Affiliated Managers Group Q3 2007 Earnings Call Transcript

| About: Affiliated Managers (AMG)
This article is now exclusive for PRO subscribers.

Affiliated Managers Group Inc., (NYSE:AMG) Q3 2007 Earnings Call October 24, 2007 11:00 AM ET

Executives

Brett Perryman - VP of Corporate Communications

Sean Healey - President and CEO

Nate Dalton - EVP of Affiliated Development

Darrell Crate - EVP and CFO

Analysts

Craig Siegenthaler - Credit Suisse

William Katz - Buckingham Research

Marc Irizarry - Goldman Sachs

Cynthia Mayer - Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by. Welcome tothe Affiliated Managers Group Q3, 2007 results conference call. At this time,all participants are in a listen-only mode. Later in this presentation we willconduct a question and answer session and instructions will be given at thattime. (Operator Instructions)

As a reminder this conference is being recorded today,Wednesday, October 24th, 2007. It’s now my pleasure to introduce today's host,Ms. Brett Perryman, Vice-President of Corporate Communications. Please, goahead.

Brett Perryman

Thank you, and thank you of for joining Affiliated ManagersGroup to discuss our results for the third quarter of 2007. By now, you shouldhave received the press release we issued regarding our earnings, as well asthe press release announcing our pending investment in Cooke & Bieler. However,if anyone needs a copy, please contact us at 617-747-3300 and we will fax youone immediately following the call.

In this conference call, certain matters discussed willconstitute forward-looking statements. Actual results could differ materially fromthose 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 SECfrom time-to-time. We assume no obligation to update any forward-lookingstatements made during this call.

In this call, the investment performance of certain productswill be discussed and the benchmarks are deemed by AMG to be the appropriatebenchmarks. AMG will provide on its website a replay of the call and a copy ofour announcements of our results for this quarter, as well as, thereconciliation of any non-GAAP financial projections to the most directlycomparable GAAP financial measures. You can access this information atwww.amg.com

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

And now, I would like to turn the call over to Sean Healey.Sean?

Sean Healey

Thanks, Brett. Good morning, everyone and thank you forjoining. AMG had a strong third quarter with cash EPS of $1.56, which is a 16%increase over the same period of 2006. Our Affiliates produced excellent investmentperformance and outstanding net client cash flows this quarter, and we remainconfident in our prospects for a continued strong organic growth, particularlyamong our largest affiliates.

Over the past 12 months, organic growth has contributed overa $56 billion or 27% to our assets under management. We also generated stronggrowth in net client cash flows during this quarter as our affiliates delivered$4.3 billion in that flow.

As we all know, the third quarter included periods ofextreme volatility about finished and positive territory. Against this backdropwe were very pleased with the strong performance of our affiliates, as well as,their ability to continue to attract new business. The growth of our affiliates’product offerings and our exposure to the fastest growing areas of the assetmanagement industry allow us to continue to generate consistent earnings growthacross market environments, which you can see in our results this quarter.

For example, domestic growth equity is contributing over a30% of our EBITDA, we were very well positioned in a strong environment forgrowth managers. Our affiliates, including Friess Associates, TimesSquare,Renaissance and Frontier offer a wide range of outstanding growth equityproducts with excellent, absolute and relative performance over the near andthe long-term.

In particular, Friess Associates’ Brandywine Funds ranked atthe very top of their categories and they are beginning to get significantattention for their performance in the press, and have been flagged as an earlycontender for Morningstar Domestic Stock Manager of the year.

The other highlight of the quarter was our performance ininternational equities, especially in emerging markets. With internationalequities contributing 35% of our EBITDA, we are well positioned for growth inthis area. As you have heard me say, we anticipate continued outperformance andstrong secular growth in international equities going forward.

Finally, as you know the alternative investment area is animportant and growing contributor to our earnings while some of our quantproducts there are difficult couple of months we continue to see strongperformance in other strategies.

Nate's going to discuss our alternative results in moredetail in just a moment. We continue to make excellent progress in the newinvestment areas during the quarter. And this morning we announced our pendinginvestment in Cooke & Bieler, a concentrated value equity manager with over$9 billion in assets under management.

