Affiliated Managers Group Inc (AMG) 2014 Q3 法說會逐字稿

Greetings and welcome to the Affiliated Managers Group third-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Ally Lynn, Senior Vice President Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you. You may begin.

Thank you for joining AMG to discuss our results for the third quarter of 2014. 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, Ally. Good morning, everyone. AMG generated economic earnings per share of $2.76 for the third quarter of 2014, which is a 26% increase over the same period of last year. Our results reflect continued momentum across all aspects of our business including strong organic growth from net client cash flows, the outstanding long-term investment performance track records of our affiliates, and the excellent execution of our new investment strategy, including the addition of our newest Affiliate, Veritas Asset Management, which closed last week.

Notwithstanding increased volatility in global equity markets, especially non-US markets, we generated $5 billion of net client cash flows during the quarter, marketing our 18th consecutive quarter of strong positive net flows, with a cumulative total of approximately $125 billion in net flows over this period. The ongoing success of our global distribution strategy reflects our affiliates' excellent long-term investment performance, but also our strategic focus on global and emerging market equities and alternatives, which collectively generated approximately 75% of our EBITDA across a broad range of industry-leading products.

Our boutique affiliates are recognized worldwide as leaders in their respective disciplines, including global and emerging market equity management Artemis Genesis, Harding Loevner and Tweedy, Browne, and alternative managers such as AQR, BlueMountain, EIG, and ValueAct. With a broad array of liquid and illiquid strategies across the credit, control equity, energy, infrastructure and private equity areas, AMG is now one of the largest alternative managers in the world.

Our success in generating consistent and substantial organic growth from net client cash flows reflects both the marketing efforts of our affiliates as well as meaningful contributions from our global distribution platform during the quarter, including new or expanded fundings in every coverage region worldwide. Looking ahead, we see strong ongoing demand around the world for our differentiated value-added strategies, as global institutional clients increasingly recognize the competitive advantage that boutiques have in generating alpha.

With our affiliates' exceptional long-term investment track records across a wide range of return-oriented products, we are well-positioned to continue to benefit from client demand trends such as portfolio globalization and the increasing separation of alpha from beta portfolios. Over time, we see similar trends unfolding among US retail clients. And with our enhanced focused on our retail platform, we are positioned to capture additional market share when these trends take hold.

Turning to new investments, we continue to make progress toward partnering with additional outstanding affiliates. Our diverse pipeline includes both traditional and alternative firms and includes an increasing proportion of non-US-based firms.

Last week we were very pleased to welcome Veritas Asset Management to our affiliate group. Veritas is a leading global and Asian equity manager, headquartered in London, with $17 billion in assets and an excellent record of investment performance, which further diversifies and enhances our exposure to some of the fastest growing product areas in the industry.

The Veritas transaction is also a great example of how we execute our new investment strategy. Through our consistent culling effort over the past 20 years, we have built proprietary relationships with hundreds of outstanding boutique firms worldwide, virtually all of which will inevitably need a succession planning solution.

In the case of Veritas, our relationship began with a direct call to the firm's senior partner, Charles Richardson, and then over time we built a strong relationship with Charles and his partners. And when they decided to pursue a transaction to address their long-term succession planning objectives, they approached AMG on an exclusive basis. Given our unparalleled competitive position, including our two-decade track record of successful partnerships, along with the relationships we've built with leading firms over those 20 years, we are uniquely positioned to execute on our outstanding opportunity set, going forward.

Finally, as you've heard me say before, through the successful execution of our strategy, we've created a virtuous circle. The addition of new affiliates increases the earnings growth of our business, while also enhancing our position in value-added product areas and enriching strategic dialogues with clients, making us an even more attractive partner to other prospective affiliates.

And, most importantly, our reputation as a partner to our affiliates, along with their individual reputations as outstanding firms, create a whole that is undeniably more than the sum of its parts. We saw evidence of this effect just a few weeks ago at our affiliates CEO forum where we gathered the senior leaders of our 30 affiliates to discuss market trends, distribution initiatives, strategic positioning, and best practices for boutique firms across all aspects of business management.

As more outstanding firms join our affiliate group, our partners increasingly benefit from the network effect of this unique array of some of the world's best boutique firms. We've built our business from an idea into one of the largest global investment managers, and our affiliates are now friends as well as partners. Through their collective efforts and the power of their positive recommendations of AMG as a trusted partner, we are confident in our ability to continue to build shareholder value through both accretive investments in new affiliates as well as ongoing outstanding organic growth.

Now, I'll turn to Nate to discuss our affiliates' results in greater detail.

Thanks, Sean. Good morning, everyone. Our results in the third quarter demonstrated the strength and diversity of our business and the multiple ways AMG can drive significant growth. While investor risk appetites were muted in several channels last quarter, we generated $5 billion in positive flows. As you know, we've now had strong positive flows every quarter for the last 4.5 years.

