Affiliated Managers Group Inc (AMG) 2012 Q3 法說會逐字稿

Greetings and welcome to the Affiliated Managers Group's third quarter 2012 earnings call. At this time all participants are in a listen-only mode. A belief 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 introduced your host, Alexandra Lynn, Vice President of Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you, Ms. Lynn, you may now begin.

Thank you for joining Affiliated Managers Group to discuss our results for the third 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 a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures.

With us on the line to discuss the Company's results for the quarter are Sean Healey, Chairman and Chief Executive Officer; Nate Dalton, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer. With that I will turn the call over to Sean Healey.

Thanks, Ali. Good morning, everyone, and thank you for joining. We appreciate that it's been a difficult week for many of you, and we wish the very best to those affected by the storm.

AMG reported economic earnings-per-share of $1.91 for the third quarter of 2012, which is a 23% increase over the same period of 2011. Our earnings growth was driven by continued strong business momentum with outstanding organic growth from net client cash flows and exceptional investment performance across our equity and alternative products.

Our strong results reflect the excellence of our boutique affiliates and the ongoing impact of our strategic focus on global and emerging market equities and alternatives, which collectively account for 70% of our earnings. We believe that specialist firms have competitive advantages in generating alpha in these areas, and our boutique affiliates including Tweedy Browne, Genesis, Harding Loevner and Artemis among global and emerging market equity managers, and Pantheon, BlueMountain, ValueAct, First Quadrant and AQR among alternative managers are all recognized as leaders in their respective disciplines.

Over the last ten quarters we have generated $60 billion in net flows. Concentrated in these product areas and looking ahead, we believe that both retail and institutional investors will continue to seek value-added equity and alternative strategies for the alpha portion of their portfolios. With our affiliates' industry leading products in these attractive categories, we are generating strong organic growth in the face of industry trends, which continue to overwhelmingly favor passive and fixed income products, and we are particularly well-positioned to benefit when investors inevitably reallocate to return oriented products. And finally in a re-risking rising rate environment, AMG will not be impacted by the decline of assets from fixed income outflows or the depreciation and value of fixed income products.

Our outstanding organic growth, with $11 billion in net client cash flows in the quarter, also reflects the continued success of our global distribution strategy, as our affiliates are winning new business and market share through both affiliate level marketing efforts as well as leveraging our global platform, which enhances the presence of our affiliates across channels and geographies. Given the ongoing success of our strategy and the forward opportunities that we see, we continue to build out our institutional and retail platforms worldwide through opening of new offices and the addition of key personnel in existing coverage regions. And these investments are increasingly resulting in incremental new business momentum as evidenced by recent wins in Asia, one of the newer regions in our platform, as well as in Europe, the Middle East and Australia.

Turning to new investments, we were pleased to complete our additional investment in BlueMountain during the quarter, which significantly increased our ownership interest in one of the world's leading credit alternative managers. The current environment remains very favorable for AMG, and our pipeline continues to include both divestitures as well as succession oriented transactions with top performing traditional and alternative boutiques globally. Going forward, given our outstanding competitive position, track record of successful partnerships over the past two decades, and substantial financial flexibility, we're uniquely positioned to execute on this diverse opportunity set, and we're confident in our ability to continue to create shareholder value through accretive investments in new affiliates.

With that I will turn it to Nate to discuss our affiliates in greater detail.

Good morning, everyone. The overall themes of the third quarter continued those we have seen for some time. Excellent organic growth from net client cash flows combined with continued good investment performance across most of our affiliates. Consistent with some broader industry trends, flow momentum has been especially strong among alternative strategies and global equities products, and we're also seeing opportunities to distribute top performing US equity products to institutions worldwide.

Now as Sean noted, we continue to generate strong client cash flows across channels, with a total of $10.9 billion in net new flows for the third quarter, our tenth straight quarter of strong positive cash flows. Looking ahead and consistent with past trends, the pipeline looks good through the remainder of 2012 and into 2013.

