Acadian Asset Management (AAMI) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the OMAM Earnings Conference Call and Webcast for the Fourth quarter and full year ended 2017. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, February 1st at 10:00 A.M. Eastern Time. I would now like to turn the meeting over to Brett Perryman, Head of Investor Relations. Please go ahead, Brett.

Thank you. Good morning, and welcome to OMAM's conference call to discuss our results for the fourth quarter and full year 2017. Before we get started, I would like to note that certain comments made on this call may constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as expect, anticipate, may, intend, believes, estimate, project and other similar expressions. Such statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These factors include, but are not limited to, the factors described in OMAM's filings made with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed with the SEC on February 22nd, 2017, under the heading Risk Factors, our quarterly report on 10-Q filed with the SEC on August 10, 2017, and our current report on Form 8-K filed with the SEC on November 31, 2017. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. We urge you not to place undue reliance on any forward-looking statements. During this call, we will discuss non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which is available in the Investor Relations section of our Web site, where you will also find the slides that we will use as part of our discussion this morning. Today's call will be led by Jim Ritchie, our Chairman and Interim Chief Executive Officer; Aidan Riordan, Head of Affiliate Management; and Steve Belgrad, our Chief Financial Officer. I will now turn the call over to Jim.

Thank you, Brett, and good morning everyone. Thanks for joining us today. Let me begin by saying how pleased I am to announce Steve's appointment as our President and CEO. I have known Steve since he joined OMAM. As Chairman of the OMAM audit committee back in 2011, I was involved in bringing Steve into the organization. At that time the board and I recognized that Steve brought a broad and somewhat unique blend of skills and experiences. He has an exceptional analytical ability, sharp financial acumen, M&A savvy and exceptional knowledge of the industry. As we work together to bring OMAM public and in the years since, Steve's strategic input has been invaluable. Throughout this interim period of our CEO search, we have continued to make progress in executing our business strategy and positioning OMAM for the next leg of growth. We have guided our company through the final separation from Old Mutual plc and worked to reduce our expense base at the center, reallocating the savings to additional affiliate growth initiatives. Steve played an integral role in all of these activities and the board recognizes and appreciates both his contributions and his leadership. As I have said, our CEO search process was broad, deep and wide. We have met with and gave strong consideration to an impressive slay of candidates. While we considered a number of external candidates who brought substantive industry knowledge and skills, Steve is distinguished for his strategic vision for driving the business forward, in-depth familiarity with our business and has demonstrated commitment to working in partnership with our affiliates. Well deserved trust and confidence of our affiliates, our employees and our board, strong and proven affinity for the boutique asset management model, ability the sustain the momentum of the organization's development over the past year, broad experience and relationships across the asset management sector which includes sourcing and structuring acquisitions in the boutique space, and of course the strong backing of our board. These factors made him our unanimous choice and I am confident that Steve will deliver excellent results for our business and our shareholders. Steve and Aidan have been a tremendous team since 2011 and particularly over the past six months as they led a deep bench of senior talent within the organization. We look forward to their continued contributions, as well as those of all our employees. Now turning over to the results for the quarter and full year. I will begin with some opening observations and then turn it over to Aidan and Steve to walk through the results in greater detail. After that, of course we will be happy to answer any questions you may have. We are very pleased with our results for the quarter and the full year. The strength and diversity of our affiliates has enabled us to participate in growing markets across the globe and first full year of our Landmark acquisition has been a marked success. OMAM's ENI per share of $0.44 and $1.62 for the fourth quarter and full year 2017 are up 33% or more over both periods of 2016. We have seen a consistent trend towards growth in higher fee products. Including many that we and our affiliates developed as part of our collaborative organic growth initiatives. This quarter we also saw substantive performance fees, reflecting strong returns in several global and emerging markets equity strategies. As you saw in the release, net client cash flows were down on an AUM basis at minus $3.7 billion and minus $6 billion for the quarter and the year. Although due mostly to some lumpy outflows from low fees sub-advisory and legacy Old Mutual plc accounts, I am disappointed. But the sizable fee differential on sales versus redemptions in the fourth quarter. Gross inflows averaged 57 bps while outflows averaged 32 bps, resulted in an annualized revenue impact of $6.8 million for the quarter. Total annualized revenue impact for the full year was $32.9 million or 4% of beginning run rate management fees. This compares to an annualized revenue impact of $11 million for 2016. Equity markets remain very strong in the fourth quarter and our affiliates active investment strategies performed well with strategies representing 65%, 72% and 83% of our revenue outperforming their benchmarks on a 1, 3 and 5 year basis respectively. Aidan will touch on performance in greater detail in a moment. Turning to Slide 4 in our deck. This year we made excellent progress in executing our growth strategy and positioning our business for the next leg of growth with interest aligned to retained equity ownership at the affiliate level and a profit share structure, our business model establishes long-term incentives for affiliates to work in partnership with us to enhance and expand their businesses. Looking ahead, one area where we have recently begun to work more closely with our affiliates is in technology. As you are aware, new technologies are emerging rapidly and we expect these will have a meaningful impact on future competitiveness across the industry. Firms will need enhanced capabilities to capitalize on advances in data and analytics. Accordingly we are assessing the structures and resources needed to help our affiliates, accelerate their adoption of next generation technologies, and optimize the integration of these across their investment talent base. Moving up the pyramid. As we have mentioned before, our global distribution team is made up of highly experienced investment centric professionals who are able to represent a diverse range of products to key clients around the world. The team had an excellent year, raising approximately $2.3 billion in assets on behalf of our affiliates in international institutional and domestic sub-advisory accounts. Our decision this year to bring the team closer to the affiliate management group, which is responsible for product research and development is in part designed to create greater responsiveness to client demand. We expect that further integration will lead to more opportunities for feedback on areas of growing global interest to translate directly into product development. I am very pleased with the early results from the initial integration of these teams. Finally, our pipeline for new investment continues to build and we expect that with today's announcement we will see some further acceleration in the pace of our discussions. We have remained very active during this interim period and have cultivated relationships with a wide range of high quality and entrepreneur boutique asset managers with varied specialties, including traditional equity strategies as well as liquid and illiquid alternative investments. As we pursue these opportunities, we are also exploring additional investment structures such as minority investments. As I mentioned earlier, Steve has brought experience and extensive relationships across the asset management sector. We are confident that prospective affiliates will find this appointment to be a key positive in their considerations. And with that overview, I would like to turn the call over to Aidan to discuss our performance in greater detail. Aidan?