As Sean said, we continue to benefit from some favorable trends, especially among sophisticated institutional clients as they continue to separate their portfolios into passive beta closures at one end and active alpha at the other. And for the alpha portions of their portfolios, clients worldwide continue be attracted to boutiques.

We also continue to benefit from our strategic focus on global and emerging markets equities and alternative products. These are the areas where we generated the bulk of our positive net flows over the last 4.5 years. Now, as risk appetites increase, and as our affiliates' track records remain strong, and we enhance our distribution resources, we will be even better positioned to drive significant positive flows.

Turning to investment performance by category, and starting with global developed markets area, overall we had a good quarter, with highlights including very strong performance from the global products at Artemis and Harding Loevner, as well as many of AQR's products in the category. In addition, Tweedy, Browne's flagship product performed exceptionally well relative to peers. Their global value fund was the top-performing fund in this Morningstar category for the quarter, and is in the top decile for the trailing 5-, 10-, and 15-year period.

In the emerging markets category, we had mixed performance during the quarter. However, long-term performance among major products, including those managed by a AQR, Genesis and Harding Loevner, remain very strong.

In our US equity category, a AQR and River Road served as notable standouts during the quarter. While Yacktman under performed in the third quarter, this was not surprising given their defensive positioning. Relatedly, Yacktman had strong performance during the volatility earlier this month, reminding investors of the value of their conservative approach.

Finally, turning to our alternatives product category, looking across our affiliate group, as Sean said, AMG is among the largest alternative managers in the world, with our affiliates managing a very broad array of liquid and illiquid strategies including best-in-class credit, control equity, currency, energy, global macro, infrastructure, managed futures, and private equity products. As you think about that array of products, it includes many that are absolute return-oriented but also a broad suite that have significant underlying beta components. For the quarter, performance continued to be generally strong, although obviously the beta-sensitive products were impacted by the underlying declines in certain of the relevant markets.

Now, turning to flows for the quarter, as I said, we were pleased to have another strong quarter, with $5 billion in positive net client cash flows, particularly given the muted risk appetite among investors in some channels. As we emphasize on every call, flows, especially in the institutional and sub advisory channels, are inherently lumpy. But looking ahead, overall flow momentum continues to be good.

Turning to the channel review, and starting with the institutional channel, we had a very strong quarter with positive net flows of approximately $6 billion. These flows came primarily in alternatives in global equity products. Notable contributions came from AQR, BlueMountain, First Quadrant and Pantheon.

Similar to previous quarters we had a number of great wins coming from leading institutional investors located around the world. In our high net worth channel, flows were roughly $500 million for the quarter, with contributions coming primarily from GW&K, Harding Loevner, and SouthernSun, including through our US retail distribution platform.

Moving to the mutual fund channel, we had outflows of about $1.6 billion. While we had positive flows into many global and emerging market equities and alternative strategies, which came from a number of affiliates, including the specialty Artemis, Harding Loevner and Tweedy, Browne, these were more than offset by outflows in our US equity products. Obviously this was against the backdrop of a difficult period for US retail flows for return-oriented managers generally, and especially in US equities.

Now, turning to our US retail platform AMG funds, even though it was challenging flow quarter for the reasons I mentioned, we continued to make progress in positioning the Business for the significant opportunities we see to build a leading retail distribution business. As we've discussed on previous calls, this is in part because we believe that over time clients and intermediaries must allocate to return-oriented products to meet their objectives. But also, fundamentally, we think there's a unique opportunity to create the point of contact through which platforms and intermediaries and other channel partners can access the world's broadest array of return-oriented boutiques.

There are really only a very few asset managers in the world that have the same breadth of performance-oriented products that our affiliates manage. We just recently finished building out the senior team at AMG Funds with the additional of Bill Finnegan from MFS as Chief Marketing Officer He started last month. And Jeff Ceruti and the rest of the senior team there are very optimistic about the opportunity to execute against our unique ability to help our affiliates drive significant growth in US retail channels.

Finally, in terms of updating you on our global institutional distribution platform, we continue to help our affiliates generate strong flows among a diversified set of products and across geographies. This past quarter, we saw a number of significant wins coming through our European and Middle Eastern platforms, in particular. The other item I would highlight here is the progress we're making in moving into additional market segments and geographies such as Australia and the Middle East where we have already made significant progress building relationships with the largest investors and their intermediaries.

Looking ahead, as our affiliates maintain their excellent long-term performance record, and as we continue to see global demand for performance-oriented products, managed by some of the best investors in their respective disciplines, we are confident that we can continue to generate strong organic growth.

With that, I will turn it over to Jay.

Thank you, Nate. As Sean discussed, despite a volatile market environment, we are pleased with our third-quarter results, including another quarter of strong net client cash flows. Given the strength and diversity of our affiliates and substantial cash generated by the scale of our business, we continue to produce stable and growing earnings, including in periods of uneven markets.