Now turning to investment performance. In the global developed markets category we had another strong quarter. Highlights include AQR, Trilogy and Third Avenue, which had very good relative performance, while Tweedy Browne's flagship global value and international products both outperformed, continuing to build on their incredible track record.

In our emerging markets category we had another excellent quarter, with Genesis and Trilogy in particular outperforming the benchmarks by a significant margin across their products. While Harding Loevner slightly underperformed in the quarter, all of their products are ahead of their respective benchmarks for the year-to-date, one, three and five year periods. As with global equities, emerging markets is a product category with substantial opportunities for growth, in part because of the macro opportunities we see, but most importantly because we have multiple extremely well regarded firms in each category.

Next turning to our alternatives products. All of the funds at BlueMountain and ValueAct were well ahead of their benchmarks for the quarter, and our other affiliates with significant alternative products, such as AQR and Pantheon, continue to deliver strong performance across our suites of alternative strategies.

One other item to highlight in our alternative category is product development. This past quarter BlueMountain launched their first credit opportunities fund, and as most of you know, AQR has been a market leader in alternative product development, especially in the retail channel, having launched a suite of mutual funds, including managed futures, diversified arbitrage and risk parity funds.

Finally, turning to our US equity products. Against the backdrop of a good quarter in the equity markets, our affiliates delivered strong relative performance. On the growth side I would highlight that it was an excellent quarter for TimeSquare, as the firm continued its long-term record of outperformance. On US value side, Systematic had a strong quarter and continues to outperform, and while Yacktman missed its benchmark in the quarter, the firm's long-term track record remains very strong, top decile for both funds for the five and ten year periods for example.

Now turning back to flows. With a headline number of $10.9 billion in positive net client cash flows, this quarter we saw very strong alternative flows as well as exceptional flows in global, emerging markets and US equities. In terms of geography, we saw positive net flows in both the US and globally, but with the majority coming from non-US clients.

Looking at our flows for the quarter by channel and starting with the institutional channel, we continue to have very strong performance, and in the quarter we had positive net client cash flows of approximately $7 billion. While we continue to be pleased with the diversity of flows across products and firms, let me reiterate that flows in this channel are inherently lumpy and we had several very large mandates fund this past quarter. That said, we are confident in our ability to continue to generate strong organic growth in the pipeline in terms of won by not funded mandates, RFPs, and searches running very strong.

Moving to the mutual fund channel, we had positive flows of $3.4 billion. Here we also continued the positive trends we have had over the past several quarters. For example, once again we had strong flows in the subadvisory channel and especially for alternatives products. In our high net worth channel flows were about $400 million for the quarter. We had positive flows from GW&K, especially through our US retail distribution platform, and from Harding Loevner and BlueMountain in their alternative strategies and credit alternative strategies respectively.

Turning to our global distribution efforts, we continue to make very good progress across our platforms. Now I thought I would take a step back and remind everyone how we're building these out. Our strategic rationale of hiring senior local experienced sales professionals is that we can provide leverage to our affiliate model and at the same time add significant incremental flows to our business. Six years ago we started in Australia and now have local specialist coverage in Australia, the Middle East, part of Europe including the UK, Netherlands and the Nordics, as well as for Asia.

As Sean said, each of these is providing meaningful contributions, now including Asia, the most recent region we launched. Looking ahead, in the coming quarter we'll be adding Swiss and German specialists to our European team, operating out of a new office in Zurich. Looking further ahead, we're focused on continuing to expand some of our regional teams, adding new senior level sales and client service professionals as well as launching new regions and diversifying by channel within the regions we already cover.

Finally, the pipeline at our global distribution platform remains very strong, and we believe we are extremely well-positioned to continue to drive good growth through client cash flows. With that, I will turn it to Jay to discuss our financials.

Thank you, Nate. As Sean and Nate discussed, we continue to be pleased with the successful execution of our growth strategy. With strong contributions from both organic growth and new investments, our third quarter results reflect a substantial increase in the earnings power of our business.

As you saw in the release, we reported economic earnings-per-share of $1.91, including a $0.02 contribution from performance fees. On a GAAP basis we reported earnings of $1.04 per share.

