AllianceBernstein CEO Discusses Q3 2010 Results – Earnings Call Transcript

Oct.28.10 | About: AllianceBernstein Holding (AB)

AllianceBernstein Holding (NYSE:AB)

Q3 2010 Earnings Conference Call

October 28, 2010 9 AM ET

Executives

Avi Sharon – Acting Head of IR

Peter Kraus – Chairman and CEO

David Steyn – COO, General Parnter

John Howard – CFO and SVP, General Partner

Analysts

Michael Kim – Sandler O’Neill

Craig Siegenthaler – Credit Suisse

Cynthia Mayer – Bank of America Securities

Marc Irizarry – Goldman Sachs

Operator

Thank you for standing by and welcome to the AllianceBernstein third quarter 2010 earnings review.

At this time all participants are in a listen-only mode. After the formal remarks, there will be question-and-answer session and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be replayed for one week.

I would now like to turn the conference over to the host for this call, Acting Head of Investor Relations, Mr. Avi Sharon. Please go ahead.

Avi Sharon

Good morning everyone and welcome to our third quarter 2010 earnings review. As a reminder, this conference call is being webcast and is supported by a slide presentation that can be found in the Investor Relations section of our website at www.alliancebernstein.com\investorrelations.

Here in New York, we have our Chairman and Chief Executive Officer, Peter Kraus; and our Chief Financial Officer, John Howard. Joining us from our London offices is our Chief Operating Officer David Steyn.

I would like to take this opportunity to note that some of the information we present today is forward-looking in nature and is subject to certain SEC rules and regulations regarding disclosure. Our cautionary language regarding forward-looking statements can be found on page 2 of our presentation as well as in the MD&A of our 2009 10K and third quarter 2010 10-Q, which we filed earlier this morning. In light of the SEC’s Regulation FD, management may only address inquiries that are material in nature from the investment community in a public forum. Therefore, we encourage you to ask all such questions on this call.

Now I’ll turn the call over to Peter.

Peter Kraus

Thank you, Avi. Good morning everyone in New York, and those of you overseas, good afternoon and good evening.

Our third quarter AUM was up 6% over the last quarter, $484 billion versus $458 billion. Net flows however were off this quarter. Outflows increased $14 billion over our Q2 flows. Equity performance in the second quarter, I’m sure you noticed was poor. That very likely had an impact on the net flows of the third quarter. However, our equity performance in the third quarter was substantially better than that of the second on both a peer and relative to benchmark basis. We think this improved performance should help improve our net flows over time.

A year ago as we discussed, our objective is to expand our fixed income services and further tailor our investment services to meet our clients’ needs. We are delivering on those goals. Fixed income is a growing franchise for us. Our performance has been excellent both in the quarter and in the long term. Net flows for the nine months were over $10 billion. Dynamic Asset Allocation or DAA, as we call it, has been a focus for us this year. We rolled out this service in April, and already, over 50% of our private clients have signed on. DAA has delivered as promised, moderating risk in the portfolios of clients, providing incremental return, and creating a better overall experience.

With regards to target date and defined contribution, our efforts generally remain on track. We view ourselves as one of the more innovative, holistic providers of solutions to the retirement dilemma in the United States and globally. In keeping with this philosophy, we’ve recently introduced two new services: customized retirement service and multi-manager retirement strategies. Both are important new arrows in our quiver. This is a scalable business as all of you know and one of the major long-term growth engines for the firm.

As we’ve discussed in the past, our growing alternative platform is important to us. In particular, we talked about the fund of funds business as being a focus. This quarter we actually acquired a fund of funds business from SunAmerica, about which we’re very excited. David Steyn will discuss this in greater detail.

Also, I’m sure our investors have noticed that we liquidated the TAP program this year for very attractive returns, and we continue to be very successful in our PPIP partnership with the U.S. government. We can also continue to build our offerings in real estate and in energy and look forward to future opportunities in both of those places.

Performance continues to be our number one focus for our clients. Delivering alpha is our job. We believe our skills in security selection will provide attractive returns and will be consistent with those we delivered over time. We’re comfortable with our strategy. Our task in the future is to execute. David, over to you.

