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Morningstar | AMG Is Recovering More Slowly From the Late 2018 Market Sell-Off Than We Had Envisioned

A confluence of several different issues--poor relative active investment performance, the growth and acceptance 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 $774 billion in managed assets at the end of March 2019, Affiliated Managers Group has the size and scale to be competitive. With 38% of its AUM dedicated to alternative strategies, and 13% in multi-asset products, AMG is not as heavily exposed to the impact passive investing has had on active equities. Additionally, its equity lineup is fairly diverse, composed of U.S. equities (14% of AUM), global/international equities (27%), and emerging-market equities (8%). Limited exposure to the retail market (27% of total AUM) and broader geographic exposure also leave the firm better positioned than some of its peers.During 2014-18 (2009-18), AMG's annual organic growth rate averaged 0.8% (2.9%) with a standard deviation of 2.1% (4.7%), stronger than other active managers, which generated negative 1.7% (negative 0.6%) average annual organic growth with a standard deviation of 0.4% (1.2%). While we expect the headwinds to be stiff as we move forward, we believe AMG can generate negative 1% to positive 1% average annual organic growth during 2019-23 as investors continue to gravitate toward products with more lucrative return profiles (along with low-cost passively managed products), with the result being slightly negative top-line growth on average, with profitability hovering around 32% of revenue on average, over the course of our five-year forecast.