Affiliated Managers Group Inc (AMG) 2013 Q3 法說會逐字稿

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

Thank you for joining AMG to discuss our results for the third 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 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, Ally, and good morning, everyone. AMG reported economic earnings per share of $2.19 for the third quarter of 2013, which is a 15% increase over the same period of 2012. Our earnings growth was driven by continued momentum across our business as our affiliates' outstanding long-term track records in a broad array of US, global and emerging market equity and alternative products continue to attract investors worldwide.

We generated over $10 billion in net client cash flows in the third quarter, our fourteenth consecutive quarter of strong positive flows. This outstanding organic growth reflects the quality of our boutique affiliates and the ongoing impact of our strategic focus on alpha-generating equity and alternative products.

More and more clients view specialist firms as the best alpha generators in these product areas, and affiliates such as Yacktman and TimesSquare in US Equities, Tweedy, Browne, Genesis, Harding Loevner and Artemis among global and emerging market equity managers, and Pantheon, ValueAct, BlueMountain, First Quadrant and AQR among alternative managers are all recognized as leaders in their respective disciplines.

Looking ahead, given retail and institutional investors' increasing emphasis on alpha-generating strategies to complement passive beta, we believe that firm such as our affiliates, with their excellent long-term track records of investment performance, will continue to generate strong organic growth.

And, as you have heard us say before, given our focus on active equity and alternative products in a rising rate environment, AMG will experience neither the drag of fixed income outflows nor the depreciation in value of fixed income products.

AMG's industry-leading organic growth also reflects the continued success of our global distribution strategy, which complements affiliate-level marketing efforts with the leverage of AMG's scale, enhancing the distribution capabilities of our affiliates across channels and geographies.

With the opportunities that we see for our affiliates to gather new business around the world, we are continuing to build out our global distribution platform, including the recent addition of two senior professionals to deepen our European coverage.

The investments we have been making in our global distribution platform continue to yield strong results, as evidenced by new mandates generated in every one of our coverage regions during the quarter, and, as in prior quarters, flows broadly distributed across all product areas and channels.

In addition, as Nate will describe, we see substantial opportunities for incremental growth in the US retail channel and are continuing to broaden our capabilities in this area.

Finally, we are making good progress in the new investments area with a notable acceleration in activity during the quarter. As always, we will remain disciplined in our approach, and while it is impossible to predict the precise timing and execution of transactions, our market position has never been stronger and we are confident that we will continue to meaningfully enhance our earnings growth through accretive investments in new affiliates going forward.

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

Thanks, Sean. Good morning, everyone. As you saw in the release, we had another quarter of very strong growth, with our assets under management now over $500 billion, which includes positive flows of $10 billion for the quarter.

Over the past 14 consecutive quarters, our consistently strong net client cash flows, especially into active equity and alternative strategies, have been in contrast to broad industry trends over most of that period, which have favored fixed income and passive products.

These past two quarters, we have seen a rotation begin out of fixed income products. During that period, industry flows into equities and alternatives have been mixed, while our strong flow trends on the other hand continued.

As Sean said, clients are continuing to move to focused, performance-oriented managers for the alpha portions of their portfolios and our affiliates remain well-positioned to attract meaningful flows going forward.

Turning to investment performance for the quarter, we had strong performance from many of our larger affiliates, and especially in the global and emerging markets equities and alternative areas. Starting with the global developed markets category, against the backdrop of rising equity markets generally, our affiliates generated good investment performance. Highlights for the quarter include strong performance from significant products at Artemis, Harding Loevner, and Trilogy, while Tweedy Browne, with its deep value strategy, not surprisingly lagged in such a sharply rising market. However, their long-term track records remain very good.

In the emerging markets category, our affiliates had very strong relative investment performance, and track records for the full year and longer periods remain excellent. In fact, all of the major products managed by AQR, Genesis and Harding Loevner are well ahead of their respective benchmarks for the quarter, one-, three- and five-year periods.

