AllianceBernstein Holding L.P. (NYSE:AB)
Q4 2013 Earnings Conference Call
February 12, 2014 08:00 AM ET
Andrea Prochniak - Director of IR
Peter Kraus - Chairman and CEO
John Weisenseel - CFO
James Gingrich – COO
Cynthia Mayer - Bank of America-Merrill Lynch
Matt Kelley - Morgan Stanley
Robert Lee - KBW
Bill Katz - Citigroup
Michael Kim - Sandler O’Neill
Thank you for standing by and welcome to the AllianceBernstein Fourth 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 a question 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.
Thank you, Shirley. Hello. And welcome to our fourth 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; CFO, John Weisenseel; and 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 2013 Form 10-K 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 @alliancebernstn.
Now I'll turn the call over to Peter.
Thanks Andrea, and thank you all for joining us this morning. Let’s start with a firm-wide overview on slide three. Equity markets continued to be quite constructive through the fourth quarter of last year, while debt markets remain challenged. This affected our flows particularly in retail fixed income in Asia ex Japan. Our fourth quarter gross sales declined 21% sequentially and 39% year on year. But gross sales of 80 billion for the year declined just 2%.
Net outflows of 10.3 billion for the fourth quarter include 6.8 billion in institutional fixed income assets we lost as a result of AXA’s sale of MONY. You can see how much stronger our flows look when we isolate the impact of AXA’s dispositions as we do on this slide. AXA’s business divestitures account for 7.1 billion of our 2013 outflows and 5.8 billion in 2012. So ex-AXA our total net outflows declined to 5.2 billion in 2013 from 8.6 billion in 2012. Market appreciation increased our AUM by 13.4 billion for the quarter and nearly 31 billion for the year and we finished 2013 with 450 billion in AUM. With strong equity market returns in equity alpha, average AUM was higher at quarter end and yearend as well.
Slide four illustrates our quarterly flow trends across channels. In institutions gross sales increased to 5.5 billion from third quarter’s 4.5 billion, absent MONY’s redemptions net flows would have been about 1 billion positive. In retail fourth quarter net flows were 3.9 billion, outflows, the vast majority from Asia ex-Japan as investors in the region shifted from fixed income to equities.
Private client fourth quarter net outflows of 800 million were down 75% year on year. So our flow improvement here is clear. We just released January AUM of 445 billion after market closed yesterday, down 5 billion or 1% from year-end. The turn in the equity markets was the biggest driver of the decline though negative firm-wide net flows contributed as well. Net flows were essentially flat in institutions, slightly positive in private client, total retail flows were negative but positive outside of Asia, ex-Japan.
Now let’s take a closer look at our businesses, starting with institutions on slide five. The chart at the top left shows just how much of our flows have improved over the past few years. Annual net outflows today are a fraction of their peak levels, our 20 billion plus net flow improvement in 2013 came on the heels of a 23 billion flow improvement in 2012. Excluding the fourth quarter MONY redemptions, we were net positive for the quarter and the year. Sales were up in every major region and asset class in 2013 and we maintained a high level of activity completing some 400 diverse new business RFPs during the year.
Our 5.6 billion new business pipeline at year-end, which you can see at the bottom right, is fairly evenly split across regions. Our new pipeline additions have also become increasingly profitable as we’ve grown in areas like select equities, real estate, factor funds and other alternatives in multi asset offerings. In 2013 the average fee rate on our pipeline of new business was double our average pipeline fee rate for 2012. Every part of our institutional business, client engagement, business mix and profitability of new business is trending in the right direction.
Let’s talk about our investment performance beginning with fixed income on slide six. Our team’s done a great job and continues to do a good job, navigating the volatility of the global debt markets even with the year we’ve just had, there’s a lot of green in that column. It’s worth noting that unconstrained bond, our new go anywhere strategy is doing very well in the institution’s channel.
Turning to the three and five year periods you can see how we have maintained our long-term investment premiums across services. At year-end 85% of our fixed income assets were in services, they outperformed their benchmarks for both periods. Looking ahead I feel very good about our fixed income franchise. It got the right global, integrated and credit focus platform to weather any market environment and we are pursuing new areas like middle market and infrastructure lending that align well with how the marketplaces are evolving and where our clients increasingly want to be.
Now let’s turn to equity investment performance which is on slide 7. Throughout the year our equity team continued its impressive turnaround, with many of our one year numbers are the best we’ve seen in years. On the value side, global strategic value outperformed by more than 1,300 basis points; US strategic value by 860 basis points and global value by 700 basis points. In growth, emerging market growth outperformed by 680 basis points for the year and US Large Cap growth by 520 basis points.
