Affiliated Managers' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Affiliated Managers Group (AMG)

Q2 2012 Earnings Call

July 31, 2012 11:00 a.m. ET

Executives

Sean Healey – Chairman, Chief Executive Officer

Nathaniel Dalton – President, Chief Operating Officer

Jay Horgen – Chief Financial Officer

Analysts

William R. Katz - Citigroup

Daniel Thomas Fannon - Jefferies & Co.

Michael Kim – Sandler O'Neill

Robert Lee – KBW

Marc S. Irizarry – Goldman Sachs

Christopher Shutler – William Blair

Cynthia Mayer – Bank of America Merrill Lynch

Robert Lee – KBW

Presentation

Operator

Greetings, and welcome to the Affiliated Managers Group Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alexandra Lynn, Vice President of Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you. Ms. Lynn, you may begin.

Alexandra Lynn

Thank you for joining Affiliated Managers Group to discuss the results for the second quarter and first half of 2012. 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 the results for the quarter, as well as the 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 turn the call over to Sean Healey.

Sean Healey

Thanks, Ally. Good morning, everyone. Despite the increased market volatility in the second quarter AMG reported strong results including economic earnings per share of a $1.56 reflecting excellent execution across all aspects of our growth strategy. With our ninth consecutive quarter of outstanding net client cash flows, two transactions closed in the quarter and our announcement this morning of our increased investment in BlueMountain Capital Management, we have substantially enhanced the growth prospects and earnings power of our business.

Even in a challenging market environment with muted investor risk appetite, our affiliates have generated $47 billion in net client cash flows over the past two years including $7 billion in the second quarter. We continue to benefit from our strategic position and differentiated value added products in the global equities and alternative areas, which represent approximately 70% of our earnings and are seeing ongoing demand from clients globally.

Our affiliates in these product areas have outstanding long-term track records of outperformance, including Tweedy, Browne, Harding Loevner and Genesis were the largest products in global international and emerging markets equities or in the top quartile across virtually all relevant periods.

Our alternative managers including Pantheon, AQR, BlueMountain, First Quadrant and ValueAct continue to generate strong returns and we remain positioned to realize meaningful performance fees in 2012. Our results reflect the continued strong execution of our global distribution strategy as our affiliates are winning new business and market share though affiliate level marketing efforts as well as by leveraging our centralized platform which enhances the presence of our affiliates across channels and geographies.

Given this ongoing success, we are continuing to add resources to our distribution platform in key markets worldwide including the recent addition of senior level marketing personnel to cover Germany and Switzerland. Our affiliates are involved in a growing number of searches and finals across Europe, the Middle East, Australia and Asia and we see a broader array of opportunities to win new business in these markets.

Our strong organic growth from net client cash flows has occurred in a period when industry flows have been concentrated in passive and fixed income products. While much of the rise of passive has come at the expensive active, to a large extent the growth of passive products also reflects a trend, where clients are separating their risk between beta and alpha portfolios and migrating away from equity products and the index hugging middle.

In our view these barbell strategies benefit not only providers of passive beta, but also value added equity and alternative products which can generate true alpha for the other side of the strategy. We see this trend continuing and we believe that firms such as our performance oriented affiliates will continue to see strong organic growth, even as passive beta products also grow.

With respect to fixed income as we along with many others in the industry have observed, current outsized levels of flows into fixed income reflect extreme investor risk aversion and will inevitably reverse. No one can predict when this reallocation will occur, but when it does we believe that we will generate even stronger growth in our return oriented products and unlike many other firms, we will not have a drag from fixed income outflows.

Now, turning to new investments. We added two outstanding new affiliates, Yacktman and Veritable during the quarter and this morning we were pleased to announce our significantly increased investment in BlueMountain Capital Management, one of the leading credit alternative managers in the world. We have tremendous respect for Andrew Feldstein, the firm’s CEO along with the rest of the senior team and in the transaction the firm’s top eight partners have entered into new commitments to BlueMountain, as well as to the AMG partnership and are reinvesting the large majority of the proceeds from the transactions into BlueMountain funds.

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