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Morningstar | Solid Inflows Offset Weak Markets and Adverse Currency in AMG's 2Q; No Change to FVE

There was little in Affiliated Managers Group's second-quarter results that would alter our long-term view of the firm. We are leaving our $215 per share fair value estimate in place. AMG closed out the June quarter with $824.2 billion in managed assets, down 0.8% sequentially but up 6.7% on a year-over-year basis. Net inflows of $4.3 billion during the period were an improvement on the $1.9 billion in outflows we saw during the first quarter, and more reminiscent of the positive flows AMG generated during the final three quarters of 2017. Institutional inflows (of $5.3 billion) were offset somewhat by outflows from the firm's retail ($500 million) and high-net-worth ($500 million) channels. And from an asset class perspective, most of the positive flows were driven by AMG's alternative products ($2.6 billion), which includes multi-strategy, market neutral and hedge products, and global equities ($1.9 billion), while U.S. equity ($400 million) platforms remain in net outflow mode.

While average AUM was up 8.6% year over year, AMG reported only a 7.5% increase in second-quarter revenue due primarily to mix shift. First-half top-line growth of 8.7% was at the upper end of our forecast for mid- to high-single-digit annual revenue growth this year, but we anticipate AMG facing slightly higher revenue hurdles in the back half of the year. Longer term, we're still forecasting mid- to high-single-digit annual top-line growth for the firm, as it benefits from the positioning of its portfolio (which we don't feel is as exposed to the threat posed by passive investing as some of its peers). As for profitability, the company's first-half operating margins of 34.0% were 40 basis points higher year over year, coming in right at 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 35% of revenue at the end of our five-year forecast period.