David Steyn

Thank you Peter, and perhaps I can start where you’ve left off with saying a few words on alternatives. We’ve made it clear over the past year and year and a half that we see the developments of a broad capability in alternative as being critical both to our private client business and to our institutional business, and in times to come, even to our retail business. How we’ve broadened that array is a work in progress. We’ve been broadening it out with our in-house liquid hedge fund capabilities, where we are building or have built capabilities of our value, our growth, our fixed income platforms.

Peter alluded to the work we’ve done post government initiatives in PIPP and TAP. We’ve talked in previous quarters about what we’re doing in real estates. We’ve announced recently that we’re building up an entity capability. One key component in the alternative platform we need for both our institutional and our private client business is the fund of funds piece of the jigsaw which we announced in 1st of October we were acquiring with the acquisition of Mark Gamson and his team from SunAmerica. This business comes with about $8 billion fund of hedge funds and fund of private equity funds.

I should make it clear that the legacy business we have acquired from SunAmerica is really sub-advisory in character, and revenues will not be material at least in the short term, and John will talk further about this. But what this business does allow us to do is to use it a spring board in the creation of, in first instance, two new fund-to-fund capabilities, one liquid, and one illiquid/private equity. The liquid one we hope to roll out in the first instance to our private client channel in Q1 of 2011, later in the year into our institutional channels. The illiquid fund of funds we aim to roll out around by midyear next year. So, this light motif of the last few calls where we talked about the growing array of alternative capabilities I hope will continue to be a theme for the next few calls into next year.

So, with that, let me turn to performance, and if you look at slide 3 of the deck, the bottom third of the box continues to show the stunning performance of our fixed income capabilities, both year-to-date and in the third quarter of 2010, which was a very strong quarter again for fixed income. Equity, as Peter alluded to, is a different picture. Year-to-date, the number’s still being challenging, but with a much better performance beginning to emerge in the third quarter and continuing into October which I’ll talk about in a minute or two. But I think it is worth just commenting on the first half of the year because clearly it’s a very important factor in the flow picture of our institutional retail and private client channels.

The first half of this year was a half characterized or driven by macro events, driven by sovereign debt concerns, driven by the inflation or bleak deflation trade, driven by fears of a double-dip recession. It was not a set of markets which could be described in any ways being driven by fundamentals. It was a set of markets both within the market and between the markets which were characterized by higher correlations. And in a world of higher correlations, it is hard to discriminate the best opportunities from the broader market. For a bottom-up, style-oriented, proprietary research house such as AllianceBernstein, this presents a headwind, and in some senses, the truer to discipline one is in this environment, the harder that headwind has been.

We actually think we passed a turning point though. As we look at our value portfolios, these are heavily-imbued or endowed with cash-rich, high-yielding, low price stocks. As we look at our growth portfolios, we have equity after equity with our premium franchise often trading at a moderate premium to market, or even in some cases, a discount to market. And at the macro trade abates, we expect risks to be rewarded again.

Now, we first began to see this in Q3 of this year, and we first began to see this in the international, i.e., non-U.S. equity markets. When we look at our relative performance against our peer group, IV, international value, in first quartile; international strategic value, global strategic value, second quartile; international large cap growth, second quartile; international blend, second quartile.

October has seen this improvement in performance spread from (inaudible) markets in the United States of America, where both of our flagship services in U.S. value and U.S. large cap growth, are outperforming their competition and their indices.

So let me turn, if I can, to flows. If 2010 when I talked about performance is a year bifurcated between a first half where performance was challenging, and a third quarter going into the fourth quarter where performance is looking as if it is being rewarded or risk is looking as if it is being rewarded, the flow picture is almost the mirror image of that.

Slide 4 shows the break, if you want to put it that way, an improved story of the first two quarters where flows in our channels or free channels materially improved. To be replacing the third quarter, where Peter referred to a disappointing performance, driven by a number of factors, Q2 performance being one of them. Those factors are concentrated in our institution business. So as I dig a little bit deeper, I am going to start talking about institutions today.

