EUR 850.00 For Business Accounts Only

Morningstar | Positive Flows from Alternatives Don't Offset AMG's Equity Platform Weakness; Lowered FVE to $175. See Updated Analyst Note from 30 Oct 2018

We've lowered our fair value estimate for narrow-moat-rated Affiliated Managers Group to $175 per share from $200 after updating our assessments for assets under management, or AUM, flows, revenue, and profitability following the release of third-quarter results, which included an onerous forecast for performance fees and flows in the near term.

AMG closed out the September quarter with $829.6 billion in managed assets, up 0.7% sequentially and 3.2% on a year-over-year basis. Net inflows of $900 million during the period were a setback from the $4.3 billion in inflows the firm saw during the second quarter, with most of the outflows coming during the final month of the quarter. Given the weakness in the equity markets since the start of the fourth quarter, we think it will be difficult for AMG to generate positive organic AUM growth his year, with 2019 also likely to be a difficult year as investors look to derisk portfolios (impacting both equity and alternative asset flows).

Although average AUM was up 5.5% year over year, AMG reported a 7.5% increase in third-quarter revenue due primarily to mix shift. Year-to-date top-line growth of 6.6% was in line with our previous forecast for mid- to high-single-digit annual revenue growth this year. That said, with performance fee income likely to be stunted in the fourth quarter, we now envision full-year revenue to grow at a low- to mid-single-digit rate. Between the derisking this year and next, as well as the prospect of a bear market in equities midway through our five-year forecast, revenue growth will be difficult to come by during 2018-22.

As for profitability, the company's year-to-date operating margins of 33.7% were 110 basis points lower year over year but were still close to the midrange of our full-year target of 33%-35%. We expect future expansion of the firm's operating margins to be somewhat muted, with profitability hovering around 34% of revenue on average during our five-year forecast period.