Affiliated Managers Group, Inc. (AMG) Earnings Call Transcript

Okay. Thank you, very much. Welcome back everybody. Good afternoon. My name is Bill Katz. I cover the asset managers and the retail brokers for Credit Suisse. I'm delighted to be at the 24th Annual Financial Services Forum, and this is my first year with it, and it's just been a terrific, terrific couple of days. So I thank everyone for coming and I couldn't think of a better company to sort of cap off for me day 2 than Affiliated Managers Group, ticker AMG. With us today, pleased to have Jay Horgen, who's the CEO of the company. I've known Jay for quite a bit of time. AMG itself was founded back in 1993 and has about $650 billion of assets under management. It's a bit of a unique affiliation model, works with key partners around the world, investing opportunistically to drive long-term value and has arguably been pivoting the franchise very nicely over the last couple of years under Jay and the new team's senior leadership into some of the faster growth areas, which I think we'll explore a bit today, including alternative managers, impact, ESG solutions, private wealth management. So I'm very prescient on that side. So Jay, first of all, welcome on behalf of the team. Good to see you, again.

Thank you, Bill. Thanks to Credit Suisse. But thank you as well. You're right. We've known each other for quite some time.

Yes. We do a lot of exotic products way back away. And yes, we won't go into that today. Okay. Well, listen, wonderful to see you. Thanks so much again for making the trip.

So in your strategy, you talked very frequently about sort of 5 areas of growth. You've talked about private markets; liquid alternatives, that's been a very topical area; wealth management, you've been at the forefront of high-quality, sustainable platforms and increasingly the APAC region. Obviously, we've had a transition away from you, but I think that's sort of a tactical dynamic. So as you think about the next several years, any shift to that thinking? And then within this bucket, maybe it's all going to work, how do you sort of think about where the incremental growth comes from?

Yes. Okay. Well, let me start. It was -- your question is a good one, and it was well put, and I think it -- makes it really easy for me to answer. The short answer is I do think those are still the same areas, but let me describe our strategy and how we got to think about where we're putting our capital. So at the very highest level, we are investing our capital in the areas of highest growth and return. And then right underneath that statement, I would put, we're making new investments in areas of secular growth. We're engaging with our affiliates to help them to magnify their efforts, to accelerate their business plans and to really invest in business development opportunities in those same areas of secular growth and other areas that they see long-term benefits to their franchise. And then we attach a very disciplined capital allocation framework to investing in 1 or 2, which is new investments or existing affiliates. So I wanted to start there because then I'm going to hone in on the new capital going out to new partnerships, right? And so we took a big step back 4 or 5 years ago now. And it was really part of lessons learned over the full 30 years that we've been in business. And at that point, it was 25, but now it's 30, which is getting ahead of client allocation trends and getting ahead of capital that's being formed around the globe to invest in opportunities. If we get that right, that really does add significant returns to our organization. And so we spend a lot of time thinking about that. And we've had the same slide in our deck for all 4 years that I've been in the seat, which is we invest in liquid alternatives, private markets, wealth, Asia and ESG or sustainable investing. And the reason why we have come to those areas, and those are pretty broad areas because I think there -- we could get deeper into each one if we wanted to. But those really have specific goals within portfolios, right? And so very simply, I think liquid alternatives. It is an area that acts as a diversifier, portfolio insurance in some cases, surrogate to either fixed income or equities. It also is a place where we've seen alpha in the last 2 years, last 3 years even, but really the last 2 years. Private markets, obviously, it's an area that's -- that has been -- an area that's been in high demand. But ultimately, the capital markets, more businesses are private than they are public. There's a lot of capital that's formed around both corporates as well as project-based financing like infrastructure. And therefore, the private markets have been a big growth area. And there's been a lot of nonbank asset management functions that have grown up on the buy side in the last decade since the global financial crisis. So there's a lot of opportunity for capital formation there. Of course, within wealth, it's not only the managers of wealth, but getting into channels with products that wealth can buy like private markets. So you can think about wealth as not only an asset management function but also a channel itself. Asia, it's fast growing region in the world. So clearly, that's got a long cycle to invest. And then, of course, sustainable investing, objective-based investing around things that are important to pools of capital around the world. So that's really the strategy. Now when you look at what -- where we are today, about 45% of our business is in alternatives, about 45% of our business is in equities. A good chunk of that equities is in sustainable strategies today. And then we have a multi-asset segment as well. That's up a lot on the alternative side from just 4 years ago, and I said in our recent earnings call, when you look at the last 9 investments, sort of the $1.3 billion of growth investments that we've made around the strategy that I just described, 2/3 of that has been in alternatives, roughly split between private markets and liquid alternatives, and 1/3 has been in ESG-related, sustainable-related investing. So that has increased our exposure in growth areas significantly. Today, more than half of our business, we think, is in growth areas -- long-term secular growth areas. When you then take that and look forward from here, we do see a continuation of those same themes. The exact mix will be hard to predict, but we do think that the growth areas will surpass 50%. They already really have, but they're on their way. If we continue to do -- if we continue to invest all of our capital that we put out to new investments in those growth areas, you would see the growth becoming more like 60%, maybe even 2/3 of our business over time. That's why when we say in the different setting that ultimately growth for us -- top line growth for us is an output of our strategy because the input is where are we placing our capital today. So $1.3 billion over the last 4 years have gone into growth investments. We have not been able to put all of our capital into growth investments, and that's also why we've done $1.9 billion of repurchases during that period.

