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Feb. 28, 2020, 4:22 p.m. EST

10-K: AFFILIATED MANAGERS GROUP, INC.

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following executive overview, which summarizes the significant trends affecting our results of operations and financial condition, as well as the remainder of this Management's Discussion and Analysis of Financial Condition and Results of Operations of Affiliated Managers Group, Inc. and its subsidiaries, should be read in conjunction with the "Forward-Looking Statements" section set forth in Part I and the "Risk Factors" section set forth in Item 1A of Part I of this Annual Report on Form 10-K and in any more recent filings with the SEC, and with our Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. Executive Overview

New and Pending Investments







                                                       For the Years Ended December 31,
        (in billions, except as noted)      2017        2018       % Change      2019      % Change
        Assets under management           $  836.3    $  736.0      (12 )%     $  722.5      (2 )%
        Average assets under management      779.2       819.9        5  %        758.1      (8 )%
        Aggregate fees (in millions)       5,545.8     5,442.4       (2 )%      4,962.7      (9 )%
        


Assets under management and, therefore average assets under management, include the assets under management of our consolidated and equity method Affiliates, and as of October 1, 2019, exclude the assets under management of certain Affiliates in which we are repositioning our interests and that are not significant to our results of operations. Assets under management is presented on a current basis without regard to the timing of the inclusion of an Affiliate's financial results in our operating performance measures and Consolidated Financial Statements. Average assets under management reflects the timing of the inclusion of an Affiliate's financial results in our operating performance measures and Consolidated Financial Statements.

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Average assets under management for mutual funds and similar retail investment products represents an average of the daily net assets under management, while for institutional and high net worth clients, average assets under management represents an average of the assets at the beginning or end of each month during the applicable period.

(2) Global equities include emerging markets strategies, which accounted for 8% and 9% of our assets under management as of December 31, 2018 and 2019, respectively.

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The following table presents changes in our assets under management by active, return-oriented strategy:







                                                                   Global                          Multi-Asset &
        (in billions)                            Alternatives     Equities      U.S. Equities       Fixed Income        Total
        December 31, 2018                       $      293.5     $   243.8     $        97.6     $       101.1        $ 736.0
          Client cash inflows and commitments           35.0          37.6              16.4              20.8          109.8
          Client cash outflows                         (62.0 )       (57.2 )           (26.3 )           (17.8 )       (163.3 )
            Net client cash flows                      (27.0 )       (19.6 )            (9.9 )             3.0          (53.5 )
          New investments                                4.0             -                 -                 -            4.0
          Market changes                                11.6          51.7              23.3              12.2           98.8
          Foreign exchange(1)                            1.7           3.1               0.3               0.8            5.9
          Realizations and distributions (net)          (3.1 )        (0.4 )            (0.2 )            (0.2 )         (3.9 )
          Strategic repositioning(2)                   (33.5 )        (2.3 )            (4.8 )            (8.4 )        (49.0 )
          Other(3)                                      (6.0 )        (1.4 )            (6.3 )            (2.1 )        (15.8 )
        December 31, 2019                       $      241.2     $   274.9     $       100.0     $       106.4        $ 722.5
        __________________________
        


(1) Foreign exchange reflects the impact of translating into U.S. dollars the assets under management of our Affiliates whose functional currency is not the U.S. dollar.

(2) Strategic repositioning includes assets under management attributable to Affiliates that are not significant to our results of operations, or those in which we have divested of our interest.

(3) Other includes assets under management attributable to product transitions and reclassifications.

