Avi Sharon – Acting Head of IR
Peter Kraus – Chairman and CEO
David Steyn – COO
John Howard – Departing CFO
Edward Farrell – Interim CFO and SVP
Michael Kim – Sandler O’Neill
Robert Lee – KBW
Bill Katz – Citigroup
Cynthia Mayer – Bank of America
Marc Irizarry – Goldman Sachs
AllianceBernstein Holding L.P. (AB) Q4 2010 Earnings Call Transcript February 10, 2011 5:00 PM ET
Thank you for standing by and welcome to the AllianceBernstein fourth quarter 2010 earnings review.
At this time all participants are in a listen-only mode. After the formal 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 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.
Thank you, Ashley. Good afternoon everyone, and welcome to our fourth quarter and full year 2010 earnings review. As a reminder, this conference call is being web cast 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; our Chief Operating Officer, David Steyn; our departing Chief Financial Officer, John Howard; and our interim CFO, Edward Farrell.
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 10-K, which we filed earlier this afternoon. In light of the SEC’s Regulation FD, management may only address inquiries of a material nature from the investment community in a public forum. Therefore, we encourage you to ask all such questions on this call.
And now I’ll turn the call over to Peter.
Thank you, Avi, and welcome everybody to the call. I’m going to touch on the firm’s stability and growth in 2010 and the diversity of our businesses, and then I would like to take a closer look at some recent performance specifically in the equities businesses. David will cover asset flows broadly, and will also provide some detail on each of the businesses, and some of the research-driven innovations we have launched in the last quarter. And then John and Ed will tackle the financials, and then of course, we will turn it over to you for questions.
So taking a look at slide two, which is a perspective on 2010, we have arranged our information in three broad categories, assets and flows, operating results and capital management.
In the assets and flow category, we saw average AUM change 6% the upside, gross sales grew [ph] substantially by 29% from $47 billion to $60 billion, and net outflows lessened from $69.7 billion to $56.2 billion. That includes what was a very disappointing December, as many of you saw. Despite our strong performance and returns in the third and fourth quarter and continuing in January, we had a very difficult December in terms of outflows.
In operating results however, our base fees were up 7%, adjusted margins expanded in the business from 18% to 21.3%, up 16%. Adjusted operating income was quite robust, up almost $101 million to $554 million, and adjusted EPU from $1.38 to $1.60, 16% increase, attractive as well.
On the capital management side, very strong balance sheet, we continue to be rock solid on that category. Ratings also strong and unchanged. We did increase share repurchases quite handsomely in 2010 generally to offset the dilution of units to our employee base as a form of compensation. And our dividend yield was increased substantially from 5.1% yield to 6.5%, and that yield is calculated on our year-end EPU, not on the adjusted EPU. If you were to use the adjusted EPU it would obviously be substantially higher than that.
Let me move over to the industry trends just to set the stage for the environment in which we operated in 2010. So what you see in front of you on slide three is the retail industry mutual fund net flows, which we think is emblematic of what was going on in the industry over the last three years. Outflows and equities in ’08, ’09, and ’10 continued to be the headline for the equity world, and significant inflows to (inaudible) in ’09 and ’10 in the fixed-income world.
We have been a net funder in equities, and in a market in which equities were actually declining that has been to our detriment. However, we had a very strong fixed income service, or set of services and we have grown quite strongly in that space, not only by growing in share, but also in capturing net flows.
If the flows shift, and of course, we don’t know whether they will or not, but if flows ultimately shift and risk safe assets become riskier assets, so people become risk seeking as opposed to risk reducing, then equities are likely to grow. And if equities are likely to grow, and about performance continues as it has in the third quarter and the fourth quarter, and in January we do expect that we will grow in the equity side of the business, and that that would be attractive.
Let us look though at the fixed income franchise for a minute, because that has been the work [ph] of the growth in 2010. Turn to page four, you see a snapshot of our major services in fixed income, US fixed-income is $117 billion, non-US $89 billion for a total of $200 billion plus in that space.
What you will see is ’08, ’09, and ’10 performance for three main categories – our services. In each of the categories you will see a challenged 2008, but followed by a very strong 2009. We’re quite proud of the way in which we navigated the 2008, 2009 time period, we had enough dry powder to be able to add to risk in 2009, that paid off handsomely for our investors, and we continue to manage our risk positions and our performance very well in 2010 with quartile performance in the first quartile in both Global Plus and Emerging Market Debt, and second quartile performance in Core Plus.
So this performance has really driven the growth in the fixed income business, and the growth in our business and attractive spaces.
So now let us move to page 5, and take a look at the year-over-year change in AUM mix. So although equity balances went from 54% to 46%, fee realizations actually edged up a bit, from 42.4 to 42.8. So, again on the basis of a very strong fixed-income business, which is largely retail and largely in the non-US space, and on the reduction of equity – in equity balances, which in many cases came from larger institutional clients, which had lower fees.
