Affiliated Managers Group Inc (AMG) 2015 Q4 法說會逐字稿

Greetings and welcome to the AMG fourth-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 Investor Relations. Thank you. You may begin.

Thank you for joining AMG to discuss the results for the fourth 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 $3.61 for the fourth quarter and $12.55 for the full year. Notwithstanding declines in global equity indices, AMG generated strong results, including year-over-year earnings growth of 10%, and excellent execution in our new investments area, with the addition of six outstanding new Affiliates, which diversify and broaden our position in global equities and alternatives and enhance the earnings power of our overall business.

With record earnings in 2015, AMG enters 2016 in a very strong position. Our outstanding Affiliates are continuing to build on their excellent long-term performance track records, especially in alternatives and global equities. And through the addition of new and Affiliates and the growth of our extant Affiliates, our business is now larger and more diverse across Affiliates, product areas and client geographies than ever before.

Obviously the volatile market environment presents challenges for all asset management firms, but while just none of us can predict future market movements it is clear that the market dislocation and rising dispersion provide the best managers of alpha-oriented products with an opportunity to excel. And this is reflected in our Affiliates' excellent performance results in alternative and active equity products in the last quarter and this quarter to date.

In addition, against the backdrop of uneven markets and lower returns, there is increasing client demand for high conviction actively managed products. We are seeing strong demand for our Affiliates' alternative strategies. And as global institutional clients increasingly allocate toward active products more generally, AMG is well positioned to benefit from this trend.

Although our net flows from the fourth quarter were impacted by several idiosyncratic factors, which, as Nate will describe, we don't expect to re-occur, looking ahead and in the current quarter we are seeing strong momentum among institutional clients and much improved retail flows. Going forward, we are confident in our ability to continue to generate strong earnings growth, consistent with our track record of growing earnings well in excess of market indices and industry averages over the short, medium and long term.

The drivers of our earnings growth include organic growth, especially into higher fee alpha-oriented products, and the accretion from new investments where we have an unmatched competitive position, as well as tremendous ongoing opportunities. In addition, our increasingly broad and diverse exposure to performance-fee products gives us an asymmetric opportunity for earnings upside. While the substantial majority of our earnings from alternative products are in the form of management fees, often in long-term locked funds, we have a large, diverse and relatively uncorrelated array of performance-fee products in liquid and illiquid strategies spanning private equity, infrastructure, energy, credit, control equity, global macro, multi-strategy, relative value, managed futures and long/short equities. And as we've added new Affiliates like Systematica, Ivory and Baring Asia, and existing Affiliates like AQR, BlueMountain and ValueAct have increased their asset bases, the prospective earnings contribution from performance fees has become both larger and even more consistent.

Turning now to new investments, we were very pleased with the excellent execution of our strategy in 2015, with five new Affiliates added during the year. And the momentum has continued into 2016 as we announced our first investment of the year with the addition of Baring Asia a few weeks ago. Baring Asia is the largest dedicated Asian private equity firm with an exceptional 18-year track record of alpha generation and outstanding forward prospects.

The quality of our new Affiliates reflects the strength of our competitive advantage in partnering with the very best boutique firms globally. We are better positioned than ever to capitalize on our substantial forward opportunity set, which is increasingly global, as demonstrated by the fact that our four most recent new Affiliates are based on four different continents.

Prospective Affiliates around the world are drawn to AMG's excellent reputation as a partner over the past two decades, as well as the proven success of our global distribution platform. And the virtuous circle of our new investment strategy and global distribution capability continues to build on itself. This virtuous circle is reinforced by the addition of differentiated or, in some cases, entirely new product areas to AMG's overall offering.

AMG has the unique ability to add best-in-class, immediately salable products, with long-term investment track records, and bring them to new client audiences around the world. Having recently brought on board new Affiliates with outstanding products sets that diversify and extend our aggregate offering, including in areas such as managed futures, global equities, long/short equities, Asian private equity, and Asian real estate, all areas where we see significant demand both now and over the long term, our client dialogues become richer and the overall franchise more valuable.

Looking back on 2015 we made substantial progress in building our business and generated earnings growth which was strong on both an absolute and relative basis. While volatile markets create inevitable challenges, they also create opportunities. And over the past two decades we have consistently demonstrated an ability to effectively manage through difficult environments and emerge with an even stronger franchise and competitive position.

With that I will turn it to Nate to discuss our Affiliates in more detail.

Thanks. Good morning, everyone. As Sean said, in a volatile market environment marked by rising dispersion across and within asset classes, our Affiliates, and especially our largest Affiliates, performed well relative to their benchmarks and peers. But before I cover our Affiliates' performance in detail I want to take a moment to describe the factors behind our net outflows in the fourth quarter, and in particular give some insights into the positive flow momentum we are seeing now.

First, in the fourth quarter, in the institutional channel, while we had significant quarter-over-quarter sequential improvement in net flows, we had large idiosyncratic outflows from several institutional clients that were unrelated to performance, meaning that we are confident that Affiliate performance was not the cause of the redemptions. Let me step back and put some of this into perspective.

