Current Price: $184.36 Target Price: $160-$166

Current Price: $184.36 Target Price: $160-$166

Analysts Josh Marquez josh-marquez@uiowa.edu Zo-Ean Lee zo-ean-lee@uiowa.edu Qiqi Shi qiqi-shi@uiowa.edu Vignesh Das vignesh-das@uiowa.edu

Company Overview Affiliated Managers Group (AMG) is a global asset management company with equity investments in leading boutique investment management firms. AMG has ownership stakes in some affiliated investment boutiques. These affiliates provide a comprehensive and diverse range of active return-oriented strategies and products to achieve their customer's' investment objectives.

Stock Performance Highlights 52 week High 52 week Low Beta Value Average Volume

$179.85 $198.40

1.80 276.26k

Share Highlights Market Capitalization Shares Outstanding EPS P/E Ratio Dividend Yield

10.247b 56.58m

9.03 20.42 0.43%

Company Performance Highlights ROE: ROA: Total Revenues:

14.49% 8.45%

2,194.60m

Financial Ratios Current Ratio: Debt to Equity:

1.28 41.36%

Key Investment Highlights Growing assets under management (AUM): During

the same month the company's 20th anniversary of its NYSE listing AMG reached a milestone surpassing 804 billion AUM the key component of revenue growth. As AMG continues to expand its affiliated partners it will absorb the invested assets into its pool of revenue sources. This effect compounded with record market performances that have been recorded thus far this year.

Expanding distribution platform: AMG gained 5 more affiliates adding those firms to its global platform of investment strategies. These partnerships are key to expansion, access, and growth. Access to these strategies offer new products to clients. Broadening the spectrum of investment strategies. Ultimately growing AUM.

Boutique alternative investment strategies: The Boutique investments firms in which AMG has developed partnerships bring a key competitive advantage to their platform. They offer unique investment strategies that would otherwise be inaccessible or at least difficult to utilize without the global distribution platform AMG is able to provide. This attracts investors that are seeking an edge in their strategy.

Heavily dependent on market returns: AMG high raw beta of 2.175. Negative net income in 2008 during the financial crisis and revenues shrunk as expected. Naturally a more volatile stock for a company with a revenue stream dependent on AUM. It's only logical AMG could would fare worse in economic downturn. As an actively managed firm it is possible that would perform better than passive in uncertain market conditions as some competitors are more passive aligned firms.

Changing Industry: As more investors become more aware of the cost advantages of passive investing the competition forces expense ratios down on investment products. Lower expense ratios will cut into the profits of actively managed investment like the ones provided by AMG and affiliates.

One Year Stock Performance

Source: Yahoo Finance1

Executive Summary

Our team of analysts have recommended a SELL rating for Affiliated Managers Group, Inc. stock. Our decision was based on many aspects of the changing economic landscape and the effect it will have on AMG. The company has several key competitive advantages that will keep AMG as a stable company, but we believe the best of its growth has passed. AMG is ultimately driven by the assets under management which has grown significantly in recent years, but this growth will slow as the economic environment changes. AMG offers a unique advantage as it offers unique investment products and strategies over its global distribution platform. These advantages will help the growth of AMG relative to competitors, but ultimately the majority of its growth are favored from stock market returns.

Economic Analysis

Real Gross Domestic Product (GDP) Real gross domestic product (GDP) is a measurement of the inflation-adjusted value of all goods and services by a nation's economy in a given year.2 According to the advance estimate released by the Bureau of Economic Analysis, real GDP increased 3.1percent in the second quarter, and real GDP increased 3 percent at an annual rate in the quarter three of 2017.3

Source: Bureau of Economic Analysis3 Compared to 2 percent increased in the second quarter, the third quarter is slightly decreased by 0.1 percent. The deceleration in real GDP in the third quarter primarily reflected decelerations in personal consumption expenditures (PCE), in nonresidential fixed investment, and in exports that were partly offset by an acceleration in private investment and a downturn in imports.3

The financial sector has high correlation to GDP as the sector relies on individual's abilities and willingness to invest money. When GDP is high, more people are able and willing to manage their money in financial investments. Therefore, we generally expect companies in the financial sector to perform favorably.

