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AllianceBernstein Holding L.P. (NYSE:AB)

Q2 2014 Results Earnings Conference Call

July 30, 2014, 08:00 AM ET

Executives

Andrea Prochniak – Director of Investor Relations

Peter S. Kraus - Chairman of the Board and Chief Executive Officer

John C. Weisenseel - Chief Financial Officer

James A. Gingrich - Chief Operating Officer

Analysts

Tom Whitehead - Morgan Stanley

Steve Fullerton - Citigroup

Cynthia Mayer - Bank of America Merrill Lynch

Gregory Warren - Morningstar

Operator

Thank you for standing by. And welcome to the AllianceBernstein Second Quarter 2014 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 the 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 Miss Andrea Prochniak. Please go ahead.

Andrea Prochniak

Thank you, Anastasia. Hello, and welcome to our second quarter 2014 earnings review. This conference call is being webcast and accompanied by a slide presentation that is posted in 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 disclosure. So I’d like to point out the Safe Harbor language on Slide 1 of our presentation. You can also find our Safe Harbor language in the MD&A of our 2013 Form 10-K and in our second quarter 2014 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 @AllianceBernstn.

Now I’ll turn the call over to Peter

Peter S. Kraus

Thanks, Andrea, and thank you all for joining us today. Let’s begin with a firm-wide overview which is on Slide 3. Our second quarter results demonstrate the progress we keep making to deliver for our clients. During the quarter, not only did our firm-wide gross sales increase by nearly [60%]. Our gross redemptions declined by 21% through our lowest level since the third quarter of ’06. As a result, net flows improved by $12.7 billion to a positive $8.3 billion, our highest quarterly net inflow number since the fourth quarter of 2007.

I told you on our first quarter call that our muted gross sales were a function of the timing of fundings. As expected, we had several large mandates fund during the second quarter. We also experienced lower volatility, better retail sales trends in Asia ex Japan as well. Both equity and fixed income markets were constructive during the quarter which contributed to our AUM growth.

We finished the quarter with AUM of $480 billion; investment performance contributed $15 billion to our $26 billion sequential quarter increase. We successfully closed our acquisition of CPH Capital. Our global core equity manager added another $2.9 billion. Average AUM was higher versus both prior periods as well.

Slide four attracts our quarterly flow trends across channels. Institutional gross sales of $10.5 billion were our highest since the second quarter of ’08 and up 36% versus the prior year’s quarter of $7.7 billion. Institutional net flows at $6.8 billion were our highest since the fourth quarter of 2007. Retail net flows of $2 billion turned positive for the first time since the first quarter of last year, the result of both higher sales and lower redemptions.

In the Private Client, we had one large low fee redemptions during the quarter, which drove the net outflow compared to the same prior year period its clear how much flow trends in this business have improved.

Now let’s view our channels. Let’s start with institutions which is on slide five. We feel very good about our gross sales for the quarter, but we all know how lumpy fundings can be. What’s more gratifying to us is to see back-to-back sequential declines in gross redemptions of 40% plus, that’s the chart at the top left.

And what’s most encouraging is the momentum we keep gaining with both clients and consultants around the world, and across increasingly diverse arrays of strategies. This tells us that we’re getting better at delivering for our clients with our investment performance and our relevant and innovative offerings.

Year-to-date, our RFP activity is up 33% and our equity RFPs have more than doubled in the prior year period, that’s the chart at the top right. We funded more mandates than we added during the quarter, which is why the pipeline was down more than $3 billion to $4.3 billion at quarter end. We’re not too concerned about that issue, since we more than doubled our typical dollar amount of pass-through activity in the second quarter. That’s business that comes in and funds during the quarter, so it never hits the pipeline.

And we added new business that is significantly higher fee than what came up. That’s why even as our pipeline declined by 43% in dollar terms during the quarter, the average fee rate on business in the pipeline increased by 49%, that’s the chart at the bottom left.

Bottom right table shows some of the diverse new business we were awarded during the quarter, including success for asset raises for our latest real estate offering, our new frontier market fund, our first mandate for global core equity, the service that came over with CPH capital in June.

