Affiliated Managers Group Inc (AMG) 2016 Q3 法說會逐字稿

Greetings and welcome to the AMG third-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thank you for joining AMG to discuss the results for the third quarter of 2016.

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 the call.

AMG will provide on the Investor Relations section of 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, including a reconciliation of any estimates of the Company's economic earnings per share for future periods that are announced on this call.

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. We were pleased to report strong results in the third quarter, including economic earnings per share at $3.02 and record assets under management of approximately $730 billion, which represents a 23% increase year over year. Our results reflect consistently strong execution across all aspects of our growth strategy, including the completion of several new Affiliate investments during the quarter, along with the continued excellent investment performance and strong positive net client cash flows of our existing Affiliates. As Jay will describe, we continue to see strong earnings growth ahead for AMG.

We were pleased with our third-quarter net client cash flows of $5.8 billion into our Affiliates' actively-managed strategies during the quarter, particularly across an array of alternative products. As Nate will discuss, our net inflows were positive across each of our institutional, retail and high net worth channels, and also across all client geographies.

We believe that the quality of our independent boutique Affiliates and the unique breadth and diversity of our alpha product set have together driven the consistency of our organic growth results over the past seven years. AMG has now generated net inflows in 24 of the last 26 quarters, including year-to-date net inflows of approximately $11.5 billion, notwithstanding continued muted industry-wide flows into actively-managed products.

The strength of our results reflects the success of our strategy, of partnering with outstanding performance-driven boutiques, and our focus on attractive alpha-oriented product areas, especially global and emerging market equities and a select set of alternative strategies. The best independent boutiques have meaningful competitive advantages in generating excess returns in value-added alpha-generating product areas, as demonstrated by the outstanding long-term performance records of our Affiliates.

Even in a period of growth in passive products on the back of cyclical and, to some extent, secular trends, select high-performing differentiated active equity and alternative managers will continue to generate organic growth and gain market share, as evidenced by our long-term record of net inflows. In an environment of lower returns, clients around the world, from sophisticated large institutions to individual retail investors, recognize the importance of alpha generation in meeting their obligations and objectives.

In seeking alpha, investors increasingly turn to differentiated high-conviction strategies, and given their focused and distinct investment approaches in the most attractive product areas, our Affiliates are positioned to benefit from this dynamic. We continue to see significant client demand for high-conviction, active-equity and alternative strategies across client geographies and channels.

Through our long-term strategic focus on areas where boutiques excel and we see secular client demand trends, AMG has assembled one of the largest and most diverse books of alternative products in the industry, focused on the product areas most attractive to clients. These strategies include both liquid and illiquid products, and offer not only alpha but also true diversification relative to traditional fixed income and equity markets, a feature increasingly valued by clients.

We are already benefiting from growing client demand for these alternative strategies, and given our investments in some of the highest quality firms around the world which specialize in these areas, AMG is uniquely placed to continue to meet this enduring demand trend.

AMG's array of alternative strategies is a strong complement to our outstanding equity offerings, and we believe that the advantages of our strategic position across our broad alternative product set will be increasingly evident.

Turning to New Investments, we continue to be well-positioned to execute on our substantial forward opportunity set and further enhance the diversity and breadth of our performance oriented product offering by partnering with leading independent firms around the world. The transaction environment remains highly favorable for AMG and we are very pleased with the quality and diversity of our New Investment pipeline, which includes both traditional and alternative firms.

Looking ahead, AMG has a unique ability to make additional investments that are not only earnings accretive but also add excellent new products with substantial capacity in defined areas where we see ongoing client demand. Given the outstanding opportunities we see to invest in excellent independent firms globally, along with the organic growth of our existing Affiliates, we are well positioned for strong earnings growth going forward.

Finally, I wanted to discuss the management change that we announced this morning. As you saw, Andrew Dyson is stepping down as head of Global Distribution to take a CEO role at a subsidiary of Prudential Financial called QMA. Andrew has been a great friend and colleague over the past five years and has made a valuable contribution to AMG. We wish Andrew all the best in his new role.

As you would expect, we have a search underway and plan to move forward with the new Head of Global Distribution early in 2017.

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

Thanks. Good morning, everyone. As Sean said, against the backdrop of muted industry demand for actively-managed strategies, we generated strong net flows in the quarter across all three of our distribution channels. This continues our broadly positive flow results of the past seven years, which ultimately stem from our Affiliates' excellent long-term investment performance and track records.