There was a recent industry research report that estimated the average so-called petrodollar-related client AUM to be 4.1% of total AUM for a number of public asset managers. Our entire remaining exposure to this category across our Affiliates is actually much lower at only half the average, or roughly 2%. Performance is generally quite good and, in fact, some of these assets are in locked up vehicles, so we believe our prospective flow volatility from these clients will be significantly less than the industry average.

Now moving from the institutional channel, all of my other high-level comments on flows relate to the mutual-fund channel and are against the broad backdrop of industry-wide continued outflows from US equities where we have a material exposure in the mutual-fund channel. Now, against that backdrop there were several significant one-off items in the quarter.

First, like many of our US fund industry peers, we had a material amount of year-end tax distributions. Our estimate is roughly $800 million of tax distributions net of the reinvested amount. Now while this is seasonal, this year was notable after six consecutive years of strong equity market returns.

However, even more significant last quarter were the idiosyncratic outflows related to the liquidation of the Third Avenue Focused Credit Fund. To be clear, in the fourth quarter we are recognizing 100% of the Focused Credit Fund's remaining assets as outflows.

In addition to this fund's impact on our net flows in the quarter, all of the other funds at Third Avenue saw elevated outflows after the announcement of the liquidation of Focused Credit, as well. These totaled together almost $2.2 billion in the quarter. Finally, we also had the termination of a large non-US sub advisory relationship across multiple products driven by internal client needs.

Now looking ahead, while we do see active US equity outflows continuing for the industry and AMG, the idiosyncratic items should be behind us, except for probably some ongoing but reduced outflows at Third Avenue. In fact, if you look across publicly available data, inflows for our US mutual-fund business are a positive $830 million for the month of January. Now that is coming especially from continued strength in our alternatives and global equity funds, combined with reduced outflows as these isolated issues from the fourth quarter get behind us and the trajectory of our US equities book improves.

Looking ahead, and setting aside the idiosyncratic factors that impacted last quarter, with positive mutual-fund flows in January, we are confident that our retail flows will be substantially better. And we see ongoing good momentum in our institutional business given the strength of our Affiliates' performance combined with the addition of several high-quality new Affiliates with in-demand product sets.

Now turning to investment performance for the fourth quarter and starting with the alternatives offering, our Affiliates in the alternatives category feature excellent long-term performance track records across a wide range of liquid and illiquid alternative strategies. As Sean noted, we have an increasingly broad and large-scale diverse set of alternative products. And in the quarter we added industry-leading Affiliates such as Systematica and Baring Asia. And the size of the alternatives book at some of our largest Affiliates continues to scale at Affiliates such as AQR, BlueMountain and Pantheon.

In terms of performance, and starting on the more liquid side, in the quarter, a number of strategies at AQR delivered strong absolute and relative performance, notably Style Premia, Delta, their hedge fund beta product, long/short equity, and equity market neutral. These strategies all have vehicles tracked by Morningstar, and each earned top decile, or even top percentile, rankings in their respective Morningstar categories for both the quarter and full-year 2015.

On the illiquid side, returns from Pantheon's infrastructure offerings and co-investments remains quite strong, and they continue to diversify their product set. For example, broadening from their successful infrastructure team into real assets capabilities in 2015. On the other hand, ValueAct had a more challenging quarter as they underperformed their benchmarks, although they outperformed a number of their high-quality peers.

Next, moving to the global developed markets category, Harding Loevner continues to deliver good returns in both the quarter and the year across our international and global equity strategies as they added to their strong long-term records. AQR also extended their long-term track records with good performance in the quarter and year, while Artemis also had excellent returns for the year, although their fourth-quarter performance was mixed.

While Tweedy, Browne underperformed their benchmarks in the fourth quarter, they have performed very well versus peers and benchmarks through the market volatility in the current quarter and now feature top-quartile returns for the one year and top-decile returns over three year and longer time periods. In addition, Tweedy, Browne announced the reopening of their Global Value Fund II on February 1, after having been closed for the past two years, as they are beginning to see opportunities to put additional capital to work.

In the emerging markets category, for the broad indices the fourth quarter was a muted finish to a volatile year. Our Affiliates, however, generated strong relative returns. Harding Loevner posted good returns in both the quarter and year, adding to their excellent long-term track record of outperformance. Trilogy also generated good relative returns in both of their emerging markets wealth and emerging market strategies, while Genesis was in line with the MSCI-EM index for the year and retains excellent relative returns over the longer term. Finally, with respect to our US equities, performance across our Affiliates was mixed in the quarter, but each of Chicago Equity, Frontier, GW&K, River Road, and TimesSquare continued or extended their good longer term performance track records.