Slide 5 shows the flow picture. What we’ve done here is to break it down, left hand side showing the quarterly view, and the right hand side the annual view to give some type of context.

So on the left, gross inflows into institutions decreased over this quarter from $8 billion in the second quarter to $4.1 billion in the third. Meantime, and more challenging gross outflows rose in $11.8 billion Q2 to $19.4 billion Q3. Digging deeper, it’s actually the second quarter on the inflows which is the outlier significantly above trend, double the previous quarter, double essentially the subsequent quarter. A more accurate picture probably is to talk about a five quarter institutional run rates of flows in of give or take $5 billion per quarter.

It is the outflow story, however, which is the one I want to focus on here. And here, the institution business is portraying or showing one of the characteristics we’ve talked about in the past, the lumpiness of the business. If you look at these outflows, some 46% were accounted by five accounts. So let’s say give or take $9 billion. And to put that into context, if we look at previous quarters over the last couple of years, the top five account outflows, probably have something much closer to 25% of the total in each quarter.

As Peter has said, one factor is the response to second quarter performance. But there are other factors that (inaudible) included a continued shift out of equities and inter fixed income which we see on a worldwide basis.

Now if I turn to the right hand side, I hope we can get some type of context, with an annualized trend for 2010 significantly better than that of 2009. And we have some confidence that this is likely to continue with the pipeline gradually rising quarter by quarter. As we enter the fourth quarter but as we come to the end of October in this fourth quarter, our pipeline is north to some $6 billion at the minute, dominated by retirement services and fixed income, which has been much of the story of the year-to-date. And if I could just correct an error in the press release where we noted the milestone of $10 billion of DC accounts, that should have read $10 billion of target date DC accounts. Out total DC assets under management as of today are north of $25 billion.

Let me turn to Slide 6 where we move on to retail. Here net outflows and I’m using the same format of quarterly review on the left hand side, annual trend on the right hand side. Net outflows are up at from $0.9 billion to $3.2 billion. At a gross level, give or take a billion dollar less sales, a billion dollar more in outflows. But as with institutional has turned out to be a particularly lumpy quarter as in previous quarters concentrated in a sub-advisory channel but dominates by one large very low fee accounts, a very short duration account, that one account being significant percentage of this picture for the quarter.

Turing to the right, an annual perspective, if institutions can be (inaudible) bottomed in 2009, I feel or we feel that retail bottomed in 2008. With year-over-year gross sales up from $23 billion last year to annualized number, and I should emphasize we are taking the first nine months and annualizing, this is not a prediction of some $35 billion; and again, led by fixed income, worldwide, which has seen very, very healthy gains in new business flows.

Lastly on the buy side of business, let me say a few words about our private clients. Q3 net outflows climbs from $100 million to $500 million, but at a gross level, outflows continued to come down $2.2 billion to $2.1 billion. We feel a testament to deep relationship paying off between our advisors during this team of extreme nervousness and our clients.

Peter commented on dynamic asset allocation where we passed last month from 50% of all private climb relationships signing up to that service. We only launched that service in April. We believe this to be the fastest rump up of a new service ever in the history of our private client business. And I think it is indicative of first, the nervousness and fear which the high net worth, and the private clients, and retail investor continued to feel during this period of volatility, and the merits of a much more aggressive approach to product development which has been under way within this firm over the past 12 months.

Turning to the right hand side, improvements in annual new flows is reflected in the year-on-year gains, a net [ph] picture of $7 billion last year coming in again on an annualized number for the first nine months of the year of 1.3, an improved sale picture, but the real story here, one of much lower redemptions.

Lastly, before I hand over to John, I’d like to say a few words about Bernstein research services. Revenues are largely and understandably driven by trading volumes and Q3 saw a weak market volume globally, certainly in the United States of America and Europe. As an example, the U.S. composite equity volumes were down some 26% third quarter over second quarter 2010. Against that backdrop, our revenues were down over the same period 18%. As volatility wanes and equities rise or stabilize, we anticipate higher volume. But meantime, regardless, we continue to invest in this business. And we are trying to have some 25 cross members and staff in Asia by the end of this year, this being the key strategic initiative of our sell side business this year, and previous investments continued to pay off. We were again rewarded in the Institutional America Survey with the very strong scoring, our analysts are number one in some ten sectors in that survey.