Inflation: A measure of the purchasing power of each unit of currency. It is usually measured in Consumer Price Index. Inflation will generally affect the consumer purchasing power, money supply, stock price, stock returns, and economic growth. The change of variable will cause the fluctuation of the supply and demand in financial sector. Focusing on this variable can help companies to identify the trend of the industry as well as the financial investment and the return that companies invested.

Source: Trading Economics4

The inflation rate is projected to increase slowly in the future. Per the above data, the indication is that inflation rate is projected to raise around 2% in short term and will increase to 2.5% in 2-3 years. In short term, higher inflation rates benefit the financial and real estate industry since it improves the purchasing power for customers to invest more money in the industry that could increase the profits of financial companies that have assets in the industry.

Based on the inflation rate forecast, the inflation rate is increasing slowly in the future. Higher inflation rates benefit the financial sector since it improves the purchasing power for customers to invest more money in the industry that could increase the profits of financial companies that have assets in the industry.

Interest rates: Interest rates are critical to the financial sector. Increases in interest rates directly increases the yield on banks' cash holdings from customer balances and business activities, in which increases the profits of the bank. In addition, low interest rate will make money less expensive to borrow and will encourage more people and businesses to borrow money. Therefore, when interest rates are expected to rise, people are more likely rush out to borrow money.

Industry Analysis

Industry Overview Asset management refers to an active management of an investor's portfolio by a financial services company. The institution offers investment services along with trading and alternative securities offering and first access to public offerings that are typically not provided to the average investors5.

Source: BCG Global Asset Management6

Current product lines: hedge funds, mutual funds, private equity, venture capital, and other financial investments

Revenue streams: According to the BCG report "The value of global AuM grew by 7% in 2016, to $69.1 trillion from $64.6 trillion. This was a marked improvement over 2015, when it rose only 1%, and it exceeded the average annualized rate of 5% from 2008 through 2014." Because of the rising market values, the global asset management industry grew by 7% which would be a great condition for the industry.6

Source: BCG Global Asset Management6

Recent Development and Industry Trends: Asset management industry has not performed well in the recent year. The current business model and product of this industry are going towards to the edge. As the demographic changed, the preference of customer shift towards to technology based.7 The development of FinTech that combines data and artificial intelligence shapes the industry to be more digital and data driven8. Majority asset management companies are facing the pressure of the increasing manager fees and the regulation obligation on managers that hinder industry to develop business and increase operational risk9. Embedding Fintech in the industry is considered as the new trend and strategy of most of the lead companies in the

industry. Firms start to move their old style of business operation to IT based model for the sake of bring more transparency to investors and regulation7. Aum firms are seeking opportunities to adapt blockchain, learn artificial intelligence and machine, develop robo-advisers and robotic process automation to improve their efficiency on services and product10.

Markets and Competition: Current Climate: The industry is affected by three factors: regulatory burden, new financial technology entry and customer preference.

Regulatory Burden: SEC has increased expectation on enhance transparency on the information disclosure, compliance, conduct standards and etc. to monitor the industry and control risk. Moreover, the DOL has strengthened their restriction on conflict of interest of advisers and asset managers11.

Financial Technology: As the technology develop, digitalization is being introduced to many asset management firms. Blockchain, Artificial Intelligence implement, machine learning, robo-advisers and robotic process automation are becoming the trend for asset management firm to switch their internal operation11.

Customer Preference: Millennials gradually become the dominant investors who are more favor using the social media and digital technology to interact their investment. Passive approach investments seems to be the popular the choice in the current demographic. Providing service and product based consumer preference is a good strategy to main market share and client relationship11.

Major players in this industry: BlackRock(BLK) Vanguard State Street Global Advisors Fidelity Investments J.P. Morgan Asset Management BNY Mellon Investment Management PIMCO

Of all the major players, BlackRock is the best positioned in the asset management industry since it is the world's largest asset manager with $5.7 trillion in asset under management as of July 201712.