In the US equity category, I also wanted to highlight Yacktman. They underperformed in the quarter and for the full-year 2015. However they have posted excellent relative returns in the market volatility this quarter so far, featuring the top 2% or 3% year to date, and remaining with the first- or second-percentile performance in the 10- to 15-year time period still.

They also have recently reopened their products. And we believe the recent dispersion and volatility is providing them with an opportunity to put some of their high level of cash to work. In fact, I would like to also make a couple broader comments about performance given the significant volatility we have seen since the start of the year.

In general, a number of our largest Affiliates and their most significant products are meaningfully value oriented, including AQR, Pantheon, Tweedy, Browne, Yacktman, and including our quality growth managers like Harding Loevner. These firms and their products are performing very well on a relative basis in this environment, and this should position them extremely well to further extend their excellent long-term track records, while the volatility and dispersion create significant opportunities for them to put client assets to work.

Now, turning to a more detailed look at flows for the quarter and by channel, as we always say, flows in both the institutional and sub advisory channels are inherently lumpy, and we certainly saw that this quarter. Starting with the institutional channel, we had significant sequential improvement in flows, with total net inflows of $253 million in the quarter. The themes in the quarter included the idiosyncratic outflows I mentioned earlier, but also very strong inflows in the quarter from alternative products, both liquid and illiquid, and in fund and separate account forms.

Now in the mutual fund channel we had outflows of $7.2 billion. As we mentioned earlier, this was driven by continued US equity outflows, consistent with the broader industry, as well as the seasonal and net tax distribution, and the Third Avenue flows we recognized in the quarter. To repeat, we are taking 100% of the Focused Credit Fund assets as outflows in the quarter. Finally, consistent with my earlier comment, we also had several lumpy sub advisory outflows in US and global equities.

In our high net worth channel we had net inflows of $92 million in the quarter. Inflows to our Wealth Partners Affiliates as well as alternatives and municipal bond strategies were partly offset by outflows from our US equity and regional products, including in broker-sold channels.

Now, maybe one final point about flows and distribution. As Sean noted, the current volatility, combined with an ongoing low-return environment, are increasing investors' focus on active management, and especially diversifying sources of return. Our Affiliates have excellent long-term track records across a wide array of strategies, and the current environment is providing increasing opportunities to show the value of active management. This excellent short- and long-term performance reinforces our confidence in the significant positive flow generation opportunity coming from both our Affiliates own selling efforts as well as our complementary global distribution teams.

And with that I will turn it to Jay.

Thank you, Nate. As Sean mentioned, our 2015 results demonstrate our ability to generate strong earnings even in periods of volatility and challenging market conditions. The combination of our broad diversification and return-oriented assets across Affiliates, client channels and geographies, and our investment structure which limits our exposure to the operating leverage at our Affiliates, provides a level of stability in our cash flows, allowing us to execute on our growth strategy throughout a market cycle.

As you saw in the release, we reported economic earnings per share of $12.55 for 2015, an increase of 10% over 2014. For the fourth quarter we reported economic earnings per share of $3.61, which included net performance fees of $0.75. On a GAAP basis we reported earnings per share of $2.72.

Turning to more specific modeling items, we reported EBITDA of $942.2 million for 2015. For the fourth quarter our EBITDA was $263.1 million, and the ratio of our EBITDA to end-of-period assets under management was approximately 17.2 basis points, or approximately 13.2 basis points excluding performance fees. In the first quarter of 2016 we expect this ratio to be approximately 13.6 basis points, which includes the full run rate impact of our new investments.

With regard to our taxes, our effective GAAP tax rate for the quarter was 29.1%, reflecting the benefit of a change in the UK tax rate. And our cash tax rate was approximately 22%. Going forward for modeling purposes we expect our GAAP tax rate to be approximately 33% and our cash tax rate to be approximately 20%.

Intangible related deferred taxes for the fourth quarter were $15.5 million, which was lower than expected as a result of the UK tax rate change, and we expect this number to return to approximately $22 million per quarter in 2016. Our share of reported amortization for the fourth quarter was $28.6 million, which includes $8.1 million of amortization from Affiliates accounted for under the equity method. For the first quarter we expect our share of amortization to increase to $34 million due to the addition of new investments.

Our share of interest expense for the fourth quarter was $20.6 million. And in the first quarter we expect our share of interest expense to increase to $22 million due to higher revolver balances from the financing of our new investments. Our other economic items for the fourth quarter were $2.5 million. And as we look forward for modeling purposes we expect other economic items to be approximately $1 million per quarter.

Turning to our balance sheet, with our substantial liquidity and capacity we successfully executed on our new investment strategy and closed three new investments in the fourth quarter and two new Affiliates, Systematica and Baring, in January. In addition, we repurchased $34 million in shares in the quarter, bringing our total to approximately $366 million for the year. With strong recurring free cash flow generated from the scale and diversity of our business, combined with prudent leverage and low cost of capital, we are well positioned to create long-term value for our shareholders.