So with that, let me hand over to John, and then we’ll come back for some questions.

John Howard

Thanks David. Good morning everyone. I’ll start with a high level recap of the third quarter results that we reported yesterday afternoon. Adjusted earnings per unit were $0.36 this quarter, down from $0.37 in the second quarter. Adjusted revenues were down 2% as lower based fees and lower research revenues were partially offset by investment gains. Our adjusted operating margins declined by a little over 1% sequentially to 19.3%. We had a lower effective tax rate this quarter. The estimated effective tax rate for full year 2010 is about 9.3%, down 1% from the 10.3% estimate at the end of Q2.

We recorded a $90 million real estate charge in Q3, as we discussed on last quarter’s conference call, we initiated a comprehensive review of our firm’s real estate footprints within New York City area. After this review, we decided to sublease over 300,000 square feet of our office base in midtown Manhattan. This will largely consolidate our New York based employees in our main headquarter building in our facility in White Plains, New York and we reduced our leased office space in New York City by 20%. The charge is based on our estimate of when we can sublease the space and the current market rental rate. We’ll save about $4 million in Q4 and going forward, we project savings of $21 million in 2011 and $23 million each year after that. Based on our current number of units outstanding the EPU benefit will be $0.07 next year and $0.08 in subsequent years. Including this real estate charge our GAAP EPU for the third quarter with $0.12 versus $0.31 in Q2. Excluding the charge our third quarter GAAP EPU would have risen to $0.44.

Let me give you a quick recap on our buyback. We repurchased 1.9 million units in Q3 and year-to-date we bought back 4.9 million units. As we mentioned before, we’ll buy back units over time in anticipation of funding our future deferred comp awards of restricted units.

Let’s move on to Slide 10. Let’s first review our summary income statement for Q3 on a GAAP basis and then we’ll review our results on an adjusted basis in the coming slides. Revenues were up 10% sequentially, primarily driven by investment gains but down 6% from the third quarter of 2009. Operating expenses, excluding the real estate charge, were up 5% from both periods, and we’ll go through our expenses more closely in a minute. As we mentioned on our call last quarter, we received our final trail payment in the second quarter from the sale of our money market business to (inaudible).

Taxes were down this quarter due to two factors: lower earnings and a lower effective tax rate. The operating partnership’s effective tax rate was about 5.25% during Q3 down from 12% in Q2 due to a change in the mix of our domestic and foreign earnings. Once again, we’ve lowered our year-end tax rate estimate by 1% to roughly 9.3% for calendar 2010 and that’s what we booked on a year-to-date basis. If you look at our year-to-date tax expense divided by pretax earnings, our effective tax rate is 9.3% and that is our latest year-end tax rate target for the year.

Moving to slide 11, let’s take a look at revenues. Adjusted revenues were down 2% from last quarter and flat versus the third quarter of 2009. Advisory fees were down 2% from Q2 and up 3% versus the same period last year primarily due to changes on our average AUM. We ended Q3 with $484 billion in assets under management, up 6% sequentially and down 3% from last year. Average assets in Q3 were down slightly from both prior periods. Performance fees increased due to the fees earned on our TAP funds, which was liquidated during the quarter. Bernstein research revenues were down 18% sequentially and 12% versus the third quarter of 2009 due to lower equity market volumes in the US and in Europe. We had $41 million of investment gains during the quarter primarily driven by $36 million gain on the mark-to-market of deferred comp. This represents a $73 million improvement from the Q2 loss of $37 million. Overall, we saw a $98 million improvement in our investment P&L from Q2 and a $66 million decline versus the third quarter of last year.

And just a follow-up comment on David’s earlier comment regarding the fund of funds team, the earnings contribution from the new SunAmerica fund of funds team will not be material to our financial results in 2010. We’ll continue to manage the $8 billion of AUM on behalf of the AIG SunAmerica affiliates on a sub-advisory basis, but the revenues earned on these services are not expected to be material this year. The $8 billion of assets will be added to our October AUM release, which will come out in a few weeks.

