Greetings, welcome to the AMG Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Celine Oh, Vice President, Investor Relations for AMG. Thank you. You may begin.
Thank you for joining AMG to discuss our results for the second quarter of 2018. In this conference call, certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors, including, but not limited to those referenced in the company's Form 10-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward-looking statements made during the call. AMG will provide on the investor relations section of its website at www.amg.com a replay of the call and a copy of our announcement of our results for the quarter, as well as a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures, including a reconciliation of any estimates of the company's economic earnings per share for future periods that are announced on this call.
With us on the line to discuss the company's results for the quarter are Nathaniel Dalton, President and Chief Executive Officer, and Jay Horgen, Chief Financial Officer. With that, I'll turn the call over to Nate.
Thanks, Celine. Good morning, everyone. AMG generated strong results in the second quarter with positive net client cash flow of $4.3 billion and year-over-year growth of 8% in economic earnings per share. Our results reflect the strength of our strategic position in attractive areas of alternatives and active global equities, and ongoing significant client demand for our affiliates' broad range of distinctive return streams, especially in these areas. At the highest level, we are pleased with our organic growth as we generated continued strong growth sales and a return to an overall more normal level of redemptions. While it's still early in the third quarter, we are off to a good start so far with positive flows, and the level of activity at all stages of the sales cycle remains very high across AMG's and our affiliates' business development teams.
We're seeing this across won but unfunded mandates, finals, and RFPs. In terms of second quarter flows across our product categories, we saw continued strong demand for alternatives with $2.6 billion in positive net flows. We generated record sales in global equities during the quarter, resulting in $1.9 billion in net flows, while U.S. equities had one of its best quarters in years on a net basis with only modest outflows. Finally, we continue to see positive flows in our multi-asset and other category as some newer products are starting to gain traction. Turning to our quarterly flows by distribution channel, we saw significant strength within institutional, producing our best quarter in the last 3 years with $5.3 billion in net flows and sales well diversified across product categories. Our institutional flows were also well diversified by geography, with sales in each of our coverage regions.
In the retail channel, we reported net outflows of half a billion, while we saw weakness in our liquid alternatives, this was mostly offset by strong sales in global equities. In terms of subcategories within the retail channel, we had good traction in sub-advisory and certain non-U.S. regions. Finally, in the high net worth channel, we reported modest outflows of half a billion, which we believe were driven primarily by a few SMA model changes. Otherwise, the underlying demand trends remain in place. One final point relative to flows in the quarter. We were pleased to see a very diverse group of product types and affiliates contributing significantly as we saw strong sales across AQR, Capula, EIG, Pantheon, and Systematica within our alternative segment, while Artemis, Harding Loevner, TimesSquare and Veritas were notable contributors within our global equity segment.
As I said, we're off to a strong start for the second half of the year. Now let me also spend a minute on why we are very confident about our long-term organic growth prospects. First, and most importantly, it begins with our affiliates' outstanding long-term track records of investment performance in areas where we continue to see secular client demand trends, including global equities and liquid and illiquid alternatives. Fundamentally, many of our affiliates' largest and most significant products continue to build on excellent and distinctive track records. Second, we and our affiliates are innovating and developing new products, which is, of course, critically important to match evolving client needs.
Examples are many and diverse and would include AQR beginning to build a fixed income franchise or a U.S. equity manager such as TimesSquare launching an international and now emerging markets franchise, or GW&K evolving from a great muni bond manager to a successful U.S. and now an international equity manager. Artemis, in particular, has a very successful model of leveraging their U.K. retail brand across a series of new products, homegrown and through lift outs. Third, we have a unique distribution strategy that combines the focused distribution resources at each of our affiliates with the leverageable scope and scale of AMG's global distribution platforms and our continuous evolution and improvement of those platforms. This includes coverage of geographies and channels, but also product packaging and operational expertise.
As you've heard us say, this distribution strategy is increasingly effective as leading clients worldwide and the intermediaries who serve them are consolidating their relationships with external managers and looking for more effective relationships and even partnerships with a smaller universe of investment management firms. One product area we've highlighted recently that pulls all three of these elements together is our growing franchise in illiquid alternatives across affiliates such as Baring Asia, EIG, and Pantheon. First, each of these affiliates produces distinctive return streams in their flagship products. Second, we and they have been working to innovate and develop additional products, such as the infrastructure, real asset, and credit strategies of Pantheon, the Asia credit and real estate products of Baring Asia, and credit direct lending and operating energy capabilities of EIG.
Third, we and they have been working together to diversify their distribution opportunities and bring their expanding product sets to the most appropriate pools of capital worldwide. Expanding on that last point about distribution capabilities, we continue to leverage AMG scale in working with our affiliates to bring their differentiated strategies to sophisticated clients and intermediaries around the world. As you know, we've been successful in strategically and deliberately building out our global distribution capabilities over the past dozen years. First in Australia, then expanding to the Middle East, Europe, and parts of Asia, and offering clients an array of distinctive return streams managed by best-in-class boutique firms. As we've mentioned on recent calls, we are extending our Asian coverage to Japan. We are opening our office in close cooperation with Pantheon, which recently opened their Tokyo office, and we're in the planning stages with certain other affiliates.