Thanks, Jim, and good morning everyone. On Slide 5 you can see our AUM progression for the quarter and full year along with a break down by affiliate and asset class. Here you can see that our participation in many of the faster growing, higher fee segments of the marketplace has been the primary driver behind the steady growth in our asset base. More than 50% of our AUM is in global, international and emerging markets equity strategies with another 9% in alternative investments. Slide 6 breaks out our net cash flows on an AUM and revenue basis. While client cash flows in the institutional space can be large and lumpy, our business has consistently positive flows on a revenue basis with positive revenue flowing 9 of the last 12 quarters and each of the last five quarters. The fee rate differential between outflows and inflows has also continued to expand as the fee rate on outflows has exceeded that on inflows in only one of the last 12 quarters. With inflows this quarter averaging 25 basis points higher than outflows, we were pleased to report an annualized revenue impact of $6.8 million for the quarter. On Slide 7, we show further detail on our flows by asset class. We have seen fairly consistent inflows on both an AUM and revenue basis in alternative and global non-U.S. equity products, both of which carry higher fee rates. While the fourth quarter was somewhat anomalous in being dominated by flows and alternative products, overall we continue to see high demand for our suite of global international and emerging markets equity strategies. On Slide 8 we break out our investment performance across several metrics, the most relevant of which we think is revenue weighted performance. The equity markets remain favorable for active asset management in the fourth quarter and our affiliates continue to outperform relative to their primary benchmarks. While the one year number dropped slightly from the prior quarter to 65%, our outperformance of those three and five years increased to 72% and 83% respectively. On a one year basis, our key strategies outperformed at a number of our affiliates including Acadian, Barrow Hanley, Copper Rock and ICM. Slide 9 provides a summary view of the full year impact of our growth initiatives. As you can see, OMAM led initiatives, seeding new products, sourcing sales through our global distribution platform and generating new business through acquisition, was responsible for about 39% of our total gross sales. We continue to see a great deal of opportunity to expand on these growth initiatives in the future, including a number of new seed products in the pipeline and strategies across specialized global equity and fixed income investments. In addition, our global distribution team has developed a robust pipeline of new business across the geographic regions and channels covered by the team. In general, we are pleased with the incremental growth we have been able to generate on our business. As new products season and we can bring them to the market in U.S. and across the globe, we expect these gains to increase. And now Steve will provide additional commentary on our financial results. Steve?

