Affiliated Managers Group, Inc.

Greetings and welcome to the AMG first quarter of 2019 earnings 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, Ms. Anjali Agrawal, Vice President, Investor Relations for AMG. Thank you. You may begin.

Thank you for joining AMG to discuss our results for the first quarter of 2019. 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 FCC from time to time. We assume no obligation to update any forward-looking statements made during this call. AMG will provide on the investor relations section of its website at ir.amg.com a replay of the call, a copy of the 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 estimates 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, Anjali, and good morning, everyone. I'd like to begin by congratulating Jay and thanking our shareholders, affiliates, employees, and friends for your support over this past year. I'll cover the evolution of roles in a moment, but first, in terms of the quarter, AMG reported economic earnings per share of $3.26. Our results for the quarter were inevitably impacted by the significant equity market declines in the fourth quarter of last year, leading to both a reduced starting AUM for the quarter and also lower performance fee generation in the quarter, as beta-sensitive products needed to make up their high-water mark. During the first quarter, however, the beta rally drove AUM higher, recovering that lost ground for a subset of our performance-free product as our affiliates continue to build on their strong long-term performance track record across many areas. Turning to flows, we had net outflows of $7.4 billion in the first quarter, a significant improvement from the previous quarter. Flows were driven by expected continued softness in our liquid alternatives and quant equity businesses, including $3.3 billion from two client redemptions, neither of which was related to the affiliates' performance. In addition, During the quarter, we continue to make progress executing our new investment strategy. And, as you saw in our separate release this morning, we were very pleased to announce the addition of Guarda Capital Partners to our group of outstanding affiliates. Looking ahead, we are very confident in our long-term growth prospects because, first, we have actively positioned our business to focus on the attractive growth opportunities and alternative and distinctive equities. Second, these are areas where boutiques have a proven ability to outperform. and where our affiliates have exceptional long-term performance records across a broad range of products. Third, we are increasingly effective at bringing our affiliates' diverse, distinctive, high-quality return streams into a range of channels and geographies using our affiliates' distribution capabilities, AMG's global distribution efforts, and, more recently, through strategic relationships with capital allocators and intermediaries. Fourth, we have a complementary growth engine in new investments, where we can add immediately saleable products through accretive investments and excellent new affiliates like Garda. And fifth, we have a very strong balance sheet with the flexibility to advance our new investments pipeline, while also continuing to return capital to shareholders. Now, let me spend a minute on a couple of these key drivers. First, the positioning of our business. Over the last decade, we have actively diversified our business across a range of growth opportunities. Our affiliates have high-quality differentiated return streams across a broad set of distinctive equity and alternative products, which have attractive secular growth characteristics. They're leveraging themes such as the barbelling of client portfolios and the erosion of home country bias. In addition, these are areas where active asset managers, and especially boutiques, have the ability to outperform. Now, in terms of specific product areas, our alternatives business now has approximately $300 billion in assets under management. making AMG one of the largest alternative managers in the world with one of the broadest and most diverse sets of liquid and illiquid alternative strategies managed by leading boutique investors. In addition, our substantial exposure to uncorrelated alternative strategies should increase the stability and resilience of our business across market cycles while, most importantly, proving attractive to clients, so increasing the long-term organic growth potential of our business. While some of our liquid alternative products are going through a challenging period, Others, like Relative Value Fixed Income and Global Risk Premia, are doing well, and we're building out an increasingly large-scale illiquid business across private equity, infrastructure, real assets, and credit. We've also built out a very diverse set of distinctive global equity strategies across both developed and emerging markets equities. Our Affiliates Global Equities products have excellent long-term investment performance records, with over 65% of our global equities ahead of benchmarks for the last five years. 