Affiliated Managers Group Inc (AMG) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Affiliated Managers Group second quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexandra Lynn, Vice President of Corporation Strategy and Investor Relations. Thank you, Ms. Lynn. You may now begin.

Thank you for joining Affiliated Managers Group to discuss our results for the second quarter and first half 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'll turn the call over the Sean Healey.

Thanks, Allie, and good morning, everyone. AMG reported economic earnings per share of $2.18 for the second quarter of 2013, which is a 31% increase over the same period of last year while our assets under management now approximately $470 billion grew by 22% year over year. Our results were driven by strong continued business momentum with outstanding organic growth from net client cash flows and excellent investment performance across our equity and alternative product set.

We generated a record $13 billion of net client cash flows in the second quarter which was our 13th consecutive quarter of strong positive net flows. Through the quality of our affiliates and the diversity of our business across market beta exposures, product areas, and client geographies and channels, AMG has consistently generated strong organic growth over the past three years through varying market environments, including periods of volatility. For example, even in a difficult quarter for emerging markets equities, our affiliates in this area continue to generate meaningful net inflows and we remain confident that this will be an area of strong secular growth over time.

As in prior quarters, our flows were broadly distributed across our equity and alternative products and positive across all channels and all client geographies including Asia, Australia, Europe, the Middle East, and of course the US. Our success in generating organic growth reflects both the marketing efforts of our affiliates as well as a meaningful contribution from our global distribution platform, including new mandates through every covered region during the quarter.

We are continuing to make strategic investments to build on the success of our global distribution platform 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 and channels around the world. In particular, as Nate will describe further, we see substantial opportunities in the US retail channel and continue to focus on broadening our capabilities in this area.

Our results reflect the ongoing success of our strategic focus on high value added alpha generating products across the US, global, and emerging market equities and alternatives. Boutique firms have a competitive advantage in these areas and our boutique affiliates are recognized worldwide as leaders in their respective disciplines, including US equity managers such as Yacktman and TimesSquare, global and emerging market equity managers Tweedy Browne, Harding Loevner, Genesis, and Artemis, and Pantheon, ValueAct, BlueMountain, and AQR across an array of alternative strategies.

Given our affiliates' exceptional long-term track records of investment and demand from clients around the world for these differentiated value-added strategies as two key trends continue to unfold. First, the ongoing globalization of client portfolios. And, second, the separation of client's portfolios between beta and alpha and the accompanying migration away from equity products in the index hugging middle. These trends benefit not only providers a passive beta but also active managers such as our affiliates which offer value added equity in alternative products which can generate true alpha for the active side of client strategies.

Finally, to the extent that there's a broader rotation by global clients, including especially US retail clients, away from fixed income and toward return-oriented products, this shift will generate strong incremental growth for AMG on top of the organic growth we've been generating already. While this so-called great rotation is not yet upon us, we believe a return to performance-oriented products is inevitable and recent industry flow trends have begun to evidence signs of a reallocation. And, as you saw this past quarter, in a rising rate environment AMG will not be impacted by the decline of assets from fixed income outflows or the value depreciation of fixed income products.

Turning to new investments. Notwithstanding recent market volatility, we continue to make progress toward adding outstanding new affiliates. As always, we remain extremely selective in choosing new affiliates. And through our consistent calling effort, we built proprietary relationships with the best boutique firms worldwide, virtually all of which will inevitably face the need for a succession planning solution.

Given AMG's unique partnership approach and 20-year track record of investing in boutique asset management firms, we are very confident in our ability to continue to generate meaningful incremental shareholder value through accretive investments and new affiliates.

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

Thanks, Sean. Good morning, everyone.

As you saw in the release, we had another outstanding quarter with record net client cash flows and strong relative investment performance. Our results for the second quarter illustrate the themes we've been talking about for several years now.

By far, the most important component of our ongoing success remains the investment performance of our high quality, diverse group of affiliates which are focused on truly differentiated return-oriented investment discipline. As you know, we have multiple outstanding products across a broad array of affiliates in global, US, and other developed markets equities, emerging markets equities, and a diverse range of alternative products.

We also believe that there are some significant favorable macro trends. First, as Sean described, clients are increasing allocations to focus performance-oriented managers, such as our affiliates, for the alpha portions of their portfolios. Second, while the timing remains uncertain, clients need to increase their allocation to return-oriented asset classes in order to achieve their objectives. Regardless of whether or not a great rotation has started, we are confident that these increased allocations will occur, creating significant additional opportunities for a number of our affiliates.