Thanks, Aidan and good morning. First, I would like to say how honored I am to be appointed President and CEO of OMAM. This is a great organization with outstanding affiliates and employees and we have a tremendous opportunity to grow the business and increase shareholder value. Dan Mahoney, our Controller who is with us today, will become Head of Finance and our Principal Financial Officer. And I know you will find him quite insightful about the business as you get to know him over the coming months. During the Q&A I am happy to talk more about my priorities as CEO, but first I should turn back to my current job, Slide 10. The fourth quarter continued the positive trends in the first nine months of 2017 and resulted in another period of record ENI financial results. This quarter benefited from the same factors that drove growth earlier in the year as average AUM consolidated affiliates increased, fee rates expanded, NCCF revenue was positive and accretion from Landmark continued as expected. Performance fees were also higher on a cyclical basis in Q4 driven by strong performance at Acadian. We also saw the positive impact of our combined 11 million share buyback in December 2016 and May 2017, which decreased our share count by approximately 9%. The fourth quarter saw continued market and flow driven growth in our higher fee global, non-U.S. equity classes and alternatives. The [EAFE][PH] and emerging markets indices increased 25% and 37.3% respectively for the full year, while lower fee U.S. large cap value indices went up 13.7%. In addition, a number of our larger strategies generated output during this period, further enhancing AUM growth beyond market levels. Finally, landmark continues to generate cash flow, fee rate and earnings accretion. On January 5, 2018, we closed on the sale of the company's stake in Heitman to its management team. Proceeds from the sale were approximately $85 million in cash, net of taxes. While there may be modest short-term dilution until this cash is put to work, we expect the overall financial impact of this transaction to be immaterial. Under U.S. GAAP equity accounting, our share of Heitman's earnings are included in our financial results through November 30, 2017. As described in the third quarter, we adjusted our AUM inflow information to reflect the elimination of Heitman starting July 1, 2017 in these metrics. We believe this presents a more accurate picture for investors. Therefore, you will notice the reduction of Heitman's $32 billion of AUM in our AUM information beginning in the third quarter, likewise, our NCCF data only includes Heitman for the first six months. Comparing Q4 '17 to Q4 '16, economic net income was up 25.2% quarter over quarter to $48.7 million or $0.44 per share, driven by a $62 million or 33% increase in revenue. On a per share basis, ENI EPS increased by 33%, benefitted by the share buybacks in December '16 and May '17. While market driven increases partially offset by outflows, resulted in a 17% increase in consolidated affiliate average assets from the year ago quarter, our continued shift in asset mix towards higher fee products enabled us to increase management fees by 29% during this period. Our weighted average fee rate increased by 3.6 basis points over the period, driven by flows in markets. Performance fees of $14.4 million contributed 16% of our revenue due to strong performance from global non-U.S. equity products. Operating expenses were up 16% but the ratio of operating expenses to management fee revenue benefitted significantly from scale. I will discuss these trends further on Slide 14. The combination of strong revenue growth and slower expense increases resulted in a 300 basis point increase in ENI operating margin to 38.8%, and our adjusted EBITDA increased 38% to $79 million for the fourth quarter of 2017 compared to Q4 '16. Comparing full year 2017 to 2016, ENI [indiscernible] to $181 million with EPS up 33.9% to $1.62 per share over this period. The same trends which drover the quarter-over-quarter results discussed above also benefited the full year, namely market driven AUM increases, flow driven fee rate increases, and Landmark accretion. One area to further highlight is taxes, both in the U.S. and U.K. As we discussed last quarter, the U.K. tax authorities enacted tax law changes in the fourth quarter that resulted in incremental U.K. tax which impacted fourth quarter results by $3 million or $0.03 per share. Also in the fourth quarter, the Tax Cuts and Jobs Act or the Tax Act, was signed into law in the U.S. As a result of the Tax Act which reduced the federal corporate tax rate from 35% to 21%, we wrote down our deferred tax assets by approximately $121 million. We also recognized a onetime charge of $1.5 million related to the deemed repatriation of unremitted foreign earnings. The reduction in the corporate rate is also expected to result in the reduction of amounts owed to Old Mutual plc under the DTA deed by at least $52 million to $65 million, and the 12/31/17 balance sheets reflect a reduction of this liability of approximately $52 million. The net impact of the Tax Act has been excluded from ENI income. Also the lower U.S. rate will impact our 2018 effective ENI tax rate, which we expect to be in the 23% to 24% range, lower than our previously provided range of 31% to 32%. While lower U.S. tax rate will reduce the benefit of our U.K. domicile, we still expect to save about $2.5 million in 2018. We continue to monitor the tax landscape and are continuing to review our structure in light of these recent developments. Slide 11 gives a better perspective of our financial trends over the last five quarters as average assets from consolidated affiliates have increased steadily over the period due to market movements. In each quarter, we show the core earnings power of the business by breaking out the impact of performance fees which were meaningful in the fourth quarter of '16, second quarter of '17 and fourth quarter of '17. Revenue increased 28%, excluding performance fees and 33% including the. While Landmark contributed about half of this revenue growth, the remainder was due to increasing average assets and fee rates in the existing business. Rising average fee rates have been driven by market appreciation and higher fee rate asset classes and the revenue flow trends we have seen in '14 of the last '15 quarters, where higher fees were earned on new asset sales and lower fees were earned on outflows, primarily sub-advisement fixed income. Our operating margin of 38.8% was a significant improvement from the prior period's 35.8%. On the right side of this chart, you can see the pretax ENI and after tax ENI per share which grew by 42% and 33% respectively over the period. Slide 12 lays out these same metrics over the period from 2013 to '17 and gives a longer term perspective of the meaningful growth generated by the franchise. We have again isolated the impact of performance fees. The 2013 to '17 CAGR as noted above the relative metrics and we have also indicated a change between 2016 and '17 on a full year basis. Average assets excluding equity accounted affiliates increased 10% annually during the five year period while the concurrent increase in fee rates from 32.6 basis points to 38.2 basis points, accelerated this growth, resulting in a 14% revenue CAGR with and without performance fees. Our operating margin of 38.1% was up about 3.8% on a total basis and 5.4% excluding performance fees. On the right side of this chart, you can see pretax ENI and after tax ENI per share which grew by 13% and 12% respectively on an annual basis over the period. On a sequential year basis, comparing '17 to '16 our ENI EPS was up 28% excluding