Given the array of relationships we and our affiliates have been establishing with some of the largest, most important clients and intermediaries in Japan, we see tremendous growth opportunities building on our early wins. We look forward to updating you more in the quarters to come. Putting together the three elements I highlighted earlier, first, affiliate investment performance, second, continued innovation and product development, and third, our unique collaborative distribution strategy, our growth prospects look very good. In addition, AMG's business strategy provides a unique opportunity to generate incremental earnings growth and product diversification through accretive investments in new affiliates. Given our outstanding track record spanning more than two decades, AMG is the partner of choice for boutique firms around the world, both traditional and alternative, which seek a permanent strategic partner.
We have an outstanding secular opportunity here, and while the pace of activity is inherently based on the dynamics of each prospective affiliate, we continue to make good progress across a range of potential new investments. As always, we remain very disciplined and highly selective. Given the scale of our recurring free cash flow generation, we're able to execute this element of our growth strategy, while also consistently returning capital to shareholders through both our regular cash dividends as well as ongoing and increasing share repurchases as our earnings grow. As Jay Horgen will discuss further in a moment, we demonstrated this disciplined approach to capital again last quarter. Looking ahead, we are very confident in our ability to continue to enhance the quality, diversity, and earnings power of our business and generate outstanding long-term shareholder value.
Through our unique business model, we offer the focused expertise of specialist managers, along with the scale and resources of a global asset management franchise, combined with a 25-year track record of deploying the cash flow generated by our business to create shareholder value. With that, I'll turn to Jay to discuss the results in more detail.
Thank you, Nate, and good morning. AMG generated strong organic growth for the second quarter with $4.3 billion in net client cash flows across a broad array of alternative and active global equity strategies. As Nate described, we feel good about our improving organic growth profile. Looking forward, we are off to a good start in the second half of the year with positive flows in July to date, and a strong pipeline of won but unfunded mandates. Turning to the details for the quarter, I'm going to describe our business trends within each product category with a focus on both flows and market performance through June. Given that this is the first time for me to review our business trends, the flow and format may be a little different and will evolve over time.
I look forward to your feedback as we continue to enhance our disclosure. Starting with alternatives, which account for 39% of our AUM, we had another good quarter of organic growth and saw meaningful positive contributions from both our liquid and illiquid product set totaling $2.6 billion in net flows for the quarter. Focusing on illiquids for a moment, we had a solid level of fundings in the second quarter, but in July, we generated more commitments in this category than all of the second quarter. Beyond illiquids, consistent with recent trends, the systematic diversified category continued to be challenged. However, we have experienced good flows within multi-strat, as well as the fixed income and equity relative value categories. Turning to our selected benchmarks by alternative category.
Within systematic diversified, which accounts for 5% of our AUM, our selected industry benchmark continued to move lower with the SG Trend Index down 1.3% for the quarter and 5.2% year to date. However, most of our products in this category maintain good relative performance. Within fixed income and equity relative value, which accounts for 9% of our AUM, our selected industry benchmarks were modestly positive, with HFRI relative value up 1.1% for the quarter and 1.5% year to date. HFRI Equity Hedge up 0.9% for the quarter and 1.2% year to date. Finally, the HFRI Activist Index was up 4.8% for the quarter and 2.4% year to date. While our benchmarks remain modestly positive, generally, we have seen mixed relative performance in this category. However, we have seen strong relative performance from our event-driven strategies.
Now turning to multi-strat and other, which accounts for 15% of our AUM. Our selected industry benchmark was modestly positive, with HFRI Fund Weighted Composite up 0.8% for both the second quarter and year-to-date. Against this backdrop, our performance has been mixed for both the quarter and year-to-date. Next, turning to our private equity and real asset category, which accounts for 10% of our AUM and includes strategies such as global and regional private equity, co-investments, credit, real assets, infrastructure, and real estate. Our affiliates maintain strong long-term track records, and the pace of product innovation and extensions in this category has led to even greater growth in our business. Next, turning global equities, which account for 34% of our AUM.
We saw net inflows of $1.9 billion in the quarter, driven by retail sales, including a number of sub-advisory wins, as well as strong momentum in institutional sales with a significant improvement in redemption levels. Selected industry benchmarks in the category were mixed, with the MSCI World up 1.9% for the quarter and 0.8% year-to-date. While the MSCI EAFE was down 1% for the quarter and 2.4% year-to-date, and MSCI Emerging Markets was down 7.9% for the quarter and 6.5% year-to-date. In U.S. equities, which account for 14% of our AUM, we reported outflows of $400 million, and while negative overall, we had a good institutional flow quarter with a number of wins and continue to see pockets of ongoing opportunity. While industry trends continue to be challenged in U.S. equities, our overall redemptions have been improving over time.
