Affiliated Managers Group (AMG) is a niche financial firm in the asset management business. From their website: Affiliated Managers Group, Inc. is a global asset management company, which operates through a diverse group of outstanding boutique investment firms. AMG’s unique partnership approach aligns incentives through equity ownership and preserves the entrepreneurial orientation that distinguishes the most successful investment management firms.
As the name suggests, this company takes a majority interest in investment shops called “affiliates.” Those boutique asset managers continue operating independently with AMG assisting with marketing through its vast global distribution network and with back-office chores. It also shares in the affiliate’s profits.
Affiliated has shopped wisely. It boasts an array of prestigious investment brands, including Tweedy Browne, Third Avenue Management, Genesis Asset Managers, AQR Capital Management Foyston, Gordon & Payne, and Yacktman Asset Management.
These are the kinds of names that will attract money as investors continue to warm up to the markets but realize that the days of buying anything and watching it go up are over. A sideways market calls for smart asset managers, and AMG has delivered.
The firm typically buys a majority interest in small to midsize boutique asset managers, receiving a fixed percentage of revenue from these firms in return. Given the revenue-share model, AMG has rich margins and cash flow that will continue to fund acquisitions. It is estimated AMG will generate over $1 billion in free cash flow this year and is one reason reason Goldman Sachs on March 21 added AMG to its “Conviction List.” While the stock has risen since, it still looks cheap given the potential, with a price-to-earnings ratio of 11.4.
AMG's affiliate model provides it with a diverse mix of assets under management AUM, investment styles and earnings, with exposure to value and growth equity strategies, fixed-income products, and alternative investments.
At the end of 2015, AMG's affiliate network had $611.3 billion in managed assets, which is a sizeable share of the $2.9 trillion in alternative asset held by hedge funds.
AMG is rolling up small boutique asset managers at a time when the entire field seems to be consolidating because of structural changes that have come about in asset management. Concerns over higher tax rates and ongoing succession planning at boutique asset managers are expected to spark the sale of equity stakes in many of these types of firms to larger financial institutions in the future.Moreover, the firm’s exposure to institutional money, making up 62% of revenue, should give it an edge in fund flows in coming quarters. Keep in mind less “sticky” sovereign wealth fund assets comprise only 2% of AUM.
Goldman’s analyst reports, "Following a tough 2H15, we expect AMG's flows to see a sharp turnaround in 1Q (GSe +2% organic growth vs -4% in 2H15) which should drive the stock's deeply discounted valuation (12x P/E and 10x EV/EBITDA are 26% and 17%, respectively, below 5-year avg.) higher. Moreover, AMG's secularly relevant product set (Global Equities, Alts and Quant), defensive margins and M&A opportunities should drive stronger long-term growth, setting AMG apart from peers. Retail flows (source of weakness in 2H15) are inflecting, tracking at +$4 billion 1QTD, driven by robust demand for AQR’s mutual funds (+$5bn) and less outflows from Yacktman (-$0.7bn QTD vs. -$2.4 bn 4Q15).”
AMG offers investors almost a mutual fund/ETF approach to alternative asset management. By holding pieces of multiple well-known and successful managers, AMG offers better diversification than many singular firms.
From their website is an explanation of the benefits of their unique corporate structure and wealth management approach: In contrast to other entities which attempt outright acquisitions of investment firms, AMG's investment structure aligns the interests of the Affiliate, its clients, and AMG. Affiliate managers typically retain control of the operational management and distinct culture that shaped their success through a customized revenue sharing agreement that leaves day-to-day operations (including compensation and budgeting decisions) to the management of the Affiliate. In addition, AMG's approach provides a mechanism whereby Affiliate managers can individually realize the value of their retained equity and transfer their interests to the next generation within the firm. Clients of AMG's Affiliates benefit from seamless management and ownership transition as well as an uninterrupted focus on service, performance and growth. AMG also benefits from the continued success of its Affiliates. We believe our structure not only incents the growth of our Affiliates, but is also more attractive to boutique firms that anticipate future growth and want to retain equity upside and independence while implementing a succession plan.
However, AMG is not immune to the recent weakness in the money manager business. While Affiliated Managers shares have increased nearly 8% since the beginning of the year, the stock has fallen 24% in the last 12 months.
Investors seeking increased exposure to wealth management firms and are a bit skittish about taking a position in just one firm may want to review AMG. Its divergence of clients, managers and asset strategies positions the firm as one of the most diversified firms in their industry.
This article first appeared in the May 2016 issue of Guiding Mast Investments. Thanks for reading, George Fisher