performance fees and 34% including performance fees. Slide '13 provides insight into the drivers that impacted management fees from Q4 '16 to Q4 '17. The overall trend during this period was a continuation of the positive mix shift towards higher fee assets including continued growth at Landmark. As noted previously, our average fee rate increased by about 3.6 basis points to 39.2 basis points in Q4 '17. In the left box, you can see average assets for Q4 '16 and '17 split out by our four key asset classes. The box on the right provides the ENI management fee revenue generated by these average assets and basis points of fees also broken out by asset classes. As you recall, our asset classes have very different fee rates with global non-U.S. equities and alternatives having an average management fee rate of 41 basis points and 98 basis points respectively, including catch up fees and alternatives. While U.S. equities and fixed income have average management fee rates of 24 and 21 basis points respectively. Between Q4 '16 and '17, the average fee rate on alternatives increased by 26 basis points, primarily as a result of the Landmark investment and subsequent growth. During this period, the combined share of the higher fee global non-U.S. equity and alternative assets at consolidated affiliates went up by 6% to 61% of average assets while the share of U.S. equity decreased approximately 5% to 33%. All asset classes expect fixed income grew on absolute terms during this period. On the right side of the chart, you can see the ENI management fee revenue increase to $233.9 million, of this amount 76% was made up of higher fee global non-U.S. and alternative assets. The largest increase in revenue, not surprisingly, was in alternatives as the Landmark transaction combined with subsequent AUM increases, helped to drive an 81% increase in this category. Landmark AUM has increased approximately 68% since our acquisition last August. Slide 14 provides perspective regarding ENI operating expenses for the three and 12 months ended December 31, 2017 and '16, and breaks out several of our key expense items. Total ENI operating expenses grew by 16% between Q4 '16 and '17 for a total of $84.8 million for the quarter. Within our existing business, we invested as planned in key initiatives including non-U.S. at Barrow, Hanley and multi-asset class at Acadian. Operating expenses were also impacted by higher fixed compensation and benefits as a result of new hires, CEO succession, and annual cost of living increases. On an aggregate basis, we achieved increased economies across OMAM as the ratio of operating expenses to management fees feel from 40.4% in Q4 '16 to 36.3% in Q4 '17, driven by scale in the existing business. As you are aware, the first and fourth quarter tend to have higher seasonal expenses than the second and third quarters, driven primarily by payroll taxes. Looking forward to 2018, assuming normal market and organic revenue growth, we would expect that 2017 annual operating expense ratio which was 36.6%, to decrease by a further 100 to 150 basis points as scale benefits continue. The next key driver of profitability is variable compensation, shown in more detail on Slide 15. The table at the bottom of the Slide divides total variable compensation into its two components. Cash variable comp and equity amortization. In this exhibit, you can see the benefit of the profit share model which links variable compensation to profitability. Variable comp increased 43% to $69.6 million, from Q4 '16 to Q4 17, proportionate to the 44% increase in earnings before variable comp. this increase was driven by growth in the existing business including tiered variable comp, along with severance cost related to our former head of global distribution. The reduction of non-cash equity amortization relates to the runoff of certain equity grants over the year and the comp acceleration related to CEO succession which reduced equity amortization. This exhibit also calculates the ratio of total variable comp to earnings before variable comp, which we call the variable compensation ratio. This ratio is stable at 41.6% compared to 41.7% in the prior year fourth quarter. For 2018, the variable compensation ratio is expected to trend towards 41%. Slide 16 shows employee, key employee distributions for the three and 12 months ended December 31st '17 and '16. Distributions represent the share of affiliate profits owned by the affiliate employees. Between Q4 '16 and Q4 '17, distributions increased 69% from $12.9 million to $21.8 million while operating earnings were up 44% quarter-over-quarter. The lower increase in operating earnings relative to distributions resulted in an increase in the distribution ratio from 19% to 22.3%. The 22.3% current ratio is driven by Landmark's 40% employee ownership and the leveraged nature of equity distributions at Acadian which experienced 30% AUM growth over the last 12 months and is now our largest affiliate by AUM. For 2018, this ratio was expected to be approximately 22%. On Slide 17 we present a summary of our balance sheet and capital position. We continue to believe that our balance sheet provides the flexibility and liquidity for acquisitions or buybacks while continuing to invest in the business. With approximately $393 million of long-term debt, excluding non-recourse debt and nothing drawn on our $350 million revolver, our debt to last 12 month suggested EBITDA ratio was 1.4 times as of December 31. This is below our target of 1.75 to 2.25 debt to EBITDA, which is the range that we are working towards. Pro forma for the sale of Heitman on January 5, we have cash and borrowing capacity for acquisitions of over $400 million, which would still leave us within the upper end of our target range. As previously noted, our cash position in 2018 is improved by at least $52 million to $65 million, due to the decline in DTA deed payments to Old Mutual. Our equity at 12/31/17 declined due to a net $69 million write-down related to the tax law impact on DTAs. On March 30, we will pay a quarterly dividend of $0.09 per share to shareholders of record on March 16, reflecting a 22% payout ratio for 2017. Similar to last quarter, I would like to again highlight page 19, the reconciliation between GAAP and ENI net income. As was true in the first nine months, you will notice the GAAP and ENI earnings continue to diverge between Q4 '16 and Q4 '17. This difference was expected given the fourth quarter trends and is primarily driven by adjustments number 1, number 2 and number 7. Item number 1 equaled to $24.4 million, adds back non-cash expense related to increases in the value of affiliates employee owned equity. Item number two for $19.4 million, primarily relates to the acquisition of Landmark. Because both the contingent purchase price and the liquidity provisions of the pre-existing non-controlling interest are subject to employee service requirements, under U.S. GAAP these items are amortized through compensation expense rather than book to goodwill or non-controlling interest. Item number 7 for $70.9 million includes the net impact of the $120 million DTA write-down and the $52 million DTA deed payment reduction to Old Mutual. In Q4 '17, we have also backed out $3.9 million of pretax gains associated with seed capital and co-investments, net of the associated financing costs which are shown as item number 4. While the difference between ENI and GAAP was significant in 2017, by 2019 once the amortization of the Landmark earn out through GAAP compensation is complete, we would expect ENI and GAAP to substantially converge. Now I would like to turn the call back to the operator and we are happy to answer any questions you may have.

