10-QPeriod: Q2 FY2004

AFFILIATED MANAGERS GROUP, INC. Quarterly Report for Q2 Ended Jun 30, 2004

Filed August 9, 2004For Securities:AMGMGRBMGRMGRDMGRE

Summary

Affiliated Managers Group, Inc. (AMG) reported a strong performance for the quarter and six months ended June 30, 2004. Revenue saw significant increases, growing by 36% and 37% for the three- and six-month periods, respectively, driven by a substantial rise in average assets under management across all segments, particularly in Mutual Fund and Institutional channels. This growth was attributed to positive investment performance and net client cash flows, along with higher performance fees. The company's net income also showed robust growth, up 37% for the quarter and 38% for the six months. This was supported by increased revenue and investment income, despite higher operating expenses, interest expenses, minority interest, and income taxes. The company also successfully issued $300 million in "2004 PRIDES" (mandatory convertible securities) in February 2004, significantly increasing its cash position and mandatory convertible securities balance on the balance sheet. Subsequent events include an agreement to acquire assets from Fremont Investment Advisors, Inc. and a tender offer to repurchase senior notes.

Key Highlights

  • 1Revenue increased by 36% for the three months ended June 30, 2004, and 37% for the six months ended June 30, 2004, year-over-year, driven by a 30% increase in average assets under management.
  • 2Net income grew by 37% for the quarter and 38% for the six months compared to the prior year periods, reflecting strong revenue growth and effective cost management.
  • 3The company issued $300 million in "2004 PRIDES" (mandatory convertible securities) in February 2004, significantly boosting cash and cash equivalents, which rose from $253.3 million to $344.7 million.
  • 4Operating expenses increased by 31% for both the three- and six-month periods, largely due to higher compensation and related expenses, reflecting the revenue-sharing model and increased holding company costs.
  • 5Interest expense increased by 47% for the quarter and 41% for the six months, primarily due to the issuance of the new mandatory convertible securities.
  • 6The company acquired 60% of Genesis Asset Managers on June 17, 2004, adding to its institutional client base and emerging markets equity securities expertise.
  • 7Cash Net Income, a non-GAAP measure, increased by 22% for both the three and six-month periods, indicating strong operational performance before non-cash expenses related to acquisitions.

Frequently Asked Questions

Revenue growth was primarily driven by a significant increase in average assets under management across all distribution channels, particularly in the Mutual Fund and Institutional segments. This rise in assets under management was fueled by positive investment performance and net client cash flows, along with higher performance fees recognized during the period.

The issuance of $300 million in "2004 PRIDES" (mandatory convertible securities) in February 2004 significantly strengthened AMG's liquidity, leading to a substantial increase in cash and cash equivalents. This also increased the company's total liabilities due to the mandatory convertible securities component.

AMG continues to pursue a growth strategy through internal growth of existing businesses and investments in new firms. Key risks identified include market volatility impacting advisory fees, the success of new investments, potential changes in accounting for contingently convertible securities, and the availability of capital. The company is also awaiting regulatory clearance for a significant acquisition from Fremont Investment Advisors, Inc.

Operating expenses are largely driven by compensation and related expenses, which are closely tied to revenue through the company's revenue-sharing arrangements with its Affiliates. As revenue increases, the 'Operating Allocation' for Affiliates also tends to increase, leading to higher compensation costs. Selling, general, and administrative expenses also rose, partly due to sub-advisory and distribution costs related to increased assets under management.