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Executives

Andrea Prochniak – Director, Investor Relations

Peter Kraus – Chairman and CEO

David Steyn – Chief Operating Officer

Edward Farrell – Controller and Interim CFO

Analysts

Michael Kim – Sandler O’Neill

Cynthia Mayer – Bank of America/Merrill Lynch

Craig Siegenthaler – Credit Suisse

Robert Lee – KBW

Ashley Hartigan – Citi

Marc Irizarry – Goldman Sachs

Jeff Hopson – Stifel Nicolaus

AllianceBernstein Holding L.P. (AB) Q3 2011 Earnings Call October 26, 2011 8:00 AM ET

Operator

Good morning and thank you for standing by. Welcome to the AllianceBernstein Third Quarter 2011 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be a question-and-answer session. That will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be replayed for one week.

I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AllianceBernstein, Ms. Andrea Prochniak. Please go ahead.

Andrea Prochniak

Thank you, Matthew. Good morning, everyone. And welcome to our third quarter 2011 earnings review. As a reminder, this conference call is being webcast and accompanied by a slide presentation that can be found in the Investor Relations section of our website.

On the call today we have our Chairman and CEO, Peter Kraus; our Chief Operating Officer, David Steyn; and our Controller and Interim CFO, Edward Farrell.

Now I’d like to draw your attention to the cautions regarding forward-looking statements on slide two of our presentation. Some of the information we present today is forward looking and subject to certain SEC rules and regulations regarding disclosure. You can also find our cautions regarding forward-looking statements in the MD&A of our 2010 Form 10-K and 2011 Form 10-Q filings. We filed our third quarter 2011 10-Q this morning.

I’d also like to remind you that under Regulation FD, management may only address questions of the material nature from the investment community in a public forum. So, please ask all such questions during this call.

Now, I’d like to turn it over to Peter.

Peter Kraus

Thank you, Andrea. Welcome to our third quarter earnings call. Today, I’m going to take you through our third quarter challenges and accomplishments. David will elaborate on performance in close. Ed will review the financials and as always we look forward to taking your questions at the end.

So let’s start with slide three. In the third quarter the series of events deeply and settled the global markets. Between the escalation of the European sovereign debt crisis, the U.S. debt ceiling debate and resulting S&P down rate and the weakling U.S. economy. Equity market performance was the worse we’ve seen since the 2008 financial crisis.

Just looking that little deeper, the S&P’s 14% third quarter decline compares with a 23% decline in the fourth quarter of ‘08 when Lehman’s bankruptcy accelerated a crisis that was already underway. And the MSCI is 21% third quarter decline exceeded the fourth quarter 20% drop.

In both the U.S. and Europe, market performance was worse and the market decline in the first quarter of 2009, which many considered the height of the crisis. Results were more severe than when concerns spread over Europe sovereign debt stress last year.

Under these conditions equity investors radically derisk and fixed income investors play credit and fled high yield, all for the safety of U.S. treasuries. The yield hit a low of 1.7%. The environment had a profound impact on the performance of our long duration equity and corporate and high yield debt portfolios when client activity and on our financial results.

Turning to slide four, these conditions intensified it difficult to have as witnessed in the market all year long. It has in particular effective the investment performance of our large cap equity portfolios. But simply the fundamental rules prudent long-term investing aren’t working.

We’ve constructed our high conviction long duration equity portfolio and core research principals and growth investing like above average long-term growth potential and on the value side targeting low price to earnings and price to book companies that we expect will arise to average of better over time.

But rather than rewarding long-term earnings growth, this market tends to reward current earnings and dividend yield. And rather than seeing opportunity in cheap stocks, this market is risk. The cheaper companies get the riskier they get. That’s clear from how the year-to-date trends in these measures stack up against the long-term.

So where does that leave us? Let’s look at slide five. This slide shows some of our investment portfolios at the short duration and at the high conviction and long duration end.

As you can see the portfolios to capitalize on what’s working now, high dividend payout current earnings and in certain funds low Beta are all performing well. Equity income and U.S. and global market neutral, newer strategies of ours are outperforming for the year-to-date. As our select equity strategies and procurement brought over to the firm. So investment strategies that are working now are working for us.