[Operator Instructions] Your first question comes from Bill Katz from Citigroup. Please go ahead, your line is open.

First off, Steve, congratulations. I have known you almost by whole career and very happy for you. I think you would be a great steward of capital and a little shocked by how the stock is reacting. First question, I guess, and you also have highlighted in your own comments, I would be curious if, we sort of see as maybe your top two or three strategic priorities as you look ahead in your new role.

Yes. Thanks, Bill. Really, I mean it's in part a continuation in acceleration of some of the key priorities that we have talked about. As I think about where we have been since the IPO, I am really proud of what we had accomplished in terms of growing the business, making the investment in Landmark. But in a way if you think about it, we have also had one eye backwards with a majority shareholder during a lot of that time that was trying to exit their position. We had obviously management change. And so I really look at the next year as an opportunity when we can really be 100% focused on growing the business at the affiliates as well as through acquisitions. And clearly, executing on another strong acquisition like Landmark is a key priority and I think now that we have the CEO succession process behind us, we have a great story, we have a great value proposition and I think we have a really opportunity to do an accretive, positive transaction for the company and for shareholders. The other areas where I think we are going to be spending some time is on the IR side. I think many people would look at the stock price and the PE and continue to believe that we are undervalued. And I think there are probably a couple of reasons for that. But as we now have sort of management continuity, the CEO in place, we went to get out and tell the story. And I think it's a really strong story to tell and so we are going to be spending time with that as a priority as well. We are also going to be rebranding over the next few months and we will sort of come out with that and get more information shortly. And then I would say another strategic priority is really leveraging the relationship with HNA. I think we have a unique opportunity there given their presence in China and we are going to put some resources to work sorting through where there are strategic opportunities to work together to grow the business. So I would say those are sort of the key things that I am thinking about right now.

Okay. That’s helpful. And then maybe one for Aidan. Just so looking at some of your gross sales trends, sort of year on year or on a quarterly basis. And it seems like a lot of the fourth quarter was on the alternatives, I am presuming through Landmark. And you had sort of highlighted in your prepared comments around some of the seed things, other initiatives you are working on. Can you talk a little bit about how you sort of see the hand off as you look into the second half of this year on the gross sales leadership. Where you might expect to see some of the better net flows looking ahead.

Sure. My guess as a general matter, I would just comment that the trends in the background market that have driven the business haven't really changed. Now I would say that we see secular pressure on the domestic side and while we did see some anomalous kind of activity in the non-U.S. flows, we don’t necessarily see that kind of being a trend. So I would say we certainly expect the alternatives positions to continue to grow and additionally we have got trends in the non-U.S. base that we think we will continue to drive opportunities. And then we have some seeded products and things like emerging markets and multi-asset class that we can't control the timing but those are things that we hope to see some traction on shortly.

Your next question comes from Craig Siegenthaler with Credit Suisse. Please go ahead, your line is open.

Congratulations on the promotion too. So now that we have visibility on the leadership of OMAM, how should we think about the reacceleration of your acquisition pipeline now that the CEO overhand is resolved.

