Affiliated Managers Group Inc (AMG) 2015 Q2 法說會逐字稿

Greetings and welcome to the AMG second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Selene Oh, Vice President, Finance and Investor Relations. Thank you, you may begin.

Thank you for joining AMG to discuss our results for the second quarter of 2015. 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, Selene, and good morning, everyone. AMG reported economic earnings per share of $3.08 for the second quarter of 2015, which is a 16% increase over the same period last year. Our strong results for the quarter reflect ongoing momentum across all aspects of our business, including excellent execution of our new investment strategy, outstanding long-term investment performance by our industry-leading boutique affiliates and continued strong organic growth from net client cash flows, bringing our assets under management to a record $650 billion.

Notwithstanding increased volatility in global equity markets and a somewhat muted investor risk appetite, we generated over $4 billion of net client cash flows during the quarter, marking our 21st consecutive quarter of positive net client cash flows with a cumulative total of $135 billion in net flows over this period.

The ongoing success of our global distribution strategy, including new or expanded fundings in every coverage region worldwide during the quarter, reflects the outstanding long-term investment track records of our boutique affiliates across a diverse range of return-oriented products, as well as our strategic focus on global and emerging market equities and alternatives. Moreover, given our position as one of the largest alternative managers in the world, we continue to benefit from significant organic growth across a broad array of liquid and illiquid alternative products, which collectively generate over 35% of our earnings.

Looking forward, we see strong demand for our differentiated return-oriented strategies as global institutional clients continue to barbell their exposures into passive beta and active alpha components, and increasingly prefer boutique managers for the alpha-generating portions of their portfolios. We believe that over time demand for these products will likewise accelerate among retail clients, who will inevitably require greater allocations to return-oriented strategies to meet their long-term objectives.

AMG uniquely offers the breadth and diversity of an array of independent managers with distinct brands and specialized investment processes, combined with the efficiency of in-market client service and a single point of contact. With our affiliates' outstanding long-term investment track records across a wide range of alpha-generating strategies, especially in global and emerging market equities and alternatives, AMG is well positioned for continued strong organic growth.

Turning to new investments, we continue to make excellent progress towards partnering with outstanding new affiliates. Earlier this month we were pleased to announce the addition of our fifth Wealth Partners affiliate, myCIO, a leading Philadelphia-based wealth management firm with approximately $7 billion in assets.

Looking ahead, the transaction environment remains highly favorable to AMG and we have a growing and diverse pipeline of prospective new affiliates around the world. Given our unmatched competitive position as the permanent partner of choice to traditional and alternative boutiques globally, our two-decade track record of successful partnerships and our global distribution capability, we are confident in our ability to meaningfully enhance our earnings growth through accretive investments in outstanding new affiliates.

Stepping back, we have built our business into one of the largest global investment managers based on the fundamental belief that outstanding boutique firms with distinct, highly-focused investment processes, alignment of interests through equity ownership and unique entrepreneurial cultures have competitive advantages in generating alpha in active equities and alternatives.

In June, we published a research paper which analyzed 20 years of institutional equity returns across nearly 5,000 strategies, and demonstrated that active boutique investment managers have consistently outperformed both non-boutique peers and indices over virtually all relevant time periods. These results present a sharp contrast to the prevailing industry narrative that active management under-performs passive products, while also validating our belief in the distinct advantages of boutiques in delivering alpha for their clients.

Going forward, we are uniquely well positioned to continue to increase the scale, diversity and earnings power of our business, both organically and through new investments. Given the strength of our existing business, our unparalleled global distribution capability and our proprietary opportunities to partner with a growing number of leading boutique firms, we are confident in our ability to continue to create outstanding shareholder value. With that, I will turn to Nate to discuss our results in greater detail.

Thanks. Good morning, everyone. As Sean said, AMG performed well during the first half of the year. While it was a period where investor risk appetite was relatively modest, over the long term we believe clients will need to continue to increase allocations to return-oriented assets in order to meet their liability stream, and we are very well positioned for when this occurs.

In the quarter, we benefited from clients increasing their allocations to focused boutiques, especially for the return, or alpha, portions of their portfolios. This trend, combined with the excellent long-term track records of our high-quality diverse group of affiliates, resulted in over $4 billion of net flows in what was our 21st consecutive quarter of strong growth, totaling $135 billion in net flows during this period.

Turning to investment performance and starting with the alternatives category, where we offer a wide range of strategies, standout performers in the quarter included BlueMountain and ValueAct. In addition, long-term performance track records across the majority of the largest products in our alternatives category continue to be very strong, including especially at AQR, BlueMountain, Pantheon and ValueAct.

In fact, Pantheon was just named Fund of Funds of the Year by EuroMoney at their investment excellence award. Continuing with the global developed markets category, our affiliates generally had strong investment performance, with highlights for the quarter including the major global equity products at Artemis, Harding Loevner and Veritas. These products continue to have outstanding performance records across longer-term periods as well.