As you saw on the release, we reported economic earnings per share of $2.76 for the third quarter, with net performance fees contributing $0.06. On a GAAP basis we reported earnings per share $1.84 for the quarter.

Turning to more specific modeling items, for the third quarter, our EBITDA increased 28% year over year to $218 million, reflecting the continued organic growth of our business and the strong execution of our new investment growth strategy. The ratio of our EBITDA to end-of-period assets under management for the third quarter was 14.6 basis points, or approximately 14.2 basis points before the third-quarter performance fees I mentioned earlier. In the fourth quarter we expect this ratio to be approximately 17 basis points, reflecting the higher performance fees that we typically expect in fourth quarter.

With regard to our taxes, our effective GAAP tax rate for the quarter was 36.7%, and our cash tax rate was 25.3%, both of which were elevated relative to our July expectation as a result of the delayed in the Veritas closing. For modeling purposes, we expect our GAAP tax rate to be approximately 34% and our cash tax rate to be approximately 25%.

Intangible related deferred taxes for the third quarter were $19.6 million. And for modeling purposes we expect this number to be approximately $19 million for the fourth quarter.

Our share of amortization for the quarter was $29.6 million, including $7.3 million of amortization from affiliates accounted for under the equity method. And we expect AMG's amortization to remain at approximately this level for the fourth quarter.

Our interest expense for the third quarter was $21.7 million, including $2.8 million of pretax non-cash imputed interest expense. For the fourth quarter we expect our total interest expense to be approximately $22.5 million, including $2.8 million of pretax non-cash imputed interest expense.

Turning to our balance sheet, through the continued growth and increasing scale of our business, we have simultaneously reduced our leverage while also executing on four new investments in 2014, including the closing of Veritas last week, and the funding of approximately $50 million of share repurchases in the third quarter. With run rate EBITDA of more than $1 billion, combined with another $1.25 billion of undrawn revolver, we continue to have substantial capacity and flexibility to execute on our significant opportunity set in new investments. And the increasing scale of our business will continue to create incremental opportunities for earnings growth.

Now, turning to guidance, we are updating and narrowing our 2014 guidance as we expect economic earnings per share to be in the range of $11 to $11.60, which reflects the impact of markets to date, as well as our expectations for fourth-quarter performance fees. For 2015, we expect our economic earnings per share to be in the range of $12.50 to $14. We also assume a weighted average share count of approximately 56.5 million for 2014 and approximately 57 million for 2015.

As always, we assume our normal convention of actual market performance through yesterday for the current quarter, and 2% quarterly market growth beginning in the first quarter of 2015. The lower end of our guidance ranges include a modest contribution from performance fees and organic growth, while the upper end of these ranges assume a more robust contribution from 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'll be happy to answer your questions.

(Operator Instructions)

Michael Kim with Sandler O'Neill.

First, Sean, curious if you could maybe flesh out your comments a bit about the deal pipeline, just in light of the more recent step up in market volatility. I think in the past you've talked about outsized volatility either on the upside or the downside that tended to make getting deals done a bit more difficult. Just wondering if you've maybe seen some potential sellers or partners stepping away a bit more recently.

It's a good question and there is no doubt that extreme volatility, as you say on either side, has a dampening effect on new investment activity. I think moderate levels of volatility actually can be helpful.

They have a way of focusing the mind on what can be lost as well as what can be gained. So, who knows what's going to happen on a near- to medium-term basis with equity markets. But if one assumes that we are past recent bit of volatility, I think to this point it actually will be helpful going forward. We have, as we've indicated, a very strong pipeline.

Got it. In terms of the retail channel, I understand the reasons why Yacktman has underperformed and that's why this amount flows. But just focusing on the mutual fund channel, curious to get your thoughts on where you see opportunities to maybe offset those redemptions as you look across other funds or regions, particularly assuming retail risk appetites remain somewhat muted.

Before I go right into the question, obviously, let me do one bit. It is partly Yacktman, as you indicated, relative to performance, but overall our product mix in retail -- really in US retail -- is more heavily US equity centric. So, that's really, even more than just the specific Yacktman point, that really is, I think, something to observe. The more heavily US-centric product mix in US retail, I think, is part of the channel, and just the challenge for us in that channel.

In terms of the opportunities to offset that, let me focus you on two things. One is I think geography, as you indicate. And, there, non-US retail has been and continues to be an area of opportunity for us. And that's UK, European, but increasingly now we're building out in Australia. So I think the non-US retail is definitely an opportunity for us.

And then within US retail, it's the evolving product mix. It's both working with the existing set of affiliates but also -- and you've heard us talk about this in the past -- as we bring additional affiliates online, that's also another very strong source of opportunity for us in the retail channel to work with those affiliates and bring retail product to bear.

The other thing I would add is that, as you know, our focus on retail has come mostly this year with the addition of a new senior team, the last of which Nate mentioned, we just hired this month, building out infrastructure. Building out, importantly, increased awareness and a brand, using the AMG brand for the first time.

