Affiliated Managers Group (AMG) Sean M. Healey on Q4 2015 Results - Earnings Call Transcript

| About: Affiliated Managers (AMG)

Affiliated Managers Group, Inc. (NYSE:AMG)

Q4 2015 Earnings Call

February 02, 2016 8:00 am ET

Executives

Selene Oh - Vice President-Finance & Investor Relations

Sean M. Healey - Chairman & Chief Executive Officer

Nathaniel Dalton - President & Chief Operating Officer

Jay C. Horgen - Chief Financial Officer & Treasurer

Analysts

Alexander Blostein - Goldman Sachs & Co.

Michael Roger Carrier - Bank of America Merrill Lynch

Craig Siegenthaler - Credit Suisse Securities (NYSE:USA) LLC (Broker)

William Raymond Katz - Citigroup Global Markets, Inc. (Broker)

Daniel Thomas Fannon - Jefferies LLC

Michael S. Kim - Sandler O'Neill & Partners LP

Chris C. Shutler - William Blair & Co. LLC

Brian B. Bedell - Deutsche Bank Securities, Inc.

Robert Lee - Keefe, Bruyette & Woods, Inc.

Operator

Greetings and welcome to the AMG Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Selene Oh, Vice President, Investor Relations. Thank you. You may begin.

Selene Oh - Vice President-Finance & Investor Relations

Thank you for joining AMG to discuss the results for the fourth quarter of 2015. In this conference call, certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors including, but not limited to, those referenced in the company's Form 10-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward-looking statements made during this call.

AMG will provide on its website at www.amg.com a replay of the call and a copy of our announcement of our results for the quarter as well as a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures.

With us on the line to discuss the company's results for the quarter are: Sean Healey, Chairman and Chief Executive Officer; Nate Dalton, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer.

With that, I'll turn the call over to Sean Healey.

Sean M. Healey - Chairman & Chief Executive Officer

Thanks, Selene, and good morning, everyone. AMG reported economic earnings per share of $3.61 for the fourth quarter and $12.55 for the full year. Notwithstanding declines in global equity indices, AMG generated strong results, including year-over-year earnings growth of 10%, and excellent execution in our new investments area with the addition of six outstanding new Affiliates, which diversify and broaden our position in global equities and alternatives and enhance the earnings power of our overall business.

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

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

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

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

The drivers of our earnings growth include organic growth, especially into higher-fee, alpha-oriented products, and the accretion from new investments where we have an unmatched competitive position as well as tremendous ongoing opportunities.

In addition, our increasingly broad and diverse exposure to performance fee products gives us an asymmetric opportunity for earnings upside. While the substantial majority of our earnings from alternative products are in the form of management fees, often in long-term locked funds, we have a large, diverse, and relatively uncorrelated array of performance fee products in liquid and illiquid strategies spanning private equity, infrastructure, energy, credit, control equity, global macro, multi-strategy, relative value, managed futures, and long/short equities.

And as we've added new Affiliates like Systematica, Ivory, and Baring Asia, and existing Affiliates like AQR, BlueMountain, and ValueAct have increased their asset bases, their prospective earnings contribution from performances fees has become both larger and even more consistent.

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

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

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

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

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

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

Nathaniel Dalton - President & Chief Operating Officer

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

First, in the fourth quarter in the institutional channel, while we had significant quarter-over-quarter sequential improvement in net flows, we had large idiosyncratic outflows from several institutional clients that were unrelated to performance, meaning that we're confident that affiliate performance was not the cause of the redemptions.

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

Now moving from the institutional channel, all of my other high-level comments on flows relate to the Mutual Fund channel and are against the broad backdrop of industry-wide continued outflows from U.S. equities, where we have a material exposure to the Mutual Fund channel.

Now, against that backdrop, there were several significant one-off items in the quarter. First, like many of our U.S. fund industry peers, we had a material amount of year-end tax distributions. Our estimate is roughly $800 million of tax distributions net of the reinvested amount. Now while this is seasonal, this year was notable after six consecutive years of strong equity market returns.

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

In addition to this fund's impact on our net flows in the quarter, all of the other funds at Third Avenue saw elevated outflows after the announcement of the liquidation of Focused Credit as well. These totaled together almost $2.2 billion in the quarter.