All of these value and growth strategies were top quartile performers or better. At the same time we held on to our long-term performance premiums and several other strategies like US small and SMID-cap value, US Small Cap growth, US growth and income and global REITs. These are very strong numbers across the board and our momentum continues.
We knew our most challenged equity services would outperform for clients once again particularly once fundamental research and stock picking came back into favor. At the same time we focused on bringing in talented, like-minded equity investor professionals with long-term track records in new areas for us. We made a great progress there.
Now I’m on slide 8. We made an exceptional addition to our equity platform when we acquired Kurt Feuerman and his team Caxton in May 2011. Kurt, a 32 year industry veteran and his team brought a disciplined process rooted in fundamental analysis and macro insights combined with an unconstrained approach and flexibility to respond to market conditions. Their offering which we launched beginning in late 2011 at Select US Equity Long-only and Select Long/Short, had the style and performance our clients everywhere were asking for, and we had the global reach to make it broadly available.
Select Equities has broad appeal with our clients day one, not only as an average annualized outperformance of more than 400 basis points since inception, and has beaten its benchmark in each of the past nine years. Long/Short has delivered positive returns in 13 out of 14 years with less than half of the volatility of the market. Clients have responded, from just over 1 billion retail and institutional assets have grown to 10 billion today. Select showed us that we could accomplish for our clients with the right combination of relevance, performance and reach.
We think we can achieve similar success with WP Stewart, a concentrated growth equity manager we purchased in December and CPH Capital, the Denmark-based global core equity manager we just agreed to acquire. Like us WP Stewart employs in-depth research and takes a team-approach to visiting and evaluating clients. What they bring to our equity franchise is expertise in creating concentrated portfolios in mid and large cap companies with predictable and sustainable earnings growth, and their track record is stellar.
Their concentrated US growth portfolios outperformed the S&P 97% for the time over the rolling 10 year periods and their concentrated global growth portfolio has outperformed the MSCI World Index 100% of the time for the rolling five-year periods. We are already launching their products on our platforms and I’m excited about what we can achieve together. Soon we’ll add CPH Capital which currently manages 3 billion in core global equities for institutional clients.
As with Select and WPS, CPH allows us to extend our platform in a client-focused way. We do not currently have a global core equity offering and while CPH shares are high conviction and focus on fundamental stock picking, their style and factored neutral approach differs from our own style pure and schematic investing. We expect to close within the next two months and have client offerings available beginning in the first half of this year. We’re positioning our equity practice in a way that strikes the right balance of knowing what to change and also what to preserve.
Slide 9 illustrates how we maintained our high conviction, our investment discipline and our deep research culture while adding capabilities in areas where our clients increasingly want to be. From introducing a suite of asset return focus strategies, to expanding our product set of stability equities, to building a presence of highly concentrated portfolios, to bolstering our conditional equity offerings. We have built a business that's designed to meet client needs across the risk spectrum in every market environment.
Let’s move on to retail on slide 10. 2013 was really a tale of two markets for us specifically for our global high yield American income funds and in Asia, ex-Japan. Coming off a record year in 2012 our global retail business generated $2 billion in net inflows through May, driven entirely by strength in Asia ex-Japan, and particularly in global high yield and American income.
Following the Fed Taper Talk in May and the subsequent concerns of over emerging growth our shares in the region and those in the two funds in particular slowed significantly. As investors start to avoid treasury and EM exposure in fixed income and rotated out-of-the-asset class and into equities, that last trend is clear at the chart at top right. Industry bond funds in Asia sell nearly 60% sequentially in the second half of 2013 while equity fund flows increased by nearly 60%. Our Asia ex-Japan retail net flows went from positive 2 billion for January to May to negative 9 billion for June to December and accounted for all of our global retail net outflows for the year.
Full gross sales for the Asia region were down for more than 30% and net outflows were about 8 billion. We are working to capture more flows in the region and several equity and alternative and multi-asset products in the pipeline. In the meantime, strong sales growth in other parts of the world is helping to offset our slowdown in Asia. Gross sales increased 12% in EMEA, 21% in the United States, 57% Latin America last year. The 4.7 billion gross sales increase in these regions combined, offset about 40% of the sales decline in Asia.
