Affiliated Managers Group Inc (AMG) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Affiliated Managers Group first-quarter 2012 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, Ms. Alexandra Lynn, Vice President of Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you, you may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the first quarter of 2012.

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

Thanks, Ally, and good morning, everyone. With Economic earnings per share of $1.58 for the first quarter, AMG is off to an excellent start in 2012 with strong execution across all aspects of our growth strategy, including two new affiliate investments, the strong performance of our products and outstanding organic growth from net client cash flows, bringing our total pro forma assets under management to just under $400 billion.

This was our eighth consecutive quarter of strong positive flows with over $7 billion in net inflows and $24 billion in the past 12 months. Our net inflows into a broad array of return-oriented strategies are particularly notable in a period where industry flows remain concentrated in fixed income and passive products. We continue to benefit from our strategic focus on highly attractive product areas, especially global and emerging market equities and alternatives, as well as the ongoing success of our global distribution strategy.

Affiliates such as global and our emerging market equity managers Tweedy Browne, Genesis, Harding Loevner, Trilogy and Artemis, and alternative firms, Pantheon, AQR, BlueMountain and ValueAct, are all leaders in their respective disciplines with outstanding track records of investment performance and prospects for continued organic growth.

Our results reflect the strong -- the continued strong execution of our global distribution strategy as our affiliates are winning new business and market share through both affiliate-level marketing efforts, as well as by leveraging our global platform, which enhances the presence of our affiliates across channels and geographies.

Given the ongoing success of our strategy we continue to build out our institutional and retail platforms worldwide through the opening of new offices and the addition of key personnel in existing coverage regions. As investor risk appetite inevitably returns around the world, our affiliates are uniquely positioned to benefit and we see numerous opportunities for continued strong organic growth ahead.

Turning to new investments, we are very pleased to have recently announced investments in two new affiliates which are industry leaders in their respective areas. Yacktman Asset Management is an outstanding concentrated value equity manager with a tremendous long-term record of investment performance and industry accolades, having been named Morningstar Manager of the Year and nominated as Manager of the Decade. Don Yacktman Stephen Yacktman and Jason Subotky are outstanding investors and have built a great business, and we are excited to welcome the team to our Affiliated group.

In addition, with our investment in Veritable, which is one of the nation's premier independent wealth managers, we successfully launched our wealth management business, AMG Wealth Partners, which extends AMG's proven partnership approach and succession planning solutions to outstanding wealth management firms. Partnering with a firm of Veritable's caliber is a key foundational step for our wealth management strategy, which is of course completely incremental to our opportunity to invest in additional boutique asset management firms.

Finally, we continue to make progress across a broad range of new investment opportunities. In addition to ongoing divestiture activity from corporate sellers we also believe that demographic trends, coupled with the prospect of rising tax rates, will result in increasing transaction activity among independent firms through the balance of 2012 and beyond. We believe that AMG is positioned as the partner of choice for outstanding boutique asset management and wealth management firms worldwide, and we are confident in our ability to materially enhance our earnings growth through accretive investments and additional affiliates.

With that let me turn it to Nate, who will discuss our affiliates' results in greater detail.

Good morning, everyone. The outstanding investment performance of our affiliate group, combined with significant flows, made for another good quarter. As Sean said, we continue to benefit from our emphasis on global and emerging market equities and alternative products. And affiliates specializing in these areas continue to not only perform extremely well, but also have outstanding business momentum.

Notwithstanding industry trends, which continue to favor passive and fixed-income strategies, we generated strong flows across channels, especially in the product areas that I just mentioned.

Net client cash flows for the first quarter were $7.1 billion, with now eight straight quarters of strong positive client cash flows. Going forward, the pipeline looks good and we are confident in our ability to continue to generate strong organic growth.

Now, turning to investment performance, in the global developed markets category, we had another strong quarter with nearly all of our global managers delivering outperformance. Our leading managers with exceptional performance include Harding Loevner, Artemis, Trilogy, and Third Avenue, with the majority of their global equity funds outperforming their respective benchmarks. Tweedy Browne missed its benchmark for the quarter but remains well ahead for the one- to three- and five-year periods.

We had another strong quarter in the emerging markets category with Trilogy and Harding Loevner outperforming their respective benchmarks by 100 basis points or more. The flagship strategy at Genesis underperformed for the first time in several quarters, but remains significantly ahead of its benchmark for the one-, three- and five-year periods.

Turning to our alternatives product category, we had good performance among many of our largest strategies. Highlights include excellent performance from firms such as First Quadrant, AQR and BlueMountain. At First Quadrant, the firm delivered outstanding performance across its suite of strategies from tactical currency products to their data-oriented products. In addition, AQR delivered strong performance among several strategies, including a global risk premium fund and diversified arbitrage fund. While at BlueMountain, the firm's flagship Credit Alternatives Fund, continued to outperform across all time periods.