Okay. Maybe we could peel into -- double click into a couple of these. Let's talk on maybe liquid alts. That seems to be like -- as I think about like the frequency of the conversations that you're having with us, liquid alts seems to be the -- probably one of the biggest swing factors. And you've seen bull bark in a little bit of a pullback and now it's sort of back in the sort of maybe a relevance opportunity set. Can you just talk a little bit about -- maybe just help us understand what we're talking about with liquid alts because it's a pretty broad array of what's out there. There's the equity long short portfolio, there's some trend following and everything in between. And then what are you hearing from the client base given a very strong track record over the last couple of years and even longer term now?

Yes. Okay. Well, maybe just break it down and please come back to me if I don't answer your specific question. But to break it down, liquid alts are really just a word put on strategies that are not private markets. They're liquid. They can trade in public markets. And there -- obviously, there are the primary fixed income, equity markets, but they're also the derivative markets. There's the commodities markets. There's lots of markets that you can trade in. And so liquid alts is just a word that's put on those businesses that trade in some or all of those markets, they have strategies that can either go long or short or even across markets. And so you're right, it's a pretty broad area but juxtaposing that with just being long an asset and looking for appreciation, which a lot of people will call long only. This is not that. So what is important to note though is that for the longest time, really 10 years, the longest time in the last sort of global financial crisis plus period, the very best thing that 1 could do is be long growth with the cheapest cost to owning that growth, right? So -- and that was because the central banking system around the globe was pumping liquidity into the markets. Risk-taking was full on and being able to buy growth really cheaply was really the right way to do it. So buying growth passively would have been the easiest thing you could have done in that 10 years. In the last year, clearly, that has changed. But I think it started in the fourth quarter of 2021, at least that's when we noticed it in our own business, which is things started, the dispersion began between markets, dispersion began between assets within markets, strategies that had really almost been pushed aside by portfolio allocators over this period, like the CTA business, all of a sudden started to come back because of the dispersion, because of the lack of correlation, because of the choppiness, the volatility that we saw in the markets, and alpha was created in those years. It was created in almost every bucket within if you use an FHRI index. If you looked at what the main buckets are, alpha was being created in each of those buckets. So if you were left out, if you were at a portfolio and did not include these diversifiers, these sort of insurance protecting type products, then your performance in 2022 was well below others who had these products. '21 as well, but really it manifests in 2022. So whether that's event-driven type strategies or it's relative value fixed income type strategies or it's macro strategies or CTAs or multi-strat, all those buckets that I just described, they produced alpha in '22 and in the prior years. I think it's -- it hasn't really fully been written up in the popular press. You're starting to see some of this come to light, but it really was a pretty good last 2 years, maybe even last 3 years for these strategies. And to put it in context, some of the CTAs in 2021 and 2022 performed so well that their 10-year numbers are better than the S&P 500. Not that that's the comparison set but just trying to give you a sense for how well they perform. So what does that mean for AMG? Well, we have kind of a 25% allocation to these strategies. It played out in '22, it helped our earnings. We grew 10% in earnings year-over-year, 50% over 2 years, kind of top-performing earnings growth for an asset manager. Performance of those strategies was a big component. Obviously, capital allocation was the other big component. Taken together, capital allocation and these liquid alternative strategies really gave us a lot of capital that we fall into this next year, 2023, front-footed. What's really interesting, though, when you have good performance? It means that you're at or above your high watermark going into the year. We have good performance, and you actually produce alpha then people start to notice. And so it takes a while for portfolios to change, but we really do believe that portfolios need to change for this new environment. And if you're going to change your portfolio, you should be looking at these types of strategies. Our activity amongst the client discussions at those affiliates that run these strategies together with our own distribution efforts. We've seen the activity increase quite a bit. Again, some of those strategies had been left by the wayside for many years that are now coming back into the -- the right way to allocate our portfolio is to be long assets, both private and public markets, but also include some absolute return in other strategies that could play across markets. And I think that's going to be a major theme. My own view is it's going to be a major theme for the next 3 to 5 years. With the way central banks have really pivoted and none of us know what's going to happen with inflation and none of us really know what the terminal rate is going to stop, where it's going to stop. And that's just going to continue to create more volatility and dispersion in markets, and it's going to be prime for these alternative managers.

