AMG Continues to Recover From the Dislocation in the Equity and Credit Markets

Sector Strategist

Greggory Warren

A confluence of several issues—poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel—has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive managed asset levels higher. While we continue to believe there will be room for active management, which is hard to do in an environment where an overwhelming majority of the flows are going into index funds and exchange-traded funds, we believe the advantage (when it comes to getting placement on platforms) will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

With $668.0 billion in managed assets at the end of March 2023, AMG has the size and scale to be competitive. Having 33% of its assets under management dedicated to alternative strategies and 17% committed to multi-asset strategies and other products, the firm is not as heavily exposed to the impact passive investing has had on active equities. Additionally, its equity lineup (50% of AUM) is fairly diverse, composed of U.S. equities (21%), global/international equities (25%), and emerging-market equities (4%). Limited exposure to the retail market (29% of AUM) and broader geographic exposure also leaves the firm better positioned than some of its peers.

During 2018-22 (2013-22), AMG's annual organic growth rate averaged negative 4.8% (negative 1.0%) with a standard deviation of 3.0% (5.3%), slightly better than most of the other active managers we cover. That said, we expect the firm to face stiff headwinds in the near to medium term, with AMG generating annual organic AUM growth in a range of negative 6% to negative 2% (negative 6% to 0%) during 2023-27 (2023-32), leading to negative mid-single-digit top-line growth on average the next five years, with adjusted operating profitability hovering between 32% and 35% of revenue on average.

Business Strategy & Outlook

We believe that the asset-management business is conducive to the creation of economic moats, with switching costs and intangible assets being the most durable sources of competitive advantage for firms operating in the industry. Although the switching costs might not be explicitly large, inertia and the uncertainty of achieving better results by moving from one asset manager to another tend to keep many investors invested with the same funds for extended periods. As a result, money that flows into asset-management firms tends to stay there. For the industry as a whole, the average narrow redemption (retention) rate, which does not include exchange redemptions, has been 25% or less (75% or greater) annually during the past 5-, 10-, 15-, 20-, 25-, and 30-year time frames. Including exchange redemptions, the rate has been less than 30% (greater than 70%). 

In AMG's case, the firm's average annual redemption (retention) rate was 21% (79%) during 2018-22, and 19% (81%) during 2013-22, well below (above) the industry average. That said, during the same time frame(s), the company's organic growth rate averaged negative 4.8% (negative 1.0%) with a standard deviation of 3.0% (5.3%), which meant that the firm was struggling to consistently compensate for investor redemptions with new flows into its products. With it is likely that the company will do a slightly better job over the next five years (given more recent improvements in some of its investment performance), we believe AMG has (at best) an average switching cost profile when compared with the industry and our peer coverage group, mainly because it has not taken full advantage of its below (above) average redemption (retention) rate for its long-term funds.

We believe that the more traditional asset managers can improve on the switching cost advantage that is inherent in their business models with organizational attributes (such as product mix, distribution channel concentration, and geographic reach) and intangible assets (such as strong and respected brands and manager reputations that are derived from successful and maintainable records of investment performance), which can provide them with a degree of differentiation from their peers. While the barriers to entry are not significant for the industry, the barriers to success are extremely high—as it takes time and skill to not only put together a long enough record of investment performance to start gathering assets but to build the scale necessary to be competitive. This has meant that the larger, more established asset managers in the industry have tended to have an advantage over smaller players, especially when it comes to gaining cost-effective access to distribution platforms. Competition for investor inflows can be stiff and has traditionally centered on investment performance, especially in the retail channel. Although institutional investors and retail gatekeepers are exerting pressure on pricing, competition based on price has been rare, aside from what we've seen in the U.S. market for exchange-traded funds. 

While compensation remains the single-largest expense for most asset managers, supplier power has been manageable as many firms have reduced their reliance on star managers and have tied manager and analyst pay to both portfolio and overall firm performance. Asset stickiness (the degree to which assets remain with a manager over time) tends to be a differentiator between wide- and narrow-moat firms, as those asset managers that have demonstrated an ability to gather and retain investor assets during different market cycles have tended to produce more stable levels of profitability, with returns exceeding their cost of capital for longer periods of time. While the more broadly diversified asset managers are structurally set up to hold on to assets regardless of market conditions, it has been firms with solid product sets across asset classes (built on repeatable investment processes), charging reasonable fees, and with singular corporate cultures dedicated to a common purpose that have done a better job of gathering and retaining assets. Firms offering niche products with significantly higher switching costs—such as retirement accounts, funds with lockup periods, and tax-managed strategies—have tended to hold on to assets longer.

