Affiliated Managers Group Inc (AMG) 2013 Q1 法說會逐字稿

Greetings, and welcome to the Affiliated Managers Group first-quarter 2013 earnings call. At this time, all the 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. Allie Lynn, Vice President of Investor Relations and Corporate Strategy for Affiliated Managers Group. Thank you, Ms. Lynn. You may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the first quarter of 2013. 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, Allie. Good morning, everyone. AMG reported economic earnings per share of $2.27 for the first quarter of 2013, which is a 44% increase over the same period of 2012, while our assets under management, now $463 billion, grew by 27% during the same period.

Our results were driven by successful execution across all elements of our growth strategy, including outstanding organic growth, accretion from new affiliate investments, and the ongoing strong business momentum of our existing affiliates, including the excellent performance of our alternative managers, which continue to produce meaningful performance fees.

We generated a record $12 billion of net client cash flows in the first quarter, which was our 12th consecutive quarter of strong positive flows. Importantly, our flows were broadly distributed across our equity and alternative product set and positive across all channels and client geographies, including Asia, Australia, Europe, the Middle East, and of course the US, reflecting the marketing efforts of our affiliates as well as a material contribution from our global distribution platform.

As Nate will describe in more detail, we are continuing to make strategic investments to build on the success of our global distribution strategy and further enhance the marketing reach of our affiliates by expanding the breadth and depth of our capabilities with additional coverage and personnel in key markets around the world.

Our results reflect the ongoing success of our strategic focus on high value-added, alpha-generating products, including especially global and emerging market equities and alternatives. These are product areas in which boutique firms excel and our boutique affiliates recognized worldwide as leaders in their respective disciplines, including Tweedy Browne, Harding Loevner, Genesis, and Artemis in global and emerging market equities; and Pantheon, ValueAct, BlueMountain, and AQR across an array of alternative strategies; along with outstanding US equity managers such as Yacktman and TimesSquare.

Our affiliates continue to build on their exceptional long-term track records of investment performance. We are seeing strong demand from clients around the world for these differentiated, value-added strategies as two key trends continue to unfold -- the ongoing globalization of client portfolios and clients' increasing emphasis on alpha-generating strategies to complement passive beta.

To the extent that there is a broader reallocation to risk-oriented products, including by US retail and institutional clients, which we see as just a question of when not if, this shift will generate strong incremental growth for AMG on top of the organic growth we are already generating.

Now turning to new investments, we continue to make progress toward adding new high-quality affiliates. Over the past 20 years we've established a unique partnership approach and an unparalleled track record in investing in boutique asset management firms. Through our calling effort we have also built proprietary relationships with many of the best boutique firms around the world.

We have a strong current pipeline of perspective affiliates, and looking ahead we are very confident in our ability to continue to create meaningful incremental shareholder value through accretive investments in new affiliates.

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

Thanks, Sean. Good morning, everyone. We had another very strong quarter with record net flows and, as Sean said, these flows were broad-based across all three of our distributional channels and driven by a diverse set of our affiliates. Our performance for the quarter reflects the overall strength and diversity of our affiliates, the outstanding long-term performance track records they have generated, ongoing product innovation from a number of our affiliates, and good execution by both our affiliates and AMG's distribution team.

Starting with investment performance, where our affiliates continue to build outstanding long-term track records, in particular in global and emerging markets equities and alternatives. In the global developed markets category, highlights for the quarter included strong investment performance at AQR and Artemis and, while Tweedy, Browne and Harding Loevner had mixed performance for the quarter, most of their products remained well ahead of their benchmarks for the medium- and long-term periods.

In the emerging markets category, most of our products had good performance in the quarter, and track records for the trailing year and longer periods remain excellent. In fact, all the products managed by Genesis, Harding Loevner, and AQR are well ahead of their respective benchmarks for the quarter, one-, three-, and five-year periods.

Turning to the alternatives product category, we had strong performance among a number of our largest products, including at AQR, BlueMountain, and ValueAct. At BlueMountain, the outstanding performance continued across all products and funds, including the flagship Credit Alternatives Fund as well as the Long/Short Credit Fund and their recently launched Credit Opportunities Fund.

At AQR, their largest alternative products, including some of their newer funds such as Managed Futures and hedge fund beta, continue to build impressive track records over now multi-year periods. ValueAct also had another strong quarter and continued to deliver excellent returns.

Now I would like to focus on performance fees generally for a moment. Given our broad array of performance fee opportunities from both alternative and traditional products in both fund vehicles and in separate accounts, we are able to generate consistent and meaningful performance fees. Some of the opportunities are correlated to the markets and each other, but many of them are not correlated to either broad markets or each other.

This quarter included an early realization of some performance fees stemming from both strong performance in the quarter and also because clients at several affiliates changed products or share classes and revised their performance fee arrangement. These triggered performance fees in the quarter, most of which we had forecast to receive later in the year.

As the performance fee opportunities among our affiliates grow and diversify across products but also across different structures, and as our affiliates continue to perform well, we believe that performance fees will continue to contribute in a consistent and meaningful way.