Now turning to more specific modeling items. The ratio of our EBITDA contribution to end of period assets under management was approximately 15 basis points in the third quarter. For the fourth quarter we expect this ratio to increase to just over 18 basis points, which includes a reasonable assumption for performance fees, and for 2013 we expect this ratio to be approximately 15 basis points. Holding company expenses remained flat at $22 million in the third quarter, and we expect them to increase to approximately $25 million for the fourth quarter, reflecting continued investment in global distribution and other anticipated year end expenses, before returning to a more normalized level of $23 million per quarter.

With regard to our taxes, our effective GAAP tax rate for the quarter was approximately 26%. This rate primarily reflects changes in foreign tax rates and reserve adjustments, including a further decrease in the UK rate, which also impacted our third quarter cash tax rate of 12%. For modeling purposes we expect our GAAP tax rate to be 35% going forward, and our cash tax rate to return to approximately 18% in the fourth quarter.

Intangible related deferred taxes for the third quarter were $11.7 million, also reflecting the UK tax rate reduction I just mentioned. While this number may fluctuate across quarters, for modeling purposes we expect our normalized intangible related deferred taxes be approximately $15 million per quarter.

Our share of amortization for the quarter was $19.7 million, and together with $10.2 million of amortization from affiliates accounted for under the equity method, AMG's controlling interest portion of amortization was $29.9 million. We expect our quarterly amortization to be $31 million in the fourth quarter and going forward.

Our portion of total interest expense for the third quarter increased to $27.8 million as a result of borrowings related to our new investment activities. This amount included $6.1 million of pre-tax noncash imputed interest expense. We expect our total interest expense to increase to approximately $30 million for the fourth quarter, reflecting the full run rate effect of our recent financing activities.

Turning to our balance sheet. We have opportunistically extended the maturity of our balance sheet and increased our available capacity to execute on our new investment growth strategy by raising $340 million in two tranches of senior debt at very attractive rates. These ten and 30 years bonds, which were issued in August and in October, were leverage neutral transactions, and proceeds were used to repay our outstanding revolver balance.

In addition, we entered into forward equity contracts to sell approximately $150 million of equity at an average price of just over $121 per share. These contracts, under which no shares have been issued to date, can be settled for cash or shares at AMG's discretion.

Now turning to guidance. We are raising the bottom end of our 2012 guidance range, as we expect economic earnings-per-share of $7.20 to $7.70. And our confirming our 2013 range ever $8.30 to $9.20. Our guidance assumes normal convention of actual market performance through yesterday for the current quarter and 2% growth beginning in the first quarter of 2013. We also assume a weighted average share count of approximately 53.4 million for the fourth quarter and approximately 54 million for the 2013.

The lower end of our 2012, 2013 guidance includes a modest contribution from performance fees and organic growth, while the upper end of the ranges assumes a more robust contribution from both performance fees and net client cash flows. As always, these assumptions do not include earnings from future new investments and are based on our current expectation of affiliate growth rates, performance and the mix of 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). Our first question comes from the line of Michael Kim with Sandler O'Neill. Please proceed with your question. Your line is live.

Hey, guys. Good morning. First, maybe a question for Nate. Can you talk about the mix of the flows for the quarter, particularly in the institutional channel as it relates to your global distribution efforts versus the affiliates more directly? And then more broadly, is it fair to say your newer offices are maybe coming online quicker relative to the more seasoned offices as you kind of progress through the distribution expansion?

Okay. So first in terms of mix of flows -- I will say a couple things here. So one, obviously every sale -- and obviously every bit of client [service] -- but every sale starts and ends with affiliates, right? So there's -- I think I made this point last quarter, which is getting increasingly harder to separate that out completely, but everything involves affiliates. That said this quarter a significant portion of the flows had our global distribution institutional folks -- folks in the institutional channel here -- a significant portion of the flows had our guys involved, including some of the very large mandates we talked about. So that's the first bit.