It’s increasingly clear that our efforts to build a broader or balanced inclined focus institutional platform are paying off. Let’s spend some time on our investment performance and product platform beginning with fixed income and that is on slide six.

Every service here is outperforming benchmarks across most if not all major time periods. Overall, 79% of our fixed income assets were in strategies that outperformed for the three-year period, and 84% outperformed for the five-year period. We’ve achieved substantial long-term performance premiums for our clients in diverse services like Global High Income, U.S. Income, Diversified Yield Plus and Unconstrained Bond.

I believe, we’re well positioned in the marketplace with our global, diverse and credit intensive fixed income platform particularly with all the work we’ve done in recent years to broaden this offering.

Now I’m on slide seven. We’ve created a new prescription for our clients that offers return seeking, return reducing and diversifying assets that each served a very specific purpose and need. We offer return seeking liquid fixed income strategies that are income focused with less sensitivity to interest rates. We had many of these high income services already and we’ve added to them over the years in areas like emerging markets corporates, RMB income plus, securitized assets and low vol high yield.

Our risk reducing offerings have both core strategies designed to offset equity volatility and lower risk strategies that limit risk to capital. The examples of our newer offerings here are our U.S. municipal bond inflation and global short duration.

Finally, we’ve introduced diversifying liquid strategies like our absolutely return focused unconstrained bond and credit long short funds, which offer investors largely uncorrelated sources of return. On the illiquid side, we’re building out an offering across the spectrum of commercial and residential real estate mortgages, middle market corporate infrastructure and cross asset class opportunistic and specialty lending.

These new services seek to exploit the opportunity that’s emerging from banks disintermediation and an early client interest has been quite high. Today, we have a great fixed income line up. I’d stack it up against any of our competitors when it comes to delivering the right exposures for broad set of client needs.

Now let’s move onto our equity investment performance, which is highlighted on slide eight. We’ve worked hard to improve our performance and we keep making progress. Today, nearly two-thirds of our equity assets are in strategies that have outperformed for the past year till June 30.

Almost half are in outperforming strategies for the three years that compares with 42% of assets outperforming for the one year and about a third for the three years at the same time last year, quite an improvement.

Standout performance include global strategic value, global active low vol and emerging markets value for the one year concentrated in U.S. growth and international discovery for the three-year and SMID-Cap Value and Emerging Markets Growth across multiple time periods. Our equity team has followed the turn around playbook based on three primary goals, improved performance, bring better balance to our offering and retain, promote and attract top talents.

I’m on slide nine now. Turnarounds take time and it’s not always obvious how much effort and investment is going on behind the scenes to get a business back on solid grounds. This is a timeline of all the positive change we’ve executed so far.

To improve investment performance, we streamlined the growth research structure. Align PM talent more effectively with key strategies and combine the global growth and thematic teams to leverage their complimentary insights. We are very pleased with the turnaround on our thematic performance, where a new team has delivered top quartile returns with less risk than in the past.

To bring better balance to the equities platform, we’ve introduced a series of new offerings including Low Vol, International SMID-Cap Growth, Emerging Market strategic core, European Opportunities, Global Equity Income and Frontier Markets. We’ve also made targeted acquisitions to bring in like-minded teams with track records and expertise in areas new to our firm. These include the Caxton absolute return focused team in 2011, W.P. Stewart, the Concentrated Growth Manager we acquired in late 2013 and CPH, the Global Core Equity Manager we closed on in June.

Not only have we succeeded in retaining the right talent to turn performance around, we’ve also provided our next-generation of leaders with exciting career opportunities. For example, Promoting Two Low Vol PMs and one emerging market PM to run new and important strategies for us. With all, we’ve done to diversify and involve our equities business; I genuinely believe we are in a better position today than ever before to meet our clients changing needs.

Now, let’s move onto the retail channel which is on slide 10. Our second quarter retail gross sales of $11.4 billion were up 15% sequentially our second straight quarterly increase, that’s the chart at the top left. Combined gross sales of our flagship funds in Asia ex-Japan, Global High Yield and American Income doubled sequentially and redemptions declined by 34%, resulting in positive quarterly net flows.