When you look at the other end of spectrum, however, where we invest in high conviction long duration ideas, you can see that our year-to-date performance in these strategies trail the benchmarks.

We recognized that the underperformers on the right side of the slide represent a much larger share of our equities AUM that the outperformers on the left. Most of our equity assets are concentrated in long duration strategy.

As we said before though we are introducing new products as part of our commitment to deliver a broader set of investments solutions to our client. At the same time, we still believe our long-term portfolios are positioned properly. You can see that on the previous slide. We may be in a period where traditional metrics just seemed to no longer apply but we’ve been in markets like this before, back in the late ‘80s and nearly ‘90s when we believe in financial stocks and no one else did and again when the tech bubble led many to say that value investing was indeed dead.

So experience tells that that despite the current environment, the rules of investing have not changed for good. We expect the market will come around on fundamentals like earnings growth, free cash flow yield – yields and evaluations, and when that time comes our consistency and discipline will once again we considered birches.

On slide six in the interim we’re by no means standing still. For three years now we’ve been evolving our business to be more diversified and capitalized on long-term security growth opportunities that we see in global markets. We shared this view of our businesses with you last quarter, while the third quarter steep market decline cut into our momentum since then, the trend is still very much intact.

By investing in and innovating in fixed income, equities beyond Large Cap, alternatives and asset allocation strategies, we’ve grown these areas by nearly 40%. They now represent more than three quarters of our firm wide AUM, fixed income alone is more than half of our AUM. And the fees these asset categories earned have gone from less than 40% of our total and on annualized basis to 60% today.

For sure the contraction in our Large Cap equity business in the end of ‘08, has been a major factor in these other areas growing in percentage terms. But we’ve grown them organically as well.

In our asset allocation business for example, net new assets account for about two-thirds of the 80% AUM growth we’ve achieved since the end of the ‘08 and a fixed income of the $50 billion increase in AUM $10 billion has come from net new assets we’ve attracted through consistent performance of new and legal legacy products. We’ll keep focusing on these growing areas because they play a critical role in our long-term growth story.

Lastly on slide seven. Positioning AllianceBernstein for long-term success is the overriding goal shared by everyone here and we’ve made steady progress in our firm wide strategic initiatives in even the most challenging circumstances. This quarter was no different.

Just to touch on a few, on the performance front our Global Fixed Income franchise held up well in difficult times. They had maintained high one, three and five-year standings. U.S. Small and SMID Cap Growth and Relative Value also outperformed. Our efforts to diversify our business across channels, investment services and geographies continue to pay off as well.

We’ve launched a new Emerging Market Multi-Asset Strategy during the quarter. We are also wining new mandates and diverse services like Global Fixed Income, Recovery Assets and Japan Equity and as well clients continue to respond to our innovative new offerings like CRS which has grown organically 45% year-to-date and Dynamic Asset Allocation which is doing exactly what we designed it to do, reducing volatility and client portfolios during turbulent times.

We are making progress on financial goals though this is definitely more challenging in the current environment. In the third quarter, we finished consolidating our London space and we were diligent in managing expenses in a declining revenue environment.

So, the third quarter was one of continued progress for us in achieving our long-term strategic objectives. We are engaging well with clients. We are interested in our new offerings and our strategies that are performing well.

We are having more constructive conversations all the time with consultants and getting into more researches as a result of that. We are broadening and globalizing our business and we are doing these things in a very challenging market environment. We want to deliver better financial results and when operating conditions improve we believe we will.

In the meantime, we remain focused on disciplined investing, diversification and innovation always to position our firm for the long-term success.

Now, let me turn it over to David for some of the specifics on our performance and gross.

David Steyn

Thank you, Peter, and good afternoon from London. The third quarter was one of many challenges which significantly divested our asset base and our operating performance. I’m going to take you through some of the details of the firm and distribution channels.

Beginning with firm-wide AUM in flows. We ended the quarter with AUM of $402 billion down $59 billion or 12.8% from the end of the second quarter and down $75.5 billion or 16% year-over-year. Our average AUM is down 8% from prior quarter and down 6% versus last year.

Gross sales of $11 billion were down by $3 billion in the second quarter and $2 billion from the same period last year. Total redemptions also declined in the quarter and as a result net out flows of $15 billion were lower versus both prior periods.