And then in terms of things coming online, I would say there's really there's really two parts to that, right? So the first is, if you think about a really new region -- so Sean mentioned -- I think Sean and I both mentioned Asia -- it's that couple year ramp, just like we have seen elsewhere. The other thing that's happening, though, is we're adding resources inside regions, so for example take Europe, where we've been there for while, but we added a Nordic specialist, for example, a little over a year ago -- maybe coming on two years now. But we added that specialist there, and as we think about adding the German and Swiss specialist, those kinds of things, those are not really brand new regions, because we have been covering them and we do expect the contribution from people like that to come online faster. And that has been our experience.

Got it. That's helpful. And then as it relates to performance fees, I know are still a couple months left in the year, but any color in terms of how things might be shaping up, particularly just given the diversification of the various strategies and affiliates that can contribute at this point?

Yes. Michael, it's Jay. We continue to see performance fees as a significant opportunity. We have great diversity, as you mentioned, in our performance fee stream, ranging from absolute return products to long only products. We've been consistent in our guidance throughout the year in terms of what we see performance fees coming it at, kind of 5% to 10%. I don't think anything has changed there. As you have heard, though, in our prepared -- in my prepared remarks, the -- we've upped the bottom end of that range, so we are seeing -- we're coming into focus on what we think our opportunity is for the fourth quarter.

Okay. Then just lastly, I know you've gotten away from guiding to an all-in number as it relates to deal capacity, but can you just maybe walk through all of the different levers available to you in terms of cash on hand, ongoing free cash flow, the credit facility as well as the equity forward agreements?

Yes, that was great. You summarized them all, but I will put a few numbers to that.

First we did see just an outstanding opportunity to finance long-term fixed-rate debt in third and fourth quarters, so that -- we took that opportunity to raise $340 million in ten and 30 year bonds, extending our balance sheet, increasing the capacity under our revolver. But we also added a level of flexibility, because we have a three and five year call feature at par for both of those, so we felt very good about those financings, both from an extending and increasing capacity, but also flexibility.

So we used that to payoff our revolver with virtually no revolver balance. We have $800 million available together with ready access to $150 million under the forward. Again, we have not issued those shares but we have ready access to that. And then our -- annual cash flow of -- in the neighborhood of $450 million of after-tax earnings, just if you added those numbers up, and I am doing it in my head, you're up approximately $1.5 billion.

That's very helpful. Thanks, guys.

Thanks.

Thank you. Our next question comes from the line of Bill Katz with Citigroup. Please proceed with your question. Your line is now live.

Okay, thank you. I apologize. The connectivity here is pretty thin. Just in terms of deals, you have seen a little pickup of other activities. Carlyle acquiring TCW, maybe a bit of an [instacratic] transaction. But then Schwab paying a pretty big number for Thomas Partners. Just wondering if you could comment a little bit about the competitive back drop and any pricing changes you may be seeing underneath the good pipeline?

Thanks, Bill. I would say that the competitive environment is -- continues to be highly favorable for us. There are, of course, always competitors for the very best firms, and you have identified some transactions that I would agree are situation specifically. In the main, for demographically driven succession transactions involving traditional boutique asset management firms, as well as succession oriented transactions involving large alternative firms, and finally divestitures of boutique firms; in all of those general categories our competitive position continues to be stronger than ever and our pipeline, as you heard me say, is very strong and balanced.

Okay. That's helpful. Then just a second question. You mentioned early that you were able to sell some US equities in some of the institutional areas. I was just wondering, just more broadly, are you seeing any more systematic change in risk appetite away from fixed income back toward active equities, or is it more at the margin?

I think what is gratifying, if that's not too strong a word, for us is that the overall industry environment really hasn't changed. As we all know, passive products, passive equities and fixed income products, both in the retail and the institutional space, domestically and to some extent internationally, although I would say non-US clients in general have been willing to re-risk sooner. Those are the clear trends. They continue.

I think we can all speculate about when the -- when clients will re-risk and what will happen when they re-risk. I think as you heard me say, we're very pleased with our position, both in terms of strategic allocation of products, but also the outstanding performance and underlying excellence of our boutiques. And really what we're seeing is -- and driving the flows, is both outstanding -- ongoing outstanding performance of our affiliates as well as good execution -- very good execution in our global distribution strategy.