You can see from the chart at the bottom left, the positive impact that a 50% year-over-year drop in the GHY & AIP Redemption rate had on our overall retails redemption rate, it fell to the lowest level since the fourth quarter of 2007. We are incredibly proud of our leading franchise in Asia ex Japan, but we’re also very focused on broadening our presence in other regions. We keep making progress there. Growth sales increased sequentially in EMEA and Latin America during the second quarter as well.

As you can see from the pies at the top right of this slide, our sales mix for 2014 to date is much more reasonably diverse than it was a year ago at this time. Fixed income still dominates our retail sales mix globally, but we’re seeing sales strength across a broader array of services today than we have in the past. Select equities long only have long/short have been our most successful and new products in both the U.S. and offshore. And with consistently top tier performance small and SMID-Cap equities have also sold quite well.

Client interest has been very high in our European income portfolio, particularly in Asia. Investors are rotating into this service from AIP to get the same barbell approach, but without the U.S. interest rate risk. AIP is also a top quartile performer for the one year period and a top decile performer for three, five and ten years. We’re also maintaining our strong performance and flow trends in municipal bonds.

Year-to-date, our muni bond fund net flows were up 68% putting AB in the top five among U.S municipal bond fund managers. Our AB high income municipal fund is service we launched in January of 2010 has been a real standout this year in term of both performance inflows to top decile performer for the year-to-date and three year periods and a top quartile performer for the one year with assets under management of $1.7 billion today. Another example on how we’ve been able to gain traction with retail clients to a combination of product innovation and strong performance.

Product innovation targeted to investors evolving needs has been an important driver behind our turnaround and private clients as well. Now I’m on slide 11. Targeted services, we’ve introduced to exploit emerging opportunities in areas like real estate, frontier markets, European recovery and U.S. financials have attracted great interest from new and existing clients looking to take more hands on product focused approach to their portfolios. That’s coming to in our flow trends while our second quarter growth sales are typically seasonally slow. This year’s second quarter growth sales were highest in four years, and our April net outflows are lowest in seven years even with the new tax changes implemented last year.

The table at the bottom left shows the positive trends we’ve been seeing in the take up of our newer core and targeted offerings with both new and existing clients. Our Fund-of-Hedge-Funds RIC a core offering in our integrated solution set has attracted $1.2 billion in assets since we began offering it to clients broadly in late 2012.

European Opportunities is already at 500 million at AUM in its first year and the real estate financial services and frontier market services we began marketing earlier this year with a combined 625 million as of quarter end. These targeted services are allowing us to appeal for broader client base. We are encouraged to see a greater percentage of assets being raised from newer versus existing clients overtime. This energy, innovation and private client is helping to create a virtuous circle when it comes to attracting and retaining talent.

Our FA turnover is at historic lows and we are attracting great talent to the firms. Our latest FA training program includes four former AB employees who have opted to rejoin the firm as advisors. Three new private clients, senior portfolio managers recently joined us, as well. So there’s a lot to be excited about going forward in this business, the effort we’re making to better customize our offerings as engaging newer, more self directed clients while those invested in our integrated solutions continue to benefit from our differentiated while forecasting portfolio rebalancing and tax planning.

I’ll wrap up our business highlight at Bernstein Research Services which is on slide 12. Despite declines in both U.S. and Asia trading volumes during the quarter, our sales side revenues held up well. They were down just 3% in the first year’s multi-year high to $119 million and up 3% versus the second quarter of 2013. For the first half revenues were 8% higher. Asia was a standout market for us in the quarter with double-digit sequential and year-over-year revenue increases.

Beyond our ability to deliver our full global research capabilities to clients, the broader footprint we’ve built also allows us to capitalize on the different cycles underway in different parts of the world. For example, investors see U.S. markets continually reaching new highs and think Europe will be next. In the long-term growth story in Asia, it’s still very much intact despite the fact that markets like Japan are taking a breather as it takes time for structural reforms to unfold.