Now turning to guidance, we are updating our 2016 guidance as we now expect economic earnings per share to be in the range of $12.40 to $14.00. This guidance range assumes our normal model convention of actual market performance through yesterday for the current quarter and 2% quarterly market growth beginning in the second quarter of 2016. We also assume share repurchases equal to 50% of expected annual economic net income over the course of 2016, which results in an expected weighted average share count of approximately 54 million for the year. The lower end of our guidance includes a modest contribution from performance fees and organic growth, while the upper end assumes a more robust contribution from both performance fees and net client cash flows.

As always, these assumptions do not include earnings from future new investments and are based on our current expectations 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 could impact these expectations.

Now, we will be happy to answer your questions.

(Operator instructions)

Alex Blostein, Goldman Sachs.

Great, good morning everybody. Sean, I wanted to pick up on the comments you made around the pipeline that you guys are seeing, particularly with respect to active equities. Maybe spend a little bit of time, A, on which of your Affiliates are seeing the most momentum so far in 2016, and then just broader for the industry, when it comes to RFP activity, what are you seeing for the active equity managers? Thanks.

This is Nate. There are two pieces to this, I'd say. One is, as a backdrop, the broad trends, where we've been seeing lots of momentum, are in the alternatives category and the global equity category including emerging markets. And that's definitely continuing.

Within US equity, the only other piece I would add, which is part of what Sean was getting at with this newer trend, is, on the managers that are on the more active side, either because they are truly differentiated processes or because they are running more concentrated products, but those trends are definitely places we are seeing, within the US equity piece, some evolution. But across global equities, including emerging markets, and certainly the alternatives category we are still seeing really good strength.

I would also add that it's the kind of change in strategy that you are hearing others talk about, consultants and clients, in our dialogues with them, even in advance of specific mandates as they look toward a different environment with volatility, dispersion and lower returns. It's a period where I think we're not alone in seeing the very strong opportunities for high conviction active managers and alternative firms.

Michael Carrier, Bank of America Merrill Lynch.

Thanks, guys. Maybe this one is for Jay. Just, when you think about your strategy on both the acquisition side and then the buyback convention, just want to get your outlook, given where maybe the stock is and the valuation, but also just given in a market where there is more volatility. Do you tend to see more opportunities to continue to be pretty active on the acquisition side? Or do you maybe buybacks take more of a focus given the valuation?

It's Sean. Jay might follow up. But I would say at the highest level, our strategy and past track record over the long term and the more immediate term is to do both. I think we have successfully demonstrated an ability to return capital to shareholders in highly accretive transactions as well as repurchases. I think going forward, the long-term strategic focus will continue to be on making investments in outstanding diversifying Affiliates where we have a unique competitive position and, as I said, a great track record.

We also recognize, and certainly recognize now, the shareholder value that is created through repurchases. I would say going forward it will continue to be an emphasis on both elements, but the mix will vary in the circumstance. And I think we anticipate -- what I'm sure will be a question around deal activity -- the market volatility generally has a dampening effect on deal activity, so I think the mix in the more immediate term is likely to be favoring repurchase. But over time, we have and we will continue to do both.

Craig Siegenthaler, Credit Suisse

Thanks, good morning everyone. I am just wondering as of today, have you experienced or received notice of any lumpy redemptions in 1Q 2016?

No.

All right. And then is there any color you can provide in terms of how total flows have been tracking quarter to date in the first quarter?

The way I would describe it is, just focusing on the quarter, which is where your question is, we talked about mutual funds, right? On the mutual fund side, trajectory is much better. We have these idiosyncratic things behind us. I gave you the number for January on publicly available data for mutual funds, which is positive, over $800 million. And we're seeing really good continued inflows in the mutual fund channel in both alternatives and global equities.

And then, really importantly, we are seeing much lower outflows in the US equity book in the mutual fund channel, as well. That's the piece that has probably the most clarity around it and certainly the most public information around it.

And then if you look at the institutional side, if you look at the totality of it, which is RFP searches, finals, won but unfunded, all that, yes, they are running about where they've been in prior periods without any of these -- again, so far, and it's early and all that -- idiosyncratic things on the other side. Putting all that together, the trajectory is just much better.

And maybe just amplifying and stepping back a bit, we had 21 straight quarters of positive flows, industry-leading, in many cases, on an absolute basis. But if you think about it from the standpoint of the product composition, for us the flows are pretty much all active equities and alternatives and the rest of the industry, as you know, is almost all passive and fixed income.

That engine of organic growth continues. And as Nate described, we see ongoing momentum. And based on, to some extent, the early anecdotal data and commentary that we see from talking to clients, and clients describing their own strategic positioning, we think, as we said earlier, it's even more going to be a period of favoring active equity and alternatives going forward -- obviously the ones that generate alpha and the ones that have a track record of being able to sell their products effectively on a global basis. And that's all that we have been doing.

