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Executives

Peter Kraus - Chairman & Chief Executive Officer

David Steyn - Chief Operating Officer

Bob Joseph - Chief Financial Officer

Analysts

William Katz - Buckingham Research Group

Craig Siegenthaler - Credit Suisse

Robert Lee - KBW

Marc Irizarry - Goldman Sachs

Cynthia Mayer - Banc of America-Merrill Lynch

AllianceBernstein Holding L.P. (AB) Q2 2009 Earnings Call July 30, 2009 5:00 PM ET

Operator

Thank you for standing by and welcome to the AllianceBernstein second quarter 2009 earnings review. At this time all participants are in a listen-only mode, after the formal remarks there will be a question-and-answer session, and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be replayed for one week.

I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AllianceBernstein, Mr. Phillip Talamo. Please go ahead, sir.

Phillip Talamo

Thank you, Juliann. Good afternoon everyone and welcome to our second quarter 2009 earnings review. As a reminder this conference call is being webcast and is supported by a slide presentation that can be found in the Investor Relations section of our website at www.alliancebernstein.com/investorrelations.

Presenting our results today are our Chairman and Chief Executive Officer, Peter Kraus; our Chief Operating, David Steyn, and our Chief Financial Officer, Bob Joseph.

I would like to take this opportunity to note that some of the information we present today is forward-looking in nature and is subject to certain SEC rules and regulations regarding disclosure. Our disclosure regarding forward-looking statements can be found on page 2 of the presentation as well as in the risk factors section of our 2008 10-K and second quarter 2009 10-Q which we filed earlier this afternoon.

In light of the SEC’s Regulation FD management is limited to responding to inquiries from investors and analysts in a nonpublic forum. Therefore, we encourage you to ask all questions of a material nature on this call.

Now, I will turn the call over to Peter.

Peter Kraus

Thanks very much, Phil. Today we are going to cover a few different things. First is investment performance. I will then ask David Steyn to talk a little bit about our client segments, and then finally Bob Joseph to deal with financial matters and expense management.

So, as most important in any asset management business performance always is the most significant thing that we can do for our clients and the headline is for us in the second quarter and the first half of the year, we’ve had much improved performance from our previous year, much more challenging performance of the different investment segments. So if you take a look at the performance of our value product, which is on page 3 of the slides for those of you that have it, you can see Global Value, International Value and US Diversified Value, you will see a chart that shows their out-performance against the benchmarks. We had a strong first quarter followed up by a solid second quarter which gives us, we think, a competitive position for all of the value products in either the top of the second quartile or solidly in the third quartile for our US products. But our second quarter performance was truly strong and gives us, we think, a very strong first quartile position for the most important global and international products.

Looking at our growth products, slightly different picture, although again improved performance from ‘08. We had a very strong first quarter with a tougher second quarter. In the second quarter we saw a significant valuation driven improvements off of a very low level of the market performance, meaning price appreciation was skewed towards smaller cap names where we tended to be in larger cap names given our mandates, and also in stocks that had much, much higher data than the market. Having said that, we feel good about the position of the portfolios, and as I said, much better performance for all of the growth products than we had in 2008.

We take a look at the Blend products. Again, same story. Strong performance, a value, and good performance of growth together, giving us strong second quartile performance from a competitive point of view.

In Fixed Income, slightly different story, meaning even better story, strong performance in the strategic Core Plus space, solidly in the second quartile and really outstanding performance in our Global Plus portfolio, which we think is our hallmark and strength in the fixed income business. And so again, very happy with that performance in this quarter and for the first half of the year.

Turning to flows, which obviously reflects past performance and hopefully will begin to reflect future performance and the existing performance of ‘09 so far, you can see the flows first by channel, and here we see a continued challenge in the institutional marketplace, where from the second quarter ‘08 to the second quarter ‘09, we see continuedly increasingly large outflows. Offsetting that have been much better performance, i.e., lower outflows overtime in the retail and private client channels where we are seeing improvements from the more challenging times of the third quarter and the fourth quarter.

Looking at flows from a slightly different angle, by investment service, what you can see is that the value service has seen the greatest amount of outflows, not surprising, given it’s the largest amount of our equity dollars. One thing will you notice if you look at the details, however, is looking at net outflows for the second quarter versus the 12 months, you will see substantially less net outflows relative to the beginning balance in that period in the quarter than you saw for the 12 months. So for example, in value for the quarter, down 10% for the 12 months, down 16, so obvious much better performance, albeit still net outflows.

We continue to believe our businesses are well-positioned with our clients and continue to believe the performance that I just discussed will have positive impacts on the business going forward and with that, I would like to turn it over to David Steyn to talk more specifically about what happens inside of our different client segments.