Selected industry benchmarks were positive, with the S&P 500 up 3.4% for the quarter and 2.6% year-to-date, and the Russell 2000 up 7.8% for the quarter and 7.7% year-to-date. Finally, in multi-asset and other, which account for 13% of our AUM and encompasses multi-asset and balanced mandates within our wealth management business, as well as a number of specialty fixed income and multi-asset products, we had a slightly positive quarter, producing net flows of $200 million. While we saw some weakness with our legacy fixed income products, our wealth management affiliates continue to generate positive flows, and we are seeing good momentum in new products, including systematic fixed income. Before turning to the financials, I wanted to reiterate that we are pleased with our improving organic growth profile as we and our affiliates are realizing the benefits of new products, new packaging, and new geographies. Now turning to our financials.
As you saw in the release, we reported economic earnings per share of $3.61 for the second quarter, which included net performance fees of $0.10. On a GAAP basis, we reported earnings per share of $2.16. For the second quarter, aggregate fees grew 5% to $1.3 billion from a year ago, driven by positive markets and organic growth in alternatives. The ratio of aggregate fees to average assets under management declined modestly year-over-year from 64 basis points to 62 basis points, which was driven in part by timing differences between AUM and revenue recognition, as well as changes in composition of our AUM. Adjusted EBITDA decreased 3% to $246.2 million from a year ago, reflecting lower other income from realized and unrealized gains, modestly lower net performance fees, and the impact of investments which position our business for long-term growth.
Economic net income grew 4% to $195.6 million from a year ago, reflecting lower interest expense and lower tax rate. Economic earnings per share grew 8% to $3.61, given lower year-over-year share count due to repurchase activity. Turning to more specific modeling items for the second quarter, the ratio of adjusted EBITDA to average assets under management was 11.9 basis points or 11.5 basis points excluding performance fees. Looking ahead, we expect adjusted EBITDA to average assets under management to be approximately 11.3 basis points in the third quarter, reflecting seasonally lower performance fees and continued investment in product development and distribution capabilities. Our share of interest expense was $21.4 million for the second quarter. In the third quarter, we expect our share of interest expense to remain at approximately $21 million.
Our share of reported amortization impairments was $74.4 million for the second quarter, including $56.8 million from affiliates accounted for under the equity method, which was elevated primarily due to a non-cash impairment charge of $33 million related to Ivory. This non-cash charge reduced our carrying value to zero, the economic impact was far less at roughly $1 million in EBITDA per quarter. Looking ahead to the third quarter, we expect our share of reported amortization to return to a normalized level of $41 million. Turning to our taxes. With regard to our tax rates in the second quarter, our effective GAAP tax rate was 21.3% and our cash tax rate was 18.1%, which was lower due to adjustments related to U.S. tax reform, and we expect these rates to normalize on a full-year basis.
Looking forward, we expect our GAAP tax rate to be approximately 25% and our cash tax rate to be approximately 20%. Intangible-related deferred taxes were $4.7 million, which was lower in the quarter given the level of amortization and impairments. For the third quarter, we expect intangible-related deferred taxes to return to approximately $12 million as our amortization normalizes. Other economic items were negative $500,000 for the second quarter. For modeling purposes, we expect our other economic items to be approximately $1 million per quarter. Our adjusted weighted average share count for the second quarter was 54.2 million, and we expect it to be approximately 53.5 million for the third quarter, reflecting a continued level of repurchases, and we now expect our adjusted weighted average share count for the full year to be approximately 53.9 million.
Turning to our balance sheet in the second quarter, we paid a $0.30 dividend per share and we repurchased $150 million in shares. Looking to the second half of the year, we expect to repurchase between $200 million and $300 million, depending on the level of new investment activity. Looking ahead, we are confident in our ability to generate outstanding long-term shareholder value through both the organic growth of our global asset management business as well as the deployment of capital into accretive investments and outstanding new affiliates while also consistently returning capital to shareholders. Now I'll be happy to answer your questions.
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you limit yourself to one question and invite you to rejoin the queue. Our first question comes from the line of William Katz with Citigroup. Please proceed with your question.
Okay, thank you very much, and thank you for taking the question. Jay, just coming back to flows for a moment. It's a bit of a differentiated update versus some of your peers who were out last week. How much of this might be cyclical in terms of some of the product gains that you've been having on the alternatives side, and how much of it do you think is a little more structural, just given as you sort of ended with new products, expanded opportunity, expanded geographies, et cetera, and how you sort of think about that beyond the third quarter to look out maybe to the second half of the year and even into 2019?
Great. Thanks, Bill, for the question. Simply put, I think much of it is using the framework you set out, I think much of it is structural, and therefore sustainable. On some level, there's really nothing all that different or new from the way we've been talking about overall levels of gross sales. If you look over the last, call it year and a half, our gross sales have actually been pretty good. The question then is, okay, why? We covered much of this in the prepared remarks, but as I said, it starts with the distinctive track records that our affiliates are producing. These are great institutional brands, these affiliates.