And that diversification, which we now have in 2010 in a rather balanced way 46% equity, and 43% fixed income will inure [ph] to our benefit going forward. Staying on the diversification scheme, let us move to page six. So here we actually have an illustration of both by strategy and by channel what our business looks like at the end of 2010.
So although we did suffer some reduction in our equity services, the fee base by strategy still has 64% of our fees coming from equities and the balance coming from fixed income and other, 33% from fixed income. By channel a rather balanced business between institutional, private client and retail.
There is an interesting story here, in the private client and retail space you will see growth in AUM, 4% for private client, 5% for retail, and on the revenue side a 12% increase in revenues in private client, and a very robust 22% increase in revenues in retail. However, disappointment as we stated earlier in the institutional flows, showed AUM down 6%, and revenues down 6%.
So let us take a look at why some of that may have happened, and why we have some confidence that that is unlikely to continue in the future. Page 7 tries to lay out for one of our products, global value, what our performance looked like from the second quarter of 2009 to the fourth quarter of 2010, and the cumulative performance over that time period. The story is similar for many of our other products. For example, institutional value, international value, international growth, SMID value, and SMID growth.
And you can look at those numbers in the appendix if you like. But returning to this particular example of global value, what you will see on the left side since the market bottomed from March 9, ’09 to the end of the year 2010, our performance against our peers was 23% better. So number one, clearly a portfolio and a set of managers who were willing to take risk in that time period, and clearly a set of securities that were selected that actually produced outperformance relative to the peers over that time period.
Indeed when you actually look at the rankings on a quarter-by-quarter and the outperformance, you see in the first two quarters of ’09, second-quarter and third quarter of ’09 picture [ph] outperformance and ranking number one out of the 13 available peers that we could find in Lipper Universe. Medium – middle numbers in the fourth quarter of ’09 and the first quarter of 2010, and then we came to the second quarter of 2010, which was the European crisis, the Greece crisis, in which we underperformed in that quarter by 300 basis points, and we are at 13 out of 13.
We got back that performance and delay [ph] in the third quarter and the fourth quarter, but that second-quarter performance set the stage for institutions making decisions with regards to their allocations to AllianceBernstein, because they didn’t see the third quarter results obviously until late in the fourth quarter, the fourth quarter not until now, and many of those decisions were made either late in the third quarter, early in the fourth and culminated in significant terminations in the fourth quarter of 2010.
So if we look at what our performance looks like across the industry and across time periods, turn the deck to page 8. What you will see is an analysis and that is much more standardized relative to our competitors. We do include in the appendix, our traditional analysis of performance. So feel free to page through that. What this shows is long-term fund assets and their comparison against the Lipper categories, and the averages that come with those categories for our performance driven from one-year, and three-year, five-year, ten-year in the third quarter, and one-year, three-year, five-year, and ten-year from the fourth quarter.
What you will see is the fourth-quarter significant improvement, which cascades down to not just the one year, but also three, five and ten year. And as of the quarter ended 2010, 76% of the long-term fund assets were beating their Lipper categories.
So with that I’m going to turn it over to David, who is going to talk about flows and other elements of the business.
Thank you, Peter. Peter has observed the correlation between performance and flows. That has always been true for our industry, and that always will be true for our industry. But also true for our industry is the fact that there is a time lag between them. So the fourth quarter was a very tough quarter for us to end the year with significant outflows out of both our institutional and retail channels.
I am now reflecting as Peter said, the much improved active performance of the third quarter and the fourth quarter, but the volatile and challenging performance of the second quarter. I mentioned that the negative flows in both the institutional and retail channel. The retail channel did see a higher number than normal of or expected of terminations. Their one-fourth of the total was from one single low fee account.
It is also worth noting that as we look out into this year, 2011 and the preliminary data shown on page 9, we have got a much improved pattern for January with aggregate net flows across the three channels of outflows of 1.4 billion. If we continue the improved performance, which characterized the second half of last year, and we continued improved performance, which continued since January and the early part of February this year, I would hope that the pattern of flows evidenced in January 2011 will be more indicative of the flow picture of our business than the fourth quarter of 2010 was.
Let me now comment on flows channel by channel, and I’m going to do this on a sort of annual basis. So as Peter commented, the institutional outflows have persisted, but they are off from their peak in 2009, and 2010 actually saw a meaningful improvement in gross sales, up about 18% from 16.2 billion in 2009 to 19.2 billion in 2010. We have commented on previous earnings calls that institutional sales activity has been concentrated in fixed income, and that has continued to be the case.
And on previous earnings calls, I have focused quite a bit on what we have been doing in fixed-income and the areas of success we have had. But our success on sales is not limited to fixed income, and meaningful traction and progress has been made over the past year in our penetration of the DC market, particularly here in the United States of Americas. What I would like to do today is actually to talk about some of the initiatives happening in DC.