Turning to our US equity products, our affiliates delivered very strong performance. On the value side, systematic had good performance across this product set in the first quarter, while on the growth side, it was a strong quarter with Frontier Capital, Friess Associates significantly outperforming their benchmarks across their respective product sets.

Times Square had mixed performance with small-cap missing its benchmark, but with their mid-cap and all-cap product leading for the quarter by 50 and 180 basis points, respectively.

Now, turning to flows, as I said, we had another quarter of good growth with $7.1 billion in positive net client cash flows coming principally in the global equities and alternatives areas, as well as emerging markets equities.

In terms of geography, we saw positive net flows in both the US and globally. In terms of flows by channel, starting with the institutional channel, we had positive flows of approximately $5 billion.

Looking at the flows in greater detail, it was a quarter where we had significant flows in global equity products and alternative strategies as well as in emerging markets equities, with notable contributions from Tweedy Browne, Genesis, Harding Loevner, AQR, BlueMountain, ValueAct and Beutel Goodman.

Now, as we always say, flows in the institutional channel are inherently lumpy, but we are very pleased with the breadth and diversity of the flows we are seeing. With respect to the pipeline, looking forward, we continue to see positive long-term trends in terms of one business, finals and RFPs.

Moving to the mutual fund channel, we had positive flows of $1.4 billion. Here, we also continue the positive trends we've had over the past several quarters.

From a product category standpoint we had good flows into global and alternative strategies. The flows this quarter once again include strong flows in the sub advisories channel and especially for alternative products.

Now, as Sean mentioned, we're very excited about our new partnership with Yacktman. We have tremendous respect for the team and their investment discipline. As you may have noticed in the announcement following the closing of the transaction, the Yacktman funds will become part of the Managers family of funds. Stating the obvious, these funds are very highly regarded and have excellent long-term track records, and we look forward to working together with the team there.

Now in our high net worth channel, flows are about $700 million for the quarter. We had positive flows at Gannett Welsh & Kotler, which continues to attract flows through our US retail distribution platform, as well as Harding Loevner and Third Avenue.

Overall we continue to make very good progress with our global distribution strategy. We are focusing on expanding our presence in key global financial centers as well as attracting additional world-class sales, marketing and client service talent to help expand in the regions where we already have a strong presence.

For example, as we mentioned in the release we opened our Dubai office at the beginning of the quarter, allowing us to deepen our presence in the Middle East.

Now, fundamentally, we were very pleased with the contribution of our distribution teams to our industry-leading flows. As you've heard us say before we remain focused on building distribution capabilities that not only can be successful in the current market environment, but that also enable us to capitalize on the even larger opportunity when some of the macro trends turn back to return-oriented assets.

In addition to the institutional business we're building in key global financial centers around the world we also have a retail and sub advisory platform here in the US through Managers Investment Group. And as we look ahead, we see significant opportunities to grow that business as well.

From a product standpoint we will continue to focus on those areas of the market where we are already seeing strong demand, including liquid alternatives but also for good performing global and emerging markets equities, and we continue to be focused on building out the infrastructure to capitalize on the inevitable return to performance-oriented strategies.

Finally, we see a lot of synergies between what we are doing on the global institutional side and the US sub advisory and retail business. And we've begun to realize those synergies with the teams working together even more closely.

Looking ahead, we are uniquely well-positioned for continued excellent long-term growth with a combination of outstanding performance-oriented boutiques and, increasingly, the scope and scale in the marketplace of a $400 billion diversified asset management firm, where that scale is useful. And with that I'll turn to Jay to discuss our financials.

Thank you, Nate. We are again pleased with our industry-leading organic growth as well as the continued successful execution of our new investment growth strategy, with newly announced partnerships in Veritable and Yacktman, which, as with all of our new investments we expect to be immediately accretive.

As you saw in the release we recorded Economic earnings per share of $1.58 for the first quarter with performance fees contributing $0.01.

On a GAAP basis we reported earnings of $0.71 per share. The ratio of our EBITDA contribution to end of period assets under management was about 15 basis points for the first quarter. We expect this ratio to remain at approximately this level for the second and third quarters, reflecting both our business mix and the expected closings of our two new investments. And in the fourth quarter we expect this ratio to trend upward with a reasonable assumption for performance fees.

Holding company expenses were approximately $22 million in the first quarter, and we expect them to increase modestly to $23.5 million per quarter for the remainder of the year, primarily reflecting fund merger and related deal costs at Yacktman and Veritable.

With regards to our taxes our effective GAAP tax rate for the first quarter was 35.7% and our cash tax rate was 13.7%. For modeling purposes we expect our GAAP tax rate to be 35% going forward, and we expect our cash tax rate to be approximately 13% for the second quarter, and then to trend upward during the remainder of 2012, with organic growth and performance fees.