Turning to our alternatives product category, we have a broad suite of strategies, many of which are not correlated with the equity markets. In the quarter, many of our affiliates' most significant products in the strategies as diverse as quantitative multi-strat, relative value, illiquid asset, credit, active value and arbitrage products, performed very well. This includes high-quality products (inaudible) AQR, BlueMountain, ValueAct, First Quadrant and Pantheon.

While the year is not over, given the outstanding performance of a number of our alternative products, we are well-positioned to generate additional meaningful performance fees this year.

Turning to our US equity products, we had a mixed quarter on the performance side, with Yacktman underperforming, while Frontier Capital, Systematic and GW&K had a very strong quarter, with outstanding performance across their respective suites of equity products.

Now, turning to flows for the quarter. As I said, we had another very good quarter, with $10.1 billion in positive net client cash flows. While flow momentum continues to be strong, as we emphasize on every call, flows, especially in the institutional and sub-advisory channels, are inherently lumpy.

Turning to the channel review and starting with the institutional channel, we had positive flows of approximately $4.9 billion. These flows came primarily in global and emerging markets products and alternative strategies, including notable contributions from BlueMountain, Pantheon, Harding Loevner, AQR, ValueAct, Trilogy, and First Quadrant.

Similar to previous quarters, we had a number of high quality wins coming from leading institutions located around the world.

Moving to the mutual fund channel, we had positive flows of $4.9 billion. From a product category standpoint, we had strong flows into US equities, as well as global and alternative strategies. The breakdown of flows in this channel was also very broad, as we had a number of affiliates make significant contributions, including AQR, Artemis, Harding Loevner, Tweedy, Browne, Aston, Beutel Goodman and Yacktman.

In our high net worth channel, flows were about $250 million for the quarter. The most significant contributors were Harding Loevner and BlueMountain, as well as two of our AMG Wealth Partners affiliates, Veritable and Clarfeld. Of course, we were very pleased to recently welcome Rob Clarfeld and his team to our affiliate group.

Finally, turning to an update of our distribution platforms, which complement our affiliates' dedicated marketing efforts. We continue to generate strong flows among a diverse set of products and across geographies. Looking forward, our basic approach remains the same. We will continue to make strategic investments in regions and channels where institutions and intermediaries seek the investment expertise of boutique firms such as our affiliates, which are focused on truly-differentiated, return-oriented investment disciplines.

To that end, we continue to selectively enhance our regional coverage with senior sales and marketing professionals, while we also expand into new channels in the geographies where we currently operate, and make progress in identifying additional geographies for future expansion.

In the third quarter, we announced a new European distribution head to lead our team of regional and country specialists who work on behalf of AMG affiliates across Europe. And in the fourth quarter, we will also add a new senior professional dedicated to selling affiliate products in the Benelux region.

Finally, as we mentioned last quarter, we remain focused on the significant additional opportunities we see in the US retail market. While it still may be early, we have begun to see the rotation of investors out of fixed income, and looking ahead, we continue to see a significant opportunity for active return-oriented products as investors will have no other way to meet their investment goals.

We are already investing in growing and scaling our US retail platform and are very pleased with the strong flows we are generating. However, we see opportunities to further build scale and, in particular, to leverage the AMG brand into our retail business. Of course, this is still early in the process, but as we think about how we have built our global institutional business and used the AMG brand to establish a very successful platform, we believe we can capture a similar opportunity in US retail.

Fundamentally, as we look ahead, we see increasing global demand for performance-oriented products managed by boutique firms such as our affiliates, which are focused on truly-differentiated, return-oriented investment disciplines, and we are confident that we can continue to generate strong organic growth. With that, I will turn to Jay to discuss our financials.

Thank you, Nate. As Sean and Nate discussed, our third-quarter results, which included another quarter of outstanding organic growth, again demonstrated the strength and diversity of the earnings power of our business.