Five Forces: 1. Threat of new entry: Low Even though new asset management companies coming up can be a threat to the existing company, the threat is relatively low since the asset management industry not only

requires skills, professional techniques and efficient data structures to build up clients' confidence and the company's reputation. Therefore, it is comparably difficult for the new entry to establish these standards in short term.

2. Threat of substitutes: Medium Even though investment requires professional skills and diversifications to reduce the risk of the investments. There are the individual investors who would like to manage their own investments without asset manager's advisory. Additionally, there are large volume of funds flowing into passively managed funds.

3. Bargaining power of customers: High According to a recent report from Deloitte, shifts in investor buying behavior is a force that can shape the asset management industry. Both institutional and retail investors are concerning about fee and transparency. The leading firms should try their best to develop efficient data structures to facilitate accounting and reporting to enhance the customer's confidence in investing their money with the asset managers13.

4. Bargaining power of suppliers: Moderate Information industry market research is a significant resource for the asset management industry. The competition between the suppliers are very high among two major players that take the greater market share. According to the Baron, the Bloomberg's share was 33.33 percent and Thomson Reuters' share was 24.29 percent. The rest is divided among smaller players. Even though there are only two majors player they keep each other in balance14.

5. Industry Rivalry: Moderate According to the Forbe The top three companies including BlackRock, Vanguard, and State Street dominates 70% of market share in the global ETF assets industry. Even though they earn most of the market share in the global ETF assets industry, there is still a big competition among the three companies15.

Industry leaders and followers: Industry Leaders (Based on Market Cap) :

Diamond Hill Investment Group, Inc (DHIL) Ameriprise Financial Services, Inc. (AMP) Franklin Resources (BEN) BlackRock, Inc. (BLK) The Blackstone Group (BX)

Industry Followers (Based on Market Cap): KKR & Co.L.P. (KKR) Janus Henderson Group (JHG) Apollo Global Management, LLC (APO) Eaton Vance Corporation (EV)

Sources: Nasdaq16

Financial and Operating Metrics Ameriprise Financial, Inc (AMP)

Source: Yahoo Finance17-21 Comparable Company Price Chart

Sources: Yahoo Finance17-21 Per the information on the charts, Diamond Hill Investments GrouP, Inc. (DHIL) is considered as the lead in terms of highest sales, net income, profit margin and not any debt issue. However, it is the best position company based on the last three months stork price data. Comparing with other industry peers, it stays low and less fluctuations due to the less outstanding shares in the stock price in general among others. BlackRock seems have a potential to grow and lead the industry based on the outlook of economic and industry. It has small market cap than DHIL and relative high on EPS, P/E ratio, profit margin and dividend payout with 160.98 million outstanding shares. Besides, it has smaller percentage of price change and it has uptrend grow on the stock price from historical data, which indicates the stock is growing relative stable in the slowly grow economic. Catalysts for Growth/Change: Economic Pressure: Declaration on GDP growth rate leads the capital markets to have low returns. Asset managers are facing huge pressure on maintaining and increasing revenues on portfolios22. Distributor Consolidation: Decreasing buyers motive the industry to enhance relationship between financial advisor and clients. Moreover, technology is gradually implemented to replace old fashioned style of advising22.

Demand for new capabilities: The current product is having less attractive to the market. New product development, like multi-asset portfolio, illiquid strategies, quantitative strategies and etc, is essential for the industry going forward22.

Shifting Value Chain: Demographic switching and high accelerating development on technology drive the industry to innovate on their operation to satisfy consumers' demand22.

Investment Positives and Negatives: Some investment negatives includes demographic shift, which more and more investors are in younger age. Given that, those old fashioned and services becomes hard to satisfy and need to updates to meet the young clients. On the other hand, asset management industry requires an efficient model and those model needs to update with the current economic and trends. FinTech and AI Robotic system can facilitate the industry to build a more efficient and more accurate models, which will be a potential benefits for the asset management industry.