I would have wanted to do this at our earnings call in November, but the initiative I’m about to talk about we only went public with a couple of days after the earnings call. A few years ago the firm made a strategic decision to push for sources into the DC business, and a key component of that and a key service, which has helped build up the traction we have had in the defined contribution market was a service called customized retirement strategies, essentially an open architecture target date fund platform for DC plans of varying sizes.
And that has been a meaningfully successful or important service for us in defined contribution. But in November we announced this latest evolution, Secure Retirement Strategies, which adds to that open architecture investment target date fund platform a key. And actually something we think a critical component, and that of guaranteed lifetime retirement income. Uniquely though for the DC business in the United States of America, we believe we are the only manager who is partnering with a multitude number of insurance companies to provide that guarantee.
In the same way that CRS, Customized Retirement Strategies, removed single manager risk of investment platforms to DC. So, we believe that SRS, Secure Retirement Strategies, will remove from the plan sponsor the single insurance partner risk.
Pensions & Investments magazine, when they profiled us in the launch of the service described it as and I quote “the holy grail” and with the many, many discussions we have had with prospects and clients in the months since we went live that is a reaction we are finding on a regular basis. This is not the only part of our DC strategy, we have investment-only capabilities, customized retirement strategies, secure retirement strategies.
Added together, this has seen a meaningful change in our DC business, which ended 2010, including one not yet funded mandates sized at 30 billion today, and that a the 60% increase in DC assets of the firm since 2008.
The story in retail is the different story. Our retail in 2010 was all about sales growth. Net outflows slowed from 9 billion the year before to about 7 billion for 2010. Gross outflows did increase over the year to 41 million, but more than offset by the increase in sales. Sales climbed year-on-year from 23 billion to 33 billion, a 45% increase. And the 45% increase in sales was led as in the institutional business by fixed income, so in the retail business by fixed income.
It is also noteworthy, it was led outside the United States of America more in the United States of America, and if I get even more granular, it was led more in Asia, although Europe began to catch up as the year progressed. Driving our retail success in fixed income in Asia was the flagship product of the firm, global high yield. It set another stellar performance here with 16% returns in 2010, following 61% return in 2009.
And that performance helped drive the over 50% sales increase in the product, much of it in Asia. But it is not a story of one product with one track record. We have had similar performance stories for American high income, for emerging debt, and for our municipal bond funds, all of which showed meaningful increases in sales activity during the year.
On the equity side of the business, obviously the flow picture is much more muted, value equity fund sales increasing 11%, growth equity fund sales increasing 8%. And if I can return to the international theme of the retail success, another indicator on metric of that change was the news very late in 2010 that our Luxembourg platform of mutual funds broke through the $40 billion barrier in 2010, having just been $20 billion at the tail end of 2008.
Let me turn to private clients. The annual trends are similar, improvement in gross sales, fewer outflows, and sweeping improvements in net flows from minus $7 billion to just under $2 billion. But the assets in this channel actually in character are quite different. They tend to be stickier, and as a result the flow trends are comparatively muted.
And in fact, that is another metric, if we look not at AUM but if we look at relationships the attrition over the past few years is minimal. As the economy brightens, as markets have improved, as risk has receded, as the credit crisis issues have diminished, so we see the opportunity in the private client channel as one of the most exciting the firm has today.
One reason for that is that our private client business has always differentiated itself by the focused we place on personal wealth planning, and its partner so to speak, asset allocation. And in this environment, I don’t think that differentiating feature has ever been more important or more valued by our clients.
About a year ago, but just under a year ago we launched the latest weapon in the armory for wealth planning and asset allocation, Dynamic Asset Allocation or DAA, and I think it is worth just spending a couple of minutes talking about DAA, because it is indicative of the changes, which are taking place within our private client business. DAA is a portfolio only [ph] service.
It is designed quite simply to lessen, dampen, short-term volatility. It has a nice side-effect, and we hope it will improve performance. But the primary motivation of DAA is as a risk tool. 2010 turned out to be a very opportune time for the launch of this service.
Opportune in two ways. In the post 2008 world, there was a hunger in the behalf of our clients to have the volatility of their portfolios dampened, to ease the ride if you want to put it that way.
But it was also opportune in another sense, as a testing ground for DAA, the Greek crisis, sovereign debt fears, fears for the future of the euro, fears of double dip of recession, fears of deflation, fears of then of inflation. 2010 was not a quiet year. And as it turned out, DAA served our clients extremely well during this period. On the return side of the equation, the DAA service enhanced returns by some 130 basis points.
But actually more importantly on the volatility side, it dampened volatility by some 100 basis points. And that has a profound consequence, the response of clients to a calmer, softer, ride in risk assets was the willingness to have more money exposed to risk assets. And we believe and are led to believe by consultants in this business that our equity exposure of our private client business was meaningfully higher than that of many of our competitors, who had seen a flight to cash and away from risk.