Now, while these macro trends are taking place, we continue to build out our distribution platform to increase our organic growth. We've taken a very strategic approach to leveraging AMG's scale to successfully bring our affiliates products to clients located around the world. As you know, outside the US our distribution platform focuses primarily on institutional clients. However, we see a very significant incremental opportunity in more retail parts of the market and, in particular, the US retail markets. Now, as a natural extension of our US retail platform and to take advantage of the macro trends I referenced, we're increasing our strategic focus on US retail and beginning to add additional resources.

In terms of investment performance in the quarter, our US equity products had generally good, relative, and absolute performance with a highlight being continued exceptional performance at Yacktman. For the year and longer periods, the vast majority of our US equity products and affiliates, including AQR, GW&K, Tweedy Browne, TimesSquare, and Yacktman are well ahead of their benchmarks.

Turning to the rest of our global developed markets category, while benchmarks were mixed for the quarter, our affiliates generated good relative results. Highlights for the quarter included strong investment performance from significant products at AQR, Artemis, Harding Loevner, and Third Avenue. While Tweedy Browne had mixed performance for the quarter, all of their products remain well ahead of their benchmarks for long-term periods.

In the emerging markets category, while the broader market and industries were down significantly, our affiliates had very strong relative investment performance and track records for the full year and longer periods remain excellent. In fact, all the major projects managed by Genesis and Harding Loevner are well ahead of their respective benchmarks for the quarter one-, three-, and five-year periods. While Trilogy's emerging markets products under performed in the quarter, AQR on the other hand had a very strong quarter in its EM equity products and continues to build an excellent long-term track record.

Turning to our alternatives product category. In the quarter we had strong performance across a significant number of products, including in AQR, BlueMountain, First Quadrant, and ValueAct. This continuing strong performance across our alternative product set, combined with good performance from some traditional products with performance-fee structures, resulted in incremental performance fees being earned in the second quarter.

Now, while most of our performance fees are earned in the fourth quarter, as you can see there are increasing numbers spread across the year. Fees in the second quarter were broad-based across a number of affiliates and product areas both beta exposed as well as absolute return oriented, and including Genesis, First Quadrant, ValueAct and BlueMountain.

Stepping back for a minute, this quarter really illustrates the strength and diversity of our exposure to performance fees. While in any given quarter a year, performance and performance fees may come from one set or another of our products, this diversity positions us extremely well for consistent, meaningful performance fee contributions going forward.

Now, turning to flows for the quarter. As I said, we had another terrific quarter with $13.2 billion in positive net client cash flows. While that headline number is another record for us as we emphasize on every call, flows, especially on the institutional and subadvisory channels, are inherently lumpy.

In the second quarter we had some very significant wins but also a couple significant outflows. That being said, for the past three years we have generated consistently strong flows across a wide range of affiliates and we see this momentum continuing.

Turning to the channel review and starting with the institutional channel, we had positive flows of approximately $4.6 billion. These flows came in US, global, and emerging markets products and alternative strategies with notable contributions from BlueMountain, Beutel Goodman, AQR, Genesis, Harding Loevner, and Frontier. Similar to previous quarters, this was a quarter with a number of high quality wins coming from leading institutions located around the world. While we spoke about this a bit last quarter, we continue to see an increase in the number of US equity mandates being funded by institutions outside the US.

Moving to the mutual fund channel. We had positive flows of $8.3 billion. From a product category standpoint, we had strong flows in the US equities as well as global and alternative strategies. This quarter once again included strong subadvisory flows including a couple very large mandates.

The breakdown of flows in the mutual fund channel was also very broad as we had a number of affiliates make significant contributions including AQR, Artemis, Harding Loevner, Tweedy Browne, Frontier, Systematic, Aston, and Yacktman. In our high net worth channel, flows are about $300 million for the quarter. The most significant contributors for the quarter included Harding Loevner as well as GW&K which continues to track flows through their sales force as well as through our US retail distribution platform.

Finally, turning to an update of our global distribution platforms which complement our affiliates dedicated marketing efforts. We continue to generate strong flows among a diversified set of products and across geographies. In fact, as Sean said, we had significant [mandate spun] in every one of our regions.

We continue to look to selectively enhance our regional coverage with senior level sales and marking professionals, expand into new channels in the geographies where we currently operate, and make progress in identifying additional geographies for future expansion. In particular, as I mentioned earlier, we are focused on the significant additional opportunities we see in the US retail market and expect to accelerate the growth of this already scaled platform over time.