Finally, we also have the termination of a large, non-U.S. subadvisory relationship across multiple products driven by internal client needs.

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

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

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

In term of performance, and starting on the more liquid side, in the quarter, a number of strategies at AQR delivered strong absolute and relative performance, notably: Style Premia; DELTA, their hedge fund beta product; Long/Short Equity; and Equity Market Neutral. These strategies all have vehicles tracked by Morningstar and each earned top decile or even top percentile rankings in their respective Morningstar categories both the quarter and full year 2015.

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

Next, moving to the global developed markets category, Harding Loevner continued to deliver good returns in both the quarter and the year across their international and global equity strategies as they added to their strong long-term records. AQR also extended their long-term track records with good performance in the quarter and year, while Artemis also had excellent returns for the year while their fourth quarter performance was mixed. While Tweedy, Browne underperformed their benchmarks in the fourth quarter, they have performed very well versus peers and benchmarks through the market volatility in the current quarter and now feature top-quartile returns for the one year and top-decile returns over three year and longer time periods. In addition, Tweedy, Browne announced the reopening of their Global Value Fund II on February 1 after having been closed for the past two years, as they are beginning to see opportunities to put additional capital to work.

In the emerging markets category, for the broad indices, the fourth quarter was a muted finish to a volatile year. Our Affiliates, however, generated strong relative return. Harding Loevner posted good returns in both the quarter and year, adding to their excellent long-term track record of outperformance. Trilogy also generated good relative returns in both their emerging markets wealth and emerging market strategies, while Genesis was in line with the MSCI EM Index for the year, posting excellent relative returns over the longer term.

Finally, with respect to our U.S. equities, performance across our Affiliates was mixed in the quarter, but each of Chicago Equity, Frontier, GW&K, River Road, and TimesSquare continued or extended their good longer-term performance track records.

In the U.S. equity category, I also wanted to highlight Yacktman. They underperformed in the quarter and for the full year 2015; however, they have posted excellent relative returns in the market volatilities this quarter so far, featuring the top 2% to 3% year-to-date and remaining with first or second percentile performance in the 10-year and 15-year time periods still. They also have recently reopened their products, and we believe the recent dispersion and volatility is providing them with an opportunity to put some of their high-level cash to work.

In fact, I'd like to also make a couple of broader comments about performance, given the significant volatility we've seen at the start of the year. In general, a number of our largest Affiliates and their most significant products are meaningfully value-oriented, including AQR; Pantheon; Tweedy, Browne; Yacktman, and including our quality growth managers like Harding Loevner. These firms and their products are performing very well on a relative basis in this environment and this should position them extremely well to further extend their excellent long-term track records while the volatility and dispersion create significant opportunities for them to put client assets to work.

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

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

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

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

With that, I'll turn it to Jay.

Jay C. Horgen - Chief Financial Officer & Treasurer

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

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

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

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

Intangible related deferred taxes for the fourth quarter were $15.5 million, which was lower than expected, as a result of the UK tax rate change, and we expect this number to return to approximately $22 million per quarter in 2016.

Our share reported amortization for the fourth quarter was $28.6 million, which includes $8.1 million of amortization from Affiliates accounted for under the equity method. For the first quarter, we expect our share of amortization to increase to $34 million due to the addition of new investments.

Our share of interest expense for the fourth quarter was $20.6 million, and in the first quarter, we expect our share of interest expense to increase to $22 million due to higher revolver balances from the financing of our new investment.

Our other economic items for the first quarter were $2.5 million, and as we look forward, for modeling purposes, we expect other economic items to be approximately $1 million per quarter.

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

Now turning to guidance, we are updating our 2016 guidance as we now expect economic earnings per share to be in the range of $12.40 to $14. This guidance range assumes our normal model convention of actual market performance through yesterday for the current quarter and 2% quarterly market growth beginning in the second quarter of 2016.

We also assume share repurchases equal to 50% of expected annual economic net income over the course of 2016, which results in an expected weighted average share count of approximately 54 million for the year. The lower end of our guidance includes a modest contribution from performance fees and organic growth, while the upper end assumes a more robust contribution from both performance fees and net client cash flows.