Think of things in global equities like Harding Loevner or Veritas, and liquid alternatives, we're talking about brands like AQR or Capula or Winton, and in the liquids, which we highlighted in the prepared remarks, it's brands like Pantheon, Baring, and EIG. I use that word brand because it is, as we talked about, these are franchises that are growing and expanding, and we talk about it as product innovation, but it's really doing a better and better job matching the capabilities of the firms with the evolving client needs across channels and geographies. A layer down, if you step back, we had sales in something like 400 products in the quarter, and a bunch of those are products we didn't have five years ago. Those include some of the fastest-growing ones.
That's not to say, as you said, some of that will have cycles to it, especially where there's something that's got a fundraising cycle to it, or where there's a product that's exploiting a specific opportunity that one of our affiliates sees. In the main, that overall kind of wave of product development and evolution is the most important theme. Again, just to make sure everybody's tracking, for us, product development happens some at the affiliates, of course, just affiliates alone. It also happens us jointly with affiliates, and this is something that we're still at the early stages of because we're getting better and better at bringing the market knowledge that we have back to the affiliates. Back to talk about leveraging the scope and scale.
As we always have, we have this unique ability to add kind of proven, well-performing product with the stickiness or distinctive product through our new investments effort. We have sort of all of those, kind of product development engines. As we said in our prepared remarks, it's not just product development that way and innovation, but it's also the packaging and distribution capabilities, extensions and wrappers, and some of it is simply bringing product to new geographies and channels. While we talked about the opening of Tokyo here, it's important to note also that over the last really couple years, we've been adding resources in Europe, and a little bit in the Middle East, and a little bit in Asia, as we're doing some channel extensions in places like that. We've also been making some modest investments in packaging capabilities.
Here I would highlight things like the Pantheon '40 Act fund or something which is public, so we can talk about it. When you put all those together, the performance, the brands, the innovation, and this region strategy into absolutely we think those are the things that have been showing up in gross sales and will continue to drive gross sales going forward.
Thank you. Our next question comes from the line of Daniel Fannon with Jefferies. Please proceed with your question.
Thanks. Good morning. Jay, could you update us on the outlook as we think about performance fees into the back half of the year and just the benchmarks versus your guidance from earlier in the year in terms of where we sit?
Thanks, Dan. Maybe I'll take this in two pieces. I'll talk about the third quarter and then maybe the rest of the year. First, as I said in the prepared remarks, we're off to a good start. We've seen positive markets and positive flows in July so far. Our current blend across all categories is up 1.5%. That includes FX as well. That's from a base of $824 billion, which you can see in the June 30 numbers. We're up in July. Should give us a little bit of lift here in the quarter and for the year. Let's see. You also just when we turned to the third quarter, I gave some guidance in the call around our EBITDA to average AUM of 11.3 basis points, which is slightly lower than where we came in this quarter.
I just want to remind everyone, our third quarter is a typically seasonally low point for us, both EBITDA and earnings, primarily given the population of performance fee contracts that crystallize in the third quarter. They're very low, that population. As a result, we're only expecting $0.01 or $0.02 in the third quarter. That's in there. Obviously, we continue, as you heard from me, to making investments in the business, new products, and new capabilities. That's all reflected in the 11.3 basis points. Looking beyond the third quarter to the fourth, and staying on performance fees for a moment, and I'll just maybe take the perspective of a full year, and then I'll narrow it to the fourth quarter. Given the benchmarks that I mentioned in my prepared remarks, in the alternative category primarily, most of those benchmarks are modestly positive.
Really, it's a comment that I'm about to make is more about the overall benchmarks, because our relative performance is pretty good, with the exception of a continuing challenging environment for systematic diversified. Really, relative performance good, benchmarks modest. I think when you factor all that together and you think about where we are in the year, we're now tracking closer to about $1.30 for the whole year in performance fee. Of course, there's a range around that. We've already booked $0.50 in the first half. I mentioned $0.01 or $0.02 in the third quarter, so that leaves about $0.80 in the fourth quarter. This is a conservative estimate, and we're just in July, so we've had obviously many environments where the third and fourth quarter bring about lots of performance fees. I just wanted to point that out.
Still feeling pretty good about the prospect for performance fees beyond 2018, just given the relative long-term performance of our alternative products. Finally, on capital deployment, maybe I'll even touch a little bit on 2019 here. As you think about what we've said, we continue to repurchase shares at a reasonably high level, $200 million-$300 million in the second half of the year. We've already done $300 million in the first half. That's brought our weighted average share count down quite a bit. We expect the weighted average share count for the year to break through 54 million. When we look at the year-end share count, we're seeing it below 53 million, just a touch below 53. That is a pretty good setup going into next year, because we started this year at 57, and we're ending at 53.
Looking forward to 2019 together with sort of an improving organic growth profile, a lower share count, and some good things going on in our business. We're looking forward to that.
Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Hi, good morning. Thank you. The last couple of quarters, you talked about some big wins in the pipeline getting delayed. Did that help 2Q, or are you still waiting for some of those to come through? Jay, your comments about July commitments and alts being more than all of 2Q, is that actual inflow or is that just adding to the pipeline? Thanks.
