AllianceBernstein Holding L.P. Q3 2009 Earnings Call Transcript

| About: AllianceBernstein Holding (AB)

AllianceBernstein Holding L.P. (NYSE:AB)

Q3 2009 Earnings Call

October 29, 2009 5:00 pm ET


Philip Talamo – Director of Investor Relations

Peter S. Kraus - Chairman & Chief Executive Officer

David A. Steyn - Chief Operating Officer

Robert H. Joseph, Jr. - Chief Financial Officer


William Katz – Buckingham Research

Robert Lee - Keefe, Bruyette & Woods

Cynthia Mayer - BAS-ML

Roger Smith - Fox-Pitt Kelton

Philip Talamo

Good afternoon, everyone, and welcome to our third 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

Presenting our results today are our Chairman and Chief Executive Officer, Peter Kraus, our Chief Operating Officer, 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 our presentation as well as in the Risk Factors section of our 2008 10-K and third quarter 2009 10-Q, which we filed earlier this afternoon.

In light of the SEC's regulation update, management is limited to responding to inquiries from investors and analysts in a non-public forum; therefore, we encourage you all to ask questions of a material nature on this call.

And now I'll turn the call over to Peter.

Peter S. Kraus

Thanks, Phil.

We basically have three points we'd like to identify or highlight in the call today. One is performance, which continues to improve, especially in Fixed Income and in Value Services, but also in the Growth world as well. The second is assets under management increased 11% sequentially and net outflows slowed by a significant percentage - 46%. And third, while operating margins and net income is down versus third quarter '08, they are up sequentially from the second quarter in '09.

To turn to a little bit of detail with regard to the performance, we'll first chat about the Value equity space. In Global Value, International Value and U.S. Diversified Value, the January to September numbers are all positive - significantly so - and in the third quarter all positive or neutral. So total performance, for example, in International Value was up 5.2% over the benchmarks for the year, Global Value, 5.9%, U.S. Diversified Value, 1.6% - a positive and very attractive performance for those services.

Growth equity, U.S. large cap Growth and GRG have had much better performance and international large cap Growth trails that. U.S. large cap Growth has had positive performance in January to September and significant outperformance in the third quarter of 2009. GRG modestly negative. International large cap Growth has continued to struggle although at a much pace than in the previous year.

In the Blend strategies, where you all know we have a significant amount of assets and a very large franchise, Global Blend, International Blend, and in particularly Emerging Markets Blend all outperformed, with Emerging Markets Blend leading that at 700 basis points over the benchmark for the period from January to September and 200 basis points for the quarter.

In the Fixed Income space, that investment service has also excelled. Our three major categories  Corporate Bonds, Strategic Core Plus, and Global Plus - have all seen significant appreciation over the benchmark - 4.2%, 10.6% and 9.7% for global plus for the period from January to September 2009, and for the quarter Corporate Bonds was 1.2%, Strategic Core Plus 380 basis points and Global Plus 4.1% or 410 basis points. So a significant performance for those investment services, which has provided a tailwind for us and, as you can see on the next page, actually has produced net positive inflows for Fixed Income in the quarter.

Total flows, as you know, were down 46%, Value slightly lower than the second quarter; the same for Growth. Inflows for Fixed Income and others are basically breakeven.

Looking at it by channel, Institutional outflows slowed measurably from $18.5 billion or $18.7 billion to $10 billion. The Retail flows also slowed substantially from $3.5 billion to $1.9 billion, and private client also substantially, from $1.8 billion to $1 billion.

So with that I would say good third quarter in terms of performance, excellent nine months in terms of performance, and attractive characteristics for the direction for net flows.

I'll turn it over to David Steyn to talk about specifically the channels.

David A. Steyn

Thank you, Peter.

Just before I talk about the channels, what I'm going to comment on is a little bit more detail on the performance and then the overview of flows, again, with a little bit more detail.

And at the risk of being repetitive, I'm going to be developing the themes which we talked about three months at the end of the second quarter because in many senses it is just a deepening, a broadening, a continuation of that story.

