AllianceBernstein Holding CEO Discusses Q3 2013 Results - Earnings Call Transcript

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AllianceBernstein Holding (NYSE:AB)

Q3 2013 Earnings Conference Call

October 24, 2013, 08:00 AM ET


Andrea Prochniak - Director, Investor Relations

Peter Kraus - Chairman and CEO

John C. Weisenseel - Chief Financial Officer


Michael Kim - Sandler O’Neill

Steven Fullerton - Citi

Matthew C. Kelly - Morgan Stanley

Cynthia Mayer - Bank of America Merrill Lynch

Marc Irizarry - Goldman Sachs


Thank you for standing by. And welcome to the AllianceBernstein Third Quarter 2013 Earnings Review. At this time all participants are in a listen-only mode. After the 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 available for replay 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, Ms. Andrea Prochniak. Please go ahead.

Andrea Prochniak

Thank you, Tracy. Hello. And welcome to our third quarter 2013 earnings review. This conference call is being webcast and accompanied by a slide presentation that's posted to the Investor Relations section of our website.

Our Chairman and CEO, Peter Kraus; our CFO, John Weisenseel; and our COO, Jim Gingrich will present our financial results and take questions after our prepared remarks.

Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosures. So I'd like to point out the Safe Harbor language on slide one of our presentation. You can also find our Safe Harbor language in the MD&A of our 2012 Form 10-K and in our third quarter 2013 Form 10-Q which we filed this morning.

Under Regulation FD, management may only address questions of a material nature from the investment community in a public forum. So please ask all such questions during this call. We are also live tweeting today's earnings call. You can follow us on twitter using our handle @alliancebern@cn.

Now I'll turn the call over to Peter.

Peter Kraus

Thanks, Andrea. And thank you all for joining us for our third quarter 2013 earnings call. Really pleased to be here with you today to share our results and answer any questions you may have about them. So let's me get started. I will begin with a firm wide overview which is on slide three.

It was a challenging quarter for us and for the industry. Amidst message from the fed about timing for a tapering of bond buybacks and the economic growth outlook the harrowing lead up to the government shutdown and potential debt ceiling debate and global concerns like unrest in Syria and slowing growth in emerging markets, made investors uneasy during the quarter.

Market activity slowed, bond fund out was persistent and we felt the impact in our businesses. My third quarter gross sales declined 20% sequentially and 13% versus last year’s third quarter. While redemptions were essentially flat our dropping sales pushed net flows $4.8 billion into negative territory, our first net flow negative quarter since last year’s third quarter. With market appreciation more than $15 billion we ended third quarter with AUM of $445 billion, up nearly $11 billion from the second quarter. But our average AUM of nearly $440 billion was a little lower at quarter end.

Let’s move on to slide four you can see the quarterly trend in asset flows across channels. Our institution channel demonstrated the greatest flow decline. Gross sales were down $3.2 billion and gross redemptions of $8 billion were up $5 billion from the prior quarter. This caused net flows to swing from positive $4.7 billion to negative $3.5 billion. This is as we know a lumpy business and we’ve had a couple of big redemptions during the quarter at passive equities and fixed income.

Our third quarter RFP activity however was actually our highest in six quarters and spread across a wide array of our services. And retail sales activity slowed as well but redemptions stabilized. So net outflows declined from the prior quarters $3.2 billion to $600 million. And private client gross sales of $1.8 billion were up $600 million sequentially. And redemptions were down by the same amount. So net outflows improved to $700 million. This was our lowest net outflow quarter for private clients since the first quarter of 2011 and reflects the greater confidence our clients have today in both our improving equity investment performance and the relevance of our newer offerings.

Let’s take a closer look at our business just starting with institutions, that’s on slide five. I mentioned that it was a slower gross sales quarter than we seen in some time and redemptions were certainly higher than we would have liked. If looking at the chart top left you can see how far we've come for just one year ago.

Year-to-date our gross sales are up $4.8 billion redemptions are down $24.2 billion and net flows have improved by $29 billion, that’s quite a turnaround. Pipeline activity was stronger than the number suggest. Funding and additions were both down significantly for the prior four quarter average. Yet pass-through activity was about average, that’s the chart at the bottom left. In other words we still had a lot of business taking place during the quarter that just never made it into the pipeline.