On slide 12, let’s begin the conversation on expenses. Adjusted operating expenses are down 1% sequentially and up 5% from the year-ago period. Compensation was up 10% sequentially driven by the mark-to-market of deferred comp. Compensation was up 2% versus the prior period. The increase from the second quarter stems from a $33 million increase in the amortization of deferred comp. This increase is driven by the large mark-to-market swings from the second quarter to the third quarter that I just discussed.

We target our compensation as a percentage of the firm’s GAAP revenues excluding distribution revenues. The rate for the third quarter was 49.8%, which is flat from the second quarter. Over the first nine months of 2010, our comp ratio was 49.4%, down slightly from 49.7% in the first nine months of 2009 and up slightly from 48.5% for all of 2009. The majority of our margin decline on adjusted basis came from the impact of mark-to-market on our adjusted compensation. The increase in the mark this quarter increased compensation as a percentage of adjusted revenues and this represents the majority of the decline in margin.

We saw the inverse of this in the second quarter when there where mark-to-market losses. This impact over the year is negligible as our year-to-date mark is only about $10 million. Our head count is roughly flat from the end of Q2 at around 4300 employees. Promotion and servicing expenses are down 2% sequentially. Distribution related expenses are up slightly and we also had lower expenses associated with client conferences as we host the majority of our annual conferences in Q2 of each year. G&A expenses were essentially unchanged from last quarter of about 1%.

Moving to slide 13, let’s briefly review the differences between our GAAP and adjusted earnings. First, let’s look at the adjustments for deferred comp. This reflects the net impact of investment gains and losses as well as employee compensation expense related to the mark-to-market of deferred comp. It reduced our GAAP results by $23 million in Q3 compared to a reduction of $54 million in the prior year period and an addback of $18 million last quarter. Second, we add back a real estate charge of $90 million this quarter and finally, we adjust for minority interest balances. This leads us with adjusted earnings of $122 million in Q3, down 9% from last quarter. Adjusted operating margins in the third quarter fell to 19.3% from 20.7% in the prior quarter. On the year-to-date basis, adjusted operating margins were 21.4% versus 18.4% for the full year in 2009.

So, to wrap things up and I’ll focus on adjusted numbers here. Adjusted net revenues were down 2% from last quarter while adjusted operating expenses were down 1%. Adjusted operating income was down 9% and for the quarter, adjusted earnings per unit with $0.36.

And now, we’ll be happy to take any questions you might ask.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Kim of Sandler O’Neill.

Michael Kim – Sandler O’Neill

Hey guys, good morning. First, can you just give us an update on what you’re seeing in terms of institutional asset allocations? It seems like pension plans maybe continue to favor fixed income strategies even though they remain probably [ph] underfunded. So, would be curious to see if you see the strength continuing and if so, how could this impact the economics of the business in the institutional channel?

David Steyn

That’s an intriguing question. I was in the States last week and I saw a statistic which suggested that the average U.S. defined benefit corporate pension scheme has the lowest allocation to domestic large cap equities today or domestic equities since the modern DB pension scheme system emerged. Now, I’m digging a little bit further to find out just how valid that number is. But the direction of that number, we believe to be totally valid. We continue to see an asset allocation shift on a global basis, out of equities into fixed income and into alternatives which is one of the reasons why we started this presentation today, talking about our initiatives and alternatives.

Within the equity allocation as we’ve touched on in previous calls, we’re seeing a shift out of domestic equities and into global and within domestic equities out of active and into passive. I think it’s very dangerous in this business to talk a secular shift but this one certainly has a problem to be a longstanding shift. As I think we’ve talked about in previous calls, the shift actually goes back further to the events of 2007 and 2008 and the move out of equities and into fixed income by defined benefit schemes. So it’s really been underway now for five or six years. We don’t see anything stopping it right now.