Cooke has a strong track record of growth with assets undermanagement increasing at a compound annual rate of 35% over the past fiveyears. The firm has deep and talented team of investment professionals led byKermit Eck and Michael Meyer and we're looking forward to working with our newaffiliate partners. As always, the transaction will be immediately accretive tocash earnings per share.

In addition, as we noted in our release, we're in advancediscussions with a number of other investment prospects and while as you'veheard me say before, we're limited in what we can say about the precise timingand size of potential transactions. Suffice it to say, we continue to be verypleased with the quality and diversity of our new investment pipeline.

Finally, we enhance our capacity to continue to execute onour new investment opportunities with our recent sale on very attractive termsof $500 million of convertible securities and again, Darrell will provide moredetails on this transaction in just a moment.

While we're obliviously very excited about our newinvestment opportunities, we are also optimistic about prospects for continuedstrong growth from our ex-ten affiliates, which were among the best boutiquefirms in the industry with broad participation and some of the fastest growingareas of the business.

With that I'll turn to Nate to discuss the result of ouraffiliates in more detail.

Nate Dalton

Thanks, Sean. Good morning, everyone. As Sean notedperformance across our affiliate group was good during the third quarter withorganic growth of $10.3 billion including $4.3 billion of positive net clientcash flows.

Now in terms of overall themes for the quarter, I'd focus onthe extraordinary performance of our growth in equity affiliates. As Sean said,their performance in the quarter points to one of the fundamental strength toour business model. It’s a diverse group of high performance boutique withinvestment processes that demonstrably add value to the full market cycle andas a result we are able to generate consistent growth as investment brochuresmove in and out of favor.

Now to discuss performance by distribution channel, wecontinue to have very good performance in the institutional channel includingpositive net client cash flows in excess of $4.6 billion for the quarter.

Broadly speaking, while we generated positive flow acrossthe wide range of our affiliate including both growth and value, we didcontinue to see some re-balancing activity, which negatively impacted flow atEmerging Markets manager Genesis and also at some of our value managers.

I would also add that notwithstanding the headlines in the quarter regarding quantitative managers, wesaw significant inflows for those firms including both AQR and First Quadrant.

Now, while we had significant positive flows to ourquantitatively oriented affiliates, I want to spend a minute talking about theinvestment performance of those firms during the quarter. There have been a lotof discussions about the challenges, quantitative strategies face, especiallythose strategies that are heavily dependent on widely used quant equitysignals.

From the AMG standpoint some of our affiliate products wereexposed to the decline that resulted from the sell-off. This included someproducts that are viewed as quant equity, but also some of the other productsthat are generally viewed as quant based, it just happened about some othername. At the same time, there are other quantitatively oriented products thatwere much less impacted and still others that benefit from oil volatility.

I will also note that many of the products that werenegatively impacted during the sell-off rebounded quite rapidly. Also, just toconfirm, because we were asked this question last quarter, we have no exposureto structured debt instruments.

Turning to the mutual fund channel, from a flow standpoint,we saw outflows from some products for value rated funds, including Third Avenue, Tweedy,Browne, and investors with fewer funds from those files, especially in realestate value and small cap value.

These were partially offset by inflows of growth funds,Friess and TimesSquare, and much of those flows coming through our manager's pipeline.We also saw positive inflows of Tweedy, Browne’s recently launched worldwidehigh-dividend product, which is off to a great start.

Looking at investment performance in the channel, Tweedy,Browne had good performance during the quarter, as our flagship global valuefund outperformed its head EP benchmark by a 183 basis points for the quarter,and 287 basis points year-to-date. While Third Avenue’s flagship value fund uppedfrom its benchmark by 93 basis points for the quarter, and a 183 basis pointsfor year-to-date.

From a performance standpoint though, the highlights for thequarter has to be Friess Associates’ Brandywine Fund. In a great environmentfor growth oriented product, the Brandywinefund had another excellent quarter. Now, this isn’t a short-term phenomenon,for example, all Friess funds had top national rankings delivered for thequarter, year-to-date, one and three-year period.

As Sean mentioned, this extraordinary performance is gettingattention in the marketplace and the press, and the funds are starting to attractflow with over $375 million in net worth in the quarter. As our manager’s platformis to do distribution for them, and we have very, very high expectations for theseproducts, given the excellent investment performance and increasingdistribution resources.