David Steyn

Good afternoon. Now Peter’s addressed both performance and flows at a high level, what I want to do is talk about the environment we think we’re operating in, in the three main channels; private clients, retail, and institutions. And in each one of these the story is really quite different.

Let me start with private clients. There the flows story has improved, sales down a bit Q2 over Q1 but terminations much more significantly down. I think there are a number of factors which are leading to this but the two most important ones I would highlight is, first of all inevitably performance. Year-to-date performance of our private client services is excellent. The second factor though is perhaps the one which has got the greater long-term impact, which is the profound risk aversion which has characterized and dominated the private clients industry since the half way through last year and early parts of this year, seems to be easing. And that profound rink aversion manifested itself in two ways; first of all, it manifested itself in terminations, it also manifested itself in asset shifts out of long-term investments into shorter term substitutes, particularly cash.

We are seeing throughout the business, throughout all of our offices, a willingness on behalf of clients and prospects to reengage and start talking about long-term investment planning and diversified stock bond portfolios. Two initiatives during the quarter, is the expansion of our suite of cash management services to include new FDIC insured offerings. We expect that to come online by the end of the year. (inaudible) I will come back to later and talk about the institutional business having (inaudible) TALF assets, we’re seeing significant interest in PPIP across the private client channel.

One of the metrics of investment in the private client business or perhaps the most important metric of investment for us is the private client business is our footprint and that is footprint devices we have on the ground, that is a footprint which is being expanded over recent years meaningfully. It takes two or three years for our advisors to come on-stream and become productive and we’re beginning to reap the benefits of that now allowing us to evolve and enhance the servicing model, improving client service but also freeing up capacity for prospecting and taking advantage of opportunities in a marketplace which we think is going to throw out more than the normal average of opportunities simply because of its volatility. Looking ahead, we took on our first class of the year of new advisors in June and we’re scheduled to have another class starting in September. So that’s the picture in private clients.

Let me talk about retail and here the story is rather more complex. Our retail business really has two large components; we have the mutual fund business, we have a sub-advisory business. Mutual fund business, about 60%, the sub-advisory business about 40% and the stories here are opposites. The mutual fund business, sales up Q2 over Q1 significant terminations down. Sub-advisory, sales down, terminations up.

Let me talk about the mutual fund side first of all. Driving it, and the same story as private clients, significant improvement in performance. Year-to-date, 50% of funds have outperformed their Lipper peer averages. Fixed income is a particularly interesting area for us. All six of our globally offered fixed income funds have outperformed Q2. So the pattern of redemptions is much better; redemptions Q2 over Q1 down 22%. Interestingly, the redemption rate Q2 is beginning to look very close to our long-term average for redemptions and sales up markedly, 49% Q2 over Q1.

I mentioned fixed income. This is an area which we sought to make a strategic focus some 18 months ago, building up our brand in an area which perhaps we had neglected in the past, an it’s therefore particular pleasing to see some real traction coming through, US and internationally, particularly attractive has been the business flows in Asia where year-to-date our net fixed income flows are 1.8 billion.

So if it’s a rosier picture right now for the mutual funds and that cannot right now be said for sub-advisory. Sub-advisory, 80% of our sub-advisory assets in the United States of America are variable annuity assets, and we, like the industry, have seen significant de-risking as platforms have moved towards passive and quasi-passive investments. There is some evidence that this de-risking may be abating, but it is not at this point yet manifesting itself in asset flows. And I think if I look forward, the sub-advisory turnaround is going to mirror behavior, timing, whatever, much more the turnaround when it comes in the institutional business, not the turnaround in the mutual fund business.

So with that, let me say a few words about the institutions. Here the environment continues to be very challenging with sales down and terminations up. Now, Peter mentioned performance. Just as with private clients and with retail -- with mutual funds, performance has improved Q2 over Q1. If I could update the performance he mentioned for the month of July and I’m very conscious that I’m tempting fate, because there’s one day yet to go. If we take the three value services, all three are ahead of their relative benchmarks. If you take the three growth services, two out of the three are ahead of their benchmarks. If you take the blend services, two out of the three are ahead of their benchmarks. And fixed on this -- fixed income there’s only one where we have the benchmark, it is ahead of it.

I mentioned private clients had had a significant interest in PPIP, we’ve been very pleasantly surprised that the degree of interest in clients, prospects and consultants so far in our initial discussions with them across the institutional business.

Lastly, let me say just a couple of words about DC. DC in a way has been a bit like private clients as a business over the past six, 12 months, sort of froze, minimal activity, as clients focused on perhaps other things. But we’re beginning to see the same warming up of the sectors we are seeing in private clients, particularly renewed interest in the open architecture, defined contribution offerings like customized retirement strategies which this firm has become a thought leader in. So again, while it’s early days for activity, the prospects, the pipeline, and the meetings which we have scheduled are all beginning to suggest that that segment of the marketplace is resurrecting itself.

