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Andrew Liyana

AMG AT A GLANCE

P/E ► -166   EV/EBITDA ► 38.7 HIGH ROA ► 1.7% AVG ROE ► -1.5% AVG Debt to Equity ► 2.01 AVG Current Ratio ► 2.27 AVG Interest Coverage Ratio ► 1.60 AVG

 

 

 

 

 

 

Affiliated Managers Group (NYSE: AMG) is the 66th largest asset manager in the world,^[1] managing $241.8 billion as of June 30, 2008.^[2] AMG is not structured like traditional asset managers such as T. Rowe Price Group (TROW) or Franklin Resources (BEN); instead of hiring and firing managers to invest its clients' money, AMG buys ownership stakes in small to mid-sized investment firms, and lets the residing managers remain autonomous. In exchange, the managers agree to a revenue sharing contract, in which a designated portion of revenue is allocated to expenses, the affiliate's management team, and AMG.

AMG's affiliates primarily offer equity investments through mutual funds, institutional investing, and asset management of high-net worth individuals^[3]. As of June 30, 2008, 42.5% of Assets under management (AUM) were invested in U.S. Equity, 35% in International Equity, 20% in alternative assets, and 2.5% in Fixed Income Assets.^[3] The large equity exposure makes the company susceptible to fluctuations in stock prices, but rising equity markets increase Assets under management (AUM), which in turn drive total management fees higher. AMG business has a natural equity tilt as it borrows money to finance acquisitions of companies that manage equities. Essentially, AMG pays interest on borrowed money, but its revenue is tied to equity prices. When stock prices are rising, AMG's AUM expand, which in turn increases revenue through higher management fees collected; yet the company's interest expense stays flat. Declining stock prices results in lower revenue, but AMG still pays interest on its debt. In 2007, the company paid $76.9 million, or 14.5% of operating income, in interest expense.^[4]

Business Overview

Affiliated Managers Group (AMG) buys stakes in small to mid-sized investment companies that have solid track records of investment performance and growth.^[5] Managers of these boutique investment companies desire to "cash out" equity stakes in their companies. AMG provides this liquidity, but also lets the manager continue to operate autonomously.^[6] It enters revenue sharing agreements with the affiliate's managers. These contracts designate the portion of revenue (generated by asset management fees) that is to be applied to operating expenses, manager compensation, and AMG's income, giving priority to AMG share of the pie.^[6] For instance, AMG establishes an agreement with an affiliated manager that 65% of the revenue will be allocated to expenses, 10% returned to the affiliated manager, and 25% to AMG. If this asset manager spends 80% on expenses, than AMG will receive the remaining revenue portion (20%) and will be compensated for the 5% in the future before the affiliated managers receive any income.

AMG's Affiliates

Eight affiliates account for 75% of AMG's Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). AMG's subsidiaries offer mutual funds sold through independent financial advisors and manage private capital accounts for individuals and institutions. For instance, its Tweedy, Browne affiliate manages $670.5 million in client portfolios, but also, $142 million through its mutual fund network.^[7]

1. Tweedy, Browne Company (AUM=$11 billion): Acquired in October 1997, the company uses a value approach to invest in domestic and global equities. This affiliate advises the Tweedy, Browne Global Value Funds.
2. Friess Associaties ($17 Billion): AMG purchased an ownership stake in this advisor to Brandywine Mutual Funds in October 2001. The funds offer growth equity investment products to investors.
3. Third Avenue Management ($23 billion): AMG made its initial investment in the advisor to Third Avenue Value Mutual Funds in August 2002. The line-up of funds include value, real estate, and distressed debt securities.
4. Genesis ($22 Billion): This affiliate manages emerging market equity to institutional investors and also offers closed-end funds. AMG made its initial purchase in June 2004.
5. First Quadrant ($31 Billion): AMG acquired a majority stake in this equity, asset allocation, and tactical return strategy manager in March of 1996.
6. AQR Capital Management ($30 Billion): The quantitative investment management firm markets mult-strategy hedge funds and institutional managed funds. AMG bought an ownership stake in the company in November of 2004.
7. ValueAct Capital ($5 Billion): AMG purchased an equity stake in VAC in November of 2007. VAC manages active value equities for institutions and High Net Worth Individuals (HNIs).
8. BlueMountain ($5 Billion): This capital manager offers credit alternative strategies for institutional and high new worth clients. AMG bought a stake in this company in December of 2007. Blue Mountain grew AUM at a compound rate of 26% over the past three years.^[8]

Distribution Channels

EBITDA by Distribution Channel^[9]

AMG's affiliates have 3 distinct distribution channels.