Now, turning to our high net worth channel, those wereessentially flat from the quarter, but for the quarter with good positive flowsto [Gordon & Payne], [Renaissance] fund through our manager's platform, as wellas the Canadian firms Beutel and Foyston offset by small outflows at a numberof other affiliates.

In the quarter, Managers started ramping up distribution ofRenaissance’s international growth ADR product, and given the excellent performanceof the product beating its benchmark revenue by 900 basis points for thequarter and over 2,300 basis points for year-to-date. We had very highexpectations for this product as well.

Finally, I want to update you on the progress of our globaldistribution initiative. Our Australian office is off to a great start, representingsome of our largest affiliates, including AQR, First Quadrant, FriessAssociates, Third Avenueand Tweedy, Browne. We started to get some wins and a very high qualitypipeline. In addition to the institutional business we are building, we aretargeting year end for the launch of one or more Australian domicile collectiveinvestment vehicle, which will allow us to broaden the range of clients withreach.

In addition, as we noted on the last call, we’ll beexpanding our international distribution platform, and plans are under way toopen a second office in London,possibly as early as year end.

The second market we’re trying is the Middle East, but notonly do we see tremendous opportunities, but as was the case of Australia, a numberof our affiliates are already been pulled into the market research activity.

Now, with a list of markets that we are working on, but mostbroadly, we’re benefiting from the significant global demand for the highestquality boutique managers. In sum, between our U.S. intermediate platform managers,as well as our global distribution platform, we’re targeting in excess of $5billion in incremental net flows for our affiliates for 2008. And with that, Iwill hand it over to Darrell to discuss our financials.

Darrell Crate

Thanks, Nate. Good morning, everyone. As you saw in the release,we reported cash earnings per share of a $1.56 for the third quarter, and GAAPearnings per share of a $1.07. Our net client cash flows of $4.3 billion forthe quarter added roughly $6 million to AMG’s annualized EBITDA. Performancefees added approximately $0.02 to our earnings in the quarter.

And now for some modeling detail, the ratio of our EBITDAcontribution to end of period assets under management was just under 16 basispoints for the third quarter. We expect this ratio to be about 22 basis pointsin the fourth quarter, as we’re recognizing most of our performance fee earningsat the end of the year.

As you look to the beginning of 2008, and the addition of Cooke& Bieler, we expect this ratio to be about 15 basis points for the firstquarter. Holding company expenses were $14.1 million for the quarter and as welook to 2008 we expect holding company expenses to be approximately $17 milliona quarter, as we continue to build our global distribution platform andincorporate additional non-cash charges related to equity compensation.

With regards to taxes, our tax rate was 37% for the quarterand we expect it to remain at this level for the rest of the year and through2008. Our cash tax rate was 26.6% in the third quarter. This should increase toabout 30% in the fourth quarter reflecting the organic growth of the business.We expect our cash tax rate to be just under 29% for the full year 2008.Intangible related deferred taxes were $6.8 million for the third quarter andwill continue at this level for the reminder of 2007. We expect deferred taxesto increase to $7.3 million in 2008 to reflect the closing of our investment inCooke & Bieler.

Amortization for the quarter was $10.3 million including$2.3 million of amortization from affiliates accounted for using the equitymethod. The earnings from equity method affiliates, which include AQR and twoof our Canadian affiliates are included in the income from equity methodinvestment line on the income statement all net of amortization. We expect amortizationto remain at this level for the fourth quarter and then to increase to $11million per quarter in 2008.

Depreciation for the quarter was $2.8 million with $1.7million of that attributable to affiliate depreciation. As you recall,affiliate depreciation is the non-cash charge, we include in cash net income asthe replenishment of these depreciated assets that's paid by the affiliates andnot AMG shareholders. We expect depreciation to remain at these levels for thefourth quarter.

Stockholders equity was $641.4 million and interest expensewas $18 million for the third quarter. We anticipate that our interest expensewill increase to approximately $18.5 million in the fourth quarter, reflectingthe recent issuance of convertible securities.

Pause it here for a moment. As Sean mentioned, we'verecently issued $500 million in convertible trust preferred securities orTRUPS. The securities essentially enabled us to issue stock at $200 per sharewith an after-tax coupon of 2%. At the time of the transaction, we bought backjust under $2 million shares of our stock. In addition to the 800,000 shareswe've repurchased during the quarter.