We were also recognized for our world class research effort in both the U.S. and Europe during the quarter. In U.S, our 30th Annual Strategic Decision Conference was once again the biggest draw in the industry. About 1,700 institutional clients attended the sessions with more than 100 leading global executives. And in this years Extel survey in Europe, we earned our highest average share of the total research firm. I like out long-term prospects in this business and I couldn’t be happier with our research, sales and trading talent.

Each quarter I closed my remarks with a weak half of the recent progress we’ve made on our ongoing strategy to deliver for our clients with our performance and our offerings in all of the areas most relevant to them.

Now I’m on slide 14. Maintaining strong long-term track records across our investment services remains our number one priority. We’re in very good shape across time periods with our fixed income strategies and as I mentioned we’re continually improving in equities.

The work we’ve done to evolve our platform and broaden our offering in a client centric way is paying off in every one of our businesses. Institutional, we’re seeing in our sales momentum, positive net flows and our steadily improving client and consultant engagement levels. In retail, we are seeing it in our sales growth across regions and in diverse strategies.

In Private clients, we are seeing it in the steady take up of our newer targeted services and our ability to appeal to a broader base of clients. On the sell-side, we’re seeing it in our ability to bring a full global research capability to bear for our clients and capitalize on different regions specific market dynamics. Just as important, we’re constantly innovating for clients and investing for growth even as we keep a tight rein on expenses. We’re seeing that in our improving margin. We’ve laid the foundation for success and I’m confident we’ll build on it from here.

Now I’ll turn it over to John for the discussion of the quarter’s financials. John.

John C. Weisenseel

Thank you, Peter. As always, I’ll focus primarily on our adjusted results in my remarks today. Our standard GAAP reporting is included in this presentation’s appendix, our press release and our 10-Q. Let’s start with the highlights on Slide 15.

Second quarter adjusted revenues increased sequentially and versus the second quarter of 2013 due in both cases to higher based fees on higher average AUM and increased performance fees. Our second quarter adjusted operating margin of 22.9% compares to 21.9% in the first quarter and 22.2% in the second quarter of 2013 as revenue growth outpaced increased expenses. Adjusted earnings per unit were $0.45 versus $0.39 in the first quarter and $0.41 in the prior year quarter.

Now I’ll review the quarterly GAAP to adjusted operating metrics reconciliation on Slide 16. As you can see we excluded second quarter acquisition related expenses mainly severance and temporary service fees related to the W.P. Stewart and CPH acquisitions which were included in GAAP expenses. As a result, adjusted operating income was $1 million higher than GAAP operating income.

Now we’ll turn to the adjusted income statement on Slide 17. Second quarter adjusted net revenues of $632 million were up 6% versus the first quarter as well as the second quarter of 2013. As a result, adjusted operating income of $144 million for the quarter was up 10% sequentially and up 8% as compared to the prior year quarter. We earned $0.45 per unit on an adjusted basis which will also be our quarterly cash distribution.

Slide 18 provides more detail on our adjusted revenues. With average AUM up across all three of our distribution channels, base fees increased 5% sequentially. They are up 4% versus the second quarter of 2013 primarily due to an increase of Private Client base fees.

Performance fees up $20 million for the second quarter compared to $3 million in the first quarter and $5 million in the second quarter of the prior year. Of the $20 million, $7 million related to the AB Recovery Assets or ABRA fund, that we liquidated during the quarter and we earned $11 million on our Luxembourg registered Select Absolute Alpha fund.

We recognized performance fees as revenues at the end of the calculation periods which is usually the fourth quarter. However, our equity long short Select Absolute Alpha fund has an annual calculation period ending in May and at that point had AUM of more than five times its total of one year ago.

Bernstein Research Service revenues decreased 3% sequentially due primarily to lower client activity in the U.S., but increased 3% versus the prior year quarter as a result of higher client activity in Europe and Asia. Investment gains and losses include seed investments, our 10% interest in the venture capital fund and our broker-dealer investments. Investment losses in both the current quarter and the first quarter of 2014 include seed investment losses compared to seed investment gains in the second quarter of 2013.