As always, these assumptions do not include earnings from future new investments and are based on our current expectation of Affiliate growth rates, performance, and a mix of Affiliate contribution to our earnings. Of course, substantial changes in markets and the earnings contribution of our Affiliates could impact these expectations.

Now, we will be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. Thank you. Our first question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Alexander Blostein - Goldman Sachs & Co.

Great. Good morning, everybody.

Sean M. Healey - Chairman & Chief Executive Officer

Morning.

Jay C. Horgen - Chief Financial Officer & Treasurer

Morning.

Alexander Blostein - Goldman Sachs & Co.

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

Sean M. Healey - Chairman & Chief Executive Officer

Nate, why don't you?

Nathaniel Dalton - President & Chief Operating Officer

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

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

Sean M. Healey - Chairman & Chief Executive Officer

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

Operator

Thank you. Our next question comes from the line from Michael Carrier with Bank of America Merrill Lynch. Please proceed with your question.

Michael Roger Carrier - Bank of America Merrill Lynch

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

Sean M. Healey - Chairman & Chief Executive Officer

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

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

Operator

Our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker)

Thanks. Good morning, everyone.

Sean M. Healey - Chairman & Chief Executive Officer

Good morning.

Nathaniel Dalton - President & Chief Operating Officer

Good morning.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker)

I'm just wondering, as of today, have you experienced or received notice of any lumpy redemptions in 1Q 2016?

Sean M. Healey - Chairman & Chief Executive Officer

No.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker)

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

Nathaniel Dalton - President & Chief Operating Officer

Yeah. So the way I would describe it is just focusing on the quarter, which is – what your question is. So, we talked about mutual funds, right? So on the mutual funds side; trajectory is much, much better. We have these idiosyncratic things behind us. I gave you the number for January on publicly available data for mutual funds, which is sort of positive, over $800 million and we're seeing really good continued inflows in the Mutual Fund channel in both alternatives and global equities. And then really importantly we're seeing much lower outflows in the U.S. equity book in the Mutual Fund channel as well. And so that's kind of the piece that has probably the most clarity around it and sort of the most public information around it.

And then if you look at the institutional side, if you look at the totality of it, which is sort of RFP searches, finals, ones not funded (27:44) all that, they're kind of running about where they've been in prior periods without any of these, again so far, and it's early and all that sort of the idiosyncratic things on the other side. So putting all that together, the trajectory is just much, much better.

Sean M. Healey - Chairman & Chief Executive Officer

And maybe just amplifying and stepping back a bit, we had 21 straight quarters of positive flows, industry-leading in many cases on an absolute basis. But if you think about it from the standpoint of the product composition, for us the flows are pretty much all active equities and alternatives, and the rest of the industry, as you know, is almost all passive and fixed income. And so that engine of organic growth continues, and, as Nate described, we see ongoing momentum and based on the, to some extent, early anecdotal data and commentary that we see from talking to clients and clients describing their own strategic positioning, we think, as we said earlier, it's even more going to be a period of favoring active equity and alternatives going forward, obviously, the ones that generate alpha and the ones that have a track record of being able to sell their products effectively on a global basis. And that's all that we have been doing.

I think we had a period; we've had two quarters with idiosyncratic events, one around large clients who are redeeming for non-performance-related reasons. And I think Nate described the extent to which our ongoing exposure is much more limited than our peers. And given the remaining products we feel as good as we can feel, including some of the products being long-term locked vehicles. We feel as good as we can feel about the exposure there. We had a tough period in retail, especially U.S. retail. And I think that's largely past us and the early trend certainly from a performance standpoint, as well as from a flow standpoint through the first month, where I think we've had a good month and I think that's good on an absolute basis, but also very good on a relative basis. And then, of course, we had another one-off event around Third Avenue and the closing of that fund, and there the flows have moderated, as Nate described.

And so looking forward, we're very optimistic about a resumption of the kind of momentum that we've shown and demonstrated over the past five years and nothing that we see, nothing that we can see, is at all at odds with that.

Operator

Our next question comes from the line of Bill Katz with Citi. Please proceed with your question.