I think we had a period, we've had two quarters with idiosyncratic events, one around large clients who are redeeming for nonperformance related reasons. And I think Nate described the extent to which our ongoing exposure is much more limited than our peers. And given the remaining products, we feel as good as we can feel -- including some of the products being long-term locked vehicles -- we feel as good as we can feel about the exposure there.

We had a tough period in retail, especially US retail, and I think that's largely past us, and the early trend, certainly from a performance standpoint as well as from a flow standpoint through the first month, where I think we've had a good month. I think that's good on an absolute basis but also very good on a relative basis.

And then, of course, we had another one-off event around Third Avenue and the closing of that fund. And there, the flows have moderated, as Nate described. So, looking forward we are very optimistic about the resumption of the kind of momentum that we have shown and demonstrated over the past five years. And nothing that we see -- nothing that we can see -- is at all at odds with that.

Bill Katz, Citi.

Thanks, good morning. I appreciate you taking the questions. And thanks so much for the extra color on the flows. It is very helpful to frame it out. Just talking about maybe capital management a little bit, I'm just trying to reconcile some of the comments this morning.

It sounds like the deal pipeline might be a little bit slower, which is not surprising given the volatility. But I guess I am a little surprised that your share count wouldn't be down a bit more if your mix is tipped a little bit more toward buyback. So, I wondered if you could highlight what I'm missing there.

And then the other side of the question is, in the last call you had mentioned the ability to do deals despite the volatility. Is it just that you worked through the more recent deals, which are certainly very impressive in their own right, and then the pipeline is a little bit softer? Or is the volatility really having that big of an impact, particularly on the alternative pipeline?

Why don't I take it in reverse order and just comment briefly on the pipeline. I am sure there will be other questions around it. The dampening effect that I described on an industry-wide basis is something that it's too early for us to tell. We have a very strong pipeline. It's probably not quite as weighted toward global and alternative as it was last year.

But we had a terrific result last year, and especially the last quarter. As we have said many times in the past, the deals tend to come in clumps and it's very difficult to forecast quarter to quarter. I would say that any pause that you might see would be around market volatility and just the accident of timing.

On an overall basis we couldn't be more positive about our prospects for continued accretion from new investments going forward. We will talk more about that, I'm sure, in addressing subsequent questions. But, Jay, why don't you respond to the first part of his question.

Bill, just on the share count, as you heard me just say, the share count for the guidance is 54 million weighted average. Our spot rate at the moment is about 54.4 million. So, obviously to get to weighted average at 54 million we are going to go below that through the end of the year.

And, again, it's just a model convention. The actual share repurchases will be based on what we see in both new investments and capital management as relates to share repurchases. So, it could be more or less than that but, again, just model convention.

Putting it in perspective, the weighted average share count for this year 2015 was 55.1 million, and last year was 56.3 million. So, we're taking off 1 million to 1.25 million over the last two years. So, as Sean said, we have a track record of doing both, and we've, during this period, had substantial new investments, as well.

Dan Fannon, Jefferies.

Thanks, good morning. A couple more for you, Jay. With the couple deals still pending to close, can you give us a makeup of what the balance sheet you expect to look at pro forma and where you are comfortable from a debt perspective going prospectively in terms of maybe additional deals or other things that might drive that higher? And then I might have missed it but did you give what the performance fees were in the quarter and maybe the diversification of who contributed to that?

Sure, Dan, I will do the whole thing. Maybe I will just start with guidance and then end up on capital levels on our revolver, which is how we funded these transactions. I will start with the guidance.

With the update in the guidance 2016 range of $12.40 to $14.00, it was based on the mark to market of our AUM since our last call. It included the inclusion of Baring Asia, which was the new transaction because on November 9 when we last gave guidance we had already announced the other three. We included Baring Asia and its accretion for the full-year effect in 2016. We also updated our performance fee assumption for the year, given the addition of Systematica, Baring Asia, and Ivory, all of which have performance fees.

Those three things were the main items that we updated and reflected on. Starting with the building blocks on market beta, since we gave the guidance on November 9, through the end of the year -- as of November 9 we were up about 4% in the quarter. And as you can see from our AUM table, we finished up about 2%. So, the delta between November 9 and the end of the year was minus 2%.

Then quarter to date through February 1, so since the end of the year to now, we experienced another 4% down, in line with broader markets. So, if you add the negative 2% and the negative 4%, you get minus 6%. And then, lastly, reminding you of our modeling convention, we assume no more market beta in this current quarter, so we removed our model convention of 2% for this quarter. So, the full change was down 8%, and part of that was model convention.

But thereafter we grow at 2%, so it's the second, third and fourth quarters at 2%. So that's the underlying assumption for beta for the rest of the year. And then when you think about Baring, because they closed on January 4, we really get the full-year effect of Baring in our earnings accretion. That does partially offset that market change that I just mentioned.

And then on performance fees, let me address that, with the growth in our existing alternative products more broadly, combined with the addition of the new products from Systematica, Baring Asia and Ivory, these products have low or no correlation to our existing product set. We expect our performance fee opportunity to grow modestly as a percentage of our earnings base. And, as Sean had said, we are confident in the consistency of this earnings stream given the diversity and the correlation of the performance fee generating products.