While Tweedy, Browne under-performed in the quarter due to both their strict deep value discipline and relatedly, the cash flow they held in their portfolios, the long-term track records there remain excellent with top decile ranking across 10 and 15 years at Morningstar. In the emerging markets category the major products managed by AQR, Genesis and Harding Loevner, slightly under-performed their benchmarks in the quarter. Long-term performance records across their product suites, however, remain very strong.

Finally, with respect to our US equity products, performance was mixed, with Yacktman under-performing, while GW&K and Systematic outperformed across most of their products during the quarter. Frontier also delivered very strong performance, both in the quarter and across longer time periods.

Now turning to flows for the quarter. As I said, we had another good quarter, with $4.1 billion in positive net client cash flows. As we emphasize on every call, flows, especially in the institutional and sub-advisory channels, are inherently lumpy. However in the quarter, flows were very diverse in terms of product category across both alternative and global equity products.

Starting with the institutional channel, we had positive net flows of approximately $6.1 billion. Flows came primarily in alternative strategies and global equities, including notable contributions from AQR, BlueMountain, EIG, First Quadrant, Harding Loevner, Pantheon and ValueAct, very diverse.

In our high net worth channel we had positive net flows of $70 million, with contributions from GW&K and Harding Loevner. We also had a notable contribution from our new Wealth Partners affiliate, Baker Street.

Focusing on Wealth Partners for a moment, I would also like to welcome myCIO Wealth Partners, a new affiliate which we announced a couple weeks ago. myCIO is a highly-regarded wealth advisory firm with strong future growth prospects.

They provide comprehensive and integrated advice regarding asset allocation, manager selection and financial and estate and tax planning, with a focus on corporate executives and retirement plans. With this most recent investment, our Wealth Partners business now includes five outstanding firms with over $30 billion in AUM, making us one of the leading wealth management firms in the industry.

Moving to the mutual fund channel, we had outflows of $2.1 billion. While we had positive flows into many global and emerging markets equities and alternative strategies, which came from a number of affiliates, including AQR, Artemis, Harding Loevner and Tweedy, Browne. These were more than offset by outflows at Yacktman and other US equity products at AMG funds.

This was against the backdrop of a tough environment for US retail flows for active return-oriented managers generally, and especially in US equities. As we've noted on previous calls, our US retail business has a skew towards US equities, unlike our broader institutional and high net worth businesses.

Maybe one final point about flows and distribution and the evolution of our distribution capabilities and strategy. This evolution has played an important part not only in driving our significant positive flows over the past 21 quarters, but more importantly sets us up extremely well to continue to drive significant positive flows in the years ahead.

Over the last decade we have made significant progress towards our vision to build out a unique multi-level distribution strategy. At the first level each of our affiliate maintains their own dedicated distribution and product specialist resources in the channels and geographies where they can do an excellent job. As you know, we have invested in affiliates that are complete firms.

At the same time, we've built a second highly complementary AMG-level of distribution that is designed to do three things. First, add the benefits of global scale to these boutique firms, allowing them to access appropriate clients around the world in a cost-effective way, clients they could not have accessed on their own.

Second, to create a relationship with the marketplace that is unlike the relationship any boutique firm could have. This is a relationship where we can engage with ever more sophisticated clients around the questions of what do you, the client, need and what problems are you, the client, trying to solve. As opposed to here are the products we have to sell.

Third, we are at the early stage of building client relationships that ultimately will allow us to work with our affiliates and help them with everything from more effective product development, more effective client acquisition and more effective client retention, all in the context of the multi-level relationships we already have with most of the largest institutional clients in the world. This global strategy is working well today and we continue to make good progress.

Also, we are in the early stages of building out this same approach for the retail market, certainly here in the US. But conceptually it can extend to other global regions as appropriate, given the return profiles we see, and we have taken some initial steps. Putting these all together, as I said earlier, we are setting up extremely well to continue to drive significant positive flows in the years ahead with our existing affiliates.

Finally, we should also recognize the significant corollary benefits of the success we've been having with our AMG platforms. We often speak about this in terms of a virtuous circle. Our distribution success makes us more attractive to prospective new affiliates who come with outstanding additional product, which in turn makes us a more valuable business partner to our clients and their intermediaries, which in turn will allow us to continue to generate even greater organic growth in the years ahead. And with that, I'll turn it to Jay.

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

As you saw in the release, we reported economic earnings per share of $3.08 for the first quarter, an increase of 16% year over year, with net performance fees contributing $0.11. On a GAAP basis, we reported earnings per share of $2.31.

Our GAAP earnings for the quarter included a non-cash imputed interest gain related to the revaluation of our contingent payment obligations. Excluding this item, our GAAP earnings for the quarter would have been $2.14 per share. This non-cash item had no impact on our economic earnings per share.

Turning to more specific modeling items. For the second quarter, our EBITDA increased 13% year over year to $239.2 million, reflecting the continued organic growth of our business and the impact of new investments. In the second quarter the ratio of our EBITDA to end-of-period assets under management was approximately 14.9 basis points, or approximately 14.2 basis points excluding performance fees. In the third quarter we expect this ratio to be approximately 14.1 basis points, as we expect only a minimal contribution from performance fees.