Of course, to some extent, it depends on broadening of our product set, and, inevitably, to some extent, on client demand trends coming toward our return-oriented product set, which we are convinced will happen. But even before then, we feel very good about our prospects looking ahead.

Got it. And then just one last one for Jay. In terms of the updated guidance range for this year, in particular, any sense of the underlying mix between the mark-to-market impact versus a bit more conservative outlook on performance fees as we stand here today?

Sure, Michael, maybe I will address that and all of guidance, so, answer a bit more than you even asked. At the highest level, we updated the 2014 and 2015 guidance. But we also narrowed the 2014 range, which is our normal practice because we have more visibility on the fourth-quarter performance fees. So, let me just take those into two pieces.

On the market beta part, I'll just start by reminding everyone our convention. We last gave guidance on our second-quarter call July 29. At that time, we assumed 0% markets for the third quarter and 2% markets for the fourth quarter and each quarter thereafter.

Since that call, we've seen this pull back. Our blend is down about 2.25% across all products through last Friday. So, a little bit better than the third-quarter AUM table shows, 2.25%.

Given that we are now in the fourth quarter, our convention is to assume no more beta for this year. So, we remove the 2% assumption for the fourth quarter. As a result, the realized performance through Friday is at 4.25% lower than our model. So, that explains most of the shift in 2014 and really all the shift in 2015.

The 2014 range also is affected by the delay in Veritas which moved from the third quarter to the fourth quarter. Your conservatism -- you didn't mention Veritas, I think there's a piece of it. It's just Veritas. It does not have an impact in 2015. It does have a small impact on 2014.

So, just to recap, our 2014 guidance reflects markets, the delay in Veritas, and the partial year impact of the deals that we did throughout the year, while our 2015 guidance reflects the full-year impact of all four investments, mark-to-market. And then our normal convention of 2% per quarter starting in the first quarter next year.

So then, the last bit, to get to the second piece, with only two months left in the year, we narrowed this range to reflect our current expectation of the fourth quarter performance fees. As you know, we've already booked $0.22 through this year. We continue to see this year as a 5% to 10% of our total economic earnings year in performance fees. We only experience performance fees when crystallized, just to remind everyone. But given the pullback this year, we have narrowed the range and that does account for the rest of the range move.

Got it. That's helpful. Thanks for taking my questions.

Dan Fannon with Jefferies.

Just on flows, you highlighted the Middle East and Australia as regions of success. Wondering -- you saw some flows, you mentioned, in this quarter. It seems like the backlog is building in those regions.

Can you talk about where you are in terms of the buildout and generally how long it's taking you to ramp these regions? And then ultimately what other regions are you looking at to expand, to get a sense of the laddering effect that will take place as you have been building out these new regions for some time, and it seems like it's expected to continue.

Got it. I will try to describe the structure here because I think your question tees up a bunch of the different ways we think about user ladder and the way we think about the ladder of the curves as these things build. We have some regions -- Australia and Middle East, parts of Europe -- that we've been in now for a while, have done a good job, as I said, building relationships with the largest pools of capital, with the biggest intermediaries in those geographies. So, we are well into those curves in places like that.

But you have to be careful not to generalize for the whole geography. I would describe it with at least two dimensions -- geography and then channel within the geography.

At the high end, institutional channel, the high-end biggest intermediaries, consultants, especially in these geographies. I think in some geographies where we've been there for a while, I think we've now built businesses that are past that beginning stage. So we've built a good brand and reputation, we've made some significant sales working with our affiliates, and we're well into thinking about how to bring additional affiliates, multiple affiliates, into those relationships and building diverse, mature relationships.

At the same time, in those geographies we also adding additional resources to move into other channels. There, we did highlight Australian and the Middle East as examples where we've added additional resources to move into sub advisory and move into the smaller ends of the geography. And we've also been building packages. I also talked about the buildout of Australian in trust, for example.

So, there's certainly markets like that where we've done a very good job penetrating some channels and we're building out and diversifying into others. There are other areas -- Asia is an example -- where we've made very good progress. We won some very significant mandates from many of the largest institutions in the region. But there's still a lot more we can do at the large end building out. So, I think there are regions like that, so that's another category.

And the third one I would mention is talking about places like Europe where we talk about it as one region but it's obviously very diverse. There are places where we've been working with our affiliates for quite some time, but there are also places where over the last year, year and a half, you've heard us add specific country resources. We talked about our Benelux hire, our German hire, our Swiss hire. And those folks are making really good progress now and are just starting to really come online and beginning to have significant wins. But their pipelines are really growing. So that is a part of this ramp that you described.

And then the final thing I'll say is, obviously, as you indicate, there are plenty of still what Andrew Dyson would call white spaces in places where we still could add additional resources, places where we are really not doing dedicated coverage today, and we're continuing to work on those. So, you have a number of ladders or curves that are moving along nicely, you have a lot of ladders or curves that are just starting to grow, and you have some that still have lots of untapped opportunity.