Company Analysis

Overview and business description: Affiliated Managers Group (AMG) is a global asset management company with equity investments in leading boutique investment management firms. AMG has ownership stakes in some affiliated investment boutiques. These affiliates provide a comprehensive and diverse range of active return-oriented strategies and products to achieve their customer's' investment objectives. As of December 31, 2016, AMG managed 688.7 billion in over 550 investment products across a broad range of active return-oriented strategies and distribution channels23.

Corporate Strategy AMG's strategy is to generate shareholder value through the growth of existing Affiliates, as well as through investments in new Affiliates and additional investments in existing Affiliates. The firm also seeks to help its affiliate firms grow in value by providing a centralized source of support for strategy, marketing, distribution, product development and operations24.

Life Cycle AMG is on the same trend in growth as the industry. The AUM industry is currently in a growing state but the rate is decreasing. Fee revenues continue to decline but there is an increasing ETF market and there is a still strong growth in the asset management fees which is related to the aging Baby Boomer generation25. The company is adjusting to the increasing awareness of asset management fees but are finding ways to keep revenues up and slightly growing. It is possible that the U.S. government can undo some regulation that had an effect on fee revenue. This would have a positive effect on growth. At this moment the company is still slightly in the growth stage.

Financial Summary

According to 10-K, AMG's Adjusted EBITDA increased in 2016, but its Net income decreased by $36.7 million or 7%, primarily due to an increase in other non-operating expenses of $44.2 million relating to Imputed interest expense and contingent payment arrangements. The increase in Imputed interest expense and contingent payment arrangements was primarily due to a $44.7 million non-cash gain on contingent payment obligations recorded in 2015, which did not reoccur to the same extent in 201623. The other changes in Net income according to 10-K include an increase in Equity method intangible amortization of $24.9 million in 2016, primarily due to the full-year impact of AMG's 2015 investments in new Affiliates and the partialyear impact of its 2016 investments in new Affiliates, offset by a decrease of $28.6 million in Income taxes primarily due to the decline in our share of Income before taxes23.

Products and Markets Product Line and New Products AMG's affiliated firms offer more than 500 actively managed investment products across asset classes and investment styles, including a deep selections of U.S. developed-market and emerging-market equity strategies, alternative investment products, and fixed-income strategies.28 Alternative investments include long/short equity strategies, private equity strategies, infrastructure and energy investments, multi strategy investment, hedge funds, and other options.28

Investment Strategy Products AMG uses its global distribution platform to offer a variety of alpha global equity and alternative strategies to clients around the world. The pie chart below shows the total investment exposures to each type strategy by percentage.29

Source: Affiliated Managers Group Website23

Below are some of affiliated investment boutique firms, categorized by strategy style, in which these investment products originate.29

Source: Affiliated Managers Group Website23

The chart below demonstrates the flow of revenue with partnered affiliates. The revenues come from the operations of the affiliated investment firms in which AMG has ownership and distribute to using their global platform. Revenue is shared according to the structured partnership interest model.AMG then earns their share of revenues as owners27.

Source: Affiliated Managers Group, Inc. (2016). 2016 Annual Report.27

Revenues come from 2 sources which are asset based advisory fees and performance based fees. Asset based advisory fees are recognized as services rendered and are typically based upon a percentage of the value of a client's assets under management. Performance fees are assessed as a percentage of the investment performance realized on the client's account. Performance fees are only recognized when they are earned based on contractual agreements. These fees will vary annually due to market volatility27.

Market for the company's products AMG distributes its products and services through its direct sales team or through consultants from around the world. It also has retail distribution platforms through its wholly-owned subsidiaries, which provide retail investors with access to AMG's affiliate investment service through registered investment companies30.

Marketing strategy and customer support

AMG adds to its investment funds and strategies buy acquiring smaller firms from around the world. These boutique firms are able to provide traditional and alternative investment strategies. AMG aims to help these firms by providing its global distribution platform as well as centralized source of support for strategy, marketing, product development and operations30.

