Affiliated Managers Group, Q3 2008 Earnings Call Transcript

Oct.22.08 | About: Affiliated Managers (AMG)

Affiliated Managers Group (NYSE:AMG)

Q3 2008 Earnings Call

October 22, 2008 11 am ET

Executives

Brett Perryman - VP of Corporate Communications

Sean Healey - President and Chief Executive Officer

Nate Dalton - Executive Vice President, Affiliate Development

Darrell Crate - Executive Vice President and Chief Financial Officer

Analysts

William Katz - Buckingham Research

Matthew Heinz - Jefferies & Company

Michael Kim – Sandler O’Neill

Robert Lee - KBW

Craig Siegenthaler - Credit Suisse

Marc Irizarry - Goldman Sachs

D.J. Neiman - William Blair

Cynthia Mayer - Merrill Lynch

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Affiliated Managers Group Q3 2008 results conference call. (Operator Instructions). This call is being recorded today, Wednesday, October 22 of 2008.

Now, I would like to turn the conference over to Ms. Brett Perryman, VP of Corporate Communications. Please go ahead, ma'am.

Brett Perryman

Thank you. And thank you for joining Affiliated Managers Group to discuss our results for the third quarter of 2008. By now you should have received the press release we issued this morning; however, if anyone needs a copy, please contact us at (617) 747-3300 and we’ll fax you one immediately following the call.

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 Forms 10-K and other filing we make with SEC from time to time. We assume no obligation to update any forward-looking statements made during this call.

In this call, the investment performance of certain products will be discussed and the benchmarks are deemed by AMG to be the appropriate benchmark. AMG will provide on its website a replay of the call and a copy of our announcement of our results for this quarter, as well as the reconciliation of any non-GAAP financial projection to the most directly comparable GAAP financial measure. You can access this information at www.amg.com.

With us on the line to discuss the company's results for the quarter are Sean Healey, President and Chief Executive Officer; Nate Dalton, Executive Vice President in charge of Affiliate Development; Darrell Crate, Executive Vice President and Chief Financial Officer.

Now, I would like to turn the call over to Sean Healey.

Sean Healey

Thanks Brett. Good morning everyone and thank you for joining. In the midst of an extraordinary difficult market environment, AMG reported cash earnings per share of $1.31 for the third quarter. This was a decrease of 16% year-over-year against declines of 22% in the S&P 500 and 30% in the EFA.

Outflows were approximately 5.9 billion, although I would note that half of our top 10 affiliates have positive flows and the relative investment performance was generally strong across our affiliate group.

Let me begin by discussing how AMG is positioned to weather this challenging period in the market. Our affiliates are among the leaders in their respective investment discipline with excellent long-term performance records, outstanding reputations and superior client service.

They have highly focused investment processes and operating cultures and strong profitable businesses and as partners and equity owners in their firms, they have a very strong long-term commitment to their firms which is especially important in times like this.

Looking across our affiliate group, we have a very broad diversity in terms of products, investment styles and distribution channels by both geography and client type. Our affiliates offer products and all major domestic and international equity categories through firms such as Friess Associates, Tweedy, Browne, Third Avenue and Genesis and we have a wide array of alternative products including the quantitative and credit alternative strategies managed by First Quadrant and Blue Mountain, which continue to perform well even in declining equity markets.

Our diversity has provided balance to our growth over the years and in a difficult market environment is an important source of stability to our results. Our affiliates have a proven ability to outperform in varying market cycles and our largest affiliates in particular have generated strong relative performance throughout the year.

Among our international products, Genesis has significantly out performed its emerging markets benchmark for the year-to-date, while deep value managers, Tweedy, Browne and Third Avenue have excellent relative performance in their international fund products over the same period.

In the domestic growth equities area, while Friess had a tough third quarter, it’s Brandywine Funds remain among the industry’s most highly regarded growth equity products, and we continue to see strong performance at Time Square and Frontier. Our alternative products have also generated strong returns this year particularly those managed by First Quadrant, Blue Mountain and ValueAct.

With their track records of out performance and superior client service, our affiliates have built strong and stable businesses. Our largest affiliates, which represent approximately 80% of our EBITDA, have grown their assets under management at an average compound annual rate of 15% since the time of our investment through the end of the third quarter.

Their business has continued to be highly profitable and as a result of their material equity ownership, our affiliates are true partners in our businesses and take a long-term view to managing their continued growth and success.

Finally as you know, in the AMG investment structure, our affiliates retain the operating leverage in their firms, which benefits our affiliate partners when margins expand with the growth of their firms, but imperious of declining markets, our structure protects AMG from margin compression when revenues decrease.

As we look forward, in addition to the strength of our affiliates and their prospects for future growth, the cash flow our business generates, which is supported by a strong -- stepping back, obviously none of us know when markets are going to recover. But we do know that over time they will, and when that happens retail and institutional investors will focus again on the need to generate returns and reallocate and to actively manage output generating products.

Given the sharp declines in the markets, institutional allocations to equities are well below target benchmarks. Anecdotally, we’re already beginning to see some endowments come back into equity. Given our affiliates’ strong, long-term performance records, we are in an excellent position to generate growth through net client cash flows as markets stabilize.

Focusing for a moment on the alternative investment area, it’s been a very difficult year from any hedge fund firm, and you hear talk of large number of firms going out of business. But our view is that strong, well-managed firms will continue to be successful and that alternative firms like our affiliates, institutionalized businesses that employ transparent, well-articulated investment processes across diversified product sets for a largely institutional client base are well-positioned as this segment evolves.

As we look forward in addition to the strength of our affiliates and our prospects for continued growth, the cash flow our business generates, which is supported by a strong and stable capital base provides an additional source of earnings growth.

Other than long-term convertible securities, we have no net debt, we’re highly liquid, our business generates more than $200 million annually and we have $800 million of available capacity and a committed bank facility on very favorable terms. We remain focused on enhancing share holder value by opportunistically repurchasing our stock and making accretive investments in additional affiliates.