Looking at the roll-in quarter view on slide 10, you can see the different dynamics underway in our three channels. Gross sales declined for both institutions and retail. Our private client gross sales increased slightly. We experienced double-digit percentage declines in client redemptions in institutions and private clients. However, in retail client redemptions were up 10%. I’ll come back to this for more details when I review our retail performance.

But first, let’s spend a moment on institutional gross on slide 11. While gross sales and client redemptions declined by about the same amount in percentage terms, nearly 40% in the third quarter. The decline in redemptions was much greater in dollar terms, more than $7 billion. As a result, our net outflows of $9 billion were lower by about $6 billion versus the second quarter.

Even with lower sales in the quarter and I’m on slide 12, we increased our pipeline by $800 million to $7 billion and that’s with several large fundings during the course of the third quarter.

Peter mentioned earlier how our conversations before clients and consultants are becoming more constructive, more engaged that they want to hear more about the new and top performance services we have.

You can see this in the diversity of our pipeline. We had wins for our new AB Recovery Asset offering for about $450 million in the quarter. In U.S., European, emerging markets has been totaling over a $1 billion.

Two of our biggest customized retirement strategy clients also may funding in the third quarter and we’re finding that more major corporate plans are willing to fund our strategies has been they acquire new companies and plan assets. That’s fueling our double-digit organic growth rates in this platform and today CRS accounts for about 40% of our pipeline.

Ongoing momentum in fixed income is also driving pipeline growth. We recently won a $300 million mandate for our international bond strategy from a state educational pension fund which actually had been previously the U.S. equities client.

We’re making continued progress in winning non-U.S. mandates as well particularly with fixed income. Clients outside the North America now account for more than 40% of our pipeline. In order to grow our business and win over clients, we need to have competitive offerings in the asset categories that represent the best long-term growth prospects.

Slide 13 highlights some of our top performance strategies with one, three and five year periods. Even taking into account the very difficult quarter we just finished, you can see a strong fixed income showing in multiple time periods. In many cases our services are performing much larger players in these spaces.

Let’s take global fixed income as an example. Our global fixed income service is in the top two quarters of one, three, five, yet our $16.5 billion in assets under management in this category represents just a 2% share over market investments sizes of $675 billion.

U.S. core fixed income where we ranked top quartile of the peers is at $1.1 trillion market. Our $6 billion in AUM a mere half percentage points market share. American markets debt is a $285 billion category this has seen a significant flows over the past year. We have $7 billion in assets in this category and a 2.5% share.

In equities, I’ll point that how strong we are in Small and SMID Cap growth. We’ve topped quartile across time periods with premiums of 500 basis points or more. With the select equity strategies we recently rolled out, we’re offering another service with a very strong long-term track record.

Of course, we’d like to be show you far more services on the slide, market conditions affected our fixed income performance during the quarter as Peter said, as well as large Cap growth in value where we’ve already underperforming. Yet we’re encouraged by the strength we have in the areas beyond this large Cap where we’re focused on diversifying our asset base and our client’s offerings.

Turning to retail, I mentioned early that we had a declining growth sales and an increase in client redemptions in the quarter. In that our net out flows has resulted more than double to $4.4 billion. The trends we saw in our retail business were consistent with what was going on in the industry as a whole in an extraordinary volatile quarter.

As you can see on the top right chart on slide 15. Industry-wide U.S. mutual fund flows, which were $41 billion in the second quarter, completely reversed to outflows of nearly $48 million in the third quarter. The first time total fund flows have been negative since the fourth quarter of 2008.

Equity fund outflows nearly tripled to $46 billion and bond fund flows went from positive $50 billion in the second quarter to just $500 million in the third. As a result, after two consecutive positive quarters, our retail mutual fund flows turned negative in the third quarter and I should add that the data, I just quoted is U.S. data that pattern was being repeated around the world. Gross sales were down in all active categories, mostly notedly in fixed income.

We continued to deliver new products to our clients. Four new product launches during the third quarter. We have now introduced more new offerings so far in 2011 than we did in all of 2010 and more than double the offerings of 2009.

And lastly, as you can see from the chart at bottom right, municipal bonds is an area where we constantly routinely differentiate ourselves. Three of our top six products are third quarter sales growth being Muni Funds.