Hello?

Yes.

Oh, I'm sorry.

We're still with you. No problem. We understand.

Okay. I think I got the gist of it. Thank you very much.

Sure.

Our next question comes from Craig Siegenthaler with Credit Suisse. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning, Craig.

Just [like to] start on the M&A pipeline, and I understand that the overall pipeline a very strong, but if you can kind of dissect your comments into three main groups, succession planning being one, and then divestitures in the US being two, and then Europe being three, how have each of those sources for M&A changed over the last six months? Are some stronger or some weaker?

I think succession oriented transactions probably have been -- I think they will increase going forward, and we have seen fewer than one might have thought at the beginning of the year, and that I think is owing, as much as anything, to the timing of market volatility. With the market recovery occurring in the second half the year, if you wanted to get a transaction done by the end of the year, you really had to begin in the let's say by June. And the ongoing driver of demand for transaction activity is of course demographically driven succession. That doesn't change. And I think we'll see -- in the medium to long-term we'll see continued strong activity and substantial opportunities for us in that category.

Divestitures tend to be more episodic. I would say there's relatively less activity among US banks and insurance companies now, but still there are some transactions that we're considering -- evaluating. And there are substantial opportunities, both in transactions or involving potential transactions that have been well publicized as well as some that are more private. And we're evaluating all of those opportunities.

We continue to be extremely disciplined and extremely selective in how we pursue transactions, and so we'll see what unfolds. Obviously, as Jay described, we've positioned the balance sheet to provide substantial flexibility in the event that we see opportunities, but we haven't taken down all of the available capital, and so if transactions don't manifest in the medium term, then we'll -- we don't have excess capacity.

And the demographic points on succession planning is very strong, and that's been here for a while. But at this point in time equity markets have recovered very strongly, so a lot of these underlying businesses have higher valuation, which I think could help some of them look to sell, but also you have taxes going up. So why isn't kind of right now like kind of the best environment for succession acquisitions? Where is that -- my thought kind of wrong there?

Well, you're not wrong, but I think if somebody wanted to get in prior to the end of the year and pending rises in tax rates, I think they would have had to have started in the first half the year, or at least let's say by June. So I think we will see substantial activity going forward, and we're seeing the early stages of that, but I think looking out into next year and beyond we're quite confident that there will be a substantial set of opportunities.

Got it. Great. Thanks for taking my questions.

Sure.

Our next question comes from Robert Lee with KBW. Please proceed with your question.

Thanks. Good morning everyone.

Morning.

I'm just curious. When you [go out] and talk to perspective affiliates -- I mean, if I think back ten years ago, five years, six years ago, in fact, pretty much except for helping with some compliance and infrastructure, there weren't that many incremental resources you could -- that you really brought to bare on new affiliates. Now you have the globe at distribution that's pretty built-out, with the [optimum] seems like you're trying to -- or making some efforts maybe even beef up the managers' business. I mean, could you maybe talk a little bit -- are you more willing to think of other types of asset managers that may have attractive investment teams and records that are intact, but you feel you can bring more to the table in terms of resources, so you're thinking more broadly about some of the organizations you're willing to invest in?

The answer broadly is no. We really aren't changing the basic business strategy. We continue to focus on investing in the highest quality boutique asset managers who really have complete businesses, and those kinds of firms anticipate continued growth. They're betting on their continued growth by choosing our structure and approach.

But of course what is the cases that in a whole set of product categories and distribution channels we can provide meaningful additional growth to affiliates, and I think it makes us that much more attractive to these very high-quality firms, both traditional and alternative, domestic and outside the US. And then finally I think one bit of our strategy -- and maybe Nate can elaborate on this -- is to continue to help our affiliates grow by acquiring or expanding -- acquiring teams or expanding their product set with the addition of key personnel. And in building out existing affiliates or helping existing affiliates build out their product sets and expand their distribution, I think we're an even better partner to our affiliates.