Significant customers Client Type: -Institutional 59% -Retail 27% -High Net Worth 14%

Client Location: U.S. Client 54% Non-U.S. Client 46% Source24

Production and Distribution Distribution AMG global distribution platform is a key strategy to AMG growth and competitive advantage. By owning stake in companies around the world it gives them access to alternative investment strategies in global and regional markets not normally available to investors. This ability to connect clients with unique investments is a major advantage for AMG.

Competition Competitive environment Affiliates compete with a broad range of domestic and foreign investment management firms, including public, private and client-owned investment advisors, firms managing passive strategies as well other firms managing active return-oriented strategies, firms associated with securities broker-dealers, financial institutions, insurance companies, private equity firms, sovereign wealth funds and other entities that serve our three principal distribution channels. This competition may reduce the fees that Affiliates can obtain for investment management services23.

Major competitors BlackRock Inc Altaba Inc Bank of New York Mellon Corb

Other Topics Research and Development AMG has done extensive research into the Boutique advantage. Active vs passive. They analyzed over 1200 individual investment management firms around the world and nearly 500 institutional equity strategies. They find 7 key

insights in their research summarizing the strong evidence that boutiques have added value.

7 key insights to the Boutique Advantage 1. Boutiques broadly outperformed non-boutiques 2. Top-performing boutiques added more value for clients than bottom-performing boutiques detracted 3. Boutiques created significant value versus indices 4. Top-performing boutiques generated exceptional excess returns versus indices 5. Boutique strategies, on average, had a high frequency of outperforming indices 6. Individual boutique strategies outperformed indices more often than not 7. Boutique outperformance versus indices was persistent

Government regulation Recent fiduciary changes to wealth management will affect how the AMG operates their relationship with clients. AMG considers themselves as fiduciaries already and see the proposed rule will only harm investors because it shields them from a full disclosure of information. It hampers the ability of asset managers from acting in the best interest of plan clients31.

Valuation Analysis

In our discounted cash flow an economic profit model analyses, we determined that AMG to have a SELL rating. Our valuation found the intrinsic stock price to be lower than the current price of $182.86. We forecasted the future cash flows out to the year of 2021. This is less than a 5 year forecast. We chose this length due to the nature of the industry. As an investment firm it performance is very dependent stock market performance in which AMG's revenues have been dependent on. We predict a slowing stock market and this will present a challenge to AMG's growth. We predict growth slowing down even as AMG aggressively pursues new source of AUM. This is due to the slowing of the stock market and increasing competitive forces of passive investments forcing the AUM expense ratios down and cutting revenues for AMG. We assume that the company is striving to reach 1 trillion in AUM within the next 4 years and that they will do so by the end of our forecast. Although, a sluggish stock market presents a challenge to this milestone we believe that AMG will achieve the 1 trillion mark due to its competitive advantage of boutique investment firms and its global distribution platform. These advantages will influence AMG's growth rate to remain

Revenue Growth The company's revenue is driven by assets under management. AMG continues to invest in partnering firms assets under management grows. In 2016 AMG gained 4 new affiliate investment firms and 8 new affiliates during 2014 and 2015. With each new affiliate AUM grows accordingly. This growth ultimately drives revenue. We forecasted the growth as percentage of AUM. Historically the revenues have averaged 0.43% of total

AUM over the last 10 years. This average is also decreasing as time progresses. This is due to the decreasing expense ratios that are hindering growth. This factor along with the expectation of a slowing stock market has lead us to developing a decreasing growth rate over time.

Source: Affiliated Managers Group Website23

We begin with the growth rate of AUM at 8.78% and shrink the rate by 4% over the next 2 years to 4.78%. This will level off to 5% of continuing value growth. Revenues follow as 0.37% of total AUM.

Weighted Average Cost of Capital (WACC) We calculated a WACC of 9.80% using our capital structure of 81.60% equity and 18.40% debt. The WACC is derived from the cost of debt and cost of equity that are explained below.