As a result, at the midpoint of our range we see the level of performance fees at approximately 10% of our earnings. And, as we have always said in the past, we feel great about the base level of performance fees in any year. The breadth and the diversity of the performance fee product set creates this positive asymmetry that Sean mentioned, increasing the probability of achieving the low end of the guidance range, and at the high end it reflects the greater expected value that we could experience given the scale and diversity.

And then, finally, just reminding you that, relative to, say, some of the publicly-traded alternative firms, we take a different approach to performance fee accounting. We only recognize them in earnings when we realize them in cash in the period in which we experience them.

So, now getting to your question of funding, we closed two after the end of the quarter, and our balance on the revolver was just under $300 million. I think I had mentioned we thought it was going to be closer to $500 million but Systematica closed right after the end of the quarter, and then of course Baring came on after that. In the first quarter the revolver balance will be roughly half of our full revolver of $1.3 billion, so call it $650 million to $700 million, is where we would expect revolver balance to be as we get through this quarter.

More broadly, as it relates to funding, we, of course, have episodic new investments. As new investments occur episodically we may increase our leverage modestly for short periods. But given our strong free recurring cash flow we're able to reduce that leverage very quickly in really a quarter or two. As a result, we really have the flexibility to continue to do deals throughout this whole year. And our long-term target leverage is at 2x or less and we will maintain that as we go through the year.

Michael Kim, Sandler O'Neill.

Hey, guys, good morning. Just to follow-up on Nate's comments on flows, not to beat a dead horse here but it's been a couple of quarters where you have called out idiosyncratic redemptions in the institutional channel. Just wondering if you could maybe give us a bit more color in terms of the size of those losses, the strategies, the clients and the drivers. I know you mentioned they were unrelated to performance, but just so that we are able to get a bit more comfort that they are in fact one-off events as opposed to something that might persist.

It's Sean. I think beyond what we've said, I don't want to say more. I think I will repeat and reframe a little bit of what we did say. First of all, I know that we are not alone. I think it's in the industry in terms of having these kinds of outflows.

I also know that our relative exposure is much less than the industry average and much less than some others, and that the remaining products are some locked up in long-lived vehicles, and the performance of the others is very strong. Beyond that, we are not comfortable saying more because, hopefully you understand, our extreme sensitivity to calling out individual clients.

Chris Shutler, William Blair.

Hey, guys, good morning. Value stocks have underperformed growth for several years now. You talked about how many of your strategies have more of a value bent to them. So, stepping back, Sean, for AMG, and maybe the industry at large, do you think that we're going to start to see more flows move into value-oriented strategies? And any anecdotal evidence would be helpful.

I will start and then ask Nate to follow on. I think the answer is, broadly, value will do better from a flow standpoint as it does better from a performance perspective, stating the completely obvious. And we are seeing early signs of that but it is soon to tell.

I think there are cross currents in the industry around passive versus active. And those will, to some extent, continue. But I think it is highly likely, given the volatility and dispersion, that this will be a period where -- and I think perhaps for a while -- where the best active strongly outperforms passive. I think you have heard -- I have heard -- some of my peers in the industry say the same thing, including firms where they have a significant passive exposure. We are believing that and it follows logically from the environment and from the track record of firms.

Our exposure has been -- is -- very heavily focused on alpha-generating products, the alpha side of the barbell, high conviction active equity managers, and alternative managers, and a broad diverse array of alternatives. We are ideally positioned for an environment like this, having had five years of industry-leading organic growth and flows in a period which was much more challenging for these kinds of products.

The other thing that we have, as you know, and it's not deliberate, but we have a significant tilt toward value among a number of our Affiliates. And maybe I will ask Nate to talk about some of the Affiliates in a little more detail and how they are doing.

Picking up on what Sean said -- and we talked about this a little in our prepared remarks, as you noted -- we have a number of Affiliates that include some of the great value investors. And I think, as you observed, it's been north of five years that that sort of growth has broadly outperformed value. And I also think this extends not just to value managers but also, as we said in our prepared remarks, quality growth managers, as well.

I think in restating the obvious, as we enter a period these managers -- some of the best managers -- are now starting to say they can find value again. Although not all of them yet, but some of them are starting to say they can find value again.

I called out in my prepared remarks, Tweedy, Browne is an example. Their products have been closed for over two years, not because people didn't want to give them money. Their cash balances were growing and they needed to be able to put the money to work for existing clients first.

They have now decided to reopen one of their global funds and they are finding things to invest in. That will take this cycle, which is, as they find things to invest in, and as performance does well and they are open to new money, they will be gathering flows. And I do think that growth value cycle -- there will be a cycle to it and flows will definitely follow.

Brian Bedell, Deutsche Bank.

