses to remain at this level for the fourth quarter. While we continue to invest in growth initiatives such as global distribution, we're managing our expense base and operating our business more efficiently.

With regard to our taxes, our effective GAAP tax rate for the second quarter was 31.6%, reflecting a lower UK tax rate and flow-through items. For modeling purposes, AMG's GAAP tax rate is expected to be 36% for the fourth quarter and going forward.

Our cash tax rate was down to 3.2% for the quarter, also reflecting several one-time items. And we expect this rate to return to approximately 20% for the fourth quarter and approximately 17% for the full year 2012.

Intangible related deferred taxes declined to $10.4 million as a result of the UK tax rate change I just mentioned. And we expect it to return to a normalized $13 million on a quarterly basis beginning in the fourth quarter.

With reported amortization of intangible assets of $22.1 million for the quarter, our share was $18.7 million. And in addition we had $8.2 million of amortization from affiliates accounted for under the equity method, bringing AMG's controlling interest portion of amortization to $26.9 million. We expect amortization to remain at this level for the fourth quarter.

We reported total interest expense of $26.4 million for the third quarter, of which our portion was $24.9 million. This included non-cash imputed interest expense of $6.8 million pretax. We expect interest expense to remain flat for the fourth quarter.

Given the magnitude of the growth opportunity we see in our new investments, we're working to enhance our already strong capital position by adding capacity to and extending the maturity of our balance sheet, including a new five-year bank revolver and term loan with a combined $1 billion in capacity. Together with the reinvestment of our strong recurring cash flows, this added capacity will ensure our ability to execute on our new investment strategy as well as to opportunistically repurchase shares. In the third quarter we repurchased approximately 610,000 shares at an average price of $82.89, and we have authorization to repurchase an additional 3 million shares.

Now, turning to guidance, we're updating our 2011 guidance to a range of $6.40 to $6.70. This range factors in actual markets -- actual market performance through yesterday. The lower end assumes no fourth-quarter performance fees while the upper end assumes a reasonable performance fee contribution.

Incorporating the market declines of the third quarter and looking forward to next year we expect 2012 Economic Earnings Per Share the range of $6.60 to $7.40. This guidance assumes our normal convention of 2% market appreciation per quarter in 2012 and a weighted average share count of 53 million. The lower end of our 2012 guidance includes a modest contribution from performance fees and organic growth, while the upper end of the range assumes a more robust contribution from both performance fees and flows.

As always, these assumptions do not include earnings from future new investments and are based on our current expectations of affiliate growth rates, performance and the mix of affiliate contribution to our earnings. Of course substantial changes in equity markets and the earnings contribution of our affiliates would impact these expectations. Now we will be happy to answer your questions.

(Operator Instructions) Bill Katz, Citigroup.

Okay, thanks. Just looking into 2012 guidance, what kind of market have you assumed for the fourth quarter to the base? Have you incorporated the bounce back in the markets or not?

It's Jay. Yes we have. Our bled to date is in the 6% to 6.5% range. But we have assumed no additional performance from here.

Okay. And then just in terms of business on a go forward basis, the Institutional Business, the net flows did slow a little bit sequentially. I'm just sort of curious if you could maybe quantify or qualify the institutional pipeline looking into the end of the year?

Sure. I think that your observation is spot on.

I think if you look at it from a short-term perspective there has definitely been some slowdown. And I think things are taking a little bit longer to get decided, which is, again, given the volatility, not really surprising. But I would say the overall pace, RFPs, finals, wins, continue to look good and is actually sort of modestly up.

Some of that reflects the longer pipeline if that makes sense. So, even the short term I think looks sort of modestly better. But again, some of that reflects the slowdown.

If you look at it longer-term, I think we still think we're still at the early stages of executing this basic strategy, which is add global scale where that makes sense and pair that with focused affiliates. Some regions -- Australia and the Middle East -- we've been doing it for 4 plus years. But as Sean said, some of these regions -- Europe really is just coming online this year and we're adding additional resources.