Intangible-related deferred taxes were $9.9 million in the first quarter, and going forward, we expect intangible-related deferred taxes to remain at approximately this level.

With reported amortization of intangible assets of $30.4 million our share was $26.8 million. And together with $8.2 million of amortization from affiliates accounted for under the equity method, AMG's controlling interest portion of amortization was $35 million. We expect our amortization to remain at this level going forward.

For the first quarter our portion of total interest expense was $19.6 million, which included non-cash imputed interest of $1 million pretax. We expect our total interest expense to remain at approximately this level for the second quarter.

Turning to our balance sheet, we expect to close Veritable at the end of the second quarter and Yacktman in the middle of the third quarter. These transactions will be funded with a combination of borrowings under our revolver and available cash, leaving us with ample capacity to continue to execute on our new investment growth strategy.

Now, turning to guidance. We are raising our 2012 guidance as we expect economic earnings per share to be in the range of $7 to $7.70. This range includes the partial-year impact of our new investments in Veritable and Yacktman, net of fund merger and related deal costs. Our guidance also assumes our normal convention of actual markets through yesterday with 2% quarterly growth beginning in the third quarter and a weighted average share count of 53 million shares.

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 for performance fees and flow expectation.

As always these assumptions do not include earnings from future new investments other than Yacktman and Veritable, and are based on our current expectation of affiliate growth rates, performance and the mix of our affiliate contribution to our earnings. Of course substantial changes in markets and the earnings contribution of our affiliates would impact these expectations.

Now we will be happy to answer your questions.

(Operator Instructions). Daniel Fannon, Jefferies & Company.

Nate, just talk more about the flows and kind of the context. It seems like -- obviously very good quarter for flows, and then the backlog still looks good. Is there a way to kind of characterize that maybe versus a year ago? Or even last quarter just kind of give some context?

Sure. So I think broadly, I think you captured it, which is we have had a series of pretty good quarters here from a flow standpoint, sort of in a range.

I think if you looked at the pipeline today, maybe versus last quarter, and obvious caveats apply, right, early in the quarter and that kind of stuff. But if you look at the pipeline this quarter versus last I would say it's running about the same. I mean there's a lot of -- obviously a lot of moving parts to it, and I'm sort of describing across RFPs, finals and all that as well as one business. I'd say it probably looks about the same.

Okay. That's helpful. And then I guess on the performance fee outlook, Jay, if you could talk, also kind of characterize that. Maybe -- we started out last year with the markets pretty strong, where we've seen that start again this year. I guess is it as you look at kind of the potential for 2012 and the contribution from performance fees, how diverse is that? And I guess is it much different than where we were a year ago?

Sure, Dan. So our guidance of $7 to $7.70 really affects primarily the update to market and flows as well as the partial impact -- partial-year impact of deals. There is no fundamental change in the view on performance fees within the model, the guidance that given mainly because it's still early in the year.

Having said that, we see great diversity in our performance fee opportunity, and we are experiencing flows into performance fee products, so we feel good about the prospects there.

Okay, great. Thank you.

Bill Katz, Citigroup.

Okay, thanks. Good morning, everybody. When you look at the pipeline for new business, I'm just sort of curious, Nate, is there any shift in appetite in terms of what you're seeing, or is it still heavily centered on the emerging market and the alternative platform?

Yes, so I think the three buckets we talk about as places we've seen strong demand and continue to see strong demand are the two you mentioned, the alternatives and emerging markets, but also the global equities category, we are seeing strong demand. I think some of that is sort of at a macro level and then I think some of it is just we have some very good products that we are bringing into new geographies and channels. So I would say those three buckets we continue to see strong demand.

And then the other things -- places like US equity kinds of products, it is more sort of episodic or idiosyncratic where we see demand. But those three buckets, global, emerging markets and alternatives, places we've been seeing strong demand and continue to.

The reason I was asking was I think last quarter you mentioned that 100% of the volume came from outside of the United States and in this quarter in your prepared remarks, you said it was both US and non-US. So I apologize for running on, but --

No, no, no, maybe let me clarify. So I think what I just described was product categories.

Right.

And product geography meaning where the flows are coming from, you're right, last quarter we did say more than 100% were outside the US, in terms of where the clients' assets are located. This quarter that was more balanced, coming both outside the US and also some good flows in the US, but those flows in the US tended to be in those product categories I mentioned, global, emerging markets and alternatives.

Okay. That's very hopeful. And then just on the deal front, obviously, you have the two behind you now. And Sean, I think you mentioned that there's a material opportunity until '12 and '13. Where are we in terms of the wealth succession? Is the deal pattern still pretty high? Or now with these two deals behind you, are things a little bit cooling off, but yet the long-term pipeline is still pretty healthy?

