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Morningstar | Outflows and a Divestiture Mar AMG's 1Q Recovery; Lowered FVE to $129 per Share

We've lowered our fair value estimate for Affiliated Managers Group to $129 per share from $135 after a weaker recovery in the company's assets under management than we were expecting in the first quarter. AMG closed out the March quarter with $774.2 billion in managed assets, up 5.2% sequentially and down 6.8% year over year. Net outflows of $7.4 billion during the period were a letdown, given the recovery in the global equity markets, but still an improvement compared with the $15.4 billion that flowed out during the fourth quarter.

Institutional and retail outflows of $4.9 billion and $3.6 billion, respectively, during the March quarter overshadowed the positive $1.1 billion of flows for AMG's high-net-worth segment. From an asset class perspective, alternatives ($2.9 billion of outflows), global equities ($3.4 billion) and U.S. equities ($1.4 billion) remained in net redemption mode, with only multi-asset/fixed-income generating positive flows. AMG's net flows did, however, exclude $2.1 billion of realizations/distributions, as well as the divestiture of a U.S.-based wealth manager (with around $6.4 billion in AUM).

While average AUM was down 10.1% year over year, AMG reported an 11.3% decrease in first-quarter revenue due to mix shift and lower performance fees. This was worse than our forecast for a mid- to high-single-digit decline in 2019 revenue, which we have revised downward. As for profitability, the company's first-quarter operating margins of 31.9% were 50 basis points lower year over year, but outside of our full-year target of 32%-34%, which we have revised downward as well.

AMG increased its quarterly dividend 7% to $0.32 per share in the first quarter and repurchased an estimated 0.8 million shares for $91 million. With the company dedicating capital during the second quarter to a minority interest investment in Garda Capital, a manager of fixed-income relative value strategies with $4 billion in AUM, share repurchases are likely to be limited.

AMG also announced some additional manager changes with its first-quarter results. Nathaniel Dalton has been CEO of AMG since May 2018, having succeeded Sean Healey, who stepped down from running day-to-day operations to pursue treatment for ALS. Healey, who had served as CEO since January 2005 (and chairman of the board of directors since January 2011), continues to serve as executive chairman. With the board deciding to move Jay Horgen, who has served as CFO since February 2011 (and was named president in February 2019) into the role of chief executive, Dalton will become a senior advisor to the company and remain on AMG's board of directors. Horgen's vacated CFO role was filled in February 2019 by Tom Wojcik, formerly of BlackRock (where he served as managing CFO for Europe, Middle East, and Africa, the head of EMEA strategy and global head of investor relations).

As for the Garda deal, it represents AMG's first major boutique asset manager investment since the company agreed to buy stakes in five money managers--Winton Capital Group (a global quantitative manager), Capula Investment Management (a global fixed-income specialist), Partner Fund Management (a global equity manager), Mount Lucas Management (a global macro manager) and CapeView Capital (an alternative credit manager)--with around $55 billion in AUM and $80 million in run-rate EBITDA. While Garda, with just $4 billion in managed assets, is relatively small, the firm is well known for its differentiated strategy with a more attractive asset class product with institutional and high-net-worth clients, which should benefit from being plugged into AMG's global distribution network.