At quarter end, we had $524 million in seed capital investments, the majority of which is hedged. Seed capital decreased $9 million from the first quarter, due to net redemptions partially offset by marketing gains.

Now let’s review our adjusted operating expenses on Slide 19. Beginning with compensation expense, we accrued total compensation excluding other employment cost such as recruitment and training as a percentage of adjusted revenues. We accrued compensation at a 50% ratio in the second quarter, in line with both the first quarter of this year and the second quarter of 2013.

Total compensation of benefits expense increased 6% both sequentially and versus the second quarter of 2013 in line with the increase in adjusted revenues. Within compensation of benefits, this sequential decline in commission, fringes and other expenses is primarily attributed to the normal seasonal decline in payroll taxes.

The year-over-year decline reflects a shift of variable compensation for our Bernstein Research business from commissions to incentive compensation. We finished the second quarter with 3,411 employees, up 2% from the first quarter, primarily due to staff adds and investment services include CPH acquisition, private client and operations.

Now, looking at our non-compensation expenses, second quarter promotion and servicing expenses increased 10% sequentially due to higher T&E expenses, trade execution and marketing cost.

Promotion and servicing expenses were up 8% from the prior year quarter mainly due to higher marketing and trade execution cost. We currently have several marketing and advertising campaigns under way in support of our global platform.

These include a German retail ad campaign, the ongoing build-out of our U.S. retail liquid alternatives product platform and several enhancements we’ve launched our college-bond savings plan with the State of Rhode Island including a first of its kind passively managed age-based index portfolio.

During this second quarter, we also held our extremely successful strategic decisions conference for our Bernstein Research business which contributed to the sequential increase in marketing spends for the first quarter.

Second quarter trade execution costs were up as a results of higher Bernstein Research client trading activity in Asia, in addition to a trading fee rate increase implemented by the SEC in the U.S.

The SEC fees are offset by a similar amount in other revenues since they are passed through to our clients. The sequential increase of T&E expenses was in line with seasonal trends, while expenses were flat year-over-year.

Second quarter G&A expenses of $106 million, decline slightly from the first quarter. The increase 2% versus the prior year second quarter primarily due to higher professional and portfolio servicing fees.

Now, let’s move on to slide 20, adjusted operating results. Here I’ll focus on our effective tax rate and our real estate consolidation plan. We now expect the full year 2014 effective tax rate for AllianceBernstein L.P. to be below 7%, which is lower than originally expected. This reduction is driven by two factors. First, we expect to transfer the majority of our W.P. Stewart business from its existing corporate structure to our lower tax AllianceBernstein partnership structure during the third quarter, which will reduce tax incurred in the future.

Second, we now expect a lower percentage of our income to be generated from higher tax foreign sources. Since foreign tax rates are significantly higher than our overall U.S. domestic tax rate, fluctuations in the mix of income generated by domestic versus foreign entities will create volatility in our effective tax rate.

We have experienced this volatility in the past and expected to continue. The second quarter effective tax rate for AllianceBernstein L.P. of 4.9% reflect the adjustment of our year-to-date tax provision for our anticipated current full year 2014 effective tax rate range.

Finally, we recorded a credit of approximately $500,000 in the second quarter relating to our global real estate consolidation plan. In Phase 2 of this plan, we have recorded approximately $217 million of write-offs to date.

The related ongoing annual occupancy savings have already been realized in our financial results. And so all of the vacated office spaces in sublet the total write-offs are subject to increase or decrease depending upon changes in market conditions.

Approximately 80% of the Phase 2 space has been successfully sublet as of the current date. We still expect the range of Phase 2 write-offs to be $225 to $250 million. These real estate write-offs are included in our GAAP results, but we exclude them from our adjusted financial results.

With that, Peter, Jim and I are please to answer you questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Kim with Sandler O’Neill. Your line is open.

Unidentified Analyst.

Good morning, this is actually Andrew [DiZio] filling in for Michael. My first question has to do with margins. So I noticed that net flows have turned positive, and it seems like there is a -- momentum continues to build more broadly. AUM and revenues continue to trend higher, and the expense base is more streamlined versus prior cycles. So just wondering how you see the margin trajectory playing out, assuming a more constructive market backdrop?