In addition, as Sean said, we are also continuing to benefit from our strategic product positioning against some positive client demand trends, as well as our unique distribution approach which includes each Affiliate's dedicated distribution capabilities, complemented by AMG's Global Distribution efforts. While these flows have been remarkably consistent, positive in 24 of the last 26 quarters, for example, it is important to look at the long-term performance, long-term strategic positioning, and our fundamental distribution strategy.

As we regularly remind, flows, particularly in the institutional and subadvisory channels, are inherently lumpy in any given quarter, but looking over a longer period provides a clear picture. And on that basis, we continue to generate consistent positive net flows.

Picking up on a point Sean made, one of the most important drivers of our organic growth over the last several years has been our decision to increase our participation in alternatives and, within alternatives, the areas we've chosen to focus on. Through our active and consistent New Investment activity and significant product development by our Affiliates, we are one of the largest managers of alternatives in the industry.

While one key point is that our Affiliates manage a very diverse portfolio of alternative strategies across a wide range of investment categories, an equally important point is that we have substantial participation in the areas of alternatives that are in high demand from institutional and retail clients as they seek returns while also trying to diversify their allocations. Finally, we also see tremendous business diversification benefits from these high-quality alternative firms and products when they are coupled with our excellent traditional boutiques and products.

Let me now turn to the performance in the alternatives category. Performance on the Fixed Income and Equity Relative Value segment was strong, including positive performance from key products at AQR, BlueMountain, Capula and ValueAct.

Results in our Multi-Strategy and Multi-Asset category was mixed. Risk-parity strategies generated strong returns in the quarter and year to date, while multi-asset style premia at AQR was down slightly in the quarter.

Within our Systematic Diversified category, this quarter was a challenging one for trend followers due to several sharp trend reversals. However, these strategies feature important diversification benefits at the overall client portfolio level, and we continue to see strong demand globally for the category. Because of their diversifying characteristics, we believe relative returns are a much more important determinant of client demand than absolute returns. And, although down for the quarter, both AQR and Winton outperformed trend-following indices, while Systematica underperformed in the quarter. In addition, all three firms feature excellent performance over the long term.

Our Private Equity and Real Assets-focused Affiliates and teams continue to put money to work and feature excellent long-term performance, as well. And we see significant opportunities for firms like Pantheon, Baring Asia and EIG to continue to broaden and diversify their industry-leading investment platforms.

As it relates to our public equity products, a very strong risk on quarter across broad market indices saw outperformance from stocks that were typically higher risk and volatility as well as lower quality. Against that backdrop, the relative performance of our Affiliates, given this environment, was more mixed, as many of our Affiliates emphasized valuation and strong fundamentals in their investment processes.

Starting with the global developed markets category, we had good performance from flagship strategies at Harding Loevner and AQR, both of which delivered strong performance on an absolute and relative basis in the quarter, adding to their already strong long-term track records. Elsewhere, performance was more mixed at Artemis, while Tweedy Browne's Global Value underperformed, although it continues to have an industry-leading long-term track record.

In the Emerging Markets category, all of our strategies were up on an absolute basis, but performance against the EM index was more mixed, with AQR and Trilogy Emerging Wealth outperforming, and Genesis and Harding Loevner trailing in the quarter.

Finally, with respect to our US equities, performance across our book of products was mixed in the quarter, although many of the largest strategies at firms such as Frontier and Systematic outperformed their indices in the quarter, as did the recently launched suite of US equity products at our UK Affiliate Artemis.

Now, turning to flows for the quarter, let me first reiterate the importance of looking at our flow trends over the longer term to understand our ability to drive organic growth. We've always said that in any given period our flows would be lumpy, and, if anything, the volatility has only increased in the current environment.

Starting with the institutional channel, we had net inflows of $2.8 billion, with gross inflows again over $13 billion. As I discussed earlier, we had especially strong growth in net flows in several parts of our alternatives book, including CTAs, multi-strategy and commodities.

In our high net worth channel, we had net flows of $1 billion. Flows remain strong from separate accounts, both directly as well as through our Wealth Partners Affiliates.