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, such as our strategic relationship with Nordea Asset Management. While this is a relatively new initiative for AMG, we are making good progress towards launching our first wave of products this year. Additionally, this quarter we entered into our second strategic partnership, this time with an investment solutions provider focused on slightly different channels and geographies. As with Nordea, together we will now work towards bringing our affiliates' distinctive return streams to their client base. Turning next to the progress we are making investing in additional high-quality affiliates. As I noted earlier, today we are pleased to announce our investment in Garda Capital Partners, a leading alternative investment manager specializing in fixed income relative value strategies with approximately $4 billion in assets under management. Well known for its differentiated strategy and highly attractive asset class, distinctive return streams, and outstanding long-term investment track record across market cycles, Garda serves a diversified set of sophisticated institutional clients around the world. We believe they have excellent long-term growth prospects and are very excited to partner with Jeff Rodney and his team. Now, in addition to executing our investment in Garda, we continue to make very good progress actively developing our proprietary relationships with leading boutiques. AMG's equity ownership succession solution is uniquely attractive to asset management boutiques that value their independence, want a permanent partner, and also access to the scale distribution platforms we've built. Now, before I turn it over to Jay, I've been working on AMG for roughly a quarter century, and this is something approaching 70 earnings calls for me. So I'd like to take a minute to talk about where we are today against the arc of that history. While there are certainly some short-term challenges, today our business is stronger and more diverse than ever, and we have more ways to drive growth than ever before. We benefit from the compounding of the asset classes we've invested in, asset classes where over time the blend has compounded at a high single-digit rate. In addition, we benefit from the excess return generated by our affiliates' products, which increases the rate at which the asset classes compound. Add to that growth from net sales from existing and new products, geographies, and channels, as well as accretive investments in additional high-quality affiliates, which can add immediately to our earnings growth and bring saleable products, which will not only further increase our growth rate from flows, but also increase in client engagement, which is good for the growth rate of all affiliates. Then, finally, We increase the growth rate our shareholders experience through other capital allocation decisions we make. This is basically the strategy we use to grow from a startup with an idea to become the permanent institutional partner of choice to the best boutiques in the world. And we've executed on this idea over the last 25 years across multiple market cycles. Beyond all of that, I'm incredibly confident in our ability to execute and continue to grow our business and generate outstanding long-term shareholder value because of the great group of talented professionals at AMG. This includes both people who've grown up at AMG, but also the teammates that joined us over the last several years as we evolved the business. The level of talent and dedication is at an all-time high. Now, turning to the evolution of roles. As you saw in our release this morning, over the past year, we continued to execute on our long-term succession plan. And today, we announced that Jay will succeed me as CEO. From the time Sean and I and others began building AMG from a true startup through today, AMG has been an important part of my life. This is not changing. I plan to remain on the company's board of directors and serve as an advisor to Jay and Sean and the rest of the senior team, focusing my time on relationships with our affiliate partners and in the industry, as well as the strategic evolution of AMG. We've always maintained short and medium-term succession plans for AMG, as we do with our affiliates. Jay has been, for well over a decade now, an important part, really a critical part of that plan. We thought Sean would serve as CEO for a number of years as we managed the evolution of our team. And over that time, Jay and an emerging group of the next generation of leaders would evolve into their roles. Of course, reality unfolded differently than we expected. And when Sean was diagnosed with ALS, we implemented our contingency plan and roles evolved much faster. At that time, I agreed to serve as CEO while Sean continues to serve as our executive chairman. We've all worked hard together since that day, Sean, myself, many others, but no one more than Jay, to accelerate achieving the milestones necessary to get the evolving team in place. I am very pleased with the progress we've made, and I'm happy to report that we've achieved those milestones, which is what allows us to be where we are today. And to be clear, while Jay has executed on a number of those milestones himself, the whole senior team has really stepped up into expanded roles. And, of course, Tom Mojic joining us as CFO is a critical piece. I was and am honored to serve as CEO for as long as necessary for all aspects of the long-term succession plan to be in place. And sitting here today, I look forward to working with Sean, Jay, and this team in my new role as an advisor and helping them as they lead AMG over the decades to come. Now, before I turn the call over to Jay, I want to talk about him for a minute and why I'm so confident that he is the right person to lead AMG forward at this moment. Of course, it's his experience at AMG over the last dozen years running and overseeing various parts of our business, from new investments to finance and distribution, as well as his experience as one of AMG's closest advisors over the decade before he joined. But it's more than that, and I'll speak personally here for a minute. Jay has all of the traits needed to excel as AMG's CEO, and I've seen these demonstrated every day over many years. He has the intellect and curiosity to lead AMG's evolution in a very dynamic and rapidly evolving industry. He has the drive passion, not just for the AMG we've all built together, but also for the role of CEO. And I fervently believe that he is the right person to lead the AMG management team forward over at least the next decade ahead. With that, I congratulate you, Jay, on your new role. Let me turn to you one last time to talk more about the quarter.