Now turning back to a review of investment performance and to our US equity products. We had generally good relative and absolute performance for the quarter, with highlights being all the products at Yacktman and TimesSquare outperforming. Over the one year and longer term periods, the vast majority of our US equity products at affiliates including Frontier, Tweedy, Browne, TimesSquare, and Yacktman are well ahead of their benchmarks.

Now turning to flows for the quarter. As I said, we had another terrific quarter with $12 billion in positive net client cash flows. That headline number is a record for us, but as we emphasize on every call, flows in the institutional channel are inherently lumpy. That said, our flows have been consistently strong over the past three years and we see this momentum continuing.

Turning to the channel review and starting with the institutional channel, we had positive flows of approximately $5.9 billion. These flows came mostly in global and emerging markets product and alternative strategies with notable contributions from BlueMountain, Pantheon, AQR, Genesis, and Harding Loevner. This was a quarter with a number of high-quality wins coming from leading institutions in the US, Europe, Australia, the Middle East, and Asia.

Moving to the mutual fund channel, we had positive flows of $4.8 billion, continuing the momentum we've had over the past several quarters. From a product category standpoint, we had strong flows into global and alternative strategies as well as US equities. The flows this quarter once again included very strong flows in the sub advisory channel as well.

We had a number of affiliates make significant contributions to our flows in the mutual fund channel including AQR, Artemis, Harding Loevner, Tweedy, Browne, Frontier, and Yacktman. In our high net worth channel, flows are about $1.3 billion for the quarter. The most significant contributors included GW&K, which continues to attract flows through their sales force, as well as through our US retail distribution platform. With Harding Loevner and BlueMountain also making meaningful contributions.

Finally, turning to the continuing buildout of our global distributional platforms, we are very pleased by the success we've had over the last several years. As we have said on recent calls and as you've seen through our new Zurich office and recent German and Swiss hires, we continued to focus our efforts on deepening our regional coverage in Europe, Asia, the Middle East, and Australia. Enhancing our coverage and expanding into new channels in the geographies we are already covering remains a key part of our long-term vision for global distribution, as does expanding into new regions.

Now, while we were very pleased with the successful execution of our global distribution strategy, we have been increasingly focused on building out our US retail capabilities. And we see a number of areas where we can capitalize on the long-term growth opportunities in this channel as investors inevitably re-risk.

Looking ahead, we believe we are still in the early days of executing on the opportunity to combine the distribution, scope, and scale of a global asset management firm with our broad array of outstanding performance-oriented affiliates. And we remain confident in our ability to continue to generate significant organic growth going forward.

With that, I will turn it to Jay to discuss the financials.

Thank you, Nate. As Sean and Nate discussed, we are pleased with our first-quarter results which reflect outstanding organic growth as well as the strength and diversity of our affiliates.

As you saw the release, we reported economic earnings per share of $2.27 for the first quarter. Net performance fees contributed $0.25, including approximately $0.03 that were expected in the first quarter with the remainder coming from the early realization of performance fees, most of which we expected to earn later in the year. On a GAAP basis we reported earnings of $1.15 for the quarter.

Now turning to more specific modeling items, the ratio of our EBITDA contribution to end-of-period assets under management was approximately 17.1 basis points in the first quarter. Again, reflecting performance fees earned in the quarter. We expect this ratio to return to approximately 15.8 basis points for the second quarter, and for the full year we expect it to be approximately 16.3 basis points, which includes a reasonable assumption for performance fees and organic growth.

Holding company expenses were approximately $23 million in the first quarter, and we except them to be approximately $24 million for the second quarter.

With regard to our taxes, our effective GAAP tax rate for the quarter was approximately 35% and our cash tax rate was 22%. For modeling purposes, we expect our GAAP tax rate to increase to approximately 36% and our cash tax rate to be approximately 25% for the second quarter.

Intangible related deferred taxes for the first quarter were $12 million and we expect this number to remain flat for the second quarter. Our share of reported amortization for the quarter was $28 million, and together with $10.4 million of amortization from affiliates accounted for under the equity method, AMG's controlling interest portion of amortization was $38.4 million. We expect AMG's amortization to remain at approximately this level for the second quarter.

Our interest expense for the first quarter was $38.4 million, including $14.2 million of pretax non-cash imputed interest expense. We expect our total interest expense to be approximately $30 million for the second quarter, including $6.4 million of pretax non-cash imputed interest expense.

Turning to our balance sheet, today we closed a new $1.25 billion five-year unsecured bank revolver. This new facility, which lowers our cost of funding and increases our capacity, extinguishes our existing term loan and provides AMG with over $1.1 billion of undrawn revolver capacity.

Now turning to guidance, we are raising our 2013 guidance as we expect economic earnings per share to be in the range of $8.80 to $9.60. Our guidance assumes our normal convention of actual market performance through yesterday for the current quarter and 2% quarterly market growth beginning in the third quarter. We also assume a weighted average share count of approximately 55 million for 2013.

The lower end of our 2013 guidance includes a modest incremental contribution from performance fees and organic growth, while the upper end of the range 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) Michael Kim, Sandler O'Neill.

Good afternoon. First, more broadly, can you just talk a little bit about sort of the outlook for allocation trends maybe coming out of the quarter?