Well, I would say we don't expect to announce a deal a month, but we feel very good about the pipeline. And all of the underlying trends that we've been describing are very much in place. Very favorable M&A environment where our competitive position is stronger than ever; ongoing divestiture activity, especially by European banks, but not exclusively; and then this wave of demographically-driven succession transactions which we are seeing now, and we expect to continue for the medium-term at least. And that reflects simple demographics, lots of great firms where the founding principles are nearing retirement age and where they are looking to execute a transaction which helps manage the firm's succession and transition issues and provide a solution.

And I think the prospect of rising tax rates is an additional catalyst to accelerate some of those transactions. But overall it continues to be a very, very strong pipeline.

Okay. Thanks for taking my questions.

Michael (technical difficulty), Sandler O'Neill.

Good afternoon. Just to follow up on the deal pipeline, can you just talk about the extent to which you are really starting to leverage the global distribution platform as it relates to sourcing deals, so you think about Yacktman obviously had scale, differentiated investment approach and was generating very strong flows, and very strong investment performance track records. So how much of a role did that opportunity to really broaden out their distribution reach plan to the partnership? Because it seems like they were obviously doing very well on their own.

Sure. I would say prospectively it's hard to measure, but I think the addition of -- or the enhancement to our global distribution capability, both institutionally and increasing, as Nate said, on a retail basis through retail channels, is helpful. It's never going to be a reason that somebody signs up with us, but the tone and tenor of the conversations that we have with new investment prospects are quite different than they were let's say five years ago, where people really -- the results of our distribution and the strength of our organic growth is obvious.

I mean we are generating industry-leading organic growth going on two years now, and so it's not just investors that are noticing that prospects, prospective affiliates, appreciate the opportunity. But in the event we are always partnering with outstanding firms that are generating strong growth, they believe in themselves, they want to keep direct equity in their own firm, and so the opportunity to enhance their growth is always viewed as incremental.

So helpful, but not essential I think we are going to have a great long-term run here of new investment opportunities which hopefully we can execute on. And the track record is incredibly important to that, but our distribution is also helpful.

Got it. And then maybe a question for Jay. I know you still have ample capacity on the revolver and continue to generate a lot of free cash, but now that you're going to put some capital to work related to the two recent transactions, if more deals were to materialize over the course of the rest of the year, how would you be thinking about funding any incremental transactions?

So, Michael, we do have ample capacity. Even after these transactions we have about $150 million of Holding Company cash in addition to the revolver, as you mentioned. Some of it will depend on timing, but I don't think we have any constraint with respect to funding transactions, whether it's on our current revolver or it's in a capital markets transaction.

Okay. Thanks for taking my questions.

Chris Shutler, William Blair.

Good morning. Nate talked about the fact that you see a lot of untapped opportunities with Managers Investment Group. So maybe you can just expand on that a bit and give us a few examples.

Sure. So I think we talked about the opportunities with Managers Investment Group in a couple different dimensions, right. So one is the opportunity to keep executing or to -- honestly improve execution in the current market environment. So I think there's some product categories -- global and emerging we talked about.

Liquid alternatives is a place where we are really distinguishing ourselves, both First Quadrant as well as AQR are doing well there, both on their own and through Managers Investment Group. There's an opportunity to continue to do more there in product development and also to bring the expertise we are developing with liquid alternatives there to a broader set of products. As you know, we have a wide array of alternative products. So that's one sort of example of a specific alternative -- opportunity.

There are also sort of channels where I think we could be -- we could certainly build a much stronger presence. The DC channel is one. Some of our affiliates participate there. We do some work there with our affiliates through Managers Investment Group, but honestly, there is a relatively large opportunity that we haven't yet built out there. And there's some natural leverage between the work we do elsewhere, both at affiliates and also our distribution in terms of firms who are on the DB side in terms of what we're doing on the consultant side, so there's a bunch of leverage opportunities in there.

And then I think I mentioned in the prepared remarks, but broadly there's a real opportunity to capture the synergies of and leverage between what we're doing in global institutional and the relationships we're building with consultants and others there and what we are doing in the retail market in the US. So I hope that gives you some flavor, both short term and long term.

And I would just add to that, Chris, as we all know, retail flow trends in the US continue to be very strongly in favor of passive and fixed income products, active equities continue to be in net redemption. And all of us in the industry are anticipating that there will be a re-risking by US retail and I would say also institutional investors, but we really haven't seen that yet.

And so the strong traction and good results that we're really already seeing in the retail space through the Managers platform and as we build out further the capabilities, is all sort of against a difficult backdrop, and to the extent and at the point we see substantial re-risking and flows into return-oriented products, we think we are very, very well-positioned for that. And all of that will be highly incremental to what we are seeing so far.

Okay, great, thanks. And then in terms of the pipeline maybe just zeroing in on the Wealth Management opportunity for a second, just wondering after a Veritable -- has that deal generated more inbound calls from prospective affiliates? Just what -- any kind of color you can provide on what's happened since that deal was announced.