Turning now to Private Clients, gross sales increased in the quarter and redemptions moderated, which led an improvement in our net outflows. We are fully aware of how important it is to help our clients to navigate these volatile markets and dynamic asset allocation has been an absolutely critical tool in this respect.

We introduced Dynamic Asset Allocation, DAA, in client portfolios last April as a way to mitigate volatility without sacrificing returns and it’s really changed our dialog with clients. Clients can see the current allocation of their account and the portfolio actions we are taking in response to market developments.

Slide 17 illustrates how we voted our equity weightings overtime to adjust the market dislocations by the Japanese earthquake and the European debt crisis. Most recently, we were significantly underweight equities when the market [down drop] in September.

The bottom left chart shows how our approach is tailored to different clients. And the bottom right chart shows how in each case we managed with DAA to reduce volatility, but not with the spends or returns.

Since inception, DAA has reduced volatility by 1.8 percentage points for the average 80/20 equities fixed income investor, by 1.2 percentage points for the average 60/40 investor and by 0.4 percentage points for the average 30/70 investor versus accounts without DAA.

And while DAA was designed to mitigate volatility without sacrificing returns, we have planned the returns for clients with DAA of an average being 1 to 2 percentage points higher than they would have been without it.

At a time when so many of our clients are focused on macro trends, we are able to make them more comfortable in a volatile market with DAA. We believe our private client franchise to be very strong in this market. It is a unique one. It is a differentiated one.

We have over 30,000 clients most difficult times to compare flows to competition, they often flow to competition being into deposits or deposit related which is not our business. And our business, is business where yields are hedging up and margins are improving.

So from one strong franchise to another strong franchise, let me turn to Bernstein Research Services. In the third quarter Bernstein revenues were up 10% in the second quarter and up 23% year-over-year. In each case the spike in both volumes and volatility during the third quarter drove the increase, with transaction volumes particularly high in August.

As you see from the bottom left chart, combined Europe Stock Exchange and NASDAQ volumes surged that month, up 70% from July and nearly 50% from August 2010. The VIX Volatility Index also rose throughout the quarter finishing September at 160% higher than in June and 80% higher than the prior year quarter end.

While volatility stayed high, volumes came back towards seasonal levels by quarter end and remain muted so far in the fourth quarter. Not only that Bernstein continued to perform well, we’re on track with our global expansion and garnering new industry recognition all the time.

We are at, our starting target at Asia for the year. Our annual European conference in September had a record attendance that was triple the number at our first even five years ago. And then this year’s North American II Survey Bernstein again scored a top 10 ranking with analysts quoted number one in nine different sectors.

Let me conclude by saying we continue to be focused on two things, one the well being of our clients and this includes delivering both the investment performance and service they expect from us. And two determining and pursuing the best long-term growth opportunities for our firm.

Even in the quarter as difficult to this one in a host of errors we were able to make progress, has something to be proud of in this environment.

Let me turn it over to Ed for his discussion of the financials.

Edward Farrell

Thank you, David. Let me first go over the third quarter adjusted financial highlights reported earlier today then I’ll get into some detail around in each area. Adjusted earnings per unit was $0.30 in Q3 that’s down $0.05 from Q2 and $0.06 from Q3 2010. Adjusted revenues of $602 million were down 5% from Q2 and 4% versus the prior year quarter.

Adjusted operating expenses were down 3% sequentially and 2% from the prior year quarter. Our adjusted operating margin was 17.7% in the quarter, down from 19.7% in Q2 and from 19.5% in Q3 2010.

We repurchased 3 million units in Q3 at a cost of $45 million. Year-to-date through September, we’ve bought back 7.6 million units in the open market to help fund anticipated obligations under our incentive compensation program.

Let’s take a look at the high-level GAAP income statement on the next slide. Our GAAP earnings per unit for the second quarter were $0.26, down $0.08 versus the prior quarter and up $0.14 from the third quarter of 2010.

Quarterly net revenues of $642 million were down 12% sequentially and 15% versus the prior year quarter. Operating expenses of $564 million were down 8% from Q2 and 19% from Q3 2010.