As of today, some – well over 50% of eligible private client assets are covered by DAA, some 20 billion and that accounts for 20 billion. Now I should say, although I focused on DAA as a private client service, we never envisaged it as being limited to one channel. And we see particular interest for DAA in sub-advisory channel. And in particular in the sub-advisory channel, with variable annuity part of that business. Now the variable annuity business has been widely reported by ourselves, by our competitors, by the participants in variable annuity, they have seen a de-risking post 2008, very often manifesting itself in a move from active to passive management.
That removed some parts of the risky question, but it doesn’t remove the basic risk. Dynamic Asset Allocation does remove the tail risks, which make hedging of variable annuity products so difficult and so expensive, and in the sub advisory channel that we are now entering into some of the most interesting discussions for this service, and indeed we have signed up our first clients.
So if 2010 on the product development side was perhaps most importantly characterized by the successful launch of Dynamic Asset Allocation, as we look out into 2011, I think the next most important initiative for us is what we are doing in alternative investments.
As slide 15 illustrates, the firm actually has a long history in alternative investments. But alternative investments, proprietary alternative investments, which have been based around our underlying research platforms of growth equities, value equities and fixed income. The post 2008 world has allowed us to fill in, what we think is probably the most significant gaps in those capabilities. What we have talked about on calls in the past, real estate, which culminated in the launch of our real estate fund last year. And then the acquisition of a team from SunAmerica for fund of funds. And we touched on that on the last call.
This is a team with a 15 year track record in managing some 8 billion of fund to fund assets just north of half of that, in private equity fund to funds just south of half of that, in hedge fund fund to funds. With the addition of real estate capabilities and fund to fund capabilities, we have significantly broadened the suite of services in alternative space, which we can bring to bear to all of our clients.
Though the acquisition of the SunAmerica team happened two or three months ago, to be [ph] precise, we actually went live with our private client channel with first iterations of the fund to fund capabilities a few weeks ago. And although it is dangerous and hard to sort of compare the growth or the penetration within the private client business and Dynamic Asset Allocation, as I lookout at our alternative offerings, I have every reason to believe that it is going to be as transformative and as broadly allocated as our Dynamic Asset Allocation service was over the past year.
So let me lastly turn and comment on our sell side business, Bernstein Research Services, we saw solid performance in the fourth quarter, revenue is up 11% over the fourth quarter. For the full year, revenues were actually down just 1%. That decrease being driven by lower equity transaction volumes in the United States, partly offset by higher transaction volumes in Europe.
At the research level, we continue to see our analyst receive acknowledgements for preeminence in industry and company security research. And this is most recently being marked with the highest ever rankings we have had in an all European survey, with six of our analysts being voted number one in seven different sectors. Europe is, as we discussed in past calls, not the end of the globalization story. Asia being the third leg which we are now investing in, and we will continue to expand this in trading, and in sales and in research.
And with that I will hand over to John and to Ed.
Thanks David. Before I recap the fourth quarter the fourth quarter and full year results, I like to quickly go over the reclassification of our assets under management. As disclosed today, we have decided to remove a large affiliated, non actively managed account from our assets under management metrics that we disclosed in our public filing.
As of 12/31 this account was approximately $8 billion in assets, and was previously classified as other AUM within the institution’s channel. We perform limited services for this affiliated account, and it generates insignificant revenues. But while the revenue impact is small, the account has had a large impact on our monthly flows in the second half of the year.
In fact, we highlighted this account in several of our monthly AUM releases in the second half of last year due to the size of their monthly flows. We continue to provide the same level of services and earn revenues on this account, but we decided it was better to remove it from our monthly disclosures going forward to eliminate distortions. All of the AUM tables in our press release and form 10-K present our historical assets under management, excluding this account.
Now let us take a look at the financial results reported earlier today. I will go through our earnings at a high level, and then add and give some color around the major variances from prior periods.
Adjusted earnings per unit are up from both Q3 and 2009, adjusted EPU was $0.40 in Q4, up from $0.36 in Q3. For the year, our adjusted EPU was $1.60, up 16% from a $1.38 in 2009. Q4 adjusted revenues were up 4% in Q3, while adjusted expenses were up 2%.
For the year, our adjusted revenues were up 5% in 2010, while our adjusted expenses were up only 1%. Adjusted operating margins were 21% in Q4, up from 19.3% in Q3. For the year, our margins were 21.3%, up from 18.4% last year.
We repurchased 3.8 million units in Q4 for $89 million. For the full year, we bought 8.8 million units for $226 million. We will continue to buy back units over time in anticipation of funding our future deferred comp awards.
Let’s first take a look at our summary income statement for Q4 on a GAAP basis and then we’ll review our results on an adjusted basis in the coming slides. Our GAAP earnings per unit in Q4 were $0.42 versus $0.12 in Q3. For the full year, our GAAP EPU was $1.32 in 2010 versus $1.80 last year. Both our Q3 and 2010 results were impacted by real estate charges taken, $90 million in Q3, and $102 million for the full year.