The following charts present information regarding the composition of our assets under management by client type as of December 31, 2018 and 2019:

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The following table presents changes in our assets under management by client type:







        (in billions)                                   Institutional      Retail      High Net Worth      Total
        December 31, 2018                              $       432.9     $  195.4     $       107.7      $  736.0
          Client cash inflows and commitments                   46.0         44.3              19.5         109.8
          Client cash outflows                                 (81.4 )      (65.0 )           (16.9 )      (163.3 )
            Net client cash flows                              (35.4 )      (20.7 )             2.6         (53.5 )
          New investments                                        4.0            -                 -           4.0
          Market changes                                        50.3         32.9              15.6          98.8
          Foreign exchange(1)                                    3.3          2.1               0.5           5.9
          Realizations and distributions (net)                  (3.1 )       (0.7 )            (0.1 )        (3.9 )
          Strategic repositioning(2)                           (36.9 )       (3.0 )            (9.1 )       (49.0 )
          Other(3)                                              (7.9 )       (7.9 )               -         (15.8 )
        December 31, 2019                              $       407.2     $  198.1     $       117.2      $  722.5
        __________________________
        


(1) Foreign exchange reflects the impact of translating into U.S. dollars the assets under management of our Affiliates whose functional currency is not the U.S. dollar.

(2) Strategic repositioning includes assets under management attributable to Affiliates that are not significant to our results of operations, or those in which we have divested of our interest.

(3) Other includes assets under management attributable to product transitions and reclassifications.

Aggregate Fees

Aggregate fees consists of asset and performance based fees. Asset based fees include advisory and other fees earned by our Affiliates for services provided to their clients and are typically determined as a percentage of the value of a client's assets under management. Performance based fees are based on investment performance, typically on an absolute basis or relative to a benchmark, and are recognized when they are earned (i.e., when they become billable to customers and are not subject to claw-back). Performance based fees are generally billed less frequently than asset based fees, and although performance based fees inherently depend on investment performance and will vary from period to period, we anticipate performance based fees will be a recurring component of our aggregate fees.

Aggregate fees is generally determined by the level of our average assets under management, the composition of these assets across our active, return-oriented strategies that realize different asset based fee ratios, and performance based fees. Our asset based fee ratio is calculated as asset based fees divided by average assets under management.

Aggregate fees was $4,962.7 million in 2019, a decrease of $479.7 million or 9% as compared to 2018. The decrease in aggregate fees was primarily due to a $486.2 million decrease in asset based fees. The decrease in asset based fees was due to an 8% decrease in our average assets under management, primarily in alternative strategies and global equities strategies, and a 2% decline in our asset based fee ratio, principally due to a change in the composition of our assets under management.

Financial and Supplemental Financial Performance Measures The following table presents our key financial and supplemental financial performance measures:







                                                                       For the Years Ended December 31,
        (in millions)                                      2017        2018       % Change       2019       % Change
        Net income (controlling interest)               $  689.5     $ 243.6        (65 )%     $  15.7        (94 )%
        Adjusted EBITDA (controlling interest)(1)        1,116.2       961.8        (14 )%       841.6        (12 )%
        Economic net income (controlling interest)(1)      824.4       780.7         (5 )%       720.2         (8 )%
        __________________________
        


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Adjusted EBITDA (controlling interest) is an important supplemental financial performance measure for management as it provides a comprehensive view of our share of the financial performance of our business before interest, taxes, depreciation, amortization, impairments and adjustments to our contingent payment arrangements. Adjusted EBITDA (controlling interest) was $841.6 million in 2019, a decrease of $120.2 million or 12% as compared to 2018. The decrease in Adjusted EBITDA (controlling interest) was primarily due to a 9% decrease in aggregate fees and a decline in earnings at certain Affiliates in which we share in revenue less agreed-upon expenses.







                                                                  For the Years Ended December 31,
        (in millions, except as noted)              2017          2018        % Change        2019        % Change
        Consolidated Affiliate average assets
        under management (in billions)           $   406.5     $   419.6          3 %      $   395.1         (6 )%
        Consolidated revenue                     $ 2,305.0     $ 2,378.4          3 %      $ 2,239.6         (6 )%
        


Our Consolidated revenue decreased $138.8 million or 6% in 2019, due to a $187.5 million decrease from asset based fees, partially offset by a $48.7 million increase from performance based fees. The decrease in asset based fees was primarily due to a 6% decrease in consolidated Affiliate average assets under management, primarily in U.S. equity strategies and global equity strategies, and a 2% decline in our consolidated Affiliate asset based fee ratio, principally due to a change in the composition of our assets under management. Consolidated Expenses

