Affiliated Managers Group, Inc. (AMG) Q2 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the AMG Second Quarter 2018 Earnings Conference Call. At this, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Selene Oh, Vice President, Investor Relations for AMG. Thank you. You may begin.

Thank you for joining AMG to discuss the results for the second 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 and a copy of our announcement of our results for the quarter as well as 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. With us on the line to discuss the company's results for the quarter are Nate Dalton, President and Chief Executive Officer; and Jay Horgen, Chief Financial Officer. With that, I will turn the call over to Nate.

Thanks, Selene. Good morning everyone. AMG generated strong results in the second quarter with positive net client cash flow of $4.3 billion, and year-over-year growth of 8% in economic earnings per share. Our results reflects the strength of our strategic position in attractive areas of alternative and active global equities and ongoing significant client demand for our Affiliates' broad range of distinctive return streams especially in these areas. At the highest level, we're pleased with our organic growth as we generate continued strong growth sales and return overall more normal level of redemption. While still early in the third quarter, we're off to a good start so far with positive flows and the level of activity at all stage of the sales cycle remains very high across AMGs and our Affiliates business development team. We are seeing across won but unfunded mandates, finals, and RFPs. In terms of second quarter flows across our product categories, we saw continued strong demand for alternative with $2.6 billion in positive net flows. We generated record sales in global equities during the quarter resulting in $1.9 billion in net flows while U.S. equities had one of its best quarters in the years on a net basis with only modest outflows. Finally, we continue to see positive flows in our multi-asset and other category as some newer products are starting to gain traction. Turning to our quarterly flows by distribution channel, we saw significant strength within institutional, it is our best quarter in the last three years with $5.3 billion in net flows and sales well diversified across the product categories. Our institutional flows were also well diversified by geography with sales in each of our coverage region. In the retail channel, we reported net outflows of $0.5 billion and while we saw weakness in our liquid alternative, this was mostly offset by strong sales in global equities. In terms of subcategories within the retail channel, we had good traction in sub-advisory in certain non-U.S. region. Finally, in the high net worth channel we reported modest outflows of $0.5 billion which we believe were driven primarily by a few SMA model changes, but otherwise the underlying demand trends remain in play. One final point relative to flows in the quarter, we were pleased to see a very diverse group of product types and affiliates contributing significantly as we saw strong sales across AQR, Capula, EIG, Pantheon, and Systematica with an alternative segment while Artemis, Harding Loevner, TimesSquare and Veritas were notable contributors within our global equity segment. As I said, we are off to a strong start to the second half of the year and now let me also spend a minute on why we are very confident about our long-term organic growth prospects. First and most importantly begins with our affiliate outstanding long-term track record with investment performance in areas where we continue to see a secular demand trend including global equities and liquid alternative. Fundamentally many of our affiliates, largest and most significant products continue to build on excellent and distinctive track record. Second, we and our affiliates are innovating and developing new products which is of course critically important to match evolving client needs. Examples are many and diverse and will include AQR beginning to build a fixed income franchise, our U.S. equity manager such as TimesSquare launching International in our emerging markets franchise, or GW&K evolving from a great mini bond manager to successful U.S. and now an international equity manager. Artemis in particular has been very successful model leveraging their UK retail brand across a series of new product, homegrown and through leftouts. Third, we have a unique distribution strategy that combines the focused distribution resources at each of our affiliates with a leveragable token sale of AMG's global distribution platform and our continuous evolution and improvement of those platforms and this includes coverage of geographies and channels, but also packaging and operational expertise. As you heard us say this distribution strategy is increasingly effective as leading clients worldwide in the intermodal serves them are consolidating their relationships with external managers and looking for more effective relationships and even partnerships with a smaller universe of investment management firms. Now one product there we highlighted recently that holds all three of these organs together is our growing franchise in illiquid alternatives across facilities such as Baring Asia, EIG, and Pantheon. First each of these Affiliates' produces distinctive return streams in their flagship product. Second, we and they have been working to innovate and develop additional product such as the infrastructure real asset and credit strategy to Pantheon, the Asia Credit and Real Estate product with Baring Asia, and credits direct lending and operating energy capabilities at EIG. Third we and they have been working together to diversify their distribution opportunities and bring their expanding products sets to the most appropriate capital worldwide. Now expanding on that last point about distribution capability, we continue to leverage AMG's scale in working with our affiliates to bring their differentiated strategy to sophisticated clients and intermediaries around the world. As you know, we have been successful in strategically and deliberately building out our global distribution capabilities over the past dozen years. First in Australia, then next turning to the Middle East, Europe and parts of Asia and offering clients an array of distinctive return streams managed by best in class boutique firms. As we mentioned on recent calls, we are extending our Asian coverage to Japan. We are opening our office in close cooperation with Pantheon which recently opened their Tokyo office and we're in the planning stages with certain other affiliates. Given the array of relationships, we and our affiliates have been establishing with some of the largest and most important clients and leaders in Japan we see tremendous growth opportunities building on our early wins and we look forward to updating you more in the quarters to come. Putting together the three elements I highlighted earlier first Affiliate investment performance, second continued innovation and product development, and third our unique collaborative distribution strategy our growth prospects was very good and that is just speaking about our existing Affiliates. In addition AMGs business strategy provides a unique opportunity to generate incremental earnings growth and product diversification through accretive investments in new affiliates. Given our outstanding track record spanning more than two decades, AMG is the partner of choice for boutique firms around the world both traditional and alternatives which take a permanent strategic partner. We have an outstanding secular opportunity here and while the pace of activity is inherently based on the dynamics of each prospective affiliate, we continue to make good progress across a range of potential new investments. As always, we remain very disciplined and highly selective. Now given the scale of our recurring free cash flow generation we were able to execute these elements of our growth strategy, while also consistently returning capital to shareholders through both our regular cash dividends as well as ongoing and increasing share repurchases as our earnings grow. As Jay will discuss further in a moment we demonstrated the disciplined approach to capital again last quarter. Looking ahead, we are very account in our ability to continue to enhance the quality, diversity and earnings power of our business and generate outstanding long-term shareholder value. Through our unique business model we offer the focused expertise and specialist managers along with the scale and resources of a global asset management franchise. To manage the 25 year track record of deploying the cash flow generated by our business to create shareholder value. And with that I'll turn it to Jay to discuss our results in more detail.

