Affiliated Managers Group, Inc.

Greetings and welcome to the AMG fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Parker, Vice President Investor Relations for AMG. Thank you. You may begin.

Thank you for joining AMG to discuss our results for the fourth quarter of 2018. 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 the call. AMG will provide on the investor relations section of its website at www.amg.com a replay of the call, a copy of our announcement of our results for the quarter, and a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures, including a reconciliation of any estimate of the company's economic earnings per share for future periods that are announced on this call. As a reminder... We have also included an updated investor presentation on this section of our website. AMG encourages investors to consult the investor relations section of its website regularly for updated information. With us on the line to discuss the company's results for the quarter are Nate Dalton, Chief Executive Officer, and Jay Horgan, President and Chief Financial Officer. With that, I'll turn the call over to Nate.

Thanks, Jeff, and good morning, everyone. As we all know, the fourth quarter of 2018 was challenging for asset managers due to broadly negative returns across asset classes, as well as the resulting client risk aversion, which impacted industry-wide flows. In addition, the quarter earned several extraordinary items, so I wanted to briefly put into context our results and forward outlook. First, while net client cash flows were negative due to both heightened client risk aversion, as well as the fourth quarter seasonality we discussed on our last call, our organic growth outlook is already improving in 2019. Second, our business is structured differently from other asset management firms. This includes not only the diversity of our business and the quality of our affiliates, but also, importantly, our investment structure, which limits our exposure to operating leverage at the affiliate level, providing earnings stability. Third, we are actively positioning our business to focus on the highest growth opportunities ahead. And finally, because we've been disciplined in managing our balance sheet, we have the flexibility to execute on the opportunities this volatility will inevitably create. Now, turning to the quarter. AMG reported economic earnings per share of $3.53 for the fourth quarter and $14.50 for the full year. While Q4 was down versus the year-ago quarter, primarily because of lower performance fees, our results for 2018 were in line with those for the full year 2017. The combination of the timing of the market declines at the very end of the year with the breadth of the declines across asset classes meant that while a number of our alternative strategies generated good relative performance, they still had low or negative absolute returns, and therefore we realized lower performance fees than we expected. As we look forward, our performance fee opportunity is broad and diverse across a range of distinctive return streams with very good track records about performance. As a result, we are confident that performance fees will be a meaningful component of our future earnings growth profile, as they have been in the past. Starting next to flows, there were a couple of high-level themes that shaped our quarter. In general, Elevated market volatility in the fourth quarter increased industry-wide client risk aversion, which led to slowing sales activity and delayed funding. In addition, we had elevated levels of retail redemptions in equities and liquid alternatives due to fourth quarter seasonality, which, in the case of liquid alternatives, was exacerbated by significant outflows from products with challenging recent performance relative to benchmarks. While it's still early in the first quarter, we were off to a much better start in 2019. If we take a look at our publicly available data for January, our retail net flows are roughly flat. And while some of that's a reversal of the Q4 seasonality, which was particularly acute for us in 2018, it's the best retail month we've seen since last April. Putting this all together, we expect good 2018 performance by many of our affiliates, as well as improving flow trend dynamics, driving much better Q1 net flow results and continued improvements throughout 2019. Now, While it's an extraordinary quarter in terms of the breadth of negative returns and client risk aversion, it's important to remain focused on the key elements of our business as we help execute our growth strategy. Let me first start with the importance of diversity. Over the past decade, we've built an incredibly diverse business through both the addition of new affiliates, as well as organic growth through product development, and innovation by the collective efforts of AMD and our affiliates. Today, our portfolio is diverse not only by asset class and product category, but also client segment, geography, and channel, as well as by affiliate, with no single affiliate contributing more than a low teens percentage to our EBITDA. In the fourth quarter, even with the extraordinary breadth of negative market returns, we saw the benefits of the diversity of our asset mix, which is approximately 40% in alternative strategies. For example, our blended asset mix declined by roughly 8% in the quarter, compared to the 13% decline in the MSCI world. While diversity is obviously important, even more important is the ability of our affiliates to sustain high-quality, distinctive return streams across that broad set of asset classes. With the return of volatility, many of our fundamental strategies outpace their respective indices and peers in the fourth quarter, as well as for the full year. We believe that, in general, volatility is good for active managers. As we noted last quarter, the data from our recently updated white paper, the Boutique Premiums, illustrates that the long-term outperformance advantage of boutiques has been most significant during more volatile periods, where their investment processes and disciplines are able to create significant alpha for their clients. This stands to reason, as the elements that drive superior alpha generation by boutiques in the first place, an investment-led entrepreneurial culture, meaningful equity ownership by the investment professionals, and a long-duration alignment with clients and partners, all support a long-term perspective which encourages these firms to maintain their investment processes through volatile periods. We're already seeing this reflected in our business, as the fourth quarter provided a more favorable environment for the highest-quality active managers, such as our affiliates, to distinguish themselves. While outperformance was broadly diversified across affiliates and geographies, global, U.S., and up and down the cap range, this outperformance was most prominent at some of our world-class value firms, such as Tweedy Brown, Gottman, Veritas, Butel, and River Road. With a combination of market volatility and very significant outperformance, is leading to a noticeable uptick in client interest and demand across channels. In addition to our strong performance across many fundamental equity strategies, a number of our liquid alternative products at affiliates such as AQR, Capula, Artemis, EFM, and Winton pose a strong relative return, which should position them to raise assets going forward. While performance across