Quarterly net revenues were up 3% in Q3. Operating expenses were down 11% due to the real estate charge. Excluding the charge, operating expenses were up 2%.
Our effective tax rate in 2010 was 8.3%, up from 7.4% in 2009.
Turning to revenues, adjusted net revenues were higher on both a quarter and year. They were up 4% in Q3, and up 5% from last year. Base fees, our largest revenue were up versus both prior periods, up 3% in Q3 and up 7% from last year. Bernstein Research revenues in Q4 were up 11% sequentially, and down about 1% from 2009. We had $22 million of investment gains in Q4 down from $41 million in Q3, primarily driven by lower gains on deferred comp investments.
For the year, we had $2 million of investment losses compared with $144 million of gains in 2009. The best majority of the decline in investment P&L came from the mark-to-market of deferred comp.
That is a review of our revenue trends, and now let us turn over to our expenses. I will go through our expenses at a very high level, and then Ed will give more detail on the major variances later on. Adjusted operating expenses were up 2% from Q3, and up only 1% from 2009. Compensation in Q4 was up 1% sequentially, and up 2% versus last year.
Our headcount is roughly flat with the end of Q3 at around 4300 employees. Promotion and servicing expenses in Q4 were up 8%. For the year, they were up 13%. These expenses increased due to higher distribution expenses and travel expenses. G&A expenses in Q4 were essentially unchanged from last quarter. Occupancy costs in the US were lower in Q4 as a result of the charge we took in Q3. This is mostly offset by higher outsourcing costs, international occupancy costs and lower foreign exchange P&L.
For the year, G&A expenses were down 1%. Now let us briefly review our standard disclosures of the major adjustments made between GAAP and our adjusted earnings. Deferred compensation adjustment reflects the net impact of investment gains and losses, and the employee compensation expense related to the mark-to-market of deferred comp.
Real estate charges were also added back. This leaves us with adjusted earnings of $139 million in Q4, up 14% from $122 million in Q3. For the year, our adjusted earnings were $554 million, up 22% from last year.
I will now hand the call over to Ed for an overview of the significant variances in adjusted operating income both for the quarter and the full year.
Thanks John. First, let us take a look at the fourth quarter versus the third quarter. As you can see on the left of this chart, operating income was positively impacted by increased revenues. Total advisory fees were up $20 million due to higher average assets under management.
Average Q4 assets were up 4% from Q3. Note these AUM figures reflect $8 billion account adjustment John mentioned earlier. Bernstein Research Services improved to $11 million due to higher customer activity. These increases were offset by smaller gains on our seed capital investments, higher incentive compensation and higher travel costs.
We earned $5 million on our seed capital investments in Q3, versus flat P&L in the fourth quarter, making up most of the $6 million decline in investment gains and losses. Comp and benefits increased due to higher revenues, offset by a lower comp rate.
As we previously discussed, we target our compensation as a percentage of the firm’s revenues, excluding distribution revenue. The Q4 rate was 49.2%, down from 49.8% in Q3. The $7 million increase in promotion and servicing expenses primarily driven by higher client related travel, as our sales force increased their engagement with our clients across the world.
As we turn to slide 23, we will take a look at our adjusted operating income variances from the prior year. As you can clearly see, earnings rose primarily because of higher base fees from the prior year, again due to increases in average AUM. For the year, our average AUM was $475 billion, up 6% from 2009.
Seed capital investments had gains of $12 million in 2009 versus $2 million in 2010. According for most of the investment gains and loss impact on operating income. Note that we started to edge our seed capital investments in the middle of 2010. The increase in comp and benefits is primarily due to higher revenues. And in 2010, promotion and servicing expenses increased from 2009, primarily due to higher travel expenses.
Overall, we saw $101 million improvement in adjusted operating income from the prior year. To wrap things up, here is a quick summary of the quarter. Adjusted net revenues were up 4% from Q3, while adjusted operating expenses rose only 2%. Adjusted operating income was 14% from Q3, and adjusted earnings per unit were $0.40 for Q4.
Now we will be happy to take any questions you might have.
(Operator instructions) Your first question comes from the line of Michael Kim with Sandler O’Neill.
Michael Kim – Sandler O’Neill
First, I will just be curious to get your take on flow trends, may be looking out over the next 12 to 18 months. It seems like the institutional redemptions remain pretty sizeable. So, assuming the markets remain cooperative, performance continues to improve and investors increasingly rerisk broadly speaking, just in that type of environment when you might expect to see a favorable inflection point for flows?
That is a tough question to answer because sort of multifaceted levels to the answer, as well as idiosyncratic to ask to us and then what is happening within the industry, so where is the money going. And there – I will start there and then come back to us. I don’t think there is any one story, so for example, if I look at the defined benefits business here in the United States, and indeed much of the West at a corporate level, you continue to see flows out of equities and into fixed income.