Well, there's no question that it has generated some inbound calls, and more importantly with the really high-quality firms that are out there that -- where we've been working to build relationships, the decision by a firm the quality of Veritable, which clearly could've chosen from anybody they wanted would be interested in partnering with Veritable, choosing AMG Wealth Partners is such a ratification of the quality of our team and of our approach that it is incredibly valuable and a great calling card to go out and continue and deepen conversations with firms, which, in almost all cases, have the same kind of inevitable demographically-driven succession needs that independent boutique asset management firms do. So we are very well-positioned, looking forward, and there is no question that the Veritable investment was a huge help, but they've got a great pipeline going.

All right, thanks. And then just one final housekeeping question on the flows, I apologize if I missed this in the prepared remarks. But were there any noticeable client concentration issues in the flows in the quarter?

I think the only ones are the ones we would -- oh you mean specific large mandate that moved it. (multiple speakers) Yes; no, nothing that I would call out.

Okay. Thank you, guys.

Alex Paris, Barrington Research.

Hi, morning, guys. Just a couple of follow-up questions, diving a little deeper. On flows, for example, we all know what the flows have been like in US, actively managed equities over the last year. And just trying to identify maybe a bottom at some point before investors begin to re-risk their portfolios, what do gross inflows look like? Have they been improving in your experience? Or similarly, what about gross outflows? Has that slowed at all?

Let me do this in two parts. So I think the first part is, as you heard Sean say, we think -- we think there is a bottom. We actually think we are approaching the bottom, but calling a specific time we think it's turned here or there or the other place, I think it's just incredibly difficult to do. And it hasn't really just -- you sort of mentioned the last year, you called it the last year but it's been much longer. It's been several years now of that trend. So that's the first that I would tell you.

The second bit, in terms of our experience, I think the challenge for us is we end up seeing -- our flows end up being determined much more by the two things I talked about before, which is, one, obviously the performance of the specific firm, and then two, the ability to marry that performance with distribution, which is bringing it into places where it will be able to be sold.

You know, look, a perfect example is you have a firm like Yacktman, which is doing very well and is gathering shares, is taking market share, against that backdrop you described. So our view is it's possible for -- demonstrably possible -- for excellent performing boutiques in the US equity space to still do well. But I think it's very hard to -- I don't know if Sean, if you had that, but hard to call it a turn.

Yes. And it's impossible to call it, but there's no question that when it occurs, which to us all seems inevitable, setting aside the precise timing, because individuals and, more broadly institutions, can't fund their retirement needs on the levels of returns that they are getting now. And over time, the best actively managed firms, the alpha-generating firms, are going to be back in favor. So we are getting this traction and good results, the share gains that Nate is describing, but there is no question that when there is a broad return to risk assets that we'll get a disproportionate benefit, prospectively, so long as we are continuing to execute and generate good performance.

Great. And then one other question regarding the investment pipeline -- you've made two larger acquisitions year to date, putting together -- putting to work $350 million or more based on -- the typical multiples that we've seen in the past.

And I think at some point you had said, either on a conference call or at a conference appearance, that you thought that you could potentially put to work $400 [million] to $500 [million] this year.

The first two acquisitions were domestic, and you have historically said that the focus of your activity has been on international and alternatives. Qualitatively, what does the pipeline look like? Are we looking more at international acquisitions or all of the above?

Well, first, I am certain that I was careful to not give a specific target for any given year because it's not something that is knowable and not part of what our guidance is.

I think there is -- if you look back to a couple years ago where we had a good run of new investments, where we put $1.5 billion to work in about 18 months, and I described that maybe as a period that wasn't so unusual or there wasn't impossible to think of that kind of a level of activity prospectively. But we don't guide year-to-year in terms of the magnitude of new investments that we anticipate.

That said, the opportunity is tremendously attractive. As I indicated earlier, our competitive position remains extremely strong, really better than ever. And the range of new investment opportunities is broader than ever. So we've got firms around the world that need succession transition solutions. Those include not just traditional firms in the US but really on a global basis, and it includes, increasingly, alternative firms, hedge fund firms, which five years ago, seven years ago, one could not even imagine as enduring franchises; now, they are really global scale and institutional quality firms, and the founding principles are in their 50s and anticipating retirement. So alternative firms represent an increasing opportunity set.

Wealth management firms, as we've discussed, again, a new and very large potential opportunity set, completely incremental to what we have been doing.

And then finally, given all the challenges in the world that the banks and other financial services firms are facing, we are seeing still a large number of divestiture opportunities, which, for a small subset of those opportunities, represent attractive new investment candidates for us.

So if you put all that together, we are quite optimistic about our ability to generate strong incremental growth from new investments, and that's -- as I said in the prepared remarks, through the balance of 2012 and beyond, we view it as a long-term opportunity for us.