We also state now, it’s our intent to convert floating rateconvertible securities or [FLOCOS] intoequity next February. As we look to 2008, these transactions have a net effectof increasing our capacity for new investments, reducing our share count, aswell as our cost of equity and provide us the flexibility to meaningfullysimplify our liability structure, by removing all senior hybrid securities fromour balance sheet.

With respect to our pending investment in Cooke &Bieler, we expect the transaction to close around January 31st, and thatconsideration will be financed primarily with cash available from operationsand a recent financing. The Cooke & Bieler transaction will beapproximately $0.17 that, accrue to cash earnings per share in 2008.

Pro forma for the investment in Cooke & Bieler,leveraged and measured by net cap divided by run rate EBITDA will be approximately1.3 times, which is at the lower end of our target leverage range allowing forwell over $1 billion of capacity for additional new investments, while alsoenabling us to continue to opportunistic repurchase our common stock.

Now turning to guidance for the remainder of 2007 and thefull year for 2008; starting with 2007, we expect cash earnings per share to bein the range of $6.75 to $6.95. We are pleased with the performance of ouraffiliates in general. But as we discussed, some of our alternative products isgoing through a difficult period in past couple of months and we are refiningour expectations to reflect the impact of those challenges. Our assumptions inthis guidance include a conservative estimate for performance fees earned in thefourth quarter.

Looking ahead to 2008, we expect our cash earnings pershares to be in a range of $7.70 to $8.20. This assumes 2% quarterly growth inmarket and a weighted average share count of 41 million shares. Our guidancefor 2008 does not include additional earnings from investments and new affiliates,other than Cooke & Bieler. It also assumes an earnings pattern similar tothe one, you have seen from us over the past several years. We will recognizethe majority of the earnings from alternative products and performance fees inthe fourth quarter.

With a continued growth of our affiliate alternativeproducts, which currently account for $35 billion of our assets undermanagement, we expect performances fees will be an increasingly meaningfulcontributor over time. We would expect our alternative products to generateapproximately 14% of our 2008 earnings. I would note that this assumes modestperformances consistent with our other guidance assumption. But however,performance fees by their nature provide considerable upside opportunity.

Our guidance is based on current expectations aboutaffiliate growth rate, performance and the mix of affiliate contribution to ourearnings. Of course substantial changes in the equity markets and the earningscontributions of our affiliate could be impacted by these expectations.

Now we will be happy to answer any questions.

Question-and-AnswerSession

Operator

Okay thank you sir. (Operator Instructions). Our firstquestion comes from the line of Craig Siegenthaler of Credit Suisse. Please goahead.

Craig Siegenthaler -Credit Suisse

Thanks Good morning.

Brett Perryman

Good morning.

Sean Healey

Morning Craig

Craig Siegenthaler -Credit Suisse

First question with the Cooke & Bieler investment, canyou comment on timing specifically Cooke's management has made smart decisionsin the past, specifically when they did the MBO in 2001 prior to the value boomwe just saw and now are in your period of growth with investments outperformingvalue. So why specifically did you kind of choose now as to the timing for thissort of deal and do you believe that 30% stake by management will be able keepthe PMs around for the next few years?

Brett Perryman

I will start with the last part of your question which isyes. Along with all the other elements of our investment approach, whichprovides for a range of substantial long-term incentives, as well as, as alwaysthe preservation of the firm's unique operating and investment culture. So weare very optimistic, as are the firm's partners who had a number of other typeof transactional alternatives available to them and chose us. So we are veryoptimistic for the long term.

With respective to your question about whether there is somekind of adverse selection. I guess I would say is, I am sure you realize, wehave been at this for a long time, 14 or 15 years at this point, 10 years as apublic company and we've made lots of investments in lots of different kind offirms and lots of different market environments, and we are quite comfortablethat this will be as our other affiliates are, investments and other affiliateshave been. This would be terrific long term investment.

Craig Siegenthaler - CreditSuisse

Great. Thanks, and one more. With respect to 2008 guidance,how does this look on EBITDA margin basis, because historically that's a metricyou have disclosed to us, I am just wondering how that looks, does that trenddown a little bit from where '07 is?