Thank you, Nate and good morning. AMG generates strong organic growth for the second quarter with $4.3 billion in net client cash flows across a broad array of alternatives and active global equity strategies. As Nate described we feel good about our improving organic growth profile and looking forward we are off to a good start in the second half of the year with positive flows in July to-date and a strong pipeline of one but unfunded mandates. Now turning to the details for the quarter, I'm going to describe our business trends within each product category with a focus on both flows and market performance through June. And given that this is the first time for me to review our business trends, the flow and format may be a little different and will evolve over time. I look forward to your feedback as we continue to enhance our disclosure. Starting with alternatives which account for 39% of our AUM we had another good quarter of organic growth and saw meaningful positive contributions from both our liquid and illiquid parts that totaling $2.6 billion in net flows for the quarter. Focusing on the illliquids for a moment we had a solid level of findings in the second quarter but in July we generated more commitments in this category than all of the second quarter. Beyond illiquid, consistent with recent trends the systematic diversified category continues to be challenged. However we had experienced good flows within multi-strategy as well as the fixed income and equity relative value category. Now turning to our selective benchmarks by alternative category, within systematic diversified which accounts for 5% of our AUM our selected industry benchmark continued to move lower with the SG Trend Index down 1.3% for the quarter and 5.2% year-to-date. However most of our products in this category maintained good relative performance. Within fixed income and equity relative value which accounts for 9% of our AUM our selected industry benchmarks were modestly positive with HFRI relative value of 1.1% for the quarter and 1.5% year-to-date and HFRI equity hedge up 0.9% for the quarter and 1.2% year-to-date. And finally the HFRI active index was up 4.8% for the quarter and 2.4% year-to-date. While our benchmarks remain modestly positive generally we have seen mixed relative performance in this category however we have seen strong relative performance from our event driven strategy. Now turning to multi-strat and other which accounts for 15% of our AUM our selected industry benchmark was modestly positive with HFRI fund weighted composite of 0.8% for both the second quarter and year-to-date. Against this backdrop our performance has been mixed for both the quarter and year-to-date. Next turning to our private equity and real asset category which accounts for 10% of our AUM and includes strategies such as global and regional private equity, co-investments, credit, real assets, infrastructure, and real estate. Our Affiliates maintained strong long-term track record and the pace of product innovation extensions in this category has led to even greater growth in our business. Next turning to global equities which account for 34% of our AUM we saw net inflows of $1.9 billion in the quarter driven by retail sales including a number of sub-advisory wins as well as strong momentum in institutional sales with a significant improvement in redemption level. Selected industry benchmarks in the category were mixed with MSCI world up 1.9% for the quarter and 0.8% year-to-date while the MSCI EP was down 1% for the quarter and 2.4% year-to-date and MSCI Merger Market was down 7.9% for the quarter and 6.5% year-to-date. And U.S. equities which account for 14% of our AUM we reported outflows of $400 million and while negative overall we had a good institutional flow quarter with number of wins and continued to see pockets of ongoing opportunities. While industry trends continue to be challenged in U.S. equities our overall redemptions have been improving over time. Selected industry benchmarks were positive with the S&P 500 up 3.4% for the quarter and 2.6% year-to-date and the Russell 2000 up 7.8% for the quarter and 7.7% year-to-date. Finally in multi-asset and others account for 13% of our AUM and encompasses multi-asset and balanced mandates within our wealth management business as well as a number of specialty fixed income and multi-asset products we had a slightly positive quarter producing net flows of $200 million. While we saw some weakness with our legacy fixed income products, our