Speaking more broadly about our Wealth Partners business, last week we reached agreement to invest in a sixth Wealth Partners Affiliate, Forbes Family Trust, and When that investment closes our Wealth Partners Affiliates will advise on a total of nearly $40 billion in assets. We're very excited about our investment in Forbes Family Trust, which is based in New York City and Philadelphia, and provides outsourced CIO services, as well as wealth advisory and planning to ultra high net worth clients.

In the mutual fund channel, we had net inflows of $2 billion. We saw mostly a continuation of the positive trends from the last few quarters in the channel. Asset class drivers were once again alternatives and emerging market equities through firms such as AQR, GW&K and Harding Loevner, while we once again saw moderating outflows in our US equities book.

Looking ahead, our industry-leading array of high-quality equity and alternatives products features excellent long-term performance. While flows in any given period are volatile, we remain well-positioned to generate positive organic growth through both our Affiliates-owned distribution, as well as AMG's complementary Global Distribution platform.

With that, let me turn it over to Jay to discuss our financials.

Thank you, Nate. As Sean and Nate discussed, we generated strong net client cash flows of $5.8 billion in the quarter and successfully closed all of our announced New Investments, which brings our assets under management to approximately $730 billion, increasing the strength, diversity and earnings power of our business.

As you saw in the release, we reported economic earnings per share of $3.02 for the third quarter, which included net performance fees of $0.02. On a GAAP basis, we reported earnings per share of $2.00.

Turning to more specific modeling items, during the quarter we updated our non-GAAP disclosures to rename EBITDA to adjusted EBITDA, but there was no change in the calculation of this performance measure. For the third quarter, our adjusted EBITDA was $219.8 million, which did not include our recent New Investments given the one-quarter lag in reporting.

The ratio of our adjusted EBITDA to end-of-period assets under management was 13.1 basis points, or 13 basis points excluding performance fees. In the fourth quarter we expect this ratio to increase to approximately 16 basis points, reflecting a higher performance fee contribution that we typically realize in the fourth quarter.

With regard to our taxes, our effective GAAP tax rate for the quarter was 31.9%, reflecting a further decrease in the UK corporate tax rate. and our cash tax rate was 19.7%. In the fourth quarter and for the full year 2016 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 third quarter were $19.5 million. We expect this number to increase to $21 million in the fourth quarter. For the full year 2016 we expect our intangible related deferred taxes to be approximately $84 million.

Our share of reported amortization for the third quarter was $34.2 million, which includes $14 million of amortization from Affiliates accounted for under the equity method. For the fourth quarter we expect our share of amortization to increase to approximately $37 million as a result of recently closed New Investments. And for the full-year 2016 we expect our share of amortization to be approximately $143 million.

Our share of interest expense for the third quarter was $22.4 million. In the fourth quarter we expect our share of interest expense to remain approximately $22 million. And for the full year we expect our interest expense to be approximately $88 million.

Other economic items in the third quarter were $1.6 million. And for modeling purposes we expect other economic items to be approximately $1 million per quarter.

Turning to our balance sheet, at the beginning of the third quarter we closed our investment in Capula, which was partially funded with $150 million in forward equity proceeds. And at the beginning of the fourth quarter we closed our investment in Winton, which we initially funded under the revolver.

We expect to settle another $250 million in forward equity proceeds by the end of the fourth quarter. Given the scale and diversity of our business, together with our flexible capital structure, we have successfully funded over $1.3 billion in New Investments year to date.

Looking ahead, the earnings power of our business has increased with the addition of Capula and Winton generating run rate EBITDA of over $1 billion, along with approximately $1 billion of undrawn capacity available at year end, positions us to create meaningful earnings growth as we continue to execute on our new investment strategy and return capital to shareholders over time.

Now turning to guidance, we are leaving our 2016 and 2017 guidance unchanged. Our 2016 economic earnings per share range of $12.30 to $13.30 reflects market performance through last Friday, our current view of fourth-quarter performance fees, and weighted average share count of approximately 55 million for 2016.

Our 2017 economics earnings per share range of $14 to $16 assumes the full-year impact of Capula and Winton, as well as the equity issuance under the forward, our normal model convention of 2% quarterly market growth beginning in the first quarter of 2017 and each quarter thereafter, and includes our normal model convention for share repurchases in 2017 equal to 50% of our annual economic net income. As a result, we expect our weighted average share count to be approximately 56 million for the full-year 2017.

The lower end of our guidance ranges include a modest contribution for 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 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 any questions.

