Affiliated Managers Group Inc., Boston, a leading holding company of money management boutiques, has been walloped in recent months by investors fretting about the layers of uncertainty embedded in its business model.
While all publicly held money managers have been pummeled by the market's plunge, having a more complicated balance sheet and business model hasn't helped AMG lately, said D.J. Neiman, an analyst with William Blair & Co., Chicago, who considers the company's stock an attractive long-term buy.
That's a reversal of fortunes from the past decade. While the going was good, AMG's model — taking sizable stakes in money management firms, but leaving managers with equity and operational control of their boutiques — attracted investors like moths to a flame.
Investors remained enthusiastic as the holding company strove to provide more operational and marketing support in recent years, and beefed up its exposure to fast-growing market segments with acquisitions of international shops — such as Genesis Investment Management LLP in June 2004 —and alternatives firms like AQR Capital Management LLC in November 2004 and credit alternatives manager BlueMountain Capital Management LLC in December 2007.
With this year's market collapse, however, many of the sectors favored by AMG boutiques — from deep value, to international equities, to hedge funds — have been hammered, and investors are asking how well those boutiques will be able to roll with the punches.
Since the demise of Lehman Brothers Holdings Inc. on Sept. 15 sparked a renewed explosion of capital market volatility, AMG's stock price has suffered one of the steeper falls among publicly traded managers, closing at $27.75 on Dec. 3 , down 68% since that date.
At a time when the prospects of other publicly traded managers can largely be judged by the market's ups and downs, the extra moving parts of AMG's holding company structure has left investors fretting about how the parent finances and values its acquisitions and how well those acquisitions are holding up as the market melts down.
Long term, AMG remains well positioned to deliver strong growth, said Dan Fannon, a San Francisco-based analyst with investment bank Jefferies & Co., who rates the stock a “buy.” For the moment, though, investors are focusing on the company"s active use of debt financing, the leverage on its balance sheet, its affiliates' exposure to hedge fund strategies, and whether the market's swoon will force it to take “impairment charges” on its investments in affiliates, he said.
In a recent note to investors about his “neutral” recommendation on the stock, Marc Irizarry, an analyst with Goldman Sachs & Co., New York, cited the prospect of accelerated outflows and the likelihood that market volatility would both hurt AMG's chances of making new acquisitions and depress its performance-fee revenue.
With over 95% of the assets managed by AMG's 26 money management boutiques in hard-hit equities and alternatives, the market's roller-coaster ride remains the main barometer for sentiment toward AMG. The plunge in equity prices this year has been problematic for the holding company's acquisition strategy.
In April, AMG backed away from an agreement announced in October 2007 to buy a stake in value equity shop Cooke & Bieler, Philadelphia. Both sides agreed that a roughly 25% plunge in Cooke & Bieler's assets under management in the interim had made the revenue-sharing/profit-sharing economics of a deal unworkable.
Analysts say investors are now wondering if the failure of AMG to complete an investment in Somerville, N.J.-based Harding Loevner Management LLC that was announced in July points to a similar event. Harding Loevner's assets under management, $6 billion at the time of the announcement, fell to $4.7 billion by the end of September, and likely have suffered further significant declines since then.
“In this environment, any type of uncertainty is getting punished,” and investors looking at AMG are finding it a complicated octopus to get their arms around, noted Michael Kim, a research analyst with New York-based investment bank Sandler O'Neill & Partners LP. Mr. Kim rates AMG a hold.