Over time, our prospect for enhancing our earnings through a new affiliate investments are excellent. And as you heard we say in previous calls, we have a strong pipeline and have made substantial progress with several very attractive potential investments. However, given the extreme volatility in the markets, we’ve put these transactions on hold until markets stabilize.

Looking ahead, the transaction environment in general is increasingly favorable for us as we see significantly pure competitors and lower valuation levels. In addition, demographic trends are likely to lead to accelerated transaction activity as Boutique firms and their founders seek a succession planning solution.

We have established reputations with a large number of high-quality firms and given our reputation as the partner of choice for outstanding Boutique firms, we’re in a strong position to execute on a range of accretive transactions including both succession oriented investments as well as potential transactions involving corporate owners of Boutique firms.

With that, I’ll turn to Nate for a more detailed discussion of our affiliates.

Nate Dalton

Thanks, Sean. Good morning everyone. As Sean noted during this very difficult period, we remain confident in how we position the business with the quality and diversity of our affiliates and the stability of our structure as two key strengths of AMG.

That said, declining equity markets obviously create challenges and I’ll talk through how our individual managers are performing in this environment in a moment. I’ll also discuss ways in which we are working with our affiliate partners to ensure we and they are out giving our resources to know the significant opportunities, and there are both strategic and tactical elements to that.

Now, turning to our results for the quarter. While the dispersion results increased across all affiliates as it did across active management in general, as a group, our affiliates generated good, relative performance this quarter.

Starting with global products, we had a very good relative quarter across most of our products including all the products managed by Tweedy, Browne, our largest affiliate in terms of EBITDA contribution. To break Tweedy's performance down, I'll use the results of their retail products.

The flagship Tweedy, Browne Global Value Fund ranked in the top 2% for the quarter in its Morningstar category and top decile for the year-to-date and one year period, while Tweedy’s newest fund, Worldwide High Dividend Yield Value Fund outperformed the MSCI World by 735 basis points in the third quarter and by 611 year-to-date, placing the funds in top decile of its Morningstar category for both time period.

Same with Global International, almost all the products of Canadian affiliates, (inudible) including both Canadian equity and global and international equity, had good relative performance in the quarter and finally, Third Avenue’s international products are having a very good year on a relative basis.

I wanted to quickly congratulate the funds manager, Amit Wadhwaney who’s recently named the frontrunner for Morningstar’s International Stock Manager of the Year.

In terms of emerging markets, Genesis had another good relative quarter and outperformed their benchmarks in most of the firm’s products and in fact are beating their benchmarks for the year to date one, three and five-year period.

Now as many of you know, we have had a focus on building out our global equity capability and we believe this is very strong relative performance across the group set the great foundation to grow assets across distribution channels when investors come back to the equity market. As we’ve discussed on prior calls, we specifically see significant opportunities to leverage these products through our global distribution platform.

Next, turning to the alternative product category, where our affiliates offer a very diverse set of products. Performance across the group was mixed with strong, absolute and relative returns across most products at First Quadrant and Blue Mountain and mixed performance atother affiliates, with some outperforming and other products underperforming.

Now, while I'll talk about flows by channel in a minute, I do want to expand on a few points Sean just made about the alternatives space. Most of our alternative assets under management are from institutional clients although we also have fund-to-funds in high net worth. That significant institutional component may make our experience a little different than some of the data you are seeing from hedge fund generally, we though it was worth sharing.

In the third quarter and beginning of the fourth quarter, we are seeing a balance of flows in and out among institutional clients in alternative products. We have gone out and spoken with a number of institutional pension consultants, now admittedly it is just in front of their third quarter review meetings, but most of them are advising their clients to maintain their alternative allocation programs. We do see elevated outflows from fund to fund clients and also the more retail-end of high net worth but the ultra high net worth clients also seem to be holding.

Now, moving to our domestic products and starting on the value-sides. Consistent with their global performance, Tweedy, Browne posted strong relative performance in their domestic portfolios as well. The Tweedy, Browne Value Fund beat its benchmark by 997 basis points in the third quarter and that fund also ranks in the top 1% for the quarter, a top decile for the year-to-date in a one-year period.

Some of our other domestic value products like Third Avenue and Systematic for example, had more challenging quarters but the long-term track records for each of them remains competitive.

Finally, turning to our growth product, this is another perfect example of the benefit of diversity within a product category. At TimesSquare and Frontier both had very strong relative quarters across their product line-up.

All of TimesSquare’s products outperformed their benchmarks by more than 250 basis points in the third quarter and had very strong relative performance in all relevant time periods. In addition, Frontier’s research strategies also posted strong relevant return in the quarter, outperforming their benchmark by more than 225 basis points.

Now on the other hand, Freiss Associates have the first tough quarter in some time across its products but they're off to a very good start this quarter.

Now before I discuss flows by channel, I wanted to spend one minute on how we continue work with our affiliates to ensure resources are allocated to areas that have the best long-term opportunities. We, and our affiliates, continue to evaluate these opportunities and are making ongoing decisions to redeploy assets. You will see some of this activity in our asset flow numbers reflecting business lines and specific mandates having been exited.

Now as I’ve said at the outset, these evaluations have both a strategic and a tactical component. On an earlier call I described the consistent long-term framework we've been applying to evaluate the returns associated with each affiliate and specific business activities. In a volatile environment like the one we find ourselves in, this discipline is tremendous help.

Turning to flows, the steam of risk aversion continued in the quarter with investors pulling funds away from return-oriented investment and new surge activity having been very slow. Starting with the institutional channel, we had outflows of 4.7 billion for the quarter. Similar to last quarter, our net outflows were largely from our quantitative products at First Quadrant, AQR, and Chicago Equity Partners.

Turning to the mutual fund channels, we have negative flows in 951 million during the quarter, which were mainly from deep value managers, Tweedy, Browne and Third Avenue while the Friess Associates’ Brandywine Funds continued to have positive flows through our manager’s distribution platform.