1. Mutual Funds (36.8% of 2007 EBITDA^[9]: AMG's affiliates offer over 60 mutual funds.^[10] The mutual funds are marketed to institutional clients and retail investors. AMG has expanded its presence in 401(k) plans and independent investment advisor platforms in hopes of reaching more potential clients.^[10] AMG's affiliates pay 12b-1 fees to financial advisors as compensation for selling mutual fund shares to the their clients. Prominent affiliate mutual funds include Tweedy, Browne Company's Global Value and American Value Funds, Third Avenue, and Brandywine funds.^[10]
2. Institutional (50.5%^[9]): AMG affiliates offer more than 75 products for institutional investors.^[11] Investment products range from micro to large capitalization funds and deep value to aggressive growth funds. Institutional clients include foundations and endowments, and defined contribution plans for corporations and municipalities^[11]
3. High Net Worth Clients (12.7%^[9]): AMG caters to two primary high net worth client groups that combined amount to 50,000 accounts managed.^[12] The first group includes direct relationships with HNIs and charitable foundations. The second are separately managed accounts. In this type, financial advisors pay AMG to act as of sub-advisor to for their client's account. AMG uses 30 sales professionals to promote its separate account management^[12]

Business Metrics & Financial Overview

Assets under management (AUM)

AMG Financials^[13]

AMG's affiliates generate money through management fees. As such, Assets under management (AUM) determine earnings.^[14] The more money its affiliates manage, the greater the management fee collected. AMG's revenue grew $199.5 million (or 17%) in 2007 compared to 2006 due to 27% increase in assets under management.^[14] The rise in AUM was a result of positive investment performance and net client cash flows and to a lesser extent acquisition of new affiliates.^[14] Similar, the company benefited from strong equity prices in 2006. Revenue rose $235.9 million (or 28%) from 2005. The double-digit growth was attributed to a 35% increase in AUM. As of the September 1, 2008 the S&P 500 is down 12.67% YTD.^[15] AUM and Net Income for AMG is also down from last year. For the first six months ended June 30, 2008, the asset manager had EBITDA $8.5 million lower (-4.6%) than the same period in 2007.^[2] AUM declined $24.8 million, or 9.3%.

Expenses

While AMG generates more money with rising AUM, it also pays more out in the compensation. This expense accounted for 56% of AMG's consolidated expenses in 2007. The payout to its affiliate managers is different for each affiliate and depends on the contracted revenue sharing agreement. Total compensation expense for 2005 was $385.9 million and $579.4 million in 2007 (or 50%), and AUM's grew 49% over the same period.^[13]

Investment Products & Breakdown

% of EBITDA Contribution^[3]

AMG offers over 300 investment products.^[16] AMG has focused on expanding its alternative assets and international offerings. AMG's CEO, Sean Healey, continues to see the international equity market as a fast growing segment within the Asset management industry.^[17] Further, in commenting on the acquisition of BlueMontain in December 2007, Mr. Healey said he believed the growth in alternative assets would persist.^[8] As of June 30, 2008, 55% of AMG's AUM were in foreign investments and 77.5% in equity investments. Another 20% of AUM were in alternative asset accounts^[3] The global and equity tilt helped cash earnings per share grow at a 20% compound annual growth since the company went public in 1997.^[16] This exposure also means that international equity markets directly impact AMG's earnings.

Market Trends & Forces

Performance compared to indexes and industry peers influences fund flows.

With 37% of EBITDA^[9] being generated by mutual funds, relative performance is a key gauge to determining fund flows. If AMG affiliates' funds do well, investors are more likely to funnel new money into them. If they have relatively poor performance, then net flow will slow or be negative. One of the key factors contributing to the 123% cumulative organic AUM growth from year-end 2003 to 2007, is strong investment performance.^[3] Nevertheless, weak equity performance cut right into that growth in the 1H of 2008; 77% of last year's growth in Assets under management (AUM) from investment performance was lost in the first six months of 2008.^[18] Of the 20 largest funds that AMG has ownership interest, 70% are above their one-year benchmarks as of June 30, 2008. Another 65% are ahead of their three-year, and 90% have done better than their five-year benchmark.^[3] The second through fourth tables show the annual performance and AUM for three of AMG's largest family of mutual funds. Negative investment performance led to declines in AUM in 2008.

International Equity Markets impact AMG's Revenue

The affiliates of AMG generate money through management fees. As such, Assets Under Management (AUM) determines how much they earn; the more money they manage, the larger the management fee. AMG's managed assets are focused on global and equity positions. 55% of assets under management are in international positions and close to 80% in equity investments.^[3] As a result, shifts in equity prices affect AMG's AUM. Weak equity markets cause capital depreciation and result in slowing capital inflows. For the first six months of 2008, when stocks indices fell, AMG had net client outflows of $10.5 billion and net investment loss of $18.9 billion.^[22] AMG's international exposure almost triples industry peer, T. Rowe Price Group (TROW), whose AUM consist of 20% international positions^[23]. This exposure will benefit AMG more than competitors when foreign assets appreciation is higher than domestic ones, but the opposite is true if the U.S. is stronger than international markets. A strong U.S. dollar and better relative Gross Domestic Product growth compared to the world are typically bullish for U.S. positions.