So lastly, let me turn from the buy side to the sell side. Revenue flat compared to the prior quarter but up 5% over Q1. It’s that time of year when the service come out and we’ve been honored again across the board, Bernstein being ranked number one in the key metrics of research quality here in the US by the leading independent survey. Number one for highest quality US equity research product, number one for greatest knowledge of companies and industries, number one for most creative ideas of themes, number one for most trusted, number one for quality of U.S. equity analysts service. In Europe in the comparable survey we climbed from 17th to 10th this year. In trading, for the second year in a row, number one.

Now, when I was talking about the private clients business I said perhaps the metric of investment is our footprint, the number of advisors we have on the ground, well perhaps the comparable metric of our investment in our Bernstein research, our sell side business is the number of publishing analysts we have. And year-on-year for US and Europe, we are up some 20%. And I’m delighted to report we now have our first publishing analyst for Asia. So with that let me turn to Bob to cover the financials.

Bob Joseph

Great, thank you, David. As reported earlier in today’s press release, net income at the operating partnership fell approximately 54% from 280 million for the second quarter 2008 to 128 million for the second quarter of 2009. This decline resulted from a 32% decrease in revenues, offset partially by 20% decrease in operating expenses. Diluted net income per unit and the quarterly cash distribution per unit for Alliance Holding the publicly traded partnership is $0.41, a decline of 57% from $0.96 per unit in the prior year quarter.

So let’s take a brief look at some of the details. Beginning with slide 14, net revenues declined by 343 million versus the second quarter of 2008. The 347 million or 44% drop in advisory fees was by far the largest contributor for this decline, which I will cover in more detail on the next few slides.

Distribution revenues based on average mutual fund assets under management decreased by 40% due to lower asset levels. This decrease in revenues is largely offset by declines in related AUM based distribution plan payments and in deferred sales commission amortization, both included in promotion and servicing expenses.

Institutional research services revenues were flat versus the second quarter of 2008, while sharply lower interest rates and client account balances resulted in a substantial decline in dividend and interest income, which decreased $14 million or 69%. This is partially offset by 9 million or 87% decrease in related interest expense.

Investment gains increased by 56 million or over 600%. We recorded 63 million of gains on investments related to our deferred compensation obligations in the second quarter of 2009 compared to 12 million of losses in the second quarter of 2008. Conversely, gains on our venture capital fund were 1 million in 2Q ‘09 versus $25 million in the prior year quarter, resulting from a liquidity event for one of our investments.

Slide 15 provides additional information about advisory fee revenues. Average assets under management decreased 41% from the second quarter of 2008 accounting for the majority of the 43% decline in base fee revenues. This decline was broad based affecting all distribution channels and is consistent with the decline in each channels assets under management. The remainder of the decline is the result of a decline in our average revenue yield per dollar of AUM as shown on the next slide.

Slide 16 illustrates how the shift of assets under management towards lower fee investment services magnified the impact of lower assets under management on our advisory fee revenue. Our average revenue yield declined by 140 basis points from June 30, 2008 to June 30, 2009, as measured by our annual fee base, that is, base fee revenues calculated by multiplying end of period assets by contractual fees rates. Specifically, lower fee fixed income assets increased from 28% of total assets as of June 30, 2008 to 40% as of June 30, 2009. In addition, lower fee domestic services increased from 38% of total assets to 45% over the same 12 month period. These shifts were caused by greater market depreciation and net asset outflows over the last 12 months in the higher fee services.

Our largest expense category, employee compensation and benefits is driven in large part by the level of headcount and slide 17 shows the trend in headcount over the last six quarters. Reducing headcount to levels appropriate to support current business activities has been an important priority for the firm. Accordingly, we ended the quarter with 4,654 employees an 18% decline from our third quarter 2008 peak.

On slide 18, we provide components of our operating expenses, which declined by $143 million or 20% to $588 million in 2Q ‘09 from 731 million in 2Q ‘08. I will cover the details of the [20%, 4%] decrease in compensations and benefits on the next slide. However, let’s talk about promotion and servicing expenses which declined by 32% versus the prior year quarter largely a function of lower distribution payments from lower average mutual fund assets under management and lower deferred sales commission amortization due to continued lower back-end load share sales. A 23% decline in controllable expenses, including travel, printing and mailing also contributed to the quarter-over-quarter decline in this expense category.