Sean Healey

Yeah. When we look at the guidance again, when we thinkabout EBITDA margin, that is principally driven by the mix of growth acrossaffiliates. So, affiliates where we own a lower percentage, of course if theygrow faster than affiliates where we own a higher percentage, EBITDA marginwill decrease and likewise, if we, firms that we own more of grow faster, thenEBITDA margin will increase. So we are, the purpose for in the guidance isreally to give investors a sense and ability to create a model and for us tocommunicate on how we believe the mix of our business is going to evolvethrough 2008.

Darrell Crate

But I would caution anyone who looks at our EBITDA marginand tries to derive some sense of health for the business or growth and all thethat sort of margin implication that has, that in our case and given ourstructure that its really just a modeling tool, and not a metric by which tojudge a business health and performance.

Craig Siegenthaler - CreditSuisse

Agreed, but it sounds like it might tick down a little bitin '08 just from performance or actually just from a business mix standpoint.

Sean Healey

Yeah. And so, what we're saying is, that there are somefirms that we own less off that are actually growing very quickly.

Craig Siegenthaler - CreditSuisse

Got it. Thanks a lot.

Operator

Thank you, Mr. Siegenthaler. (Operator Instructions). Ournext question does come from the line of William Katz of Buckingham Research.

William Katz -Buckingham Research

Okay. I thank you. Good morning. Nate, you are going veryquickly, so I apologize and the line wasn't very clear. Could you repeat whatyou said about the $5 billion number in that question for management? You weretalking about the global obviously?

Nate Dalton

Yes that's right. So the number that I gave you, I gave youa combined distribution platform number, so that includes managers, as well asglobal distribution for 2008, and I said, yeah, in excess of $5 billion.

William Katz -Buckingham Research

And that was the incremental new business that you areanticipating?

Nate Dalton

Yeah. That's correct. That's incremental and new businessfor our affiliates, driven by AMG platforms, on top of the growth from theirown distribution.

Sean Healey

And I take a moment just to reminds folks, that this startedfrom scratch, less than a handful years ago and it's grown nicely by almost $1billion a year. Maybe it is a little bit more. And as we look at this, the newopportunity to build offices around the globe that represent our affiliates,and I think it is certainly an accelerating opportunity over time.

William Katz -Buckingham Research

Okay. Then Darrel surely I guess, in terms of the guidance,I guess what I struggled with little bit is next year, and that you sort ofsuggesting if you look midpoint, to midpoint, it's about 16% EPS growth, butyou sort of walking up the performance fee number, you have Cooke & Bielercoming on and then so the incremental EBITDA contribution from the assets thatyou accumulate in the third quarter. Is this just a sense of being conservativeor is this something else that I am missing here, in terms of the outlook for'08 or '07?

Darrell Crate

I think, again if you look at our track record of deliveringconsistent strong cash earnings growth year-over-year. You know, as we lookback to 2006 and compared it to 2007, we have reported $5.63 in 2006, and nowyou look at the guidance range that we've presented. That's in excess of 20%growth and as you know our model is based upon the base business of existingaffiliates that continue to grow nicely.

And with that we repurchase stock and we do deals, and wesupplement that as all part of our earnings growth strategy. But to this year,before 2008 has even begun, and to layout expectation for investors, when we’lllearn a whole lot between now and the end of 2008, it just doesn't feel likethe right thing to do.

We have many opportunities that we've built for, and that wewill take advantage of in 2008. But today, they have growth rates, in anestimate, that are in excess of 15% to 16%, just doesn't feel like the rightthing to do. We have a long time to continue to do this, and we feel greatabout the track record that we have built. And it feels like this is the rightway to manage expectations given where we stand relative to 2008 today.

William Katz - BuckinghamResearch

Okay. And then, Sean, there is something curious, last timeyou guys used verbiage this last, this is all we can say for now, a few dayslater you announced Genesis, if I recall correctly, after an earningsstatement. So, just sort of curious whether there is now $1 billion plus orsort of incremental liquidity adjusting for the conversion to COBRA, you havesaid in the past that you thought deals sort of morphed, so that $10 to $20 or$30 billion in size has given the growth of the mid-tier players of theunderlying assets, is that still the case, because I guess, at the end of theday this transaction you announced this morning is still relatively small, justgive us your expectations in more traditional base. I guess, the question is, yourprimness for alternatives, your primness for internationally, your primness forbigger deals, is it a matter of stay tuned here or is there something changing?