(Operator Instructions)

Our first question comes from the line of Craig Siegenthaler, Credit Suisse.

Thanks. Good morning, everyone. I just wanted to start on the strong flow result. And I know it is very difficult to predict flows on a short, three-month time period, but can you provide some backdrop behind metrics like RFP activity, new sales levels, the institutional pipeline? That would be helpful on the institutional channel. And then on the mutual fund channel, I was wondering if you have any data points in terms of how flows are tracking quarter to date in the US and outside the US in your retail channel?

Okay, thanks. As we said in our prepared remarks, we feel really good about the underlying trends and activity levels. Focusing on the institutional channel, the ones I'd call out is the levels of RFP activity and then certainly levels of finals activity, which were really strong and actually up again this quarter. So, good finals activity in the third quarter.

I think, as you say, it is hard to predict on short term rolling three months. But I will say, looking to the fourth quarter, that's often a seasonally weak quarter for us. I think a couple of the reasons for that are we've got the year-end redemptions from both quarterly and annual lock vehicles. And we've obviously got the distribution of performance fees that are earned during the year. So, those put a little bit of a headwind in.

And then in retail you'll often see people reticent to buy ahead of taxes reasons and stuff. And then, as I said in the prepared remarks, this year there's actually more volatility in flows than normal. I think that's due to the macro environment. Wouldn't be surprised if you also saw some retail slowdowns due to just macro stuff like the election.

That said, underlying and fundamentally, both with respect to the quarter and then looking at that longer-term trend, as I said in the prepared remarks, the institutional pipeline is really strong and RFP activity is good, finals activity continues to tick up. And then if you look out to the medium term, obviously we still think the trends -- look, there are some headwinds, obviously, but the trends we're benefiting from remain intact. So, investors have to get returns into their portfolios.

We do think people will continue to barbell between passive on the one side and then return-oriented on the other. And our Affiliates are really well positioned to compete for and win those mandates and take share.

Thanks, Nate. If I could just squeeze one more in on Andrew Dyson, I just want to see how this move will impact the business model, and if we could see any impact to flows or the business over the short term from this move? And, also, when do you think we could learn of his replacement by?

The short answer to the first part of your question is no. When we launched our distribution strategy 15 years ago, the core vision was to offer Affiliates the benefit of scale in institutional, especially global institutional, and retail markets on a basis that was bespoke, best suited for them and complementary to each of their own distribution strategies and efforts.

We established our US retail platform in 2004, and opened our first non-US institutional distribution office a couple of years later in Australia. In fact, in a few weeks I will be in Sydney celebrating the 10th anniversary of our office founding.

Andrew has been a valued member of our team, for sure, since he joined five years ago. But our strategic vision, commitment to the Business, remain completely consistent.

Remember, for clients, we are providing a unique offering where the clients, especially global institutional clients, but increasingly retail clients, get the benefit of the focused expertise of industry-leading specialist firms, combined with or backed by the scale, resources, and operational risk management of a global franchise. And they get, especially in these far-flung markets, the benefit of in-market client service and a single point of access to this very broad array of many of the industry's best boutique firms.

If you want any demonstration or validation of the effectiveness of the strategy, you have only to look at the success that we've had over the past seven years. As you know, 24 out of the past 26 quarters, strong positive flows in our active equity and alternative product set. It's a record that we'd compare to any in the industry.

The one other question that you asked is when you will get an announcement. I think in my prepared remarks I said early 2017. I think I'm going to stick with that. Thanks, Craig.

(Operator Instructions)

Our next question comes from the line of Alex Blostein, Goldman Sachs.

Good morning, everybody. Sticking with the flow question, I was wondering if you guys could spend a minute on the high net worth channel. It's your third quarter in a row with pretty robust flows, and it seems like the activity there has been a little bit stickier recently than over the last couple of years. Maybe comment on what's different in this channel today versus the last few years. And then if there's any particular product or Affiliate that's driving this strength, that would be helpful, too. Thanks.

This is Nate. You are right. We've had some really good traction in the high net worth channel.

I think the drivers -- I'd really highlight two main drivers. One is strong flows into separate accounts, and that includes through our AMG platform. Probably the one that is doing the best there would be GW&K, and that's both on some of their equity products as well as their muni bond products.