Yes. I think, as I said, this is going to be a key area of attention and focus for me. M&A and strategy will be reporting directly to the CEO and that is an important area I think to indicate the importance we have put on that business. I would say that while we have continued to have meetings with potential investment candidates as well as respond to basically to opportunities that came up, during the last six months it sometimes is difficult to go out and tell a comprehensive story when you don’t have the CEO in place. We think we have a really strong story to tell in terms of the value proposition, the profit share model, the collaborative benefits we bring to affiliates to Aidan's group, in terms of global distribution, capital, investment in their business. But we want to make sure as we approach potential candidates that we can put our best food forward. And I think now that the management clarity is in place, we can really get out there and begin really increasing the number of meetings we are taking and really build up that pipeline. I think we also are very focused on what's going on in the market in terms of opportunities that are there and we think there continue to be a pretty strong pipeline out there, particularly in the alternative side where we continue to have an interest as well. And so I hope that the opportunities of having a number of candidates out there and our own efforts to generate flow on a proprietary basis will yield something this year.

And then just one follow up on M&A. So the new number, $400 million of deal capacity, that’s actually pretty large for a company of your size and I think the old number before tax reform was $250 million. So it seems like much bigger number now and pretty large for you guys. How should we think about the capital return mix between acquisitions buybacks. We saw the news on the dividend. And also how focused are you on the stock's liquidity which is one limiting factor. And then also on the HNA ownership constraint at 25%, which could be another factor as you can consider the buyback potential.

Yes. I mean look, as we have said, we have bought back about 11% of the stock over the last -- a little bit over 12 months now. That was important. We are always going to be looking at where we believe shareholders capital should be allocated. Whether it should be returned in dividends or returned in stock buybacks or through acquisitions. And $400 million is a larger amount but look, I think it doesn’t need to necessarily be spend all on one transaction either. We will, we have quite a bit of flexibility as you know in terms of the actual size of investments we make because we are not buying 100% of the company and we have the flexibility, the structured transactions to buy a portion today, maybe buy more later, have an earn out, that sort of thing. So I wouldn’t think of the $400 million going necessarily to all one transaction although it could. But I think we are looking at a range of sizes and a range of investments and we will understand what kind of return we can get.

Your next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead, your line is open.

Congratulations again, Steve. Just want to get a -- you briefly mentioned about potential technology investments, granted still early, assessments are still being made. But perhaps you could just talk a little bit more about what potential areas and when or when or where we could see potential expenses arising from these investments.

It's [Ken], I will chime in. It's obviously safe to assume that we have some pretty impressive capabilities today. Particularly in those areas of our business that utilize [quant] [ph] models and the like. And thinking about our industry in general, if you give highly talented people tools for new analytics, it's also I think a reasonable assumption to do -- for them to do better. Where we see it going is, if you broadly think about a lot of technology has been in a sense backward looking. So why did particularly things happen or what happened, we see the new tools as being able to help our firms be more forward looking, so what's going to happen next. What should, like responses look like and the like. As we take a hard look at ourselves, we think it's actually reasonable to expect that a boutique manager such as us, meaning our current size, our current number affiliates, should be able to move quickly and produce some good results.

I think this is exactly one of the areas that I am excited about because one of the benefits that we have always said that we try to bring is to bring the resources of the $250 billion asset manager to boutique asset managers which have a lot of unique skill sets and characteristics that clients really like as well. And I think technology will provide an opportunity where I think we will be able to invest money and invest more than perhaps standalone affiliates of our affiliate size might be able to have done on their own. And we are sort of early days still but I think that’s going to be a big opportunity to really continue to help our affiliates grow and provide strong results for the clients.

Okay. Great. And just one -- just wondering what the implications could be in terms of competitive positioning for M&A transactions. Maybe some of the thoughts around that. Thanks.

Yes. I think if you recall when we first went public, the relative advantage of our U.K. domicile was probably in the order of $30 million or so. That’s now $2.5 million. But at the same time, if you look at in absolute dollar terms where our tax rate is today, when we went public it was probably around 26%, 27%, now our effective tax rate after tax reform is going to be in that 23% to 24% range. So in general we are keeping more cash and tax reform is a positive thing. And so we will continue to sort of look at what the right structure is between whether keeping the current U.K. domicile and U.K. tax structure is advantageous, because obviously you have not only the pure analysis of what taxes are you paying but also the complexity of the story from an IR point of view. The complexity of the business in terms of running the business with this U.K. domicile, and also obviously looking at regulatory structure and the overall structure of the business. And so those are all factors we are going to look at. Purely from an M&A point of view, I think we are -- I am not sure that the tax law itself will have an impact on our competitiveness or not. But I think overall it clear is a positive to us and the shareholders.

Your next question comes from Michael Carrier from Bank of America Merrill Lynch. Please go ahead, your line is open.

This is actually Sameer Murukutla on for Michael Carrier. Steve, first just want to convey our congratulations also. So I guess just wanted to go back to the flow question, and I know you have provided color on some of the outflows in 4Q and the building pipelines and maybe some of the growth areas, and maybe some lumpiness in global. So should we expect the quick turnaround in global and can you provide us maybe another color on know lumpiness going forward.