wealth management affiliates continue to generate positive flows and we are seeing good momentum in new products including systematic fixed income. Before turning to the financials, I wanted to reiterate that we are pleased with our improving organic growth profile as we and our affiliates are realizing the benefits of new products, new packaging, and new geographies. Now turning to our financials. As we saw in the release, we reported economic earnings per share of $3.61 for the second quarter which included net performance fees of $0.10. On a GAAP basis, we reported earnings per share of $2.16. For the second quarter, aggregate fees grew 5% to $1.3 billion from a year-ago driven by positive markets and organic growth and alternatives. The ratio of aggregate fees to average assets under management declined modestly year-over-year from 64 basis points to 62 basis points which was driven in part by timing differences between AUM and revenue recognition as well as changes in composition of our AUM. Adjusted EBITDA decreased 3% to $246.2 million from a year ago reflecting lower other income from realized and unrealized gains, modestly lower net performance fees, and the impact of investments which position our business for long-term growth. Economic net income grew 4% to $195.6 million from a year ago reflecting lower interest expense and lower tax rate, while economic earnings per share grew 8% to $3.61 given lower year-over-year share count due to repurchase activity. Turning to more of specific modeling items for the second quarter the ratio of adjusted EBITDA to average assets under management was 11.9 basis points or 11.5 basis points excluding performance fees. Looking ahead, we expect adjusted EBITDA to average assets under management to be approximately 11.3 basis points in the third quarter reflecting seasonally lower performance fees and continued investment in product development and distribution capabilities. Our share of interest expense was $21.4 million for the second quarter. In the third quarter we expect our share of interest expense to remain at approximately $21 million. Our share before the amortization impairments was $74.4 million for the second quarter including $56.8 million from Affiliates accounted for under the equity method which was elevated primarily due to a non-cash impairment charge of $33 million related to Ivory. While this non-cash charge reduced our carrying value to zero, the economic impact was far less at roughly $1 million in yield of per quarter. Looking ahead to the third quarter, we expect our share before the amortization to return to a normalized level of $41 million. Turning to our taxes, with regard to our tax rate in the second quarter our effective GAAP tax rate was 21.3% and our cash tax rate was 18.1% which was lower due to adjustments related to U.S. tax reform and we expect these rates to normalize on a full-year basis. Looking forward, we expect our GAAP tax rate to be approximately 25% and our cash tax rate to be approximately 20%. Intangible related to deferred taxes were $4.7 million which was lower in the quarter given the level of amortization and impairment. For the third quarter, we expect intangible related for taxes to return to approximately $12 million as our amortization normalizes. Other economic items were negative $0.5 million for the second quarter. For modeling purposes we expect our other economic items to be approximately $1 million per quarter. Our adjusted weighted average share count for the second quarter was 54.2 million and we expect it to be approximately 53.5 million for the third quarter reflecting a continued level of repurchases and we now expect our adjusted weighted average share count for the full-year to be approximately $53.9 million. Turning to our balance sheet in the second quarter, we paid a $0.30 dividend per share and we repurchased 150 million in shares. Looking to the second half of the year, we expect to repurchase between 200 million and 300 million depending on the level of new investment activity. Looking ahead, we are confident in our ability to generate outstanding long-term shareholder value through both the organic growth of our global asset management business as well as the deployment of capital into accretive investments in outstanding new affiliates while also consistently returning capital to shareholders. Now I’d be happy to answer your questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Will Katz with Citigroup. Please proceed with your question.