And there is no sign that that is changing at this point. However, if you look at the defined benefit public sector business here in the United States of America, you continue to see flows into equities and not into fixed income. And again, I don’t think there is any evidence that that is going to reverse.
There was as it has been widely commented, and we have evidenced some evidence in Q4 that at a retail level that is a bit of a shift from fixed-income to equity. I think it is a little bit hard to call the churn on the back of one quarter’s numbers, and again it is wide regional divergence on that. That phenomenon was much more true here in the United States of America that it was let us say the markets, I was talking about earlier in Asia.
So when I look at the fixed-income side of the balance sheet going that way, I think looking at, so far as you can look into this crystal ball, we would anticipate continued healthy flows in retail, in institutions and in private clients for our business. On the equity side, it is really as Peter said, this is the story of correlation between performance and flows.
If we continued with the improved performance of our equity platform in both growth and in value that we saw in the latter part of last year, and has continued into this year, by the way on a cumulative basis in the bottom of the marketplace – bottom of the equity markets in 2009, we have been outperforming on a relative basis and absolute basis. Then, I think the improved pattern of flows in January, and that is only one month to testify to, will continue to manifest itself. So this will come back to the performance issue.
Michael Kim – Sandler O’Neill
Okay. That is helpful. And then I guess last quarter you mentioned you thought gross sales of about 5 billion per quarter, and the institutional channel was a good run rate, but it looked like you were a bit below that for the fourth quarter. Can you just maybe talk about some of the reasons behind that, and then on the redemption side, I know you mentioned roughly I guess 25% of the redemptions were from one account in the institutional channel, but can you maybe talk about the concentration of redemptions if you look at maybe your top five largest accounts, so that would be helpful? Thanks.
Let me work backwards, if I said that the 25% redemption was from the institutional channel one clients, I made the mistake. It was for my retail channel. I know it was a sub advisory relationship. And the good side of the sub advisory business and the bad side of the sub advisory are from the flip sides of the same coin, and they tend to be lumpy, and in essence pretty hard to predict.
As to the institutional sales run rate, it is hard to get too specific about a quarter. There is a seasonal element to institutional sales. And in that sense I suspect Q4 we were hurt by that seasonal element the extent to which pension plans tied up their asset allocations when they come to the end of a financial year et cetera.
As I look out at our pipeline and activity at institutional channel so far this year, nothing I’m seeing would challenge the number you have quoted back.
Michael Kim – Sandler O’Neill
Okay. That is helpful, thanks.
Your next question comes from the line of Robert Lee with KBW.
Robert Lee – KBW
Can you may be give us a little bit of further color on the pipeline you have, and I know right from the beginning, it is 6 billion, is that predominantly assets in the DC business, any color on that would be helpful.
Right now a significant portion of that 6 billion is DC assets. I have to knowledge one thing about the DC business, it has a much slower sales cycle than the DB business, and then furthermore, even when you have won the business a much slower implementation process. It is anyway a complex business to actually get up and running.
So it is a little bit hard to forecast with our DC flows, exactly when the dollars are going to hit the account, but the pipeline itself continues to look healthy, and the broader pipeline in terms of the discussions we are having with DC clients is very, very encouraging.
Robert Lee – KBW
As a follow up, could you may be give us some color, I think you may have done this in the past, but you know, I think my presumption is maybe incorrectly that where your DC business is where you are being hired is kind of the overlay or glidepath manager, and can you give us some sense of number one to what extent are you capturing some – have you been able to capture some of the underlying management of the different strategies in vision to the glidepath and maybe kind of refresh our memory on what the differences, and kind of the fee structures, what you get paid for generally speaking for being a glidepath manager, as compared to actually managing the sleeve beneath that?
Sure, I mean you get paid, as you would expect, we get paid a lot less within glidepath managers than you get paid for managing the underlying sleeve. However, this has potential to give way for profitable business even if you were limiting yourself to that first component. So, we most certainly are not limiting ourselves to that first component. And we see owning the relationship of the glidepath or platform level as one, a key entree into the sleeve level, and two, one to be blunt, one of the attractions of this entire business is the stickiness of the assets.
So that is one of the barriers to entry into the DC business, and then one of the great advantages of being in the DC business. I would also add one other thing, having – earlier on such a question commented on the slow sales cycle of DC, and having commented on the slow implementation process of DC, one positive characteristic of the DC business is the constant flow of new money in from an existing relationship, it just keeps coming in.
So, as we look at the business going forward, both because we expect to win new business, and we clearly expect to win new business as we think we have an extremely competitive product offering, which right now may be a category without any competition. And of course, people are going to try and copy as our estimate, but we have first mover advantage with SRS.
And then secondly because of the constant flows which come into DC as a result of individual investments, we would expect the margins of this business to expand over time.
Robert Lee – KBW
So then, all of my remarks so far on DC I have limited to the United States of America, but US is not the only country in the world with a thriving and growing DC business, and DC marketplace for example in the United Kingdom is another part of the world, where we are focusing a great deal of time and effort.