You saw some of that -- Asia, greater China, Korea -- [is that is] really just in the very, very early stages and we have now added a great guy to sort of run the overall effort. So, I completely agree with your observation short-term. But I think if you sort of look at the longer-term, we're pretty excited about it.

I think the thing to underscore, which obviously you understand but it is worth emphasizing, relative to the industry overall or our peers, we're getting these flows into equities and alternatives, especially global and emerging market equities, not into fixed income. We don't have a really material fixed income business, as you know. So I think looking ahead we see continued strong momentum in these value-added products.

And to the extent that fixed income instead of having incredibly strong flows, positive flows, eventually as we think it will inevitably unwind and cycle turns and you begin to see fixed income outflows, we're not going to be suffering any of that.

Okay. Just one last one, you did a little buyback this quarter. You increased the authorization as well last night. Just sort of curious, one of your peers was out -- sort of suspended buyback this past quarter because they were looking at something in Europe. I was wondering if you could sort of balance between buyback versus the deal pipeline, and where do you think your capital gets deployed more quickly?

Sure. Well, Bill, as you know, part of our core strategy is to use the cash that the business generates to create shareholder value both from investing into affiliates, continuing to invest in our global distribution platform to drive stronger organic growth, but also to repurchase shares. And in a quarter where you have extreme market volatility and a consequent chilling of new investment activity with declines in our stock price, having a measured buyback of our shares seemed attractive and appropriate.

I think going forward obviously no one knows what the markets will do into next year. But to the extent that you assume past this period of volatility a measure of more stable markets, we see enormous opportunities to make new investments as I mentioned earlier. And therefore we'll focus, as we always do, on new investments as the primary use of our cash.

But to the extent that we see opportunities, periods of volatility between investment opportunities, we will continue to make repurchase. So I think it will be a balance of both, with a hope and expectation that we'll see much more in the area of new investments.

Okay, thanks for taking all my questions.

Dan Fannon, Jefferies & Co.

Good morning. I guess in terms of the flows, can you talk about the mix of affiliates gathering assets? You kind of gave a little bit of a lift in certain segments. Just want to compare that to potentially, say, the last couple quarters. And has there been any shift in kind of contribution from flows from specific managers?

Okay. So I think the first thing I would say is I think it was reasonably broad. It went well. More than half of our affiliates had positive flows. So I would say that is one thing.

I would say we -- and, look, one of the challenges as -- I'll go through some of the examples, but as you go through it, some of these as I say are large, especially institutional channels. So there is some -- maybe it's a little more idiosyncratic than sort of indicative of a trend. But I would say this quarter we actually saw pretty good flows in US equities, as I called in my -- in the prepared remarks.

I think we saw a little bit more of that than we'd seen in prior quarters. But it really -- I guess the bottom line is it was reasonably broad. We look to continue to see strong flows, which is consistent -- global equities, emerging market equities and across the range of our overall alternative products, whether it is sort of the more liquid ones, the [FQs] And AQRs, but also the BlueMountains, And ValueAct and Pantheons.

Yes, we continue to see good breadth there. I think those are trends. So, if I was going to say one thing that was a little bit different this quarter, maybe it was we saw a little more contribution from the US equity piece.

I mean one thing that is noteworthy, I think relative again to industry trends, is we actually saw an acceleration of flows into emerging market equities. And I think that is driven by both the quality of our affiliates in this area, but also the more institutionally-focused client set where you can imagine sophisticated institutional clients, in the face of declines in the emerging market index, see this as an attractive entry point and a way to take steps toward increasing their exposure to get to toward their target allocation.

Okay, that is helpful, I guess. And then thinking about fourth quarter and the institutional flows, is there any kind of seasonality as we think about a slowdown potentially into the fourth quarter as a result of that, regardless of what the market might be doing?