The chart at the top right shows how balanced our pipeline is today by service and by region. Our mix of business is pretty evenly split between fixed income a global growth engine for us this year and equity alternatives and multi-asset services where we’ve seen a significant pick-up in activity.

You can see from the display at the bottom right how our new pipeline additions have been spread across asset classes. It’s more of a profitable mix of business as well. In growth areas like Select U.S. Equity, Real-Estate Debt and our new Factor Fund has improved the average fee rate of our pipeline. As a result while we are about even in dollar terms of AUM with where we were two years ago our pipeline’s average fee rate has more than doubled during that period. So I feel very good about the underlying strength of our institutional business and our long-term prospects from here.

Continued strength in our fixed income business will be a key driver of our success going forward and we have two primary reasons to believe that.

Despite recent market volatility around fed tapering bring and the budget index ceiling theatrics in Washington the long-term opportunity is very much intact. One, our fixed income platform is very well positioned for the normalization we expect in interest rates. And two we keep delivering for our clients with our investment performance.

Let’s talk about each of these factors starting with how we are positioned. I am on slide six now. You can see from the chart top left the impact and uncertainty over tapering has had on treasury yields since May.

After peaking at 2.98% in early September yields have come down since the fed's surprise decision to delay tapering and the 10 year finished the quarter at 2.64%. The chart at the top right shows how the spike in yields affected flows to core bond funds after pouring nearly $134 billion in from January 2012 to May 2013, investors redeemed more than half that amount, $69 billion from June to September.

Meanwhile flows to taxable bond funds beyond the core category, which totaled $245 billion in a lead up to May kept coming in, $6.8 billion in the past four months. The good news in all this is that most of the portfolios we manage for clients are more dependent on the broad credit markets, meaning sector and security selection than duration time, that’s clear from the pie at the bottom right of this slide. And history shows that both municipal and taxable credit have a high likelihood of outperforming in a rising rate environment because economies are improving, that’s the chart at the bottom left. So we feel well positioned for the gradual rise in interest rates we expect from here.

We have also maintained stellar long term track record across our fixed income strategy. Now we are on slide seven. Even as performance of our core U.S. Regional and Global Fixed Income strategies has been affected by recent market volatility we held on to our long term investment premiums across our services. At quarter end, 89% of our fixed income assets were in services that outperformed their benchmarks for the three year period. For the five year it’s 87%.

I am pretty proud about fixed income franchise. We have navigated the recent markets well and have the right balance of offerings to thrive over the long term.

Now let’s turn to equities investment performance which is on slide eight. Looking at the quarter year-to-date and one year period the progress we have made in improving our track records is clear. In fact we have some top performance in the mix in Growth, Emerging Markets, International Discovery and U.S. large cap growth have outperformed for the one year period and more importantly since the current PM have been in place and Value, Global, and Australian Value significantly outperformed for the one year beating their benchmark by 1,000 basis points. U.S. Strategic Value is not far behind at 910 basis points over the benchmark, all three rank well into the top quartile for the period.

We could see this trend continuing. Since signs pointed early-stage Deep Value recovery, something our portfolios are very well positioned to exploit.

Slide nine lays this out. The chart on the left shows all of the value cycles from 1971 to today. In most cases, periods of outperformance the low priced book and priced earnings stocks well exceed periods of underperformance. In fact, the average period outperformance is four in quarter years versus one in three quarter years of underperformance on an average. And there have been only two value cycles in the past 30 years where the period of underperformance of low priced to book NPE stocks outlasted the period of outperformance that preceded including the last value cycle.

So you can see why one year into this current value cycle we think there are significant opportunities from here, spread between the higher and lower priced book global stock shown at the top right is 8.4 times down from last year’s peak of 88% above the typical trough of 4.6 times. And even with market at or near historical high stocks are more attractive today than in prior peaks that’s the chart at the bottom right valuations are cheaper.

Forward P/E ratio is at 4.2 times today versus 15 times at the October 2007 peak, 25.5 times in the March 2000 time period. With core inflation lower today than in prior peaks P/E ratios have leaned to rise from here. Also company’s earnings are more and managing their debt better. Forward earnings per share for the S&P is 115 today, up from 103 and 60 in the two prior peak periods. And the current net debt-to-equity ratio of 29% compares to 61 and 31 previously, all of these factors bode well for fundamental bottom of research and stock picking that are hallmarks not only of our value discipline but of our full suite of equity strategies.