I know you are less reliant on sort of prevailing patterns or trends, but do you get the sense we will continue to see some follow through on the re-risking front, assuming the broader markets remain constructive? Or is there a risk that we kind of fall back to more of a holding pattern, if you will?

I will start and then I will ask Nate to fill in. I think we are seeing early indications of re-risking across the industry, but it's not so far a rotation out of fixed income into equity. In fact, I think our view is that the degree to which there continue to be strong flows into fixed income is troubling for the industry.

We all know the amount of risk in long-duration fixed income at these levels, and I think to the extent that rates rise and there is actually a rotation with outflows from fixed income into risk assets, I think it has the potential to be destabilizing on a broader basis.

Of course, for AMG, our product set is composed almost entirely of risk assets. We are generating in a period where industry flows continue, even in this quarter, to be into predominately fixed income and passive equity. We are generating in our active equity and alternative products at very strong flows, very broad-based flows, and so to the extent there is this re-risking on a broader level, a rotation, it will be, in our view, strongly incrementally positive.

Nate, do you want to talk about the breadth of our organic growth across products and any trends we may be seeing?

Sure, I will try to add a little bit of maybe some of the shorter-term color to that. So, as Sean said, we are seeing our flows coming through from sort of across channels and then from a wide array of affiliates with, for us, mostly the same trends we've been talking about from a product standpoint -- global, emerging, and alternative.

And as you sort of implied in your question, some of that has been, or a lot of that has been countertrend. As Sean said, we've been generating these 12 strong quarters of organic growth against some --- the backdrop of some other prevailing trends to fixed and passive.

In terms of shorter term, I think I would divide it into maybe retail on the one hand and institutional on the other. Obviously, the inputs we have are things that are sort of broadly read or pretty public, and then sort of our own sort of the insight from our affiliates and from our distribution.

So I'd say on the institutional side I think our sense is it's just a continuation of the things we've been seeing. I think as people are searching for --- or that we've been saying we've been seeing. People searching for risk, ways to get risk on into their portfolios and that's driven a lot of the strong flows in alternatives, but also sort of different and evolving equity. And also specialized fixed income, so I think on the institutional side that is a continuing prevailing trend.

Then on the retail side I do think there has been sort of this move where people are getting risk on, including just simply saying we need to get more equity into the portfolio. It's not even necessarily at the expense of fixed, maybe at the expense of cash, but people are just getting equity exposure on. I think we saw some of that last quarter I think would be our view.

And I think we -- again very, very early in the next quarter, but we are seeing that continue this quarter. So we are seeing that trend I guess I would say.

Okay. Then in terms of capital management, how are you thinking about deploying capital beyond sort of the more traditional deal flow? Are you seeing some opportunities to do something a bit out of the box, if you will, just given the strength of the balance sheet? And at what point do you maybe start to circle back to share repurchases?

Michael, it's Jay Horgen. Just in terms of positioning the balance sheet this year and the strategy that we have, clearly you are seeing us continue to position our balance sheet for flexibility, simplicity, and capacity. And we are taking advantage of the rate environment ourselves and we will continue to do that.

The near term, the nearest term, we have the opportunity to lower our cost of funding with a convert that is sitting out there. We can't call it till August; clearly we will wait to see the position that we are in at that time. But that can reduce our cost and our share count, which I note has some modest dilution that we are experiencing.

So that is a near-term use of funds. Longer term I think clearly our new investment strategy, which we can talk more about, as well as share repurchases; we have done it in the past. I think we are mindful of share count creep and also efficient capital deployment. So I think it's a balance but we are willing to do both.

Okay. And then just finally, coming back to the guidance range. Any sort of change in assumptions beyond just kind of updating the market returns? If I am doing the math correctly, maybe the markets are up 2% to 3% on a blended basis thus far this quarter. Plus you had an incremental, let's call it, 2% of market gains in the last two months of the first quarter, so just trying to box that with the updated range.

You're tracking all that. I will just try to be slightly more precise. Since the last call, which was January 29, our blend is a little bit over 3%, so call it 3.25%. Which means relative to our model -- because we at that time, in January we had assumed 2% for the second quarter, but as you know our model convention is to assume what we have got through yesterday and then nothing else. So that means that we are 1.25% above where we were in January from a market perspective.

That is offset, of course, by a slightly higher tax rate as well as a slightly higher share count. Together with a performance fee that while most of our performance fee opportunity was a result of early realization, and so all things being equal it doesn't increase our range by virtue of that, it does provide a slightly higher degree of certainty. And I note that we narrowed our range slightly in light of that. But it's still early to refine performance fee further.

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

Daniel Fannon, Jefferies.

Good morning. I guess a question or clarification from how you guys talked about the pull-forward of performance fees. I think it was mentioned that there's a new performance fee arrangements; they switched share classes or funds. So is the economics any different in terms of how you guys will be accruing or booking performance fees going forward based on those changes?

Yes, I don't that there should be any change in the way we sort of guide and explain the overall book. Maybe it would be helpful to sort of step back and try and put it in some context, right?

So as we said, we've got a very broad range of products across affiliates and there is a range of the ways in which they come. So some are percentage of gains, some are tied to benchmarks, some are hurdles, some are sort of traditional funds, [one or two and 20], some are very highly customized and so we've got this broad array.