With regard to our taxes, our effective GAAP tax rate for the quarter was 35% and our cash tax rate was approximately 22%. For modeling purposes, we expect our GAAP tax rate to be 34% and our cash tax rate to remain at 22%.

Intangible related deferred taxes for the second quarter were $20.7 million, and we expect this number to stay flat at $20.7 million in the third quarter. Our share of reported amortization for the quarter was $30 million, which includes $8.7 million of amortization from affiliates accounted for under the equity method. We expect our share of amortization to remain at approximately $30 million for the third quarter.

Our share of interest expense for the second quarter was $22.5 million and for the third quarter we expect our share of interest expense to remain at this level. Our share of pretax non-cash computed interest expense for the second quarter, excluding the contingent payment gain of $15 million, would have been $1.8 million. For the third quarter we expect our pretax non-cash imputed interest expense to decline to approximately $1 million.

Turning to our balance sheet, the excess cash flow generated from the size, scale, and diversity of our business provides us with significant capacity to execute our new investment strategy and the flexibility to return capital by repurchasing shares. In the quarter we repurchased approximately $125 million, bringing our year-to-date total to approximately $280 million. Looking forward, with run rate EBITDA of approximately $1 billion, combined with over $1 billion of undrawn revolver, we continue to be well-positioned to create incremental opportunities for earnings growth.

Now turning to guidance. We are updating our 2015 guidance, as we expect economic earnings per share to be in the range of $12.80 to $14.00. The revision in guidance was entirely attributable to market changes since our last earnings call.

This guidance assumes a model convention of actual market performance through yesterday for the current quarter, 2% quarterly market growth beginning in the fourth quarter and repurchases of 50% of annual economic net income for 2015, resulting in a weighted average share count of approximately 55.5 million for the year. The lower end of our guidance range includes a modest contribution from performance fees and organic growth, while the upper end assumes 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 will be happy to answer your questions.

(Operator Instructions)

Craig Siegenthaler, Credit Suisse.

Thanks, good morning, everyone.

Good morning, Craig.

Wanted to hit on retail first. Jeff Cerutti has been in place for over year now and I think there's been some changes among the retail wholesaling ranks. So really you when will product tweaking and the US distribution effort be ready to really more aggressively attack and gain market share from the bigger broker-dealers, RIAs and some of the key distribution partners?

Sure. This is Nate, I will take the first part of that. You are right, the team is now in place. I think there were several members, but the team is now in place. I think you also hit on the key question as you think about short term, which is the product mix.

We've talked about the product mix of the install base. It's a reasonably scaled US retail platform already, and we've talked about the product mix there being skewed towards US equities and the challenges that active US equities are having.

But there's actually a lot of work going on already in terms of product development and building out a product set, or additional product that is both appropriate near-term, but also trying to also focus on the medium to longer term, where do we think the real opportunities are? Examples that we've talked about, I think on previous calls, have been in the alternative spaces, an example where we have lots of manufacturing capability and we also have packaging capability. And that's both liquid and illiquid, as we talked about before.

So I think you hit on the right question, which is, I think, the team's built and in place. They are executing and continuing to evolve the focus of the people underneath and where they're pushing.

And I think we've also talked about we have good penetration in some places, wires and RIAs as examples, as we bring AMG Funds and Aston together, as we have rebranded and are now leveraging the AMG brand into these channels. So there's lots of good things happening. But again, you can hit on the key term then, I think, in the short run, which is making sure we continue to evolve the product mix.

In the long run, the biggest opportunity is around broader client demand trends. We are convinced that, and history tells us, that demand trends move in cycles. And I think with rising rates, and ongoing evolution, and among retail investors, and the inevitable need as I said, to find and pursue more return-oriented strategies in order for retail investors to meet their long-term planning objectives, we believe that the retail universe will -- client demand universe -- will increasingly move toward the return-oriented products that we emphasize, the alpha portion of the barbell, if you will.

Then, I know you understand this, but I think it is worth emphasizing, and we saw it again this quarter in a period of challenging US equity demand -- for us and for the industry -- in the US retail space, the strength of our business, and the preponderance of our business and the global, institutional client universe is evident. And you saw that in the strong flow numbers that we put up, which even as I said, in a difficult period for US retail, resulted in flows that were strong, especially relative to overall industry results.

Great, think she said just one question, so I will get back into the queue.

Dan Fannon, Jefferies.

Thanks, good morning. Jay, if you could clarify the components of the guidance in terms of the marks through the quarter. Then also, on the buyback in the quarter, would you characterize 2Q in terms of the purchases in that level as a base case for thinking about modeling going forward?

Okay, so Dan, as I mentioned in my prepared remarks, the change in guidance, the revision, is entirely attributable to lower beta since our last call, which is off about 3% since the last time we gave guidance. This is reflecting the downward volatility in global markets that started late June and continues through yesterday, I guess.

Stepping back, though, on the convention, and then I'll address your question about quarter to date. Our convention is, since our last call, April 28, we assume zero markets for the remainder of second quarter and 2% for the third quarter. As I just mentioned though, the actual blend was off 3% from April 28, which is the last time we did the guidance through yesterday, which results in a 5% cumulative market decline versus our model.