Now, having said which, I would add two caveats to that. The public sector is not moving in that direction and if anything seems to be hopefully re-risking or I wouldn’t say hopefully re-risking but it certainly re-risking. And then, secondly, there are already a large number of sophisticated institutions worldwide who have seen this as an opportunity to re-risk themselves too. So behind that statistic, does not lie one homogenous market.

Michael Kim – Sandler O’Neill

Okay, that’s helpful. And then, the second question, assuming the broader markets continue to rally, would you expect your equity strategies to increasingly outperform which is I think what we’re seeing in prior cycles?

Peter Kraus

We do think that that will be the case, Michael. David mentioned our portfolios in the value side are filled with cash rich, high yielding low price companies and on the growth side as David commented, premium franchise that are trading at the modest premium and in some instances, discounts. We’ve actually seen when risk has come back into the market these portfolios outperform. They did that in September and they continue to do that in October. We’re confident that that sort of disciplined fundamental approach that we’ve always taken will be rewarded over time and that makes us feel good about the performance we’ve had recently and what we expect we will receive for our clients in the future.

Operator

Your next question comes from Craig Siegenthaler of Credit Suisse.

Craig Siegenthaler – Credit Suisse

Good morning, everyone. When you were going back through slide 6, you mentioned that there was a kind of one large mandate termination from a kind of a low-fee paying mandate, some advisory account. Does that fit into the fixed income non-U.S. redemption bucket on slide 26?

David Steyn

Yes, indeed it does. There was one significant retail very short duration account termination, and actually there’s also one reasonably significant, again, very short duration, institutional fixed income account termination during this period, but you are right in your assumption.

Craig Siegenthaler – Credit Suisse

Can you help us on the size of that mandate, and also, was there anything of size showing up in the growth equity and value equity buckets inside the U.S., because those two redemption levels were also quite elevated?

David Steyn

I think I’m (inaudible) to going to detail on size. I would just say it was a very low fee account.

Craig Siegenthaler – Credit Suisse

And was there anything of size in the equity side of things institutionally?

David Steyn

We publicly announced the termination of a large sub-advisory equity account in September.

Craig Siegenthaler – Credit Suisse

And what was the size of that, just to recall?

Peter Kraus

I think the thing David’s referring to is Vanguard. We continue to have a very strong relationship with Vanguard, but they did terminate one portion of the service with us and that’s in those numbers. The Vanguard Group and AllianceBernstein continue to have a long and strong sub-advisory relationship, we’ve got a number of assets in their funds and that continues to be an expanding relationship for us.

Operator

Your next question comes from Cynthia Meyer of Bank of America Security.

Cynthia Mayer – Bank of America Securities

Hi, just following up on some of the larger pieces that went out. Is there anything remaining on those to go out in 4Q? And it sounds like you’re more optimistic on flows. Is that stemming from the better performance or are you actually seeing improved trends this quarter?

Peter Kraus

Cynthia, as we mentioned, we think that the performance in the second quarter was impactful on our flows in the third quarter, and similarly we think the strong peer performance in Q3 and the much better relative performance against the benchmark that we had in Q2 will have a positive effect on flows in the future. And we’re continuing to see that performance rally strongly in October. So, that’s how we sort of feel about where flows are going to go. We have seen, as David mentioned, an increase in the pipeline. That pipeline number has steadily increased over the last 12 months and that also suggests traction with our clients in various parts of the world. And I think as you asked the question, if it was in the last call, it might have been in two calls ago, how can we get people to see more of the strong performance we have in fixed income and how do we build that over time. That was the reason for my comment at the front end of the call which we had been focused on fixed income, we have been able to show our clients that actually superlative performance that we’ve been able to produce over the last two years, and that has evidenced itself in net flows this year and we expect that to continue.

Cynthia Mayer – Bank of America Securities

Okay. And then maybe in the private client channel, apart from the flows, can you talk a little about what sorts of trends you’re seeing in terms of numbers accounts, opening versus closing, and in terms of size of accounts and what sorts of accounts are signing up for the more muted defensive strategy you have?