As you saw in the release, we reported economic earnings per share of $2.19 for the third quarter, with net performance fees contributing $0.04. On a GAAP basis, we reported earnings of $1.37 for the quarter.

Turning to more specific modeling items, the ratio of our EBITDA contribution to end-of-period assets under management was approximately 15.4 basis points in the third quarter. We expect this ratio to be approximately 19.9 basis points in the fourth quarter, reflecting a reasonable assumption for performance fees. And for 2014, we expect this ratio to be approximately 16.6 basis points.

Holding Company expenses were $25 million in the third quarter, and we expect them to be approximately $30 million in the fourth quarter, reflecting year-end expenses, before returning to a normalized $25 million per quarter.

With regard to our taxes, our effective GAAP tax rate for the quarter was 29.6%, primarily as a result of a further decrease in the UK tax rate, which is expected to be the final UK tax rate decrease. And our cash tax rate was 30.6% as a result of higher pre-tax earnings and the retirement of our senior convertible securities.

For modeling purposes, we expect our GAAP tax rate to return to 36% and our cash tax rate to be approximately 28%.

Intangible related deferred taxes for the quarter were $5.2 million, also as a result of the UK tax rate change. We expect this number to return to approximately $14 million for the fourth quarter and to increase to approximately $16 million per quarter in 2014.

Our share of reported amortization for the quarter was $27.8 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 $38.2 million. We expect AMG's amortization to decrease to approximately $34 million in the fourth quarter, with a further reduction to approximately $30 million per quarter in 2014.

Our interest expense for the third quarter was $23.8 million, including $3.9 million of pre-tax, non-cash imputed interest expense. For the fourth quarter, we expect our total interest expense to decrease to approximately $22 million, including $2.7 million of pre-tax, non-cash imputed interest.

Turning to our balance sheet. As we discussed on last quarter's call, as part of our ongoing effort to simplify our balance sheet and reduce our cost of capital, we retired our senior convertibles using cash and revolver. In addition, given the increasing opportunity we see in the new investments area, we will continue to focus on maintaining ample capacity and flexibility in our capital structure.

Now, turning to guidance. We are raising our 2013 guidance as we expect economic earnings per share to be in the range of $9.30 to $9.80. And for 2014, we expect economic earnings per share to be in the range of $10.50 to $11.70. Our guidance assumes our normal convention of actual market performance through yesterday for the current quarter and 2% quarterly market growth beginning in the first quarter of 2014. We also assume a weighted average share count of approximately 55.5 million for the fourth quarter and for next year.

The lower end of our guidance range 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 expectations with affiliate growth rates, performance and the mix of affiliate contribution to our earnings. Of course, substantial changes in markets and earnings contribution of our affiliates would impact these expectations.

Now we will be happy to answer your questions.

(Operator Instructions). Dan Fannon, Jefferies.

Good morning.

Good morning, Dan.

I guess, Sean, to start with you, just on the deal front. I guess what has changed or makes you a little bit more bullish about the commentary for activity or your pipeline today versus where we were three months ago or at other points in time?

Well, I think the changes, as I said, and increase in acceleration in the level of new investment inquiry and opportunity. Why is that occurring now? I think it is not a surprise that given the market environment, given the number of prospective affiliates for us, given the extent and success of our calling effort, that we are seeing more opportunities. Inevitably, though, they tend to come in waves and we may be seeing one such wave now.

The opportunity set is partly probably driven by a positive market, partly driven by idiosyncratic considerations, which is always the hardest thing to assess and predict. It includes firms that are -- and transaction opportunities that are relationship-driven, which is of course the core of our new investment strategy. But also includes organized processes which cover the spectrum, including independent firms that have chosen to hire an investment banker to manage a potential sale process, as well as some divestitures.

As I mentioned in our prepared remarks, as always, we will be disciplined and selective in our approach. And so no specific predictions, beyond just giving you that broader color.