Operating income of $78 million was down 33% from Q2 but up 35% from Q3 2010. In our GAAP earnings, we recorded a $7 million real estate charge in the current quarter associated with the disposition of space in London. As a reminder, we recorded a $90 million real estate charge in the third quarter of 2010 associated with consolidation space in New York Metro area.

Our effective tax rate in Q3 was 6.7%, down slightly from the prior quarter. We think 7% is still a good proxy for our full year projection. Now I’ll review our quarterly – quarterly revenues and expenses in more detail.

Looking at the revenue components, you can see that the largest variance in Q2 came from investment gains and losses line which declined $52 million in the quarter. Due to the declining markets in the quarter, we saw a larger current quarter investment losses in both our deferred compensation related and seed capital investments. Base fees declined 7% from Q2 in line with 8% decline in average AUM.

As David mentioned earlier, Bernstein Research revenues were up 10% or $10 million from the prior quarter due to higher market volumes particularly in August. Compared to the prior year period, we had investment losses of $66 million versus prior quarter gain of $41 million and 6% lower base fees in line with the 6% decline in average AUM over this period. These were partially offset by a 23% increase in Bernstein Research revenues.

On an adjusted basis, net revenues were down 5% sequentially and 4% year-over-year attributed to lower base fees versus both prior period and investment losses in our seed capital investments. That’s the review of the revenue trends. Now, let’s turn to expenses.

On a GAAP basis, Q3 operating expenses of $564 million were down 8% from Q2 and 19% from 3Q 2010. This can be primarily attributed to decrease in compensation and benefit costs.

Total comp and benefits decreased 13% sequentially lead by 37% decline in percent of compensation. The decrease was partially due to a larger current quarter mark-to-market losses on prior year’s deferred compensation works.

In addition as we’ve previously mentioned, we target annual compensation as a percentage of adjusted net revenues which were down 5% this quarter. Versus the prior year period, these compensations increased as a function of annual merit increases that include the shift in our compensation mix from incentive to base pay.

Incentive compensation was down 49%, in Q3 2010 we calculated compensation as a higher percentage of adjusted net revenues also last year we had mark-to-market gains on deferred compensation $14 million versus current quarter losses of $24 million. Our compensation ratio year-to-date is 49%.

Looking at our non-compensation expenses, promotion and servicing in Q3 were down by 7% sequentially to the lower T&E costs and lower distribution related payments. The decline in T&E is a typical trend for the third quarter as we hold the majority of our conferences in the first half of the year, travel tends to slow down during the summer months.

The 5% year-over-year rise in promotion and servicing expenses can be attribute to higher distribution related payments and trade executions and transfer fees. Excluding the previously mentioned real estate charge, G&A expenses were down 2% sequentially, this is due to be receipt of $11 million in the insurance proceeds related to the market timing issue back in 2003. This is offset by higher portfolio servicing fees and greater FX losses.

Year-over-year G&A expenses declined 1% as the current quarter insurance proceeds were offset by increased international occupancy costs and current quarter FX losses versus the prior year quarter gain.

We will exclude the insurance proceeds from adjusted earnings as there are one-time credit and distorted to our results. Again in 3Q 2010, we recorded a $90 million real estate charge related to the space in New York area.

The current quarter $7 million charge is primarily related to the disposition of space as we consolidated our presence from two locations to one. These costs as usual will be excluded from our adjusted earnings.

On an adjusted basis, operating expenses were down 3% sequentially and 2% versus 3Q 2010.

Now let me briefly review the major adjustments made to GAAP earnings to get to adjusted earnings. The 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 compensation.

As I just mentioned, we’re removing the $7 million current quarter real estate charge. Also we’re removing $11 million in insurance proceeds from adjusted earnings. We adjust for non-controlling interest as well, which had a positive impact on adjusted earnings this quarter as we experienced losses in our venture capital fund. Overall, the results in Q3, adjusted earnings of $107 million, a decline from a $126 million in Q2 and $122 million in 3Q 2010.

To wrap things up, here is a quick summary of the quarter. We delivered GAAP earnings per unit of $0.26 and adjusted earnings per unit of $0.30. Adjusted net revenues declined by 5% and adjusted operating expenses decreased 3% sequentially.

Adjusted operating income of $107 million for the quarter was 15% lower than 2Q and 13% lower than 3Q 2010. Adjusted operating margin declined 2 percentage points from 2Q and 1.8 percentage points versus 3Q 2010.