John C. Weisenseel

We’ve been able to continue to expand our margin, which we’ve been very pleased with. We continue to be focused on keeping expense in check. And I think in terms of margin expenses from here it’s really depending upon an increase in revenue and a continued increase in AUM.

Our incremental margin continues to increase as well, so for the current quarter, the incremental margin was actually 39%, compares to 35% of where it was in the second of last year.

So, again we continue to make improvements on the incremental margin side, continue to manage the expenses tightly, and as revenues continue to increase hopefully you will see more and more of that drop through to the bottom line.

Unidentified Analyst.

Great. Thanks. And then next, if I look at your equities performance, I think at a high level, it is fair to say that the one-year numbers are quite strong. But the three-year track records are still a bit more uneven, broadly speaking. So just looking ahead, as prior under-performance increasingly rolls off the three-year numbers, just wondering if you think that could be a near-term catalyst for a step-up in demand for those portfolios. Or do you feel like you still need another year or so of good relative returns?

Peter S. Kraus

Andrew, its Peter. I think that the equity performance is being noticed by institutional investors, consultants, and retail home offices. And I think as we talk more about our performance and our new services with them and the broader lineup we have. And as the performance continues, I think that investors will begin to allocate more capital to us.

The speed of that, the timing of that is awfully hard to gauge. But what we do notice that our equity flows – our active equity flows are getting better. Much of that is redemption activity falling, but some of that is actually new services and existing services gathering assets.

We have existing clients who have been with us a long time in our core services, who are saying to us, we are performing better, in some cases the best of any of their managers. That’s going to have a positive impact over time.

Unidentified Analyst.

All right. Great. Thanks. Thanks for taking my call.

Operator

Your next question comes from Tom Whitehead with Morgan Stanley. Your line is open.

Tom Whitehead - Morgan Stanley

Great. Thanks for taking my questions, guys. I want to start on the institutional pipeline. Could you maybe help us breakout a little bit more what’s in that $4.3 billion today? I know, the RFP activity is up, but I just trying to get a sense for the makeup of that 4.3 and you know, is the increased in the fee rate in that channel due to the product mix or is there something more there?

Peter S. Kraus

Well, first of all, I think we do give you a reasonable list of the large things in the asset class -- asset class that’s in the pipeline, that’s on slide five on the bottom right hand corner. So you can see there that there are both a mixture of fixed income and equity alternative and multi-asset opportunities.

I think if you were looking at that slide over time and comparing it to information we’ve given in the past, there is more diversification here, and indeed more equity. And that, I think bodes well for the objective of diversifying the business.

In addition to slide above that, which I’m sure you saw, shows a market change in RFP activity particularly in equities. Now that is to some extent low number of RFPs in previous periods, but it’s still a stunning percentage change of 120%. So, we see the pipeline being more diverse, and we see the RFP activity being much more significant.

We also have added to the equity lineup, as you know, W.P. Stewart and CPH Capital, both of which will attract significant RFP activity that’s true factually in the case WPS. But it will also be true for CPH.

Tom Whitehead - Morgan Stanley

Okay, great. That’s helpful. And then, just on performance fees. So $20 million this quarter, is it fair to assume that the AB recovery fund, if I heard correctly, I think that’s $7 million that’s not going to recur? And then of the select absolute alpha fund, just curious as to sort of the level of performance, the level of alpha you guys have to generate to get that $11 million and what we – I know it’s a moving target and its hard to predict, but what to sort of expect in terms of magnitude from that going forward?

Peter S. Kraus

Well, the performance fees -- our traditional fees are 20% of performance. So, it’s an absolute return fund. You can do the math, I don’t think its -- there’s nothing uncomplicated about that. It’s pretty straight forward.

Tom Whitehead - Morgan Stanley

Okay. And then just to clarify the $7 million on the recovery fund that is -- that was from the liquidation, if I heard correctly, right?