But then the thing that's also different is we've begun to build in more consistent, over the last couple of quarters, positive net flow contribution from our Wealth Partners Affiliates. And we continue to develop good traction there. And, as you heard, we are continuing to grow out that platform. So, I think that's also building in some nice stability and diversity into that channel.

Thank you. Our next question comes from the line of Dan Fannon, Jefferies.

Thanks, good morning. Jay, just looking at the guidance, and the fourth quarter in particular and into next year, can you go through the moving parts from what we heard from you last of when you gave guidance last? And then the range from fourth quarter seems a bit larger. Usually I think you typically narrow that -- some context around performance fees and where they sit today and how you are thinking about those into the fourth quarter.

Sure, thanks, Dan. Just bear with me here, I will try to give you all the pieces. As you said, we did leave guidance unchanged, primarily because the impact from market beta was only modest. It will only have a modest impact on the fourth quarter, as you would expect, given that we are three-quarters of the way through the year.

Just on the components, when we last gave guidance, which was August 1, our market blend at that time was 2% up from the prior transcript. As you can see from our AUM tables, we experienced approximately 3.1% in market changes, which included FX. I put those two numbers together, for the entire quarter. So, 3.1% versus the 2% that we knew about that had a positive impact of 1.1% relative to the last time we gave guidance, going through the end of the quarter, so that was through the end of the third quarter.

Since the beginning of the fourth quarter, though, we have seen markets, including FX, off about 1.5%. So, it took that positive 1% down to a negative 0.5%. I think the other thing you're probably aware of is that when we remove our 2% market growth assumption for the fourth quarter, relative to our model, that has a negative impact, so really down 2.5% from the model.

All that being said, though, given it's the fourth quarter, it will only have a small impact on 2016. So, we left guidance unchanged because, setting markets aside, our 2016 range is primarily a judgment on performance fees, as you had mentioned. When we look at various performance fee scenarios for the remainder of the year, both up and down scenarios, we have considered a few lumpy performance fees, as well as the timing between 2016 and 2017 realizations in certain products. So, considering all of that, that's why we left the range unchanged.

Just to remind you of a couple of other items for 2016, there is a quarter lag in the financial reporting for Capula and Winton, so we saw no impact of Capula in this quarter other than the funding of Capula. We will see an impact in the fourth quarter with Capula being included, but we will not see Winton till next year.

Second, we will assume, for model purposes, no more share repurchases for 2016. None of these items will affect 2017. So, we will have the full effect of Winton and Capula, and we will return to our normal model guidance.

And then, lastly, just to touch on 2017, even though we remove the 2% market and we were down a little bit quarter to date, we feel comfortable that our 2017 guidance range still captures our forward opportunity set, especially since we have a full year of both Capula and Winton in the numbers for next year. We also have included the full-year effect of the $400 million of equity: $150 million has already been issued, $250 million in the fourth quarter. And reminding you of our model convention again, all of these numbers are included in our 56 million average weighted share count for 2017.

And then, finally, just on performance fee expectations for next year, with the addition of Winton and Capula, as well as just the broad diversity within our performance fee opportunity, we see mid-teens at the mid-point of the guidance range for next year in terms of performance fee contribution.

Thank you. Our next question comes from Bill Katz, Citi.

Thanks very much. Sean, you mentioned that you still feel pretty good about the new investment pipeline. There's been a seminal transaction in the space in between the last time you've spoken and today. I was wondering if you could talk a little bit about how you see the M&A backdrop and the fact that you're seeing some public-to-public deals happening. Does that help or hurt the opportunity set for yourself?

Sure. I think most of the activity in the industry, generally including the kinds of transactions you describe, is either not a fit with our strategy, or not interesting and attractive to us. We continue to build relationships with outstanding boutique firms, which are generating alpha, generating strong organic growth. And investments in those firms will arise, as they always have, out of these relationships that we have built over years, and occur at a time that is appropriate and driven by the firms themselves.

As always, in this environment, and maybe I will say especially given the uncertainty in the environment, we are very careful and very disciplined in our approach to pricing and structuring New Investments. But we feel, as I said in the prepared remarks, very optimistic about our prospects, both in the near term and long term to continue to, in our own unique way, generate incremental shareholder value through this strategy.

Our next question comes from Robert Lee, KBW.

Hello, everyone. It's actually Andy McLaughlin in for Rob Lee. We just had a quick question about institutional flows. We know that mutual funds are strongly driven by AQR. We're wondering if you're seeing something similar out in the institutional channel, and if you could size that at all?