Let me start with performance. Peter's talked about the performance of our core services, of Value, Growth, Blend and Fixed Income against the index. The improved picture against the index is matched, as you'd expect, with an improved picture against the competition.

So, for example, of the three services he mentioned of Value, in Q3 all three are in the top quartile of the Institutional universe against which we measure them. In fact, if you look at our strategic constructions, our most concentrated Value [Services], where the performance premium is particularly pronounced, not only are those three service in the top quartile but two out of those three are in the top decile of performance for Q3 of 2009.

Similarly, Fixed Income, three out of three in the top half of performance; one of the three in the top quartile of performance.

Now Growth has begun to feature, too. Our Domestic Services, which Peter alluded to one second ago, in the top quartile of universe performance against our competitors. In fact for the third quarter of this year, it's in the top decile.

And this improvement in Growth, matched with the improvement or continued improvement of Value, is being reflected in our Blend services - three out of three services in the top half, and our global service 11th percentile at this point for the third quarter.

So a broad-based, deepening turnaround in performance, which brings us on to the second theme Peter mentioned, which is the improvement in flows.

Now if you look back to what we said at the second quarter earnings call, there things were beginning to improve, driven largely by the slowing in redemptions. So sales in the Private Client channel were down, but redemptions down more. Sales in Retail were down, but redemptions down more. And Institutional, as you may recall, the channel which was most challenged at that point, has sales down and redemptions up.

The picture with the third quarter is materially better both on sales and redemptions. So the sales picture of Private Clients, improving and redemptions down; sales in Retail improving and redemptions down; sales in Institutions improving and redemptions down. And if you drill down further into the Retail business, which I'll talk about in a minute, we recorded a second quarter where our mutual fund business has had positive flows.

So with that, let me comment in slightly greater detail on each of our channels, starting with Private Clients. Three months ago we talked about the improved pipeline of our business with private clients beginning to re-engage, what we called re-risking, re-examining their portfolios and beginning to return to, for example, the equity markets. That trend has continued and that has been manifested in the improved flows of the channel as a whole.

Two enhancements to services are being rolled out over the next couple of quarters, first of all, our dynamic asset allocation with enhanced risk management, and then secondly inflation products. We did mention three months ago in the earnings call our FDIC insured [CEDA] product, cash management product. We've begun to get our first traction there.

And then lastly one of the things we talked about was the investment in the footprint of the private client channel which we've made over recent years which we see as a power competitive advantage in this market, a market which here particularly in the United States of America we believe is going to see great volatility in private client fund management. We continue to make that investment. We alluded to a class of new advisors which started in September. We're now planning a further class for the first quarter of next year and a second class next year in the third quarter of next year. So over the course of the next three quarters we'll continue to see adviser headcount rise.

The Retail picture is one which has been for some time bifurcated or split, polarized between the two components of our business, mutual funds being one-half of our Retail business and sub-advisory being the other. Sub-advisory largely is sharing the characteristics of our Institutional business.

I alluded earlier to the fact that mutual fund trends have improved with positive flows in both Q2 and now in Q3. And what has been particularly encouraging to us is that this has been led by Fixed Income, Fixed Income being an area which we began to prioritize as a business some 18 months ago and where we're beginning to see the rewards come through today.

In Q2 when I talked about mutual fund flows I was largely talking about Fixed Income flows coming out of non-U.S. markets. Equally encouraging is the fact that this now has become a global trend, with positive flows in Fixed Income in every major market in which we're operating.

The picture for sub-advisory is more challenging, and as I said earlier, it reflects the quasi-Institutional nature of the sub-advisory business. But it's particularly challenging insofar as the de-risking which has characterized the sub-advisory channel whilst it's abating has not reversed, and we continue to see shift of assets into passive and quasi-passive alternatives. Underlying that and behind those numbers, redemptions are down and sales are rising, with a healthy pipeline.