Let’s move on to retail which is highlighted on slide 10. As I mentioned earlier sales activity slowed during the quarter but so did redemptions that’s because we have seen redemptions stabilize in our largest products in the Asia ex-Japan retail fixed income marketplace, Global High Yield and American income. The chart at the top right shows our overall retail redemption rate by quarter. In last year’s second half when we were enjoying record sales particularly of Global High Yield and American Income in Asia our redemption rate is stable in the low 30’s.

Now look at this year's second and third quarters. When yields shot up in the second quarter our combined redemption rate for global high yields and American income spiked by 22 percentage point and their flows turned negative. This pushed up our overall retail redemption rate. The third quarter yields came down their combined redemption rates dropped by 23 percentage points and our overall retail redemption rates normalized.

We talked about how Asia is the yield progress market and we expect flow to return to high yield especially as rates begin to rise. Those sales remain well up our prior level , redemptions have traded down from their June peak for both global high yield and American income. Yes these two products are big for us and they’ve been through a period of remarkable growth but they are not we all we have to offer to our clients. We spent years investing to innovate retail to broaden our client offering.

It's working you can see it in the chart at the bottom left. On this slide net sales of new offerings represent nearly one quarter of our total gross sales year-to-date nearly double the share they represented for year-to-date 2012. The newer products have not only performed well they’ve also resonated with our clients which is why the early success in asset data are selective and equity loans only and long short after the turn focus strategies have together raised more than $5 billion in assets, long short rate more than $360 million in the third quarter alone.

Limited duration high income, a U.S. 40 ACT fund and short duration high yield the LUX version have together raised nearly a $1 billion in their first two years.

Even with our recent slowdown we are having a very good year in retail. So far gross sales are at a pace with last year’s record. More importantly we getting better all the time delivering for our clients.

Turning to private clients, tailoring our offering to best meet client needs is our driving force here as well. Now move on slide 11, I am very pleased with the stability this business demonstrated it during the challenging quarter as I mentioned earlier with gross sales up and redemptions down by roughly the same amount quarterly net outflows fell to a multi-year level.

Exciting things are happening in private client, our financial advisors are energized on the back of strong equity portfolio returns and new smart timely and innovative client offers. Our Fund-of-Hedge-Funds RIC exemplified their performance and innovation win-win. As you can see in the chart at the bottom left, in its first year the RIC beats its benchmark by 4.4 percentage points. Client take up has been strong from day one and this offers is becoming of central feature at qualified client portfolios.

We are having early success with European Opportunities a fund we just introduced to private clients, European Opportunity is a concentrated value equity portfolio seeks to exploit the opportunities created by risk aversion, fear contagion in the European markets today we launched it quickly. In response to client demand for a product design to exploit a current and specific market dynamic and take up has been very strong so far.

We are committed to evolving our offerings to deliver the best results for existing clients and appeal to a broader set of clients with services that match their unique needs and varied investment needs.

I’ll finish up with our business highlights with Bernstein Research Services on slide 12. Summer is typical a seasonal slow quarter for us so revenues were down 7% sequentially yet year-over-year were up 6%. Industry wide trading volumes at Asia declined 29% from the second quarters very high level though year-over-year activity was up 53%. European volumes are looking better year-over-year as well. The operating environment remain very challenging on the sell side which make differentiated research even more important to capture business and share you have to prove your research adds value and ours clearly stands apart from the crowd.

Once again we received third party validation of that factor in the quarter in this year's annual II All American Survey we held our number seven overall ranking and number six weighted basis ranking. Our analyst ranked number one in most cases for multiple years in a row and several of our newer analysts had strong early showings as well. In Europe our 10th Annual Pan-European Strategic Decision Conference was our best yet. We had a record participation with double digit increases in client attendance and presentation to company needs.

Everyone is looking at the edge and emerging recovery in Europe. Our research in that region gives the edge. I am proud of the franchise we built there. Finally, another new analyst launched coverage in Asia during the quarter in the consumer goods space. This brings our total to 12 up from eight one year ago. We are well on our way to positioning ourselves distinctively in this region as we already have in the U.S. and Europe.

To wrap up we keep making progress on our long term goals of better investment performance, a balanced global business, relentless innovation for clients and stronger financials. Slide 13 puts this altogether. We’ve maintained our long term fixed income out performance and have improved our equity track records. When we complete our W.P. Stewart acquisition we’ll have strong track records in concentrated growth equity strategies to offer to our clients as well. Our fee activities as I mentioned is up in several product areas and the year-to-date sales growth is strong in many of our regions, more proof we are building a more balanced global business.