I would agree with that. I think one way we -- I think we've talked about it on previous calls, but there really is a [virtuous] circle we're building, and one of the things between the increased strength of the distribution platforms we're building in a collaborative way with our affiliates, right? So we're not really building it for them, we're really building it with them.

But one of the pieces of that circle is the ability to increase the pace of product development, increase the pace of new product launches, and so I think it opens up a number of new possibilities. And you will hear us talking more about these as we go forward, but I think each of these pieces opens up more and more opportunities, including the one Sean mentioned.

All right. Great. And could you maybe also update us a little bit on -- I guess this is part of the pipeline discussion, but on your wealth management you had large transaction, I guess it closed around the middle of the year, and are you kind of comfortable with where you are in terms of that process, in terms of seeing more -- Did that really have the desired effect of kind of attracting more people to your model or at least willing to engage in conversations, or is it kind of been going a little slower than you thought or kind of right in line? Any kind of color you could provide.

I think we're -- we continue to be very pleased with the launch of that business. The investment in Veritable was absolutely a huge boost to their profile, and that serves as a flagship investment, which certainly helps them in their prospecting efforts. But any new initiative requires a tremendous amount of investment and time in going out and building relationships with all these independent firms and teams, and so that process continues, and the very best opportunities will manifest over time. But looking at what they're doing and the way in which they're executing the business plan, I'm quite happy.

And maybe one last question for Jay. Is it possible to get some color on what proportion of the AUM are -- the fees are at this point base predominately on the committed capital, they're not really market value. Obviously this Pantheon, I'm assuming this credit opportunities -- maybe incorrectly -- but with BlueMountain maybe based more on committed not markets. I am just trying to get a feel for what piece of the asset basis is kind of -- just kind of rock solid steady quarter to quarter, is not going to move around too much?

I think you're identifying the main kinds of pieces of it. I think it's -- and I was -- I think even on the BlueMountain one I would be a little bit careful in the way you just described it as well, because it is a -- the credit opportunities kind of funds -- [I'll do it that] way -- and those lines of business. They're not just rocks solid committed capital in one sense, which is they all do have upside opportunities as well, so you can think of it as sort of a baseline level of fees with opportunities above that.

And we've talked about Pantheon being our most stable affiliate because of this committed capital, and that is by far the largest affiliate with this type of arrangement. And it really is the single biggest place to find long dated capital.

All right. Great. Thank you, guys. Thanks for taking my questions.

Sure.

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

Hi. Good morning.

Good morning.

Maybe a question on the EBITDA to AUM ratio. It sounds like 15 basis points in 3Q. You said just over 18 basis points in 4Q, 15 basis points for next year. So if next year's fourth quarter has also got performance fees and so it's higher than 15 basis points, doesn't that imply lower than 15 basis points for 1Q through 3Q, and if so, why would it be going down a little bit? Thanks.

So as you note, Cynthia, I said the word approximate, and that was for a full year. And of course the other quarters also have some level of performance fee, notably the second quarter usually has a noticeable amount. I really do think that you're right, the fourth quarter will have an elevated amount, but when you take 25% of the fourth quarter and you blend it with stuff that looks like 15 basis points around the one through three, you will end up with something that looks like 15 for the year.

Okay. But wouldn't that imply that say a year from now the 3Q 2013 would be a little bit lower than this year's?

Not necessarily, no. No. Not necessarily. And remember -- so again, when we give this guidance, we're really giving it to a reasonable level. So it -- there is a range. There's a range around it. That's why we have a $8.30 to $9.20 range out there next year, and so if you -- you have to imagine that we're talking to the middle of the range. More or less.

Okay. All right. And then --

And, Cynthia, I would just add that I think we may be the only one of our peer companies to give guidance of any sort, and so I think we're -- hopefully, you will appreciate the challenge in forecasting asset management businesses generally in a business as large and diverse as ours is just inherently difficult to forecast, and predicting the changes in mix over time is -- especially challenging. We are very confident in the underlying drivers of our earnings growth.

Obviously, incremental new investments will always change the ratio that we're discussing in a way that we're indifferent to. So it's not really a number that we use to manage the business in any way. I understand it has an element in building a model, but hopefully you can appreciate the degree to which it's impossible to be precise.