Great. And then just one last related question -- with the platform of Wealth Partners and the acquisition of Veritable, is it possible that we will see smaller acquisitions which you might have called an affiliate development acquisition in years past?

Sure. There's no question that the universe of wealth management firms represents, in the main, firms which are relatively smaller than the asset management firms which we would regard as the sort of prime prospects for us to make investments, affiliate investments, in asset management firms.

That said, the wealth management firms that we will look to invest in are still going to be substantial multi-billion-dollar firms, and so they are not going to be -- they will be smaller but not small transactions.

Fair enough. Thank you very much.

Marc Irizarry, Goldman Sachs.

Great, thanks. Sean, this might be a tough one to answer, but are you sensing capitulation from some of the US -- the US-focused managers that are in the pipeline, such that maybe the active world is under a bit more pressure and that maybe they are more likely to seek an alternative or a planned succession now versus waiting?

Here's what I would say to that, March -- those firms, whether they are US equity managers or some other product set, those firms which are headed towards capitulation, they are not the firms that we're looking to invest in. So that may be true broadly for a bunch of firms, but the prospects that are most attractive to us for new investments are great firms generating strong organic growth, which includes, as Nate has observed, taking market share, but also positioned in products which are generating growth more broadly.

Great. And then what does that imply then maybe for the multiples and sort of the bid/ask on some of the businesses that you like?

The multiples are really not that changed. There's no question that relative to a decade ago, when there were banks and insurance companies who for whatever reason were actively seeking to acquire boutique asset management firms, the environment is much more attractive for buyers as a general matter.

But for us, we have been very consistent over time in the pricing that we've -- we paid for investments and outstanding firms, and that really hasn't changed. I think to the extent we can be opportunistic in divestiture settings where we are partnering with management and buying out their business from a larger company, then, sure, we will seek to price those as aggressively as we can. Although we also want to be viewed as an attractive counterparty by those banks and I think have been.

So on an overall basis, it's really a consistent discipline and one that allows for us to make investments where we think we are paying a fair price, but we are getting a very attractive return and very substantial accretion for our investors.

Okay, great. And then, just, Jay, on the EBITDA contribution guidance, I guess there is some seasonality there, but it did strike me as the EBITDA contribution was maybe a bit lower this quarter. Anything to infer there? It's obviously a bit difficult to get at some of the affiliate-level profit -- profitability if you will, but anything behind that?

No, there isn't. If you look at our base business, we're pretty much year over year flat, $1.57, excluding performance fees. And on an EBITDA contribution, the 15 basis points just reflects the math associated with the contribution. And I think as you look forward you will see it tick upward as we get through the year as we grow and we see performance fees.

Okay, great. Thanks.

Cynthia Mayer, Bank of America Merrill Lynch.

Hi, good morning. A couple of questions. One is I guess it looked like you said you had flows from a broad number of affiliates, but I'm just wondering if you could give us a sense of what percentage are from minority-owned affiliates versus majority?

Okay, so --

Any trends there.

Yes, so, I'll start with that. I think there definitely was good flows through minority firms, which so again stands to reason, because if you think about the broad set of alternative firms, a number of our alternative firms, really most of our alternative firms, many to most of our alternative firms fall there, and that as I said is an area where we have been seeing good growth. So whether you think about BlueMountain or a ValueAct or an AQR, those are firms where we have been all seeing good growth. So I think that's the right answer. There's definitely good flows coming through there.

But I think what's also notable is that the very large majority, whether you take our largest 10 affiliates, including both traditional and alternative firms, or our entire affiliate mix, the large majority are seeing positive flows.

Great. Okay. And then last year second quarter you had pretty hefty performance fees I think. Could you talk a little about how this second quarter is shaping up versus last year?

On performance fees, Cynthia, I think that of course they are hard to predict. We do have some seasonality in the second quarter where we oftentimes will see a bit more performance fee contribution. Again, it's still unknown to us, but we do think that the performance fee opportunity this year is in line overall with that 5% to 10% of our earnings guidance that we give. And candidly given the flows in the alternative products that Nate just described, we think that opportunity, depending on how the year plays out, could be even better.

Okay. And then let's see, do you have -- I don't know if you mentioned this, but do you have average AUM, particularly for funds? And I'm wondering if you could just talk about any trends you're seeing in terms of the average fee rates in funds. And maybe how Yacktman would affect that.

So, yes, you're right. In the 10-Q we put I guess our billable rates or our average fee rates. We have -- in total our average fee rates have really not changed materially. I think they are kind of in the single plus 1%, minus 1% across all of the segments.

Gosh, you're testing me a little bit here. I think that Yacktman at kind of 70-ish basis points coming in, is consistent with our mutual fund fee rates. And I don't think it will change it much.

Okay. And last one is maybe just how do you feel about making more minority investments? Are you mostly looking for majority or how do you feel about the mix of that overall?

