The asset management industry has enjoyed a nice run of strong years, buoyed by the long bull market in stocks. Affiliated Managers Group (AMG +0.71%) has capitalized on the rising market not only by keeping its existing clients happy but also by searching for new growth initiatives designed to broaden the asset manager's scope.
Coming into Monday's fourth-quarter financial report, AMG shareholders expected to see the party continue, and the company's results were quite strong and pointed toward ongoing success for 2018. Let's look more closely at Affiliated Managers Group and what it said about its future.
Image source: Affiliated Managers Group.
Finishing 2017 strong
Affiliated Managers Group's fourth-quarter results kept showing accelerating growth. Sales were up nearly 10% to $604.1 million, which continued to pick up speed from quarters earlier in the year. Net income doubled due largely to one-time items, but even on an adjusted basis, economic net income soared 24% to $261.3 million, resulting in economic earnings of $4.68 per share.
Changes in tax laws gave AMG a big one-time boost. Revaluation of deferred tax liabilities was primarily responsible for the $194.1 million net tax benefit for the quarter, which resulted in a huge boost to GAAP net income that the company left out of its preferred economic net income figures.
From a fundamental perspective, AMG hasn't seen the resonance from its investment clients that it would like to see. Net inflows for the quarter came in at just $1 billion, down by two-thirds from the previous quarter. As we've seen in previous quarters, most of the money that the company attracted came in through alternative and multi-asset investments, with net outflows of $1.6 billion in U.S. equities. The market added more than $30 billion to AMG's asset base, which grew to $836.3 billion, and market returns for global equities and alternative strategies were especially noteworthy.
Affiliated Managers Group also kept seeing a shift toward individual investors. Institutional clients saw net outflows during the quarter, while the retail and high net worth categories saw net inflows. Even with the move, institutions still represent almost 60% of AMG's overall assets under management.
Cost discipline was instrumental in keeping AMG's bottom line healthy. Even as compensation and related expenses ballooned higher at a greater than 10% clip, the company kept cutting its overhead expenses. That kept total operating cost growth at less than 5%, lagging the pace of revenue gains and helping to drive enhanced profits.
What's next for AMG?
CEO Sean Healey was pleased with how 2017 ended and looked forward to the coming year. "Assets under management increased 21% year-over-year," Healey said, "driven by the long-term investment outperformance of our alpha-generating affiliates and the strong execution of our growth strategy, including organic growth from net client cash flows and the ongoing success of our strategic initiatives to support and enhance our Affiliates' new business momentum." He also said that AMG is competing well in the industry and should see further earnings growth as a result.
Affiliated Managers Group reflected its optimism by making an increase to its dividend. The asset manager will now pay $0.30 per share every quarter to its shareholders, representing a 50% jump over the previous $0.20 quarterly payment. AMG also chose to continue its balanced approach to capital management by increasing its share repurchase authorization to a total of 5 million shares. With the company having bought back about 2.4 million shares in 2017, AMG has demonstrated its commitment to returning capital to shareholders.
Shareholders didn't seem all that impressed by the report, although the 3% drop in the stock on Monday following the announcement reflected in part the swoon in the overall stock market and rising investor fears about the sustainability of the bull market. For now, AMG remains well positioned to capitalize on market strength, and as long as the investment climate remains favorable, the company should see further gains in key metrics like assets under management.