We keep innovating for clients with new offerings like Flexible Multi Credit, Factor Funds and European Opportunities. And we've kept a tight rein on expenses which has enabled us to increase our margin.

Looking year-end it is hard to tell what impact the recent government shutdown and other policy issues will ultimately have on investor confidence and market activity. Last year’s record second half was certainly a comeback. Yet I can tell you that in any environment we keep executing on our long term strategy to deliver to our clients and stakeholders and best position AB for future growth.

With that I’ll turn you over to John to discuss on quarter financials. John.

John C. Weisenseel

Thank you, Peter. Our remarks today will focus primarily on our adjusted results. As always you can find our standard GAAP reporting in this presentation appendix, our press release and 10 Q. Let’s start with the highlights on slide 15. Third quarter adjusted revenues and expenses were both down sequentially. Versus the third quarter 2012 revenues were up 1%, our expenses decreased 2%. Our adjusted operating margin in the third quarter improved to 22.6% from 22.2% in the second quarter and 20.2% in the third quarter 2012.

Adjusted earnings per unit were $ 0.40 for the quarter versus $0.41 in the second quarter and $0.36 in the prior year quarter.

Now I’ll review the quarterly GAAP to adjusted operating metrics reconciliation on slide 16. This quarter there were two adjustments that account for the difference between GAAP and adjusted operating income. First, we excluded the 2 million of investment gains related to the 90% non-controlling interest in the venture capital fund from net revenues.

Second, we adjusted for the $24 million in net non-cash real estate charges recorded in GAAP expenses in the third quarter. Of this total approximately $10 million was related to new write offs and 14 million was related to true-ups of real estate charges recorded in previous quarters. A majority of the 10 million new write-offs were from the further consolidation of our office space at our White Plains location which is in addition to the 510,000 feet of office space targeted in our global real estate consolidation program launched in the third quarter of last year.

This action will result in incremental occupancy savings of approximately $1.5 million per year. We may record additional through-ups in the fourth quarter as we approach the end of marketing periods on force written off during 2012 and we compare current sub-lease conditions to those assumed in our initial write offs and adjust accordingly. At this juncture we still anticipate cumulative write offs in our previously announced range of $225 to $250 million for the real estate consolidation program which targets a sub-lease of approximately 510,00 square feet of office space.

Now we will turn to the adjusted income statement on slide 17. Adjusted net revenues of $580 million for the third quarter were down 3% versus the second quarter and up 1% versus the third quarter of 2012. Adjusted operating expenses of $449 million were down 3% versus the second quarter and 2% versus the prior year quarter. Adjusted operating income of $131 million for the quarter decreased 2% sequentially but increased 13% for the prior year quarter. Adjusted earnings per unit were $0.40 cents and our cash distribution will also be $0.40. Slide 18 provides more details on our adjusted revenues.

Base fees for the third quarter declined 1% sequentially due to lower retail fees. The 6% increase versus the prior year quarter is due primarily to the increase in retail average AUM. Performance fees decreased sequentially primarily due to fees realized on one of our equity offerings in the second quarter.

We recognized performance fees as revenues at the conclusion of the respective calculation periods when the amount are known with certainty. Our third quarter performance fees are typically lower than the other quarters of the year since we have only a limited number of investment contracts for which the performance fee calculation period ends in the third quarter.

The third quarter of 2012 was an exception. During that period we completed the liquidation of the public private investment partnership or PPIP funds we managed and recorded $22 million in net performance fees.

Bernstein Research Services third quarter revenues decreased 7% sequentially due to seasonal trading volume declines. While the 6% increase versus the prior year quarter was due to an increase in client activity in Asia and Europe. Investment gains and losses include seed investments, our 10% interest in the venture capital funds and our broker dealer investments. Gains in these investments were down slightly versus the second quarter and down $4 million for the prior year quarter as a result of lower seed investment gains.

We ended the third quarter with $403 million in seed capital investments, down 30 million from the second quarter primarily as a result of net redemptions in the period. Total adjusted net revenues were down 3% sequentially but increased 1% versus the third quarter of 2012.

Now let’s review our adjusted operating expenses on slide 19. Beginning with compensation expense, as you know we accrue total compensation excluding other employment cost such as recruitment and training as a percentage of adjusted net revenues.