Yes. I mean maybe just in terms of the, looking at the fourth quarter in terms of what caused the higher $3.7 billion of net flows. I think part of that is really about $1 billion of it, relates to withdrawals from Old Mutual accounts. These are not general accounts money, these are basically sub-advisory accounts managed for their U.K. business, as well as their South African business. And I think they had made a decision to in-source some of that management. There is about $2.7 billion or so of assets that are remaining from Old Mutual and we will see what happens with that over time but it's about 25 basis point asset. So that impact is, probably of that billion about half was U.S. equity, half was non-U.S. equity, or about actually a little bit more than half, 60% was non-U.S. equity. We also, within the sub-advisory space, saw about a billion more of outflows in the U.S. sub-advisory in the fourth quarter of '17 compared to the fourth quarter of '16. But then on the non-U.S. sub-advisory, there was really almost a one-off sub-advisory withdrawal that contributed almost all of the increase in sub-advisory net outflows or outflows during that fourth quarter of '16, '17. So taking a step back, I don’t think we look at the decline in flows in non-U.S. equity as systemic in any way or emblematic of what we would expect going into the future. I think it really was the result of really two one off events that happened in the same quarter, one the U.S. equity, or sorry the non-U.S. equity withdrawal from Old Mutual. And then the other was this non-U.S. sub-advised relationship that took money out as well.

Your next question comes from Glenn Schorr from Evercore. Please go ahead, your line is open.

This is actually [John Dyen] [ph] for Glenn. We want to also extend congratulations, Steve. Just to follow on previous question, you know you guys have good performance but 2017 was the worse value versus growth in spread in like 20 years. And just curious how that environment is pressuring your different strategies and channels.

I think really where we overall see the most outflows, as we have talked about, is really U.S. equity, in particular probably sub-advised U.S. equity. And look, it is I think the value versus growth differences are really purely cyclical. And some periods value outperform, others it's going to be growth. We really could only control what we can control. I mean we are -- if we look at our sort of largest U.S. equity composite, large cap value, we outperformed versus benchmark in 2017 and did quite well there. And what we do is we just continue to -- if we can continue to generate a strong performance relative to benchmark, which is what our clients are hiring us to do. We just have to put those numbers up and when value comes back into favor or U.S. equity comes back into favor, we have competitive product. At the same time, as Aidan talked about, a key part of what we are doing and what our affiliates are doing is continually looking at our product set and looking at opportunities to basically continue to expand the capabilities that their affiliates, which leverage their core competencies so that we have a constant cycle of competitive new products that we hope will appeal to investors. So we are investing in that part of the business. We are also investing in diversifying in the new asset classes through acquisitions and so it's really that combination of making sure that you have strong performance in legacy that are absolutely critically important but also continue to be looking towards the future and making sure that you have made appropriate investments in the products that you think investors are going to want to buy three and five years out.

Your next question comes from Andrew Disdier from Sandler O'Neill. Please go ahead, your line is open.

Steve, congrats. Excited to see how you move the company on a forward basis. So first on performance fees during the quarter. So understand that dynamic between Barrow Hanley and Windsor II, understand the dynamic of the fund mandated bench versus the manager preferred bench. But kind of away from them, could you remind us the basis for benchmark calculations on other product performance fees. And then this quarter, I know you said you did in global non-U.S. products with the performance fees, was it tied to the redemptions from the parent or the former parent, rather.

No. Not at all. I mean where we tend to see, you know the products that we tend to see performance fees coming from are generally emerging markets products, some [indiscernible] products. Those have been where we have seen, tended to see the most performance fees. And those are more your typical type products where there is a benchmark management fee rate and then if you outperform benchmark, you get little bit extra. And so I think one of the really positive things about those performance fees is that they were sort of across a few different mandates, across a few different strategies and really reflect just fundamental strong performance in those strategies rather than some sort of hedge funds hitting at all for something like that. But that’s really what made up most of the fourth quarter increases. It's really some of the non-U.S. strategies relative to their normal benchmarks.

Got it. And then Jim, had a few questions around your rhetoric. So last time I had though the minority interest strategy was new on the last call. I mean this time it sounds like there is rhetoric around traditional products as a potential target. So I think that’s the first time I remember hearing that. So I guess what's the process, thought process there and I was kind of always under the impression that [odds] [ph] were the favorite.

Are you talking about in terms of acquisitions or in terms of just the investment?

Acquisitions.

Yes. I mean I think maybe there was -- no, I think in terms of priorities, we probably would be more on the offside within traditional equity asset classes. I think where we would certainly have an interest and continue to want to invest, is areas where there are capacity constrained products or where we think there is strong growth potential. So even within some of the non-U.S. equity side, on traditional side, we have had tremendous runs at a number of our affiliates but you want to be able to continue to diversify where those assets come from, so you don’t run into capacity constraints. So I think in areas like small cap or global non-U.S., emerging markets, where you always are looking at capacity constraints, those will be areas within the traditional space that you would look at as well.

This is Aidan. There wasn’t meant to be any suggestion of a change in prioritization. We have always opportunistically looked to debt.