Then sort of what happened in the quarter was we had -- obviously we had good performance in the quarter, but then we had sort of several unconnected events that all just happened in the same quarter, which sort of triggered this what you've described as sort of the pull-forward. So there's no real change if you think about it over the long term. There's no change in the way we think about the opportunities.

Just to clarify, the realization of performance fees obviously is reflected in earnings in the period of realization. The guidance around performance fees is based on our judgment of a number of factors. And what we don't talk about but is implicit in our guidance and judgment, is unaccrued performance fees where at any given point we may have --- do have, typically, a fair amount of alpha that we can see but obviously we are not describing specifically.

Okay, that's helpful. I guess next just in terms of capital deployment around new deals or new investments, you guys have talked about a very healthy backlog and opportunity set for some time. I guess anything you would say different about your outlook today or what you see as potential deals in terms of maybe scope or size than you would say previously, say, a year ago?

Well, a year ago there was a favorable market environment, but then a period of volatility in the equity markets. And I think, as we all know, the volatility is inevitably dampening, at least in the short term.

I think to the extent that the markets continue to be positive or at least stable, the deal environment will remain quite favorable. We are pleased with our pipeline. We have a pipeline that includes prospects on a global basis -- alternative, traditional, and wealth management.

I guess to the extent that I am describing -- and I think this is mostly anecdotal. But to the extent that I'm describing any changes that we've seen through the first part of this year, I think that our pipeline is more than normally based on one-on-one transactions, negotiated transactions arising out of our calling effort and the relationships we've built over time.

I think the banker-driven processes are never a huge theme for us for obvious reasons, but I would say this year even less so. So transactions that we've seen through banker processes have really not been --- opportunities have not been fits for us I think even more than normal I would say.

What does that mean? I'm not sure it's enough of a trend to indicate anything on a long-term basis. And to the extent that our pipeline of discussions includes one-on-one transactions, that's obviously to the good. It means that we know these firms better. It means that our structuring of the transactions is more refined.

And I think the only way in which it's not a good thing is it makes the always-challenging effort to give some sense or have some precise sense of timing even more difficult, because you don't have a banker organizing a process. But both in the current pipeline and certainly over the medium to long term, we remain quite optimistic.

Thank you.

Robert Lee, KBW.

Thank you. Good morning, everyone. I apologize if you had gone over this earlier, but I got to the call a bit late. I am just curious with Yacktman, trying to get a sense of where you are seeing the strong flows. I know when you did the acquisition one of the things you had talked about was really kind of being able to leverage that through the managers platform.

I don't know if it's possible to provide some insight or color into, if you look at the flows today, how much of that is kind of being driven by some of the new distribution resources you've been able to bring to bear to Yacktman. Then maybe as a follow-up to that, what other opportunities do you see that maybe have been relatively untapped at this point with that platform so you know to leverage other affiliates?

Thanks, Rob. So I will start and then turn to Nate to answer the specific part of your question. Your question gives me the chance to repeat something which I am happy to say again, which is that our flows were broad-based across our equity and alternative product set across a broad array of affiliates. Positive in every channel, positive in every covered region, so we feel very good about the strength and momentum of our business with respect to Yacktman specifically and managers.

Nate, why don't you add to that?

Sure. So as you said, Yacktman has been experiencing good flows. I think we always say when we talk about flows at affiliates, whether they are --- where they are working with our distribution it is all about the affiliates and nothing really happens without them. So I think they are responsible for all of it, first point.

But it is hard to unpack, as you say. There is no question there's a contribution from the managers' platform and indeed from other parts of our distribution platforms for Yacktman. Some of that is easy where we have been able to leverage them on to a distribution platform because we had a selling agreement in place and we were already covering and they weren't worked on that platform. That is very easy to see.

The things that are harder is where you are seeing acceleration on platforms they were maybe already on with a selling agreement but didn't have a sales force of scale behind and those sorts of things. Actually separating out how much of it precisely is due to us, how much of it is due to their just continued, very good investment performance, which again the performance last quarter was again.

So we are definitely contributing. I think there's opportunity with Yacktman to do more, both within the US on the manager's platform but also with global distribution outside.

Then to your other question, which is the opportunity to leverage other affiliates with the manager's platform. We think over the, let's call it, medium-term; it's very hard to do exactly when. But we do think -- this is something we've talked about for a few calls now -- we do think there's an opportunity coming in the US to leverage what we are doing today with managers, but also some things we aren't really doing that much of yet today with managers.

So let me do --- I will do a very simple example, which is I think there's no question we can bring additional institutional-quality product, equities and alternatives, and I think there's a lot of opportunity in alternatives still, into the channels where we have very good coverage today. So the wires and RA channels now I think we have good coverage and all that.

Then I think there are some things we can be doing in channels where we --- helping build out managers to take advantage of opportunities in other channels, DC or something, would be an example of that. But I think we can do much more. So it's a combination of bringing more product through managers into some channels and also expanding the managers' capabilities.