Okay, thank you very much. And thank you for taking the questions. So just come back to flows for a moment if it's sort of differentiated update versus some of your peers last week, how much of this might be cyclical in terms of some of the product gains even out there on alternative side and how much of it do you think is little more structural just given that you sort of ended with new products, expanded opportunity, expanded geographies, et cetera and how you sort of think about that beyond the third quarter just look out maybe the second half of the year and even into 2019?

Great. Thanks, Will for the question. So sort of simply put I think much of it is using the firm, so I think much of it is structural and therefore sustainable and on some level there is really nothing all that different or new from the way we’ve been talking about overall levels of growth sales but if you look over the last probably year and year-and-a-half our gross sales have actually been pretty good. And then the question then is well okay so why and we covered much of this in the prepared remarks but as I said it starts with the distinctive track records and that our Affiliates are producing, and these are great institutional brands, these Affiliates I think are seeing in global equities like Harding Loevner or Veritas and with our alternatives we are talking about brands like AQR or Capula or Winton and in the liquids which we highlighted in the prepared remarks it’s brands like Pantheon, Baring, and EIG. And I used that word brand because it is as we talked about these are franchises that are growing and expanding and we talked about just approximization but it’s really doing a better and better job matching the capabilities of the firms with the evolving client needs across channel and geographies. And so sort of a layer down if you sort of step back, we had sales in something like in 400 products in the quarter and a bunch of those are products that didn’t have five years ago and those include some of the fastest growing lines. Now that say as you said some of that will have cycles to it especially where is something that's got a fund raising cycle to it or where there is a product exploiting specific opportunities at one of our Affiliates fees. But in the main that that overall kind of wave of product development and evolution is the most important, is most important theme. And then again just to make sure everybody is tracking for us product development happens some at the Affiliate of course just Affiliates alone, it also happens us jointly with Affiliates and this is something that we’re still at the see early stages of because we’re getting better and better at bringing market knowledge that we have back to the Affiliates. Again that can talk about leveraging the scope and scale. And then as we always have we have this unique ability to add kind of prudent well performing products with distinctive, serve distinctive products through our new mechanism. So we have sort of all those kind of product development engine and then as we have said in our prepared remarks, it’s not just product development that way and innovation but it’s also the packaging and distribution capabilities, extensions and wrappers and some of that is simply bringing product to new geographies and channels. And while we talked about the opening of Tokyo here, it’s important to note also that over the last really couple of years we've been adding resources in Europe and little bit in the Middle-East and a little bit in Asia as we are doing some channel expansions in places like that and then we’ve also been making some modest investments in packaging and capabilities and here I would highlight things like the Pantheon, Zodiac Fund, or something which is public as we can talk about it. If we put all this together the performance, the brand, the innovation and this distribution size so actually we think those are the things that will -- that have been showing up in gross sales and will continue to drive gross sales going forward.

Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Thanks, good morning. I guess Jay could you kind of update us on your kind of the outlook views, you think about performance views into the back half of the year and just kind of the benchmarks versus your guidance from earlier in the year in terms of where we sit?

Yes, thanks Dan. So maybe I'll take this in two pieces. I will talk about the third quarter and then maybe the rest of the year. So first as I said in the prepared remarks, we’re off to a good start, we have seen positive markets and positive flows in July so far our current blend across all categories is up 1.5% that includes FX as well that's from a base of $824 billion which you can see on the June 30 -- in the June 30 numbers. So we’re up in July should give us a little bit of lift here in the quarter and for the year. You also just one week turn to the third quarter I gave some guidance in the call around our EBITDA to average AUM of 11.3 basis points which is slightly lower than while we came in this quarter. And I just want to remind everyone our third quarter is a typically seasonally low point for us both EBITDA and earnings primarily given the population of performance fee contracts to crystallize in the third quarter a very low that population, so as a result we’re only expecting one or two pennies in this third quarter. So that’s in there obviously we continue to as you heard from Nate to make investments in the business of new products and new capabilities that's all reflected in the 11.3 basis points. And then looking beyond the third quarter to the fourth and staying on performance fees for a moment then I’ll just maybe take the perspective of full-year and then I’ll narrow it to the fourth quarter. Given the benchmarks that I mentioned in my prepared remarks and the alternative category primarily most of those benchmarks are modestly positive and so really if the comment is about make is more about the overall benchmarks our relative performance is pretty good with the exception of the continuing challenging environment for systematic diversified. So really relative performance is good, benchmark is modest and I think when you factor all that together and you think about where we are in the year, we’re now tracking closer to about $1.30 for the whole year in performance fees of course is a range around that, we’ve already booked $0.50 in the first half I mentioned one or two pennies in the third quarter, so at least about $0.80 in the fourth quarter, this is a conservative estimate and we're just in July. So we’ve had obviously many environments where the third and fourth quarter bring about lots of performance fees. So I just wanted to point that out still feeling pretty good about the prospects of performance fees beyond 2018 just given the relative long-term performance of our alternative products. And then, finally on capital deployment and maybe I will even touch a little bit on 2019 here. As you think about what have you said, we continue to repurchase shares at a reasonably high level 200 to 300 in the second half of the year. We have already done 300 in the first half that's brought our average share count down quite a bit, we expect the weighted average share count for the year to breakthrough $54 million and when we look at the year-end share count we’re seeing it below $53 million, just a touch below $53 million. So that is a pretty good set-up going into next year as we started this year $57 million and we’re ending it $53 million. So looking forward to 2019 together with sort of improving organic growth profile, lower share count, and some good things going on our business we're looking forward to that.

Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.

Good morning, thank you. Last couple of quarters you talked about some big wins in the pipeline getting delayed, did that help 2Q or you still waiting for some of those to come through and Jay your comments about July commitments and all being more than all of 2Q, is that actual inflow or is that just adding to the pipeline? Thanks.