Yeah. Let me start and then maybe Jay can pick up on that last bit. As I think we've talked about, we have in both sort of composition, meaning the product mix as well as kind of the combination of challenge geography, been pursuing some more complicated mandates. Some of that absolutely did start to materialize in the second quarter. In terms of the pipeline overall, that's all been replenished. It's not like, hey, this was this kind of one-time thing. Those kinds of mandates, I think, are part of two overall trends. One is a trend in the marketplace, which is the behavior of pools of capital and the consultants and the intermediaries and how they're narrowing. You've heard lots of folks talk about that.
The other is, again, on our side, which is the evolving capabilities that we and our affiliates have to do an increasingly good job. Again, to be clear, there's lots more we could do, an increasingly good job sort of facing off against that trend. We are seeing some of that pull through, we're also just seeing that opportunity as a long and growing opportunity. Jay, if you wanted to touch on the-
Yeah. Patrick, just maybe starting with the second quarter, I mentioned in my prepared remarks we saw $2.6 billion in net flows for the second quarter, I also mentioned that we saw net flows in both the liquid and illiquid book. If you imagine something in the neighborhood of an equal weighting, we had good flows in both. I would say that going into July, we're seeing a number of our private equity real assets and illiquid managers starting to close on a number of funds that have been in the market without going into any more detail there because I can't. Some of those have made the news, some of them haven't. We're seeing that number being quite a bit more than what we saw net in the second quarter.
Thank you. Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed with your question.
All right. Thanks, guys. Kind of a two-part question. First for Jay, just on the EBITDA, you mentioned down year-over-year, I think you mentioned the other income performance fees and the investments. I guess just on the investments, how much is that maybe weighing on it? In terms of maybe the investment time horizon or where we should think about the return on those investments. I guess just bigger picture, if I look at how you guys are positioned on you mentioned the structural allocations, that makes sense. The investments you're making, it makes sense. On the other side, the alts, it seems like the performance as a whole, meaning for the industry, has been more muted. You had the impairment with Ivory.
I just wanted to understand, when you look across all the affiliates, if you have any stats on how many are outperforming the benchmark, even if it's a longer term, like 3-5 year, or out of all the affiliates, how many are having inflows versus outflows on maybe a trailing 12 months. Just something to get a little bit of color, because the flows were obviously good for the quarter, but just to get a little bit more color on the sustainability of that. Thanks.
Yeah. I'll start with the back half and then turn to Jay. Appreciate the comment, and there's a couple of different themes that we have. As you are, there's a couple different themes that we have to work together here. One is kind of short-term performance themes. Just honestly, on a lot of levels on the short-term kinds of performance themes, I think we have to look through those. You've heard us talk about some specific areas where they had been good and now we have to sort of look through those. I would start with where do we see, and we will think about the ways that we can get better kind of meaningful data out. Where are the places where we can see, and again, we're much better at this as we go here.
Where are the places we can see significant opportunities, in part for specific products, but really for capabilities, right? I don't think that's just specifically in alts, but you can use alternatives as an example and a place to start that. We think there is a long-term opportunity for the capabilities that our affiliates have. Some products absolutely underperforming, some products absolutely outperforming. In the main, the alternative products, if you sort of think about it across the whole, in the main, the alternative products are performing better than peers. That's probably the right way to think about it once you've gone from category because there is demand characteristics of the categories, and then which are the better performing products and capabilities within that. In the main, our affiliates are performing better than peers, and we'll figure out ways to get that.
It's demand characteristics, it's capabilities, and then within alts specifically, we've talked about around these two dimensions, which is liquid and illiquid. We've sort of put down somewhat artificial stakes around those two definitions, but then stakes around those definitions. If you do it that way, the illiquid book and the illiquid opportunity set is behaving as good as the liquid is. The illiquid opportunity set is even better. There's just an incredible amount of demand for both the existing capabilities and also reasonably easy to see extensions of what our affiliates are doing. To the extent that these businesses are ultimately, and you heard us talk about this a little in our prepared remarks, these businesses are behaving more like platforms as you look at the way they can extend their products consistently under their brands.
I don't know, Jay, if you want to add to that or also take the second part.
Let me take the second part. There's a lot I could say here, so I'll try to just be brief. Just on the earnings, the EBITDA, and kind of where we are. Our business is seasonal, so I want to make sure that we note that. We have higher level performance fees in the first and the fourth quarters, seasonally low in the second and the third. To some extent, that's affecting our EBITDA on the second and the third. If you kind of look at us as that first half, second half kind of business, I think you'll see numbers will be more, I guess at least you'll take into account sort of the spreading of those performance fees. The other point that I made in the prepared remarks is other income clearly was down.
You can see it was down $4.5 million on the financial statement line item, but actually we had last year a bit more realized gains than we do this year. It's really more down like $6 million, not four and a half. That obviously impacted. Those are gains from investments that we've made, typically seed or GP investments, and that's part of our business. We leave that in our earnings, and we expect them to go up over time. That is something that we usually have a contribution from almost every quarter. It was just down this quarter. There's a little bit of Ivory in there. As I mentioned, there's a non-cash element to Ivory, and then there's about a million a quarter, which we would take out.