And then maybe Jay, a question for you in terms of next year and your guidance, what you are assuming for growth on an organic basis.

On the seasonality point I guess what I would say is, on the institutional side you tend to think our business doesn't have a lot of seasonality to it. I do think there is this -- we have been experiencing this slowdown in just the pace of decision-making that we have talked about.

The only place where I think I would say -- well, we have the normal seasonality that other folks have in Q1 and Q2 around the mutual fund segment and retirement fundings and the whatnot. But I think on the institutional side relative to Q4, the only thing that I would say is you do have the phenomenon where people with lockups in which they're only coming out either quarterly or annually. We do have some that are annual.

I will say as we look at that business today, sort of what we see as redemption notices that are in, and I will caution with some people have 90-day redemptions. Some have shorter -- one month or 45-day or whatever. So we don't have all of it in.

But as we look at that today, where we see redemption in relative to what we know from a contribution standpoint in those products, we see those funds are a net contribution. So that is the only bit of seasonality that is something we can specifically point to, but those are in net contribution right now.

And Dan, to your question on 2012, we do have a modest level of flows assumed at the bottom of that range and a more robust version at the top end. I think you would be happy that a reasonable amount of conservatism goes into our thinking on that subject. So, when I say modest, I mean modest at the low end. And robust is not an aggressive number.

The other assumption of course for next year is performance fees, and I might just take a moment to -- that's probably a question for some. We see our performance fee opportunity continuing in roughly the same magnitude that we've seen in the past, kind the 5% to 10% contribution to our earnings on an annual basis. That is again what we see for this year we see that for next year. We don't have any really material change in the level of those performance fees.

Dan, I would just emphasize with respect to generally guidance for 2012 that, again, as you know but with underscoring, given our exposure to global and emerging market equities, those indices were down sort of mid-to high teens since we last gave guidance. So those market-related declines are obviously factored into our guidance.

And to the extent that you assume that there is some level of growth from positive markets through the balance of this year, that will have a big effect on 2012 given that we're -- it matters not with the starting point is. And we are not forecasting that.

I'm not saying that we don't have a measure of cautious optimism about markets generally and certainly about business. But that -- just our guidance methodology doesn't have any incremental performance from here, and that weighs heavily in terms of where our guidance numbers come out.

Great, thank you.

Sure.

Craig Siegenthaler, Credit Suisse.

Hi, good morning.

Good morning.

Just given the commentary on the institutional flow pipeline, it sounds like 3Q institutional flows were sort of on kind of the low end of the range you have been growing at. And maybe 2Q, especially if you have add back some of the usuals, was more at the high-end. Is this roughly in line with your expectations? And it sounds like if also some of these new initiatives outside of the US come on track, we could even accelerate that level.

I think that is not unfair. I do think, again, if you sort of look back, last quarter was high. Just looking back over history, it was high on the gross sales side. I do think this quarter, as we said in our prepared remarks, was impacted by the sort of slowdown that we saw.

How long that lasts, again, not going to be able to -- we can't predict that, right, but I do think that was a phenomenon there. I do think the pipeline continues to look good. And then, yes, the question of how long it takes for the additional regions to come online.

That is exactly the thing that has us so excited is -- as we have now got a track record of doing this across a bunch of regions. And we are continuing to invest both to explore new regions -- as Sean said, greater China, Korea being examples -- but also adding additional resources within region. We gave the Nordics as an example and you will see us do more of that. I think that is exactly the thesis.

I think to the extent that you imagine that markets stabilize and recover, we could see in a period of a more positive market environment a much stronger overall opportunity. We're generating, we think, very solid flows in a period of extreme market volatility. And I know that it's much higher than industry averages.

So, as we look ahead, both a combination of a more positive market environment but especially getting all of these other resources online I think gives us considerable optimism.

Thanks. And then just a similar type of question, when I look at the mutual fund channel, 3Q was a disaster for a lot of asset managers in terms of flows. And you guys put up some really strong kind of low teens organic growth. Was this at the height of the range? Is this something you think you can build on?