John C. Weisenseel

Yeah. This is John. That’s correct. And just to clarify as well. On the performance fees we recognize them as the conclusion of the calculation period. So with the select absolute alpha fund it’s an annual period that ended in May. And that’s why we did the calculation and we recognize the revenue. So, for example, for that fund you’re not going to see any additional revenue next quarter, right. You have to wait another year.

Tom Whitehead - Morgan Stanley

Right, right. Okay. All right. Thank you.

Operator

Your next question comes from Bill Katz with Citi. Your line is open.

Steve Fullerton - Citigroup

Hi. This is Steve Fullerton filling in for Bill. So it seems like the private client business is benefiting from strong alternative flows. Is there in the same – excuse me, is there same traction in retail and you see clients also gravitating towards alternative type products in that channel?

Peter S. Kraus

We have built a pretty strong lineup in liquid alternatives in retail, both in [uses] funds and in 40-Act funds and we’ll continue to add to that. And so, I think in word, we do see that as an increasing opportunity for us and we see clients, meaning investors broadly speaking interested in that space.

I don’t want to overestimate it. I don’t want to oversell it. It is a new asset class for many people and it’s also quite a diverse asset class. So when you talk about liquid alternatives there are single managers, there multi-managers and there is all kinds of things in those classes.

But for us, it’s an increased area of focus. We are one of the few managers with actually a broad lineup in that space, not just one manager here, one manager there. And I think we will capture more than our fair share of opportunity in that space given that we’re populating product in many different markets on many different platforms.

Steve Fullerton - Citigroup

Okay. Great. And then just tactically on the G&A decline quarter-by-quarter. Is the 106 a good run rate in the next quarter? And I know it increase year-on-year and you gave some color there. But is this a good run rate going forward?

John C. Weisenseel

The G&A has been within a fairly tight range the past couple of quarters. And so, I think you just going to see it within this tight range, move around, keeping in mind there’s lots of things in there, there is foreign currency revaluation, there is errors, there’s professional fees, lots of things in there. But I think what you see in the past is just been fluctuating within a range and that’s what we should be able to expect going forward.

Steve Fullerton - Citigroup

Great. Thank you.

Operator

Your next question comes from Cynthia Mayer with Bank of America Merrill Lynch. Your line is open.

Cynthia Mayer - Bank of America Merrill Lynch

Hi. Thanks a lot. So I just digging into the flows a little bit more. It looks like this quarter you had equity outflows and very strong institutional fixed income sales, which were up quite a bit. So, can you give a sense of what the biggest inflows were on the fixed income side by dollar amount not fees?

And then on equity, are those redemptions, concentrated in any particularly area? It sounds like it’s improving, but not sure where?

Peter S. Kraus

Yes. To be a little bit careful about the equity between passive and active. So, most of the outflow is in the passive side not the active side. And what is selling in fixed income global bond, U.S. investment grade, U.K. credit, Canadian core, are some of the larger ones, some other diversifiers that we saw in institutional, [China] value, international -- excuse me, strategy value, international strategic value, Asia-ex Japan value, so we’ve seen a little bit of nibbling away, meaning growth at the value portfolio, at the value platform and that’s been a good story for us.

Cynthia Mayer - Bank of America Merrill Lynch

Okay. Just to clarify, I’m seeing a $1 billion in equity -- active equity outflows. Does that sound right?

John C. Weisenseel

That’s correct.

Peter S. Kraus

That is correct. But there are larger flows.

Cynthia Mayer - Bank of America Merrill Lynch

Only 0.2 and passive equity outflows.

Peter S. Kraus

That in total, yes.

Cynthia Mayer - Bank of America Merrill Lynch

Right. Okay. And then, just wondering if you can give any color on quarter to date first, because there been a lot of headlines on pressure on high yield and just not sure if that would carry to your -- over to your retail business?

Peter S. Kraus

Well look, we’ve had a much better quarter than we had last year this time. And we had talked about the fact that we thought our clients would come back to our platform which they did. We also recognize and I think clients recognize that they are still interested in yield.

And we also believe clients recognize that the sale-off of August last year gave rise to a pretty attractive return after that of some 6% or so percent. And so there’s been a more modest exit this year in front of anticipation that interest rates will up and the fed will change its policy.