As you know, for the remainder of the year we will assume no additional market this quarter -- for the remainder of the third quarter -- and then 2% for the fourth quarter. So that is our guidance. So when we look at the revision it was entirely a market-driven revision.

But the detail you were looking for, a little extra detail on quarter-to-quarter changes. First as you saw in our AUM table, we experienced almost no contribution from market change in the quarter, so it was basically flat. And then from June 30 through yesterday, our market blend was off about 1%. So that is another way of looking at the same market on a quarterly basis.

On repurchases, this quarter our share count was 55.6 million. In the third quarter we expect the share count to come in because of the weighted-average effect. In the second quarter we will have a full effect on the third quarter, and that $125 million that we repurchased was more reflective of the fact that we didn't have material new investments in the period.

Go back to the model convention, which is just a convention of 50% of annual economic net income for repurchases. But the substantive point is our first priority is new investments to the extent that in, because of the accident of timing, we don't have a new investment or material new investments. We might do a little more. As we look forward in the second half of the year, we do have a good pipeline and we will be mindful of the new investment opportunity as it relates to the capital that we put out.

I would just add, underscoring what Jay just said, that the baseline expectation for investors should be that we will return the cash the business generates either through repurchases. Or the first priority, as Jay noted, is always going to be new investments.

So your question around baseline is, I think, relevant to the guidance convention. But not really relevant to the overall business strategy, where you may see periods of even more elevated repurchase activity in a quarter.

But over time we expect that you will see substantial new investment activity, with some repurchase activity along in the mix as well. But the overall opportunity in new investments, and I'm sure I will get a question around this in a moment, remains extraordinarily strong, better than ever.

Great, thank you.

Bill Katz, Citi.

Thanks so much and, Sean, let's just pick up right there. In your press release you did add some verbiage here you're saying progressively well, so not to mince too much but it sounds like little bit more upbeat than what you said last quarter.

Stepping back, could you talk a little bit about the pipeline sequentially, where you see the best appetite? Could you also address competition, because I've noticed a couple deals have been announced of late. Blackstone made a majority stake in to First Eagle. I think Ares merged up with Kayne. Curious if there's any pressure building on multiples? Thank you.

Sure, thanks for the question, Bill. The overall pipeline, as you heard Jay and me both say, continues to be very strong. It continues to be skewed to alternative and to non-US prospects with, and I will talk about this further in a moment, but with a broad universe of outstanding prospects where we we've built strong relationships.

I would say current-year pipeline, there were a couple of investment opportunities that were deferred for one-off idiosyncratic reasons earlier in the year. And Jay alluded to that in the slightly elevated repurchase activity.

But at the moment we are very busy with some excellent new investment prospects. I'll leave it there in terms of the short term.

I would say our experience and activity level is against a backdrop of actually relatively slow overall industry activity. If you look sequentially at the number of transactions, even AUM, it's down. There have been a few notable transactions which involve different kinds of firms doing different kinds of deals. So not really relevant to us.

I would say we continue to be highly selective in our choice of prospective affiliates. There are always going to be deals which others will pursue, which you will see announced, where we didn't think the opportunity was right for us.

And then finally, over the medium to long term, our market position continues to be extremely strong. The universe, and we talk about 150 core prospects where we built relationships, I would say even over the last several months, that universe expands. We've done a very good job of adding to and deepening our relationship set among the best prospective boutiques around the world.

Transaction timing is inevitably going to be driven entirely by the individual prospective affiliates and their idiosyncratic decisions about the right time for them. I would say we, on an overall basis, none of our expectations about transaction activity or timing, is reflected by or based on, any perceived increase in competitive pressure.

I would say on an overall basis, as we think about the opportunity set, again, in the medium to long term, we look at this universe of outstanding boutique firms around the world, and our judgment is that the decision for these firms to seek a succession planning solution is a question of when, not if. So our relationships which form the foundation of the opportunity, and our market position, competitive position, and the offerings we provide, and the track record of success in our relationships and recommendations from existing affiliates, give us just enormous confidence as we look forward.

Okay, thank you.

Michael Carrier, Bank of America Merrill Lynch.

Thanks, guys. Just on the M&A front, you've been a little bit more active on the wealth management side, and I know each transaction is going to be different. But just wanted to get your take on the outlook for both that industry, and then how you guys see it. And then, on the transactions, just how we should think about deploying capital in that arena versus maybe the legacy, like what you traditionally have been active in on the asset management side, just how those economics differ?

Well, first, the core opportunity among asset management boutiques remains as I just said, extraordinarily attractive, with a very large number of firms, and our judgment that we have an extremely strong competitive position. Separately, and it really is separate, with a separate team and a separate strategy and I will ask Nate to talk about the strategy and some of the potential synergies that we see with the wealth management boutiques. I am extremely pleased with the results and execution by the wealth management team. And as you've heard, another new wealth management affiliate, we are now up to about $35 billion in wealth management assets, which puts us in a very short span of time among the leading independent wealth management firms with lots of ongoing prospects. Maybe I will ask Nate to talk in a little more detail about the execution and the opportunity.