The third of our businesses is the Institutional one, and here certainly the improvement in performance which Peter alluded to and which I commented on in my earlier remarks, is beginning to manifest itself in activity. Gross sales significantly higher Q3 over Q2; behind those numbers is the even more encouraging fact that every single one of our regions recorded that improvement in gross sales. It wasn't localized to any particular part of the world.

A couple of particular areas where we're see activity at the minute is sovereign funds, particularly out of the Middle East, where we're seeing high and continued demand for Fixed Income products. And we allude to the fact that we reopened three of our services which had been capacity constrained and we've seen, as we would have expected, high demand for those services. One we have as of today met 75% of the reopened capacity, a second, 50% of reopened capacity, the third, 10% of reopened capacity but with very high pipeline interest, so an improvement in the Institutional outlook at this point in October.

Now the last of our businesses is the sell side of AllianceBernstein or Bernstein Research. And here again is a continuation of the themes we talked about some three months ago. I commented then about the awards the firm had been awarded in industry service. That has continued into this quarter, this time on individuals. In the Q2 industry service, we were ranked first for U.S. equity research, for knowledge of companies, for knowledge of industries, for ideas and things.

In the individual service of institutional investors we have had the strongest score this firm has ever had - 28 total team positions, 10 of our 22 analysts, receiving a number one ranking, number one in IT hardware, number one in computer services and IT consulting, number one in hard lines retail, number one in cable and satellite, number one in entertainment, number one in integrated oil, number one in oil exploration and production, number one in major farmer, number one in household and personal products, and number one in specialty pharmaceuticals.

As I said, this industry recognition is the highest scoring this firm has ever had. Also encouraging is the fact that every single analyst we have who was publishing prior to the beginning of '09 was recognized in this survey.

A second theme I mentioned when we talked about AllianceBernstein three months ago was the broadening of the footprint with our first published analyst in Asia. I'm delighted to announce we now have three more analysts in the pipeline for the Asian marketplace and our first sales presence on the ground in Asia.

And then the third point I would say is that the data we received from independent surveys suggests significant market gains both in the United States and Europe.

The last slide in the presentation I want to cover looks at the headcount trend, which has been a major area of attention for us over the past five quarters. So we peaked as a firm with headcount in third quarter of 2008 with 5,633. As of the end of third quarter 2009, we've reduced the headcount of AllianceBernstein some 20% to 4,644. In fact, as of today that number is 4,400 and something, and I expect we will end the year with a number which will be 4,400 and something.

So with that let me hand over to Bob, who will take us through the financials.

Robert H. Joseph, Jr.

Thanks, David.

So as reported in today's press release and as shown on Slide 14, net income attributable to AllianceBernstein unitholders declined approximately 9% from $220 million for the third quarter of 2008 to $199 million for the third quarter of 2009.

Operating income declined by 11%, the result of a 4% decline in net revenues offset partially by a 1% decline in operating expenses.

Non-operating income for the current quarter was a one-time $10 million contingent payment related to the sale of our cash management business in 2005 which is incremental to the annual payments that will end in March 2010. In addition, we experienced a decline in the operating partnership's effective tax rate because a higher proportion of our consolidated pre-tax earnings is now being generated from our U.S. operations. This shift will lower the full year 2009 tax rate to approximately 8%.

Diluted net income per unit for the public company declined to $0.67 or 2008 compared to the prior year quarter; however, the distribution per unit, which was also $0.67, actually increased by 12% year-over-year since the third quarter 2008 distribution excluded a $35 million insurance reimbursement we received in that quarter.

Although not shown on the slide, note that net income attributable to AllianceBernstein unitholders increased by 55% from the second quarter of 2009. Net revenues increased sequentially by 12% while operating expense declined approximately 1%. Likewise, diluted net income and distributions per unit at the public partnership increased 63% sequentially.

There's some interesting dynamics affecting the financial results this quarter which we'll cover on the next couple of slides.