And just I guess to follow up on that, is there any specific type or focus of the backlog that appears to be more realistic, whether it be alternatives, still the global theme, US, or is it generally just broad?

I think it is actually quite broad-based. Of course, our focus, as you know, is on return-oriented products, emphasizing global and emerging market equity and alternatives. Although quite willing to invest where we see an opportunity to partner with an outstanding firm, like Yacktman for example, in US equities. So no, it is quite broad-based and consistent with our overall business strategy in terms of products we want to focus on.

And then just one follow-up. Jay, quickly what was the end of period share count as of the third quarter?

So on an economic basis, it was -- end of third quarter was 55.6 million, and so the share count guidance that we had given you was 55.5 million fourth quarter and next year.

Okay. All right. Thank you.

Michael Kim, Sandler O'Neill.

Hey, guys. Good morning. Just first, based on some commentary that we have been hearing from some other firms and some real-time data we have seen across the industry more recently, it does seem like retail investors are starting to move up the risk curve, to your point earlier.

So just given the fact that a lot of your flows over the last few years have gone into global and emerging market equities, as well as alternative strategies, do you see any sort of rotation risk, assuming investors start to come back to more traditional US equities strategies? Or do you think that sort of shift is really just incremental to flows?

Well, I think the global institutional client base, which is the dominant portion of our current and prospective clients, continues to be focused on global and emerging market equities. I think certainly there will be opportunities for US equities. I wouldn't necessarily say that we see the trend reversing.

I think the big opportunity that Nate and I have talked about is -- that is incremental is in US retail. And there, I think that you will see some continuation of what we think is an enduring trend, the erosion of home country bias and the opportunity to invest in fast-growing emerging markets.

I think what we have seen in terms of the market beta performance for the year suggests that the opportunity is probably greater in the markets that have performed less well. That is obviously not always how investors perform -- or behave.

I think we have a very broad product set, and our position to be ahead of the main trend, which is rerisking, which is separating alpha and beta and moving both in institutional, but also in retail, toward the firms that generate true alpha. So we remain quite confident, and whatever the trends within the trend are, I think the broad focus on re-risking and return-oriented, alpha-generating products plays very well to our product set.

Okay, that's helpful. And then a question on performance fees. So it sounds like the near-term outlook remains constructive, particularly as the diversity across affiliate strategies and structures continues to improve.

If I look at the performance fee contributions as a percentage of total earnings, it has pretty much been at the high end of sort of like the 5% to 10% range over the last four years, which has obviously been a pretty volatile market backdrop.

So understanding the inherent difficulty in trying to predict performance fees going forward and wanting to be conservative in terms of what you have built into your outlook, just wondering if it is reasonable to think that you have reached a new level here in terms of the level of contributions and maybe the consistency of those earnings.

So, Michael, I will get to the punchline in just a second. I think you are right to say that our performance fee opportunity continues to grow and diversify and it is across the products and it is across structures. This year, we have already booked, with the $0.04 in this quarter, $0.44. So we like to say a typical year is a 5% to 10% contribution to our earnings, so you will note that we are already close to the 5% range.

And then as you heard Nate say, we are having a good year in both absolute and relative performance. And kind of assuming no change with that, we would have the potential for additional meaningful contribution in the fourth quarter. So this does feel like a pretty good year.

I think as you look forward to the 2014 guidance, though, I think we would still imagine just a typical year, because there is no reason to assume it won't be a typical year, and that would still be in that 5% to 10% range. But of course, when we get into next year, we will reflect on whether that is a better than average year.

And the absolute level of performance fee earnings, of course is rising, but it is rising in the context of an overall strong level of earnings growth in the rest of our business. And so -- as well as the opportunity to get earnings accretion from investments in new affiliates.

So I think the proportionate relationship can confuse. The overall opportunity is very large. Nate, why don't you talk a bit more about the breadth and capacity of our product set?