The only thing I would add, Dan, you are aware of this, but I think when we talk about market position, generally, or you think about what other public asset managers talk about in terms of market position, it's generally more -- their position in more mature markets where it's more of a market share gain than an underlying market growth.

And, of course in Australia and the Middle East, markets like Korea where we're not as developed, although we have a strong and growing position and some important client relationships, those markets have tremendous underlying growth momentum. So, you're getting the benefit -- we are getting the benefit -- of not just our strong position of those relationships maturing, but as the underlying growth continues in those markets, we can get, if you will, an acceleration of that contribution to our overall flows.

Great. That's helpful. Jay, I believe you mentioned $50 million in share repurchases in the quarter. Can you talk about, first of all, what the level was where you buyers of your stock, and then how you are thinking about that in the context of 2015?

Is it just opportunistic, or are we at the point where you are generating enough cash flow where we could see a little bit more of a consistent buyback coming into the numbers?

On the top level, we have noted several times just the size and scope and the growth of our business, as well as just the structuring of our balance sheet to maintain flexibility. It gives us the opportunity to not only execute on our new investment activity, which has been significant year to date -- and that is our priority -- but it also gives us the opportunity to buy back stock.

I think the way to characterize this quarter of approximately $50 million, it was simply to maintain our share count at roughly the same level. So, I'm not even sure I would describe it completely as opportunistic, but it was opportunistic to keep our share count at 56.6 million, 56.7 million.

But when you look forward, I think that's the more interesting comment because we have $1 billion of run rate EBITDA and $1.25 billion undrawn on our revolver. Of course, we will continue to focus on new investments. But, depending on the timing of those new investments or the size of those near-term transactions, the scale of our business allows us to comfortably buy back some shares in periods of lesser activity, and so will continue to monitor that.

Yes, I would say, buybacks will become an increasingly important theme in our earnings contribution, just inevitably. It doesn't say anything about the scale and attractiveness of the new investment opportunities set, which is, as you've heard me say, Dan, really better than it's ever been. But, really, the increased contribution from share repurchase that I seen prospectively over the coming years just reflects the very strong growth in our business, the substantial scale and cash generation of a business that's making over $1 billion a year in EBITDA.

Great. Thank you.

Bill Katz with Citigroup.

Coming back to maybe an opportunity to build out the US retail business and maybe offset some of the weakness you are seeing at Yacktman, how quickly do you think you can bring on -- you mentioned SoutheasternSun [sic -- SouthernSun] was a little bit on the high net worth side. How quickly can you bring on that and Veritas into the retail channel where you might still see some step up of flow?

Again, I'd remind, I think it is not just a Yacktman story. I do think it is the US equity story more broadly, that I mentioned. And then on the other side, I think the bringing new product to bear, it's a combination of a few things.

One is product that's already existing in the appropriate form -- call it mutual funds -- but existing in the appropriate form where the track record is good and it's coming up on a long enough duration that it's the kind of thing that can really be sold. That's one part. Those are products where we are already working with the firm, we've already got the package built, the distribution team is already familiar with it, it's already probably on some platforms already and maybe beginning to be brought into the model portfolios. So, I think there's a category of those even before you get to either new products from existing affiliates or new products from new affiliates.

But, you are right, there is a very big opportunity in those latter two categories. It's new products from existing affiliates. And we've talked about this before but working with our existing affiliates who are alternatives managers, especially, and helping them bring those products to bear in the retail channels in the US and outside the US. So, that's a very large opportunity for us.

And then the last one is the one that you mentioned, which is you go through the affiliates that we've -- the four most recent affiliates -- SouthernSun and River Road, we're working with both of them already in retail channels, and bringing them into additional retail channels. And, then, for both EIG and Veritas, we're having conversations are underway. Those would involve both building the product as well as working with them in distribution in US retail. But the conversations are underway with both of those firms already.

Again, they are the kinds of firms that have the capability that is in high demand. So, there should be a very strong medium-term opportunity with firms like that.

Thank you. The second question I have is just conceptual in nature. Just given the strong free cash flow and the optionality to do deals and/or buyback. Should we be watching that if there's stepped-up repurchase that might signal that you don't have transactions coming? Or, can you do both simultaneously just from a legal perspective?

I think you'll see in periods -- for example, of extreme volatility -- more repurchase just because there will be, inevitably, some dampening of activity. But, in general, I would say, if you saw a lot of repurchase, a significant amount of repurchase activity, that would say something about the immediate near-term pipeline, yes.

I think if you saw us building cash in a period where you would otherwise have expected us to be doing significant repurchase activity or reinvestment of the cash, it would probably be a signal that there is substantial medium-term new investment opportunities that we're preparing for.