So turning to Slide 15, net revenues declined by $35 million or 4% compared to the third quarter of 2008 as a $239 million positive variance in investment gains largely offset declines in advisory fees, distribution revenues and institutional research revenues. Advisory fees fell by $229 million or 32%, the result of a 29% decline in average assets under management as well as a modestly lower revenue yield. Our revenue yield declined about 1 basis point to 43 basis points from a year ago principally because lower fee Fixed Income investment services have grown to represent now 39% of total assets under management, up from 32% a year ago. Additional information about advisory fees, as always, is included in the appendix on Slide 31.

Distribution revenues, which are based on average mutual fund assets under management, decreased by 24% year-over-year due to lower asset levels. As a reminder, this decrease in revenue is largely offset by declines in related AUM-based distribution plan payments and deferred sales commission amortization, both included in promotion and servicing expenses.

Institutional research services revenues declined by 12% from the record achieved in the third quarter of 2008 as declines in client trading volume and lower securities values that adversely affect revenues in our European operations were partially offset by the market share gains David mentioned earlier.

Investment gains and losses experienced a favorable variance of $239 million resulting from $107 million of gains this quarter compared to $132 million of losses in last year's third quarter. The majority of this variance is attributable to investments related to employee deferred compensation, which generated $71 million of gains this quarter compared to $123 million of losses last year; more on that when we get to Slide 18.

The balance of this variance is comprised primarily of gains on seed money investments as well as on a gain in our consolidated venture capital fund from a successful initial public offering of one of its holdings. I should remind you that we only have a 10% interest in this consolidated fund, so a large portion of that gain is backed out as minority interest below the line.

Slide 16 shows the components of operating expenses. I'll cover the 2% increase in employee compensation expense which is somewhat counterintuitive in light of reduced headcount in the following slides, so let's look first at promotion and servicing expenses with a 21% decline compared to the prior year quarter, which is due primarily to lower distribution plan payments, the result of lower average mutual fund assets under management, as well as lower deferred sales commission amortization due to declining back end load mutual fund sales. A 24% reduction in controllable expenses, including travel, printing and mailing, also contributed to this decline.

General and administrative expenses increased $16 million or 14% compared to last year's third quarter. Note that the prior year quarter benefited from a $35 million insurance reimbursement and the current quarter included $10 million of foreign exchange gains. Adjusting for these items, G&A expense would have shown a decrease of approximately 6%, reflecting a 10% decline in controllable expenses such as office-related technology and professional fees. Absent future actions related to office space or significant changes in other non-controllable expenses, we believe general and administrative expenses have stabilized at a run rate of approximately $140 million per quarter.

On Slide 17 we provide some additional details on employee compensation and benefits expenses. Headcount reductions of 20% have resulted in a similar impact on base compensation, which is down about 18% after adjusting for a $3 million increase in severance costs compared to the prior year period. We expect to begin 2010 with an annual run rate for sales of approximately $400 million.

The $56 million accrual in the current [inaudible] for cash bonuses is flat with both the prior year quarter and the first two quarters of 2009. Recall that in the third quarter of 2008 the accrual was lower than the prior two quarters as we began to reduce our estimates for the full year in response to turbulent capital market conditions.

The significant increase in deferred compensation expense from $12 million to $73 million was the main driver of the increase in total compensation expense this quarter. We'll cover that dynamic on the next slide.

Commissions declined by $25 million year-over-year or 28%, primarily due to lower new business activity and revenues in our Private Client and Institutions channels and, to a lesser extent, our sell side research unit. Fringes and other compensation expenses decreased by 24% from the third quarter of last year due mostly to lower payroll taxes and recruiting.

Turning to Slide 18, you'll note that we've moved the six quarter deferred compensation trend slide that we've been providing for the last couple of quarters upfront from the appendix. We're also showing separately on this slide now the impact of investment gains and losses in each quarter on the related amortization expense for that quarter as well as the impact of the cumulative prior period investment gains and losses.

Remember that for 2008 employees receiving deferred awards elected to make notional investments in services we offer to clients or in AllianceBernstein holding units. Changes in the value of the holding units did not result in a change in the related account expense. However, for awards notionally invested in client services, increases or decreases in the value of those investments result in corresponding higher or lower amortization expense in the current and future periods.