Yes, let me start and then maybe Jay can take up on that last bit. So as I think we’ve talked about we have been both sort of compositioning the product mix as well as kind of the combination of channel geographies and pursuing some more complicated mandates. With some of that absolutely did start to materialize in the second quarter but in terms of the pipeline overall the overall pipeline that’s all been replenished and so it’s not like hey that this was this kind of one-time thing. That is part of -- those kind of mandates I think are part of two overall trends, one is a trend in the marketplace which is the behavior of pools of capital and the large intermediaries and how they're narrowing because lots of folks talk about that and the other is again on our side which is the evolving capabilities that we and our affiliates have to do it increasingly good job, and again to be clear there is lots more you could do increasing good job sort of spacing off against that trend. So we are seeing some of that pull-through but we also -- we’re also just seeing that opportunity as a long and growing opportunity. And then Jay I don’t know if you want to touch on the --

Yes, Patrick just maybe starting with the second quarter, I mentioned in my prepared remarks we saw $2.6 billion in net flows for this second quarter and I also mentioned that we saw net flows in both the liquid and illiquid books. So as you imagine something in the neighborhood of equal weighing we had good flows in both. I would say that going into July, we’re seeing a number of our private equity real assets and illiquids managers starting to close on a number of funds that have been in the market without going into any more detail there because I can’t. Those some of those have made the news, some of them haven’t but we’re seeing that number being quite a bit more than what we saw net in the second quarter.

Thank you. Our next question comes from the line of Michael Carrier with Bank of America/Merrill Lynch. Please proceed with your question.

All right, thanks guys. Kind of two part question. First for Jay, just on the EBITDA, you mentioned down year-over-year, I think you mentioned the other income performance fees and investments, I guess just on the investments like how much is that you may be weighing on it and then like in terms of the maybe the investment time horizon or where you should think about like the return on those investments and then I guess just bigger picture like if I look at how you guys are positioned on the -- you mentioned the structural allocation that makes sense, investments you’re making they make sense. On the other side it seems like performance as a whole maybe for the industry has been more muted and then you had the impairment with Ivory, so I just wanted to understand when you look across all the affiliates do you have any stats on like how many are outperforming the benchmarks even if it’s a longer-term like three, five year or out of all the affiliates how many are having inflows versus outflows on maybe a trailing 12-months, just something to get a little bit of color because the flows are obviously good for the quarter but just to get a little bit more color on the sustainability there? Thanks.

I will start with the back half and then turn it to Jay. So I appreciate the comment and there is a couple of different themes that we have and as you are there are a couple of different themes we have to work together here. So one is kind of short term performance themes and this sounds down on a lot of levels on the short-term kind of performance themes, I think we have to look through those and so you heard of talk about some specific areas where they have been good and now we've to sort of look through those, I think there are questions, so I would start with where do we see and we will think about the ways that we can get better kind of meaningful data out. But where are the ways in which we can -- where are the place where we can see and again we're much better at this as we go here, where are the ways we can see, where are the places we can see significant opportunities in part for specific products but really for capabilities, right. And so I think that and I don’t think just specifically in us but you can use alternatives as an example and a place to start that. And so we think there is a long-term opportunity for the capabilities that our Affiliates have. Some products absolutely underperforming, some products absolutely outperforming in the main the alternative products you just start think about it across the whole, in the main alternative projects are performing better than peers. And that's probably the right way to think about it once you've gone from category to because there is demand check versus all the categories and then which are the better performing products and capabilities within that. So in the main, our Affiliates are performing better than peers and we will figure out ways to get that. So then -- so demand characteristics, its capabilities and then within all specifically there’s -- we’ve talked about it on two dimensions which is liquid and illiquid, we sort of put them somewhat artificial stakes around those two definitions but within stakes around definition. If we do it that way the illiquid book and the illiquid opportunity set is behaving as good as the liquid is, the illiquid opportunity set is even better and there is just an incredible amount of demands for both the existing capabilities and also reasonably easy to see extensions of what our affiliates are doing and to the extent that these business are ultimately and you've heard us talk about this little in our prepared remarks, these businesses are behaving more like platforms as we look at the way they can expand their products consistently under their brand. I don’t know Jay if you want to add to that or also take the second part?