Your next question comes from the line of Bill Katz with Citigroup.
Bill Katz – Citigroup
Okay, thank you. Okay, frankly just two questions, I just have a clarification, I apologize, I couldn’t hear Ed very well, maybe just from my end, were you mentioning the comp ratio before, was that net of distribution, I apologize.
Yes, it is.
Bill Katz – Citigroup
Okay, terrific. My first question comes back to the performance discussion, and I thank you for the extra disclosures, very helpful. As (inaudible) quickly flip between your new sort of presentation versus some of the appendices towards the back, what strikes me is the differential in terms of the rolling one, three, and five-year track record versus some of the most recent performance.
So again the question comes down to how much does volatility play in terms of the ability to overcome some of the short-term performance trends?
I am not sure what you mean by volatility Bill, but if you are referring to the fact that the third quarter of ’08 was a particularly poor period of performance, and that of course is one quarter, and that of course rolls off and we get into the third quarter of 2011. That actually is going to have a big impact on our performance numbers.
We’ve tried to highlight this in the past, and again talked about it today that our performance is episodic. And indeed our outperformance is more consistent, but also when it is significant also episodic, then the underperformance. The underperformance tends to come in very concentrated, very specific time periods. So, again the third quarter of ’08 was very tough for us, and the second quarter of 2010.
We are trying to say to you and people to consider it that since the bottom of the market, most of our main core products have outperformed their peers very strongly, number one. Number two is institutional clients, they were particularly sensitive to the ’08 experience and the unfortunate underperformance in 2010 in the second quarter. We made decisions without having seen the third quarter outperformance, the fourth quarter outperformance 2010 and January continued outperformance in 2011.
So while we can’t be certain that this markets are turning of institutional flows, and we can’t be certain that we won’t under perform in the future, our consistent outperformance in ’09 and ’10 seems to us to indicate that institutions will be a lot more comfortable with AllianceBernstein, and ultimately will find the equity products attractive to both retain and to continue to allocate capital to.
Bill Katz – Citigroup
Okay. So thank you. Second question I have is it comes back to margins, and this is maybe not fully fair because I’m looking more, if you look over sort of last five quarter basis, but if you look on the adjusted margin that has been running in the very low 20% range, despite what has been a very strong market backdrop, and your discussion on the fee rates going up despite the attrition.
So as you look forward, what is going to be the catalyst to the margin, if you will, is it just market tailwind here, because it seems like the mix is going to continuing to be shifting towards fixed income in the short term. I am just trying to understand how do you get a little more competitive with the industry on margins?
Bill, I think it is very simple. Our expenses, other than compensation are reasonably fixed. So if we add revenues, and we know compensation is a percentage of revenues, the bottom line goes to – the excess goes to the bottom line. In fact, if you look at the difference between ’09 and 2010, I think as both John and Ed pointed out it was Ed’s chart specifically that of the $148 million of revenue increase, nearly $101 million went to the bottom line. That's what you should continue to see.
So we believe we’ve created a substantial amount of operating leverage in the company that if we continue to perform, and we continue to see volatility in the market drop, stock correlations continue to come down. You know, we said a couple of quarters ago that one of the issues that we have is we take a lot of risk in our portfolio as our clients want us to, and when stock correlations are very high as they were, we didn't perform. As the stock correlations came down, and as in fact we saw significant value on large cap stocks, we actually have outperformed, and the portfolios were actually doing exactly what we said they would do. So if that performance turns into revenues and generally performance does over time, the operating leverage is baked into the company and you're going to see substantial improvement in those margins.
Bill Katz – Citigroup
Okay. That's helpful. Thanks for taking my questions.
Your next question comes from the line of Cynthia Mayer with Bank of America.
Cynthia Mayer – Bank of America
Hi, good afternoon. Can you maybe just talk a little bit about turnover both on the investment management side, and just firm-wide? Is this at all a concern for you and can you give us a sense of how it compares, I know that there is always a seasonal aspect, but how it compares this year versus last year.
If you count the senior personnel turnover in the investment teams ’09 to ’10, 2010 is drastically lower. I don't have a percentage on the top of my head but drastic would be the adjective that I would use. I think the turnover in general in the firm since the middle of 2009 has been lower and you know, we continue to be comfortable with that personnel changes as few as they are in 2010 that have been made. So significant change we announced in the third quarter of 2010 was Sharon taking over as head of equities, and that's been an evolution that we moved to over time, and that's worked out quite well for us as we’ve continued to focus more on producing performance in both our value services and our growth services.
Can I maybe add to that answer? Since I've been with the firm this is now my 12th year, the heads of equities, heads of fixed term, heads of blends, heads of private clients, heads of institutions, and head of retail, so every single front line division have been in this firm longer than I have. So with the exception of Peter, I am the baby of the management team.
Cynthia Mayer – Bank of America
Great, thank you and –
I appreciate David referring to me as a baby. When I look at myself it doesn't quite come off that way.