And also a separate question, are all the funds in there either cross-border outside the US or mutual fund 1940 Act type fund in the US? Or is there some separate account in there? Because I know you have been winning a lot of business on more kind of insurance platforms.

Yes, so I will do this in reverse. So they are either cross-border or '40 Act funds, but that includes '40 Act product where we are a subadvisor. And so that does include subadvisory mandates. And there were subadvisory mandates in there this quarter.

To your -- it's actually sort of interesting if you look at last quarter versus this quarter for us, last quarter was actually one where we had a very large subadvisory loss that we told you about which really brought that number down. The sort of net flow number for us this past quarter actually looks a lot more similar. If you go back to the first quarter, it's sort of at about that rate. I'd say sort of it's the opposite of the way you're describing in the institutional channel.

Last quarter there was a very large idiosyncratic outflow in the mutual fund channel in the form of a subadvisory loss. This quarter it is coming from both straight '40 Act funds where we're the manager, as well as '40 Act funds where we're the subadvisor, as well as cross-border funds both where we're the manager and also where we're the subadvisor. We saw positive flows in those areas.

Great, Nate. Thanks for your help.

Cynthia Mayer, BofA Merrill Lynch.

Hi, good morning.

Good morning.

Maybe looking ahead at this quarter's performance fees, I'm wondering if you can update us on what percentage of fee assets are above high water marks. And did 3Q have any impact on that, anything that would make a difference? Because it seems like there's still a fairly wide span of potential earnings for this quarter in your guidance.

So, just in the third quarter, of course, it is a historically low quarter for performance fee just on the timing. So I think that was what your first question of kind of $0.02 is what we reported.

As you look to the fourth quarter and you look back to the historical bit of this year, our performance fee opportunity has been mainly impacted by the crude but not crystallized as opposed to the high water mark. It really is just a situation where some of our performance fees are beta sensitive, and so the amount that we would expect to realize has just come down on a level basis as opposed to going below high water marks. So I think we see that opportunity maybe slightly lower than we did in say July, but still not impacting our kind of future prospects for performance fees.

Okay. So when we look at the range of driven by performance fees, the biggest driver of that range, then, is just the beta as you say?

For the rest of this year, yes.

For the rest of this year.

Correct. But more over a year basis, it is going to be the diversity of our offering, both the absolute return as well is the beta sensitive. (multiple speakers) But the range in fourth-quarter guidance is only partially explained by performance fees, right? It is also organic growth.

Yes, got it. And then maybe just in terms of opportunities you see potentially in Europe, can you discuss a little bit about what kinds of things would be of most interest to you and what kind of competition you might expect to see from private equity or other potential buyers?

Sure. Well, maybe I will start by talking more broadly about the new investment pipeline.

Obviously the market volatility, as I mentioned, has chilled activity in the -- among succession oriented transactions. But we see incredibly attractive prospects going forward because of the buildup of these succession oriented -- the need for succession oriented transaction among firms out there.

If you look back over the last five years, large number -- increasingly [on] a global basis of really outstanding boutiques and relatively few windows in which they could find a measure of stability in the markets to go through the -- what for them is an important and lengthy process of finding the right solution. So I think that large build up looking into next year, especially, is very encouraging. And our competitive position is stronger than ever. I think it is certainly stronger than ever for the succession oriented transactions.

And then with respect to the divestiture opportunity that you described, especially in Europe -- and remember, it is European institutions. But their -- the subsidiaries that they have and the opportunities that are presented are not necessarily all in Europe, although many are. So as we look across the universe of potential divestiture opportunities, I would say it is clearly a small subset that is attractive and appropriate for AMG.

