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Article Excerpt
UNIDENTIFIED SPEAKER, MERRILL LYNCH: Our next presentation is from Affiliated Managers Group. AMG, as most investors know, is a little different from other public asset managers in that it invests in other asset managers, and therefore has a stable of about 25 affiliates, both long-only and hedge funds, contributing to its earnings. We're very fortunate this afternoon to have both Sean Healey, CEO, and Darrell Crate, CFO, to talk about the AMG strategy and outlook and hopefully also provide some insight into any industry M&A trends generally. I think Sean is going to start us off and then Darrell will follow. And I'm required to note that Merrill has a banking relationship with AMG.
SEAN HEALEY, PRESIDENT & CEO, AFFILIATED MANAGERS GROUP: Thanks, Cynthia. Good afternoon. Make sure I've got the--oh, that's fine. As Cynthia noted, AMG has a unique strategy in asset management. We conduct our business through a diverse group of high quality boutique affiliates. Our investment approach provides for key affiliate management to retain or receive direct equity in their own firms creating a powerful incentive for continued growth. In addition, we invest through a partnership structure, which preserves the unique culture and approach which has made each affiliate successful in the first place.
Our affiliates are among the leaders in their respective investment disciplines with excellent long term performance records, outstanding reputations, and superior client service. They have excellent track records of out performance relative to peers and benchmarks across a wide range of investment styles, asset classes, and geographic areas.
Our affiliates also have strong and profitable businesses, and as partners and equity owners in their firms they have a demonstrated commitment to their businesses, which is especially important in times like these. Our experience in working with boutique firms has enabled us to identify opportunities to leverage our scale on behalf of our affiliates through growth initiatives in areas such as distribution, as well as operational enhancements such as compliance and financial controls. AMG has generated excellent long term growth in earnings and our affiliates have strong track records of out performance and organic growth.
Finally, we maintain a disciplined focus on efficient capital management in order to maximize shareholder returns. And in addition to repurchasing our stock, we also have a unique opportunity to generate earnings growth through investments in additional outstanding boutique asset managers. Darrell will talk more about that a little later.
Here you see the results of executing our strategy since our IPO in 1997. Over the past decade, we've generated strong earnings growth including a 19% compounded annual growth in cash EPS, which is the most important metric for us. The S&P, as you all know, is compounded at 3% over that same period. We've achieved these results primarily through the strong organic growth of our affiliates. For example, since the last bear market in 2002 through September 30, our organic growth in assets was 100%. In addition, it's important to understand, again, especially in an environment like the one we're in now, that our affiliates in our structure generally retain the operating leverage in their firms, which benefits the affiliate partners in rising markets when margins expand and they can fund the growth in their firms. But in periods of declining markets, our structure protects AMG from margin compression as revenue decrease. And again, Darrell will describe this phenomenon in more detail.
Here we see the range and diversity of our affiliates across 300--there are 300 investment products. As you see, we have substantial exposure to some of the higher margin segments of the industry and meaningful diversification across investment styles and geographic regions. Approximately 37% of our EBITDA is from global and international equities, including leading products managed by affiliates such as Tweedy Browne, Third Avenue, and Genesis. Another area where we have a strong--where we have strong results is alternative investments, which contributes 15% of our EBITDA and includes a wide range of investment styles and strategies. And even in the extraordinarily difficult environment of this year, we've generated material performance fees from this product area.
Approximately 45% of our EBITDA is derived from domestic equities with 15% from value oriented products by firms such as Tweedy Browne, Third Avenue, and Systematic, and 30% from growth oriented products led by Friess Associates and Times Square.
Our internal growth is obviously driven by the performance of our largest affiliates, which are happily also our fastest growing firms. As you see, these eight affiliates contribute approximately 80% of our EBITDA. All of these affiliates have generated consistent strong growth over time, and again, as you see at the bottom, as of September 30, the average compound annual growth in AUM is approximately 16% since we made our investments in each firm.
And of course, there's great diversity in this group by investment style, product, distribution strategy. You look at deep value managers like Tweedy Browne or Third Avenue against growth managers like Friess Associates, Times Square, international products by several of these affiliates, including Genesis, the leading emerging markets equities manager. And our affiliates have a proven ability to outperform over varying market cycles and our largest affiliates in particular have outstanding long term performance records across a wide range of strategies.
Here on the right, we show the percentage of our affiliates' products, weighted by their EBITDA contribution to us, which have outperformed their peers over time. As you see, the overall performance is strong in both the near and long term.
Looking ahead, as markets stabilize and investors reallocate to equity products, we have a large number of products with outstanding performance records. We've listed a couple of examples here and just to comment briefly, First Quadrant is a leading quantitative manager. They've generated outstanding results across their product set, but especially in their largest product, a global macro fund, which is up as you see substantially year over year. Among our international managers, Tweedy Browne and Genesis have significantly outperformed their peers and benchmark not only for the year to date, but for every year over the past five years.
Domestic equities, Times Square's performance has been especially outstanding this year and we see lots of prospects for growth there. As direct equity owners in their businesses,...
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