I wouldn't describe it that way. I would say the themes to think about on the institutional flows side for the quarter -- and then maybe I'll talk a little bit looking forward -- as we talked about in our prepared remarks, there are significantly higher gross sales in alternatives. AQR is a contributor there, but it was AQR, BlueMountain, Pantheon -- it was a number of firms that contributed significantly there.

Also, we had relatively lower redemption rates in alternatives. So, the alternatives category did quite well. We also saw an uptick in gross sales in US equities, and the same thing, moderating outflows in US equities. So, I think it was a couple of things there.

I've talked already about fourth quarter and some of the seasonality there. But I think, again, the main thing to focus on as you look forward in the institutional channel is the trends that we think we have been benefiting from. Put the headwinds aside for a second, those remain intact. And it's how do people get returns in their portfolios, it's how do people continue to barbell passive and active, and how well positioned we are to compete for those active allocations.

We have a large number of very good-performing products in high-demand areas, global emerging markets and alternatives, as we've talked about. And then, as Sean mentioned, we've got this unique go-to-market distribution strategy combining Affiliate focus teams at their level with the scope and scale of a large institution with significant expertise, by geography or by channel, to bring to bear for the Affiliates, as they wanted. So, I think you put those things together and we feel really good about the opportunity set in the institutional channel.

Our next question comes from the line of Brian Bedell, Deutsche Bank.

Thanks. Good morning, folks. Maybe, Sean and Nate, can you talk a little bit more about the AMG distribution strategy in light of Andrew Dyson leaving? First of all, what portion of sales are coming from AMG distribution, say, in the third quarter and year to date? And how does that compare with the trend over the last five years?

And what type of replacement are you looking for? Are you looking to do anything different in that Global Distribution strategy? And then maybe if you could just comment on Department of Labor, how you are looking at that coming into the next couple quarters?

You squeezed quite a few questions in that one question there, Brian. I will try to address some, and then, Nate, I will ask you to fill in.

The contribution to our flows from, quote, AMG Distribution varies quarter to quarter. And we don't track it in a direct way because a lot of the influence is going to be in indirect ways. So, I would say over time it is, in aggregate over the past six, seven years, about $50 billion in incremental contribution, at least. And in any given period it has been half, sometimes more than half. And sometimes, of course, given the dynamics of a particular quarter, it is a less significant contribution.

I think the trend lines remain very much consistent and intact. As you heard Nate describe, we feel very good about our forward opportunity, especially, ultimately fundamentally driven by the quality and performance of our Affiliates. But their distribution, and our distribution alongside theirs, is absolutely contributing to our continued organic growth.

Looking ahead, as I said, we see no change. There will be, of course, inevitable evolution, adaptation, growth in our distribution capabilities and strategy, but no fundamental change to the vision or strategy.

We are looking for, and I'm very confident we will find, a very high-quality, experienced, driven, motivated person who is a cultural fit with our team, and of course with our Affiliates and our overall corporate philosophy. So, quite confident that we will complete a search in a very expeditious way with somebody who we are enthusiastic to have join the AMG team. Nate, I think I left DOL and maybe something else.

Let me pick up on the DOL piece there. I will do it in probably at least two parts. First, I think as we have said before, we don't believe that the DOL Fiduciary rules will have any significant direct impact on our Business.

All of our Affiliates that are interacting with retirement investors are already fiduciaries. And, frankly, and this goes beyond the direct piece, the retirement area is actually one, on our US side, it's a part of our Business that is relatively modest and is actually an area, as we look out over the medium to long term, an area we should be able to really grow.

The other thing I think we've also said before is we are probably doing much the same thing as many other people similarly situated, which is we're trying to help our distribution partners, the people that we work through, and we're trying to figure out how we can best partner with them as they evolve the way they bring their offering to market.

I do think there's some other things I'd add. While we have a small share, we are relatively well positioned as you look at how those partners may be evolving their businesses. So, we don't really have brokerage; we're almost all in the advisory side. We have, by and large, the right kinds of share classes that will be attractive.

And then, importantly -- and this picks up on a point Sean made earlier -- this is a place where we can be enormously useful to our Affiliates because having the scope and scale and breadth to be a good partner to wirehouses and others, as they go through their product rationalization, may be very important. Again, it's not a direct impact, and the retirement piece is a relatively small part of our Business today. And while there will be a bunch of noise and work as we go through this, I do think there are opportunities on the medium to long term for us to partner well with our channel partners here.