We accrued compensation at a 50% ratio in the third quarter, inline with the second quarter of this year and down slightly from 50.2% in the third quarter of 2012. Total compensation and benefits decreased 3% sequentially but increased versus the prior year quarter in each case in-line with the change in adjusted revenues.

We ended the third quarter with 3,269 employees. Now looking at non-compensation expenses. Third quarter promotion and servicing expenses decreased 15% sequentially primarily due to lower marketing cost, G&A and trade execution. These expenses were at the lower end of the expected ranges due to lower summer activity.

Promotion and servicing expenses were flat from the prior year quarter. Third quarter G&A expenses of 104 million were unchanged from the second quarter. Increased professional fees, resulting primarily from legal and accounting fees incurred related to our W.P. Stewart acquisition were offset by slight decreases in occupancy and technology expenses.

G&A declined 11% versus the prior year quarter due primarily to occupancy savings with the remainder due to lower technology expenses. Total adjusted operating expenses were down 3% versus second quarter and 2% versus the third quarter of 2012.

Now let’s move on to slide 20, adjusted operating results. Adjusted operating income for the quarter was 131 million, down 2% sequentially and up 13% year-over-year.

The adjusted operating margin of 22.6% increased both sequentially and versus the third quarter of 2012. The sequential increase resulted primarily from a slight improvement in operating leverage. The increase versus the prior year is due to higher revenues compared with lower expenses. Adjusted earnings per unit of $0.47 for the third quarter compared with $0.41 in the second quarter and $0.36 in the third quarter 2012. The effective tax rate for AllianceBernstein L.P. for the third quarter was 6.7%, which was lower than expected.

During the third quarter we completed our U.S. cash return filings for 2012 and adjusted our related tax accruals to reflect our actual tax liability. This adjustment reduced the tax rate by approximately 100 basis points for the third quarter.

Finally I’ll discuss two items included in our press release and 10-Q. First effective July 1, 2013 management of AllianceBernstein L.P. and AllianceBernstein Holding L.P. retired all unallocated units and AllianceBernstein L.P.’s consolidated Rabbi Trust. To retire such units AllianceBernstein delivered the unallocated holding units held in its consolidated rabbi trust to holding in exchange for the same amount of AllianceBernstein units.

Each entity then retired their respective units. AllianceBernstein and Holding intends to retire additional units as AllianceBernstein purchases holding units on the open market. Holding will newly issue Holding units to fund AllianceBernstein restricted Holding unit awards in exchange for the newly issued AllianceBernstein units.

Second on October 1, 2013 AXA completed the sale of one of its subsidiaries, MONY Life Insurance Company to an unaffiliated third party. As a result we lost approximately $7 billion in MONY fixed income assets during October which represents most of the approximately $8 billion in total assets we managed for MONY as of September 30, 2013. The loss of these assets will not have a material impact on our revenues as this are low fee assets. We expect to ultimately lose the remainder of the asset although the timing is uncertain.

With that, Peter, Jim and I are pleased to answer your questions.

Question-and-Answer Session


(Operator Instructions). Your first question is from Michael Kim, Sandler O’Neill.

Michael Kim - Sandler O’Neill

Good morning. First it seems like the backdrop of flows remains pretty black mostly across the industry, so fixed income strategies remained out of favor broadly speaking but at the same time we haven't necessarily seen any meaningful follow through on the equity side. So just curious assuming we remain in sort of this kind of the holding pattern where do you see the biggest growth opportunities in the near term just looking across your products and distributions channels?

Peter Kraus

Hi Michael. Thanks for the questions. Let me just drop back for a second and say something more inflows because I know it's on the front of your mind so we will try to give you a little bit more detail.

So number one is in the institutional world we know flows are notoriously lumpy and it's very tough to predict when clients in the institutional world were actually going to mandate us something and/or terminate us.

In this quarter we had a few large redemptions in the passive side and that had an effect on the redemption numbers in the quarter. One of the things we are trying to get focused on a little bit though is not just the AUM, that's important but also the profitability of the pipeline and the annualized fee rate on the new businesses we have been adding to the pipeline have been higher. As a result the estimated annual fee rate on the pipeline is probably double what it was a couple of years ago when the pipeline was reasonably at the same level. So that higher annualized fee rate is attractive relative to the historical institutional rate and even relative to our overall rate affirmed.