Yes, yes. So let me take the second part, there is a lot, there is a lot I could say here. So I will try to just be brief. Just on the earnings, the EBITDA and kind of where we are, if you look at our business is seasonal, so I want to make sure that we note that, we have higher level performance fees in the first and the fourth quarters seasonally low in the second and the third and to some extent that's affecting our EBITDA in the second to third. So if you kind of look at it the first half, second half kind of business I think you will see numbers will be more I guess at least you'll take into account sort of the spreading of those performance fees. The other point that I made in the prepared remarks is other income clearly was down you could see it was down $4.5 million on the line item the financial statement line item but actually we had last year a bit more realized gains than we do this year. So it’s really more down like $6 million not $4.5 million. So that obviously impacted and those are gains from investments that we’ve made typically SE or GP investments and that's part of our business. So we see that in our earnings and we expect them to go up over time. So that is something that we usually have a contribution from almost every quarter but just down this quarter. There is a little bit of Ivory in there as I mentioned, there is a non-cash element to Ivory and then there is about a $1 million which we would take out if you reconcile that's about $10 million spread that we did not see recurring in this quarter year-over-year. And then as I mentioned in my remarks the investments that we have and we will make in the business that’s included in the guidance will be 11.3 basis points. I would say you know and just to dimensionalize it a little bit, I think if you think about our history of expanding geographies in front of both the significant demand and participation by all of our affiliates you think about Japan as an example and then I’ll make the comment that just like Australia, Middle-East et cetera before that we do have a bit of a start-up expense initially and in Japan it's contextualized, it is even a more robust statement because not only have we moved to open up the Japanese office and work in Japan. We helped some of our affiliates do the same. So if you think about the Pantheon we work side-by-side with Pantheon in a way to get that start-up cost through and so when you see that come through our numbers, sure we’ve had a little bit of that it’s in the forward projections and we do expect that return coming through as AUM as accumulated in those regions and that’s been our history.

Let me maybe just add a text to our last point which is as Jay said, we -- we’ve been looking at Japan for a while and we’re now in a place where we have enough, we see enough demand that we and our Affiliates are going to -- are going after on the ground kind of way, there is a little bit of start-up costs as we said and that’s to everywhere as we invest and then start to experience the growth curve. I'll say to be clear most of the time as we’re entering the market we have much less traction than we already have in Japan and we really had quite a good sort of experience and some of which has already come through but not much obviously hasn’t but we’re really seeing good traction there. And then the other just small point I'd add is obviously we have had to start the process to open a Dublin office and we had contingency in place but we're having to execute on them. So not a lot of money but obviously and the ultimate shape of it will depend on Brexit and obviously our conversation with regulators but we’re having to stand that out.

Thank you. Our next question comes from the line of Robert Lee with KBW. Please proceed with your question.

Good morning, maybe I guess my first question well I will ask two parts, first one is just on M&A, I know you guys obviously anticipate discipline but you haven’t seen the fair amount of activity in the market, some competitors acquiring stakes and some of these kind of called permitting capital vehicles whether it’s Dell or Blackstone’s platform, can you maybe talk a little bit about beyond the looking for a permanent partner but kind of perceive maybe your strategy or what you’re looking to invest and compare to what you are kind of seeing happening in the marketplace as it relates to each minority stakes and all managers? And then I guess maybe this is a second part, in New York’s business you talked about lot of commitments coming on board in July, I guess a lot of fund closing. I’m assuming that when that's going to flow into AUM all of that if they haven’t turned on fees. So is there any sense of getting a -- anyway getting a sense of what your kind of dry powder pipeline maybe like if commitments that your affiliates have received but we’re not seeing yet in AUM or they haven’t been turned on?

Great, so let me start on the first part and then I'll have Jay to do the second. So and I think you framed it you understand it exactly really well and framed it well. So just a sort of a level stepping back, we do have a differentiated model and approach and we've been kind of running and evolving this model for now nearly 25 years. Our approach is very attractive to our target universe which is perspective Affiliates that are looking for permanent institutional partner and I would underline the word permanent there and look at the highest level we’re helping solve it demographically driven kind of management ownership and succession problem for these firms and we have a solution that preserves and protects their unique entrepreneurial cultures across successive generations of management and that's why that kind of permanent underline is important. And then in terms of how we pursue it right we have this project calling for, we’ve been out building relationships with that firm for many years and that activity continues okay and you heard us say those kind of firms that we’re pursuing generally don’t have to do anything and at least to the point of time, so what’s driving the transaction of those firms is generally us building the relationships and the firms deciding that now, now is the right time to address that long-term demographic issue. So that's a universal firms where we have a unique solution I think we're uniquely attractive. Now in terms of your comments about the current environment absolutely this has been an elevated period of M&A activity in the industry and you should assume alongside of our project calling effort we’re looking at all the opportunities in the market. And then you should also assume and expect as you sort of ledger your question that when we're looking at investment we're very disciplined and that’s across multiple dimensions that discipline around business quality, that discipline around long-term alignment structures that we talked about and of course that discipline around pricing. And then I guess the last point I make is that when we talk about this discipline, we also always measuring the opportunities we have against reinvesting in our business through share repurchases and we have a very high quality towards business in place, so we're always looking at it against that backdrop as well. Put that altogether we have this outstanding secular opportunity to partner with the best boutique firm and while the timing of anyone has been driven by those dynamics I described, yes we continue to be really busy and make good progress across the range of new investment.