We are also having continued success with offerings we've introduced over the past five years. Sales of these newer services were up 49% in 2013 and totalled 26% of our overall gross sales for the year. So, our sales are growing in every part of the world and for our new offerings as well just not enough to overtake the slowdown in Asia.
Turning to private client on slide 11, 2013 was a year of greater stability and improved flows. Few things are happened that bode well for us in this business. One, strong equity returns have made for much happier clients and two, all of the enhancements and new flexible solutions we introduced have reenergized our advisors and our clients and bought new clients into the firm.
In 2013 that translated to higher sales, low redemptions and improved flows. Gross sales were up nearly 50%, redemptions fell by 23%, as a result our total net outflows were less than half the prior year’s total, our lowest since 2010. We also didn’t have a single principal assay departure in all of 2013. Our advisors are excited about all the new services we can offer clients. We are both responsive to their evolving needs and performing well. Now in its fourth year dynamic asset allocations is successful in lowering volatility and client portfolios while preserving returns that display at the bottom left.
The fund of hedge funds which we introduced in October 2012 and they call alternative offerings broadly available to private clients have significantly outperformed for the quarter, year and since inception, that’s the chart at the bottom right. Private clients have embraced the opportunity to add alternative exposure allocating some 1.5 billion to the strategy since we began offering them to qualified investors. We have been able to expand our market of addressable clients with our new offerings. To appeal to this growing audience we have been launching innovative and timely products that clients can add to their existing portfolios for investing separately.
Our AB securitized assets fund and diversifying source of fixed income exposure has raised nearly 200 million since it launched in March 2013 in European opportunities and concentrated equity portfolio fix to exploit opportunities in years on recovery, raised nearly 230 million in its first three months. We are talking a more tailored approach to helping clients achieve their asset allocation wealth objectives and how they appreciate that we are innovating on their behalf. I will finish up our business highlights with Bernstein Research Services on slide 12.
It was another very strong year of our sales side business. Even if activity levels remain muted in the U.S. our largest market, we still manage to generate higher total quarterly and annual revenues. Fourth quarter revenues were up 6% sequentially and 9% year-on-year and annual revenues were up 7%, our highest since 2008. Our success extending our global presence is shaping up to be a key driver of top line growth. In 2013 our revenues from Europe and Asia were up by strong double-digits. Today these two markets account for about one-third of our revenues, up from less than one quarter of revenues four years ago.
As we expand our presence, we are building a reputation for our integrated global research insights that’s coming through in the results of third-party fund manager surveys. We are also building regional reputations as strong as the one we have had in the U.S. for years. In 2014, the European II survey just out last week, we held our number 10 ranking overall and moved up a spot on a weighted basis from 7 to 6. And now with our Asia build out nearly complete and ahead of the revenue and client penetration targets we've set, we can follow the same trajectory of success there. I am very proud of what the team has accomplished.
To wrap up, 2013 was another year of meaningful progress for us and our long-term strategy to continually improve how we deliver for our clients and exploit new opportunities across our businesses around the world. Slide 13 hit the high points. We held our long-term fixed income performance premiums through volatile times and significantly improved our equity track records. With W.P. Stewart and CPH coming on-board this year, we'll have even more to offer our clients going forward. We maintain high levels of client activity and grew sales in every asset class at every region and institution. In retail we grew sales in every region beyond Asia. We kept innovation front and centre with clients and we’re welcoming our new and flexible solutions.
We made real progress on our financial goals adding five points to our adjusted margin in 2013, thanks in part to the $125 million in adjusted non-comp expense reductions we made since 2011. We’re stronger, we’re a balanced firm today and the credit goes to all the hard working people here at AB who has been relentless in their focus on delivering to our clients and ensuring our firm is on a path to growth. We still have work to do but I am confident we’ll keep moving forward from here.
With that I am going to turn over to John for a discussion of the quarter’s financials. John.
Thank you Peter. My 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-K. Let’s start with the highlights on slide 15. Fourth quarter adjusted revenues and expenses both increased sequentially. For the year, revenues were up 6% and expenses were down 1%. Our adjusted operating margin in the fourth quarter improved to 29% from 22.6% in the third quarter. In 2013 full year adjusted operating margin increased to 24% from 18.8% in 2012. Adjusted earnings per unit were $0.60 for the quarter versus $0.40 in the third quarter. For the full year adjusted earnings per unit increased 39% to $1.78 from $1.28 in 2012.
