Affiliated Managers Group

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global asset management company, AMG partners with independent investment firms, providing distribution and other services, and generating revenue through management fees based on assets under management.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Competitive Landscape

Affiliated Managers Group (AMG) operates in the asset management industry, a sector characterized by high competition, fluctuating market values, and regulatory oversight. The company’s strategy revolves around partnering with independent investment management firms, providing them with resources, distribution, and operational support, while allowing them to maintain their autonomy.

AMG’s business model is to provide a platform to boutique asset managers who lack the scale and infrastructure for wide distribution.

  • Revenue Distribution: AMG generates revenue primarily through management fees, which are a percentage of the assets under management (AUM) by its affiliated firms. These fees are influenced by market performance, as higher AUM will generally translate to greater fee revenue. Performance fees are also present, but to a lesser degree than management fees.

  • Industry Trends:

The asset management industry is undergoing significant transformations. The rise of passive investing, increased fee pressures, and technological disruptions are reshaping the competitive landscape. The industry is also seeing a push towards globalization and increased consolidation, resulting in competition for scale in operations and distribution of products.

  • Competitive Landscape: The asset management industry is highly competitive and fragmented, featuring a diverse group of players. Large asset managers like BlackRock, Vanguard, and Fidelity, with extensive reach and diversified offerings, pose a challenge.

There’s an increasing amount of funds flowing into passive investment vehicles, like ETFs, which threatens firms with active-management strategies.

  • What Makes AMG Different: Unlike large, integrated asset managers, AMG positions itself as a platform that provides independent firms with an opportunity to grow, without losing their autonomy or their particular strategy. It focuses on retaining successful managers and allows for a diverse range of investment approaches.

AMG describes its partnership structure as “a model that empowers entrepreneurs and generates value for our shareholders,” which they consider their ‘economic moat’.

  • Other relevant facts:
    • AMG operates globally, with a focus on the U.S., Europe, Middle East, and Asia. The U.S. represents a large part of the assets under management and revenue.
    • The company’s revenue depends heavily on the performance of their affiliates and their ability to attract and retain assets under management.

Moat Assessment: 2 / 5

AMG’s moat can be best described as narrow with limited durability.

  • Intangible Assets: AMG has a diversified portfolio of brands with distinct investment capabilities and strategies in their Affiliates. While these can give it some pricing power, especially as the company seeks out niche managers, brand recognition is not a major differentiating factor among institutional investors as it would be among the general public.
  • Switching Costs: Although sticky assets, where investors might be hesitant to switch providers due to a variety of reasons (tax consequences, long-term relationships, etc.), can provide some customer retention, the ease of exit from asset management businesses also reduces its moat power. Moreover, contracts with individual fund managers can be terminated if performance is unsatisfactory.
  • Network Effects: There is some level of network effects due to the company’s brand name and distribution capabilities, but this is not as strong as in businesses where network effects are more significant.
  • Cost Advantages: AMG has little to no discernible cost advantage versus competitors. It also has a high dependence on the success of affiliates, which is not a source of reliable or predictable cost advantage.

The ability to retain good asset managers is vital and it makes the network valuable for other managers, which generates a somewhat sustainable advantage. However, this is limited because the investment talent is very mobile.

Moat Durability and Legitimate Risks

While AMG has some moat characteristics based on diversification and scale, these are vulnerable to various threats:

  • Market Downturns: Declines in equity markets, which are largely out of the management’s control, are an unavoidable risk, which could drastically affect AUMs, reduce revenue, and lead to an outflow of investments. The company has faced these challenges in the past and could face them again. A change in interest rates also affect valuations, which could reduce asset values.

Past performance of assets has not always translated into good results during economic downturns.

  • Managerial Risk: A strong reliance on affiliates creates a key-man risk-the possibility of key fund managers leaving for another firm or starting their own business-which may trigger a significant outflow of AUM.
    • The quality of management in their Affiliates is critical to success, but is not always uniform or predictable.
    • Inability to attract and retain top talent in management and Affiliates.
  • Competition: The asset management industry is a zero-sum game, and high AUMs attract other firms that try to take market share from existing players. Increased competition, both on price and value, is always a risk for every player, including AMG.
  • Disruptive Technologies: Technological innovation may render the traditional structure of asset management less relevant, increasing competition for passive investment products, or robo-advisers.
  • Increased Costs: Increases in personnel costs, investment costs, and technology costs could all squeeze margins, reducing profitability.

Business Resilience

AMG’s structure provides some resilience to these challenges: * Its partnerships provide a level of diversification as performance and strategies will differ across their affiliates. * AMG is better equipped to grow in foreign markets using their partnership structure * As a business-to-business company, they depend less on customer behavior, which can lead to stickier cash flows than a consumer-facing company. * The core business model is not capital intensive and most of the spending is not related to the cost of products, but rather the cost of running the operations.

However, these are all defensive measures rather than offensive, and they don’t guarantee long-term success.

Financial Analysis

AMG’s financial performance is heavily tied to market conditions and the performance of its affiliates. * Revenues are mainly dependent on average assets under management. * The company’s compensation is highly dependent on performance, directly affecting net income. * The balance sheet has been stable and liquid.

  • Revenue: AMG’s revenue primarily comes from management fees, which are directly tied to the market value of assets under management. As can be seen in the latest 10-Q, for the last 3 months, revenues were down a bit from last year, even though AUMs increased, signifying that the company’s performance is highly dependent on the performance of the markets.
  • Expenses: Expenses are mainly related to personnel costs (compensation and benefits), which can increase if the company wants to retain talent and grow or attract better managers. Selling, general, and administrative expenses are primarily overhead expenses related to running the company’s operations. These expenses are generally fixed, so if revenues increase rapidly, then they can generate improved margins.
  • Profitability: Profitability is highly volatile and depends on the market. This quarter net income was down compared to last year. However, if markets do better, AMG is in a great place to quickly capture the profits. Net income is subject to special items like amortizations and impairments that can create volatility in profits.
  • Balance Sheet Health: 4 / 5: The balance sheet of AMG is pretty stable and very liquid, with over $800 million in cash on hand.
    • There is about $2.5 billion in goodwill on their balance sheet, so these intangible assets are the main risk they have for balance sheet volatility.
    • The company has around $600 million in long-term debt, but their cash holdings can absorb any issues they might face
    • The debt-to-equity ratio is ~1, which is well within what the company’s current operations can manage.

Recent Concerns/Controversies and Management’s Response

  • In the last quarter, the company noted that there were continued challenges in the global investment climate, which impacted assets under management (AUM) and their related earnings. However, it mentioned that even in those difficult situations, they have continued to generate strong cash flows due to the diversity of their affiliates.
  • A recent lawsuit was filed by a former affiliate against AMG over various payments. While this is a concerning development, the management believes that this does not have merit and won’t materially impact their operations. This highlights the risks associated with depending on third-party operations and having to work through litigation.

Understandability Assessment: 3 / 5

The business is quite complex and thus merits a rating of 3/5 for understandability.

  • A major chunk of the business depends on the market and their performance. Understanding that and how it will change their value is hard for most retail investors.
  • The number of subsidiaries, affiliates, different share classes, and complex agreements make it tough to assess. The financial statements often need extra analysis to reveal the company’s actual performance, which makes for very technical reading.
  • Although the company is described as simple, due to their reliance on other firms and market performance for their revenue generation, they are quite hard to understand. This is because their profits and valuations are heavily affected by the factors not immediately related to its own activities.