As we mentioned on prior calls, we expect that for 2009 and future years all deferred awards will be in the form of restricted holding units. As a result, the amount of deferred compensation related investments on which we recognize marked-to-market gains and losses will decline as awards previously made vest and are paid out.

So focusing on the center section here, mutual fund expenses, you can see there are three main components to the amortization expense. The first line is the amortization of the value of deferred comp awards as of the date they were made ratably over the four-year vesting period.

The second line shows the amortization of the investment gains and losses recognized in each current quarter. Note that this amount is approximately 40% of the related revenue number. Keep in mind that because employees can make voluntary long-term deferrals, not all awards are distributed as they vest, so a significant portion of the current period investment gain or loss is actually amortized immediately.

And finally, the third line represents the amortization of cumulative prior period investment gains and losses. This is a negative number or a reduction in expense for each quarter shown reflecting the impact of prior quarter investment losses not yet fully amortized. These credits partially offset the debits resulting from the investment gains for the second and third quarters of 2009, thereby moderating the increases to compensation expense that would have otherwise occurred.

So hopefully this additional detail adds some clarity around changes in deferred comp expense from quarter to quarter.

Before I close I want to update everyone on the impact of our expense reduction initiatives. We estimate the headcount reductions initiated over the last 12 months have reduced salaries and fringe benefits on an annualized basis by about approximately $112 million. That's up from $100 million that we discussed on the second quarter call. In addition, annual reductions in other controllable expenses are now estimated to be approximately $85 million compared to the $75 million number we provided last quarter. The incremental savings achieved in the current quarter are not fully reflected in our third quarter 2009 financial results.

So that covers the financial results, and now I'll turn the call back to Peter.

Peter S. Kraus

Thanks, Bob.

A couple of points I'd like to make before we turn it over to all of you to ask us questions. I think as Bob ably laid out, the controllable revenues for the company, asset management fees and commission revenues and employee compensation, have declined roughly the same percentage when comparing Q3 2009 versus Q3 2008. The decline in relative compensation was driven primarily by headcount reductions - approximately the 20% that David referred to - in headcount from our peak in Q3 2008. Therefore, go forward compensation will include lower fixed costs - obviously, salaries and fringes - as well as variable compensation resulting from a smaller population of bonus pool recipients. These factors together should produce higher operating margins assuming higher revenues in future reporting periods.

I'd like to just spend one more second on our initiatives in the real estate side. As many of you have seen, our special opportunities and advisory services group, which recently held an initial investor closing for our PPIP fund, which closing amounted to dollars that were well in excess of the required minimum, is focused on investments in securitized pools of real estate, some of which are distressed.

For the PPIP fund, this group is partnered with Greenfield Advisors and Rialto Capital Management, which are providing on the ground expertise and advice regarding real estate factors impacting the value of the structured products and the securities targeted by the investing group.

Secondly, as I think you all also know, we've hired two outside professionals - Jay Nydick and Brahm Cramer - to head up our new initiatives in commercial real estate investments for our clients. Jay and Brahm, when he arrives in the first quarter of 2010, will build a business focused on the opportunistic acquisition of ownership interests in real estate. We expect over time this will expand to include Core and Core Plus real estate investments.

With that, I'll turn it back over to Phil, who I'm sure will MC the questions.

Philip Talamo

Okay, Barrett, please provide instructions for the Q&A, and we'll be ready for our first question.

Question-and-Answer Session


Absolutely. (Operator Instructions) Your first question comes from William Katz – Buckingham Research.

William Katz – Buckingham Research

My question is on the Institutional pipeline. You mentioned that you're seeing a little bit of a pickup in the gross sales. I was wondering if you could maybe dimension that between product and geography, where you're seeing the leverage?

David A. Steyn

Well, the pickup in Institutional activity is pretty broad-based, so I wouldn't really highlight any one country or one region.