Hi, good morning. Sean, if you could talk a little bit about Third Avenue a little bit more in terms of where the AUM currently stands, the potential redemption outlook in 1Q. I know we've gotten through a lot in 4Q already. And, sorry if I missed it, the actual total redemption number for 4Q for Third Avenue Focused Credit Fund. And then more strategically going forward the game plan for that firm, and how it may become more reinvigorated with management changes, and what your long-term outlook is.

Sure. I think the number -- Jay, correct me if I get this wrong -- in terms of aggregate outflows through the end of the year, including, for our purposes, all of the Focused Credit Fund, is a little over $2 billion -- $2.2 billion for the quarter, for the fourth quarter. I don't have the number for this year to date. It's going to be all in the public data. Maybe Nate would have it. But there is a clear trend toward the outflows moderating.

As clients focus again on the outstanding long-term record of Third Avenue's products, especially their flagship real estate product, which obviously is completely unrelated to and away from the Focused Credit product. The management team has more than a decade, on average, of experience, and we feel terrific about the firm's prospects and their financial and operating position. They are extremely well reserved.

I think it is probable that there is some further redemption and shrinkage through this period. But I see over time a little bit, as market trends favor them, as we were just discussing around the opportunities for deep value managers, but of course they are going to have to generate excellent performance, as they have in the past. And as they do that, we see them bottoming and then recovering. And as I said, we have every confidence in their ability to do that.

But stepping back and maybe reframing a little bit, just to put this in context for AMG. Third Avenue is, from a run rate earnings contribution standpoint, 1% of our earnings. So, really, no impact to AMG's financials from their results. And you didn't ask this but to the extent anybody has a question, we don't think that Third Avenue has any legal exposure around the Focused Credit Fund closure, et cetera.

But we are completely comfortable that AMG has no legal exposure at all, given our structure and approach. So, going forward, while it has been a difficult period for Third Avenue, and obviously attracted a lot of publicity and perhaps a lot of uncertainty around any potential exposure to AMG, hopefully these comments make that crystal clear.

Robert Lee, KBW.

Thanks, good morning, guys. Just a quick question on the asset mix a bit. Over the years as you have acquired more alternative firms, whether it's Baring or Pantheon and others, could you maybe update us and give us a sense for what piece of your assets are actually in non-redeemable structures? And then maybe also to the extent you could provide any color on what the fundraising pipeline may be for those types of products or structures, any color you can provide around that.

Yes, happy to. Just to step back a bit, if you think about our alternatives book, as you've described it, we can think of it as more liquid and illiquid strategies, and we can also think about it along the dimensions that you laid out about structure of product and locked assets. I think we also need to think about the fact that there are things that are not necessarily legally locked structures but where, for all intents and purposes, they are very stable asset bases, separate account, GP fund-of-ones and those kind of structures. And that's a significant portion of our alternatives book.

When you talk about the fundraising pipeline, it's a source of particular strength for us. Right now we are having good traction -- exceptional traction -- on the liquid side. Firms, like AQR in our existing Affiliate group doing a fantastic job. And you look at new Affiliates, firms like Systematica, and the opportunities there, very strong looking backwards, but also the opportunity set there is really extraordinary.

And then on the illiquid side, I would call out firms like Pantheon where they had a really good year. The forward opportunity set looks very good, both in the traditional private equity primaries and secondaries, but also they've really broadened out their capabilities in infrastructure, and now, I think we mentioned in the prepared remarks, in real assets. And those are really high demand product areas. The early track record is very good and the think they can put a lot of assets to work.

And I also think you will see continued product development, frankly, on both sides, liquid and illiquid. As we've talked about on prior calls, I think we are very well positioned to help these firms as they bring new products to market because of the quality of engagement we have with the marketplace, both on the institutional side -- we have these good dialogues worldwide -- but also in the packaging and bringing product to the retail marketplace.

Again, an example I would highlight here in last year was bringing the Pantheon private equity capability set to the DC marketplace, both in CIT and mutual fund form. First clients landed there, first DC clients landed there. I think that's the kind of business where we can add a lot of value and where you'll see really good growth. But, in sum, the new business pipeline for our alternatives set, liquid and illiquid, is really good.

Dan Fannon, Jefferies.

Thanks. One more question, Nate, on flows. I was just wanting to get an update on the 2014 vintage of new investments, the River Road, SouthernSun, Veritas, EIG. Just wondering how that has contributed over the last 12 months. Are those net positive flow-ers? And are they integrated into your distribution and how we can think about the ramp of new investments in terms of their contributions to net flows going forward?

Got it. I am not going to do it Affiliate by Affiliate but if you step back, those firms have all now engaged with us in distribution. Now, it's very different for different firms, so what's appropriate for an EIG, as we look at the opportunities to bring their capabilities -- and we are working with them on some products right now, we're actually in market with them on some products right now -- which is a very institutional sale but we are leveraging their already very strong distribution capabilities but we're adding geographically to it.