David Steyn

Cynthia, I’m very happy to try to answer that question. As we said in previous calls, the pattern we are seeing in the private client channel at this stage of the recovery from the events of ‘07, ‘08, is almost exactly in line with our experience at previous stages of the cycle in terms of the number of relationships. If there are two differences, it is in the size of the average account which is signing up, one, and secondly in the exposure to risk assets of a client who is signing up. So, our sense is that your typical private client is inching back into the market but keeping some of his or her powder dry in the bank; thus smaller average balances, but very, very significant sums of money waiting in the wings. Then on the second question, as to where the typical or the average private client is investing, we continue to see an inching up of exposure to equities in new flows into the firm. It’s meaningful, it’s all in the right direction, but it is still a business where many, many private clients are extremely nervous, but it is moving in the right direction at this time.

Cynthia Mayer – Bank of America Securities

Thank you.

David Steyn

I might add that within our own dynamic asset allocation service, we have moved towards an overweight position in equities.

Operator

The next question comes from Marc Irizarry of Goldman Sachs.

Marc Irizarry – Goldman Sachs

Great, thanks. Just following up on the dynamic asset allocation, when you think about the total private clients portfolio and then the sort of closed architecture and your products suite, Peter, maybe you can comment on, as the dynamic asset allocation opportunity grows, is there any sort of expand the product and the sort of reach in the private clients business?

Peter Kraus

Thanks Marc. Well, one of the really significant values to the acquisition we made at SunAmerica is that it does provide open architecture on the fund of funds side. And we think that that’s extremely important to the private client business. We continue to be committed to – on the long only side, meaning the equity business and the fund business to the services that we provide which are multi-faceted, multi-dimensional, multi-geographic, and so therefore provide (inaudible) diversity to our client base. The dynamic asset allocation activity is we think also unique. We think we are one of the few firms who actually are providing a consistent application of our views on risk and opportunities within markets across our private client business. As David mentioned, the allocation to equity is now at a 60-40 level, if you took that as a standard of portfolio for a moment, of course, not portfolios of that is higher than that standard allocation of equity to 60%. And as I mentioned in the outset, the actual moderated risk in the portfolio and the improved performance that’s come from that has benefitted our private clients since they have adopted that activity in April.

So we think what we’re providing clients is a more robust set of services in the form of the alternatives including open architecture and a way to moderate risk in volatile time periods but produce a smoother ride and better performance over time.

David Steyn

If I might add to what Peter just said, we could have approached anyone of a number of fund of funds businesses around the world in order to gain access to fund of funds capability. But one of the appeals of this particular team was our desire to have our proprietary fund of funds capability upon which we could build a set of solutions tailor-made for our private client business. So that was a great appeal of Mark Gamson and his team. That was in a sense opened up to other managers, we could do it in a manner where we were able to influence that type of platform to mesh in with the holistic approach to investment management we offer all of our private clients today.

The second comment I make is we don’t see dynamic asset allocation is being limited to the private client channel. As we said on the previous call, we entered into our first sub-advisory relationship. We have two further sub-advisory relationships under discussion at this time. So in time to come, we see dynamic asset allocation is having a much broader capability.

Operator

Your next question comes from Cynthia Mayer of Bank of America Securities.

Cynthia Mayer – Bank of America Securities

Hi. Just some modeling questions. In terms of comp, are you expecting to maintain the 49.8% ratio and is there any year end true up we should think about?

John Howard

Cynthia, it’s John. We are 49.8% in the second quarter and the third quarter; year-to-date, we are at 49.4%. So I’d say for Q4, it’s pretty safe that that number will be in between 49.4% to 49.8% based on what we see today.

Cynthia Mayer – Bank of America Securities

And what’s your outlook for the tax rate in next year? Is it also 9%?

John Howard

Yes, I’d stick with 9.25%.

Operator

We’ve reached the conclusion of the Q&A session of today’s conference call. I will now turn the floor back over to Avi Sharon for any closing remarks.

Avi Sharon

Great. Thank you everyone for participating on our conference call today. Please feel free to contact investor relations with any further questions. Have a great day.

Operator

Thank you. This concludes your conference call. You may now disconnect. Thank you for your participation.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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