In terms of product, if there's a bias it's towards fixed income, which I think is sort of consistent both with what our clients are doing in the de-risking which is taking place with pension funds and consistent with the type of performance we've been talking about. So insofar as there's a bias, the bias would be towards fixed income.

William Katz - Buckingham Research

I understand the mix issue on the fee rate, but nonetheless you look quarter to quarter, the equities did outperform fixed income. I would have thought there'd have been a bit more of a lift in the fee rate, all else being equal. Can you just maybe talk a little bit about in fixed income how the incremental new business compares on a fee basis relative to the [inaudible] business?

Robert H. Joseph, Jr.

Well, as David mentioned, to answer the second part of the question, since there's more of a bias towards fixed income, those are really where the assets have been growing. And obviously there's also, as you mentioned, a lift in equity AUM that's increasing faster than fixed income because of market activity.

I think the whole idea on the fee realization rate is that it's kind of lost in the rounding here. We have seen a slight pickup between the second and third quarters sequentially as a result of the fact that our equity assets under management have appreciated a little bit more quickly than our fixed income assets.

David A. Steyn

But if I could add to that and drill down a little bit into the fixed income, the realization rates are likely to rise going forward or are rising with what's in the pipeline because some of the significant mandates we have won or are pitching for or working on at the minute are in global and emerging markets capabilities, which have higher fee rates. And, indeed, that trend is not just Institutional. That trend is also reflected in the mutual fund business.


Your next question comes from Robert Lee - Keefe, Bruyette & Woods.

Robert Lee - Keefe, Bruyette & Woods

Looking at the Blend strategies, if I think back, that was certainly a big growth driver through most of the last decade, and when you look at the performance since inception it looks like you kind of underperformed benchmarks. How much of the flow pressure that you're feeling is actually coming from those services, and to what degree has, well, it looks like the challenged records since their inception kind of made it problematic to thinking that product won't be an outflow for awhile?

Peter S. Kraus

I think the Blend product still is in significant demand around the world, probably larger demand outside the United States than in the United States as non-U.S. investors are slightly less style driven. And so the Blend product really fits in the Core category, and that's an attractive category for our investors.

I think a little bit the problem in looking at the end point is that you're including obviously very difficult performance in '08, and I think clients are focused on the significant improvement in '09, the consistency of that improvement, the consistency of the investing process, and actually the divergence - although we would prefer both Value and Growth to be growing at exceptional outperformance at the same time - but the divergence of the performance of Growth and Value, that actually is providing somewhat more comfort.

One of the issues that we experienced last year is that Growth and Value both underperformed relatively equally at the same time, which was not the design or the expectation of the product, and that was a bit uncomfortable for clients. So now that actually Growth and Value are effectively producing performance that is different and is not linked and both are outperforming in most cases - although I have to say International large cap Growth is not and that's in the International style Blend product - I think clients actually are feeling better about that prospect.

So the growth of the Blend product will, of course, be relative of the performance over time, and it - meaning the Blend product - is likely to outperform less quickly given the speed at which Value is outperforming and the lower speed at which Growth is outperforming. I think we still feel it's a sweet spot for the marketplace.

Robert Lee - Keefe, Bruyette & Woods

Looking forward on expenses as we kind of grind through our earnings season here and listen to pretty much all the asset managers reporting, one of the things you hear from a lot the other companies that had expense reductions is there seems to be some thought of, looking forward  not that we're there yet  but starting to kind of think about loosening the reins a little bit on spending.

And certainly you continued, at least through this quarter, to cut and gave us some good guidance about where to start the year, but where are you thinking in terms of assets have come back somewhat, new business seems like it's picking up some, particularly in Fixed Income - are you starting to think about when do we actually start? I mean, are you under investing maybe? Do you feel like maybe you need to start to thinking about reinvesting back in to kind of take care of some of the opportunities you see?

Peter S. Kraus

Well, it's a good question, Robert. I think we never actually stopped investing. The fact of the matter is the Special Situations Group or Special Opportunities and Advisory Services, which I mentioned, was a build out. David mentioned the build out in the sell side business. We also are building this real estate business.