Now, turning to our High Net Worth channel, flows were a negative 338 million for the quarter. This was a combination of outflows due to the risk aversion described above as well as the turmoil in a number of the broker-dealers platforms we distributed (inaudible) through.

There is certainly going to be some changes here as the distribution platforms merge and change and a significant number of the underlying financial advisers move as well. Now however, the team and our platform manager investment group is doing an excellent job for this very challenging period.

Finally, during these difficult times in the asset management industry, our affiliates are doing what they do best, by remaining disciplined in applying their proven investment processes, providing high-quality client service and managing their firms to generate long-term growth. We have a long history of working alongside our affiliate partners during good times and bad and we remain confident in their prospects going forward.

Now with that, I would like to turn over to Darrell.

Darrell Crate

Thank you, Nate. Good morning everyone. As Sean mentioned, AMG is well-positioned to generate stable earnings relative to market even during challenging periods. Our affiliates are among the industry’s leading asset managers and their ability to generate out performance across a diverse range of investment products provides consistency to our results.

Our investment structure, which leads the operating leverage with affiliates is another important source of stability to our earnings, especially in the current environment. Our business is supported by a strong capital structure and we have substantial financial capacity to continue to create long-term value for our shareholders.

As you saw in the release, we reported cash earnings per share of $1.31 for the third quarter. Cap earnings per share were $0.69. Performance fees, earned principally at First Quadrant, contributed approximately $0.09 to cash earnings.

Moving to additional financial detail, the ratio of EBITDA contribution to end of period assets under management was 18.8 basis points in the third quarter. This was higher than we had forecast principally because of the markets declines in the final weeks of the quarter, as well as the contribution from performance fees. As we look to the fourth quarter, we expect this ratio to increase to 23 basis points as the majority of our performance fee arrangement still at the end of the year.

Holding company expenses were 14.8 million for the quarter. We continue to seek operational efficiencies across our business and reduce holding company expenses including lower compensation accrual.

As we’ve indicated in the past, incentive compensation accruals are highly variable and are primarily based upon cash earnings per share results. We expect holding company expenses to decrease to 13.5 million in the fourth quarter.

Our cash tax rate for the third quarter was 17.2% and our GAAP tax rate was 48.8%. The GAAP tax rate included one-time reevaluation of our deferred tax liabilities as a result of the New Massachusetts Tax Legislation. This had a one-time effect reducing cash earnings per share by $0.02 in the quarter. In the fourth quarter, the GAAP tax rate will be 38% and the cash tax rate is forecasted to be 15.5%.

Intangible related deferred taxes were 14 million for the third quarter including this one-time reevaluation. With the closing of the Gannett Welsh & Kotler, we expect deferred taxes to be approximately 10 million in the fourth quarter.

Amortization for the quarter was 13.5 million including 4.9 million of amortization from affiliates accounted for using the equity method. The earnings from equity method affiliates are included in the income from equity method investments line on the income statement all net of amortization.

Depreciation for the quarter was $3 million with 1.7 million of that amount attributable to affiliate depreciation. We expect depreciation to increase to 3.2 million in the fourth quarter with the completion of GWK with 2 million attributable to affiliate depreciation.

Interest expense was 17.8 million for the third quarter. We expect our interest expense to increase to 19.8 million in the fourth quarter reflecting the full quarter effect of the interest cost associated with our recently issued convertible security.

Pausing here for a moment, as you saw during the quarter we issued $460 million of convertible securities and used the proceeds to pay down our revolving credit facility. The coupon is 3.95%, but after tax benefits these securities have a cash coupon of only 50 bases points. The conversion price for these security is $126.

With respect to our capital structure and financial capacity going forward, as Sean mentioned, we have substantial capital available. We currently have a $190 million of holding company cash and 770 million available under our committed bank facility.

In addition, through Bank of America, we have sold a $120 million of equity at an average price of $97 through a forward sale agreement. Under the terms of that agreement, we can draw on these funds at any time.

Finally, as you know our business generates strong, recurring free cash flow of approximately $200 million a year. We believe our capital structure is well positioned for the recent challenges in the market. Our leverage is low with senior bank outstandings that are more than offset by available cash.

While in this environment we believe that our lower target leverage ratio is appropriate, we are confident there’ll be a well position to execute on our new investment opportunities in addition to repurchasing our stock.

Now let’s talk about guidance for the remainder of the year. The most significant variables are what will happen with the markets broadly and what will happen with our performance fee generating products. While no one can predict what will happen in the markets in the near term, for modeling purposes we will assume that markets remain flat from here.

With respect to performance fees, we expect modest performance fee contributions from a number of affiliates in the quarter. However, there are two firms, First Quadrant and Blue Mountain that are particularly well-positioned and have strong prospects for earning material performance fees in the fourth quarter.

As I mentioned, First Quadrant contributed approximately $0.09 to earnings in the third quarter from performance fees, but they continue to perform well in this environment. That said, the extreme volatility in the markets makes the magnitude of total performance fee contribution for the coming quarter, inherently difficult to predict even for products that are not correlated to the equity market.

Accordingly, our range of expectations for fourth quarter earnings is wider than in past years, largely due to the variability in performance fees.

With these assumptions, we expect fourth quarter cash earnings per share to be within a range of a $1.05 to a $1.75. Our guidance assumes a weighted average share count of approximately 41 million shares in the fourth quarter.

Normally in this quarter we will give 2009 earnings guidance; however, given the extraordinary volatility in the equity market, it’s virtually impossible to establish a baseline from which to build a useful forecast and we’ll instead look to provide guidance on the fourth quarter call when as we can all hope the markets are stabilized.

Now we’ll be happy to answer any questions.

Question-and-Answer-Session

Operator

Thank you, sir. Ladies and gentlemen at this time we’ll begin the question and answer session. (Operator Instructions). Our first question comes from the line of William Katz with Buckingham Research. Please go ahead.

