Affiliated Manager's Group Continues to Weather Uncertainty

By Markets Fool.com

Image source: Getty Images

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In the wake of the recent worrisome Brexit vote, Affiliated Manager's Group, Inc.(NYSE: AMG) announced reasonably solid second-quarter 2016 results earlier this week. But shares are down a modest 4% since then, as the asset management company endures the uncertainty brought by volatile markets and macroeconomic turmoil. Now that the dust has settled, let's take a closer look at how Affiliated Manager's Group closed the first half of the year.

Affiliated Manager's Group: the raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Year-Over-Year Growth

Revenue

$554.1 million

$646.6 million

(14.3%)

GAAP net income

$107.4 million

$128.7 million

(16.6%)

GAAP earnings per share (diluted)

$1.97

$2.31

(14.7%)

Data source: Affiliated Manager's Group, Inc.

What happened with Affiliated Manager's Group this quarter?

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  • Affiliated Manager's Group's preferred bottom-line measure, economic net income, declined a more modest 2.9% year over year to $166.5 million. Economic earnings per share fell 0.6% to $3.06, exceeding analysts' consensus estimates for economic EPS of $3.01 per share.
  • Earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 7.9% to $220.3 million.
  • Net client cash flows were $0.6 billion, including the following:
    • a $1.8 billion increase in cash flows from mutual funds,
    • a $1.7 billion increase from high net worth channels, and
    • a $2.9 billion net reduction from institutional channels.
  • Pro forma aggregate assets under management (AUM) grew 8% year over year to $700 million at the end of the quarter.
  • AMG announced an agreement to acquire 100% of Petershill Fund I's minority equity interests in five leading alternative investment firms for a total consideration of $800 million, including the following:
    • Winton Capital Group Ltd.,
    • Capula Investment Management LLP,
    • Partner Fund Management, L.P.,
    • Mount Lucas Management LP, and
    • CapeView Capital LLP.
  • Subsequent to the end of the quarter, AMG completed the investments in Capula, Mount Lucas, and CapeView.
  • AMG's investments in Winton and Partner Fund are expected to close by the end of this year.
  • AMG priced an underwritten public offering of 2.5 million shares of common stock, with expected proceeds of roughly $425 million before discounts, commissions, and offering expenses, as well as a 30-day option for the underwriters to purchase up to an additional 375,000 shares (which would bring proceeds to $489 million). Any proceeds received will be used for "general corporate purposes," including funding investments in new and existing affiliates.

What management had to say

Affiliated Manager's Group CEO Sean Healy lauded the results as "solid" in the face of elevated market volatility, particularly as demonstrated with its positive net client cash flows in the wake of "industrywide risk aversion" following the Brexit referendum.

Healy elaborated:

Inflows through our retail and high net worth channels were offset by lower institutional sales, including several delayed fundings from institutional clients. In an environment of rising dispersion and market dislocation, we believe that our Affiliates have substantial opportunities to generate alpha across the broad array of their differentiated active equity and alternative strategies, and to build further on their long-term track records of investment outperformance. Looking ahead, as market conditions improve, we see meaningfully enhanced prospects for organic growth in the second half of 2016 and beyond.

Looking forward

Nonetheless, Affiliated Manager's Group now anticipates economic earnings per share for the full year to be in the range of $12.30 to $13.30, marking a reduction from its previous guidance for 2016 economic earnings of $12.70 to $14.20.

This assumes AMG's normal model convention of actual market performance through the day prior to its earnings report and 2% quarterly market growth in the fourth quarter. But unlike last quarter, when AMG also assumed share repurchases in the amount of 50% of expected economic net income, given the pacing of its 2016 new investments, this guidance does not assume incremental share repurchases for the remainder of 2016. To a lesser extent, according to Healy during the subsequent conference call, AMG has modestly reduced its expectation for performance fees for the year.

Finally, AMG offered an early look at next year, with preliminary 2017 guidance for economic earnings per share in the range of $14 to $16, assuming the full-year impact of its 2016 new investments, its impending share issuance, and resumed share repurchases of 50% of annual economic net income.

With the 2016 reduction in mind, it's no surprise to see shares of AMG also trading modestly lower following the report. But in the end, with all things considered -- and given the environment in which AMG finds itself operating right now -- I tend to agree this was indeed a "solid" performance as AMG positions itself to generate more meaningful earnings growth down the road.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Affiliated Managers Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.