our existing products and capabilities is critically important, we and our affiliates have been continuously innovating and developing new products with diverse, distinctive return streams to match evolving client needs across all market environments. As we talked about in our last call, we have a differentiated product development approach. We benefit from product development that happens within our affiliates, as well as from products that we develop jointly with affiliates, and of course, our unique opportunity to add immediately saleable products with proven track records to our new investment center. This unique product development opportunity has been successful in creating a significant number of new products in the last five years. including some of our fastest-growing products. Examples are many and diverse. Across our traditional managers, firms such as Artemis, Boyston, and Times Square are launching entire products of suites of global, international, and emerging market strategies. In the case of GWMK, building on an equity franchise, domestic and global, as well as most recently adding trilogies to proven emerging market capabilities. Within liquid alternatives, firms such as Blue Mountain, Capulon, and First Quadrant are taking advantage of market opportunities to build out ranges of systematic products in areas such as alternative credit, market neutral, global macro, and volatility. Our illiquid alternative managers also continue to diversify their product offerings, with Pantheon offering infrastructure, real asset, and credit, Bering Asia extending the credit and real estate products, and the introduction of credit-direct lending and operating energy capabilities at the IG. Lastly, AQR continues to innovate its existing equity and alternatives franchises and is in the early innings of what could be a very significant systematic fixed income buildup. Alongside this product development opportunity, our unique distribution strategy, which combines the focused resources of each of our affiliates with the scope and scale of AMG's global distribution platform, is an increasingly valuable component of our overall growth strategy. This model affords our affiliates the opportunity to diversify their distribution capabilities and bring their expanding product sets to the most appropriate pools of capital worldwide. Moreover, as leading clients worldwide and the intermediaries who serve them, are consolidating their relationships with external managers and looking for more efficient relationships and even partnerships with a smaller number of investment management firms. AMG and our unique model are beginning to capitalize on this trend as we can bring to bear the largest collection of independently managed distinctive return streams in the world to meet client needs. As we discussed last quarter, we've been making progress in formalizing some of these relationships. For example, we entered into a strategic relationship with Nordea Asset Management where we'll work together to develop and place certain AMG affiliate strategies on their European and Latin American platforms. Simply put, we're collectively leveraging our affiliate manufacturing and product design and structuring work with Nordea's strong brand, scale, packaging, and distribution expertise in a strategic and additive way to our existing efforts in these regions. We are currently very active in working on a number of near-term opportunities with them, as well as the operational elements of this relationship. As we discussed on previous calls, While this is a relatively new initiative for AMG, we're making good progress towards establishing a range of these strategic relationships, with some being more formal and some less so. Finally, as we also discussed in recent quarters, we've been actively reviewing our business to identify opportunities to improve efficiency in general, and in particular to make sure that AMG's and our affiliates' resources are focused on the best risk-adjusted return opportunities in the market. At the affiliate level, we continue to support the positioning of their businesses for future opportunities, And in some cases, this has included strategic activity, such as the combination of Trilogy and their emerging markets investment team into GW&K, resulting in enhanced opportunities for their collective clients and increasing both the growth opportunity and efficiency for GW&K and AMG. As Jay will explain further in a moment, we also reduced operating expenses at AMG and work with many of our affiliates, including where we participate in categories of expenses, to help them ensure that They are aligning the infrastructures of their business with the opportunities and challenges they see ahead. Now, in addition to these elements of organic growth in our existing business, we have another complementary growth engine. AMG's business model provides a significant opportunity to generate increased earnings, as well as to add immediately saleable products through investments in excellent new affiliates. AMG's equity ownership succession solution is very attractive to asset management critiques that value their independence, want a permanent solution, and access to the scale distribution platforms we built. We continue to actively develop our proprietary relationships with leading boutiques. And while the volatility of the fourth quarter inevitably impacted some discussions, and more broadly, the pace of activity is inherently based on the dynamics of each prospective affiliate, we have a good pipeline of high-quality new prospects. But we remain disciplined on pricing and alignment, particularly at this stage of the cycle. In addition, as Jay will describe further, we continue to position our balance sheet to prioritize flexibility and prudent financial leverage in anticipation of continued market volatility, which, in our experience, often creates the most compelling investment opportunity. In addition to maintaining the financial flexibility to invest in new affiliates and continuing to execute on the other elements of our growth strategy, we also remain committed to consistently returning capital to our shareholders, and we demonstrated this disciplined approach to capital allocation again in the fourth quarter. Finally, while these are volatile times, we've built our business with diversity across multiple dimensions, asset class, geography, channel, and affiliates. Across this diversity, we have very high-quality, distinctive return streams managed by extraordinarily experienced investment teams. We also have a unique structure with low operating leverage, as you think about the revenue-sharing model, which underpins a significant majority of our business. And we have prudent financial leverage. These characteristics differentiate us from other asset management firms by providing stability as volatility continues, but also, importantly, position us to take advantage of the opportunities this volatility will inevitably create. Now, before I turn to Jay, I want to congratulate him on his appointment to president and thank him for a significant contribution as an integral member of AMG's senior team for many years. But, in particular, I wanted to acknowledge his hard work and the true partnership he brought to Sean and to me through the CEO transition. Sean and I are looking forward to working with him in his new role as we grow our business and create long-term shareholder value. With that, I'll turn it to Jay.