But where a firm is an appropriate and attractive candidate, where they have a measure of autonomy from their parent, a defined and focused investment and operating culture, and a great team that probably has no equity but has really built the business and runs the business affectively as partners, those kinds of firms we are, I think, the best positioned relative to any competitor. And it's really just a matter of finding those attractive opportunities. But relative to private equity or other potential acquirers that have more of a consolidating approach, the kind of firms we want, they're going to prefer us. It is just a matter of the right firm being available at the right time.

Great. And maybe just one more quick one. How much how large was the subadvisory win this quarter you mentioned?

Sorry, it wasn't just one subadvisory win this quarter. We had -- the large amount I was referencing was the outflow last quarter. This quarter we had pretty significant subadvisory. We had -- several significant subadvisory wins came across a couple of different affiliates.

Okay, thanks a lot.

Sure.

Mark Irizarry, Goldman Sachs.

It's Mark Irizarry with Goldman Sachs. Just on the mutual fund segment for a second, the -- I know it's kind of early in the fourth quarter. Maybe you alluded to this already, Nate, but can you give us some perspective in terms of the ins and outs there that you are seeing so far?

You're saying for the fourth quarter so far?

Yes.

Look, it's very still very early still in the quarter. I do think the trends we saw -- now putting aside the wins that look more institutional, so the subadvisory wins, I think if you put those aside, I think the trends look pretty similar still quarter over quarter. But it's very early.

Okay. And then on the institutional side of the equation, you mentioned that you are seeing a lot of success in replacement activity. Do you think in the fourth quarter should we expect to see some rebalancing? Are there any indications, maybe from some of the affiliates, that there is some rebalancing that might affect the ins and outs there?

I do think the pace of activity -- again, I think the Affiliate Group is broad enough. As Sean said, there's parts of the market that we're not really seeing as much, sort of the fixed income pieces. But I think there is -- it's interesting.

On the one hand I think we definitely had the slowdown in decision-making phenomenon that we sort of observed in the pace of things getting done. But on the other hand, I think there's a lot of people where you're seeing them not just replacement searches, but also looking at how they are managing their overall portfolios. And I think some of our affiliates are pretty well positioned for that.

There's some very interesting large-size conversations going on. Some of those tend to be longer duration conversations, but there is some pretty interesting (inaudible) conversations going on.

And Sean, maybe you can just help us some perspective around some of the larger sort of financially inspired type deals that you're looking at for maybe European institutions. One of the things that clearly won't work in your mind or even maybe for domestic institutions where you're just looking at the deals and they're just not working out for you, what are some of those limiting factors?

Well, firms that are not real businesses where they are parts of a larger entity but not really able to function as a stand-alone business; obviously not attractive. Firms that don't have a focused operating and investment culture and a track record of adding alpha -- those aren't interesting.

Many products are not interesting and attractive to us; fixed income, for example. Obviously there's a lot of that out there and our view is that -- would have been just from a market timing standpoint maybe something great to have five years ago, but not where we want to be now. And in any event, as we have said in the past, we don't view fixed income in the main -- core fixed income -- as an area where boutiques have a demonstrable track record of adding alpha relative to larger scale firms.

Quite different from the value-added areas like global and emerging market equities and alternatives, so firms that have those kinds of products which we are most interested in. As firms that have a -- that are based in or have a client set that is global is -- i.e., non-US -- is attractive. And it ultimately always comes down, when you are investing in firms, but the firms that run by a relative few key professionals, it comes down to a people judgment. So it is all of that.

I think to the extent that we find those firms, and there are of course a number that we've come to know over the years, to the extent we find those firms and the parent company is interested in a transaction, we think we're better than anyone at executing in those circumstances. It is just, as I said, a small subset of the universe of businesses that might be sold.

Okay, great. And then just, Jay, a quick modeling question for you. The minority interest looked like it might've been a little bit lower than what we were looking for. How should we think about that line item? I don't know if you give us the detailed guidance. I might've missed it. But how should we think about the minority interest line item?

The income statement [I hear] you saying?

Yes.