Our next question comes from Chris Shutler with William Blair.

Good morning. I wanted to follow up on one of the questions from earlier. I'm curious, have you sensed any pick-up in the deal pipeline which you would attribute to the DOL, or just broadly an increasing recognition, particularly within the US retail, of the importance of scale?

I would say -- and, Jay, tell me if you disagree or have something to add -- there has been a pick-up in the activity level or the number of firms who are, quote, for sale or looking for a transaction. But in the main, those really aren't firms that we would include in our pipeline and pursue as prospective Affiliates.

I think, on the margin, the scale and expertise that we provide, to your question, in retail distribution and more broadly in global institutional distribution, global compliance, these kinds of scale benefits, when delivered or packaged with a two-decade-plus proven track record of being a good partner and providing protection for the unique operating and investment culture of our Affiliates, which is absolutely critical, fundamental, that really is distinguishing. So, we are looking for prospective Affiliates who appreciate the advantages of that capability, but are themselves making a decision to move forward from a position of strength.

These are strong, growing firms which recognize that on the margin we can help them. But we are not interested in opportunities, of which there are absolutely some where firms are struggling with the changes in the environment and, quote, need a partner. That's for other firms with different strategies.

Our final question comes from the line of Michael Carrier with Bank of America.

Thank you, guys. A question, just on the alternative suite of Affiliates and the demand that you are seeing: I think on one hand we see a lot of interest in that area. On the other hand, it's been a tough year for certain strategies on the hedge fund side. So, I just wanted to get maybe an update on the Affiliate mix, how you see that playing out, where you are seeing demand, and maybe where you're seeing some lack of demand.

And then, Jay, if I can sneak in a quick one. Just given the Affiliates that you have been acquiring, any change in the tax rate going forward, just given more of an international bent? Thanks, guys.

I will start with a high-level response to your question, which is, for all of the industry talk and the news that you see in the media around the decisions that certain clients have made around limiting their alternative or, quote, hedge fund manager universe, or the challenges that we read about regarding certain firms in certain strategies, especially long/short equity and macro, that obscures the underlying reality which we are seeing, which you see in our results this quarter. And I think with the very best alternative firms globally you are seeing as well, which is, there is increasing demand by global institutional clients, especially, but also to some extent retail clients, for high-quality, differentiated, uncorrelated or less correlated strategies which have a track record of generating alpha.

And our approach to alternatives is very focused and strategic in a set of defined product areas, which Nate described. And we find, for the best of those firms, absolutely ongoing demand, both in the short and, in our view, long term for those products and those firms.

Maybe just a couple things. I do think we're seeing -- we described the four general groupings within our alternatives book -- private equity and real assets, systematic diversified, fixed income and equity relative value, and multi-asset and multi-strategy. Within each of those categories, we are still seeing strong flows to the best-performing products.

I think the point I would make, and this is consistent with the point Sean was just making, which is, look, the pressure is coming when you have poor returns in a space that's relatively crowded, even if people want that space. Those are the places where you're seeing the pressure. But even in those areas, the strongest managers are both continuing to do well and continue to attract assets, and then also will ultimately benefit from that evolution or shakeout or what have you. And then, again, as Sean said, the long-term thesis around the attractiveness of these kinds of products in terms of the need for people to get them in their portfolios is, we think, absolutely intact.

On the tax rate, you're right, our tax rate has been coming down, both our GAAP reported tax rate but also our cash tax rate. That is a trend that's been going on for three years now. Each of the last three years, we've seen a decrease in those rates.

I do think it is stabilizing at the current level. It is a structural change, and that structural change is because of New Investments offshore; we spent some money offshore. And the effect of non-US corporate taxes are lower than US corporate taxes. So, having AMG avail ourselves of a global rate has lowered both our GAAP and cash rate.

For the moment, I think that level of 33% GAAP and 20% cash going forward is the right rate to consider. But that is certainly down year over year and over the last three years.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Sean Healey for any closing remarks.

Thank you again for joining us this morning. As you've heard, we are pleased with our results for the quarter, and confident in our ability to continue to create shareholder value through both organic growth and accretive investments in new Affiliates. We look forward to speaking with you in January. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.