WTV - Affiliated Managers Group: Positive On Earnings Beat And Favorable Strategy Mix

• Affiliated Managers Group's overall AUM contracted in the recent quarter due to turbulent market conditions, but AMG's alternative strategies still saw substantial inflows.
• Performance fees and share repurchases have enabled AMG to beat market expectations with its Q2 2022 earnings.
• I remain positive about Affiliated Managers Group, as I think its strategy mix will allow it to excel in the current market environment.

Elevator Pitch

Affiliated Managers Group, Inc.'s ( AMG ) shares are still rated as a Buy.

My prior update for Affiliated Managers Group was published on October 15, 2021, where I elaborated on AMG's ESG (Environmental, Social, and Governance) strategies and its recent investments. The focus of my current article is Affiliated Managers Group's recent second-quarter financial performance disclosed at the beginning of this month.

AMG's revenue and EPS for Q2 2022 came in better than what investors were hoping for, thanks to the contribution from performance fees and a lower share count driven by share repurchases. Looking ahead, Affiliated Managers Group's favorable strategy mix with meaningful exposure to alternatives and value equities should be a tailwind for the stock.

Alternatives Were The Bright Spot For AMG With Positive Inflows In Tough Period

AMG reported its key Q2 2022 financial and operating metrics on August 1, 2022 before the market opened.

As indicated in the company's second-quarter earnings presentation slides , Affiliated Managers Group's assets under management ("AUM") declined by -11% QoQ from $776.7 billion as of March 31, 2022 to $690.9 billion as of the end of the second quarter of this year. On a YoY basis, AMG's AUM also contracted by -9% as compared to its AUM of $755.7 billion as of the end of June last year.

At its Q2 2022 investor briefing on August 1, 2022, Affiliated Managers Group attributed its lower AUM at the end of the recent quarter to "elevated market volatility which resulted in significant client de-risking." Specifically, AMG's global equities strategy witnessed net client cash outflows of -$15.2 billion in the second quarter of this year.

AMG's end-Q2 2022 AUM would have been even lower, if not for a +$6.5 billion net client cash inflow for its alternatives strategy in the recent quarter. Affiliated Managers Group commented at its recent quarterly earnings call that investors are seeking to "diversify into uncorrelated return streams" and this is reflected in "a significant uptick in industry flows into liquid alternatives this year."

Even though AMG's AUM shrunk in the previous quarter, the company still achieved higher-than-expected top line and bottom line for Q2 2022 as discussed in the subsequent section.

Better-Than-Expected Financial Results Helped By Performance Fees And Buybacks

Affiliated Manager Group's top line increased by +3% YoY from $586 million in Q2 2021 to $604 million in Q2 2022, and AMG's actual second-quarter revenue exceeded the analysts' consensus estimate of $562 million by as much as +8%. Although AMG's AUM declined YoY in the recent quarter, the company managed to generate the same amount of normalized earnings per share or EPS ($4.03) as it did in the same quarter one year ago. Affiliated Managers Group's Q2 2022 non-GAAP adjusted EPS was +2% better than the sell-side's expectations of a second-quarter EPS of $3.97.

There were two factors that resulted in AMG's Q2 2022 bottom line turning out to be higher than what the market anticipated.

The first factor is the resilience of Affiliated Managers Group's earnings derived from performance fees. While a smaller AUM translates into lower base management fees, AMG has been able to make up for that to some extent with its performance fees.

AMG stressed at its Q2 2022 investor call that "performance fee earnings have been a steady and reliable contributor" for the company. In its Q2 results presentation, Affiliated Managers Group also shared that that more than three-quarters of its "AUM eligible to generate performance fee earnings" are "in strategies with low or negative correlation to public beta." This explains that why AMG's performance fees are more recurring and stable as compared to that of other asset managers.

The second factor is share repurchases. Affiliated Managers Group has spent around $487 million to reduce its EPS by approximately -8% in the past one year as disclosed in its second-quarter results presentation. This has helped to boost AMG's EPS growth for Q2 2022, as the company benefited from a shrinking share base.

Since the start of 2019, AMG has bought back 12.8 million of its own shares, or decreased its number of shares outstanding by roughly -23%. Moving ahead, Affiliated Managers has guided for a minimum of $400 million in share buybacks for FY 2022, which will be supportive of AMG's earnings per share growth in the full year.

Positive On AMG's Mix Of Strategies In The Current Market Environment

I have a favorable view of Affiliated Managers Group's strategy mix, which puts the company in a good position to excel in this current market environment.

As indicated in its most recent quarterly earnings presentation, AMG generates about half of its EBITDA from alternatives and multi-asset strategies, and the other half from equities.

I already highlighted in an earlier section of this article that Affiliated Managers Group's alternatives strategies are doing well, as there is demand from investors to "diversify into uncorrelated return streams" now.

On the other hand, AMG's equities strategies should outperform, due to its relatively higher exposure to affiliates which are asset managers focused on value stocks like Tweedy Browne and Yacktman. It is clear that investors in general have pivoted from growth to value in recent months, as seen with the substantial valuation de-rating for high-growth, unprofitable stocks over this period.

Closing Thoughts

Affiliated Managers Group is a Buy. Continued share repurchases and stable performance fees should continue to provide support for AMG's earnings growth in the foreseeable future. This explains my Bullish view and Buy rating for AMG stock.

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