Sure. And so in answering that part of it, I do agree with part of the way you framed the question, which is the growth in both -- the growth in diversity, both by firms, by investment strategies and by product structures and types does tend to create more consistency. So I think that dynamic is definitely -- that you describe is definitely there.

But just sort of stepping back -- and I tried to cover this a bit in my prepared remarks -- we have a number of firms -- it is traditional and alternative products, it is across a whole range of different affiliates. Some of these are sort of the traditional kind of one-in-20 or two-in-20 kinds of products. A number of them are also very highly customized.

And also, the blend is -- implicit in the way you framed the question -- the blend is really not -- has a lot of significant parts that are really not correlated with each other. Yes, it doesn't mean there won't be periods where there is correlation, but the blend over time tends to not be correlated with each other. And of course, it is asymmetrical, right? So it is bounded on the downside of the [kick], right?

And so it is very broad, very diverse. And again, I don't think we would want to sit here and say, it is growing as a percentage, in large part because of the point Sean made, which is the overall business continues to grow at a good pace, but the size and amount of the performance fees that can be generated is definitely growing.

Okay, that's helpful. And then just finally, coming back to capital management and deal flow, it sounds like some of the recent moves on the capital management side are ways to maybe maximize some liquidity. And then just given what sounds like maybe a bit more constructive commentary around the pipeline.

Just taking those two things together, is it reasonable to characterize the pipeline as maybe being skewed more toward bigger deals, or is it just more a function of maybe rightsizing your capacity with the opportunity set in terms of just the number of potential transactions?

I think the pipeline is strong and includes a broad set of prospective affiliate types, both in terms of product types, geography and size. I think I would leave it at that. Do you want to comment --

Just on the capital planning. So of course, we have been kind of harping on this point that we are focused on simplicity, flexibility and capacity. I think given what Sean has said about increasing activity, flexibility, liquidity with the potential to even add capacity is really the thing that we are thinking about today.

Okay, thanks for taking my questions.

Robert Lee, KBW.

Hi. Good morning, guys.

Hey, Rob.

Just real quickly I guess for Jay, just sticking to the balance sheet. Do you still have -- is there still the forward equity rate arrangement to get cleaned up?

So, yes, of course, you saw the senior convertible was retired. We have unwound approximately half of our forward equity, with no shares issued. I think at this point, we will reflect on whether to do the other half. I mean, the forward equity together with our $1.25 billion revolver is part of our readiness program to execute on our new investment strategy. So I think we are going to continue to reflect on that.

Okay, fair enough. Maybe a question for Nate. I am just kind of curious -- if I think of the global distribution and just generally thinking of that as predominantly an institutional success story and where most of your flows have been. But can you maybe -- how do you think of a retail component to that? Clearly, you are focused on it here and I know it probably takes some additional investment.

But is there or do you see an opportunity to kind of leverage what you've built that and maybe start attacking more of a retail outside the US?

To do the last bit first, I think in the long-term, of course, that is part of it. And there is -- and I will work my way backwards through the question -- I think there is definitely some cross-leverage between things we have done in global distribution. For example, there are number of intermediaries that are truly global intermediaries. There are a number of platforms that are really global platforms that we are interacting with both in the US and outside the US. And there is definitely leverage to bring through the way we face off against those global platforms. So there is definitely cross-leverage between the two, as well as obviously lots of learning.

But the main thing I would say is our US retail business is today a very successful platform, and we are driving positive flows for a number of our affiliates through that platform. It is just -- sort of coming to a point that Sean made -- it is just that looking ahead, we think there is a real big opportunity here as investors re-risk, and so -- and we think that this is definitely a channel where there are significant benefits to scale.