Contrast that with a firm like a SouthernSun or River Road. SouthernSun, we very quickly integrated them into our retail distribution. But, again, the experience there, it's very hard, there's no -- here's the base case. But they are fully integrated into our retail distribution, and were from day one. With a firm like River Road we actually knew on the distribution side already, so we are working with but have done some things on product development and also extending their product distribution into the wires where we ended up working with them historically, I think, more on the RA side.

The short answer is, we are making really good progress with all of those firms integrating them in. I do think, 2014 is not that long ago, and so the trajectory impact is probably more impacted by the macro things than what's going on with their product set, what's going on with the various distribution channels, still. But there definitely have been wins in all of these cases.

Yes. And to just again make a fairly straightforward observation, in any circumstance with any new Affiliate investment, you can't project what the market trends will be following the investment. I think over time we have a great track record and are very confident that really all of these investments, each in their own way, will be great investments for us.

But sometimes you make an investment and it's a tough period for value, let's say. And other times -- Systematica, for example -- you make an investment and then the market environment immediately -- and this is, of course, silver lining because the overall market environment is challenging -- but for them it's best of all worlds and they are having a tremendous start to the year, which I think will provide very substantial momentum for their whole array of products. I think at the end of this year I think the Systematica investment will be one of the investments we call out as having had -- Nate is knocking on wood -- tremendous flows right out of the gate. So, we will see.

Brian Bedell, Deutsche Bank.

Thanks very much for taking my follow-up. Just one data point on Third Avenue AUM at December 31. And then I have a question on institutional flows after that.

Third Avenue AUM December 31, it was about $5.5 --.

No, it was net-net. You have to take out Focused Credit, so it was about $5 billion.

Okay. And then just the longer term, Sean, I know you're getting a lot of questions on institutional flows, but if you think about the industry and some of the rotation away certainly from equity products across different types of institutional clients, and then obviously compare it with your performance advantages in a lot of your Affiliates, how do you see that dynamic playing out, say, later through this year and into 2017 in terms of what you would determine as risk of idiosyncratic outflows versus market share gains that you think you can get through your Affiliates and marketing?

I will answer in a broad way and then ask Nate perhaps to follow-up. If you look in the last four to five years, and look at client trends on a retail basis but also institutional, which is of course more the focus of our overall business, it's been a period which has favored passive products -- so, retail investors increasingly moving from active to passive equity exposure. But also a similar trend, in a different way, and obviously it expresses itself quite differently from one institutional client to another, but I would say there has been, broadly, a similar kind of trend among institutions. And through that whole period we have had extremely strong flows on the back of excellent performance by our alpha-oriented Affiliates, as well as excellent results in our alternative products, which are away from the question that I think you are posing.

Looking forward, I think that the trends are much more likely to favor active managers -- high conviction, high-performing, alpha-oriented managers, for sure. And, therefore, I think there is every reason for us to feel confident. And we do feel confident that going forward our active equity Affiliates are going to continue to do well and, indeed, maybe even see accelerating flows. And, meanwhile, our significant exposure to a very broad, diverse set of alternative products, which have been and continue to be highly favored by institutional clients, gives us another source of confidence. Nate, do you want to add anything?

No, I think that's right. As we look at it, there's a set of long-term trends, and sean talked about some of them, that sort of weren't in our favor, and we think those are evolving and moving towards us. There were a set of long-term trends that we think we were benefiting from, and we think those remain intact, which is people needing to get returns in and people continuing to look to active, especially differentiated return-oriented managers like our Affiliates, to get those returns in and fulfill the alpha portions of the portfolio. So we think those trends remain intact.

And then if you look at our business, we've got this large number of good-performing products. That continues to grow both from product development within our Affiliates as well as -- and this quarter is a great example -- the addition of a whole bunch of fantastic new products that we can leverage. They have their own great distribution, and they are great businesses with good growth trajectories, but we can leverage that through the global distribution platforms we are building, that incremental scale, and make it easier for them to attract appropriate clients for them. And then that virtuous circle you heard us talk about continues.

And then how is that offset by these idiosyncratic things? I think the problem with surprises is it's hard to predict them. But we dimensioned for you earlier the size of the potential exposure, which, I don't want to repeat all the stuff Sean said, which is less than most and pretty easy to dimension, and actually is not all at risk. And we are actually having very good engagement with a number of those clients. And we think those are very good clients today and will continue to be very good clients tomorrow, and we can continue to bring them even more great product. That, I think, is the way we would dimension that specific risk. But that against the broad backdrop we described, obviously we feel really good about the opportunity set over the medium term.

Thank you. We have reached the end of the question-and-answer session. Mr. Healey, I would now like to turn the floor back over to you for closing comments.

Thank you again for joining us this morning. As you've heard, we are pleased with our earnings growth in 2015, and we remain confident in our ability to continue to create shareholder value through both the organic growth of our existing Affiliates as well as accretive investments in new Affiliates and share repurchases going forward. We look forward to speaking with you in May.

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