Sure. So let me start by emphasizing the point that Sean made, which is sort of this separate effort. It really is a separate effort, and customized for that space. And maybe I'd broaden it a little and say separate and complementary, and maybe I will use that to get in a little bit into, I think where Sean was headed. Which is, so we've made, we have five affiliates now in the Wealth Partners group, and they are among the very best. So as we have made investments in among the very best wealth partner firms, there's a continuing pipeline of firms of sort of equivalent scope and scale that we are looking at. And so, I think that sort of path and continued growth is there.

The other thing is, and this comes back to the complementary, there are two things we are starting to do now, right? One is now, at our scope and scale with the wealth partners firms, as we did with our more traditional affiliates, once you get to a certain scope and scale, you can start to leverage that to improve and provide additional opportunities to the business.

So we are beginning to do that, which is what are the things we can do to help these firms, instead of spending more effort, which is what are the things we can be doing to help these firms capitalize on opportunities. And we think there are number, some that look like what we've done with traditional firms, but a number that are different, given the different nature of those businesses.

And then there are also opportunities we believe, and this is more of a medium to longer term opportunity. But we believe there are opportunities to build bridges between the more traditional affiliates, and the excellent manufacturing capabilities that they have, and the -- Wealth Partners affiliates. So again, that's more of a medium term opportunity set. But we do think these are highly complementary businesses on a bunch of different dimensions.

Okay, thanks a lot.

Thank you, the next question is coming from the line of Chris Shutler with William Blair. Please proceed with your question.

Good morning.

Good morning.

I think last year, Sean, late last year you started talking about potentially broadening the investment strategy. Clearly, you guys have been adding firms on the Wealth Partners side. But just curious what else are working on behind the scenes to the extent that you can elaborate?

You are right to make the observation, Chris, and I think we've made excellent progress, and there has been a great deal of time and energy devoted to identifying a universe of prospective targets, and thinking through the various issues around the best way of partnering with such firms. There isn't a lot that I can say beyond that at this point.

But I think you will see some announcements, and I don't there will be any one investment or partnership that stands out. But the cumulative effect, I think over time will contribute meaningfully to ongoing diversification and broadening of our product set. Maybe I will ask Nate, who is heading up this strategic effort to add anything that I left out, given the constraints about not announcing what we can't announce yet.

No, I think you said it just right, and I think we are very focused on, as you know, we are very focused on alignment, and where the leverage opportunities between what we know how to do, and what we are good at, and where the opportunity set is. And so, we have looked at a lot of things, and maybe on the margin you could say, being a little on the cautious side right now. I think we are also known by the things we don't do -- so we have looked at a bunch of things, and I think we are making good progress. and but I agree with what Sean said.

All right, thanks. And then, just the other question I had was just on capacity, and maybe just give us an update on the existing managers that you have, particularly the ones where you have been seeing really good flows over the last several quarters? Are there any that stand out as having capacity constraints at this point? I would think ValueAct is probably in that bucket. But maybe help us think about firms like Harding Loevner?

So you don't get in trouble with Selene, Chris, we're going to view that as linked to your prior question (laughter)

Sorry, Sean (mutliple speakers -- laughter).

Yes, so I think -- let me answer across the group, I want to be careful and not get ahead of how specific affiliates are talking about it to their clients. But look, there is definitely some areas where affiliates are looking carefully at capacity, and I'll break it into a couple buckets, right? So one is absolutely, right, because there's a limit to how much someone can manage in a capacity.

There is also a number of the affiliates that are managing the pace as their firm grows, right. So we've had affiliates building queuing and pacing systems and all that, which is less about the capacity and investment process, and just making sure that they bring in the assets in a way that they are doing a good job for their existing client base first. And there are certainly affiliates doing that. And then there are certainly also ones, where affiliates are managing capacity to match it with the investment opportunities they see now. And so, an example of that that is public, would be a firm like Tweedy Browne which has been soft closed for a while. And so, managing inflows from their existing user base really. And so, I think when you talk about capacity, you have to sort of think about all of those.

The other thing I would say, and we have examples of all of those. The other thing I would say though, is those are more than offset, and you are seeing this in our flow results, that is more than offset by new products coming online at a range of different affiliates. And I think, I used the words coming online sort of consciously, because it's some partner products being launched, and it's also a number of products coming up on three-year records or five year-records or $100 million in assets, and places where they can really be brought to market. And we've got a number of affiliates across channels and geographies where that is happening.

And some of this also relates to packaging, right, so we have to make sure we can help affiliates with the packaging. And a lot of this also relates back to that virtual circle conversation that I talked about before. Because we are also, I think being able to be a more effective partner to our affiliates in conversations around product development, where they should be taking these products so they can access clients faster, appropriate clients faster, and make the cost of acquisition and time to acquisition shorter.