If you reconcile, that's about a $10 million spread that we did not see recurring in this quarter year-over-year. As I mentioned in my remarks, the investments that we have and will make in the business, that's included in the guidance of the 11.3 basis points. I would say, and just to dimensionalize it a little bit, I think if you think about our history of expanding geographies in front of both the significant demand and participation by all of our affiliates. You think about Japan as an example, I'll make the comment that just like Australia, Middle East, et cetera, before that, we do have a bit of a startup expense initially.
In Japan, contextualizing it's even a more robust statement because not only have we moved to open up a Japanese office and work in Japan, we've helped some of our affiliates do the same. If you think about the Pantheon, we've worked side by side with Pantheon in a way to get that startup cost through. When you see that come through our numbers, sure, we've had a little bit of that. It's in the forward projections, and we do expect a return coming through as AUM is accumulated in those regions, and that's been our history.
Let me maybe just attest to that last point, which is as Jay said, We've been looking at Japan for a while, and we're now in a place where we see enough demand that we and our affiliates are going to go after it in an on-the-ground kind of way. There's a little bit of startup costs, as we said, and that's true everywhere as we invest and then start to experience the growth curve. I will say, to be clear, most of the time when we're entering a market, we have much less traction than we already have in Japan, and we've really had quite a good experience, some of which has already come through, but much of which obviously hasn't. We're really seeing good traction there.
The only other just small point I'd add is obviously we have had to start the process to open a Dublin office. We have conditions in place, but we're having to execute on them. Not a lot of money, but obviously the ultimate shape of it will depend on Brexit and obviously our conversations with regulators, but we are having to stand that up.
Thank you. Our next question comes from the line of Robert Lee with KBW. Please proceed with your question.
Thanks. Good morning, guys.
Morning.
Morning. Maybe I guess my first question, well, I'll ask a two-parter. First one is just on M&A. I know you guys are obviously trying to stay disciplined, but you have seen a fair amount of activity in the market. Some competitors acquiring stakes, and some of these kind of quote "permanent capital vehicles," whether it's Dyal or Blackstone's platform. Can you maybe talk a little bit about beyond the looking for a permanent partner, but how do you kind of perceive maybe your strategy or what you're looking to invest in compared to what you're kind of seeing happening in the marketplace as it relates at least to minority stakes in alt managers? And then, I guess maybe just as a second part, is it in the alts business you talked about a lot of commitments coming on board in July, I guess a lot of fund closing.
I'm assuming that that's not necessarily going to flow into AUM, all of that, if they haven't turned on fees. Is there any way of getting a sense of what your kind of dry powder pipeline may be like of commitments that your affiliates have received but we're not seeing yet in AUM or that haven't been turned on?
Great. Let me start on the first part and then ask Jay to do the second. I think you framed it, if you understand exactly us, I think really well and framed it well. Just to sort of level set, stepping back, we do have a differentiated model and approach, and we've been kind of running and evolving this model for now nearly 25 years. Our approach is very attractive to our target universe, which is prospective affiliates that are looking for a permanent institutional partner, and I would underline the word permanent there. Look, at the highest level, we're helping solve a demographically driven kind of management ownership and succession problem for these firms. We have a solution that preserves and protects their unique entrepreneurial cultures across successive generations of management. That's why that kind of permanence underline is so important.
In terms of how we pursue it, we have this proprietary culling effort. We've been out building relationships with the best firms for many years, and that activity continues apace. You've heard us say those kind of firms that we're pursuing generally don't have to do anything at any specific point in time. What's driving the transactions of those firms is generally us building the relationships and the firms deciding that now, whatever the now is the right time to address that long-term demographic issue. That's a universe of firms where we have a unique solution, and I think we are uniquely attractive. Now, in terms of your comments about the current environment, absolutely, this has been an elevated period of M&A activity in the industry.
You should assume alongside our proprietary culling effort, we're looking at all of the opportunities in the market. You should also assume and expect, as you sort of led your question with, when we're looking at an investment, we're very disciplined. That's across multiple dimensions. That's discipline around business quality, that's discipline around the long-term alignment structures that we talked about, and of course, that's discipline around pricing. I guess the last point I'd make is that when we talk about this discipline, we're also always measuring the opportunities we have against reinvesting in our business through share repurchases, and we have a very high-quality, diverse business in place. We're always looking at it against that backdrop as well. Put all that together, we have this outstanding secular opportunity to partner with the best boutique firms.
While the timing of any one can be driven by those dynamics I described, yeah, we continue to be really busy and make good progress across a range of new investments.
Yeah, I was just going to add one thing. I'll talk about the liquid AUM in a moment. Just the thing I would add is one of the major advantages that we have in the market is our reputation for being a supportive partner over 25 years and our permanence. The AMG model that is what people know to be the succession planning model to ensure that that permanence for both us and the affiliate and really alignment is implicit in that. That is still highly valued in the market. It's not for everyone. When you look at some of these stake buyers, whether it's pricing or other elements, in some cases, we have just decided that it's not a situation where we want to chase because pricing can be too high in those environments.