William Katz - Buckingham Research

Thank you and good morning everyone.

Darrell Crate

Good morning Bill.

William Katz - Buckingham Research

A number of questions, if I may. Just staying on the discussion on intangibles for a moment. Just given the decline in the markets to date, sort of wondering how we should be thinking about any kind of potential impairment and then sort of taking that to a second level, how much further can markets go down before somebody’s wherever you're sharing arrangements starts to get a little pressured?

Darrell Crate

This is Darrell. I will address the impairment and then Nate can talk a little about the revenue share agreement and their structure. From the impairment perspective, we just completed all of our impairment task at the end of the third quarter. So, as things stand today, we’re not thinking about any impairment charges or looking at our balance sheet and imagining that we would have to alter any of the carrying values in any way. And now with regard to revenue shares.

Nathaniel Dalton

Sure, so, obviously we’re working closely with all of our affiliates but the good news and this is the vast majority of them including all of the large affiliates are fine. I think the only point that I’d also make relative to that is we are also working with them, as we said earlier, we are also working with them in where are the opportunities and it’s not just where are the challenges. And so, might that mean we worked with them to pursue things? Sure, absolutely.

Darrell Crate

And I would just say from a revenue share perspective again, I can’t emphasized enough that that’s one of the components that’s a real strength of our business model. I mean if you look at how markets declined in the third quarter, and again as they’ve also declined in this quarter as revenues have gone down, our expenses have gone down roughly in line with those declines.

And I think that that of course as we’ve talked for the last 10 years about how the stability of our structure provides an opportunity for stability in earnings relative to market. And all those statements hold in this environment.

Sean Healey

And I would make one more general comment and response to your question, Bill. As you can imagine we always but especially in the midst of the very difficult market environment are very careful and prudent in how we manage the business. We look at sensitivity cases that are down sharply from even where we are today and we feel very comfortable about how the business is positioned even with further decline.

I think the other point, which I mentioned in my prepared remarks, that's important to bear in mind, is that for the largest affiliates, which contribute the vast majority of our earnings, we and importantly they enjoyed tremendous growth over the years since our investment, which in some cases is over a decade and in other is as short as a few years.

So an average of even through the end of September, an average still of 15% compound annual growth in revenues and because of the way our structure works, a much larger increase in the available cash flow for affiliate partners. And so that cushion that was built up over the years is available to provide stability and support for their businesses even given the level of market decline.

William Katz - Buckingham Research

That's helpful. Sort of commented in the discussion of capital management, I guess sort of to listen to what you said about selling forward some of your stock north of $125 or so, the way the stock is now I certainly appreciate earnings have compressed because of what's happened in the marketplace.

But can you help me understand why not just get more aggressive on buyback and leave gilst aside. It would seem like just based on your growth and potential of your existing base that there be some nice return from a buyback perspective that might at these levels be comparable to the economics of a deal. Just sort of help me understand the balancing act there?

Sean Healey

Well, I would in the midst of this extreme volatility, our view, as I said, is that a more prudent cautious approach is appropriate for the time being. But we have a long track record of using our cash appropriately to increase shareholder value and that includes repurchasing our stock, which we've done in a substantial way over time, as well as making new investments.

Sitting here today we have and looking forward we have, I guess, the silver lining of the very difficult environment is that we have a very attractive opportunity to repurchase our stock and we also have a number of very attractive new investment opportunities which are available.

So what you see in the immediate aftermath of these steep declines, I think, is not what you should expect as we look forward to the rest of this quarter and next year.

William Katz - Buckingham Research

And just one last question. You mentioned before that you hadn't really seen any change yet on the institutional consultant appetite for alternatives. I'm sort of wondering when you had the conversation with that channel and what is any more of the more recent thinking maybe going now we're deeper into October.

Nate Dalton

Yes, those conversations we were referencing were in just the last week or two and so I think that's still what we think is the (inaudible). There is lots of volatility and as we said that's right ahead of them going out and having their third quarter review meetings with clients. But that's where they were all indicating they were headed.

William Katz - Buckingham Research

Okay, terrific. Thank you, guys.

Operator

Thanks. Your next question comes from the line of Matthew Heinz with Jefferies & Company. Please go ahead.

Matthew Heinz - Jefferies & Company

Good morning. Thank you for taking my questions. Has your appetite for acquiring alternative managers changed at all, given the current issues in the hedge fund world and also given your previously stated desire to kind of increase capital allocations to the space?

Sean Healey

I think the answer is that obviously in this environment whether you're talking about traditional or alternative firms, it's more important than ever to be highly selective in choosing the firms that you want to partner with.

I think the competitive dynamics, again both for traditional and alternative firms, the competitive dynamics in the merger market have tilted very much in the favor of buyers and we think we're especially well-positioned.

And then with respect to the alternative area generally, Nate and I each commented in our earlier remarks and while there is tremendous turmoil and I'm sure there will be some hedge funds that go out of business, it is absolutely the case and happily our affiliates are among them that strong, well-managed alternative firms will continue to do well going forward.

And so we're going to make sure that they're the kind of firms that I described, institutionally oriented in their client base, diversity of products and institutionalized, well-managed business. But there is still a very good opportunity to set up firms like that that looking forward we would like to partner with.

Matthew Heinz - Jefferies & Company

Okay. Thank you. That’s very helpful and then secondly, has the make up of your pipeline or I guess size of your pipeline changed over the last three months given what’s occurred in the market and I guess have any central candidates that’s fallen out due to valuation or performance fees or I’m sorry performance issues?

Sean Healey

I would say the pipeline is very different than it’s ever been before. These are extraordinary times. As I mentioned, we had several opportunities that were very far along with outstanding firms. They haven’t gone away. We and they have agreed in the midst of this tremendous volatility that it’s appropriate to suspend our discussions for the moment.

There are other firms that we were in earlier stages of discussion with and a broad array of firms that we have relationships with, which over time, not probably in the immediate forward time, but over time, for demographic reasons, as I mentioned earlier, will need to find some succession solution and we think we’re very, very well positioned for those.