Despite the positive impact of expense initiatives, general and administrative expenses actually rose by $12 million or 9% from the prior year quarter. The year-over-year comparison for G&A expenses was adversely impacted by an $8 million insurance recovery received in the second quarter of 2008 that lowered G&A costs for that quarter, as well as, an $8 million unfavorable variance in foreign exchange losses. However, occupancy-related expenses did decline by approximately $5 million from the prior year quarter with reductions achieved at a number of U.S. and non-US locations. Finally, technology expenses were comparable to those of the prior year quarter.

Slide 19 provides some additional details of employee compensation and benefits expenses. Base compensation declined by $19 million or 14% from the prior year quarter. Salaries actually declined 18% in line with the 18% reduction in headcount noted previously, that decline was offset partially by an executive retirement accrual. Incentive compensation declined 22%. The accrual for year-end cash bonuses was down 42% versus the prior year quarter reflecting the impact of lower headcount in our current estimate of full year 2009 cash bonuses. As a reminder we estimate full year cash bonuses each quarter and true-up year-to-date cash incentive compensation expense on a pro rata basis. In other words, our year-to-date accrual represents approximately 50% of our full year estimate.

Deferred compensation increased $7 million or 12%. There are a number of components to this variance, however and to provide some context, remember that employees receiving deferred awards elect to make notional investments in services we offer to clients or in AB holding units. Changes in the value of holding units do not result in a change in the related accounting expense, however, for awards notionally invested in client services, increases or decreases in the value of those investments result in corresponding higher or lower compensation expense in future periods. Because deferred compensation related investments appreciated during the second quarter 2009 our liability increased resulting in a $9 million net charge to amortization expense for the period for cumulative mark-to-market adjustments. This is compared to a $7 million net credit to amortization expense in the second quarter of 2008. This net increase in the amortization expense was partially offset by forfeitures of unvested balances due to employee terminations and retirements.

Note that we updated the chart we introduced last quarter showing the components of deferred compensation related revenues and expenses which is included back in the appendix as slide number 35.

Commissions declined by $35 million or 34% year-over-year second quarter versus second quarter primarily to lower new business activity and lower revenues in our three buy side distribution channels and fringes and other compensation expense decreased by 17 million or 38% including lower recruiting expenses, temporary help and payroll taxes.

You may have noticed back on slide 13 that our effective tax rate declined to 6.9% for the second quarter 2009 from 9.2% for the comparable period last year. Like incentive compensation our income tax provision for interim quarterly periods is based on our current estimate of our full-year tax rate. For the first quarter of 2009 we estimated that rate to be approximately 12%, however, our current estimate, due to changes in the mix between US pre-tax earnings, which are taxed at partnership rates, versus non-US pre-tax earnings, which are taxed at corporate rates is that our full-year tax rate will approximate 9% or about 9.5% with the impact of several discreet adjustments recorded in the first half of the year.

So on slide 20, we summarized the impact of various expense initiatives we’ve implemented in the second half of 2008 and the first half of 2009. First, note that operating expense in the first six months of 2009 declined 23% from the comparable 2008 period that reduction was achieved through savings related to headcount reductions of approximately $100 million in annual savings and reductions in other controllable expenses which we estimate now will total approximately $75 million on an annual basis. These savings are fully reflected, however, in our second quarter 2009 operating expenses.

In addition, barring future market volatility that could affect deferred compensation accruals, incentive compensation expense is expected to stabilize at the year-to-date 2009 run rate. And finally, we believe that continued aggressive management of both operating expenses and capital expenditures will result in additional savings.

And now I will turn the call back over to Peter.

Peter Kraus

Thanks Bob and thanks David for your insights on both the financials and the various parts of our client channels. I wanted to spend a little bit of time talking about a question that I have been asked most frequently in the seven months that I have been at the company, and that is, what is the change in the culture of the company and ultimately, what change, if there is any, impact has it had on the important employees and the turnover in the business. I think in terms of talking about the culture, we focused on research. Research has, in fact, been our long-term cultural aspiration, to be the very best at it and it continues to be.

We’ve identified three elements of that that are particularly important to us; one is, to continue to embellish and support intellectual curiosity within the organization. Ask the question of why, why do you believe that? Why do you think that? And secondly, have the capacity to self-examine your points of view. We all have biases, we all feel passionately about a particular point of view or a position, that’s good, but we need to be willing to self-examine that and to be able to ask the questions of those long held beliefs are they still appropriate and are they still active.

And last is partner ability, and everybody wants to be team players but here we’re looking for people who have in their utility function of working with others an experience that by getting their colleague’s points of views they come up with better results, make better decisions and create better returns for clients overtime. As a result of that cultural affinity that I think we all have, we have had very low turnover and consistency in the investment personnel over the last seven months and while that may not be our experience forever in the future it certainly has been our experience in the last seven months of my tenure here.