We have stuck to that eight to 10 times EBITDA discipline. Where we really are attractive to partners is where they value the permanence, they value the reputation and the model. As it relates to the AUM policy, you did say one thing I wanted to clarify. Our policy is actually to take assets in under and account for them when they come under supervisory, really, when we start to manage those assets. Generally speaking, fees are tied very closely to that timing. I would say, I mentioned it in my prepared remarks, even this quarter, we saw our aggregate fees to AUM tick down a little bit, mainly because of this timing issue. We have taken in some AUM before the fees were turned on. That's usually days or months or a quarter, but it's not usually that long.
I think you will see us book again in the third quarter some AUM right at the onset of fees. We could have a little noise in the third quarter. In general, we are taking that AUM as we start to manage it.
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Great. Thanks very much. Morning, folks.
Morning.
Just wanted to come back to the EBITDA and the investments in the business. Clearly, obviously a lot of good promising organic growth opportunities that we would naturally think you'd want to invest in. As you talked about the Japan office, and that opportunity, and then the Dublin office also, should we be thinking of these investments as sort of, I don't want to say one-time, but sort of brief, and then you guys coming back to a realization rate closer to that 12 basis points ex performance fees? Rather, do you see enough organic growth opportunities that you want to really continue that into the future?
Let me start and then hand it to Jay. Look, the last part of the question, sitting here today, we think there are a lot of opportunities for us to improve how we're bringing these sustainable return streams to market. I think our method and approach will be pretty consistent. I think you've seen us be quite disciplined as we've built distribution over the last 12 years. I think you'll see us pursue in a deliberative fashion. Part of the question is what's the pace and how do we do it in our way, which is partnering with affiliates and pursuing things that we think have the highest return opportunities at any point in time. I think you'll see us pursue it in sort of the same disciplined way we always have. I think there are definitely included things that are short-term in nature, right?
The startup costs for a geography or the startup costs for a channel within a geography. The Dublin office, I think the question is highly dependent on how Brexit unfolds, we very much hope that it is a temporary thing. I think there's absolutely a category that goes that way. The most important part of it, in my mind, the most important part of the question is sort of where you ended, which is we're sitting here today, we do see opportunities each, we will continue to pursue them in that disciplined way. The other thing I'd say is it's working. We are seeing returns on those investments coming through in gross on the sales line.
Yeah. Our sort of AUM realization rates obviously they have a lot to do with the level of performance fees in addition to asset-based fees. When you think about over the course of the year, if I go back to my first half, second half nomenclature, if you're averaging the first quarter with the second quarter and the third quarter with the fourth quarter, you'll see the realization being higher just by virtue of that normalizes our performance fee opportunity. That you really have to think about those I think all together. The last thing I would say is on that ratio, we have and we continue to see faster growth amongst our equity method affiliates, primarily because those are in the alternative space, and that's where most of our liquid managers are, although Pantheon is a consolidated affiliate.
We are seeing more growth there, which we obviously own a bit less. That will change that ratio just from a composition perspective over time.
Thank you. Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.
Hey, guys. Good morning.
Morning.
A couple on the pipeline. I think this first one's kind of touching on the point you were just making, Jay. Looking at the pipeline and where you're going over the next couple of years, can you give us a sense of where you think the revenue yield and the EBITDA yield on the inflows will be compared to the yield on the outflows at least in the near term there? On new affiliate investments, I know you've been talking about focusing more on larger, more diverse prospects. Within that context, in your conversations with prospects in the near-term part of the pipeline, is distribution still as much of a selling point of the AMG model?
Let me start with that last question. I think the way we talk about it is we're looking for the highest quality boutiques, right? I do think that the dimensions of the highest quality boutiques more require either products that are more leverageable through distribution or otherwise, or firms that themselves have investment processes and disciplines and an orientation to continue to grow and expand their business. I think it can be both. A firm doesn't have to necessarily be larger right away, but it would have to include those things. There's a process that can evolve and grow as well as that orientation. Absolutely, we are looking at larger firms and more diverse firms as well.
In terms of the relative importance or attractiveness of any distribution, we say one of the things is we are looking at firms that are themselves already complete firms, therefore have proven distribution capabilities generally in at least one or two geographies and one or two channels, right? Those are the firms we're attracted to. Our distribution, the distribution we've been building over this dozen years that we talk about, is designed to knit to the distribution capabilities of our affiliates, which includes some obviously very large, successful, diverse firms. We are very used to working with and continuing and partnering with and enhancing and diversifying the asset bases of very successful, large, diverse growing firms, right? Not that's easy, but that is something that we've really done. We put a lot of effort behind and are doing an increasingly good job at.