And while markets are volatile, the business realities and the human realities of folks getting near a retirement age is inevitable and there’s still a large number of traditional and alternative firms, which represent very attractive targets for us.

Matthew Heinz - Jefferies & Company

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Michael Kim with Sandler O’Neill. Please go ahead.

Michael Kim – Sandler O’Neill

Hey you guys. Good morning.

Sean Healey

Good morning.

Michael Kim – Sandler O’Neill

Just in terms of performance fees, just so I’m understanding this correctly that there’s still a component that is guaranteed into next year, correct? And then maybe taking that a step further, is it an absolute dollar amount that is guaranteed or is it based on kind of a percentage of related assets?

Darrell Crate

There is a component of performance fees that are guaranteed. Of course the way it’s not an absolute dollar like a bank loan. As firms have asset decline that guarantee also declines as well. But as we look at next year, we certainly will have some performance fees under the guarantee.

As we look past at this year, we’ve already reported $0.21 of performance fees and maybe just to give a little bit more color around the guidance that we’re giving for next quarter, when we, at the low end of the range of a $1.05, that assumes almost no incremental performance fees, which I don’t think is realistic, but again is prudent given that sort of volatility that we see in the market.

The upper end of the range is $1.75 is also equally realistic and as we look into the market over this last quarter, even with the $0.09 of performance fees that we reported from First Quadrant in the third quarter, the volatility was significant and again, we’ll only know if those performance fees are on December 31st but the opportunity that we have continues to be significant as we look at our portfolio of tough performance fee assets and we look at the high water marks in those assets. It’s roughly similar to the way it’s been for each of the last quarters that we’ve been on these calls.

Thankfully, it’s a diverse portfolio and many of those products are not correlated with the equity markets and that has certainly been to our benefit and I think will continue to be to our benefit in the years to come. But sadly or unfortunately, all of this volatility makes it very difficult to predict week to week, month to month, quarter to quarter exactly when we will realize those fees.

Michael Kim – Sandler O’Neill

Okay. That’s helpful and then just the total AUM that has performance fee structures at this point?

Darrell Crate

It’s just about $35 billion.

Michael Kim – Sandler O’Neill

Okay. Then kind of moving on to the pipeline, I understand from your perspective the outlook continues to build longer term, but as you said with kind of activity on hold here across the industry, is there an incremental focus on kind of enhancing growth at existing affiliates by either leveraging your scale or perhaps opening up new distribution channels?

Darrell Crate

The answer is, and I’m not trying to be glib, we’re doing both and we have been doing both. And I think the important thing to understand about our pipeline, as I just mentioned, is that while I feel very good about long-term prospects, it is the case that we have very substantial and well progressed transactions that are in our pipeline, which are on hold. It doesn’t mean that -- and I’d be very surprised if they all went away. It just means that they’re on hold until markets reach some level of stability.

Michael Kim – Sandler O’Neill

Okay. So no kind of incremental focusing on the existing affiliate base and kind of driving new distribution channels perhaps?

Nate Dalton

Yes, this is Nate. There absolutely are, I think, as Sean said, we’re doing both. So there, given all the things that are going on in the marketplace, we have a platform that has lots of option value, if you will, throughout it and we’re absolutely working with our affiliates to figure out the best way to take advantage of specific opportunities.

So both on the product development side using existing resources, product development side bringing in additional resources, distribution side using the platforms we’ve already built as well as looking at other things. So absolutely.

Michael Kim – Sandler O’Neill

Okay and then just finally can you let me know what the end of period share count was and if there was any buybacks during the quarter? I know you kind of spoke to that a bit earlier.

Nate Dalton

Yes, we bought back several hundred thousand shares and end of period share count is around 41 million.

Michael Kim – Sandler O’Neill

Okay. That’s helpful. Thanks.

Operator

Thanks. Your next question comes from the line of Robert Lee with KBW. Please go ahead.

Robert Lee - KBW

Thanks. Good morning everyone. Just a couple of quick questions I mean, just to clarify, Darrell, when you gave your guidance and (inaudible) so you’re basically assuming down 20% quarter to date than last (inaudible).

Nate Dalton

That is correct.

Robert Lee - KBW

Okay and is there I guess you still have one outstanding, I believe, acquisition left to close. Is there any reason we should expect that that the closing of that is going to get extended or there may be some issues around that given the market volatility.

Nate Dalton

Yes. The transaction you’re referring to is Harding Loevner. They are in the midst of their client approval process, which is normal, ordinary forward transactions. As they near the conclusion of that process, obviously in cooperation, coordination with the Harding Loevner folks, we’re going to look at the effects of the market declines on their business and we would make whatever adjustments are appropriate to the investment structure in terms at that point.

Robert Lee - KPW

And I mean when do you expect that client approval? Are you really looking at this as a Q1 potential close?

Nate Dalton

I would hope that we can still do it this year.

Robert Lee - KPW

Okay and Darrell, just to follow up to Bill’s earlier question. I mean understanding that you did your intangibles testing at the end of September, that obviously you've had -- continued pretty big draw downs in the market since then. I mean how often do you do your -- is it quarterly that you do the intangibles testing, annually? I mean how do you feel with kind of where we are today?

Darrell Crate

Yes, maybe more than you want to know, but our most scrutinized intangible test happens at the third quarter every year and that’s one that’s very comprehensive. And thankfully as we’re in the fourth quarter and there have been significant declines, we are having just gone through the exercise, i very easy for us to refresh our sensibilities about how those numbers look. And I would also say if we were to do that test today, we’d be in the same position as we were in the end of the third quarter.

Robert Lee - KPW

Alright. Great. That was it. Thank you very much.

Operator

And the next question comes from the line of Craig Siegenthaler with Credit Suisse. Please go ahead.

Craig Siegenthaler - Credit Suisse

Okay. Good morning.

Darrell Crate

Good morning Craig.