One other important point to mention that will affect the entire employee base is going forward, our Board has approved the use of units as a vehicle for deferred compensation. So, instead of using cash going forward, we will use units of the partnership to provide our employees deferred compensation, that aligns our employees’ wealth with the wealth of the unit holder and it reflects our employees’ desire to own a greater percentage of our company.

So with that, I will turn it over to Phil to get your questions and we’ll attempt to answer them.

Phillip Talamo

Thanks, Peter. Juliann, please begin the Q&A process.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of William Katz with the Buckingham Research Group.

William Katz - Buckingham Research Group

Okay. Thanks very much. I did join a few minutes late so I apologize if you covered this already, just wondering, your discussion on the institutional business seems to be a bit contrary to what’s happening to many of your peers based on your stated pipeline as well as your flows sequentially. In the past couple of conference calls, management suggests that perhaps February was the weak point or the high point in terms of redemption rate. Just sort of wondering if you could talk a little bit about how the conversations are going with the consultants at this point in time and then any insight on flows on a month-to-month basis would be helpful. Thank you.

David Steyn

Let me kick off with comments on the consultants, which is a hard question to answer because they’re not a homogenous group either in one country or across countries. So, it’s [in essence] and I apologize, but I’m going to generalize. We continue to receive significant support from large sways of the consultant community. They want to know that the reasons that they have supported us in the past are still valid, that the philosophy which underpins our value, growth, and fixed income services is still robust, that the processes and the research platforms which generate the offer are intact and that we do what they originally supported us that we do what made them originally support us. Now, clearly, there has been some degree of rates and downgrade but the majority of the consultant community is continuing to have us let us stay on hold rather than buy but it’s not so. There are exceptions to that, country-by-country or consultant-by-consultant.

Peter Kraus

Bill, I would add that I continue to meet with the consultants on a regular basis and the reason why I made the comments at the end of the call about research, our culture and very low turnover in the investment personnel is exactly the point you are making, which is what consultants were clearly concerned about, given the very tough performance in ‘08 and the change in the CEO, was would that lead to significant changes in the process and would that lead to significant changes in investment personnel turnover. It hasn’t changed the process, as David mentioned. Our culture is still very much focused on research and the impact of all that in terms of personnel turnover is virtually nil. So, you can’t change everything in a day but I think with the positive performance that we have now been able to show, and David commented on July as well, and with the consistency of the investment personnel and the consistency of the research process, we feel we’re in as good a place as we can be with the consultants.

David Steyn

Now clearly Bill, we are going to have to have several more quarters of performance of the type we’re just we beginning to register now before we’re going to get back on consultant buy list its, this is not going to determinant on a turn on a dime.

William Katz - Buckingham Research Group

With that, sort of curious, just the flavor of how the monthly trends played out and was this tipped more to the early part of the quarter is it sort of steady state the drum beat going on? I guess the reason I’m asking that question is, leads to my, second question, it seams to be a growing appetite for rebalancing, that is what we’re hearing from a lot of the other managers, I’m just wondering if there is incremental risk here that the attrition could actually get a little bit more worse yet before it actually stabilizes.

David Steyn

Bill, I don’t think there is a pattern, at least the pattern, if there was a pattern, it is going to be overwhelmed by the noise. I do think there was a buildup of activity, because in a strange way, the institutional world was quite quiet last year and then we reached a stage where corporate governance necessitated a reexamination of asset allocations as to whether clients accepted an asset allocation which is [newly] imposed on them by the marketplace or whether they went back to something else. So there’s been a buildup, from a very quiet period 2008 within the industry, there has been clearly a buildup of activity into this year. Thereafter, however, every scheme takes a different amount of time to manifest itself in the rebalancing, some acting very, very quickly, some acting very, very slowly. So, I’d be loathe to really say there was any pattern, month-by-month. It would be reading too much into the data.

Peter Kraus

Yeah, I think Bill, again, that’s why I mentioned at the outset that we wanted to stay away from a monthly flow information but for the quarter, we’ve definitely seen a slowdown of the redemptions as a percentage of the beginning balance in the quarter.

William Katz - Buckingham Research Group

Is that the denominator effect, though?

Peter Kraus

No, because I’m doing it on a declining balance.

William Katz - Buckingham Research Group

You mean sequentially?

Peter Kraus

Yes, quarter to -- quarter versus the 12 months.

William Katz - Buckingham Research Group

Okay. That’s helpful. Thanks so much.

Operator

Your next question is from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

First, just on the deferred comp expenses, I’m just looking here at slide 19 and 14. I’m wondering, does this imply the net impact in the deferred [fund] portfolio is roughly 55 million? I thought there would have been a bigger offset on the expense side to that 64 million of additional revenues.