Yes and I was just going to add one thing and I’ll talk about the liquid AUM in a moment but just the thing I would add is one of the major advantages that we have in the market is our reputation for being a supportive partner over 25 years and our permanence and the model AMG model that is what people know to be the succession planning model to ensure that permanence for both us and the Affiliate and really alignment is close in that, that is still highly valued in the market, it's not for everyone and when you look at some of these stake buyers whether it's pricing or other elements in some cases we have just decided that it's not a situation, we want to chase because pricing can be too high in those environment. So we have stressed it at eight to 10 times EBITDA discipline but where we really are attractive to partners is where they value the permit, they value their reputation in the model. And then as it relates to the AUM policy you did say one thing, I wanted to clarify our policy is actually to take asses in under account for them when they come under supervisory really when we start to manage those assets. Generally speaking fees are tied very closely to that timing but I would say and I mentioned in my prepared remarks even this quarter we saw our aggregate fees to AUM tick down a little bit mainly because of this timing issue, we have taken in some AUM before the fees were turned on that's usually days or months or a quarter but it's not usually that long and I think you will see us book again in the third quarter some AUM right at the onset of fees, so we could have a little noise in the third quarter but in general we are taking that AUM as we start to manage it.

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Just sort of come back to the EBITDA and the investments in the business critically obviously lot of good promising organic growth opportunities that we would definitely think you want to invest in but as you talked about the Japan office and that opportunity and then the Dublin office also, should we be thinking of these investments as sort of I know it’s actually one-time but sort of brief and then you guys are coming back to the realization rate closer to that 12 basis points ex-performance fees worth or rather do you see enough organic growth opportunities that you want to really continue that into the future?

Let me start and then hand it to Jay. So the last part of the question sitting here today, we think there are a lot of opportunities for us to improve how we’re bringing distinctive return streams to market. I think our method and approach will be pretty consistent, I think you've seen us be quite disciplined as we built distribution over the last 12 years and so I think you'll see us pursue in a deliberative fashion and I mean part of the question is what the pace and how do we do it in our way which is partnering with Affiliates and pursuing things that we think of the highest return opportunities at any point in time. And so I think you'll see us purse it sort of the same disciplined way we always have. I think there are definitely included things that are short-term in nature right, so the startup costs for a geography with the startup costs for channels and geography, the Dublin office, I think is -- the question is highly dependent on how Brexit unfolds but we very much hope that it is a temporary thing. So I think there's absolutely the category to go that way but the most important part of I think in my mind my most important part of it, the question is sort of where you ended which is sitting here today we do see opportunities each and probably we will continue to pursue them in that disciplined way. And the other thing I'd say is -- it's working we are seeing returns on those investments not coming through in growth on the sales line.

And our sort of AUM realization rates obviously they have a lot to do with the level of performance fees in addition to asset base fees. So when you think about over the course of the year, if I go back to my first half, second half, nomenclature that if you’re averaging the first quarter, the second quarter and the third quarter to the fourth quarter you’ll see the realization being higher just by virtue of that normalizes our performance fee opportunity. So you really have to think about those, I think altogether. The last thing I would say is on that ratio we have continued to see faster growth amongst our equity method Affiliates primarily because those are in the alternative space and that’s where most of liquid managers are Pantheon is a consolidated Affiliate. So we’re seeing more growth there which we obviously own a bit less and that will change that ratio just from a composition perspective over time.

Thank you. Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.

So a couple on the pipeline, I think this first one kind of touching on the points you’re just making Jay but looking at the pipeline and where you’re going over the next couple of years, can you give us a sense of where you think that the revenue yield and the EBITDA yield on the inflows will be compared to the yield on the outflows at least in the near-term there and then on new Affiliate investments, I know you've made you've been talking about focusing more on larger more diverse prospects, you’re still within that context in your conversations with prospects in the near-term part of the pipeline is, is distribution still as much of a selling point of the AMG model?

Okay. Let me start with that last question. So I think the way we talk about it is, we’re looking for the highest quality boutiques right and I do think that the dimensions of highest quality boutiques more require either products that are more leveragable through distribution or otherwise or fair to themselves have investment processes and disciplines and orientation to continue to grow and expand their business. So I think it can be both, the firm doesn’t have to necessarily be larger right away but it has to include those things which are process that can evolve and grow as well that orientation. But absolutely we’re looking at larger firms and more diverse firms as well. In terms of track the relative importance or attractiveness of AMG, physically it is one of the things which is as we are looking at firms that are themselves already complete firms and so therefore have distribution, proven distribution capabilities generally in at least one or two geographies and one or two channels, right. So those are the firms we are attracted to. Our distribution, the distribution we’ve been building over this dozen years that we talk about is designed to nit to the distribution capabilities of our affiliates which include some obviously very large successful diverse firms. So we are very used to working with and continuing and partnering with and enhancing and diversifying the asset bases of very successful large diverse growing firms. So that’s actually and that not so that easy but that is something that we really done, we put a lot of effort behind and are doing an increasingly good job at. So it’s not so much that they specifically needed but I think we have built the unique distribution, flat set of platforms that can sort of nit to the distribution of boutiques and enhance them. And that’s something that we’ve been investing in over the past decade. So I don’t know that it’s I’m not sure necessarily specifically important to each of them but I think as we go through these conversations with them, I think they will get it. I want to pick up on a point that Jay made before which is a huge asset that we have is this track record of partnership with these firms and so all the things we described about the ability of the distribution platform to work with very successful large scale diverse and growing boutiques is highly referencable. So they can just call and speak with any number of our affiliates about how we work with them in ways that are highly customized to those businesses. So we do think that what we’re building is additive and again we’re building it not just any of the virtuous circle we've talked about much of it because it's helpful to these new boutiques and add to new investment process but it’s also absolutely today additive to even largest most of our affiliates and we saw that again this quarter in coming fall.