And so really what we're doing is two things at once. We're continuing to spend money and investment dollars where we think there are interesting opportunities for us to build at, and we are resetting the stage effectively for what we think is leveragable and will produce outsized operating margin on the way up and feel pretty comfortable with that.

That was the reason for Bob's detailed explanation about what's going on with expenses and for my sort of summary comments at the end.


Your next question comes from Cynthia Mayer - BAS-ML.

Cynthia Mayer - BAS-ML

It seems like on flows clients reacted pretty quickly to better performance in Fixed Income with the higher sales, and I'm wondering if you think the old assumption about institutional managers relying on three-year performance really is less reliable at this point. And by implication, if people re-risk and move toward equity, what are the chances that people will really rely on your one-year performance?

David A. Steyn

That's a difficult question in a way to answer. I think the fixed income dynamics are complex. It's just a response to short-term performance. I think we are seeing some secular shift to increased fixed income exposure by pension funds in many of the markets around the world.

Now, by the way, I think that shift has been under way for more than one year, so it's not just a response to the events of the last 12 months. But as pension funds reexamine or reassess the risks they're prepared to take in the pension funds and what the [inaudible] profile should look like, we have seen a shift out of equities and into fixed income. So in that sense the pie has got bigger. We are in a nice position right now, being very competitive in that bigger pie.

So I think looking ahead this isn't just a performance story. This is also a client rebalancing story which may have further to go.

Peter S. Kraus

Cynthia, I would add to David's comments on the equity side saying that there probably is a little bit of a bipolar personality there. A portion of the world is going to continue to look at, call it three-year track records or some set of annual year track records, but there's also a portion of the world that recognizes that investing is driven by styles at times and everybody has cycles, and if you wait for that cycle to ultimately prove out for three years you may in fact miss some significant opportunities for outperformance.

And we're currently reflecting that, in other words, we're currently reflecting significant outperformance in our style, both Growth and Value - more so in Value, as we mentioned. And so I do think that there is some part of the Institutional and individual and retail world that's looking at that and going I don't want to miss that opportunity because it won't last for five years but it may last for three, but if I wait for three, I'm going to miss a big chunk of it.

Cynthia Mayer - BAS-ML

And then I'm just wondering also within the quarter was there any interesting pattern in terms of flows? It looked like most of your outflows, I think you said, were in July. Did you see any migration toward different strategies toward the end in Retail or Private Clients that would lead you to believe that demand for equity or other strategies is growing or changing?

David A. Steyn

Let me pick up on that and also sort of develop Peter's point, because in a way [inaudible] description of this as a sort of bipolar marketplace, and in each of our client groupings we see the two different trends happening at the same time. So we have institutions, we have private clients and we have retail clients who are de-risking, and we have institutions, private clients and retail who are re-risking, which is quite interesting dynamic.

Insofar as there's any trend within the quarter it would be that as the quarter progressed the themes you've been talking about accelerated a little bit, so there is more debate with private clients about re-risking month by month by month. If we look into the Fixed Income side, Fixed Income sales went up each of the three months of the third quarter.

So if there was a pattern it was just, in the same as Q3, develop the themes of Q2 while September developed the themes of August and August developed the themes of July.


(Operator Instructions) Your next question comes from William Katz - Buckingham Research.

William Katz - Buckingham Research

First, a very [tactical] question. In terms of venture capital recognition, does any of that get amortized through the P&L?

And then the second question is I was wondering if you could size the sub-advise assets you think that might still be at risk for some potential rotation and what the timing of that rebalancing might be?

David A. Steyn

Let me answer the second quarter first before I hand over to Bob.

I think the shifts towards de-risking from the sub-advise channel which we have seen, the pipeline or the trend was identified early on in the year, so it's many clients we've been working with and they've been working with them over the course of the last nine months, and so some assets have moved in each of the quarters. We're certainly not seeing any acceleration of that; on the contrary. I think we're coming to the end of that process. Sort of to Peter's point, I think many sub-advisory clients are beginning to talk about the opportunity which active management now offers in this extraordinary capital market we're operating in today.