Looking ahead, as our affiliates maintain their excellent long-term performance records and as we continue to see strong global demand for performance-oriented products, we are confident we can continue to generate strong organic growth. And with that, I'll turn it to Jay to discuss our financials.

Thank you, Nate. As Sean and Nate discussed, we are pleased with our second quarter results which reflect our continued outstanding organic growth as well as the strength and diversity of our affiliates. As you saw in the release, we reported economic earnings per share of $2.18 for the second quarter with net performance fees contributing $0.15. On a GAAP basis, we reported $1.18 for the quarter.

Turning to more specific modeling items. The ratio of our EBITDA contribution to end the period assets under management was approximately 16.8 basis points in the second quarter. We expect this ratio to return to approximately 15 basis points for the third quarter and for the full year we expect it to be approximately 16.2 basis points which includes a reasonable assumption for performance fees. Holding company expenses were $24.1 million in the second quarter and we expect them to remain at this level for the third quarter.

With regard to our taxes, our effective tax GAAP rate was 35.8% and our cash tax rate was 19.7%. In the third quarter we expect our GAAP tax rate to decline to approximately 30% as a result of a further decrease in the UK tax rate, and we expect our cash tax rate to be approximately 28%. For the fourth quarter, we expect our GAAP tax rate to return to 36% and our cash tax rate to be approximately 26%.

Intangible related deferred taxes for the second quarter were $12.3 million. We expect this number to be approximately $5.6 million for the third quarter, reflecting the UK rate change, and expect it to return to approximately $14 million in the fourth quarter.

Our share of reported amortization for the quarter was $27.8 million and together with $10.3 million of amortization from affiliates accounted for under the equity method, AMG's controlling interest portion of amortization was $38.1 million. We expect AMG's amortization to remain at approximately $38 million for the third quarter. Our interest expense for the second quarter was $32.7 million, including $8.4 million of pre-tax, non-cash imputed interest expense. We expect our total interest expense to decline to approximately $25 million for the third quarter, including $4.3 million of pre-tax non-cash imputed interested expense.

Turning to our balance sheet. As we've indicated in prior quarters as part of our ongoing effort to simplify our balance sheet and reduce our cost of capital, we are retiring our senior convertible. In June and July we repurchased approximately $80 million in face value of the convertibles, and we have submitted a notice to call the remaining $380 million in August. While we have the flexibility to settle this cash or shares, we expect to deliver cash.

Also in the quarter, our credit rating was upgraded to BBB reflecting the scale, growth, and diversity of our business. With our $1.25 billion revolver and well over $0.5 billion of annual cash flow, we continue to have ample capacity to execute on our growth strategy.

Now turning to guidance. We are raising our 2013 guidance as we expect economic earnings per share to be in the rang of $9 to $9.70. Our guidance assumes our normal convention of actual market performance through yesterday for the current quarter and 2% quarterly market growth beginning in the fourth quarter. We also assume a weighted average share count of approximately 55 million for 2013 which includes a cash settlement of our senior convertibles.

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 the market and earnings contribution of our affiliates would impact these expectations.

Now, we will be happy to answer your questions.

Thank you, ladies and gentlemen, at this time, we will be conducting our question and answer session.

(Operator Instructions)

Thank you. Our first question is coming from the line of Craig Siegenthaler with Credit Suisse.

So, I heard the guidance related to share count for 2013. I'm just wondering given how much free cash flow you're generating now, is there any potential to take out the diluted impacts of the equity forward sale and also what are your thoughts on mixing buy back into the capital return mix, especially if you're doing maybe one deal a year going forward here?

So, Craig, it's Jay. Let me just take a step back. Clearly just on the balance sheet broadly we continue to position our balance our sheet for simplicity, flexibility, and capacity. And I think we noted and we have noted that lowered our cost of capital this year both through our upgrade as well as the retirement of the senior convertible and then looking forward we do have nearly $600 million of after-tax earnings and $1.25 billion of revolver. If affords us the opportunity to not only execute on new investments which is meaningful, new investments meaningfully accretive to our earnings, but also we will consider reducing our share count through either share repurchase or the forward unwind.

And just for the record, Craig, we don't like hypotheticals generally, but I definitely don't like your hypothetical about one deal a year. We see a very substantial opportunity over the medium to long term without trying to time it in the short term.