Peter Kraus

Well, what’s happening there actually is that, yes, there is an offset on the expense side because of those revenues and roughly and we’ve talked about this before, about 40% of the current year mark-to-market impact flows through expenses in that same quarter, but we also have mark-to-market losses from prior periods that are also running through that amortization. So, it’s really the cumulative mark-to-market that drives what the expense accrual is going to be. And I think that’s illustrated on slide 35, if you go back and take a look.

Craig Siegenthaler - Credit Suisse

Got it. And so, I’m just thinking, as we look forward one quarter and if we take away that positive 55 million, which may or may not occur, what will happen on the expense side? How do you think about the cumulative impact that you seen in your balance sheet now if markets are flat impacting the third quarter?

Peter Kraus

Well if markets are flat, then that expense amortization line will start to flatten out as well and you will see it stabilize because again you will still be amortizing only prior period marked-to-market, that's obviously not going to change.

Craig Siegenthaler - Credit Suisse

What's the duration of that amortization? Is it like three years? I mean how can we estimate that?

Peter Kraus

That’s thing is four years.

Craig Siegenthaler - Credit Suisse

Four years. Got it.

Peter Kraus

There is no duration to it. Its four years and by the way, Craig, going forward, this is one of the benefits of using units, so that we won't be torturing ourselves and you in trying to understand the P&L impact of marked-to-market changes in deferred comp.

Craig Siegenthaler - Credit Suisse

Got it. Then just for my second question, on the institutional research business, you mentioned that there was deceleration in June. As we look forward to this third quarter, should we think about June being a good run rate for this third quarter and can you help us quantify what the deceleration was? Because, results are pretty strong in the second quarter.

Peter Kraus

I think that we can't estimate what the volume impacts are going to be in the market. The only comment I would say to you is that if, if equity markets continue to appreciate, we do get some benefit of that appreciation in non-US commissions, because they're basis points, as opposed to commissions. But, I think my own view is projecting on any one month is particularly impractical.

Craig Siegenthaler - Credit Suisse

Great. All right thanks for taking my questions.

Operator

Your next question is from the line of Robert Lee with KBW.

Robert Lee - KBW

First question is, Peter, I think you maybe gave some color on this last quarter, but just to refresh, when you look at the redemptions in the institutional business, can you maybe give some color, has it been more of a case of kind of last-in-first-out, and is there any kind of geographic concentration and I mean, certain markets where you're seeing an out-sized proportion of outflows?

Peter Kraus

Well, I think that overseas, we've seen a substantial amount of out flows, but not greater than the US in total, for example. Well, I take that back, I was looking at the UK; the UK I think has been reasonably sizable relative to the US given the size of the UK market, but that's a consultant based market, so you're really not surprised with that. That's where the toughest effects will be on recent performance, consultant concerns and by the way that's where a lot of the growth was in '04, '05, and '06.

I would caution you all to be projecting one way or the other on the basis of that. I mean, there is no reason to believe that clients who are new to AllianceBernstein, meaning they've just invested in the recent two or three years, don't find the current recent performance exciting for them, and vice versa, that, they didn't have very good performance in '07, it was much worse in '08, and, 2009, while better, is not satisfying their needs. So I think the net flows and the redemptions is just going to have to take time for the positive performance to have the impact that you all know that it ultimately will.

As David points out, it's not always that the private client and retail businesses are pre-staging what happens in institutions, but we're definitely seeing improvements in those parts of the business.

Unidentified Analyst

If I could ask a follow-up question on the retail business, if I think back for a bunch of years, I mean in my sense at least is that, that business had kind of not been as much of a priority as growing the institutional business to global platform, private client and as you kind of revisit your fixed income business, which was actually, I guess, the original alliance legacy going way back. Is it harder to leverage that business because in a way, you're kind of reintroducing yourself to big segments of the retail business where you weren't that involved for maybe the middle part of the decade?

Peter Kraus

Let me just comment broadly, and I'll let David get into the details on retail. First of all, I don't want to leave any of with you the impression that we're focused on one channel versus another channel. I think the strength of the global platform is that we have three channels; private client, retail, institutional, and we're focused equally on all three of them. What is the great strength of the organization is that we are focused equally on all three and that we are in virtually all the geographies of the world, and that gives us a unique advantage in terms of reaching more clients, more individuals and more opportunities to actually sell the services. So, whereas maybe in the past, that was different, or maybe not, I don't know, but clearly going forward that is our focus and that is our intent.

David Steyn

I would add to that in commenting on the regional business, certainly there's been no intention or no desire whatsoever to de-emphasize the relation to the other two channels. In fact, on the contrary, we took a decision 18 months ago, a year ago, to make the retail side of our business the center of excellence for sub advisory mandates within the firm. Up until then, sub advisory business had been split without that much rhyme or reason between institutional and the retail departments and I think it was a sign of total confidence in the retail (inaudible) and wanted to make it the center of excellence within the group. So, the majority of our sub-advisory business today is located within retail. Now, clearly it is a challenging environment for all businesses, but the signs of gaining traction within retail are definitely there.