I don’t think that we would expect there to be an absence of volatility in that market. We continue to believe that there will be volatility there and we continue to believe that that volatility will be driven by expectations of central bank activity particularly in the fed.

One of the things we’ve been able to do is introduce new services or different services that have a different risk profile. I mentioned the European product -- income product which doesn’t have U.S. interest rate risk, and one can take a position that the ECB interest rates will be more modest, and go up as fast, may actually go down. And that could have an offsetting effect in terms of risk and return for clients in that space.

So, we think we’re little bit more diversified. Clients have little more experience about how this work. But don’t take my comments to mean that we don’t think there’s any volatility going forward, because we do believe there is.

Cynthia Mayer - Bank of America Merrill Lynch

Okay. Thanks a lot.

Operator

(Operator Instructions) Your next question comes from Gregory Warren with Morningstar. Your line is open.

Gregory Warren - Morningstar

Yes. Thanks for taking my question. Just stepping back to conversations we’re having of about flows in the equity side. And your flows are significantly better than they had been in the past and a lot of that due to low redemption activity. And we look at the flows for the industry overall, most of its passive. If there is any money coming in, it’s coming on the international side. But just wondering, given the competition for active equity flows, are going to be much differ, given the fact that a lot of managers are rolling off bad five-year numbers this year and the next year, what gives you confidence that you’re going to be able to pickup your fair share of assets as they become available?

Peter S. Kraus

Well, I think couple of things. All good points. One is that, our core services, we’ve been very persistent with our strategy. Haven’t wavered, stuck to our knitting. And we have been able to show clients that by doing that we can produce the performance that we have expected. And in those core services -- and I think this is largely going to be institutional and sub-advised retail, buyers of those services recognize that persistency.

So, even though we will benefit like others as you say of bad years rolling off, we also benefit from the persistency and consistency that we’ve stated we have and have shown over the last five years. So there’s some value to that as a differentiator.

Secondly, as we’ve expanded the equity platform quite dramatically, and there’s a number of services that we’ve bought to investors both new people to the firm, as well as new services created by the existing investment teams that are more concentrated, higher active share, are unique sometimes really differentiated in their space and we’ve talked to a number of those and those are attracting flow, because they are different, they are unique. And they also are part of a broad platform that we are able to talk about with again large clients who are allocating assets and give them alternatives for their financial advisors and their clients, to actually provide that kind of equity return over time. So that differentiates as well.

Now, you’re right. It’s a competitive world. And those categories, for example, core activities, global core activities have a lots and lots of mangers and you have to have something different and unique. We think in some cases we do. CPH Capital would be an example of that.

Gregory Warren - Morningstar

Okay. Just one we think about the equity, the active equity side of the business. And I know you guys don’t look at it this way anymore and don’t report it this way. But we think about the breakdown between say value and growth, which of those do you feel you have clients, because we have those conversations in the past about you’re having some long standing clients been with you 10, 15 years have stuck with you guys throughout, which ones do you feel are more of those stickier assets on the value or the growth side and which areas do you feel better about as far as generating growth as we move forward?

Peter S. Kraus

It’s a tough question to answer, because projecting how the performance is going to rollout on those two services or any services is hard to do. But let’s assume that we have a continuation of the performance. I think we have seen particularly in the value side, additions by existing clients to existing portfolios. And they’re probably are both in the pure growth world and in the value -- pure value world, deep value world, very few competitors. There is not lot left. Many people have migrated to relative value or less aggressive growth for example the Thematic growth portfolio there are just not a lot of competitors in Thematic growth. And I think that we’ll probably benefit from that too.

Gregory Warren - Morningstar

Good. Thanks for taking my questions. It’s good to see guys, definitely getting back on track here.

Operator

There are no additional questions at this time. I turn the call back over to Ms. Prochniak.

Andrea Prochniak

Thanks everyone for participating in today’s call. IR is available to the rest of the day if you have any follow-up questions. Thanks and have a great day.

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Source: AllianceBernstein Holding L.P. (AB) CEO Peter Kraus on Q2 2014 Results - Earnings Call Transcript
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