Craig Siegenthaler - Credit Suisse

I just have some questions on the deal math. If these two assets, GWK and Harding Loevner close in the four quarter, I’m wondering how we should think about capital on the balance sheet being redeployed in thinking of AUM popping up in the mutual fund, institutional, private wealth distribution channels and then also which ones of these has gone above the line and then which ones can go into equity investment?

Darrel W. Crate

The answer is GWK has already closed and Harding Loevner is a traditional investment.

Nate Dalton

It would go above the line and consolidate as well. And permanent asset perspective, they would be roughly split between mutual funds and institutional?

Craig Siegenthaler - Credit Suisse

Wasn’t one going in the private wealth bucket?

Darrell Crate

Maybe a small portion of GWK.

Nate Dalton

Retail distribution, separate account. It would probably go to retail distribution as well.

Criag Siegenthaler - Credit Suisse

Okay. That will not go in the private wealth bucket then?

Sean Healey

Some of it would.

Nate Dalton

I think it’ll be split among them, It’ll be split among them.

Craig Siegenthaler - Credit Suisse

And the GWK numbers, is that in the 3Q results or will that just show up in the 4th quarter results?

Sean Healey

It’ll just be in the 4th quarter results..

Craig Siegenthaler - Credit Suisse

Got it and it just sounded like from your last comment on the last question, the Harding Loevner deal, that price is not fixed yet; can that still change?

Darrell Crate

The price is fixed in the contract but obviously the contract provides for adjustments in certain circumstances and as I said, when we get to the appropriate point, we’ll look at where we are and talk to the Harding folks about appropriate adjustments.

Craig Siegenthaler - Credit Suisse

Got it and then just my final question on the -- if I think of compensation and really SG&A as a percentage of revenue, it held up very, very well this quarter. Can I -- in further market weakness, can I think about those ratios holding up as well or is there any trigger or anything which allows some sort of margin benefit to your subsidiaries?

Sean Healey

No I think you can say that it roughly holds and that’s what I was trying to communicate in my earlier comments in that the absence of operating leverage in our model certainly provides stability in these environments.

Craig Siegenthaler - Credit Suisse

Okay. And actually I’m sorry, I just have one more question. In this environment, do you know, I think you communicated on prior calls that there’s a level of ownership interest from your subsidiaries that can get put back to AMG every year, what’s the maximum that that level could be in in any given year in terms of capital needed and also how are the conversations going with the boutiques?

Nate Dalton

Starting with the conversations, they’ve been sort of very much normal course, which is not surprising for a couple reasons. One, these are sort of long-term conversations, right? These are people putting back small portions of their equity over time as they move through their careers at these businesses.

So these are not, in terms of how the conversations are going, these are all sort of in the normal course in the context of long-term conversations. So there’s nothing, we haven’t seen any sort of dramatic changes in that or anything.

Sean Healey

And I think, from a capital allocation perspective, as we look to next year, it’s again normal course and we look to $50 to $70 million as what seems to be a reasonable amount for us to allocate towards.

But I think it’s important to understand and appreciate how it’s hard to get visibility to this from the outside, but the demographics among our affiliate partners and the tenure of our relationships with almost all of our largest affiliates is such that the amount of equity that can be put back in any given period is quite limited.

It really is only when folks have reached the designated optional retirement date, which is years to come for the vast bulk of our affiliates that the puts are more than a small percentage for any individual partner or even any individual firm.

Craig Siegenthaler - Credit Suisse

Great. Thanks a lot for taking my questions.

Sean Healey

Thanks Craig.

Operator

Thank you. Your next question comes from the line of Marc Irizarry with Goldman Sachs. Please go ahead.

Marc Irizarry - Goldman Sachs

Oh great. Sean, you mentioned the word demographics as it relates to the owners of your affiliates, leaders if you will, but those same demographics, I think, are having implications for traditional asset management and obviously alternatives may be on the midst of a bit of a sea change.

When we do get back into the deal making or better deal making environment, do you think the business has changed in terms of really the ability to look longer term at each of the secular opportunities or has something really changed in terms of the longer term opportunities set for you to do deals?

Sean Healey

I think there’s no doubt that in many ways especially in some of the distribution channels there have been significant changes. I think in general, we’re well positioned to address any such changes in the environment.

If your comment about demographics is oriented towards the people who are nearing retirement investors, that is, are nearing retirement and there will be less or fewer allocations to equity, I think there may be that kind of effect but folks’ ability to forecast on either side, in my experience, has been pretty limited in its predictability.

So I think given the level of declines and both for individuals and especially for institutions, looking forward I see, we see allocations to equity being as I mentioned, substantially below benchmark levels.

And going forward, past this immediate period of extreme volatility, we see more demands than ever for focused performance-oriented boutique firms that can generate outflow consistently over time for their clients.

So yes, it’s the same kind of opportunity set that we focused for four years. I think looking ahead, we’re going to have fewer competitors out there going after these firms and we’ll have an opportunity and we’ll no doubt continue to be selective in the firms that we choose to partner with.

Marc Irizarry - Goldman Sachs

And you’re seeing outflows of high net worth, power of distribution changes to get product demands on high net worth folks, how has that sort of changed and how is the business positioned that’s going forward in terms of potential consolidation among distributors to high net worth?

Nate Dalton

Yes well look, I think the obviously this past quarter and into October, there’s been sort of extreme change and a little bit, what’s it going to look at on the other side. We obviously, we have views and we’re positioning or beginning to position business to take advantage of it.

But you look at our position in those sort of scale retail markets, we’re really helping provide product, which is then used to package, right? That sort of fundamental thing hasn’t changed and I think picking up on what Sean was just saying, he said we can bring very high quality performance-oriented products into that market and get the leverage that that market place still brings as an addition, in addition to the core growth of our affiliates, which again you have to remember that’s sort of the way we’re building that platform.

That can be a powerful additional source of growth for our affiliates. We are seeing that. We started to see that really over the last couple of years so.