Chris just on the yield point, so look it’s a fee rate comment, it’s also an ownership comment for us but just at the fee rate level you’ve seen us and you’ve heard us say that our fee rates have been holding relatively stable at the highest level we’re at about 52 basis points with some performance fees, so we’re in that 59, 58 kind of range without performance fees that level and you think about it, we -- you could say it’s been holding relatively stable interesting thing is we probably seen everything underneath that right we have some places where we’re seeing our mix shift to higher fees, we’re seeing places where we see the mix shift to lower fees, we’re seeing differences between Affiliates, we’re seeing it all. I mean because when you have $824 billion in AUM and as many Affiliates we have we’re seeing it all but we’re seeing the composition remain relatively static at the highest level, why is that because we continue to grow an alternative just sort of plain and simple and then within alternative the illiquid tend to have higher fees. So when you think about and frankly longer duration. So I think that’s a good phenomena or structural phenomena that’s actually happening in our business today and that’s keeping our yield on the assets higher and attractive mix shift if I had to say it that way. On the ownership side we do have the comments I made earlier about EBITDA to AUM, we are seeing good growth in those alternative business but we’re also seeing good growth in some of our global equity manager like Harding Loevner and Pantheon these are consolidated affiliates, so we have – we are keeping up if you will on an ownership basis but from quarter-to-quarter over time those changes can be modest but you have to stay focused on the EBITDA line that should be growing over time.

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

I was hoping you guys could give us a couple of specific answers around the systematic performance, I guess one topic but a couple of questions there, I guess A would be helpful to get an update on how different strategies have done year-to-date kind of on an absolute basis, obviously we can all see the public fees, managed features long short et cetera but it would be helpful to get a sense of where the others are and I guess more importantly given sort of year-to-date challenges in that bucket, can you give us a sense of how critical it is going to be for flows over the next six months from an institutional perspective and ultimately kind of what the clients care about, is it absolute or relative performance in that category?

Let me start, there is a bunch of pieces in there. So I think the clients in that category are divided into couple of different groups. I think there is clearly clients who are -- who understand the product and are investing in it because of the characteristics, the diversifying characteristics of it. I'll make an observation here which is the large drawdowns in traditional portfolios tend to be more severe than the drawdowns, trend managers both now in specific environment and historically. So I think there are absolutely I think the core of the investors especially the core of institutional investors understand the reason they’re investing in new strategies and how these strategies should behave as diversifying their overall portfolios. So I think that’s true. And I think that while this is a challenging period for the category it’s not sort of unheard of period. So I think that applies, those comments are really important for a significant portion, I’d say the most significant portion of the asset base for us in the category. Now there is also absolutely people investing in the strategy in the way that was following performance being driven by performance and the performance of the category has not been good and that has been reflected in flows and you’re seeing that in the weak outflows that you mentioned and I think you can look at that asset base as long as performance continues this way some portion of it will behave that way. We at the highest level, we’ve in the category I think we -- as part of our diverse business, I think it’s an important part of the business and I think for us that’s the most important point to make which is we have a large diverse business with significant participation in areas that we think have long-term secular demand trends behind them, any one piece of it will not -- of the product set within those segments will not be performing well at any one given point in time and that’s okay. In fact that actually also provide some opportunity. So I think that’s kind of how I would answer it at the highest level.

Yes and I wanted to pick up on what Nate mentioned in his prepared remarks as well. I mean with systematic diversified being 5% of our business today on an AUM basis, it really speaks to the diversity and sort of the power of the diversity of our business because as you saw in the public data, I’m sure all of you saw in the public data that it look like we’re going to have negative flows and actually had demonstrably positive flows this quarter and it just shows you that that we do have tremendous diversity in this business and even though systematic diversified is challenged at the moment as Nate said it’s an opportunity for the future and again within a context of diversified business it’s -- you’re always going to have those pockets and we’re completely confident that over time that segment will provide us some growth in the future period.

Thank you. At this time, it concludes our time for questions. I will turn the floor back to Mr. Dalton for any final comments.

Thank you. Thank you again for joining us this morning. We’re pleased with our results for the quarter and we’re confident in our ability to continue to create long-term shareholder value. We look forward to speaking with you again in October. Thank you very much.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for participation.