Affiliated Managers Group, in our view, has a narrow economic moat. With $668.0 billion in managed assets at the end of March 2023, the company has the size and scale necessary to be competitive. Having 33% of its AUM and 50% of firmwide EBITDA coming from alternative strategies (which includes multi-strategy, market-neutral, and hedge products) and 17% and 7%, respectively, derived from multi-asset strategies and other products, AMG is not as heavily exposed as some of its peers to the impact that passive investing has had on active equities. Additionally, its equity lineup (50% of AUM) is fairly diverse, composed of U.S. equities (21%), global/international equities (25%), and emerging-market equities (4%), and generates 43% of EBITDA. AMG's product distribution is also more heavily weighted toward institutional (51% of AUM) and high-net-worth (20%) clients, who tend to be stickier than retail fund investors (and generate 50% and 15% of EBITDA, respectively). On top of that, the company is slightly more global than its peers, with more than a third of its AUM sourced from clients residing outside of the U.S.

Unlike most traditional asset managers, AMG does not involve itself directly in the management of investments. Instead, it acquires equity stakes in successful boutique asset managers, receiving a fixed percentage of revenue in return. These affiliates continue to operate independently, with AMG providing strategic, operational, marketing, and distribution support. This arrangement leaves most of the benefits that typically come with running an asset-management business to accrue to the managers that AMG buys, with the company not even generating the typical cost synergies created by most mergers and acquisitions (since it purchases equity stakes as opposed to entire operations). That said, we think the firm's proficiency at investing in and maintaining relationships with well-respected boutique asset managers has provided AMG with at least one unique competitive advantage. Having initiated its strategy of buying equity stakes in boutique asset managers in the early 1990s, AMG has been working with and adjusting its business model for more than 20 years. In that time, the firm has built out a target investment universe that includes around 2,000 investment management firms (each with more than $5 billion in AUM), including a select grouping of 100 core prospects, creating a pipeline of potential investments where AMG is generally viewed as the "buyer of choice" by the owners of these boutique asset managers. 

At this point, we believe it would be difficult for another firm to replicate much of what AMG has created with its business model; those that have tried over the years have struggled to generate the level of success that AMG has had with its strategy. We think this cements the firm's position as the buyer of choice for many boutique asset managers. In addition, we remain impressed by AMG's build-out of its global distribution network, which we think has gone a long way toward improving the sales growth of its affiliates and enhancing the impact that the firm can have on asset stickiness. We think the global distribution network can also make AMG a more appealing partner for future affiliates, setting up a virtuous circle that the company can exploit to its advantage in the long run. Looking at its competitive positioning overall, we think AMG is facing a somewhat more competitive environment for investment stakes in boutique asset managers, which puts more weight on its ability to gather and retain assets within its existing operations but would note that one of AMG's greatest strengths over the years has been its discipline when it comes to doing deals.

Narrow

Economic Moat

Affiliated Managers

Affiliated Managers Group, Inc. is an asset management company with equity investments in boutique investment management firms. It provides assistance on strategic matters, marketing, distribution, product development, and operations. The company was founded by William J. Nutt in December 1993 and is headquartered in West Palm Beach, FL.

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Affiliated Managers Group, Inc. engages in the provision of asset management with equity investment. The company was founded by in December 1993 and is headquartered in West Palm Beach, FL.

WEST PALM BEACH, Fla., Sept. 25, 2023 (GLOBE NEWSWIRE) -- AMG, a leading partner to independent investment management firms globally, today announced the appointment of Loren M. Starr to its Board of Directors, effective immediately.

AMG Appoints Loren M. Starr to its Board of Directors

Affiliated Managers (AMG) closes deal to acquire a minority interest in Forbion. The acquisition will broaden AMG's participation in private markets and the life sciences sector.

Affiliated Managers (AMG) Closes Acquisition Deal With Forbion

WEST PALM BEACH, Fla., Aug. 17, 2023 (GLOBE NEWSWIRE) -- Affiliated Managers Group, Inc. (NYSE: AMG), a leading partner to independent investment management firms globally, today announced the completion of its investment in Forbion Group Holding B.V. (“Forbion”).