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Our Consolidated expenses are primarily attributable to the non-controlling interests of our consolidated Affiliates in which we share in revenue without regard to expenses. For these Affiliates, the amount of expenses attributable to the non-controlling interests, including compensation, is generally determined by the percentage of revenue allocated to expenses as part of the structured partnership interests in place at the respective Affiliate. Accordingly, increases in revenue generally will increase a consolidated Affiliate's expenses attributable to the non-controlling interests and decreases in revenue will generally decrease a consolidated Affiliate's expenses attributable to the non-controlling interests.







                                                                    For the Years Ended December 31,
        (in millions)                                 2017          2018        % Change        2019        % Change
        Compensation and related expenses          $   979.0     $   987.2          1  %     $   943.0         (4 )%
        Selling, general and administrative            373.1         417.7         12  %         376.8        (10 )%
        Intangible amortization and impairments         86.4         114.8         33  %         144.5         26  %
        Interest expense                                87.8          80.6         (8 )%          76.2         (5 )%
        Depreciation and other amortization             20.3          22.0          8  %          21.3         (3 )%
        Other expenses (net)                            58.0          69.7         20  %          57.0        (18 )%
        Total consolidated expenses                $ 1,604.6     $ 1,692.0          5  %     $ 1,618.8         (4 )%
        


Compensation and related expenses decreased $44.2 million or 4% in 2019, primarily due to a $30.8 million decrease in bonus and salary expenses as a result of a decline in the percentage of revenue allocated to expenses as part of the structured partnership interests in place at our consolidated Affiliates, and a $15.9 million decrease in Affiliate equity compensation expense. The decrease was also due to a $6.3 million decline in pound sterling-denominated expenses due to changes in foreign currency exchange rates. These decreases were offset by a $5.5 million increase in compensation related to headcount repositioning in 2019.

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For a majority of these Affiliates, we use structured partnership interests in which we contractually share in the Affiliate's revenue less agreed-upon expenses. We also use structured partnership interests in which we contractually share in the Affiliate's revenue without regard to expenses, and in this type of partnership interest, our contractual share of revenue generally has priority over distributions to Affiliate management.

Our equity method revenue is derived primarily from asset and performance based fees from investment management services. Equity method revenue incorporates the total asset and performance based fees earned by all of our Affiliates accounted for under the equity method and is generally determined by the level of our equity method Affiliate average assets under management, the composition of these assets across our Affiliate sponsored investment products and client accounts that realize different asset based fee ratios, and performance based fees. Our Affiliates accounted for under the equity method manage a greater proportion of assets subject to performance based fees than our consolidated Affiliates and, as a result, equity method revenue will generally have more performance based fees than Consolidated revenue.







                                                                   For the Years Ended December 31,
        (in millions, except as noted)                2017          2018       % Change       2019        % Change
        Operating Performance Measures
        Equity method Affiliate average assets
        under management (in billions)             $   372.7     $   400.3          7  %   $   363.0          (9 )%
        Equity method revenue                      $ 3,240.8     $ 3,064.0         (5 )%   $ 2,723.1         (11 )%
        Financial Performance Measures
        Equity method earnings                     $   501.4     $   370.6        (26 )%   $   289.4         (22 )%
        Equity method intangible amortization
        and impairments                               (199.2 )      (370.8 )       86  %      (627.4 )        69  %
        


Our equity method revenue decreased $340.9 million or 11% in 2019, due to a $298.8 million decrease from asset based fees and a $42.1 million decrease from performance based fees. The decrease in asset based fees was primarily due to a 9% decrease in equity method Affiliate average assets under management, primarily in alternative strategies, and a 3% decline in our equity method asset based fee ratio, principally due to a change in the composition of our assets under management.

Feb 28, 2020

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