So all of those things are happening. So we certainly have affiliates where there are capacity things, but it's certainly more than offset by new products coming online at a range of affiliates. And then finally, there's the role that new affiliates play, which is what you've heard us talk about before. Which is as we bring on new affiliates, one of the certainly strong advantages we have, certainly as we have been building out distributions is you can bring in new affiliates with the appropriate products, and leverage distribution capabilities much more quickly. So I think we feel good about the new products coming online in our existing affiliates, and then obviously also the opportunity set as we look at the pipeline of potential affiliates.

All right. Thanks a lot.

Thank you. Our next question is coming from the line of Michael Kim with Sandler O'Neill. Please proceed with your question.

Hey guys, good morning. So just in terms of flow trends, it seems like on the one hand demand for alternative strategies continues to remain strong, but less favorably, interested in more traditional actively managed domestic equity funds remains soft across the industry, and pretty evident when you look at your flows by product and channel. So just assuming those trends sort of hold steady for the time being, just wondering about sort of the relative economics for AMG in terms of EBITDA contribution? It seems like you may have some offsetting dynamics around maybe higher fee rates for the alts, but maybe lower ownership stakes in some of those affiliates. So just wondering how that might play out at a high level?

Well, I think the first reaction I have is you notably left out global and emerging marketing equities, which do even in the US retail channel, and certainly on a global basis, represent real growth opportunities where we have a number of excellent affiliates. So it's not just an alt story, indeed global and emerging marketing equities is a bigger element of our product set, even than alternatives.

And so, that is the first answer, is you look at our broad product set. You look at overall industry trends and our own results, which I think relative to the industry, including of course, in return-oriented products, I think position us very well and are evidence of the ongoing strength and vitality of our business, and the quality of the underlying affiliates, and their products. So that is the high level answer.

The second high level answer I would give, which I'm sure Jay would say, but I'll say it first, and then let Jay add to this, is we are unique among our public peers, certainly among any large public peers, in giving earnings guidance. And sometimes the guidance methodology about what we assume about market returns in a given quarter like this one, can sort of mask the underlying strength of our results and of our business and future prospects. We leave it to you, to sort through all of that. But if you look at our forward guidance, and compare our earnings growth to any of our peers, we are happy to be judged on that basis. And the guidance assumes, and encompasses judgments around any of these changes in mix.

And in many cases, the difference between our -- the economic impact of a quote, minority-owned affiliate is not that different, given the incremental investments in firms like BlueMountain and AQR. It's not that different than some of the quote, majority-owned affiliates. And just the guidance in itself is evidence of this. We feel very good about our earnings growth prospects. I will ask Jay to add to that.

I think Sean did a nice job of covering it, Michael, but just to add a bit more color to it. I think on the fee bit, really in alternatives in general not only have a management fee component, but they have a performance fee component. So when you look at in total, especially through the years and over the course of the year, most of our performance fee is expressed in the fourth quarter, you are actually seeing our fee rates go up a little bit in that context.

And as Sean mentioned, the equity method affiliates, while a slightly lower ownership in the consolidated is not that much especially since we've made a second investment in AQR, and a second investment in BlueMountain so the mix is much closer between equity method and the consolidated. So when you take the two together, and you think about we give guidance every quarter.

On a quarter where there's very little performance fees like the third quarter, for example, we've held pretty steady at EBITDA to end the period assets under managements in the 14 bps, low 14 bps. But on a yearly basis, we are north of 15 bps, maybe even close to 16 bps. And if you look at that over a longer period of time, it has actually been flat to up, not flat to down.

Got it. That's very helpful. Thanks.

Thank you, next question is coming from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Good morning, folks. Okay. Maybe just to get a little more on the performance fee question, Jay, and then a related question for Sean. Just in terms of the math on the $0.11, that seems to be about 3% of EBITDA, if you can verify that. And then, are the lower and upper bounds of the guidance range still 5%, of EBITDA and performance fees, and 10%? And then, do you feel -- just based on the comment you just said, Jay, I think you're tracking on the better side of that? And then just longer-term about the affiliates that you are interested in, is increasing that performance fee part of the mix, is something that is interesting to you from a, I guess, alternative perspective?

Okay. So that's a good question. So let's maybe, take it, the performance fees at a high level, a couple of quick points, and then I will be more specific.

The performance fees have and they continue to contribute earnings in a consistent and meaningful way, given the breadth of our products, and the type of performance fees that we have, and the diversity of the affiliates that produce performance fees. Some of those performance fees are related to alternative products, both liquid and illiquid, and some of them are related to more traditional, long-only products. So there is a lot of ways for us to generate performance fees. So that's the first point.

So second point is, when you look at our flows, and we have talked about good flows over a long period of time into alternatives, I would like to just add a small point before I make the bigger point, that not all alternative flows go into performance fee oriented products, notably Pantheon and liquid alternatives at AQR, tend to be more management fee products. So when you see our flows, not all are going into performance fee sensitive products, some of them are going into management fee products.

But as I think you would expect, against the backdrop of continued flows, we are seeing our performance fee opportunity go up modestly, as a percentage of our earnings. I think on the last call I said, given the scale, diversity and the performance to date of our alternative products, our 2015 guidance range includes a slightly higher performance fee assumption. So that is the case at both the low and the high end, a slightly higher performance fee assumption.