Now I will review the quarterly GAAP to adjusted operating metrics reconciliation on slide 16. Fourth quarter adjusted operating income was $10 million lower than GAAP operating income primarily due to the following four items. First, we adjusted for the $2 million non-cash real estate charge we took in the fourth quarter, which was included in GAAP expenses. This charge represents the true up of real estate charges recorded in prior periods resulting from changes in market assumptions.
Second, we excluded the $11 million reduction in contingent payment arrangements that was recorded as a reduction to GAAP expenses. We reduced our estimated contingent payment liability relating to an acquisition of the Sun America’s alternative investment group in 2010, based on lower projected revenue sharing payments.
Third, we excluded 3 million in acquisition related expenses primarily severance and professional fees related to the W.P. Stewart acquisition which were included in GAAP expenses.
Fourth, we excluded the 3 million of investment gains related to the 90% non-controlling interest in the venture capital fund from net revenues.
We have chosen to exclude the reduction in contingent payment arrangements and the acquisition related expenses along with the other adjustments discussed for purposes of calculating our adjusted operating results since we do not consider these items part of our core on-going operations.
Slide 17 provides a full year GAAP to adjusted reconciliation. The largest driver of the differences between GAAP and adjusted operating income was a $28 million in non-cash real-estate charges we recorded throughout the year related to our global real-estate consolidation plan. I will provide you with an update on our progress in the coming slides.
Now we’ll turn to the adjusted income statement on slide 18. Fourth quarter adjusted net revenues of 638 million were up 10% versus the third quarter. Full year revenues of approximately 2.4 billion were up 6% from 2012. Adjusted operating expenses of 453 million were up 1% sequentially, full year expenses are approximately 1.8 billion were down 1% from 2012. Adjusted operating income of 185 million for the quarter increased 41% sequentially. Full year adjusted operating income of 575 million was up 36% versus 2012. Adjusted earnings per unit for the fourth quarter was $0.60 and our cash distribution will also be $0.60.
For the full year adjusted earnings per unit were $1.78 up from a $1.28 in 2012 and our distribution was $1.79 per unit, up from $1.23 in 2012.
Slide 19, provides more detail on our adjusted revenues. Base fees for the fourth quarter increased 1% sequentially primarily due to higher private client revenues. The 6% increase versus the prior full year is primarily due to an increase in retail average AUM. Performance fees of 44 million for the fourth quarter were significantly higher than those recorded in the third quarter, since we recognized performance fees on services as revenues at the conclusion of their calculation periods which in most cases end in the fourth quarter. Of the 44 million, 7 million related to the strategic opportunities fund that we managed and liquidated during the fourth quarter. The remaining 37 million came primarily from performance fees earned on our fund-to-funds and equity offerings.
Annual performance fees of 54 million resulted from fees earned on fund-to-funds and equity offerings and increased 5 million versus the prior year. Performance fees for 2012 included 22 million of net fees earned in the third quarter where we liquidated the public private investment partnership or PPIP fund we managed. Bernstein Research service revenues increased 6% sequentially and 7% on an annual basis due to an increase in client activity in both Asia and Europe.
Investment gains and losses include seed investments, a 10% interest in the venture capital fund and our broker dealer investments. In the fourth quarter we had higher gains in our seed capital investments compared with the third quarter. For the full year we have lower gains in our seed capital investments than in 2012. We ended the fourth quarter with 442 million in seed capital investments the majority of which is hedged. Seed capital increased 39 million for the third quarter primarily as a result of additional net investments and market appreciation.
Now let’s review our adjusted operating expenses on slide 20. Beginning with compensation expense we accrued total compensation excluding other employment costs such as recruitment and training as a percentage of adjusted revenues, we’ve accrued compensation at a 45.3% ratio for the fourth quarter and 48.7% for the full year. In the first nine months of 2013 we’ve accrued at a 50% ratio, however with higher than expected fourth quarter revenues primarily due to higher performance fees we were able to accrue compensation at a lower ratio of revenues while still meeting our compensation objectives. Lower severance payments in 2013 and higher forfeitures of incentive comp granted in prior years also played part in our ability to meet our compensation objectives for 2013. The 4.7 point reduction in our comp ratio for the quarter added approximately $0.11 to our fourth quarter EPU. Total compensation and benefits was down 1% sequentially. Although the comp ratio was lower for the year compensation of the assets were up 4% due to higher revenues. We ended the fourth quarter with 3,295 employees.
Now looking at our non-compensation expenses, fourth quarter promotion and servicing expenses increased 12% sequentially primarily due to higher T&A resulting from higher client related travel. You will recall that the third quarter promotion and servicing expenses were at the lower end of the expected ranges due to lower levels of summer business activity. Promotion and servicing expenses increased 3% in 2013 in 2012 due to higher marketing and trade execution costs.