It's not so much that they specifically need it, but I think we have built a unique distribution set of platforms that, as I said, can sort of knit to the distribution of boutiques and enhance them. That's something that we've been investing in over the past decade. I'm not sure it's necessarily specifically important to each of them, but I think as we go through these conversations with them, I think they all get it. I want to pick up on a point that Jay made before, which is a huge asset that we have is this track record of partnership with these firms. All the things we described about the ability of the distribution platform to work with very successful, large-scale, diverse, and growing boutiques is highly referenceable.
They can just call and speak with any number of our affiliates about how we work with them in ways that are highly customized to those businesses. We do think that what we're building is additive. Again, we're building it not just the virtual circle we talked about. It's not just because it's helpful to these new boutiques and additive to that new investing process, but it's also absolutely today additive to even our largest, most diverse affiliates, and we saw that again this quarter in company flows.
Yeah. Chris, just on the yield point. Look, it's a fee rate comment, and it's also an ownership comment for us. Just at the fee rate level, you've seen us and you've heard us say that our fee rates have been holding relatively stable at the highest level. We're at about 62 basis points with some performance fees, so we're in that 59, 58 kind of range without performance fees. That level, when you think about it, you could say it's been holding relatively stable. Interesting thing is we've probably seen everything underneath that, right? We have some places where we're seeing our mix shift to higher fees. We're seeing places where we see the mix shift to lower fees. We're seeing differences between affiliates. We're seeing it all.
When you have $824 billion in AUM and as many affiliates as we have, we're seeing it all, but we're seeing the composition remain relatively static at the highest level. Why is that? Because we continue to grow in alternatives, just sort of plain and simple. Within alternatives, the illiquids tend to have higher fees. When you think about and frankly, longer duration. I think that's a good structural phenomenon that's actually happening in our business today, and that's keeping our yield on the assets higher, and it's attractive mix shift, if I had to say it that way. On the ownership side, we do have the comps I made earlier about EBITDA to AUM.
We are seeing good growth in those alternative business, but we're also seeing good growth in some of our global equity managers like the Harding Loevner and Pantheon, who's a consolidated affiliate. We are keeping up, if you will, on an ownership basis, but from quarter to quarter, over time, those changes can be modest, but you have to stay focused on the EBITDA line that should be growing over time.
Thank you. Our next question comes from line of Alexander Blostein with Goldman Sachs. Please proceed with your question.
Hey, good morning, everybody. I was hoping you guys could give us a couple of specific answers around the systematic performance. I guess one topic, but a couple of questions there. I guess A, would be helpful to get an update on how different strategies have done year-to-date kind of on an absolute basis. Obviously, we could all see the public sleeves, managed futures, long-short, et cetera, but it would be helpful to get a sense of where the others are. I guess more importantly, given sort of year-to-date challenges in that bucket, can you give us some sense of how critical it is going to be for flows over the next 6 months from an institutional perspective? Ultimately, kind of what do clients care about? Is it absolute or relative performance in that category?
Let me start. There's a bunch of pieces in there. I think the clients in that category are divided into a couple of different groups. I think there's clearly clients who understand the product and are investing in it because of the diversifying characteristics of it. I'll make an observation here, which is the large drawdowns in traditional portfolios tend to be more severe than the drawdowns trend managers, both now in this specific environment and historically. I think the core of the investors, especially the core of the institutional investors, understand the reason they're investing in these strategies and how these strategies should behave as a diversifier in their overall portfolio. I think that's true. I think that while this is a challenging period for the category, it's not a sort of unheard of period. Yeah, I think that applies.
Those comments are really important for a significant portion, I'd say the most significant portion of the asset base for us in the category. Now, there's also absolutely people who are investing in the strategy in a way that was following performance or being driven by performance, and the performance of the category has not been good, and that has been reflected in flows, and you're seeing that in the retail flows that you mentioned. I think you can look at that as a base, and as long as performance continues this way, some portion of it will behave that way. At the highest level, we believe in the category. As part of our diverse business, I think it's an important part of the business.
I think for us, that's the most important point to make, which is we have a large, diverse business with significant participation in areas that we think have long-term secular demand trends behind them. Any one piece of the product set within those secular demand trends will not be performing well at any one given point in time, and that's okay. In fact, that actually also provides some opportunity. I think that's how I would answer it at the high level.
I wanted to pick up on a thread that Nate mentioned in his prepared remarks as well. With systematic diversified being 5% of our business today and on an AUM basis, it really speaks to the diversity and the sort of power of the diversity of our business. As you saw in the public data, I'm sure all of you saw in the public data, that it looked like we were going to have negative flows, when in fact we had demonstrably positive flows this quarter. It just shows you that we do have tremendous diversity in this business. Even though systematic diversified is challenged at the moment, as Nate said, it's an opportunity for the future.
Again, within the context of diversified business, you're always going to have those pockets, and we're completely confident that over time that segment will provide us some growth in the future period.
Thank you. At this time, this concludes our time for questions. I'll turn the floor back to Mr. Dalton for any final comments.
Thank you. Thank you again for joining us this morning. We're pleased with the results for the quarter, and we are confident in our ability to continue to create long-term shareholder value. Look forward to speaking with you again in October. Thank you very much.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.