Definitely. Yes, sure, it's an output. So -- yes, and I appreciate it. On the -- I think on some of your presentations you guys give emerging markets expose by EBITDA, and I'm just wondering if you could update us on that? Sounds like two out of -- most of your emerge market managers are doing well.

Yes, it's just over 10%. It's in that 11% to 12% range.

11% to 12%. Okay, and last question is just on Yacktman. I guess you noted the underperformance. Is that due to any particular slant in their strategy, and what kind of impact do you expect on flows going forward on that?

No, I think it really was just in a market that kind of ran like that, you-- we weren't surprised, they weren't surprised. And the new flow profile of the business remains strong, and I think one item we talked about, maybe the last call, we're also seeing them -- we're able to be helping them get onto some additional platforms and also begin to cross-sell a little bit into our relationships. So I think we feel good about where they are and the flow opportunity.

So given the new platforms and -- would you expect the flows to accelerate ahead?

Well, I think -- remember, there's the mutual fund side of it and also the separate account side of it. And so I think over the long run we're confident in the opportunity to keep distributing the funds and there is little bit of lumpiness in that business as well, so I'm sure it won't be a straight line.

Okay. Thanks a lot.

Thank you. Our next question comes from Daniel Fannon with Jefferies. Please proceed with your questions.

Thanks. Good morning.

Hey, Dan.

Nate, I think you mentioned on the call in your prepared remarks about opportunities for some of the top US funds to kind of continue to expand worldwide. If you could kind of elaborate maybe on products or individual firms as to kind of what think that I that opportunity is?

Yes. Okay. So I think -- so this quarter we had some good wins for US equities, both inside and outside the US in the institutional channel. And I think the opportunities are coming from a couple places. So one -- and I think Sean mentioned this --if you think about our affiliates, we have some -- we have firms who are managing really -- we talk about as truly differentiated products, right? So even though there are some trends away from US equities, people are looking at ways to get returns into their portfolios and including -- within asset classes, looking at ways to get returns into their portfolios. And so for managers who are really willing to try to get returns in we're seeing opportunities.

I think part of it is that, right, which is I do think there is that trend. I think part of it is also the -- this sort of same macro point we're making in global emerging and elsewhere, which is we're just simply bringing more specialist coverage online to match up with good performing US equity firms. So if you can imagine new very senior sales person in a region who has a set of very good relationships and is able to look at the breadth of our all of our affiliate products, he has some -- he or she has some very good performing US equity products to pick from, and so we're just simply increasing the front the part of the funnel, if you will, for these affiliates in ways that just wasn't there before.

And so I think some of it is also that. So I think it's partly there is -- I do think there is some trend there to people looking for ways to get returns in, including for differentiated products in US equity. I think that's helping us, but I also think part of it is just -- and we saw it this quarter -- part of it is just bringing product to places it just wasn't before and so -- and making those matches.

Great. That's helpful. And then I guess just one more question on guidance. And I realize you don't have a crystal ball, but looking at 2013 and what you guys see today, whether it be alternatives versus performance fees, outlook versus high water mark, or kind of pipeline for flows. I mean, would you characterize what you have laid out for 2013 as kind of conservative, middle of the road? Just some color on that.

I would say consistent. We have a -- as hopefully comes through, an optimistic view, a confident view of our underlying business dynamics and the quality of our business and the affiliate franchises, and I think all of those trends are continuing in so far as we can tell. Of course, there is much about our business and about the macro environment which is impossible to predict, and so among other considerations we -- both in how we positioned our balance sheet as well as in the diversity and breadth of our product exposure, we have positioned our business to be resilient even in difficult times as well. But we feel confident about our prospects.

Great. Thank you.

Sure.

Our next question comes from Greggory Warren with Morningstar. Please proceed with your question.