Marc Irizarry - Goldman Sachs

Great. Then just in terms of First Quadrant, if you look at some of the performance, obviously have been good, I guess there’s one question in terms of how many different products are comprising the performance fees that you’re generating and then also why aren’t the flows or what are you seeing in terms of flows at First Quadrant as performance has sort of improved here on a relative basis?

I mean it looks like you’re certainly seeing something on the quant side, maybe you can just reflect on flows of First Quadrant?

Nate Dalton

Sure. The products that are performing well, it is a cross range of products. The thing you have to be careful on, on the flows, they have a very diverse business and we’ve talked about some of the different product categories they have but it really ranges from sort of product that looks traditional hedge fund like 1 in 22 and 20 kinds of products up to large institutional mandates with low basis point, C product structures.

And so when we talk about the dollars not, a dollar in one is obviously not equal to a dollar in the other and so we are seeing some, you’re seeing some rotation within their product mix towards higher fee and higher margin products.

But that’s again, when we talk about outflows at the asset level, that I think is that’s probably not exactly the right way to look at the growing strength of their business and the performance C profile. I don’t know if that’s helpful.

Marc Irizarry - Goldman Sachs

So how many products have, the performance fees that you’re generating, how many products have generated those fees? Is it just one or two out of --

Sean Healey

I think as we look to the fourth quarter, there are five products that we look to that provide opportunity for performance fee and as I say that again, these are products that have performed well not only over this period, but over the medium term and again our only question and level of any question about performance fee generation is all driven by the volatility of these products and they they bill four days a year.

Nate Dalton

Yes and the only nuance I’d put on what Sean just said is I think when we use that, you’re really talking about sort of strategies, right, which might be several institutional accounts plus a fund kind of thing, each of those strategies and those may have modest, again not to get to in the weeds, but they may have modestly different billing cycles or benchmarks or fee structures.

So some of those where we build already and you saw some in the third quarter, some of those same products may not build until the fourth quarter. So again it’s hard to simplify it the same way you think about the five fund business. It’s not really like that.

Sean Healey

No, that’s exactly right.

Marc Irizarry - Goldman Sachs

And then in terms of TimesSquare, obviously performance has been strong there as well but are there some products that are closed there and is the intention to sort of to open some of those products up?

Nate Dalton

There are some products that are closed on the small cap side. They have, let me just back up a second, they had very good performance across the product lineup. They have some of the small end of it that are closed.

And again I think, as we’ve said before about other products, we can’t really get out in front of them and the way they talk about when’s appropriate to open all that. So there’s really nothing to report there.

Marc Irizarry - Goldman Sachs

Okay. Great. Thanks.

Operator

I think our next question comes from the line of D.J. Neiman with William Blair. Please go ahead.

D.J. Neiman - William Blair

Hey, good morning guys.

Darrell Crate

Good morning D.J.

D.J. Neiman - William Blair

Just a couple of quick follow-ups to other questions. Darrell, could you be more specific on the percent of alternative strategies that are at or above high water mark? I think in the past, you said around roughly 30%, is that roughly the number you’re talking about still?

Darrell Crate

Yes, from an AUM perspective, it’s right in that 30 to 40% range.

D.J. Neiman - William Blair

Okay and then looking more towards ‘09 performance fees, can you provide some sort of measure of how far below high water mark the rest of assets are?

Darrell Crate

Well it really varies. I mean we have some very small set of products that were levered that are meaningful double-digits below their high water mark, but again that’s a very small percentage of assets under management.

Then there’s a set that you find in the interim 200 to 600 basis points below the high water mark and again, given the volatility that doesn’t feel that far away from a high water mark. And as we look over this last quarter, there are many products that, if I was on this call, when I was on this call came to mind as being below high water mark and I had very low expectation for performance fee generation, which today stands above their high water mark.

So and I don’t mean to provide information and for it to see more confusing. I look ahead to 2009 and some of what I’ve said is that the portfolio, while may be 10 or 12% smaller than when we sat here a year ago, when we look at high water marks and we look at products, we look at that opportunity and it feels roughly similar to and has many similar characteristics to how we looked at it a year ago.

D.J. Neiman - William Blair

Okay. So the $35 billion, the total book is still, you would say, in striking distance of producing performance fees in ‘09?

Darrell Crate

No. I mean there’s a portion of it, as I mentioned, that is not but again as I said, close to 40% of those assets are at high water mark and they again, depending upon performance can contribute very materially to our revenues and our earnings.

D.J. Neiman - William Blair

Okay. Okay just real quickly, can you provide in some detail on the crystallization periods for performance fees? It seems like we’re getting some performance fees here and there that are unexpected. I mean could you say what percentage of accounts are generating performance fees on a Q1, Q2, Q3?

Darrell Crate

Again there are so many clients and it puts it -- many of the institutional clients have a tailored contract on how those arrangements are constructed. Some bill quarterly, some bill annually and there’s no way to give information that would be helpful in forecasting how those performance fees are going to materialize.

We look at the overall portfolio and look at the opportunity and again can make some assessments over a 12-month period what we think is a reasonable amount. As I said, we billed already at $0.21 to those performance fees occur but again as we look to, and as I said in my prepared comments, as we get to the fourth quarter, the majority of those arrangements bill at the end of the year.

D.J. Neiman - William Blair

Okay. Okay. Just turning to one other topic. There was some talk earlier this summer about Third Avenue raising distress funds at some point in the next year. Do you think that’s still on the table and would that have the same economics to AMG as the rest of their business?

Nate Dalton

Third Avenue is definitely still pursuing and working on that fund. They haven’t sort of gone to market and said here’s the terms and the way it’s structured and all that nor sort of finalized all the details but they’re definitely still working on it.

Sean Healey

And we would expect a share as partners. Obviously, the different nature of fund vehicles can involve different forms of compensation, i.e. shares of carry et cetera, all of that still being worked out but we would be in the same position as the Third Avenue partners.