Got it. Thanks, Sean. And just a follow-up here. As you become bigger and each of these deals potentially becomes smaller if you're still looking at asset managers $10 billion to $20 billion in AUM, they're going to be less accretive and require less capital cash up front. What are your thoughts on at some point introducing a nominal dividend as a way to return cash flow to shareholders, too?

Well, I think if you trace the evolution of AMG, we obviously started from nothing and built through the early years as a public company, including through the issuance of hybrid securities in a period where we didn't want to issue common equity and obviously didn't have a large base of cash flow to fund new investments. As we -- following the financial crisis has continued to build our business and generate now a relatively large -- have a large base of recurring and growing cash flow. That, of course, is available to fund new investments and I think if we're in the $500 million to $600 million range, we obviously have had many years and expect years in the future where we will have well more than that in terms of new investments. Last year we had, for example, $750 million in new investments.

The question about how the world changes for us and how we look as the Company that has $1.5 billion in EBITDA; and how we think about capital management; and how that affects our new investment strategy, we'll have the same strategy. We'll put the same amount of money to work, maybe more money to work in some years. Our position keeps getting stronger and there are still a very large number of outstanding firms for us to invest in but, of course, inevitably we will find years where we can't put all the cash the business generates too work and in that event we'll be an even more active repurchaser of our equity. And we are certainly considering, and I would expect at some point, would have a dividend, but there's no specific plan around that.

Thank you, Sean.

Our next question is coming from the line of Daniel Fannon with Jefferies.

Just looking at the quarter, wondering if you could talk about if there was any real slow down in given the macro impacts of June or if there's been any change as we've gone into July in terms of your inflows?

The biggest -- this is Nate. The biggest thing I'd say is obviously the lumpy nature of some of the institutional subadvisory flows dwarfs the kinds of things you're talking about. There were in some product categories, again, they tended not to be places were we had -- in the main, where we had that much exposure. But if you look at something like I'll pick a detailed view, if you look at something like muni bonds for example, you would have seen strong first two months and then tail off in the third, but I think there's no -- all of those things are dwarfed as I said by the bigger size wins.

To the second half of your question, looking forward, I think we see really strong, again, perhaps it was very early days but both within the institutional channel and on the more retail side, we see the strong flow patterns continuing.

Okay. That's helpful. And I guess that would imply that the demand from the non US-based investor for your product still remains quite strong?

Absolutely.

And then I guess a follow-up just on the distribution. You talk about the US retail being a focus of improvement or investment. Can you talk about what you're looking to do there? Is that just adding additional personnel or are there other things you're looking at changing or improving?

Sure. Let me say one thing to start. So, the basic model, right, is for all of our distribution, is to bring the benefits of scale where scale matters and it's helpful without getting in the way. And so at this stage I'd say the main thing we're still doing, is figuring out how to exactly position that business. We already do have a scale retail business in the US, but the main thing we're still doing is figuring out how to position that business given the macro trends that Sean described. We are beginning to make some incremental investments and we expect to do more, but the exact shape of that, the fundamental principle is how do we get the scale that we have and keep adding scale to it to benefit our affiliates ahead of these trends that we see.

Great, thank you.

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

First, just on the deal front, I know timing is always difficult to predict, but just to play devil's advocate, it seems like you've been pretty optimistic on putting capital to work for quite some time. So, just wondering if there's anything more specific that you could point to as a reason why you haven't announced any transactions for a while or is it really just a function of markets continuing to trend higher here in the US combined with maybe some volatility overseas?

Well, I think volatility is certainly a factor, but as you heard, we remain very optimistic about our prospects. The short term is inherently difficult to predict around the pace and timing of new investments, and so we don't really try to guide in the short term. In the medium to long-term, we see enormous opportunities. Maybe to give you a sense of what you can't see from the outside, we have relationships that we have developed over many years with many of -- and I'd say most of, the very best boutique firms worldwide. I've been in the past six months in 11 countries and 10 of those I met with prospective affiliates. It's an increasing global, increasingly broad traditional as well as alternative prospect universe, and our position has never been stronger.

And so what we have learned over the years is that we need to be patient and wait for the opportunities with the very best firms to develop which they, as we said, inevitably will because all of these firms will inevitably face a succession planning need and want some a transaction to solve that, and we are ideally positioned for that. So, I don't worry about -- we don't worry about the short-term quarter to quarter impact really at all because we know that the important thing is to wait for the very best opportunities and in our position and opportunity set is -- continues to be outstanding.