But, that's hard to read and we give as clear a guidance as we can. And I think what we expect going forward -- again, absent market volatility -- is an ongoing level, elevated level of new investment activity where there are more opportunities than ever; where our market position is stronger than ever; and simultaneously, although I think the repurchase activity will probably be at a lower level in the early years, ongoing repurchase and reinvestment -- repurchase of our stock and reinvestment of the cash. We are quite confident in our new investment opportunity set, and also quite willing, committed, to reinvest the cash the business generates where we don't have immediate opportunities.

Just one last one. Thanks for taking all the questions. You mentioned in your prepared remarks, 75% of your business is coming from global equity, emerging markets alternatives. You've done a nice job there. As you step back and think about some of the structural demands, shifts that are going on, as well as maybe some of the turbulence that comes, like the [timco] you're dealing with, does that change your view at all about adding on fixed income managers, looking out over the next few years?

No. At the end of a 30-year bull market in bonds, It doesn't seem -- however uncertain it is when rates will rise and what has been a tremendous tide running in favor of fixed income managers and fixed income products, however difficult it is to predict that turn, we are committed or convinced that there will be that turn. And maybe one or two more years, but it won't be another 30, put it that way.

We also believe that the only way that institutions and individuals will ultimately generate returns that provide for their retirement needs and plan objectives is by investing, increasingly, in return-oriented products. And we are seeing that, of course. You recognize in our results we're seeing that from global institutional clients. And we think that will continue and broaden across other client channels and client types. So, going forward, we are extremely optimistic about our prospects for ongoing organic growth.

And the last thing I would say is that the strategy is borne partly from a judgment of where secular growth opportunities are greatest in the industry -- the alpha side of the barbell, if you will. And also a view of what product areas boutiques excel in. And for sure alternatives in global and emerging market equities and niche areas of US equities are among them. And arguably core fixed income isn't. But we certainly have substantial exposure in niche fixed income or credit alternative space, and that will continue.

Okay. Thanks for taking my questions, guys.

Chris Shutler with William Blair.

Sean, stepping back for a second, if you look out over the next, let's say, five years, based on the discussions that you're having with prospective affiliates today, how would you expect the mix of EBITDA to change by asset class or geography over a long period of time?

I don't expect that the product categories -- IE, the contribution from alternatives in global and emerging market equities at 75% -- I don't expect that to change dramatically. I think there will be increasing depth and diversity in, let's say, the alternative products set with more and more strategies. We have significant breadth of strategies and exposures in the alternative set, but lots of areas where we don't have any exposure. And the same in a different way in the active equity product area.

I think we like the rough level of product exposure. I think in any given period, through the fortuity of new investment opportunities, we may get a little more in alternative or a little more in global and emerging market equity, but I don't see a dramatic change in the composition of our product set in terms of contribution to earnings.

I do see an increasing globalization in our product set, in our client base, in our affiliate geography, meaning more and more non-US affiliates. I think that represents a different kind of diversity and opportunity for growth. We're seeing more and more outstanding prospective affiliates in non-US markets, and I think that will continue. So, that theme of diversity and non-US clients, we are already with roughly half of our clients from outside the US where we already have a strong position, I think that will continue.

All right. That's very helpful. And then just a couple of questions on US retail. First, could you update us, at least roughly, how many salespeople you have in that channel today versus maybe a year ago?

And then, secondly, to what extent do you think some of these new retail products are going to need to build a track record, a three-year track record? Or is it possible, given the record of some of these firms and just the client demand, that you could see flows quite a bit sooner? Thanks.

I think the overall level of headcount on the sales force right now has been pretty stable. But I think as we look ahead, I do think it's been more reshaping, I'll put it that way, the mix, internal and external, and also by channel within the channels they cover. So, thinking about the wires and the RIAs and how they adjust that mix. But I think the overall headcount has been ready stable.

On the second part of the question, I think probably the way to describe it would be to think about it by product category. In product categories that are mature, I think it's going to be -- and we are experiencing it -- it is more important that we have the track records. And that's because it's easy for people to slot you into a competitive universe, and for that, they do want a track record of a certain duration and asset levels of certain size.

You're absolutely right, there are places where we believe that, because it's either a relatively new product area or because the offering is so different and compelling and the institutional track record is so strong -- I do think those are slightly different -- but the institutional track record is so compelling, so strong, that we have the opportunity to work with folks to get the product into, especially, in the model portfolio kinds of places where people are looking for additional diversifying return streams, and we can bring them to them. This is much more like an institutional sale. We are absolutely experiencing that.

And we are experiencing that across channels -- so, within the wires. But even in the DC channel, which is a place that hasn't been historically an area of very particular strength for us, we are having some very good conversations, bringing especially new diversifying return streams to people.

Thanks, Nate.

Brian Bedell with Deutsche Bank.

Nate, while we are on the US distribution side, if you want to maybe talk a little bit more in depth on the US retail distribution in terms of where you've seen the outflows. You mentioned a little bit on the sales force side, the wirehouse, the RIA segment and maybe the defined contribution investment. Where have you seen the outflows coming more recently? And, then, within that US mix, what are your most optimistic about turning around over the next few quarters?