Thank you. Maybe just one follow-up on Pantheon. And I know there's always some reluctance to talk too much about any one specific affiliate. But if I think of the Pantheon business very stable quarter to quarter and the way fees are generated, can you maybe, I'm just curious, update us a little bit about their capital raising?

I mean, certainly there has been a fair amount of M&A activity within the fund of funds space broadly and it certainly feels -- some of that is obviously hedge fund of funds, not private equity. But can you maybe update us? Are they in-market currently with some funds that you think could be sizable?

And maybe even update us on if there's any kind of pipeline of capital that has actually been committed to them, but isn't yet showing up in the AUM and at least provides a little bit of a kind of backlog, so to speak, of some high-fee assets for them at least.

As you noted, this one it's a little difficult to give too much specific visibility, in part because there's a bunch of rules around when you are doing fundraisings and whatnot. They are --- I will talk to sort of two broad trends.

So one is they are out-raising money right now for sets of products and the products that are scalable, or essentially very significant sized products, are things like infrastructure and co-investment. So they are out-raising right now. There also out-raising emerging markets as well, which is another big opportunity, and they are very well known for their especially Asian capabilities. So they are out-raising that way.

Then the other thing I would say, which is -- I think we have talked about this maybe on earlier calls, which is definitely part of, I would say, a trend is this evolution from asset raising in fund format versus asset raising in what's more sort of fund of ones or sort of separate account format. And I think that is a part of the business that is absolutely growing and evolving part of the business, too.

All right, great. Thank you for taking my questions.

Cynthia Mayer, Bank of America Merrill Lynch.

Thanks a lot. So maybe just a couple of questions, one on flows -- couple on flows. You mentioned that sub advise was a big part of the mutual fund flows, so what kinds of products are generating those? Is the fee different enough that we should begin to think about factoring that into the overall fee rate in that channel?

Okay. So one thing I will say, and this was true of this quarter --- the trend has been sub advisory. For some quarters sub advisory has been a significant contributor. I think there's two parts to that market from a product standpoint, and this plays a little bit also into your fee conversation.

There's a part of it which is sort of simply replacement searches, sort of more traditional assets generally, so equity managers and those sorts of things. So that's a part of it. And there is some of that fee dynamic you are describing.

The other part of it, which has been sort of significant for us, is bringing --- we have talked about this more broadly with the retail channel as well, but that's bringing alternative products into the sub advisory channel. And that's coming at maybe for the product category --- sorry, maybe for the channel, so if you think about sub advisory specifically, retail more broadly those are coming at higher fees understandably.

So I think you have both of those trends sort of playing through. One is the sort of replacement searches traditional product and the other is, for us, bringing a high-quality alternative product into sub advisory at higher fees than other sub advisory mandates would be, can be.

Okay. And it looks to you like both will continue same pace?

Pace, this is another one where sub advisory is of very, very lumpy channel. Wins and losses, right? And we have some of those, too. So very lumpy channel, much more like the institutional channel.

From a trend standpoint, I think the replacement search part of it is sort of -- I don't know if it's exactly zero-sum, but it's -- because the overall underlying clients may be growing, but the replacement search I think is much more sort of apathetic and hard to predict than sort of trends. The search trends look like replacement institutional searches.

I think the other, sort of the newer products I think the broad background -- again, very lumpy but the broad background trends I think are long-term favorable.

Great, okay. Then in the high net-worth channel it looked like the best quarter ever, and I'm wondering is there anything lumpy in there that was similar to -- I think a few quarters ago GW&K took over a whole portfolio; was there anything lumpy like that or seasonality that we should factor in?

I don't think there were any large one-offs. I do think there were maybe some more products gaining traction kinds of things, but I don't think there were any large --- I am not thinking of any large one-offs.

Okay. Then maybe just a follow-up for Jay. I think you said the cash tax rates going from -- to 25% from 22%. What would be driving that? That is a little bit higher than normal, right?

Yes, the main issue with our tax rate is just higher overall earnings because the elements that reduce our tax rate are fixed in dollar terms. And as you go to the incremental dollar we are getting taxed at our highest marginal rate on that, so it's really mainly that is going on.

That is a problem. Okay, thanks a lot.

Marc Irizarry, Goldman Sachs.

Great, thanks. Just I guess, Jay, a quick clarification question on the performance fees. So what we saw this quarter, the dynamic, should we expect that this is sort of an annual occurrence for those affiliates, or sort of the nature of those affiliates and the funds that they manage suggest that we will see this on and off throughout the year?

The short answer is no, this is not a trend, and I think it's unique in its appearance although it can happen again. We can't predict it, but it can happen again. We don't think it necessarily will. We had expected a level of performance fees during the year, so these are just fees that have moved from later in the year to this quarter.

Part of what is occurring, Marc, is that the alternative product set is broadening the asset base, is increasing as the firms grow and generate performance and organic growth. And that includes sort of complexity of products, and so I think you may see these sorts of one-off items repeat, but the broad backdrop is very positive. And as Nate said, we feel very good about both the consistency and the growth potential for our performance fee revenues.

Okay and then, Sean, just on the same note if you will the outlook for deals in the alternative space, do you still see pretty ripe opportunity there and are you willing to -- is this sort of a threshold that you're thinking about in terms of level of performance fees that you are willing to sort of tolerate in the business; any update there?