So that's a terrific update. Within that, I would just sort of box of increased RFP activity. Maybe it's too opaque to understand. But do you have a sense of where the allocations might be coming from?

So look, it's a really good question because -- let me back up and say there is -- when you -- when your main strategy was to own growth at the lowest cost that you could, you almost stop thinking about portfolio allocation altogether. I think portfolio allocation is one of the more important things that a sovereign wealth, a pension plan, an individual adviser can do for their clients. But for a number of years, the best thing you could do was just own the FANG stocks or an index that own the FANG stocks. And so this -- for a decade, the idea of portfolio allocation and making money off of portfolio allocation, it really wasn't necessary. I think it's really important. So today, I think portfolios are all going to adjust, all of them. Now the question is which ones were under over-allocated, but I'll give you an example. If you've a pension plan and you had too much illiquid private markets, you're going to have to adjust that some people call that the denominator effect. And it caused some unusual behavior, for example, in some portfolios, you're seeing lots of secondary assets being sold off. In the LDI portfolios, you're seeing lots of liquid products being sold. I mean, lots of liquid assets being sold off, that just gives opportunity for dislocation for those -- the beneficiaries. So what ultimately has to happen, though, is they don't sell off those assets in an uncoordinated way. They actually allocate new money in a coordinated way. So I do think that you're going to see pension plans adjust to more liquid assets, which plays well to liquid alternatives. I do think that they are going to think about diversifying their exposures and non-correlated asset bases. So I think pensions are an example that could go this direction. I also think individuals as well, especially high net worth individuals, those portfolios could use more absolute return in their portfolios. There's a big push within wealth to add private markets. And I believe that wealth is a long-term secular trend for private markets because they literally had no allocation at all. So I do think that will go up. But in lots of other areas, the endowment, the foundation, the sovereign wealth, the pension, they were full up with private equity. So the question is, cyclically, does that go down for a while? I believe it does. And it gets replaced by more liquid, maybe more specialty products within alternatives. And I think that's what you're going to see. So you're going to see all these portfolios adjust based upon their starting point and what they need in order to be well balanced from an allocation perspective. So I think there's a lot of opportunity. Now one of the overreaching statements that I might just put out there is we've been in a passive growth environment that hasn't been that value sensitive. So the inverse of that is a more active, more value sensitive, more absolute return environment. And if that is the contrary and beautiful environment that we were in, that is a good environment for AMG.