In retail, we've been pretty clear with you that the record sales of Global High Yield and American Income were big drivers of retail in the last 12 months and we also know that those flows can be volatile and we certainly saw that in June.

Redemptions are down a lot from the peak but gross sales were up as well which we think is an issue of investor asset side to the point that you just made. The bottom line is that I think the firm has done an awfully good job growing everywhere else in a much more balanced global business today, but we did in June get back some of what I think was the unusually strong growth in Asia that we had in during the prior 12 months.

That's kind of is I think the more balanced picture for us in inflows. And specifically answering where do we think flows are going to be going forward I do think they we are going to continue to see increased momentum in equities as investors de-risk and look at what look at what are their opportunities are in Europe, the European Opportunities Fund is an interesting barometer on that, but don't forget for us select has been a big growth area in the U.S.

I think the U.S continues to be a strong economy and if we were lucky enough to have some reasonable budget answer, I think that will create more momentum in growth in the United States and services like equity in WPS which we are going to hopefully be able to close this year. It’s going to give us an opportunity to raise assets there.

Global credit is becoming more and more interesting to even U.S. investors and we see that momentum as well and I think the alternative area will grow with some degree of consistency and so that would be my answer to your what does it look like in the future.

Michael Kim - Sandler O’Neill

Okay, that’s all. And then just turning to capital management you have been pretty active or proactive over the last few years on the product development side, so just wondering how you are thinking about seed capital needs going forward. So are you at a point when you maybe starting to recycle some of those investments that are reaching scale, such that there is less of a need for incremental capital and how would you look to deploy that excess capital assuming that’s the case. Thanks.

Peter Kraus

We have seen the seed capital come down a little this quarter, that reflects exactly what we said, the recirculation of that capital. I think we have been consistent on the issue of buying back units to continue to fund the compensation that we pay people and that isn’t going to change. We’ll be consistent on that. I don't think that I would say to you that we would think that seed capital is going to continue to decline. We have plenty of things on the drawing board that we think are important and I think that we will be aggressive at continuing to seed them and grow them.

So I think that’s not, the seed capital business is not a huge source of additional liquidity. I think it’s more than likely going to be a continued need and I think there are going to be times when we are going to have more seed capital than we have got today, to fund some of the ideas that we have.

John C. Weisenseel

Michael, this is John. Just to add to Peter’s comment. The seed capital is very fluid. For example in the quarter we actually had nine redemptions, from the seed capital we had seven new investments. So there is always a lot of activity back and forth. It just so happens in recent quarters it’s been declining for us, obviously we expect it to increase as Peter mentioned going forward.

Michael Kim - Sandler O’Neill

Okay, that’s helpful. Thanks for taking my questions.

Peter Kraus

Thanks, Michael.


Your next question is from Bill Katz with Citi.

Steven Fullerton - Citi

Hi, this is Steve Fullerton filling in for Bill. My first question just in relation to slide eight with the strong equities performance, how has that altered your conversations with clients and would a return to equities for clients be more a function of macro factors or it is individual performance for companies like the strong funds you are seeing?

Peter Kraus

Well I think in the last 12 months we have evidence of what we have been saying for frankly last three years in both stock picking and in a resurgence of our style based strategies. The most obvious were the examples we gave you in value where the outperformance was in some cases a 1,000 basis points and in some cases 900s but emerging market growth, which I also mentioned has had 500 and 600 basis points of outperformance in the last 12 months as well.

So stock picking has become more important as correlations severely declined over time and these more factor based or style based investing activities are more attractive as funds have flowed out of those areas for three or four years and the stocks that comprise that kind of investing have become less and less expensive and that’s the reason we talked about the history of value investing, so you could see how that you know trend works.

So when we are talking to clients there is still a strong interest on the part of investors to own stocks that are stable and have stable earnings but there is an increasing interest on the part of clients who recognize that that’s crowded, that that’s been a long run, that is risk in holding that and that there is increase appetite of looking at other areas of the equity markets that have potentially much higher returns because they are undervalued. That’s again European Opportunity is a really good example of that. So is Global Value, so is U.S. Strategic Value so as Emerging Market Growth.

These are all cases where we see significant value opportunity. Just emerging markets returns in general relative to developed markets have begun to look up from a multi-year low in the deference of returns in emerging markets versus developed markets and so there is another opportunity for people to invest in places that are somewhat less [potential].