I think we still feel very positive about the opportunity broadly, but including to invest in great alternative firms. The constraint around performance fees and the percentage of the firms' revenues that come from performance fees would be more around the appropriateness of a firm with that dynamic for us generally. In other words, what I mean is that the alternative firms that are most attractive to us and most appropriate for us are firms that are institutionalized, that have a diverse product set, a multigenerational management team, and some reasonable scale. Without drawing a fixed line, let's just say generally north of $5 billion in assets under management.

Those firms, if you take all those dynamics together, will almost inherently tend to have pretty significant management fee revenues. And I would say as I was sort of indicating earlier in talking about the broad M&A trends and what we are seeing, there are a lot of firms out there including a lot of alternative firms, and only a subset are firms where we view them to be appropriately high quality and firms where we share a philosophical orientation.

So we are going to continue to be in all respects very highly selective, and how a firm's revenues break down will be just one element of that.

Okay, great. Thanks.

Bill Katz, Citigroup.

Thanks very much. Just coming back to deals for a moment, these are more negotiated at this point in time. Are these typical wealth succession type deals?

And then should we be thinking typical deal size here is a couple hundred million, so right down the fairway of what you're looking at? Or is there another way to be thinking about that?

Well, when you say wealth succession, I am not sure what you mean by that. I would say the transactions which tend to be --- which arise out of one-on-one relationships and one-on-one discussions are inevitably more around us providing a solution to succession and transition needs. But that may include for alternative firms where the demographics are less of an issue and it's more around the institutionalization of the equity incentive structure, let's say, as well as traditional firms were it is largely around demographically-driven succession issues.

Sizing of investments I think is --- it runs the gamut, as you would have heard us say. We are focused in general on making sure that we are investing in firms that are meaningful.

What does that mean? Again, with no fixed line I would say, in general, it means that we are putting at least $100 million to work in a single investment. Perhaps in the wealth management space with AMG Wealth Partners some transactions will be lower than that.

But, in general, that's been of very consistent approach and we are seeing plenty of opportunities really all across the board.

That's helpful. Second question is -- and you may have said this and I apologize; there is a couple calls going on at the same time today. In terms of the institutional business, very strong showing once again. I heard you answer the high net-worth question.

Was there any, quote-unquote, pull forward of mandates this quarter relative to maybe the out quarters? I heard Nate say that the pipeline was still pretty full, but just from a sizing perspective anything unique this quarter?

Look, I think we say pretty consistently the flows the come through this channel are going to be very lumpy and some quarters -- I think the long trend have been consistent. We've been generating good flows in the institutional channel and across the business for 12 quarters now.

I think -- I wouldn't say there's pull forward. I think the way I look at it is I would look at the underlying trends that sort of help you get a sense. And I would look at what's the pace of our fees? What is the pace of finals? What's the one but unfunded debt as well? Obviously, that's the easiest.

Again, those long-term trends that I talked about in our fees continue to be strong and positive and finals continue to be strong and positive. And the one but unfunded pipeline continues to look good.

So I think the long-term trends remain in place. I think from a very top-down sort of conceptual standpoint we feel very good about it, because we also are bringing additional resources online, if you will. So think about the Swiss and German resources we talked about that earlier or what have you, there are -- we have talked about this sort of curve as additional resources come up.

So more and more resources are coming online, but I don't --- I think as you look quarter to quarter, I would go back to the oft-used lumpy. It really is hard to predict.

One other thing to say implicit in Nate's comments, at the most fundamental level what drives forward flows for us over to some extent the near term. But certainly the medium to long term is our product positioning, the product set that we have had a strategic focus on, and of course our affiliates' performance. And those --- that performance remains generally quite strong across the equity and alternative product set.

Okay, thank you. Just one last question; thanks for taking all my questions. I was intrigued by your comments on sort of the retail focus at the margin and the $135 billion of assets, 15% growth this past quarter, obviously Yacktman doing well among others.

How are you thinking about scaling the business from now? Is it just combining what you have in managers and others, or is there incremental investment need that needs to be done to further take advantage of some of this performance?

I wouldn't say there's a sort of significant new investment need. I think some of it is focus, some of it is reallocation of existing resources as you look across the whole. I would say those are the biggest things.

There might be some things on the margin that you would want to be adding from a resource standpoint.

And also positioning the business for what we anticipate to be strong flows prospectively as retail clients in the US increasingly re-risk and we have this, quote, great rotation.

Okay. Thanks for taking all my questions. I appreciate it.

Chris Shutler, William Blair.

Good morning. As you look at your top five or six affiliates, is there anywhere that you see a capacity issue today? Looking specifically at AQR and Harding Loevner, it doesn't appear like there are any major capacity constraints, but maybe you could just comment a little bit more broadly about some of the other large affiliates that have been generating your flows, so Genesis, Tweedy, Artemis, etc.?

So I think the way I will answer that question is I will answer it across the group. I think doing it affiliate by affiliate is probably not the right way to do it, but I will do it across the group.

So I would say there's definitely some areas -- because also it's a product thing more than an affiliate thing, frankly. There are definitely some areas were affiliates are looking carefully at capacity and I'd say that breaks into a couple buckets.