Fourth quarter G&A expenses of a 107 million were up 3% sequentially primarily resulting from higher portfolio service fees. 2013 G&A declined 14% primarily due to lower occupancy expenses with the remainder from lower professional fees and technology expenses.
Now let’s move on to slide 21, adjusted operating results. This slide summarizes the improved adjusted operating results that I’ve already discussed. The higher adjusted operating margins for both the fourth quarter and full year results from lower compensation ratios and improved operating leverage realized from our cost production initiatives. The full year 2013 effective cash rate for AllianceBernstein LP was 6.5%. This is lower than expected because of a change in actual taxable income mix versus forecast with a higher percentage of income derived from lower tax jurisdictions.
I will finish with an update on our global real estate consolidated plan as outlined on slide 22. We began phase 1 of our consolidation plan in 2010 and then added phase 2 in 2012. Each phase targeted specific floors for consolidation within our global office footprint, and this time we have vacated more than 900,000 square feet of office space and made it available for sub lease. In third quarter 2013 we identified an additional opportunity outside our original scope for phase 1 and 2 to further consolidate our White Plains office location. We recorded an incremental charge and realized additional occupancy savings. Today we’ve recorded write-offs of 350 million and realized approximately 70 million in annual adjusted occupancy savings from these activities. Although we have included these write-offs in our GAAP financial results we have excluded them from our adjusted operating results. There may be additional adjustments, both increases and decreases to previous write-offs until all vacant space is sublet if market conditions change. Of the 350 million total, 217 million has been recorded to date for phase 2, to which the expected range of write-offs remains $225-250 million. So far we have successfully sublet 92% of the phase 1 space and 70% of the phase 2 space. During the past several years we have reduced our office footprint by approximately 40% to better align with our current and anticipated staffing levels and have realized a meaningful reduction in our own going cost structure. We will continue to search for further consolidation opportunities and may be able on occasion to identify additional floors to vacate and sub-lease on an ad hoc basis. With that Peter, Jim and I are pleased to answer your questions.
Please limit your initial questions to two, in order to provide all callers an opportunity to ask questions, you are welcome to return to the queue to ask follow up questions. Our first question comes from the line of Cynthia Mayer from Bank of America-Merrill Lynch, your line is open.
Cynthia Mayer - Bank of America-Merrill Lynch
Hi, thanks a lot. You gave a lot of color on performance by strategy which is great but not so much on assets by strategy. So I’m just wondering if you could - or fees by strategy – I’m just wondering if you could give a little color on which strategy is the largest assets at this point both in equities and fixed. Particularly say the 64 billion in retail taxable fixed assets. Is that mostly high yield or is that something else? Thanks.
Good question, Cynthia, of course we don’t have all that data for you. I guess there hasn’t been that much of a change in the character of the assets quarter-to-quarter. The Asia ex-Japan asset that had suffered some redemptions as I noted are taxable assets in Global High Yield and American Income. Assets that we’re bringing in are also - in fixed income - also credit intensive assets, so they are similar types of assets. So I guess I’d answer the fixed income question that way. On the equity side the equity assets coming in are a range of assets, US equities as we talked about continued success in our whole range of mid to small cap assets, thematic assets where we have had very strong performance in the last six months, and although we have been saying for the last few years that we thought we’d see a turnaround in our core services, we actually have now seen that turnaround. And there are clients who are reallocating to us, because of that performance.
If you want more detail, I think you can follow up with Andrea, she’ll be happy to give it to you.
Our next question comes from the line of Matt Kelley from Morgan Stanley. Your line is open.
Matt Kelley - Morgan Stanley
I first wanted to ask actually I'll follow-up on what you just said Peter on the clients coming back to you on the equity side on some of the core services and looking at your one year performance for institutional equity, quite strong, three year, five year more mixed and worse in the one year. But I would be curious in your conversations with consultants and other institutions, what those dialogs are obviously your RFP activity has picked up but how far away do you think you are from winning more of the institutional RFPs that you are kind of -- RFPs converting to wins I guess is the question.