William Raymond Katz - Citigroup Global Markets, Inc. (Broker)

Okay, thanks. Good morning, everyone. I appreciate taking the questions and thanks so much for the extra color on the flows. It is very helpful to frame it out. Just sort of talking about maybe capital management a little bit, I'm just trying to reconcile some of the comments this morning. It sounds like the deal pipeline might be a little bit slower, which is not surprising given the volatility. I guess I'm a little surprised that your share count wouldn't be down a bit more if your mix is tipped a little bit more toward buyback. So I'm wondering if you could sort of highlight what I'm missing there.

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

Sean M. Healey - Chairman & Chief Executive Officer

Why don't I take it in reverse order and just comment briefly on the pipeline? I'm sure there'll be other questions around it. The dampening effect that I described on an industry-wide basis is something that it's too early for us to tell. We have a very strong pipeline. It's probably not quite as weighted toward global and alternative as it was last year. But we had a terrific result last year and especially the last quarter. And so while, as we have said many times in the past, that the deals tend to come in clumps and it's very difficult to forecast quarter-to-quarter, I would say that any pause that you might see would be around market volatility and just the accident of timing. On an overall basis, we couldn't be more positive about our prospects for continued accretion from new investments going forward. And we'll talk more about that, I'm sure, in addressing subsequent questions. But, Jay, why don't you respond to the first part of his question?

Jay C. Horgen - Chief Financial Officer & Treasurer

Yeah. So, Bill, just on the share count, as you heard me just say, the share count for the guidance is 54 million, weighted average. Our spot rate at the moment is about 54.4 million. So obviously to get to a weighted average of 54 million, we're going to go below that through the end of the year. And again, it's just a model convention. The actual share repurchases will be based on what we see in both new investments and capital management, as it relates to share repurchases. So it can be more or less than that, but again just model convention.

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

Operator

Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Daniel Thomas Fannon - Jefferies LLC

Thanks. Good morning.

Sean M. Healey - Chairman & Chief Executive Officer

Good morning.

Daniel Thomas Fannon - Jefferies LLC

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

Jay C. Horgen - Chief Financial Officer & Treasurer

Yeah. So, sure, Dan, I'll do the whole thing. Maybe I'll just start with guidance and then end up on capital levels on our revolver, which is how we funded these transactions. Start with the guidance, just what was the update in the guidance 2016 range of $12.40 to $14? It was based on the mark-to-market of our AUM since our last call. It included the inclusion of Baring Asia, which was the new transaction because on November 9, when we last gave guidance, we had already announced the other three. So we included Baring Asia and its accretion for the full year effect in 2016. We also updated our performance fee assumption for the year, given the addition of Systematica, Baring Asia, and Ivory, all of which have performance fees. So those three things were the main items that we updated and reflected on.

Starting with the building blocks on market beta, since we gave the guidance on November 9 through the end of the year – well, starting as of November 9, we were up about 4% in the quarter. And as you can see from our AUM table, we finished up about 2%. So the delta between November 9 and the end of the year was minus 2%. Then quarter-to-date through February 1, so since the end of the year to now, we experienced another 4% down, in line with broader markets. So if you add the negative 2% and the 4%, you get minus 6%.

And then lastly, reminding you of our modeling convention, we assume no more market beta in this current quarter. So we've removed our model convention of 2% for this quarter. So the full change was down 8%, and part of that was model convention. But thereafter, we grow at 2%, so it's the second quarter, third quarter and fourth quarter at 2%. So that's the underlying assumption for beta for the rest of the year.

And then when you think about Baring, because it closed on January 4, we really get the full year effect of Baring in our earnings accretion. That does partially offset that market change that I just mentioned.

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

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

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

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

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

Operator

Our next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed with your question.

Michael S. Kim - Sandler O'Neill & Partners LP

Hey, guys. Good morning.

Sean M. Healey - Chairman & Chief Executive Officer

Good morning.