It was mainly impacted in the quarter just because of lower overall level of earnings. And, yes, the way the revenue share works, of course compensation at the affiliate level comes down. We don't own that. So I think that attributes most of that change.

Okay, great. Thanks.

Robert Lee, KBW.

Thanks. Good morning everyone. Let's see, a couple questions. First, is there any way of quantifying the kind of incremental distribution you picked up through the subadvisory relationships? I don't know if, in terms of providing color on kind of what you have been seeing, or what proportion of your fund flows or whatnot are kind of being driven by these kind of new relationships?

Yes, it's -- I'm trying to think if there's some meaningful way to do it. I think the -- I'd say a couple things. One is, if you sort of look at growth rates, I think the growth rate of that part of our business is pretty strong. But -- and we have talked about this in [another context]. Part of that is growing off of a very small base.

So if you sort of went where was, call it five years ago to where it is today, it has definitely been an area that has grown for us. Part of that is the evolution in the market place, right, and part of it is also the fact that we have put [a grades] or a dedicated team against it to help our Affiliates grow. So it has definitely been a growing part of the business.

I'm not sure would think about it any differently fundamentally than I would think about an Australian institutional piece or a Middle East piece, which is that we're trying to find areas in the market that have strong organic growth characteristics. And then we're trying to add dedicated resources to help our affiliates penetrate where this -- if it would be a benefit to scale.

Okay, and a question I have on uses of capital, one of the things you have seen in the industry, and I guess maybe it's been more of a phenomenon in the retail part of the business. But it does feel like, at least for a couple of years now, in general firms have been going through more aggressive product development cycles, not every firm, but a lot of them. And we have seen generally more capital used for seed purposes, and that is not something you guys have really traditionally done, I believe.

But if you ever see -- is there any need or do you ever see a need, as your affiliates want to develop new strategies, that there may be a need for you to contribute seed capital, start-up capital for new strategies at all?

Well, I would start by observing that while we have done some, I wouldn't say none of the kind of investing that you have described, just inherently given our structure and the number of affiliates that we have and the number of products the underlying affiliates have, relative to our overall scale, we have a substantially larger number of products than other firms. And it is just the nature of the holding Company structure.

We have, for example, over 350 products. We have in the emerging markets equities area, through our affiliates who include three of the premier boutique affiliates in -- sorry, not boutique. Three of our boutique affiliates would be counted in the top 30 emerging markets equity managers in the world if you looked at across consultant rankings. So, each of those affiliates has a distinct product set and investment style, etc.

So the nature of our structure allows for much more diversity among products than an integrated operating company would have. That said, over time I'm sure that we will see more opportunities to help our affiliates by seeding products.

But we have been making substantial investments in growth initiatives around distribution, as you have heard. That is working very well. And I think we are certainly not feeling any constraints in terms of product availability to match against the distribution opportunity. But over time, I'm sure there will be some. It is just it's not something that is holding us back, obviously.

And then maybe one last question, I guess it's for you, Sean, I guess. But I'm just curious. I know it is kind of a new business and don't expect much out of it, but anything to report or talk about on kind of your (inaudible) new initiatives to the (inaudible) wealth market?

No. I think we're very pleased with the start that they're off to, meeting with a very large number of firms, some transactions that are in the pipeline. All of this in a period of -- you can't imagine a more difficult period to have launched a business like this. But given our track record, given the quality of the personnel that we have put against this opportunity, we continue to be quite optimistic.

And I would say I don't want to give a specific target. But certainly, next year this time I would be hopeful that we will have something. We have reasonably stable markets. I would hope that we have some good progress to show.

Maybe just a follow-up, I guess rightly or wrongly one of the ways that I kind of think of your deal activity (inaudible) your typical deal structure, maybe every $100 million, $0.10, $0.20 accretive depending on the multiple. When you look at that market, does it have similar kind of economics that you are looking at? Maybe on a somewhat smaller scale, but is kind of the economic profile pretty much the same?