Cynthia Mayer – Bank of America
I apologize if you went over this already, but did you mention whether you expect comp to continue to come in under 50% of revenues net of distribution?
We said in our 10-K that we expect compensation to be less than 50%. I think 50% or less, and that is absolutely our intention. There may be circumstances in which that isn’t the case, so that is absolutely our intention and we have done exactly that.
Cynthia Mayer – Bank of America
And going forward too?
Yes. That is our intention. That is what we have done and that is our intention going forward. Yes, we feel strongly about that.
Cynthia Mayer – Bank of America
Your next question comes from the line of Marc Irizarry with Goldman Sachs.
Marc Irizarry – Goldman Sachs
Oh, great, thanks. Peter, can you just talk about the US response from non-US clients to, you know, to the performance versus US clients, particularly on the institutional side, and then you know, how are things moving along in the consultant and relationship side of the equation?
Well, I'm not sure that I see a great distinction between the reaction to our performance from non-US versus US clients as it relates to performance, except for the fact that in some of our non-US business, particularly in Asia, it is dominated by fixed income in emerging market kinds of assets, where our performance quite frankly has been very attractive. You know, we tend to be quite open book on performance as you would expect, and we talk a lot about the services that have been underperforming and that has been our core activities in global value, and our core activities in global growth.
I would hasten to add however that Japan value, Australia's value, our SMID products, our small-cap products, our global semantic [ph] product, in particular our global semantic and US semantic growth products have an outstanding track record, and are actually quite well thought of buy our clients. So I think you know, there is not much of a distinction mark but I'd say in Asia given the nature of the assets that the Asian investors hold that that was – that they feel slightly better.
You know, I just want to make sure that everybody saw the January flows, because I know we have bad flows, I hear about it and I just wanted to make sure that we have better bad flows that is clear. You know, the flows, the net flows were $1.4 billion and that’s a far cry from what we experienced in December alone. And I think again that harkens back to this performance story that we are trying to get you all to focus on that we believe it, and that's the reason why I mentioned that.
On the consultant side Mark, look, I think the consultants have been quite both supportive and thorough in their discussions with us. We continue to have in my judgment very strong relationships with the consultants. I personally see all of the major consultants all over the world. We have active dialogue with them about not only the core services, but some of the newer things that we are doing whether that's DAA or the hedge funds or alternatives or unique activities that they are trying to source for their clients. We continue to be I think a research driven thought leader for them, and participate in many of their seminars with their clients and provide, you know, awful lot of good research and detailed thinking for them. So I think relationship-wise strong, I think thorough diligent, constant communication strong, improving on performance.
Marc Irizarry – Goldman Sachs
Okay. Great, thanks.
I think we have time for about one more question. It's almost 6 o'clock.
Okay. You do have a follow up question from the line of Robert Lee with KBW.
Robert Lee – KBW
Thank you again for taking the follow up. I guess one of my – I was just curious of sticking with the DC business I guess, I guess you call the SRS as the churns or annuity product. I’m just curious you know, how does the lines get paid on that or is it really just, do you view more just as a service you provide in combination with other things or is it, you know, I'm just kind of curious how you would actually get paid on that.
Sure. Conceptually, we get paid on SRS exactly the same way as we get paid on CRS. So we are being paid for the platforms, if you want to put it that way for the target, glidepath, maybe asset allocation. And then we get paid for the management of any underlying sleeve. The insurance companies get paid for the provision of their guarantee for lifetime income.
I think what's really unique about it Robert and David alluded to this, but as the world moves from defined benefit to defined contribution, participants in the defined contribution world are to use the shorthand, short to big risks. They are short crash risk and they are short longevity risk. So if they live longer than they expect, where they live to another 2008, they are the only providers of insurance against that, and so what the SRS program does for individual participants is actually provide insurance, against those risks and that is a key deal because without that frankly they haven't got any coverage, and so we think that this is a particularly valuable product to individuals.
It is addressing risks they can’t otherwise address, and that we think actually from a social policy point of view, it's actually quite an important development in the world of retirement savings.
Robert Lee – KBW
And you know, I know there has been some – I'm sorry just one follow up. You know, some competitors have had different variations I guess if you will, I think BGI [ph] had something that came out with a year ago which hasn't had much uptake is my understanding, I mean maybe you know, how do you think this – if you can maybe compare and contrast it to or some of the other things that are out there, why this should have more uptake.
Yes, I mean, you're a student of this. So you’ll notice immediately but the really big difference is that our program is a multiple insurance program and from a fiduciary point of view, it’s extremely attractive for sponsors to be able to offer to their employee base, a product that has multiple insurers and not just one insurer, and that is the key and most important difference.
Robert Lee – KBW
Okay, great. Thanks for taking my follow up.
Thanks everyone for participating in our conference call. Please feel free to contact investor relations with any further questions. Have a great day.
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