Operator

Your next question is from the line of Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Peter, can you shed a bit more light on the variable annuity business and the shift toward passive? How big is the sub-advisory business on the institutional side for VAs? Can you tell us how big AXA is out of the percentage of that total?

Peter Kraus

We don't disclose AXA as a percentage of the VA business, but you should know that the VA business for us is across every major insurance company, frankly, in the world, and that we were a major, and are a major participant in active equity managers who are utilized in the VA platforms. Now, you know that what occurred in 2008, across almost all active managers, Bernstein was no different, was that there was a significant deviation of the returns, vis-a-vis benchmarks, and because it was on the negative side, that clearly caused a reaction on the part of most insurance companies to de-risk their VA product, so that the hedging costs would actually be substantially lower for them, and the balance sheet strain and the P&L effect of that would be reduced going forward. So we've seen that actual de-risking occur, including the development of products within the VA market that actually have built into them and re-risking mechanisms. Our own point of view of this is that this is a bit of a cycle. Ultimately you have to ask yourself the question is, how valuable, or how successful can a VA product be that over time only offers passive investing. I think the answer to that is sort of obvious in history. Almost always, those products move back into active management.

So we probably are at a point where most insurance companies have taken action against their VA or in their VA products to reduce the significant divergence that's possible, from active management vis-a-vis the benchmark, and that moves in the future are more likely to be back into active management as opposed to more into passive.

So I'm not signaling to you there's a huge opportunity next quarter, but I am saying to you, over the next few years, I think the trend is going to be positive for active managers as opposed to negative from the point of view of active versus passive. Now, as to its impact on us, since we're big players in that marketplace, you know, I think that that probably could be a net positive for us, but it also will depend on our performance.

Marc Irizarry - Goldman Sachs

Is there any way you can quantify how much of the institutional outflow is due to this?

David Steyn

It wouldn't be showing up in the institutional side. The variable annuity management is parked and resides in retail.

Peter Kraus

Because it's part of the sub-advice business. So we don't break out in sub-advice with the VA pieces.

Marc Irizarry - Goldman Sachs

Okay and then just my second question in terms of the change towards [restrict] as a holding units. I guess over time there's a goal to move more towards these units, meaning the cash component of comp will come down so that there maybe be a different cash comp run-rate going forward, and then the second part to the question, and sort of unrelated but related in a way; is this change in the way you are compensating investment personnel. Do you think this could be an issue with the consultants or clients?

Peter Kraus

There are two points. As you well know, there's two parts of compensation. There's deferral, i.e. of your total compensation, how much is cash and how much is deferred, and it's not our intent to increase the deferred piece of compensation on average for the company. In fact, on average over time that deferred piece might slow down a little bit. But with regard to the deferred piece, it is our intention to use 100% unit as opposed to deferred cash going forward. So you might ask a follow-up question, what's the impact on the dilution per unit, and we expect that to be marginal and not particularly material, because obviously we can buy back units to reduce the dilution, and we would clearly do that as appropriate over time.

Now, as it relates to the investment personnel and the consultants, I think we're not dissuading our investors from investing in their products, and by the way, the cash deferral program that existed did not actually require investors to invest in their own products. It just required them to invest in AllianceBernstein products which might have been cash, for that matter.

So I think the same pressure on investors to invest in their products exists today with a different compensation product structure, as existed before that. So I don't think we have a consultant issue. In fact, I actually think consultants are quite supportive of this, because now they see the whole organization is invested in the ultimate performance of the company, and that's a net plus for them.

David Steyn

I would endorse that. If the consultant community has a bias, in my experience it is a bias towards equity ownership in the money manager itself. That is an issue which very often consultants will ask RFPs and databases, as exactly how much equity do your key stock have in the firm.

Peter Kraus

You've heard me say this before but I think that AllianceBernstein as a corporate structure is quite unique. This actually takes advantage of that and to David's point, consultants are first out of the box saying how much they like employee-owned investing organizations, and therefore we're going to use our asset to actually produce it.

Mark Irizarry - Goldman Sachs

Okay, great, thanks.

Operator

Your next question is from the line of Cynthia Mayer with Bank of America-Merrill Lynch.

Cynthia Mayer - Banc of America-Merrill Lynch

Hi, thanks. When you look at the performance records, obvious this year, you've improved on a year-to-date basis in value and fixed income, and I guess emerging marks, but when you do the analysis and you look back at the three-year records and the rolling three-year records, and you look at the period of time that you're about to lose as you roll forward, what sort of outperformance would it take for you to get back to average or better, and/or the time periods that you're losing going to net help you or net hurt you?