One is there may just be limits to what you can manage on strategy. There may also be managing capacity carefully because you want to match it with the investment opportunities you see at a particular point in time.

And we definitely have affiliates that do that. That say, look, right now we are going to slow down the assets that we are taking in, and when the market environment looks better for what the specific thing I'm trying to do we're going to take assets on faster. So there's definitely those things going on.

But what I would say is, and I tried to allude to this maybe in the prepared remarks, which is I think that's more than offset by new products that are coming online at a range of affiliates, including many of those top ones you mentioned. So if you think about something like a BlueMountain Credit Opportunities Fund, which is a brand new product and a new opportunity set for them, there is lots of things like that. I mentioned earlier Pantheon doing infrastructure or something, a place where they had a small opportunity and a much larger opportunity now.

So there is places where there are truly new products. Then there are also places where there are products, and there are a lot of these as well, where there are products that are not really new in the sense that they've been around for a few years, but they are just now starting to get to the point where the track records are three, four, five years old. And so now these products, again, including the firms you mentioned, now been around long enough that they are really salable. There's a lot of that in those products getting traction and becoming contributors.

So that is most of it. Then obviously there is the other bit, which is also the evolving products, but that is the last to your question. So I think, yes, there is some but I would say more than offset by these new products coming online.

Okay. Thanks, Nate. Then the only other questions, as you guys look at RFBs and finals, to what extent do you feel like your success in recent quarters has been institutional investors looking for more exposure in the asset classes that you are in versus your win rates improving?

Do you mean the past 12 quarters, Chris, or the last few?

Good point, Sean.

Look, it's very hard to bucket it the way you described. But, look, I think it's a bit of both. I think it's institutional clients --- so I would break it into a few categories. I think it's institutional clients looking for the set of exposures, how can they get return into their portfolios and looking for new ways to get returns in.

We have, as Sean said, we have affiliates who have done a fantastic job over long periods of time generating performance in asset classes that people are trying to get exposure to -- global and emerging markets, the globalization trend Sean spoke to, and alternatives. And people looking for different ways to get returns. So that's definitely a part of it.

Our affiliates, to repeat again what Sean said, our affiliates have done a really good job generating strong track record, investment track records over this, again, sort of medium- to long-term trailing. So those are the biggest drivers. Then I would put on top of it the fact that we are adding additional distributional resources to augment what our affiliates are doing.

And so we are bringing this in-demand product set with very good performance into or helping our affiliates bring into markets, geographies, and channels were those products weren't. And so that is -- I think you put all those together and that's what I would say is a big part of what accounts for those 12 quarters.

Okay. Thanks, guys.

Craig Siegenthaler, Credit Suisse.

Actually this is [Julien Aumena] from Craig's team. Good morning. Given stronger performance in US equities year-to-date and a stronger US dollar, are you seeing improved demand for US equities versus global?

I wouldn't --- so again very -- a bit of what I said in the last question, very hard to attribute motive. Why are people doing exactly what they are doing? But I would say -- I wouldn't say it's instead of. I don't think it's this pivot where people are moving from desiring global and emerging to desiring US equity, but I do think we are seeing a pickup in demand for US equity.

It's --- when I'm talking about the institutional channel here I think it's anecdotal data at this point. It's not enough data points that I would sort of say here's some trend or what have you, but there does seem to be a pickup in non-US institutional demand, anecdotal pickup in non-US institutional demand for US equity product.

Again, part of that may be the environment, here's what people want. Part of it may be just the relative performance, so someone's changing one to the other, but some of it may be also we are bringing them to geographies where they weren't. Hard to break among those which is exactly why, but we are seeing a little bit of that pickup. But I don't think it's instead of global.

And I would emphasize the degree to which our strong organic growth across products and channels and geographies is really countertrend. If you look across the industry, including through this quarter, flows are coming in to fixed income and passive equity and active equity flows have been very muted. In many cases, still in outflow.

So I think our experience is with a different set of products and a different distribution strategy and a broad-based, both in terms of channel as well as geography, set of clients.

Then can you provide us an update on your aggregate European cross-border seek out effort? And how large is this consolidated AMG effort versus the boutique-led effort?

So I will work my way backwards to that question. Today the vast majority of that effort is at the affiliate level, so we have a number of affiliates who have products. Now the vast majority is at the affiliate level, both from a product packaging standpoint as well as, I would say, from a distribution standpoint. Although from a distribution standpoint, where we have coverage and we are able to play the usage to see product through that's happening.

It's not really exactly always the target market for our sales force at this point, although as we talk about channel growth within geographies we already cover that will evolve over time. And from a packaging standpoint we are still at the very, very early days ourselves and so the vast majority of that is at the affiliate level.

I think emphasizing the degree to which our results reflect, of course, reasonable breadth and scope in our business and distribution strategy. But there still is a great deal of white space in terms of geographies where there are attractive client opportunities and where we have strategies to develop those opportunities, as well as in other elements of distribution such as retail distribution more broadly, and are relative to the overall scale of our business and the opportunity set ahead of us.