Steven Fullerton - Citi

Okay great and then one thing just to follow up on the AXA redemption. Which bucket is that coming out off?

Peter Kraus

That’s almost entirely fixed income.

Steven Fullerton - Citi

Okay, thank you.


Your next question comes from the line of Matt Kelly, Morgan Stanley.

Matthew C. Kelly - Morgan Stanley

Morning, guys. Peter I wanted to ask you a little bit more about alternatives. I know you talked about that recently. But as I look at your kind of breakdown of retail and private client assets in the other bucket as you guys define it versus the institutional and also what’s in the U.S. versus non-U.S., just seems like, I’d be curious to get your thoughts on where the growth could come within the different channels is it going to be equal parts or is retail and private client a much bigger opportunity for you from here?

Peter Kraus

Good question, Matt. I think that more than likely at the outset the private client then retail are likely to be the first movers. Institutional activity will be driven more by longer term track records and experience that, that brings. Having said that we have been at the alternative business now for close to three plus years and we are coming up on those kinds of track records that will interest the institutional buyer and we have seen evidence of that.

So I think that we are going to be lucky in the sense that we are going to be able to source assets from all three of the channels. Thus I'd be hard pressed to say to you that one versus the other is going to be more important. I think the European opportunity is an interesting example and that’s not just -- that’s really an alternative but it's a service where there's no track record, there is obviously a track record for the manager but this is completely new in terms of a specific service and private clients was definitely interested, but so was the retail side of business.

And I think we’ll see institutional follow that and that’s sort of the trend that I would expect with these kinds of services.

Matthew C. Kelly - Morgan Stanley

Okay that’s helpful. And then just a follow up from me in terms of your Asia Retail Fund flows, I know that investors focus a lot on the two biggest funds and they are the American Income and Global High Yield, but the performance on the Global High Yield has obviously been strong and the flows more recently have been more resilient. So I’ll be curious to get your thoughts on bifurcating the two funds and what you are hearing from your distributors over for Asia retail channel sales?

Peter Kraus

Well I think the Asian market place is resting, this is the term I would call. I don’t think it's a market place that rests for that long but it's resting. I think and we said it's sort of the investor appetite is low right now frankly for making any particular move. We haven’t seen huge flows into equities in Asia, even in the industry. There is some interest in multi-asset activities and we actually are launching a multi-asset service in Asia.

I think that come the beginning of year and some more clarity on tapering we’ll see investor appetite come back and I think that yield is always going to be attractive to them and Global High Yield is -- Global High Income is that product.

American Income as a product is more stable. It does have a duration element to it and that duration element will likely be less attractive in rising rates. But on the other hand it's a stable investment and a core investment and I don’t expect it to be unattractive to investors but I am not sure it will have same level of attraction it did in last few years.

Matthew C. Kelly - Morgan Stanley

Okay. Thanks very much.


Your next question is from Cynthia Mayer, Bank of America-Merrill Lynch.

Cynthia Mayer - Bank of America Merrill Lynch

Hi, good morning, thanks. Thanks for the disclosure about the fee rated, the new business being higher in the past, just to clarify how is the annualized fee rate of the new businesses compared to the fee rate of the existing business? And how close you are to closing that gap?

Peter Kraus

Well I think we said that the pipeline fee rate exceeds the rate of the whole business.

Cynthia Mayer - Bank of America Merrill Lynch

Okay. I am sorry I missed that.

Peter Kraus

It’s okay.

Cynthia Mayer - Bank of America Merrill Lynch

Okay, great. And John any shift in looking forward in terms of the ratio of the comp to revenues that you guys have been targeting and also on the G&A you mentioned in real-estate other than that should we expect any shift in upcoming expenses worth calling out?

John C. Weisenseel

Sure. Cynthia, it’s John on the -- just first on the compensation, we have to pay folks to be competitive in the marketplace and based upon our current level of revenues we believe that the appropriate compensation ratio that's required to do that is 50%. So that’s -- we’ve been accrued of that now for the first three quarters of the year and that’s where we currently are at.

As far as the G&A we’ve been at $104 million now for a couple of quarters. I’ll say that, that would be the low end of the range that I would expect going forward. The past couple of quarters G&A has many different components to it, different expense line items. And what we’ve seen in this quarter and the past couple of quarters is we’ll have a [pop] in a one line item but that will have some offsets at some other line items. Sometimes these offsets are non-recurring.