The other thing I would say is, over time actually getting non-U.S. manufacturing in one only space would be something that we would look at. And that’s not something that we actually have today.

Your next question comes from Michael Cyprys from Morgan Stanley. Please go ahead, your line is open.

Congratulations, Steve. Apologies, I hopped on late so you maybe already covered this. But just on the institutional pipeline, just curious any color that you could share in terms of how that stands how, say versus a year ago. How the level of conversation is with clients today and what's sort of the trends are on the RFP activity picking up and any sort of client color commentary.

Yes, I mean. Michael, as you know, I mean we can comment a little bit on sort of what we are seeing on the global distribution side but in terms of some of the more granular information, just as sort of holding company, that frankly is, lot of that RFP information and stuff is not what we really collect and analyze because that’s really proprietary to the affiliates. But I don’t whether, Aidan, do you have anything to add on the global distribution, what kind of products are...

I am happy to talk about that. And I would say, just to reiterate what I said earlier, the trend that have carried us to this point remain the trends that we think are going to carry us forward. All in the backdrop of having been through kind of very very strong equity markets in 2017. I think with regard to distribution, as was disclosed earlier, $2.3 billion of assets across a variety of strategies for a variety of our affiliates. And as that effort continues to grow and we continue to invest in it and develop new products, I think the trends that you are going to see particularly on the non-U.S. side are around global type products, emerging markets products and a variety of the other products. So for us it's continuing to build on that momentum. And then on the U.S. side, it's really providing access in scale into the sub-advisory space and being really a provider of services in a market that’s consolidating. Those are the areas that we continue to build in.

Great. Thanks. Just any thoughts, commentary around the organic revenue growth. It just looked a little bit lighter than what we had seen last quarter and a year ago.

I mean look, it's a function of -- look, when we have $3.7 billion of asset outflows, I should think of it as a pretty positive thing that we generate, $6.8 million of revenue flows. But clearly I think it's a function of the fact that you had more of those net outflows and that proportionately because of these one off items that we talked about of some global non-U.S. sub-advisory and Old Mutual, it came from some of the areas that would tend to be slightly higher fee. But overall, when you look at the trend of gross sales and what the basis points were earned on those gross sales relative to the gross redemptions, I think in general we actually had a higher spread between the two this quarter than we have in the past., i.e., we had 57 basis points on inflows this quarter compared to 44 in the year ago quarter. And then on outflows, we had about 32 basis points on outflow relative to 35 in the year ago quarter. So even though those trends were actually much better, we were still weighted down a bit by the fact that just the wrong number of outflows relative to inflows.

Your next question comes from Bill Katz from Citigroup. Please go ahead, your line is open.

Most of my question were answered, but Steve while I have you, just want to run through again where we stand in terms of the seed capital. Not the seed capital, sorry, the cash flows related to DTA. It seems like, from what you said in the press release that they might -- and what you said in your comments, that there may be further opportunity to potentially rework what the residual payment might be, number one. And then number two, where do you think you stand out that we have the tax reform on potentially re-domicile because there seems like there is a simplification argument that we have when looking into '19, particularly of GAAP and ENI [got] [ph] to converge.

Yes. I think I gave a range between 52 and 65. It really reflects the fact that we are -- the way the DTA is valued is based on an assumed growth rate and an assumed discount rate for those DTA benefits. And those will still need to be -- we need to come to final resolution with Old Mutual in terms of exactly how to calculate the reduction of the DTA payment. And that sort of represents the range and obviously from a conservative accounting point of view, we took the low end of that range. But that’s the reason for the range. In terms of the re-domicile, I have covered this a little bit, but it's really going to be a function of analyzing the financial impact relative to what we think the benefits are going to be from simplification, and that simplification comes from sort of organizational complexity that exists today. Having board meetings, costs of that over in London. Likewise, the regulatory environment between the two domiciles. And so all of those things we will get back to when we make the decision. The other things which is sort of unknown, is even though the difference between U.S. and non-U.S. today is $2.5 million, what you don’t know is what's going to happen to tax rates in the future. U.S. tax rates are probably not going to go down in the future. Whether they go up or when they go up, anyone can have their views on and I don’t want to spoil the party after we have just had the tax cut to think about when they might go up again. But once you have given up your U.K. domicile and come back to the U.S., that’s it. That’s a permanent decision. And to the extent that the differential between the two tax regimes increases again, you won't be able to take advantage of that. So it's all of those factors that are going into an analysis as well as just understanding a bit better exactly some of the nuances of the current tax law which you are working through. And as we get through the year and we think about all those items, we will continue to evaluate and figure out what's going to be in the best interest of shareholders in our judgment.

This concludes our question-and-answer session. I would like to turn the conference call back over to Jim Ritchie.

First I would like to thank everybody that’s participated in today's call and have actively engaged with us. I am really grateful for the many kind words that you have said on the line about Steve's appointment. We are really very excited about that. And for those who haven't had the opportunity to get on to the call but have sent emails or text messages expressing the same during the call, thank you very much.