D.J. Neiman - William Blair

Okay. Great. Thanks,

Operator

Thank you. Our next question comes from the line of Cynthia Mayer with Merrill Lynch. Please go ahead.

Cynthia Mayer - Merrill Lynch

Hi there.

Darrell Crate

Good morning.

Sean Healey

Good morning Cynthia.

Cynthia Mayer - Merrill Lynch

Still here, yes. Just very quickly on the capital, I’m just wondering if in terms of the capital, if you wanted to, in some way, if the market stabilized and you wanted to take advantage and make a much larger acquisition than usual, do you think you could find the capital to do that?

And secondly, just in terms of the capital you named that you have like the committed bank facility, if the market were to fall further, do you see, would that in any way impeded your access to the capital to the facility?

Darrell Crate

I’ll start with respect to the potential for a large investment. I would say in the immediate environment, the prospects for a large investment are low. Looking forward, we are going to even, in a period of relative market stability, we will continue to be prudent in how we manage our capital and I think the availability of capital will likely improve over time.

But our orientation is much more in the kinds of investments that we have made historically both in traditional and alternative firms. I would say that we are certainly, as always, opportunistic in how we look at transaction opportunities, but the bar is set very high in terms of return levels that we’re seeking and we will continue to be, as I said, quite prudent in how we think about managing our capital.

Sean Healey

Yes and I would just say, from an availability perspective, I hear of course there is less capital available in the world and it is challenging to raise capital. That said, in this last quarter we added an additional $55 million of commitments to our bank facility.

That full bank facility is available to us today and I think we’ve always been opportunistic as with deals and finding good deals that create long-term value for shareholders over time. We’ve been opportunistic in finding capital so that we make sure that all the good work that we’ve done over these last 15 years to position the business are in a place where we can execute on those opportunities in a way that’s good for shareholders.

Cynthia Mayer - Merrill Lynch

Okay and a couple of other follow ups. Nate, I think you mentioned that you devaluated products of the affiliates and found some that sounded like they’re going to be phased out. Could you size those for us in terms of the AUM or the fee type and give a sense of timing?

Nate Dalton

Hard to give a sense of timing. It’s something that we’re obviously still working through with them so also hard to be very specific. I think the place to focus they’ll be clearly very small, sort of otherwise, that’s a huge project now for us, very small sort of financial impact to us and the affiliates.

That doesn’t necessarily speak directly to the asset level, speaks maybe more to the fee level and the margins in some cases. But the important thing, that’s sort of a piece in the question is it’s not just hey here are things we should stop doing, it’s much more hey, there are some real significant opportunities out there right now. Let’s make sure we’re focused on the right thing, right.

So at the same time, that you’ll see some of those kinds of changes coming through, you’ll also see us pursuing new opportunities and that can be, as I said earlier, that can be sort of in the product development using existing resources, product development, using new resources, bringing new people in.

There’s lots of opportunities to do things there as well as pursuing things in the distribution areas. There’s some real significant opportunities associated with some of the turmoil here.

Cynthia Mayer - Merrill Lynch

I’m just trying to gage whether we’re going to see like a 5% drop in AUM because you discontinued some product. It sounds like you’re expecting it to net out?

Nate Dalton

Well again, from a financial standpoint, yes we’re not expecting to net out, we’re expecting to grow, right? I mean that’s, yes, absolutely.

Cynthia Mayer - Merrill Lynch

Okay and then just finally follow up on the high water marks. Are there any high water marks which reset after a year or do they all carry forward indefinitely?

Nate Dalton

We have some that reset. We have some that, again let me just go through, we have some performance fee products where the performance fee calculation resets, absolutely, but most of them, I think, are sort of more typical, sort of carry forward but we do have some that reset.

Cynthia Mayer - Merrill Lynch

Okay. Great. Thanks.

Operator

Thank you and our next question is a follow up from the line of William Katz with Buckingham Research. Please go ahead.

William Katz - Buckingham Research

Great. Thanks, just actually two follow ups. Number one is just on the Harding Loevner transaction. Are the economics still the same in terms of the incremental accretion maybe sort of review the guidance there. And then number two, if the quarter were to end today since your guidance now assumes a flat market, what’s the most likely performance fee outcome?

Sean Healey

Okay. I’ll bet Darrell’s not going to answer that second question because we said what we’ll say about the range. And with respect to the accretion from Harding Loevner, I think it’s, I can’t give you an answer on that either obviously, it will depend on where they are when we sit down and talk to them and obviously what kind of adjustments we make to the terms and the structure of the deal.

Darrell Crate

And again with performance fees, again we’ve articulated a range for next quarter. Clearly, if we were to close it right now, we’d be somewhere in that range but again the volatility has been significant and I’d again, wouldn’t want to give specific information that is inappropriate to extrapolate.

Sean Healey

And Bill I think you know we’ve, over time, given and tried to always give guidance even on performance fees, which has a level of precision. The current environment is unbelievably volatile and these products, which as Darrell noted, are not correlated with the equity markets, are themselves, given overall market effects, enormously volatile and it is because of that volatility that the range is so wide.

And we certainly are hoping and are still at least hoping and expecting a varied result and that’s really all we can say at this point.

William Katz - Buckingham Research

Okay. Thank you.

Darrell Crate

Sure.

Operator

Thank you and management, there are no further questions, I turn it back to you for closing comments.

Sean Healey

Thank you. Despite continued market volatility in the fourth quarter, AMG’s well positioned to weather this extraordinarily difficult time, our affiliates are some of the most highly regarded boutique managers with established investment disciplines and long-term track records about performance.

We focused on building a diverse business that’s supported by a strong capital structure and we remain committed to executing our business strategy in order to continue to create long-term value for our shareholders. Thank you very much.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference, please dial in to (303) 590-3000 or 1 (800) 405-2236 and enter the access code of 11120725 followed by the pound sign.

We thank you again for your participation and at this time, you may disconnect. Have a nice day.

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