Yes, thank you for taking my question. Jumping back to the Yacktman a little bit and the flows overall, it looks like, based on the data I'm looking at, you hit about $1 billion plus in flows for Yacktman during the quarter. That was part of what helped push your total flows up closer to $11 billion. As you look forward, do you think we should be looking at maybe a quarterly run rate in that $7 billion to $10 billion range? Is that too optimistic, or do you think that you've hit another level here between Yacktman and between the traction you're getting with the distribution platform?

Yes. So this is Nate. Let me start. So I think I would not describe it the way you just did. I think -- I would not say things like we just hit another level or what not. I would go with -- I think the themes are really the ones we talked about in our prepared remarks, which is, look, we feel good about the transaction that we have, we feel good about the ten straight quarters now of positive flow momentum, but the flows this quarter -- I take your point about Yacktman.

With the flows this quarter the institutional channel was a very big contributor, and flows in the institutional channel are very lumpy, and we had some -- we experienced the benefits of that this past quarter. And so I would not characterize this as really other than that. So we feel good about the prospects. We feel good about the momentum, but this quarter we really did benefit from some of that lumpiness, not to overuse it.

Okay --

And I would add to that -- and maybe this is something that is also responsive to Dan's question, which is we're assuming that the -- some version of the status quo is continuing. What we're not assuming is that there is a dramatic re-risking in client appetite and client demand. I think to the extent that occurs -- and we can all speculate is to whether it will and when it will, but to the extent it does occur it will be a very substantial addition to the underlying drivers of our organic growth.

So the growth that we are consistently achieving we all understand is -- it's in spite of broader industry trends, and I think we feel quite good about how our business is positioned generally both for difficult times but also for good times, and I don't think we're in -- from an industry environment, a client demand perspective, we're really not in good times yet and so that opportunity is not reflected in our underlying guidance expectations.

Okay. And I think that's the impressive quality of what we've been seeing from you guys over the last year or so. But you sort of answered my second question, which is looking at institutional. I mean, understanding it is a bit lumpy, noticing that the sales ticked a little bit higher, the redemptions were a little bit lower and just thinking that was not going to be a continuing factor going forward.

But I guess just back to round about to my question again, do you think it's unreasonable to assume a 2%-ish quarterly organic growth rate? Do you think that's out of the norm, based on what you have done with the distribution platform, based on fact that even Yacktman with poor performance this year relative to it's history and relative to benchmarks, is still generating decent flows?

I think we are confident in our expectations for continued strong momentum and not really comfortable giving more precise guidance than that.

Okay. Thank you.

Sure.

Thank you. Our next question comes from [Xiaowei Hargrove] with William Blair. Please proceed with your question.

Hi, guys. I've got a couple questions on behalf of Chris here. First on the institutional channel, your redemption rate there is at a multi-year low, so maybe if you could talk about what you think has been the key drivers of that trend?

Yes. So I think -- and the last question also -- question-- touched on this a little bit. I think we are benefiting both from an uptick in [gross] sales institutional, but also -- and as you note, in this quarter in particular -- a decline in the gross outflows. I think -- look, it comes down our affiliates are in the main, performing very, very well, right? I think that's a big -- that's the place that it starts and stops. And I really think that's the main driver of it.

Okay. And then my second question is kind of related to that also. So the hedge fund industry has seen a pickup in outflows this year versus last year, and obviously its performance has been a big driver of that, so do you think -- is it just performance that's been a differentiator for your affiliates and that's how they've been seemingly able to buck that trend?

I think it's -- as Nate said, for alpha oriented firms, all of our affiliates, traditional and alternative, it is all about performance ultimately, and so good performance will drive. That's not all you need, but without good performance you're not going to see strong organic growth. That said and stepping back a little bit and talking about what we see in the alternative industry generally, I think there are a large number of -- I will say, a substantial subset of the alternative firm universe where you see excellent franchises performing well and generating strong organic growth from net flows. Happily our affiliates are among those kind of firms, and I think it's the firms that are -- either have not built their business franchise for the long run or have had performance challenges that are seeing declines, and so it really is that bifurcation in the industry which is underlying those broad trends that you described.

Great. Thank you. That's all I had.

Sure.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to Sean Healey for closing comments.

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

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