Our [usage] business is, as Nate said, at the very early stages with lots of opportunity ahead of us.

Got it. Thanks for taking my questions.

Robert Lee, KBW.

Thanks and I appreciate -- one follow-up. Not to focus so much on Pantheon, but a question kind of maybe around that. If I understand it correctly, that is one of the few affiliates where you actually do operate a lot of their infrastructure or middle or back office.

I'm just kind of curious to what extent you see an opportunity for some of your affiliates to actually get more day-to-day involved in running some of their own infrastructure more efficiently. Not that you expect that this would be a moneymaker for you, but generally just to make their lives easier and places where you think you can add more efficiency than what they are doing. Do you see that as a potential trend we should expect over time?

So first -- I will do two parts to this; first, on Pantheon. I think you may have a bit of a misconception. We did do some infrastructure work largely that was driven by getting through that transition.

We do do some of it still in the technology area, which is in addition to other things we do. I'm drawing distinctions between Pantheon and others, so we do legal and compliance alongside them. We do lots of distribution things alongside them, all the rest of that.

But there was some additional things we did at Pantheon, especially in the technology area, and that was largely around this transition is sort of what drove that. We definitely learned from it, and I'm not trying to minimize the really good work a lot of people did around that.

You used the phrase sort of day-to-day involved. I think our view is we are very careful what areas of the firm we try to offer the affiliates the opportunity to sort of leverage the scope and scale of AMG. So distribution is one where the benefits are very clear and there is a real operational component to that as well.

So another thing everybody should have is when we talk at our US retail distribution platform, what we are offering affiliates is not only the ability to do sales, marketing, client service in a bunch of channels, but we obviously have built all of that operational infrastructure to do the different product packaging, whether it's mutual funds or separate accounts or what have you. So there's a significant operational component there, which is complicated.

Then, obviously, the legal and compliance area and other areas like that we have ongoing interaction with all of our affiliates, of course, but we also offer a sort of very complete outsourced solution I will use. But it's customized to each, which is very important for a number of reasons. One it allows them to get leverage from the scope and scale of AMG, but also it goes alongside what we are doing on the distribution side. Because as we are helping them enter geographies, we also -- obviously there's a very significant sort of legal component around that.

And also at the same point across channels going to get into the mutual fund business there's a significant legal component to that as well. So I think you will see us --- we do have a long list of things we think about, but I think you will see us be very, very sort of thoughtful and careful about what we bring out, why it's a really good place for them to leverage the scope and scale of the overall organization.

And I don't think there is really a sort of desire. It's not our business model really to try to sort of do things just to get involved into that day-to-day for each affiliate.

I agree with all of that. And I think, Rob, what I would say is that a way to understand the importance of that capability, especially in the IT infrastructure area, is it's partly around what we can do to help extant affiliates, of course, in all of the ways that Nate described. But the operational transition piece of it is I think especially important to understand where we have opportunities to invest in high-quality subsidiaries.

Now, you know that's a subset of the opportunities that we have on an overall basis and relatively few of the subsidiaries that are for sale are, in our view, really high-quality businesses and ones that are appropriate for us. But when we find them, and we do occasionally, it's very helpful relative to, let's say, private equity alternative to be able to offer a true strategic capability so that we can easily replace the kinds of functions that their parent might have provided. And then help them over time to transition into managing them on a freestanding basis.

Great, I appreciate the additional color. That's helpful.

Cynthia Mayer, Bank of America Merrill Lynch.

Thanks for the follow-up. You partly answered my question, which was just looking at now you guys bring more and more distribution capabilities to the table and you can do infrastructure and you have more breadth. So does that really alter the way you might structure a deal or does it allow you to buy on more attractive terms?

Or does it -- I think you partly answered this, does it change the kinds of potential affiliates you can look at because now you are able to bring in subsidiaries more easily?

Well, it's clearly helpful to be able to offer a broader set of capabilities that affiliates, prospective affiliates can take advantage of if they wish, and I put it in the broad set of considerations that prospective affiliates consider generally. The most important element of which has been and continues to be our track record and the way in which existing affiliates talk about us as a partner in good times and bad.

Then, answering your question a different way, what I would say is of course we have -- through our distribution strategy and professionals around the world we have insights into clients' demand, which helps us target a little bit. But in general, we still are focused on the same kind of firms we have always been focused on. Really the best firms in the world, firms with multigenerational management team, a partnership orientation, building long-term enduring franchises.

And in every one of those situations it requires, notwithstanding all of these capabilities and all of our track record, it requires us to do a very good job selling and convincing these firms and these partners that they should trust us and give us their confidence. Now obviously we think we are pretty good at doing that, but the best firms in the world have a number of great options inevitably, including doing nothing.

And so what we are not going to do -- we could do but we are not going to do is start investing in firms where we think they are not complete firms, where we think they are somehow just okay and we could make them better. We really don't ever want to think about our investing opportunity in that way. So it's always going to be a subset of the opportunities around and we are always going to be very highly selective and willing to wait in order to find the very best firms, as opposed to just making investments because there are firms out there.

Great, thanks a lot.

There are no further questions at this time. I would like to turn the floor back over to Sean 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 to you in July.

This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a great day.