So there's absolutely no evidence of an acceleration; if anything, on the contrary, what we're seeing is an abatement. But the flows haven't turned around yet.

Robert H. Joseph, Jr.

And, Bill, on your other question, all the holdings of the venture capital fund are really marked to fair value if you will every quarter. There's no amortization prospectively, and it shows up in the investment gains and loss line, 100% of it, because we consolidate that fund.

But again, remember, 90% of that comes out on the minority interest line.


Your next question comes from Roger Smith - Fox-Pitt Kelton.

Roger Smith - Fox-Pitt Kelton

I was just wondering could you tell us what's happening in the pension closeout business? I think the insurance companies were big players there for awhile, and I think that sort of changed for them with their capital issues. Is that something that's a bigger opportunity for you now?

David A. Steyn

How many hours do you have for that particular discussion? Look, the pension closeout business is a tough one to make any prediction on right now, first of all, for the reason you've just identified, which is there's not an overabundance of capital. The second reason is pension funds by and large are at record underfunded levels, and you can't close anything unless you've restored your funding status and the cost of closing is prohibitive, if you combine all of those three things.

So do I think the closeout business is here to stay and will be a factor? Yes. But if anything I would have said right now in this environment it's probably receded a little bit. But the hunger by some clients to close their pension schemes is definitely still there.

Roger Smith - Fox-Pitt Kelton

I don't want to beat this down, but if I look at the marked-to-market on the prior periods and I'm looking at $11 million this quarter, $16 - $17 million going backwards, how do I kind of think about that from a modeling point of view. Should I really be going up and looking at those investment gains and trying to think of them over some period of time from an amortization perspective?

Peter S. Kraus

Well, these are all lagging, right, so this all represents amortization of losses that occurred in prior periods that will runoff over time over the roughly four-year vesting period. So you're right, you do need to look backwards and then sort of project out how you think that's going to run off in the future.


Your last question comes from Cynthia Mayer - BAS-ML.

Cynthia Mayer - BAS-ML

I think you used to break out performance fees and have a slide on alternative, so I'm assuming that the chance of performance fees in 4Q is not particularly strong but what about for 4Q 2010? What are your alternative assets at this point?

Then also just a follow up on the Private Client. You mentioned that you're going to have training classes. Maybe you said this, but could you give a sense of what growth you want in headcount there?

Peter S. Kraus

Let me just comment on the alternative space, Cynthia. We have not provided that level of detail. As you know, the level of assets got to the point where we thought it was not that material to all of you. Having said that, performance has been attractive in that spot for us, and we continue to be focused on how we build that out over time. And as that becomes more significant we'll make all that information available to you.

But I would say that we're very focused on it. We like that space. We think we've got value-added opportunities there, and that looks to us like an attractive opportunity in the future.

David A. Steyn

And to the Private Client question, we're not at this point targeting any specific growth rate of advisors. Let me explain why and how we approach this.

We've grown the adviser force at the Private Client business dramatically over the last decade. I joined the firm almost 10 years ago, and I think there were less than 100 - there were less than 100 - financial advisors here in the United States. We're verging on 300 advisors.

One of the metrics we look at very closely is the speed to productivity, if you want to put it that way, of our new adviser intake, and we sort of manage the increase in the headcount to that. So we'll keep expanding at the rate which the pipeline, if you want to call it, can absorb the new cohorts of advisors which we bring into the classes.

If you wanted a rule of thumb moving forward, I think it's hard for any sales force to expand by double-digit net numbers on a sustained basis because it's just very hard to deploy those advisors in a productive way quickly. But there isn't a set target right now as to what the number of financial advisors will be in 12 months' time.


There are no further questions or comments at this time.

Philip Talamo

Great. Thanks, Barrett, and thanks, everyone, for participating on the call. As always, if you have any further questions, feel free to call Investor Relations. Enjoy the rest of your evening.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!