Got it. First, I think if I were going to call out a trend to focus on, it is that product trend, which is the US equity area within US retail distribution. If you're going to look at channels within that, our experience has been more wire and RIA. But, I want to caveat, that's our experience. That's also, I think, as much a function of those happen to be the places where we have the most assets. So, I'm making much more of an AMG-specific comment there than something that has broader applicability. For us, it has been both on the broker-dealer side and the RIA space. And, again, in large part, those are the places where our assets are.

In terms of the things that I think change the flow pattern for us in US equities, I think it's going to be probably a couple of things. First, performance is going to be, of course, a part of that. Relative performance -- no question that will absolutely be a part of it.

The other thing I'd remind people -- and this is a Yacktman-specific comment although it applies in a few other places -- we do have products like Yacktman's which have been soft closed. So, while part of the outflows are certainly performance, part of the outflows are certainly product category has been out of favor in a difficult place. Part of it is also the products are soft closed and so the gross sales number, it just can't be there.

The reason those products are closed, just to remind everybody, is not because of capacity. The reason those products are closed is they have high cash levels -- although they have been declining -- but they have high cash levels given the opportunity set they see to put assets to work. So they -- so soft close products. Those products will reopen.

So I think it's a combination of things. It's certainly performance. I think it will be product like theirs -- and there are others like theirs -- reopening to opportunities when they see the opportunity. I think those are the things.

And then I'll say one last thing, which is -- and we mentioned it before -- additional US equity products coming online. And we mentioned SouthernSun earlier, River Road, as well, earlier. So, it's from existing affiliates but also new affiliates with very attractive US equity products come online.

I think it's worth stepping back, also, because we've had a couple of questions focusing on a relatively small part of our business, and where there is apparent visibility on a part of the product set -- meaning, a lot of our US retail is less visible and harder to gauge trends. But the important point is really to underscore that degree to which we're primarily a global institutional asset management company.

This quarter, we haven't talked about it but this quarter our active equity and alternative flows were, so far as I can tell with maybe one or two exceptions, far ahead of the industry average, far ahead of any of our -- or virtually any of our public company competitors. I think on a gross inflows basis, Nate, this is one of our stronger quarters in several years, even in the midst of a period of market volatility.

So, the point to emphasize, that I'm trying to emphasize here, is that, while a piece of our business where we see substantial forward opportunity in the coming years is worth understanding, the biggest part of the business, which obviously has more than offset any outflows that we might have in US retail products, is the global institutional opportunity, where, as you've heard us say, we think we have a very strong position, doing much better than the industry, and where we see ongoing strong opportunity for growth.

That actually took away one of my questions, Sean. I was going to say, you seem to be doing very well in the active versus passive trend, as you highlighted, in terms of more allocation to the boutiques, whereas that trend is hurting other managers. So you answered two questions with one.

Maybe just switching over to Jay on the guidance. The bottom and the top of the range for 2015 is, I assume, the 5% performance fees, 10% contribution performance fees. Jay, can you talk about the performance you have implied in October for the Firm? And then the range for 2015 in terms of your net flow assumptions on the high end and low end.

Brian, the comment to both -- because we don't go to that level of detail because it's assumed in our guidance range, it's the purpose of giving guidance -- I made this comment earlier but I will talk about performance fees first here and then we can talk about flows a bit. With respect to performance fees, we have seen, historically, that our range has been in that 5% to 10%.

We feel comfortable with that range because of the diversity of the performance fees in terms of both the strategies that underlie the performance fees -- and, obviously, there's lots of different strategies and lots of different products; more than half of our affiliates have performance fee opportunity -- as well as underlying contracts because they all have different ways to express those performance fees. Some of them are absolute returns, some of them are relative returns, et cetera.

We are in a unique position, given AMG's affiliate model and the ability to have the diversity that we do across all of these different performance fees streams, that when you stress test it or look at it in different ways, you can see how the 5% to 10% is a pretty good estimate. Now, one of the interesting things about performance fees is they can never go below zero. So, in good years, like last year, it can go well above 10%.

What we're doing in this October/November call is really giving you a sense for where we are to date, because ultimately we only express performance fees when crystallized, and we've seen 10 months of performance. It doesn't mean that we can land that exactly, because we still have two more months to go, but we do have a sense for volatility around where we see accrued but not realized, which is not a number we report, but we do have a sense for that. So, that's what informs our decision to narrow the range the way we did.

As it relates to flows on a 2015 basis, and really flows generally, we obviously reflect on our historical performance, but we want to be conservative. I think Michael Kim earlier asked the level of conservativeness. I think we do have an ounce of conservatism across all these different assumptions. And there you would assume we were being relatively conservative in how we think about flows. But we don't give a flow estimate.

That's helpful. Thanks very much for taking my questions.