AMG Completes Investment in Forbion

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Affiliated Managers Group Inc. (NYSE:AMG ) Q2 2023 Earnings Conference Call July 26, 2023 8:30 AM ET Company Participants Patricia Figueroa - IR Jay Horgen - CEO Thomas Wojcik - CFO Conference Call Participants Alexander Blostein - Goldman Sachs Patrick Davitt - Autonomous Research Michael Brown - KBW Operator Greetings, and welcome to the AMG Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode.

Affiliated Managers Group Inc. (AMG) Q2 2023 Earnings Call Transcript

Affiliated Managers Group (AMG) came out with quarterly earnings of $4.45 per share, beating the Zacks Consensus Estimate of $4.23 per share. This compares to earnings of $4.03 per share a year ago.

Affiliated Managers Group (AMG) Surpasses Q2 Earnings Estimates

A decrease in total expenses supports Affiliated Managers' (AMG) Q2 earnings amid lower revenues and AUM balance.

Affiliated Managers (AMG) Q2 Earnings Top, Revenues & AUM Down

Company reports EPS of $3.25 , Economic EPS of $4.45 in the second quarter of 2023

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Affiliated Managers' (AMG) global distribution capability and a robust balance sheet poise it for growth in the second quarter of 2023.

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WEST PALM BEACH, Fla., July 19, 2023 (GLOBE NEWSWIRE) -- Affiliated Managers Group, Inc. (NYSE: AMG) will report financial and operating results for the second quarter ended June 30, 2023 on Wednesday, July 26, 2023.

AMG to Announce Second Quarter Results on July 26, 2023

WEST PALM BEACH, Fla., July 17, 2023 (GLOBE NEWSWIRE) -- Affiliated Managers Group, Inc. (NYSE: AMG), a leading partner to independent investment management firms globally, today announced that it has entered into an agreement with Pathstone Family Office, LLC (“Pathstone”) and Veritable, LP (”Veritable”), under which Pathstone will acquire 100% of the outstanding equity interests in Veritable. AMG will receive all of its transaction proceeds in cash at closing.

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Pathstone welcomes Veritable, one of the first and largest multi-family offices in the U.S. Acquisition adds over $17 billion in assets across 200 clients (averaging $75 million in assets each) and brings Pathstone's Assets under Advisement & Administration to over $100B. The acquisition strengthens Pathstone's position as the largest independent Registered Investment Advisor ("RIA") focused on the ultra-high net worth ("UNHW"), cementing Pathstone's status as THE Family Office.

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Affiliated Managers (AMG) signs a deal to acquire a minority interest in Forbion. The agreement will broaden AMG's participation in private markets and the life sciences sector, further diversifying its business.

Affiliated Managers (AMG) to Acquire Minority Stake in Forbion

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WEST PALM BEACH, Fla., June 27, 2023 (GLOBE NEWSWIRE) -- Affiliated Managers Group, Inc. (NYSE: AMG), a leading partner to independent investment management firms globally, has entered into a definitive agreement to acquire a minority equity interest in Forbion Group Holding B.V. (“Forbion”). After the closing of the transaction, Forbion partners will continue to hold a significant majority of the equity of the firm and direct its day-to-day operations.

AMG Announces Partnership with Forbion

Affiliated Managers Group Inc. (NYSE:AMG ) Q1 2023 Results Conference Call May 1, 2023 8:30 AM ET Company Participants Patricia Figueroa - IR Jay Horgen - CEO Tom Wojcik - CFO Conference Call Participants Bill Katz - Credit Suisse Daniel Fannon - Jefferies Craig Siegenthaler - Bank of America Alex Blostein - Goldman Sachs Brian Bedell - Deutsche Bank Patrick Davitt - Autonomous Research Operator Greetings, and welcome to the AMG First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode.

Affiliated Managers Group Inc. (AMG) Q1 2023 Earnings Call Transcript

Affiliated Managers Group (AMG) came out with quarterly earnings of $4.18 per share, beating the Zacks Consensus Estimate of $4.15 per share. This compares to earnings of $4.65 per share a year ago.

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A decline in expenses supports Affiliated Managers' (AMG) Q1 earnings, while lower revenues and a fall in AUM balance act as headwinds.

Affiliated Managers (AMG) Q1 Earnings Top, Revenues & AUM Down

Company reports EPS of $3.47 , Economic EPS of $4.18 in first quarter

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