Yes, I would say it is roughly the same. I think there are differences, as we have noted, between the way we will execute that strategy and our investments in institutional boutiques.

For example, there will be more that we do with affiliates and the wealth management space on a collective basis, although we do a heck of a lot on a collective basis, especially distribution with our institutional affiliates. But there will be a different, in some ways more integrated, strategy. And I think over time we will certainly see attractive opportunities.

So if you imagine in some indeterminate time in the future that we have a reasonable installed base of wealth management client assets, let's say it's $50 billion, those client assets will have a significant allocation toward return oriented products like global and emerging equities and alternatives, and having the opportunity to have access in a more convenient way, not coerced to have to use affiliate products. But just getting easier access; perhaps help in the way we package the products, you can imagine over time that there will be considerable cross synergies between the wealth management business and our institutional affiliates. So that is another element of the value proposition that is out there, obviously not quantified hat this point.

Great. Thanks for taking my questions.

Michael Kim, Sandler O'Neill.

Okay, just a couple of questions. First, I think in the past, Sean, you talked about not really being in favor of raising capital ahead of deals. So should we read anything into the amended credit facility? Maybe just a broadening out of opportunities in Europe, so just making sure you have enough capacity to take advantage of some opportunities that could maybe come about in relatively short order?

Well, I will let Jay answer the second part of the question. I think maybe it's just semantics. But we actually, over time, have as a strategy sometimes to our detriment where we have too much excess capital available, have been focused on making sure that we financed ahead of new investment opportunities. And so, you can look back over time and have a rough guide.

Again, we're not always right because sometimes we see opportunities and then the market changes and they go away, or we decided in 2008 not to execute on new investment opportunities because of our own judgment about the underlying businesses or market environment. But in the main, we try to be on the conservative side of being prepared.

And so our repurchase program, for example, this past quarter was more measured than it might have been because we see very substantial potential opportunities ahead of us. And, Jay, why don't I let you talk about the bank facility and what we are doing.

I think the bank facility going out five years and expanding it with a term loan to $1 billion is again just part of being prepared. I think the element that we didn't talk about but we should just mention is our leverage ratio is at pretty much a historical low for us. We're it kind of 1.8 times roughly on our measure, and we have historically run that between 2 and 2.25, 2.5.

So we really do have a very strong position to execute sizable transactions. Just to remind you that between sometimes in July of 2009 through the middle of 2010, we put out $1.5 billion in deals. So I think we're just matching our balance sheet with what we think the perceived opportunity might be.

Along with very substantial ongoing cash generation by the business, of course.

Okay. And then just to follow-up with Jay in terms of the new guidance, if you start with base fee earnings of something like $1.60 for the fourth quarter and then you annualize that and make some -- what seems like reasonable assumptions from markets and flows, I'm still coming up with a number that is basically already at the midpoint of your guidance range for next year. And that obviously doesn't take into account any performance fees. So is the new range really just kind of a function -- more of a function of wanting to stay conservative kind of in light of ongoing market volatility?

Well, of course this quarter we produced $1.53 base earnings. And I think what you're doing is you're applying some growth to it based upon the quarter to date, so that is not unreasonable. I think your points are well taken.

I even said earlier we're trying to keep it in a conservative range, both on organic growth as well as in performance fees. So we're starting at a place where we feel good about it.

And were still we've got almost a full quarter left to go in this year, and so gutting into next year and the midst of extreme market volatility is frankly challenging. So we have applied our normal convention, which I think is conservative. But obviously we will see what the markets do.

Okay. Thanks for taking my questions.

Thank you. At this time we have no further questions. Mr. Healey, I would like to turn the floor back over to you for closing comments.

Well, thank you again for joining us this morning. As you have heard, we're pleased with our results for the quarter, especially given the market environment. And we're confident in our prospects for continued growth ahead. We look forward to speaking to you again in January.

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