And so, again, remember, if you sort of go all the way back to what we are trying to do with global distribution is we are trying to marry excellent performance [running] boutiques with the scope and scale of a global distribution platform and business. And we are trying to be big where big is an advantage, but not get in the way of the things where boutiques really have competitive advantages, an area that we think US retail is absolutely a place where that kind of theme can really play out.

And so while it is a scale business today and we are driving good flow today, as we look forward, we think there is a very big opportunity there. And it will require some incremental investment on our part, but it will also be a lot of just how we position that business and how we pull affiliates in and ultimately leverage the scale that we have got and relationships we have got already.

Well, maybe following up on that. So if I think of the US retail business -- without getting maybe too lost in the weeds, two questions here. When you talk about investing in the platform, should I simplistically think of it as, hey, we need more boots on the ground, so it is really more wholesalers and servicing people?

And then I guess the second part of that, to your point, maybe getting a sense of how many of your existing affiliates are actually using your retail platform that exists today. And is part of the opportunity bringing -- how much is the opportunity to bring more of them, whether it is Third Avenue or whoever it may be, kind of into that fold?

So the answer is -- the short answer is yes. Some of it is the incremental investment. Some of it is absolutely there are firms that are working with us in global distribution. And as we have gotten -- as we have built businesses together elsewhere, we see the opportunity to bring them into retail.

Look, the biggest place where that kind of opportunity exists -- or a big place -- not the biggest, but a big place where that kind of opportunity exists is of course bringing additional high-quality alternative product, packaged appropriately. It is more than just the boots on the ground plan; it is how do we appropriately package the product and then how do we leverage our relationships at the home offices of large distribution platforms. I think there is -- a lot of the value will come through things like that.

Great. Thanks for taking my questions.

Chris Shutler, William Blair.

Hey, guys, good morning.

Hi, Chris.

So I know that you said that the flows were diversified geographically. But I was hoping maybe you could hit the key regions -- so US, Europe, Middle East, Asia -- and just talk about what kinds of products you think you are having the most success with in each of those different regions. I mean, I know it might be tough to make generalizations, but any specifics you could offer would be helpful. Thanks.

So obviously, that could be a very long question. I think maybe the easiest way to start into the answer is not to focus specifically on the quarter. Because if you focus specifically on the quarter, there is all sorts of idiosyncratic things that come out.

So if I look back -- so in the US, which is absolutely one of the -- we will start with the US. In the US, it has been global emerging alternatives in US equities. That has definitely -- it has been all of those. Those are areas where we have been having really good success.

As we look at -- I will do sort of the other regions where we are mostly institutional, so a Middle East or an Australia or an Asia -- those have tended to be mostly global emerging markets and alternative. There have been some significant -- I don't know whether it is trend or idiosyncratic US equity wins. That is something we had talked about the last quarter or two. So there has been some of that, but it has been more of these same themes that we have been talking about -- global, emerging and alternatives.

And in Europe, it is those plus also sort of more European-focused product as well. So that is sort of a high-level, long-trend kind of answer.

And again, it is positive net flows in every covered region, every channel, across a broad range of products. Virtually all of our largest affiliates -- more than 70% of our total affiliate base has had positive flows. So it is quite broad-based.

Obviously, ongoing success and organic growth requires continued excellent execution by our affiliates in generating alpha for their clients, and by our affiliates and AMG's distribution professionals. But we are -- all of the elements continue to be in place for us to see sustained growth.

All right, great. That's encouraging. And then the only other question would just be given the strong flows of some of your minority interest affiliates, how would you compare the opportunity to acquire larger stakes in some of those firms today versus maybe at the outset of the year? Has it changed? Thanks.

No, it hasn't changed.

Okay, thanks a lot.

Greggory Warren, Morningstar.

Yes, good morning, guys. Thanks for taking the question. As we work through this year and we get into next year, I think we have gotten a bit of a reprieve here on the fixed income side with the Fed backing off a little bit on the Quantitative Easing.