Michael S. Kim - Sandler O'Neill & Partners LP

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

Sean M. Healey - Chairman & Chief Executive Officer

Hey. It's Sean. I think beyond what we've said, I don't want to say more. I think I'll repeat and reframe a little bit of what we did say. First of all, I know that we're not alone, and I think it's in the industry in terms of having these kinds of outflows. I also know that our relative exposure is much less than the industry average and much, much less than some others, and that the remaining products are some locked up in long-life vehicles, and the performance of the others is very strong. Beyond that, we're not comfortable saying more because of, hopefully you understand, our extreme sensitivity to calling out individual clients.

Operator

Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.

Chris C. Shutler - William Blair & Co. LLC

Hey, guys. Good morning.

Sean M. Healey - Chairman & Chief Executive Officer

Good morning.

Chris C. Shutler - William Blair & Co. LLC

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

Sean M. Healey - Chairman & Chief Executive Officer

Well, I'll start and then ask Nate to follow on. I think the answer is, broadly, value will do better from a flow standpoint as it does better from a performance perspective, stating the completely obvious. And we're seeing early signs of that, but it's too soon to tell. I think there are cross-currents in the industry around passive versus active and those will, to some extent, continue. But I think it is highly likely, given the volatility and dispersion, that this will be a period, and I think perhaps for a while, where active, the best active strongly outperforms passive. And I think you've heard, I've heard, some of my peers in the industry say the same thing, including firms where they have significant passive exposure. And so we're believing that, and it follows logically from the environment and from the track record of firms.

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

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

Nathaniel Dalton - President & Chief Operating Officer

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

So I think, in restating the obvious, right, I think as we enter a period, these managers – some of the best managers are now starting to say they can find value again. Although not all of them yet, right, but some of them are starting to say they can find value again. I called that in my prepared remarks, Tweedy, Browne is an example, right? Their products have been closed for over two years, not because people didn't want to give them money. Their cash balances were growing and they needed to be able to put the money to work for existing clients first. And they've now decided to reopen one of their global funds and they're finding things to invest in. And that will take this cycle, which is as they find things to invest in and as performance does well and they're open to new money, they'll be gathering flows. And I do think that growth value cycle, there will be a cycle to it and flows will definitely follow.

Operator

Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Brian B. Bedell - Deutsche Bank Securities, Inc.

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

Sean M. Healey - Chairman & Chief Executive Officer

Sure. I think the number, Jay correct me if I get this wrong, in terms of aggregate outflows through the end of the year, including for our purposes all of the Focused Credit Fund is a little over $2 billion.

Jay C. Horgen - Chief Financial Officer & Treasurer

$2.2 billion.

Sean M. Healey - Chairman & Chief Executive Officer

$2.2 billion.

Jay C. Horgen - Chief Financial Officer & Treasurer

For the quarter.

Sean M. Healey - Chairman & Chief Executive Officer

Sorry, for the quarter, for the fourth quarter. I don't have the number for this year-to-date. It's going to be all on the public data. Maybe Nate would have it. But there is a clear trend toward the outflows moderating. As clients focus again on the outstanding long-term record of Third Avenue's products, especially their flagship real estate product, which obviously is completely unrelated to and away from the Focused Credit product.

So the management team has more than a decade, on average, of experience and we feel terrific about the firm's prospects and their financial and operating position. They're extremely well reserved. And so I think it is probable that there is some further redemption and shrinkage through this period. But I see, over time, a little bit as market trends sort of favor them, as we were just discussing around the opportunities for deep value managers. But of course they're going to have to generate excellent performance as they have in the past. And as they do that, we see them bottoming and then recovering and, as I said, have every confidence in their ability to do that.

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

And so going forward, while it has been a difficult period for Third Avenue and obviously attracted a lot of publicity and perhaps a lot of uncertainty around any potential exposure to AMG, hopefully these comments make that crystal clear.

Operator

Your next question comes from the line of Robert Lee with KBW. Please proceed with your question.

Robert Lee - Keefe, Bruyette & Woods, Inc.

Thanks. Good morning, guys.

Sean M. Healey - Chairman & Chief Executive Officer

Good morning.

Robert Lee - Keefe, Bruyette & Woods, Inc.

First quick question on the asset mix a bit. Could you maybe just – I mean, over the years as you've acquired more alternative firms, whether it's Barings or Pantheon and others, could you maybe update us or give us a sense for what piece of your assets are actually in non-redeemable structures? And then maybe also to the extent that you can provide any color on what the kind of fund-raising pipeline may be for those types of products or structures, any color you can provide around that?