Look, Matt, I think that’s always a difficult question to answer. I’ll try to be consistent with what we’ve said in the past. We have noted time and time again that during the period of underperformance in value and growth that there were very clear reasons for that underperformance and it wasn’t due to our research process being broken. It wasn’t due to the fact that that way that we invested was never going to produce returns again; it was due to the preference of investors to buy which we noted many times, safer stocks with higher yields, that’s changed. And we believe that there is a trend there. We believe that that’s going to continue for a while. And I think we noted last quarter we actually had an interesting slide to talk about values, history over the last 50 years or 40 years where we noted periods of time when there was underperformance in periods of time when there was outperformance.
This is beginning a period of time where outperformance. I think there are clients that have been with us a long period of time that know that and that’s why they have in their judgment allocated assets to us to take advantage of that. I think the consultant community and clients who are not currently allocated to those strategies are going to watch carefully but probably move cautiously, that’s their nature. I do think that we’re being very outspoken about this and we may convince people more quickly than normally that the performance is really attractive for a couple of reasons. One, because I think we have been consistent on a point and we have had a long period of outperformance over time and these are very consistent teams that have been in place for virtually inception to date.
And secondly because investors are so sparsely allocated to these services, because the underperformance went for a period of time, and because people really were not comfortable with volatility that came with those services, there is very little money allocated in these spaces, and so I think that it’s more than likely that money will come back into these spaces sooner versus later because of that low allocation. But I am predicting that you can’t take that to the bank.
Our next question comes from the line of Robert Lee from KBW. Your line is open.
Robert Lee - KBW
Two questions, first one is maybe John can you give us a little bit of color as we look forward on what we should be thinking about as kind of a comp ratio expectation for ’14, is it still kind of 50% target or since you are kind of beating that we should think that the full year comp ratio is more in line with what expectations are.
And then maybe Peter, just give a little bit more color in the different strategies in the other bucket, that’s clearly been a pretty good driver catch-all, but a very good driver of flows, I mean assets in there are up 40% year-over-year if I look at the numbers correctly. So maybe a little bit of kind of more triangular color on which strategy specifically in there are kind of driving that that will be helpful. Thanks.
This is Jim, I will let Peter answer the first question but let me tackle your -- second question, let me tackle your first question. In terms of compensation, let me offer up a couple of thoughts. One is, as we have talked about a number of times we think that if we can grow the company over time there is going to be significant operating leverage in both the non-compensation portion of our P&L but also to a degree in the compensation portion of our P&L. And thinking nearer term, a couple of thoughts, one is, we don’t plan on what performance fees are going to be over the course of the year and so those performance fees are realized. As we sit here today we know that markets are flat to down for the year.
And the second thing is that as we look at the opportunities that we have today we see several opportunities to invest to bring in teams and build the business that will have near-term comp implications. So, I think it’s probably prudent to continue to plan on a 50% comp ratio going forward but we'll see how that plays out depending on how the year unfolds.
On your second question, Robert, as noted in the slide I think it says that there are asset allocation assets and alternatives in that bucket but to give you a little bit more color on that, so, again we’ve talked for the last few years on building a multi-asset capability, talked about dynamic asset allocation. We talked about growth in assets in that space. We talked about our focus on the defined contribution space, target date, customized retirement solutions, life-time income solutions, factor funds. All those things that we've been focused on that we started from scratch, you build from zero, continue to grow. And they are growing because they are in demand and because they make sense for large institutional clients just to segue on a second for that.
Large institutional clients and [inaudible] clients have two persistent characteristics. One is, they hire numerous managers and two is, they tend to hire managers with good track records. That has two implications. One is every manager has their own risk diversifiers built into them. So, if you hire multiple managers, you have essentially a potential for over-diversification. And secondly is, when you hire managers that always have good track records they tend to be exposed to similar factors. That goes back to the question that Matt asked about deep value. So, these factor funds give institutional investors an opportunity to diversify and to do so in a way that doesn’t upset the apple cart in their manager selection process.
Same thing for securities or services like dynamic asset allocation, also a chance to actually create some additional alpha from an asset allocation process different from your existing manager line-up. In the alternative space, we talked about Kurt Feuerman’s business, the long-short business. We've launched other alternative products like real estate and fixed income both the mortgage assets in residential and commercial and we just keep building those businesses and of course we have made some comments about our fund-to-funds business and the performance of that and that keeps growing as well. So, look we are just going to keep adding and those assets are going to keep getting bigger.
Our next question comes from the line of Bill Katz from Citi. Your line is open.