Sean Healey

I wouldn't disagree with, while I probably disagree with thepriming verb, but we certainly have indicated that we see, as our businessgrows, naturally, a move to making investments in larger boutique firms. Wealso have said that not only do we currently have a proportionally largerexposure to fast growing areas like alternatives in international than ourpublic company appears, but we want to increase that exposure and believe thatwe will in addition to the extent growth, our extent affiliates growing fasterin those areas. We do see significant opportunities for new affiliate investmentsin those areas.

But we have always committed ourselves to a view that wherewe have the opportunity to invest in a terrific firm, whatever it does or doesnot do to the overall diversification of our exposure, we are going to do it?And that's precisely what we've done in investing in Cooke & Bieler. Ithink, to your point about how much money we put to work in any investment, Ithink this may be at the lower end of what we would typically be targeting now,but it’s certainly very meaningful investment, and I think we're focused oninvesting in firms, which are meaningful and which offer a very substantiallong-term growth opportunities, and that's what you should expect to see fromus going forward.

William Katz -Buckingham Research

Okay, thank you. Just use a bit more goodwill here. Nate, doyou say anything, I apologize, a connection is important, do you see anythingof that sort in the institutional pipeline looking on to the fourth quarter?

Nate Dalton

Sure, obviously its still very early days in the quarter,but that said and looking at it consistent with prior quarters obviously andlooking at it today, it looks good and its looks good in terms of mandates wonand funded mandate won, who are not yetfunded where people look in the process. So again but they are early days inthe quarter.

William Katz -Buckingham Research

Okay thank you.

Sean Healey

Thanks, Craig.

Operator

Thank you. Our next question comes from the line of MarcIrizarry of Goldman Sachs

Marc Irizarry -Goldman Sachs

Great thanks. Sean question for you on the environment outthere for acquisitions, where do you think seller expectations are, relative towhere they need to be for you to get some of these deals done that are on thetable right now? Thanks.

Sean Healey

I think, as you have heard me say in recent quarters theenvironment for us is actually very attractive. There are large number of veryhigh quality boutique firms out there, many of them are seeking the kind ofsolution to their succession issues that we offer or seeking a strategicinvestor of the nature and form that we represent. And so, I think if anything,if I am trying to sort of gauge merger market trends in the boutique space, Iwould say they are even more appealing now than they were last quarter, becauseobviously the disruptions in the markets had made the IPO alternative a littleless attractive for some firms. And, I think well, high quality firms continueto generate strong growth. Having a market environment that has a bit of volatilitybut underlying continued growth is probably good for us. And with respect topricing, I think it's the expectations are right in line with what we wouldhope them to be.

Marc Irizarry -Goldman Sachs

Okay, great. And then looks like the holding companyexpenses are going up and you making more investments in some of these globalplatforms. If you will to help may be the distribution of some of theaffiliates, when you think about the business model and the potential traps ofhaving to deliver or fulfill some distribution needs of some of the affiliates,how do you balance to that with kind of buying the faster growing affiliateswho have their own sort of distribution plans and how much would you plan toaccelerate their growth to help drive the distribution to make the deals work?Thanks.

Nate Dalton

Let me start on this one, I'd go back some, when you saywhich is distribution needs and I think that's not necessarily the right way, Iwere to think about it. We are investing in firms, every firm in which we areinvesting has their own very strong distribution in generally across the coupleof channels at least. And what we are doing is we are adding distribution tohelp those firms in those channels where it's a challenge for boutiques, not tosay they can't do it on their own, but with just much more efficient forboutiques do you think collectively.

And so you are seeing us do this in an incremental sort ofstep by step fashion. But there are expenses associated with that. Of course,its not a significant amount of expenses at each of these steps. And really youalso heard us say we are being pulled in the markets and so what we are doingis we are not building these offices ahead of growth. We are building it alongside of clear business trends, in fact in every case today we're building atalong side of actual client win, where the client needs to be serviced anywayand so then the question becomes can we help the affiliates do it collectivelyand generally it doesn't cost more than having the affiliates do it themselves.But we’re doing much more excellent job of it and as we said, this has alsobeen our experience to date as we now have been doing this.