So I think going forward, looking ahead it’s reasonable to expect that at some point we’ll have a [pop] on a line item and we’re not going to have an offset to it. So again I think going forward I would be looking at $104 as at the low end of the range.

Cynthia Mayer - Bank of America Merrill Lynch

Okay, great. And may be since my first question was a dud, I can slip in the third which is just on W.P. Stewart which sort of channel and type of client are you intending that for? I wasn’t really clear because they do both did both high net worth and had some funds, is that a private client product you expect to rollout or you are going to rollout funds, is that a U.S only type of product or you expect to sell it overseas? Thanks.

Peter Kraus

Cynthia, I think we actually see W.P. Stewart having appeal across a range of channels and a range, and appeal in a broad range of geographies, they have a [40 F] Fund in the U.S. strategy they have a usage product as well that would allow us to sell that overseas. As you mentioned they have a very strong business in the private client world but the idea of a concentrated high output strategy that offers very good downside protection also has a lot of appeal in the institutional world as well.

So where in fact it’s a process that has proven itself to be robust over a number of decades now and we think it’s got the folks here quite excited about its potential. So we are optimistic about the type of take up we could see across all three businesses around the world.

Cynthia Mayer - Bank of America Merrill Lynch

Great, thank you.


(Operator Instructions). Your next question comes from Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Hello, great thanks. Peter can you talk a little bit about your strategy in terms of inorganic growth, acquisitions maybe you could just put the W.P. Stewart transaction into context in terms of how you maybe want to grow your equity business over time or just may be some areas where you see more sort of inorganic opportunities?

Peter Kraus

Sure, thanks Marc. So I think we’ve said many times that it would be not impossible but unlikely that we do some large acquisition because you end up with overlaps and lots of duplication and people issues and change and just hard to mange that effectively. What was very appealing in the W.P. Stewart acquisition is as Jim mentioned a process over decades that has produced sustainable alpha, actually attractive alpha with a concentrated portfolio consistently applied and a team that done that for over twelve years. That a service that we don’t have.

We don’t have a concentrated service of that type anywhere in the firm. And it seems that also fits comfortably into our culture, thinks about research the way we think about research, thinks about stocks the way we think about stocks and therefore it's not just consistent with the investment process and the investment team but also is consistent with how we talk to our clients.

So a firm like that where they have a lot of room to grow where capacity they are not up against the capacity limits, that fits in the culture that is not an overlap, that is focused on a long term part of the market that we think is sustainable, i.e. concentrated investing that’s a very attractive inorganic opportunity. And if we can acquire businesses like that, that have that kind of fit we will continue to do so. It leverages our relationships with our clients, it leverages our research, it leverages our ability to describe our investment processes to our clients and it leverages our client group's distribution capability around the world, that is a win-win for us.

Now they are not easy to find. We’ve done three when we closed W.P. Stewart, the current [Forman’s] business and the SunAmerican fund to funds business and now WPS, that’s not a lot in the last five years. But I think there are all reasonably consistent kinds of activity.

Marc Irizarry - Goldman Sachs

Okay that' helpful. And obviously you guys have been able to, tighten the range if you will on some of the controllable expenses. And but I am just curious like where do you think the operating leverage from here on in comes from, is it from leveraging some of the distribution and regional growth that you have or is it in finding may be a few really highly scalable products and watching them scale up or where do you think the go forward operating leverage really lies right now?

Peter Kraus

Well Marc I think we’ve said that we are pretty happy with where our cost structure is now. So the operating leverage will come from growth. I think that, that is going to be a combination of growth across the various strategies that we have been, are putting in place within that fixed income, or that’s in alternatives, equities and multi-asset. The great thing about where we are now positioned as a firm is that we do have that type of balance in terms of the asset class we are participating and the type of outsources that we are able to produce for our clients and the distribution footprint as you mentioned that we have a place that really is really is global in scope.

So we are seeing that already this year. We’ve had very strong growth sales increases in the U.S., in Europe and Latin American and Japan. And so we are encouraged about what the future can be because we do have so many levers that we can pull going forward.

John C. Weisenseel

That frankly has taken three an half years to build, it doesn’t happened over night.

Marc Irizarry - Goldman Sachs

Okay, great thanks.


(Operator Instructions).

Andrea Prochniak

So it sounds like we have no further questions in the queue. I am around all day for any follow-up you may have with investor relations. Thank you for joining the call this morning.

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