Bill Katz - Citigroup
Thank you very much for taking my questions and I really appreciate the very comprehensive press release and supplement very, very helpful. First question has a sort of, if you could go back maybe from a macro perspective Peter [and also] prognostication with this. But just given the likelihood for the U.S. tapering what breaks the dynamic of the elevated traction outside the United Stated and Asia, I guess mainly the correlated question is, is there enough momentum on the gross sales side in the rest of the business to sort of migrate from outflows to inflows as we work through this year?
Yes, it’s a good question Bill, look, I think that we are really excited about the growth in positive flows, positive flows not outflows, positive flows all over the world with the exception of Asia ex-Japan. And we believe that we have got positive momentum there. We have got strong equity performance, strong fixed income performance, more services available, more innovative products, W.P. Stewart, CPH Capital. These are all additive and all of services that have strong track records that are saleable today. In Asia ex-Japan two things, one is, many of those innovative services and new services are going on platforms in Asia as well. And as I noted in my commentary, equity rotation in Asia in the last two quarters grew substantially.
Now what happens in January given the down markets, we'll see. Clearly the emerging market concern had an impact on our global high yield service. I expect over 2014 emerging market exposures will resolve themselves, meaning that I think that the volatility will decline. And so that should have a positive impact on accelerating outflows, if you will. We also have announced a new dividend class in global high yield that competes with other smaller competitors who have announced gross dividend classes and that will help our capabilities as well in that marketplace.
I was just in Taiwan, we have an incredibly strong brand there, an incredibly strong relationships and I think that that will play to our strength over time. I can’t predict what will happen with those flows. And I think that they will probably be volatile, but I believe that we have got a very strong market presence and very strong share; and as I say new services to bring out and over time emerging market credit which is actually pretty attractive today in terms of yield is going to have an attractive impact in that market.
Our next question comes from the line of Michael Kim from Sandler O’Neill; your line is opened.
Michael Kim - Sandler O’Neill
Couple of questions; first, just following up on the fixed income side, be curious to get your take on the opportunity seemingly developing for institutional managers, assuming pension plans, increasingly shifting to more defensive asset allocations, now that there may be closer to being fully funded.
And then second; just as it relates to product development, you’ve obviously had good success thus far raising a lot of assets from newer strategies, but just wondering if there are any particular offerings that, or may be approaching three or even five year track records that have strong performance and may be positioned for a step up in demand?
Well on the latter part of your question, Michael, there are a number of services that we are excited about. It’s -- Peter has mentioned, our unconstrained bond service is having significant success in the institutional channel. Our Select Long/Short services which while an acquisition is a service that we put in [indiscernible] form is having a lot of traction. We in the real estate debt space, similarly we are very excited about what that holds. So as you go across from fixed income to equities to alternatives there are activities and developments, but I think we are excited about every place we look.
In our core services, equity opportunities -- it is global opportunities I think we call it, and it’s got a great three year track record and now five year track record and that’s changing. So now that's a really top decile performer. And in our emerging market growth area, we've also got now very strong three year track records and so some of those core services, Michael, that are not necessarily new but that we’ve been working on for the last few years are actually now in top quartile or top decile positions. And we think that that is going to create incremental flow for us as well.
I also think in the fixed income space, as Jim mentioned the unconstrained bond, is also and we mentioned this is also an interesting growth in the defined benefit plans and large institutional investors moving to liquid credit. So credit instruments where there is clearly not that much liquidity in the market, but there’s attractive credit spreads. We see that in the commercial mortgage space, we see that in the residential mortgage space, we see that in middle market lending, and we see that in the unconstrained bond space. And so that’s a trend that we think will continue to grow.
Our next question comes from the line of Cynthia Mayer from Bank of America Merrill Lynch; your line is opened.
Cynthia Mayer - Bank of America Merrill Lynch
Thanks for the follow-up. Just a couple of follow-ups actually, one is just to understand on the -- if I look back, back to the last somewhere you had picked performance fees, you know six and a seven, in those days it seemed like there was sort of an echo of the performance fees in income, and but this time you guys had strong performance fees but comp actually went down, so should I soon go going forward to for next year that the performance fees don’t really affect the comp?
Well obviously performance fees do affect comp meaning that, I don’t want to give anyone the impression that we have performance fees and we don’t pay investors. That’s just not happening. Of course we’re paying the investors their share of the performance fees. But you have to remember the leveragability in the business, and we know we have said all along that if we can grow revenues, we will be able to take the comp to revenue ratio down, and so that’s what happened with the performance fees. Not all performance fees have comp to revenue ratios of 50% or greater.