David Steyn

That's an almost impossible question to answer across all of value growth, fixed income, blend, domestic, international. I mean, you're absolutely right that the time it will take for the turn in performance to be reflected in (inaudible) institutional business is a longer phenomenon than it is in the private client or retail business. But I don't think we can turn around and say, well it's two years or three years, it's going to be product-by-product, service-by-service, and frankly also country by country.

Peter Kraus

Cynthia, I would say, first of all, I just want to underscore that also growth did have a better quarter and year-to-date numbers than they had last year. So, all of the segments are actually doing better, although growth is the least strong performance through June of the three elements. I think the way consultants are thinking about us, and I say this from our conversations with them, is not so much, what are the three-year numbers or the five-year numbers, because you can look at 10-year numbers; actually 10-year numbers look better. But what's happening now. I think they recognize that 2008 was a tough year for this company, and a tough year for performance. But this is an investment organization that takes risks where our clients want us to take risk, and so what they're really looking for is, what is the current return, and what is the current trajectory. Because the question they're asking is if they had cash today, what would they buy? Would they buy this; would they invest in this platform or not? So, yes, the three-year track record is going to be a challenge for awhile, for the obvious reason.

In 2012, when we don't have 2008, it will be much better, and you will be saying to us then in 2012, well, you know, you are going to roll off that big number, that's going to make these three-year number look great, is that really going to create sales? We're going to saying the same thing to you then, that we are saying now, that it is not going to be the three year, it is going to be how people feel about us today.

Cynthia Mayer - Banc of America-Merrill Lynch

Got it, thanks. Also, just wonder if you can give us a sense of how separately managed account flows are going. I think some other managers have described that business as a bit under pressure due to distributor consolidation. I am wondering what trends you're seeing.

Peter Kraus

We don't have any serious pressure there. In fact, it's sort of been a non-event, I'd say, for us. So it's up, appreciation in the accounts is well offset the net flows and net flows are marginal.

Operator

Your final question is a follow-up question from the line of William Katz with the Buckingham Research Group.

William Katz - Buckingham Research Group

Thanks for taking these extra questions; sort of maybe more modeling in nature so I apologize for the minutia. Last quarter, if I recollect correctly, I thought that the discussion around base salaries was going to be of a run rate of about [$102.5 million]. Looks like that number was $5 million to $10 million higher this quarter, if I'm reading that right, how to think about that going forward. Then I presume it's not material, because you didn't mention it in your prepared remarks, but could you highlight the FX impact on the revenue and expenses this quarter?

Bob Joseph

Getting to the second one, we do not really disclose what that number is. The FX losses that I talked about that are included in G&A are really just a matter of marking-to-market assets and liabilities that we have in non-US locations that are not denominated in local currency. We are just converting them back to sterling or euro, whatever their local currency might be. In terms of the overall FX impact on revenues, we have not disclosed that before. I'm sorry, but can you get back to your first question?

William Katz - Buckingham Research Group

Maybe I'm just not remembering correctly, and I apologize. I thought you had said last quarter that it was like a $102.5 million run rate, and then I'm looking at the results here, it's like 112 on base comps. I am just sort of curious on the delta.

Bob Joseph

I think what has happened Bill is, while our headcount is down and therefore our run rate continues to decline, we were down in that $400 million run rate range. But we also, as Peter has mentioned before, may have made a few selective hires here and there, and so it hasn’t drifted quite as low as we thought.

Peter Kraus

Plus you've got people coming out in the quarter.

Bob Joseph

In the quarter, that's correct.

Peter Kraus

So I think the lion's share of your concern, Bill, is probably what's coming out in the quarter. You can sort of see that if you look at the quarterly headcount information. I'm looking for that chart. You can see that people are leaving in the quarter.

Bob Joseph

Yes, you can see that. If you remember, Bill, at the end of first quarter we indicate that although we were largely finished with our reduction in force that there were about 75 folks that were going to be carried over into the second quarter.

William Katz - Buckingham Research Group

Okay. All else being equal that would trend down as that seasons off?

Bob Joseph

Correct.

William Katz - Buckingham Research Group

Thank you very much.

Operator

There are no further questions at this time. Mr. Talimo, do you have any further remarks?

Phillip Talimo

No. Thank you very much Julian, and thanks everyone for joining the call. As always, if you have any follow-up questions feel free to call Investor Relations and enjoy the rest of your evening.

Operator

Thank you for participating in today's AllianceBernstein second quarter 2009 earnings review. You may now disconnect.

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Source: AllianceBernstein Holding L.P. Q2 2009 Earnings Call
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