Robert Lee with KBW.

Most of my questions have been asked. But one I did have was capital management related, and specifically talk a little seed capital in the sense that in the past you guys really haven't had to put up too much in terms of seed or commitments. Most of the affiliates have funded that on their own.

As you look to expand into retail where sometimes seed capital and new products, demand seems to have gone up over the years, can you just talk about how that's evolving? Do you see that could be an incremental use of capital compared to the past coming years, just as you deepen retail penetration, roll out new alternative strategies across different affiliate? Just any thoughts there.

Nate, why don't you talk about product development broadly and then we can --.

Sure. For us, seed capital has been the way we think about it as an integral part of the way we work with affiliates in product development. And as you observed, I think, the work we do with affiliates in product development has been increasing over these years. It's coming from a few places, which is working -- we have a feedback loop now that we didn't have several years ago, which is the feedback from all of the distribution professionals working closely with these large pools of capital.

We are able to bring all that information back into our dialogue with affiliates or beginning to work with them all the way as early as that level, which is product conception. Working with our affiliates where we see demand, where they see demand, where obviously they think they will be excellent, and then working with them in packaging, as well.

Part of that conversation is, of course, are there things we can do to help them if the product needs a level of capital, either doing it as AMG or doing it in partnership with or helping them get those first seed investors from among the institutional relationships that we've built around the world. So, we've been doing more and more of that as an integral part of our work with affiliates in product development. That does include, as I said, that does include more work with them in seed capital.

A couple of points to add. I hear people talk about seed capital and their seed capability. Frankly, in many cases, it comes as a response to net outflows, to poor performance in organic growth, where it's that -- don't worry, it will somehow change because we'll throw some money at it.

Our experience has been that, of course, supporting affiliates -- and affiliates themselves are investing in new products -- is incredibly important. But it's just one component. And at the end, the most important measure is of course what's the actual level of organic growth, what's the consistency of the organic growth, what's the diversity of the product set. And or us, virtually all of our flows are in active equities and alternatives.

And the industry flows, virtually all of what the public company peers are reporting, are in passive products or fixed income. Very few firms have positive flows in active equities and alternatives. We see the continued development of products and their continued growth as part of something that's a long-term story and clearly working, and continuing to work going forward.

The other point I would make, which is unique for AMG, is that we have this feedback loop that Nate described, where we have real insight from our distribution platform about where forward client demand is in terms of specific types of products. And through our new investment strategy, we are able to find firms or focus more on firms which have products where we see substantial future client demand.

When we are investing in a new affiliate, and, if you will, acquiring that product exposure, by definition, instead of investing in a new product which will have to incubate and mature and we're not sure it's going to work, when we invest in a new affiliate we know by definition that it is very successful product, that it's readily salable immediately. And of course if we're focused on it in this regard it's got substantial capacity.

That really is a very unique and important way that AMG offers product development. Our distribution relationships, increasingly, with the largest clients and their advisors, actually focus on asking us for insights and opportunities to get exposure to broader, more diverse clients set, or product set.

Great. That was all I had. Thanks for taking my question.

Greggory Warren with Morningstar.

Just real quick, I don't think you mentioned it directly but I did the math on the Veritas deal. It looks like when you brought it in, it had about $17.5 billion in assets at the end of September. I just wanted to clarify on that. And also just your feel on how flows are looking for that particular business. I know they're more exposed to the Asia-Pacific region.

You're right. Pro forma it was 617 and I think our AUM table shows just around 599.5. That is the math and you are correct about that. I don't know, Nate, do you want to comment? I would say that the Asia products were relatively small, it's more of a global equities exposure. But they are meaningful Asia products.

Yes. And the Firm is actually having a very good year in terms of organic growth. They are, like our other affiliates, focused on measured growth and building an enduring franchise. But we feel very good about their near- and long-term prospects for organic growth.

Okay, good. I'm not sure if anybody asked this or not, it didn't stand out, but on the institutional flows, could you point to -- it was a bit stronger than what I was expecting for the period -- really point out to where the product sets that were working, where you actually picked up things and whether or not you expect that to continue?

The flows this past quarter, if I were going to characterize anything, I'd say probably stronger alternative. So, more in alternative institutional flows. We have a very strong pipeline. It is lumpy. But, if we look ahead the pipeline is very strong and it remains -- as we have been saying -- it remains in global equities alternatives including the (inaudible) equities in the institutional area. But this past quarter, very strong alternative. That's how I would categorize, based on alternative institutional flow.

Okay, good. Thanks a lot.

Ladies and gentlemen, at this time we've come to the conclusion of our question-and-answer session. I'd like to turn the floor back to Mr. Healey for any final remarks.

Thank you again for joining us this morning. As you've heard, we're pleased with our results for the quarter and we remain confident in our ability to generate meaningful earnings growth through both organic growth and accretive investments in new affiliates going forward. We look forward to speaking with you in January. Thanks.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.