The last thing I wanted to say about performance fees just to note, we like to say this, we only express performance fees when realized. So we get the performance fee in cash when it is expressed in our earnings.

Which is distinguishing between us and other firms, which may use method two, which is mark-to-market performance fees, where you can see more volatility in the performance fee stream, or effectively a reversal of performance fee earnings that might have been recognized in an earlier period, but wouldn't given changes in market, perhaps ever be realized as cash. For us, it is an inherently more conservative approach.

The other thing I would say, which Jay, I think implicitly mentioned is the nature of performance fees for AMG is that they can be much higher, and we have many different strategies and many opportunities to generate exceptionally strong performance fees. But they can never be below -- for any strategy -- never be below zero. There are not scenarios where we are giving back money, and that one-way option is again not always present in the way that other entities talk about, or experience performance fees.

With respect to the second part of your question around our future strategy for investing in alternative firms, there is no question that there are a large number of really excellent institutionalized alternative firms that have built, and want to continue to build enduring franchises, where some kind of succession solution, or partnership is attractive to them. And I think I would say broadly AMG's proposition -- value proposition -- is attractive to a firm that probably does not need money. If all you offer is just money, that is not something that the typical successful alternative firm really needs.

And if that is the kind of transaction that clients see, it really isn't aligned with client interest. If by contrast, it's a comprehensive partnership where we offer in a way that is very attractive and amenable to the needs and desires of alternative firms in areas like global distribution, global compliance, et cetera, where the prospective affiliates get the opportunity to access and benefit from economies of scale in a real strategic capability, that is sensible and attractive to firms, and by extension to their clients.

And in the same way, a permanent partner with a long track record of successful partnerships, where part of the ongoing opportunity is to have the partner participate in ongoing succession transition in a way that we have done several times with our alternative affiliates, and was really the cornerstone of our overall business activity. That too, is attractive for the right kind of alternative firm.

And so, yes, you will see more investments in the future in excellent alternative firms. But I should say, the largest part of the universe of excellent boutique firms around the world are still in traditional long-only strategies, including especially global and emerging market equity strategies. And so, on an ongoing basis, I do not expect the mix of our business to, from a product standpoint, from a performance fee contribution to overall earnings standpoint, to change that much. Obviously, we expect growth in all areas, both organically and through new investments.

Okay, that's great color. Thank you very much.

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

Thanks, and I appreciate your patience taking all the questions this morning.

Sure.

Just on the global distribution. I guess when I think of global distribution, I guess I have historically thought of it as predominantly an institutional effort in the US, the AMG Funds platform is predominately a retail effort. But can you maybe talk to us a bit about, what the plan is kind of non-US retail? I mean, is that kind of the next leg of your global distribution that you are either investing in, or thinking about? That would seem to be a logical extension. And so, maybe just talk about that a little bit, where that type of initiative stands, and if it's on the horizon, and maybe how you think -- what you would think it would cost?

Perfect. Thanks very much for the question. So I think you understand exactly right sort of how we have built to here. So fundamentally as we said, we are marrying excellent performance-oriented boutiques with the scope and scale of global distribution platforms. And you are right, the non-US has been predominantly institutional, but does include some sub advisory, but predominantly institutional. And, we've started out going to regions, hiring experienced marketers.

I think you've heard us talk now for a couple of quarters about deepening the coverage that we have within existing regions. So increasing specialization by country sometimes, but also sometimes broadening the channels we are covering within the regions, right? So if we have a good, high-end institutional calling effort, we're building a brand in that market where people know us, and know our affiliates. And then, beginning to take that down market.

Now some of that down market can just be smaller institutional, and through intermediaries to smaller institutions. But some of it certainly, can be into platform markets, and then through that, where it would be more effective, direct access. And some of that, through that, building out more packages, which can help the institutional market, as well as be leveragable for more retail platforms. And we are absolutely starting to work on those things.

Now it's showing up, we have done some work already in UCITS space, so we have launched a few UCITS with affiliates. Again, mostly we're focused on places where we can leverage that package to help our existing distribution team deepen their coverage. But so we are starting to build those packages.

The same thing we talked about I think in Australia, where we've begun building out Aussie trusts. Same thing, we can leverage the brand that we have already built over the better part of the decade into platform markets, and we have hired someone to begin working on that effort as well. So I think you are understanding it exactly right, which is it is an additional leg. I wouldn't say it's the additional leg, but it is an additional leg, as we look at the ways that we can continue to leverage the good work that we have done so far building the AMG brand, and helping our affiliates penetrate a bunch of the most attractive markets in the world.

I will say there are other legs, and the other legs include, there are geographies we've not really penetrated yet. And there certainly other channels besides the more retail channels and the more packaged product channels within geographies though that we are already, that we haven't penetrated yet. So there are lots of places for us to go. But one of them is certainly build the appropriate packages, and then bring those packages into more retail markets generally through the platform.

Great, thanks for taking my question.