Marc Irizarry -Goldman Sachs

Okay. Thanks.

Operator

Okay. Thank you. Our next question comes from line ofCynthia Mayer of Merrill Lynch.

Cynthia Mayer -Merrill Lynch

Hi. Good morning. Just a couple of questions.

Darrell Crate

Hi. Good morning, Cynthia.

Cynthia Mayer -Merrill Lynch

I was curious to hear to you say, there was rebalancing at Genesis,it seems like such a good quarter for emerging markets, companies, I just wantto make sure, are there any performances issues there, and would you expectthat to continue?

Darrell Crate

Yeah, I think what I’ve said, the rebalancing at Genesis, soGenesis has had, it wasn’t just a good quarter for emerging markets, it’s beena very strong long-term trend, couple of year trend, emerging markets performingvery, very well. And so, I don't think we're surprised to see rebalancing byinstitutional clients who have exposure there. And again, just to be very, veryclear, it is rebalancing when you go down the lift, it is the, I don’t thinkthere are any client losses in there. It is literally just rebalancing, and ifyou look at the performance they’ve generated with these clients over themedium term there, it’s truly extraordinary, the run rate they have had.

Sean Healey

I would add, they also have new money coming in, andespecially new money coming in to some new products which they have recently launched,including alternative vehicles, which obviously are more profitable products. So,on the whole, you only think the firm is in terrific shape, and while emergingmarkets are inherently a more volatile asset class, we certainly, over time,expect to see continued growth, continued outperformance and are very happy forthe exposure that Genesis provides us to those markets.

Cynthia Mayer -Merrill Lynch

Okay. And the first quarter and then NQR inflows, howsignificant are those, and given things like a lockups which you expect to seea different pattern in 4Q or 1Q?

Sean Healey

Okay. They both had very strong flow quarters. Remember,just to emphasize, both of these firms have client bases which are not reallyjust funds. So AQR for example, about a third of their client base is alternative,two thirds long, FQs, they also are very institutional client base, and sothere seems to be a significant flow in the funds, yes, but also in theinstitutional separate account products, with the kind of things you aretalking about, are much more customized. So, it’s like a sort of the fundsphenomenon that you’re going to be thinking about our business most probably.

Cynthia Mayer -Merrill Lynch

Okay.

Darrell Crate

And I want to add to that, Cynthia, as we look forward bothof those firms continue to be well positioned given their long-term trackrecords and reputation to continue to have inflows.

Cynthia Mayer -Merrill Lynch

Okay. And, Darrell, could you go over once again why thecash tax rate would be going up?

Darrell Crate

Only in that, as we generate organic earnings, they are, thecash tax rate on them marginal earning is 37%, and so as we look to the fourthquarter and we realize increased earnings through performance fees for thatquarter that cash tax rate will go to 30% and then as we look to the next yearfor the full year, again, including some performance fees in the fourth quarter,we think, for the full year, that cash tax rate will be 29%, and that is theresult of billions of dollars of organic growth across our affiliate base.

Cynthia Mayer -Merrill Lynch

So if you were to reduce some large chunky acquisitions, thecash tax rate would go down, I guess, from a --

Darrell Crate

Exactly, right.

Cynthia Mayer -Merrill Lynch

Okay. Thanks.

Operator

Thank you. At this time we have no further questions. Iwould like to turn it back over to you for any further closing remarks.

Sean Healey

As you’ve heard in the discussion, we’re pleased with ourresults and with our prospects for continued growth. Our affiliates includesome of the highest quality boutique firms in the industry, and we have broadparticipation in the fast growing areas such as alternative and internationalinvestments.

In the past ten years, since our IPO, which includes a fullrange of market environment, AMG has produced a compound annual growth rate incash earnings per share of over 20%, and over this period, AMG has alsogenerated outstanding long-term returns for our shareholders and we lookforward to building on this track record in the years ahead. Thank you againfor joining us this morning.

Operator

Ladies and gentlemen, this does conclude the AffiliatedManagers Group Q3, 2007 results conference. Thank you for your participation. Youmay now disconnect.

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!