We think we are in a great position. There is certainly plenty of room for additional investments in alternative firms. We've talked -- you've probably heard me talk at conferences and our meetings about being sensitive to some upper limit of exposure to performance fee products, but we are a long way from that.

And I think to the extent that we have a large business generating strong organic growth and a very substantial new investment opportunity set, I think there is plenty of room for investments in great alternative firms and there are a whole bunch out there.

Great, thanks a lot.

Robert Lee, Keefe, Bruyette & Woods.

Thanks. Good morning, everyone. I had a question on Pantheon, I guess one of the few alternative managers you haven't talked about today. Can you maybe update us at all kind of what you're seeing there in terms of their -- I know it's hard to get too specific, but I'm assuming that they are out there fund-raising; I don't know to what extent they may have some you know existing committed capital that's not showing up in the AUM yet, but any kind of color you can provide on the progress there and kind of dry powder that they may be sitting on?

Sure. I'll try a little bit. And then sort of one little caveat here which will probably answer in part your question, is, they are in the market right now with their group of primary funds, which includes the traditional primary funds as well as some carveout funds. So they are actively marketing which probably implies some limits for how much detail we can give right now.

But I guess I'd say a couple things, right, which is overall they are looking at some upcoming closes in the primary funds; this is the fund-raising first and the dry powder second. They are looking at some upcoming closes in the primary funds. One thing that I think is an evolution, I don't think unique to us, but if you think about sort of the shape of that business, the growth -- a lot of growth is coming alongside the funds in sort of separate accounts. And so they are actively out there with that as well. And I think in this quarter they had some -- a couple of separate account closes, sort of modest sizes, but it had a couple of separate account closes. So I think that's sort of one way to think about it, which is they are active in the market, there are some upcoming closes, and they're pretty consistently active in the market now on the separate account side.

And then in terms of dry powder, they certainly do still have some dry powder, both on the primary side but certainly on the secondary fund side, both funds and separate accounts from things they've raised, not all that long ago, sort of within the last year or two.

Okay. Great. And then I'm just curious, and maybe a question for Sean on the divestiture front. I mean obviously you all read about it and you talk about a lot of the opportunities there and a lot of financial -- European financials in particular looking to divest things. But it doesn't seem like at least the last year or so there's been too much movement there. Is there -- curious, are you seeing that there's for all the talk of it there's maybe sellers' expectations are out of whack with kind of what people like yourselves are willing to pay? Or is it really just that it's dealing with these large organizations, that's just a slow grind and it takes forever to get things done? Or kind of why do you think you haven't seen kind of a little more activity to date?

It's probably a mix of everything you said. I don't think we are seeing fire sales, right, so there's no great urgency on the part of most of these organizations. Many potential divestitures are discussed and then they are not necessarily followed through with an active process.

And then finally for us, only a small subset of the firms that are being divested represent really appropriate and attractive investment prospects. But I think it's a real trend, and I would be surprised if we don't see a significant level of activity through the balance of this year.

All right, great. And just one last question on the Wealth Management initiative. Can you talk a little bit about what type of infrastructure you've built or you think you need to build to kind of attract additional wealth managers? If you think of what you've done on the asset management side and whether it's taking over some compliance functions for some affiliates, or obviously the distribution initiatives? Do you have -- what are the plans on the Wealth Management side, or what do you think you need to add there to kind of attract additional managers?

Well, I would say that there is no need to build infrastructure in order to attract excellent prospects. If you think about AMG, we are coming up on our 20th anniversary as a company. And the global distribution initiative is just five years old, and the centralized compliance opportunity is -- capability is maybe only a few years older than that. And we continue to build out additional capabilities as scale and the complexity of the world create new needs or new imperatives.

But we managed to do just fine, and I would say we continue, to reflect back to an earlier question, we continue to find that the very best firms are strong believers in their own growth prospects and the continuation of an excellent performance track record and the continued generation of strong organic growth from net flows.

And so their primary focus is on maintaining direct equity exposure to their business and getting of course a measure of liquidity and a solution to their succession and transition needs. And all the while wanting very much to have a partner that is supportive and helpful, but most importantly doesn't at all distract from or disrupt their unique operating and investment culture and the great momentum that they had. So that is true still today for asset management prospects, and it's definitely true for Wealth Management prospects. So I know that the team is working on an array of capabilities that they will work to put in place, work with their Wealth Management affiliates, to put in place over time. They will be different from what we have done and will do in the asset management space, but we are still very early days.

And I would say that over time we continue to be very optimistic about their prospects for -- or say broadly our prospects for continued new investment activity, independent of whatever capabilities that we build. And as we build in these capabilities, we'll talk about them, but they are not being held back at all so far.

All right, great. Thanks for taking my question.

Greggory Warren, Morningstar Capital.