So a Fed pivot to zero or working on pajamas of Zoom, it's not a good outcome. That's what you're saying?

Right. Yes, exactly.

So let's just unpack that a little bit more because it was my next set of questions. Let's stay with the private market -- I'm sorry, the global wealth management opportunity set. As I think about AMG, I think you've done a very good job of having strong relationships globally on the institutional front. And sort of working a little bit more on the retail but not as a primary of growth per se. It seems like a tremendous opportunity for retail democratization. How do you see AMG strategy trying to pivot into that to sort of take advantage of that denominator opportunity, which is de minimis allocation there?

Right. So I do agree with you that AMG's profile has historically been institutional-oriented, institutional quality strategies, institutional quality asset management and ultimately attracting institutions themselves into those products. Where we have seen affiliates in general, be successful in the wealth channels, they've developed largely on their own and AQR being probably the most notable of those. But generally speaking, the effort in wealth was more of a 40 Act type effort historically. Today, the opportunity set for independent firms into the wealth channel is significant because they are differentiated return streams. As I just described, we're seeing alpha in liquid alts. And getting the right packages in place to go into the wealth channel, we see as a primary attribute that AMG can help our independent firms with because an independent firm doesn't build up the expertise just to know exactly what package that their strategy should be in, in order for a wealth adviser to introduce that to their client. So I think strategically from a business development perspective, we've never been more relevant to those firms that have those types of strategies as it relates to wealth, right? I do think, wealth, for the whole industry is a big opportunity. And so it will be a big opportunity for Blackstone and BlackRock, but it will also be a big opportunity for AMG. And especially for independent firms, if they want a partner that can help them get into that. So it will not only play out into our own ability to generate organic growth, but it will play out in our attractiveness to the next new affiliate who wants to choose a business partner who has the opportunity set and can get them into the wealth channel in the right package. So for us, it actually plays in both ways. It plays to our new investment strategy, but it also plays to our organic growth strategy.

Is that a push pull? Like how are you doing that with the independent affiliates? Are they calling up the team and saying, "Hey, look, we sort of see what's happening with these non-traded REITs now." And we think we have a great opportunity, BDCs would have [ interval ] funds. We have a great opportunity. Let's just start cranking up the machine? Or is it more top down where you're sort of going back to them and saying, "Look, we think the conditions are right for you to sort of think about scaling." I know they're very independent, you don't impact the manufacturing IP. But how do you sort of think about taking the raw inputs of AMG and pushing it into the pipe?

So we've had a measure of success, which we've described in different settings. We were early in the private markets, introduction of the Pantheon fund. That was 6 years ago now, that funds up to about $1.5 billion. Each of the last, I guess, 5 or 6 private markets, businesses that we've invested in, in the discussion around making that new investment, we discuss new products with them as part of the new investment pitch, if you will. And the follow-through has been that each of those are in product development with us to launch some sort of product, whether that's a debt-focused BDC or a REIT-focused multifamily or sort of another strategy within the digital infrastructure space that Peppertree is in. Each of those conversations are in flight to develop products that are right for the wealth business. So it isn't that we're -- this is aspirational. These -- we've already done it with Pantheon, and we're really working towards doing it with these other illiquid managers. And so it will feed on itself. So the more success we have, the more obvious it will be that we're the right strategic partner for independent firms.

Understood. Let's pivot back to the alternative private side of the equation. Notwithstanding the notion that maybe there's a little bit of an allocation back to the liquid side in the fourth quarter, and I have to sort of go back and look at all the data, but my sense is that you actually -- AMG actually had arguably 1 of the strongest, if not the strongest, net organic growth quarter out of anybody. And I don't think you have a big flagship cycle underneath all that. So how do you sort of see the opportunity set for -- on the private side? And where are -- I think you've talked about infrastructure in the past, the diversification of your footprint. Maybe help us understand where a couple of the bigger drivers might be as we look out to '23 and beyond?