Nathaniel Dalton - President & Chief Operating Officer

Yeah, happy to. So just to step back a bit, so if you think about our alternatives book, right, we've got as you sort of described it, we can think of it as sort of more liquid and illiquid strategies and we can also think about it along this dimension that you laid out about sort of structural product and locked assets.

I think you also need to think about the fact that there are things that are not necessarily sort of legally locked structures but where, for all intents and purposes, they're sort of very, very stable asset bases, a separate account sort of GP (50:33) funded ones kind of structure and that's a significant portion of our alternatives book.

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

And then on illiquid side, I'd sort of call out firms like Pantheon, where they've had a really good year. The forward opportunity set looks very, very good both in sort of the traditional private equity, primaries and secondaries, but also they've really broadened out their capabilities in infrastructure and now, I think we mentioned in the prepared remarks, in real assets. And those are really high demand product areas. The early track record, they are very, very good and they think they can put a lot of assets to work. And I also think you'll see continued product development, frankly, on both sides: liquid and illiquid. And as we've talked about on prior calls, I think we are very well-positioned to help these firms as they bring new products to market, because of the sort of quality of engagement we have with the marketplace, both on the institutional side, right, and we have these good dialogues worldwide, but also in the packaging and bringing product to the retail marketplace.

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

Operator

Your next question is a follow-up question from Dan Fannon with Jefferies. Please proceed with your question.

Daniel Thomas Fannon - Jefferies LLC

Thanks. One more question, Nate, on flows. Was just wanting to get an update on kind of the 2014 vintage of new investments: the River Road, SouthernSun, Veritas, EIG. Just wondering like how that has contributed over the last 12 months. Are those net-positive flow-ers (53:04) and are they integrated into your distribution and how we can think about the ramp of kind of new investments in terms of their contribution to net flows going forward?

Nathaniel Dalton - President & Chief Operating Officer

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

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

So the short answer is we're making really good progress with all of those firms, integrating them in. I do think even 2014 is not that long ago. And so, the trajectory impact I think is probably more impacted by the macro things and what's going on within the products sets, what's going on with the various distribution channels still. But there definitely been wins in all these cases.

Sean M. Healey - Chairman & Chief Executive Officer

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

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

Operator

Thank you. Due to time constraints our final question will come from the line of Brian Bedell of Deutsche Bank. Please proceed with your questions.

Brian B. Bedell - Deutsche Bank Securities, Inc.

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

Nathaniel Dalton - President & Chief Operating Officer

The Third Avenue AUM at December 31 was about 5% and a...

Jay C. Horgen - Chief Financial Officer & Treasurer

No. Net-net, I have to take out Focused Credit, so about 5%...

Nathaniel Dalton - President & Chief Operating Officer

About 5%.

Jay C. Horgen - Chief Financial Officer & Treasurer

Yeah, yeah.

Nathaniel Dalton - President & Chief Operating Officer

About 5%.

Brian B. Bedell - Deutsche Bank Securities, Inc.

About 5% then. Okay. And just longer term, Sean, I know you are getting a lot of questions on institutional flows, but if you think about the industry and some of the rotation away certainly from equity products and across different types of institutional clients, and then obviously compared with your performance advantages in a lot of your Affiliates, how do you see that dynamic playing out, say, later or through this year into 2017 in terms of what you would term as risk of idiosyncratic outflows versus market share gains that you think you can get through your Affiliates and marketing?

Sean M. Healey - Chairman & Chief Executive Officer

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

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

Nathaniel Dalton - President & Chief Operating Officer

No, I think that's right. I think as we look at it, the long-term trends, there were several long-term trends and Sean talked about some of them that sort of weren't in our favor and we think those are evolving and moving towards us. There were a set of long-term trends we think we were benefiting from and we think those remain intact, which is people needing to get returns and people continuing to look to active, especially sort of differentiated return-oriented managers like our Affiliates to get those returns in and fulfill the alpha portions of their (1:00:00) portfolio. So we think those trends remain intact.

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

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

Operator

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

Sean M. Healey - Chairman & Chief Executive Officer

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!