Hi, guys. Just thinking about Yacktman, it was generally a pretty solid pickup from our point of view. Could you guys walk through some of the aspects of how you came across the firm, how it came across the radar? Was this more of a pure succession planning situation, or was it a global distribution move for Yacktman?

And then, could you talk a little bit more about what really made the decision for you guys? Because realistically this doesn't fall into one of the three buckets that you've been doing deals in more recently being alternative assets, global equities and emerging markets.

So we knew the Yacktman team had -- everybody in the boutique asset management space, and in the retail space generally in the US would know the Yacktman firm and have worked to build a relationship. I think in this setting they called us, but it was a product of a relationship and it very much fits within the mold of our other new investments. As I said earlier I think our global distribution capabilities were interesting and on the margin attractive, but what was most essential to the Yacktman team is to find a partner that had a long track record of successful partnerships, and one that would allow them to continue to do what they are doing and help them in providing a solution to succession and transition, not only get a measure of liquidity for the senior partners, but build out the equity incentive structure in the firm so that they can continue to have the outstanding franchise that they have built, endure and grow over time. And it's very much like that. Would you add anything to that, Jay?

No. I think that's just right, Sean. I think the one obvious thing about Yacktman is that they run a more concentrated portfolio that has outperformed over long periods of time. And they are taking share away from index-sensitive funds, and so I think that's another aspect that we liked. And so that fits into the category of boutiques that can generate alpha.

Yes. And we have never said that we have an aversion to a certain product or another within the return-oriented product space.

And I remember when we were on our IPO road show, and we just made an investment in Tweedy Browne and everybody wanted us to say that we would never do another value manager because that wasn't fashionable back in the day. And I said then if a clone of Tweedy Browne walked in today, we would happily make the investment again.

And so outstanding firms that generate alpha for their clients and have great long-term organic growth track records and ongoing prospects, they are attractive to us, whatever the product set.

No, I think it's a great pickup overall.

You had mentioned that it was probably going to close sometime in the third quarter. Have you guys seen any interest yet from clients as potentially picking up investments in the fund, once it comes live?

Well, so, just on the timing, we do expect middle of the third quarter. And we are merging the funds into the Managers group of funds, so it is going to take a little longer than a typical deal, and that proxy process is underway.

Yes; and on the demand side, we have -- it's still all sort of specific represented on broad trend but we have absolutely seen existing client relationships through global distribution where people have noticed the pickup and have started to talk about it, so --.

Great, great. Thank you.

Bill Katz, Citigroup.

Just a follow-up -- thanks for taking it; and I think there's been some discourse back and forth during the call. As you think about incremental growth from the affiliates on a flow level, is it accretive or dilutive to your earnings growth of the company?

I'm not sure I'm tracking your question. The organic growth from net flows is terrific, and more of it is better, and I like that we don't have to pay for it, so it's all good. I think we must be missing the thrust of your question, though, Bill.

I think there's some concern from investors that as you look at the equity-based earnings level of your company, in other words, where you have great ownership, your organic growth hasn't been as robust as in some of the minority stakes, and gotten that question quite a bit. So I'm just curious as you look about -- and I think it goes to EBITDA, to AUM contribution discussion earlier. Just as you think about growth from whether the AQR or Brandywine or BlueMountain, I should say, or from Tweedy or Third Avenue, as you think about the incremental growth, does that -- is it accretive to cash earnings -- economic earnings leverage, or is it more of a volume versus margin discussion at this point?

Well, there's no question that it's all accretive. So our peer companies that are getting flows into lower-fee products like fixed income and passive products, I'm sure they are still happy to get them. And for us, all of our flows are into return-oriented products where we are getting higher levels of fee, including for alternative products, the opportunity for performance fees.

That said, of course as we have discussed, even on this call, we own less of the, in the main, the alternative firms.

I would observe that one of the firms that continues to be extraordinarily successful and was Morningstar's International Stock Manager of the Year is Tweedy Browne, where our ownership in their fee levels is at the higher end, so each dollar of new money into Tweedy is extremely valuable to us. But it doesn't mean that the flows into alternative firms isn't also extremely valuable, including with the added possibility of performance fees.

So we are quite pleased with the product set that we have, including the addition of new affiliates with new products. We think that it is -- I would step back and say our business right now is really hitting on all cylinders. We are generating industry-leading organic growth, and as well, we have an extraordinarily attractive new investment opportunity set where we are executing -- we have been executing over a long period of time, and we are quite confident in our prospects for continued growth and accretion.

And as you know, none of that contribution from new investments is included in our guidance. And so looking ahead, we are quite cognizant of the need to continue to execute and the degree to which we are all as asset managers dependent on markets being at least benign, if not positive. But we feel very good about our business prospects.

Okay. Thanks for clarifying and taking the extra question.

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

Thank you, again, for joining us this morning. As you've heard we are pleased with our results for the quarter and confident in our prospects for continued strong growth ahead. We look forward to speaking with you again in July.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.