Okay. That's helpful. And then -- but just given the step up in performance fees in the second quarter and some of the strong absolute and relative returns that you highlighted across what seems like a pretty diverse set of affiliates and strategies. Just curious to get your take on the outlook as you look out to the fourth quarter and beyond, and just thinking about the mix of performance fees going forward.

Jay.

I'll start on the current year and then maybe Nate or Sean will do the outlook. Michael, just as Nate had said, our performance fee opportunity is growing and its diverse across products and I'll just add across structures as well. Our affiliates have continued to produce excellent investment performance, which is obviously the critical ingredient to the performance fee itself. So, we believe that performance fees will continue to contribute in a consistent and a meaningful way to our earnings and, as we said in the past, just a typical year we see performance fee in 5% to 10% range of our economic earnings.

Of course this year with the $0.15 in this quarter and the $0.25 in the first quarter, we've already booked $0.40, so this year we can't go below $0.40, and in good years we can see that go beyond 10% and I think we're well positioned. It's still early in the year, but with already $0.40 in the bank and looking forward, there is a good opportunity for us this year.

In terms of looking forward, I think Jay captured it which is the book is very broad both across affiliates and then certainly even within affiliates across strategies. This trend towards including maybe more across different quarters I think it's a very positive thing. And the book is just growing, partly it's just the organic growth of the businesses. Some of it is also new product coming on line and all the rest of it, so the opportunity set keeps growing. The base business keeps growing as well but the opportunity set for performance fees keeps growing and is, again I'd echo it's a very broad book across both firms and strategies.

Got it. And then just finally, any update on Veritable in the wealth management platform now that it's been about a year since that deal closed. And then more broadly just curious to get your thoughts on just the outlook in terms of potentially adding more affiliates in wealth management?

Well, Veritable is doing very well. We're quite pleased with that investment and I think the partnership is doing great. The Wealth Partners team is hard at work. They have a strong pipeline. I'm obviously not going to comment beyond that, but we feel terrific about their prospects. I think inevitably given the growth of our base business and the size of the new investment opportunity set among asset management boutiques, wealth management is never going to be a huge piece of our earnings picture, but we think it's a terrific opportunity and I'm very pleased with the progress that the team is making.

Okay. Thanks for taking my questions.

Thank you. Our next question is coming from the line of Cynthia Mayer with Bank of America.

So, on the proposed increase in US retail sales, what -- can you talk a little about what specifically you'll be adding and over what time period and also -- maybe I missed this, why in particular now?

Well, I don't think we can -- as I said in an answer to an earlier question, I think at this stage a lot of what we're still doing is sorting out exactly how we're going to position this business ahead of the trends that we see, which is the second part of your question. I think we think as re-risking happens, as people move more assets to return oriented asset classes, we think the opportunity to participate in that on the retail side is really significant. We have lots of appropriate product that's not really being distributed in those channels today. That's a base piece of it. In terms of things we've done so far, we've begun making some incremental hires and you'll see us make some, but it's more at this point, still work on positioning the business.

As Nate said, this is a business that is at scale. It is a business that is generating very strong flows. I mean, I think we'd view our US retail flows relative to the industry as being right at the top of the group. So, we're talking about building strength on strength and anticipating client flow trends that we're beginning to see but we're expecting to unfold over the coming years.

Okay. And then also you guys are, of course, quite global and to the extent that US equity is gaining traction in its institutional channel. Do you see any need for more institutionally oriented US equity managers than the ones you have because -- correct me if I'm wrong, but aren't many of your traditional US equity managers are a little more retailer oriented, right, than say some of your global and emerging market managers?

We have a broad set of affiliates in the US equity category and I think there's no question that over time we will find outstanding new affiliates to broaden that product set even further. And so I wouldn't necessarily say it's a need. Our business is performing very well. Obviously, the addition of more great affiliates or more new products from the existing affiliates is going to be helpful, but we think our business is positioned quite well and certainly don't find any gaps or needs as much as we see ongoing opportunity.

The only thing I would add to that is I think we have a number of our US equity affiliates are institutionally focused and have historically had larger -- it's really an opportunity for us and have had historically largely US institutional client bases. And so the opportunity to bring them, as we've done with others, bring them around the world and introduce them into through high-quality relationships that in many cases are already client service relationships where we've made a sale already and have found those demands again.