Cynthia, this is John. Just to add to Peter’s comment. I think the way you should look at this is that, at the end of the third quarter we’ve mentioned to you that we were accruing at 50% ratio year-to-date and the was based upon what our outlook for revenue was for the full year and keeping in light in terms of what we thought we had to pay our folks a competitive market rate. And so what happened here with the fourth quarter with the huge run-off in the markets, the revenues were much higher than we had projected at the end of the third quarter, we were still able to pay our folks the same amount or a bit more than we have expected at the end of the third quarter and still lower the comp ratio. So I think you should just look at it in light of that and looking forward to 2014 to Jim’s comment given what we’re seeing in the markets in January and the investments that we’re making in our business is prudent to continue this year with the 50% comp ratio at this juncture.
Cynthia Mayer - Bank of America Merrill Lynch
Got it, that’s really helpful. And then just going back to retail fixed income if I look at page 28, it looks like those strategies underperformed for the last year while overall fixed income seems like it outperformed. But just looking at the retail fixed income, how important is one year performance to those clients versus other like the macro that you are talking about or it’s maybe absolute yield level or things like that. How important is that performance and does that further pressure outflows or you really think it’s really more about macro and yield?
So the performance numbers you are looking at are benchmark numbers and those are while important, they are a little bit less significant than competitive performance and absolute yield, those are the two things that really drive the sales in that market. But if you look at the charts that we gave you that reflects industry growth sales changes, there is no way you could get away from the tidal wave of a 60% decline in gross sales in the industry. And that was reflective of the taper action and concerns in emerging markets.
I think the taper action is pretty clearly communicated, so that’s a lot less of a surprise and as I said I think emerging markets will resolve themselves, meaning I think that they are not going to continue to fall like a knife. I think they will be revalued, they are being revalued and at a certain point, currencies adjust and yields become particularly attractive, and when that occurs, global high yield is going to be an attractive fund from yield point of view and investors will come back into that market.
Our next question comes from the line of Matt Kelley from Morgan Stanley. Your line is open.
Matt Kelley - Morgan Stanley
Thanks for taking another question from me. I am not sure how much you can provide on this but of the 44 billion that you guys have in other services as of yearend, just curious, any detail or breakdown you can give us of what’s funds-to-funds? What’s allocation? What’s long/short or anything like that would be helpful. And how you think about each of those individual buckets which have the strongest potential for growth from here?
So I appreciate your question, but we’re not yet at a position to sort of break out all that detail. But I’ll give you some -- again some color. All of those areas are growing, and you have to remember what I said earlier, we started at zero, we decided to build these businesses, we have been at it now for the better part of call it three years. And we haven’t reduced our concentration or focus on growing any of those three. As Jim mentioned, the U.S. select long/short is now in 40 act form. We recognized the trend in the 40 act world and alternatives. We have populated a number of 40 act funds that have short track records but are coming up to three years by the middle to the end of ‘14. So I think that we believe that that area will continue to grow in all three of the components that we mentioned. So the asset allocation service, the single manager services and the fund-to-fund service, all three are going to grow.
[Operator Instructions]. Our next question comes from the line of Bill Katz from Citi. Your line is open.
Bill Katz - Citigroup
Thanks for taking the follow up as well. Let’s come back to expenses for a moment. Is there anything on the non-comp side that was particularly unusual in the quarter or maybe better way to answer is as you look into 2014, do you see any major reinvestments and within that could you update us on where you are in terms of residual savings on real estate consolidation?
Sure, Bill it’s John, I think we always thought the fourth quarter is really in terms of both promotion and servicing and G&A is just a bit of a bounce back from the third quarter where we had the lower summer client business activity and the expenses were lower than typically we would expect. So I think right now kind of where we are is kind of more the normal that you would expect going forward. If things could top a bit higher from time to time in different quarters depending upon the level of T&E based upon client activity or where have additional marketing expenses relating to client conferences. I think pretty much we’re right now, is what one should expect going forward with the potential for a tad higher from time-to-time. As far as the real estate savings, as I mentioned, we have realized 70 million over the past couple of years, so that’s already in the numbers. And so everything that we have identified and we have written-off, those savings have been realized. So, anything going forward if we are able to on ad hoc basis identify a floor to in future quarters, they would resolve the incremental write-offs as well as incremental savings. And we would notify you of what those would be at that particular point of time.
There are no further questions in queue at this time. I will turn the call back over to Ms. Prochniak.
Thank you. Thanks everyone for participating in our conference call today. Do you any follow-up; feel free to contact investor relations. Thanks and have a great day.
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