But as we look out, we all know that interest rates are eventually going to go up, and people are going to be moving out of fixed income more than they have already. Do you think there is a potential as we get into next year of the first half of the year being a really good positive period of flows for you guys, sort of akin to what we saw the first half of this year?

I think we are not going to try to predict the forward path of interest rates. I think in our experience, no one does a very good job at doing that and inevitably the consensus is wrong. So I certainly wouldn't disagree with the premise that rates should rise over time.

I think what is very clear to us is that clients, both institutional and retail, are increasingly aware of and sensitive to the very substantial risk that there is in long-duration fixed income products. Now how that reflects in client flows, I think, is going to vary firm to firm, and it too will be somewhat difficult to predict.

For us, we know that we don't have any exposure to long-duration fixed income. So to the extent that one believes that there will be outflows after a period of really epic inflows into fixed income, to the extent one believes that there will be this rotation, the fixed income outflows will not affect us, nor will the depreciation in the value of fixed income products as rates rise over time.

To the extent that you see a true rotation and flows into risk products in a more sustained and dramatic way, obviously, as we have said, we think we are very well-positioned to take advantage of that. We are seeing early signs of that opportunity. We are building out our US retail capability to take even greater advantage of it.

And so none of us know when, but I think to the extent that we believe that these trends will reverse, we are quite optimistic about its impact on us.

Okay. I guess my question wasn't as eloquently put as I wanted. But you got around to kind of the answer I was trying to get at. And I was just thinking as we got into next year, sort of that first half of the year is generally a good period for especially advisor-driven accounts and institutional accounts, looking at mandates, looking at specific things to kind of adjust allocations, and emerging developing markets continue to be sort of an area of growth within equities that people are still interested in, in US equities, I think you guys are well-positioned there. I was just wondering if we were likely to see kind of a continuation of the run rate -- the quarterly run rate we have been seeing this year from a flow perspective. Because I think we are on pace to do sort of a double-digit rate of organic growth this year.

I think it is very difficult to predict what industry flow patterns will be quarter to quarter. So I think we don't disagree with your broad characterization, but don't want to get in the business of predicting quarterly retail flows.

Okay, that's fair. Thanks.

Marc Irizarry, Goldman Sachs.

Great, thanks. Sean, I was wondering two things. One, if and when the tide does turn on fixed income, if there is a rotation within fixed income, where are you sort of in the thought process or discussions with more fixed income type of boutiques? Is that something you see as an opportunity for you in the future?

And I don't know if this is for Nate, but can you give some perspective on how much of the flows in the equity world that you are seeing from institutions is sort of re-manager or replacement activity versus sort of outright allocations? Thanks.

So, to answer your first question with respect to our interest in fixed income prospective affiliates, there are certainly niche areas of the fixed income product set that that are attractive, either alternative categories or some maybe non-US fixed income managers.

But core fixed income is not, as you know, a product area that we think is something that makes sense for us, either in terms of the unique nature of the elements that make for a successful fixed income manager -- we think they are different in many respects than they are for what makes for the most successful alpha-generating product categories.

We also don't find many boutiques that are successful in core fixed income. And the last thing I would say is that from a timing standpoint, I think we missed a 25-year run. Nate and I got our first project together when we were both on the advisory side -- was in the transaction that created PIMCO Advisors. That was in 1993. That would have been a really good time to invest in core fixed income. I think 2013 isn't such a good time, and so you shouldn't expect us to be doing anything in that area. Nate?

So your question was focused specifically on the equity piece, I think. As best we can tell, more than half -- and I am focused here on this quarter -- as best we can tell, more than half of the flows in institutional equity were replacement. Again, it is really hard. That is a sense, not something that is sort of scientific. And a lot of them, we honestly, it (inaudible) -- a lot of times, we just can't tell. But that is our sense.

Okay, great. Thanks.

There are no further questions at this time. I would like to turn the floor back over to Mr. Sean Healey for closing comments.

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

This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.