I'm not sure whether it's a trend yet. Personally, I'm not sure if it's a trend or if there just happens to be a bunch of replacement searches coming all at once because a number of firms are having challenges or something, but yet we were able to play US equity into relationships that our guys had already built around the world over this last six to nine months.

Including with very large sophisticated global clients.

Okay. And, also, did you give the mix of flows from overseas clients versus US clients?

I think it was pretty well split, but I think US might have been a little more but, yes, it was pretty well split.

Okay, thanks.

Our next question is coming from the line of Chris Shutler with William Blair.

Just one quick for me. On the strength in subadvisory in the quarter it sounds like there were a couple of larger mandates. I'm just curious what product areas or geographies those might have been in. And then I think you also had talked about some larger outflows which obviously that's not the bigger picture, but just curious to see what's going on there? Thanks.

Sure. So, I think the bigger subadvisory wins were mostly -- again, interestingly, US equity and to US clients to the first part of your question. And then on the losses, there were a couple of large outflows which were -- I'm thinking of two in particular. One was a client closing down a program and another was a client internalizing a product category, so those are two that just come to mind that I think were the two biggest in the quarter.

Okay. Thanks a lot.

The next question is coming from the line of Robert Lee with KBW. Please proceed with your question.

Just curious, going back to the deal pipeline. It seems like I can't pick up an industry rag without reading about someone else coming up with a great idea of raising money to buy stakes in alternative managers and then take them public. So, I'm just curious -- understanding why do that if you guys exist if they're a quality manager, but how is that affecting pricing expectations among some of the managers you deal with? Because it would seem like there's a lot of money all of a sudden out there chasing alternative managers and looking to do something along the lines of what you guys have historically done?

Well, I think back, looking here at Nate and remembering 19 years ago when I was joining AMG. There was AMG and I think four other competitors that were emulating our approach. And maybe we hadn't established our approach yet, so they were trying to do the same thing as well as larger entities like United Asset Management and Legg Mason, and Invest, et cetera, and so there has always been competition. I think for most of the past 20 years, the toughest competition has been what I would call uneconomic buyer appetite from banks and insurance companies and occasionally the public market.

And I think in the current period not only is our competitive position the strength of our business performance and most importantly the quality of our affiliate relationships and their recommends of us as a partner, those are all better than ever. The competitive landscape has changed so that there are far fewer competitors. The public market, I think, is going to be at least for a while I think more discriminating and there are more boutique firms that are quite hesitant to try to go public after what happened following the financial crisis. Banks and insurance companies are not sellers.

So, the other entities that are out there that are trying to compete and all separate other large asset management firms that have a very different business model which we don't really compete with. So if you look at the universe of competitors that remain, of course in every given situation you have to compete, you have to make sure that the prospective affiliate knows you, trusts you, is willing to commit to you and that's something that we do very well with, and we've built -- as I said, a strong set of relationships over time. And I think that's going to be the foundation of a series of very attractive investments. So competitors are out there but they've always been out there and it's not affecting our ability to make new investments and it's not affecting pricing.

Okay. Great. Just follow-up question on distribution. I know, Nate, you mentioned that one of the opportunities in the US retail was getting more of existing product into the channel, but I'm just curious if I look more globally, do you feel like all your affiliates at this point are starting to make full use of what you've built or are there still affiliates that are -- maybe provide some momentum to the channel, too. But more affiliates you can bring into the channel who aren't currently using it?

Yes, so I would say the way I would answer it is the affiliates are almost all -- almost all of the affiliates with appropriate product are using us somewhere, right? And I think the opportunity set is as we -- and some of this is just honestly is prioritization both on our part and on their part, right, as we work together figuring out where the highest return opportunity is today and playing them into that. And then beginning to leverage that within a specific geography. Also, as you work with the specific geography and our team builds [that piece in] comfort and knowledge, beginning to move that to other geographies. Some of that is made easier by working with consulting firms, for example, who really help you bring that around the world. So, I think everybody is working with us.

That doesn't imply at all that we've got everybody working with us in all of the places that they could or should ultimately be as the business scales. Some of it's also as we do channel development within geographies that will open up additional opportunities. So, we're still at -- there are places where we built, Australia where we've been for seven years or the Middle East for almost the same amount of time, where we've built large scale businesses now. But in each of these geographies there's real opportunity to continue to expand into other channels which opens up opportunities for additional affiliates.

