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TWST: How has the environment for asset managers changed over the past 12 months?

Ms. Ouimet: Needless to say, it has been very tough recently, and particularly on the equity players in the asset management business versus the fixed income players. They have witnessed the double whammy of slower net inflows coupled with a very weak equity market in the last two months.

TWST: What will determine the successful asset manager in the next few years? Is the playing field going to be a little different going forward?

Ms. Ouimet: Yes. I would say that it depends on changes in the mix of assets. The companies that are more diversified will weather a continuation of market volatility. Federated Investors, for example, acquired the Kaufmann Fund two years ago, which added a larger equity component to their revenue. As a result when the equity markets recover, they will have more of an opportunity to participate compared to when they were garnering more fixed income assets. We expect that although Affiliated Managers Group (AMG) is primarily an investor in equities through their 18 affiliates. Their success will center on the diversity of investment style and diverse distribution. The style is currently split evenly between growth and value. Between the affiliates, about 90% of assets are in equities. If you believe in an eventual recovery in the equity markets, which we do, then it is a great company to participate through.

TWST: You mentioned that you have several buys of these small to mid-cap asset management funds. Could you tell us what they are and the reasons why?

Ms. Ouimet: I will start with Affiliated Managers Group, which is one of our top picks. The shares are now trading almost 40% lower than their high of $73 in March of this year. It’s still a very good company with very strong management and a unique business model. Affiliated Managers buys majority stakes in small to mid-sized management companies generally with managed assets of $500 million to $10 billion. We believe the small asset managers will grow faster than the larger managers, so this is a sweet spot for acquiring an interest. One of the company’s main objectives is to help companies with succession issues, so they can pass equity down to future generations of managers. We anticipate that there will be more of these in this kind of market environment where managements are uncertain about the continuity of their businesses. Again, although they have targeted hundreds of companies with this issue, it is difficult to price an investment in this market. They just closed on their announced investment in Third Avenue Funds in New York. This is a good example of the type of investment they target. They had spoken to management for years about the investment as the senior portfolio manager wanted to keep his company intact while he allowed some of the younger portfolio managers to take on more responsibility. There is a built in incentive since AMG does not buy 100% of these affiliates to grow the business and AMG receives a revenue share of that growth. Also, in Third Avenue’s case, it added more diversity to AMG's managed assets, since they are deep value managers and Affiliated Managers did not have an affiliate primarily focused on deep value. Also, management does not have the operating leverage issues of some of their competitors either, since AMG leaves an operating allocation with the affiliates. If an affiliate doesn’t manage his expenses properly, his revenue share is affected, while AMG will receive their share.