MutualFundWire.com: Three Things to Know from AMG’s Earnings

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Thursday, November 1, 2012

Three Things to Know from AMG’s Earnings

It’s been a good year for Affiliated Managers Group, so much so they are ready to take on the world in the next year.

AMG chairman and chief executive Sean Healey and his colleagues outlined some rosy earnings numbers, validating their affiliate model of management, during an analyst call Wednesday. The transcript for this discussion can be found on SeekingAlpha.

The three big takeaways were as follows:

Point #1: AMG Is Going Global, in a Big Way

Point #2: AMG Is Riding the “De-Risking” Train, And They’re Doing It With Alpha

Point #3: AMG Is Ready for More Acquisitions

Before we go into further detail on the three big takeaway points, let’s look at these numbers a bit, because they set the stage for everything else.

Healey had this to say about the numbers:

AMG reported economic earnings per share of $1.91 for the third quarter of 2012, which is a 23% increase over the same period of 2011. Our earnings growth was driven by continued strong business momentum with outstanding organic growth from net client cash flows and exceptional investment performance across our equity in alternative products.

Our strong results reflect the excellence of our boutique Affiliates and the ongoing impact of our strategic focus on global and emerging market equities and alternatives, which collectively accounts for 70% of our earnings.

Meanwhile, president and chief operating officer Nathaniel Dalton, noted that “we continue to generate strong client cash flows across channels, with a total of $10.9 billion in net new flows for the third quarter, our 10th straight quarters of strong positive client cash flows.”

In other words, the affiliate model is working and they are going to leverage it heavily next year. The three big takeaway points from the call help to underline how.

Here they are:

Point #1: AMG Is Going Global, in a Big Way

AMG is embracing global in two fronts: product development and distribution.

Healey sees a strong demand for global emerging market products and expects them to drive growth for the foreseeable future.

He had this to say on the subject:

Our strong results reflect the excellence of our boutique Affiliates and the ongoing impact of our strategic focus on global and emerging market equities and alternatives, which collectively accounts for 70% of our earnings.

We believe that specialist firms have competitive advantages in generating alpha in these areas and our boutique Affiliates, including Tweedy, Browne, Genesis, Harding Loevner, and Artemis, among global and emerging market equity managers.

However, the most important element of AMG’s global strategy, arguably, lies in their aggressive global distribution initiatives.

Healey described these initiatives in this way:

Given the ongoing success of our strategy and the forward opportunities that we see, we continue to build out our institutional and retail platforms worldwide through the opening of new offices and the addition of key personnel in existing coverage regions. And these investments are increasingly resulting in incremental new business momentum as evidenced by recent wins in Asia, one of the newer regions in our platform, as well as in Europe, the Middle East and Australia.

Dalton elaborated a great deal on these efforts:

We continue to make very good progress across our platforms. Now, I thought I would take a step back and remind everyone how we're building these out. Our strategic rationale of hiring senior local experienced sales professionals is that we can provide leverage to our Affiliate model, at the same time, add significant incremental flows to our business.

[Six] years ago, we started in Australia, and now have local specialist coverage in Australia, the Middle East, parts of Europe, including the U.K., Netherlands and the Nordic, as well as for Asia. As Sean said, each of these is providing meaningful contribution, now including Asia, the most recent region we launched.

Looking ahead, in the coming quarter, we'll be adding Swiss and German specialists to our European team operating out of a new office in Zürich. And looking further ahead, we're focused on continuing to expand some of our regional teams, adding new senior-level sales in client service professionals, as well as launching new regions and diversifying by channel within the regions we already cover.

Finally, the pipeline at our global distribution platform remains very strong. And we believe we are extremely well positioned to continue to drive good growth through client cash flows.

Point #2: AMG Is Riding the “De-Risking” Train, And They’re Doing It With Alpha

Healey said that AMG believes that “that both retail and institutional investors will continue to seek value-added equity and alternative strategies for the alpha portion of their portfolios.”

With our Affiliates industry-leading products and these attractive areas -- attractive categories, we are generating strong organic growth in the face of industry trends, which continue to overwhelmingly favor passive and fixed income products. And we are particularly well positioned to benefit when investors inevitably reallocate to return oriented products.

And finally, in a rerisking rising rate environment, AMG will not be impacted by the decline of assets from fixed income outflows or the depreciation in value of fixed income products.

Point #3: AMG Is Ready for More Acquisitions During the Q&A portion with analysts, Healey made two interesting sets of comments regarding acquisitions.

The first involved the pricing environment for purchases:

I would say that the competitive environment is -- continues to be highly favorable for us. There are, of course, always competitors for the very best firms and you've [Citigroup analyst Bill Katz] identified some transactions that I would agree are situation specific in the main for demographically driven succession transactions involving traditional boutique asset management firms, as well as succession-oriented [ph] transactions involving large alternative firms, and finally, divestitures of boutique firms in all of those general categories are a competitive position. It continues to be stronger than ever, and our pipeline as you've heard me say, is very strong and balanced.

Regarding future transactions, Healey made the following comments:

I think succession-oriented transactions probably have been -- I think they will increase going forward, and we've seen fewer than one might have thought at the beginning of the year. And that I think is owing as much as anything to the timing of market volatility with a market recovery occurring in the second half of the year. If you wanted to get a transaction done by the end of the year, you really had to begin in, let's say, by June.

I would say there's relatively less activity among U.S. banks and insurance companies now, but still there are some transactions that we're considering, evaluating. And there are substantial opportunities, both in transactions or involving potential transactions that have been well publicized as well as that are more private. And we're evaluating all of those opportunities.