So, example would be Australia where we just brought someone on to focus on the subadvisory channel which will open up opportunities for affiliates that didn't really want to build separate account business there but who are happy to build a more packaged business there. So, sorry, long answer, but I do think there's much more opportunity to go even though we are working with most affiliates.

And the thing I would add is that in addition to the extant group of affiliates, there will be future affiliates. You look back a year ago, we had just brought on Yacktman. You look several years ago, there -- a number of affiliates that have been added and as we look ahead, there will be -- we're very confident, a number of really outstanding affiliates who will want to take advantage of our distribution platform to some extent. Again, we're happy to get flows wherever they come and don't really regard use of our distribution platform as necessarily an end in itself. But I would say and as the point that I didn't make earlier, the strength of our distribution platform and the track record of success with industry-leading organic growth over the past three years, there's no firm in the industry that is anywhere close in terms of the ability to generate worldwide organic growth in return oriented product categories and I think that is very attractive to prospective affiliates.

Again, affiliates that are successful already [but look at the challenges of building] a scaled global distribution business and infrastructure. And recognize that for many of them that the opportunity to partner with a global scale asset management business that is already successfully generating sales for its existing affiliates, that's quite attractive. And so that's both an added element to our new investment opportunity and gives us confidence -- (technical difficulty) increasing set of products and capabilities to offer clients which of course makes us an even more valuable distribution counter party to our clients.

Thanks. Just one more follow-up question on the distribution. To what extent has -- what I'll call a, reverse inquiry helped drive product development or flows? You establish a relationship say it's in the Mid East with some particularly large asset owners or sovereign wealth funds. And they're saying -- look, these guys are great but here's really the particular thing we are looking for, and then you go back and figure out which of your affiliates is the right one and try to develop a strategy from that, is that becoming a part of the mix, too or are there some successes you can point to in that regard?

I'd break your question in two parts. The first part which is leading to flows where maybe we wouldn't have been expecting them, I'll do it that way, and I here I'd go back to my answer on US equity which was absolutely what you described. We've been engaged in conversations with both prospect and increase in clients and because of our breadth, we're able to have much more complete conversations which are -- what are the challenges you're facing, what are you interested in? We're broad enough that they let us have those conversations and want to have those conversations with us increasingly.

So, the first step of that is that then lets us play into it, existing products. So, it certainly does allow someone who had been more focused on global or emerging markets or alternative products to come back and say -- look, there's real opportunity with this client or that client -- Sovereign wealth fund or large super, whatever it is, to play US equity into their strengths. That part's absolutely -- and this quarter was an example of that, frankly some of that happening. The other, the product development I still think the opportunity to do that ultimately is there. I don't think we've yet even scratched the surface of that.

Great. Thanks for taking my questions, guys.

Our next question is coming from the line of William Katz with Citi.

First question is to Jay. Curious, the spread between GAAP and cash taxes seem to be narrowing over the next couple quarters. Can you talk through some of the dynamics that might be driving that? And longer term as you're scaling up your assets from organic growth and just given the sheer denominator of your assets, [should we now start thinking over the long-term that the GAAP and cash tax rate might] (technical difficulty) each other?

So, the nature of the difference, of course, is the main element is the intangible related deferred taxes, Bill, which you're aware of. And that is, of course, if you think about it, it protects us on the first dollar and up to a level and that's a -- I guess what I'll say a deductible level and then if we grow beyond that, that is exposed to our marginal tax rate. [So, yes, if our IRDT] (technical difficulty) remains static, then ultimately they would converge over time, but it is a long time from now because we have in magnitude quite a large amount of these deductions. But we do expect substantial new investment activity in the future and, therefore, we don't imagine it being static, so I think if you -- if you're modeling both the concept of the tax rate but also new investments over time affecting that, we expect that to be a meaningful gap between GAAP and tax note, no pun intended.

What's happening in the next two quarters is really just some noise. The UK has given us another tax rate decrease and then because of that, we're revaluing our balance sheet, deferred tax liabilities which causes a one-time rate change to GAAP, so that was just noise. And then the retirement of the convertibles creates some noise because there's a small amount of excess deductions we won't -- that we'll have to give back, but a very small amount, so the next two quarters' noise longer term there will be a gap and it will be influenced by the rate of new investments.

Okay, it's helpful. And I know you've covered this now in both your prepared remarks and the Q&A, but I'm still not quite clear on exactly what you're going to be doing on retail to try and generate growth? Is it a branded campaign, is it great investment spend, and does it come from the affiliate bucket or does it come from the owner's allocation?