Cost of Debt To calculate our cost of debt, we use the risk free rate plus the spread from the rating A3 to get the pre-tax cost of debt of 3.74%. We then calculated the after-tax cost of debt by multiplying the pre-tax cost of debt by one minus marginal tax rate of 35%. The after-tax cost of debt we calculated for AMG is 2.43%.

Cost of Equity To calculate our cost of equity, we used the Capital Asset Pricing Model (CAPM). The three variables we used to calculate the CAPM are as follows: Beta = 1.78 Market risk premium (MRP) = 4.81% Risk-free rate = 2.88%

We calculated Beta by using AMG's average weekly oneyear and two-year betas reported on Bloomberg. The market risk premium equals was derived from Damodaran's 12 month cash free yield. The risk free rate used reflects the current yield on the 30-year U.S. Treasury.

Discounted Cash Flow & Economic Profit Model By using the discounted cash flow and economic profit model, we calculated a stock price for AMG of $163.10, which we believe is an accurate representation of the company's intrinsic value. We assume the CV growth rate of 5% using the WACC and Cost of Equity based as we calculated from the above.

Dividend Discount Model (DDM) We do believe the dividend discount model is a more accurate representation of the current value of AMG and we refers the model to evaluate the target price in the future. We calculated AMG's stock price using expected future earnings per share and dividend, and we came up $178.55 for the intrinsic value. This gives us some sense of the price tends to fall in the future as the data is less than the current price today.

Relative Valuation Model We used a relative model to compare the peer competitors within the asset management industry based on the average project P/E ratio. The average P/E ratio for 2017 that we came up was 15.07, which is lower than the P/E ratio that AMG projected. The implied value that we got from the model for 2017 was $121.63. However, we decided to not take this price as consideration since AMG is a special company that have special structure, it is complicated to compared with other competitors.

Sensitivity Analysis

CV growth of ROIC and WACC We tested the terminal growth of ROIC vs WACC to test how sensitive the stock price is to changes in our forecast. Incremental changes in ROIC have little influence on price. Changes in WACC do have a large impact on price. Any increase in WACC will significantly reduce the stock price.

CV growth rate and WACC We tested the terminal growth rate vs WACC to test how sensitive the stock price is to changes in our forecast. We found that incremental changes in either will have a significant impact on price. The stock price changes inversely to each other but CV growth rate has the great impact on price.

Important Disclaimer

This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students' skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned.

Unless 10 otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

References:

1. Yahoo Finance. AMG. 2. Investopedia. "Real Gross Domestic Product" Retrieved November 13, 2017 from 3. Bureau of Economic Analysis. "National Income and Product Accounts Gross Domestic Product: Third Quarter 2017 (Advance Estimate)." Retrived November 13, 2017 from ase.htm 4.Trading Economics. "Economic Forecasts" Retrived November 13, 2017 from 5. Investopedia. Asset Management Definition. Retrieved September 12 ,2017, from 6. The Boston Consulting Group (BCG). Global Asset Management 2017 The Innovator's Advantage (July 2017). Retrieved September 12, 2017 from 7. Deloitte. Investment Management Outlook 2017. Retrieved September 12 ,2017, from 8. Gary Shub, Brent Beardsley, and etc. (July 11, 2016). Global Asset Management 2016: Doubling Down on Data. Bcg.Perspectives. Retrieved September 12 ,2017, from 9. Shub. G, Beardsley. B, and etc. (July 11, 2016). Asset Managers Get Real with Risk. Bcg.Perspectives. Retrieved September 12 ,2017, from 10. Hugener, G, Mavros, K. and Courbe, J. (2017), 2017 Financial Services Trends Moving beyond the old-fashioned Centralized IT model. PWC Retrieved September 12 ,2017, from 11. Henny. P, Eckenrode. J, and Dannemiller. D (Feb 15, 2017). Three Forces Shaping the 2017 Outlook for

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download