Thank you. The next question is coming from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Great, thanks. Good morning. A question for you guys on retail alts, something you have talked about for a while, and the industry has been talking about this product and opportunity for some time as well. It feels like it is taking a little bit longer to really gain much of a meaningful momentum. So just trying to get a better sense of what you guys are hearing from the channels, and what are the biggest hurdles for these products to become a bigger part of the retail allocations?

So I think you're right. We have been talking about it for a while. I think we have been seeing some good flows into sort of retail liquid alts. And I think that's both sort of a little bit touching this question and the prior one, that's both US as well as non-US retail with liquid alts. So I do think we have been seeing some good penetration, and we have also been doing some work as you have heard us talk about on prior calls in bringing the sort of less liquid alt products to the marketplace, which has certainly taken a while to catch hold.

And a lot of that is building the packages, and sort of getting the mix, of building what is appropriate for the marketplace with the liquidity, with the constraints of continuing to doing an excellent job relative to the investment process that underlies it, you're sort of putting those together. I think there is -- I can't speak for the industry, that's sort of for us. I think there is lots and lots of good groundwork that has been laid, and I think bringing product into market.

I think it's -- some of it is just figuring -- helping the channels figure out how to use this product, getting it onto platforms, and then through platforms, getting the first movers to adopt it. I just think it's -- I'd say just maybe taking a bit longer. But fundamentally, we have been seeing good flows in liquid alts so far.

And hard to judge exactly when or how, but our view is that there will be more and more demand, especially in the retail channel for alternatives. And if you think about it, the rest of our return-oriented product set, even though you have seen reasonable demand for global equity products, the rest of our return-oriented products that we think will be increasingly in favor in the retail channel.

And you can imagine in an environment where that is the case, or increasingly the case, there will be other products, most notably long-duration fixed income, where the products and the underlying retail investors are struggling, and experiencing even losses in products where they thought they were investing in a quote, safe, i.e. limited principal risk kind of product, and they thought they were investing in a product that was highly liquid, which in some scenarios for some products might not be. And so, that will be challenges for the broader industry, and certainly the firms which emphasize those products. For us, I think it will actually be an opportunity, as clients rotate out of those kind of products, long-duration, fixed income oriented products and into more -- a broader suite of return oriented products like liquid alts.

Got you. Thanks for the color.

Thank you. The next question is coming from the line of Greggory Warren with Morningstar, please proceed with your question.

Yes, good morning, guys. Thanks for taking the question. Hey, real quick. You touched on this a little bit as far as uses of cash, and allocations for capital as we move forward here. Number one priority, being new investments, number two, being repurchases of common stock, when the stock is trading at a reasonable value.

But I think one of the broader questions that I get from time to time from people is looking at a dividend, and I know we've talked about this a little bit in the past. And it looks like with the Wealth Partners investments here, you have found a good source of putting that capital to work, at least in the near to medium-term. But just wondering, what kind of time frame you might be thinking about longer term for a dividend, and whether or not a special dividend makes sense in the near-term?

Well, thanks. I think the opportunity to invest the cash the business generates, and indeed additional capital in new investments, both asset management and wealth management, or Wealth Partners affiliates is enormously attractive in the short, medium, and long term. And we, if you look over any reasonable time period, I think you know we have demonstrated an ability to execute investments over market cycles.

And if you look forward at the 150, and I don't know that we have quantified the number of wealth management prospective affiliates, but it is a very large universe worldwide. I think if anything, it is a growing universe over the course of this year. There are more of these really excellent prospects, that represent ideal investment opportunities for us. And there is, as we have said, a certain inevitability to transaction activity, based around succession, finding a succession solution, a question of when, not if, and AMG's competitive position built over the last 20 years, is really better than it has ever been.

So an enormous opportunity set. We've quantified the asset management opportunity set as $40 billion to $50 billion in purchase price, not even overall enterprise value. So it is that kind of a magnitude of opportunities looking forward, which makes us to sort of return to the specific timing question that you raised. It makes us much more sensitive around maintaining the flexibility that share repurchases provide, in terms of calibrating the return of capital, to periods where we have fewer new investment opportunities, and for us there will be those periods inevitably.

But they will be short in duration, hard to predict ex-ante. And the thing that we are very convinced of, and very much positioning our business for, is over the next five years, a very substantial amount of new investment activity, which we have been able to -- we have demonstrated an ability to make investments in outstanding firms which enhance the overall value of our business franchise, and obviously create even greater shareholder value. So that's what we are looking toward in the medium term.

There will be, at some point, a dividend, but I think it will be at a point where AMG is much bigger, and where we imagine that the amount of available cash flow that is generated every year is more than we are likely to invest in a typical period. And even at more than $1 billion in EBITDA, current run rate, we are not close to that.

So I wouldn't count on it anytime soon. But you should count on a real commitment to return substantially all the capital the business generates in a way that is most attractive to shareholders. I don't know if I left any meat on the bone for you, Jay.

Well said, well said.

Okay. Thank you.

No, thanks, guys. That's good color.

Thank you. We have reached the end of our question and answer session. I would like to turn the floor back over to Mr. Healey for any additional concluding comments.

Thank you again for joining us again this morning. As you've heard, we are 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 October. Thank you

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