I think you will see as the quarters unfold a range of initiatives at the affiliate level and certainly at the AMG level and the message that we want to convey here is that we are -- it's an area of strategic focus. We're going to commit increasing resources ahead of an opportunity that we see reflecting broader client demand trends. And right now in the interim we have a scale business that is generating very strong flows which we're happy to put up against anybody in the industries and we feel good about the prospects.

Okay. And just one last one with me. I've been looking at your retail business and if my analysis is right, about 50% of your buying comes from outside of the United States. Was there anything unique in the second quarter -- it really does stand out quite nicely relative to peers, or is it just the cumulative buildup of momentum and diversification of the business?

I think you might be -- so, the way I would describe it is there's three big parts, probably one of which you're seeing clearly and then the other two are probably just much harder to see. So, the one you're seeing clearly is probably the US retail flow picture. And then the other bits are both, as you say, non-US retail flows and that includes affiliates like Artemis who is having very good flows, firms like Beutel Goodman who is having very good flows, so there's some retail flows outside the US as you described.

And then the other piece is subadvisory wins which -- both subadvisory win and then just also subadvisory flows, so flows within existing subadvisory accounts that are separately branded, branded away.

Okay. (multiple speakers)

And some of those last two that is probably the number you're thinking about. Not just the non-US.

Understood. Okay. Thanks for taking all my questions.

Our next question is coming from the line of Gregg Warren with Morningstar.

You touched on it a little bit there in the last answer, but I was curious to see where the bulk of the positive flows are coming from on the US equity side. Because, as you know, it's an area that has not seen a whole lot of flow other than on the active management side. And then I guess on the international equity side, too, where you're seeing the bulk of the flows coming through and whether you expect that to fall through the rest of the year?

So, let me do those in reverse order. So, when you say international, I'm going to take that to mean both the broad global as well as international as well as emerging markets, so all of the non US --

Correct.

-- but also global including US flows. I think there we're seeing very broad -- and then have for a while now, seen very broad flows both developed markets and emerging markets, both institutional and retail and so it's hard to pick one very specific thing. I think the first part of your question on the US, as we said in the prepared remarks and as we answered in a coupe of these questions, some of it's been I won't say surprising us because we saw a little bit of it last quarter as well, I'm not sure if it's a trend. We're seeing demand both in the US and outside the US.

Some of what we see in both categories I would say is counter trend, broad trend, and some of that's because we have very good performance across a range of affiliates and are adding distribution resources to them so just bringing them to places they haven't been might be part of it. So that's overstating it is a version of market share which is we're taking places. And then maybe related to that again, US equity hard to tell. I don't know if it's -- again, maybe a little bit surprising to us as you suggest. Some of it might be people allocating to it or beginning to allocate to US equity active. We have that maybe going on. Some of it may be there are some other managers struggling because a lot of these do seem to be replacement searches. So, hard and still early to try to call exactly what's happening.

I would add to that by saying part of what we're seeing to the extent that there's a broad reallocation is the benefit of global platform and getting affiliates -- many of which would not have otherwise been exposed to global institutional clients in markets like the Middle East or Australia, getting -- having them presented to clients in a way that is leading to some flows. As Nate said, it's too early to call a trend but I think there's no question we're seeing the benefit of the breadth and scale of our business and our distribution platform reflected in a number of areas. And obviously the overall growth is very strong and very broad-based.

I guess that's a perfect segue to my next question. Looking at Yacktman a year on, the performance has been fantastic for them year to date. Have you guys been surprised with the level of flows you've been able to generate pulling that on to your distribution network? (technical difficulty) Has it been stronger than you were anticipating when you initially signed the deal?

No. Look, we obviously believe Yacktman is a tremendous firm and so I think we had lots of confidence in that. And, as we said at the time we thought we could be -- so they had good flows already, right, but we also thought we could be helpful to them bringing them on to a few platforms and things where maybe they weren't. So, I wouldn't say it we were surprised, but also think they are a significant contributor to the flows in the quarter. But there were a large number, there were a number of very significant contributors to flows in the quarter, including in the mutual fund channel. So it's a breadth story rather than a specific story.

Okay. Good. Thanks for taking my questions, guys.

Thank you. Ladies and gentlemen, we have reached the end our question-and-answer session. I would now like to turn the floor over to Mr. Sean Healey for any additional concluding remarks.

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

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