AMG's Equity Tilt

AMG borrows money to buy affiliates that manage equity resulting in an equity tilt. At the end of 2007, the company had $897.6 million in senior debt compared to $469.2 million in stockholder's equity.^[13] AMG's financing makes it even more sensitive to declining equity prices as it pays interest on borrowed debt, even when its revenue declines with falling equity markets. AMG's debt is rated BBB- by the Standard & Poors.^[3]

Aging Baby Boomers

According to the U.S. Census Bureau, between 2000 and 2020, the 45-64 age group will increase by 34%, with most of the growth occurring by 2010^[24]. This age demographic tends to be those in greatest need of financial advice as retirement approaches. They also tend to have more investable assets than younger people. With increasing savings, asset managers like Affiliated Managers Company stand to benefit; more net inflow supports higher assets under management. Rising AUM increases total management fees collected.

Successful Acquisitions necessary to drive revenue growth.

In addition to Organic growth, Affiliated Managers Company revenue is driven by acquisitions. Acquisitions over 2004-2007 added approximately $65 billion to AMG's Assets under management (AUM).^[3] The company plans on continuing to acquire boutique investment firms^[3]. Out of the 8500 small to mid-sized asset managers, AMG sees 150-200 core prospects.^[3] AMG attempts to only make investments that will had to its Cash Earnings Per Share (EPS) immediately.

Competition

AMG's affiliates not only compete with the likes of other asset managers, such as Franklin Resources (BEN), T. Rowe Price Group (TROW), and Janus Capital Group (JNS), but also each other. Due to the autonomous ownership structure, AMG does not synergize its affiliates, but rather, lets the managers decide how to best grow Assets under management (AUM). Of course, the main driver to increasing assets is strong capital appreciation; strong investment performance drives Organic growth and investor net inflows.

Affiliated Managers hope its bet on global equity and alternative assets pays off.^[8] While competitors, like T. Rowe Price Group (TROW), are focused more on domestic investments, AMG international assets form 55% of assets under management.^[3] This international allocation means relative foreign performance to the United States impacts AMG's revenue compared to its industry peers.

The following table^[1] ranks assets managers by AUM (in $millions) as of December 31, 2006. AMG is ranked #66 in the world.

Assets Managers Ranked by AUM

References

1. ↑ ^{1.0 1.1} Pensions&Investments "The World's Largest Managers"
2. ↑ ^{2.0 2.1} (AMG) 2nd Quarter Financial Highlights
3. ↑ ^{3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11} (AMG) Q2 FY 2008 Company Presentation to Investors
4. ↑ (AMG) 10-K, FY 2007, Item 7, Page 27
5. ↑ (AMG) Press Release "AMG to Make Investment in Harding Loevner
6. ↑ ^{6.0 6.1} (AMG) Form 10-Q FY 2008 2Q, Item 2, Page 26
7. ↑ Tweedy, Browne Co. LLC Website
8. ↑ ^{8.0 8.1 8.2} (AMG) Press Release "AMG Announces Investment in BlueMountain Capital Management"
9. ↑ ^{9.0 9.1 9.2 9.3 9.4} (AMG) Form 10-K, FY 2007, Item 1, Page 2
10. ↑ ^{10.0 10.1 10.2} AMG Mutual Fund Distribution Overview
11. ↑ ^{11.0 11.1} (AMG) Insitutional Investor Channel Overview
12. ↑ ^{12.0 12.1} (AMG) HNW Clients Overview
13. ↑ ^{13.0 13.1 13.2} 2007 Year-End Financial Highlights
14. ↑ ^{14.0 14.1 14.2} (AMG) Form 10-K, FY 2007, Item 7, Page 25
15. ↑ Google Finance: S&P 500 Index
16. ↑ ^{16.0 16.1} (AMG) Investor Overview
17. ↑ AMG 2Q FY 2008 Press Release
18. ↑ ^{18.0 18.1} (AMG) Form 10-K, FY 2007, Item 7, Page 23
19. ↑ Morningstar.com Profile for Brandywine Mutual Funds
20. ↑ Morningstar.com Profile for Third Avenue Mutual Funds
21. ↑ Morningstar.com Profile for Tweedy Browne Mutual Funds
22. ↑ (AMG) Form 10-Q, FY 2008, Q2, item 2, Page 28
23. ↑ Wikinvest (TROW) Author: Dave Cleveland
24. ↑ (AMP) Form 10-K FY 2007, Item 1, Pages 1-41