Now, I’ll be happy to fill any questions you might have.

Question-and-Answer Session

Operator

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

Michael Kim – Sandler O’Neill

Hey guys good morning. First, can you maybe talk about the expense outlook going forward just a given kind of the recent market down draft, other areas besides consolidating some of your office space where you can maybe tap the breaks or right size the footprint without kind of meaningfully compromising the long-term growth prospects of the franchise?

Peter Kraus

Sure Michael. Look I think that, we are always as we said in the last few years are looking for places to become more efficient, I think some of the things that were focused most on right now is taking efficiencies out of both the operating platform and technology platform space of its space platform as you will and other parts of the support structure of the firm where we see the product set becoming more concentrated.

There are number of places in the investment platform where asset sizes have gotten to a point where we can consolidate services, where we can create some efficiencies and we see an ability to do that over the next 18 months. And so, we will take advantage of that. But I would say that’s the normal course of business, but that’s what we are focused on.

Michael Kim – Sandler O’Neill

Okay. And then maybe turning to the fixed income side of the business, which strategies are you seeing gaining most traction? And how much of a risk do you think it is that maybe some of these alternative credit strategies start to increasingly take allocations away from sort of the more of the traditional fixed income mandates, particularly given where rates are today and how do you think you are positioned if that dynamic plays out?

Edward Farrell

Well, I think the big growth we’ve enjoyed has been in products such as global and high yield and we continue to see a significant demand for global and high yield. I mean, leaving the last quarter which was obviously kind of unusual quarter. And that demand is even more pleasing visits spread around the world and spread across the channels.

When you touch on new generation fixed income products, I think we have a platform in fixed income today which is never ever being stronger in the history of this firm. And I think we can be competitive across the entirety of that fixed income range. Now, our products can do both, absolutely. We will put up, we just learned today, we put up an award for a [member] funds by a German consultant.

If you had asked me five years ago or three years ago would I’ve even imagined we’d have a fund like that, either raised an eyebrow. So the whole fixed income world has changed -- it is changing rapidly, but we would expect to be a player in it, both in terms of the legacy services we both have business on and in terms of new evolving ones.

Michael Kim – Sandler O’Neill

Okay. Thanks for taking my questions.

Operator

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

Cynthia Mayer – Bank of America/Merrill Lynch

Hi. Thanks a lot. Just wondering if you could maybe clarify G&A a little bit, I guess does the G&A number that you reported include the $10.7 million insurance proceeds and should we -- how should we think about that going forward we backed out is that a good rate for G&A going forward?

Peter Kraus

The insurance proceeds number that we coated is the onetime event and backed out from our adjusted operating earnings. So I wouldn’t include that as a run rate item.

Cynthia Mayer – Bank of America/Merrill Lynch

Okay. So if we take a look at the GAAP G&A, I guess it would in there and if we’re just trying to project GAAP G&A should we assume that it’s a good run rate without that?

Peter Kraus

That’s correct.

Cynthia Mayer – Bank of America/Merrill Lynch

Okay. And then just second question may be you can in the context of what your where talking about with expense opportunity -- say opportunities, could you update us on head count and may be your plans for next year.

Peter Kraus

So we have said on head count in past discussion that we continued to mange that head count where the given the size of the firm and we’ll continue to do that. So I don’t think that we’re attempting to change the trajectory of the firm given where the asset levels are today.

Cynthia Mayer – Bank of America/Merrill Lynch

And what’s the…

Peter Kraus

So, I think that, yeah, I think that where we are in terms of numbers is year-to-date we’re down by about 8% and 4% between third quarter and second quarter.

Cynthia Mayer – Bank of America/Merrill Lynch

Okay.

Peter Kraus

So, that’s the trend that, you can’t project that to infinity obviously but it’s a, it’s a trend that reflects our prudence with regards to head count given where we are in the cycle of the market and given where we are in the history of the products.

Cynthia Mayer – Bank of America/Merrill Lynch

Great. Thank you.

Operator

Your next question comes from the line Craig Siegenthaler with Credit Suisse. Your line is opened.

Craig Siegenthaler – Credit Suisse

Thanks. Good morning everyone. First, just to head on the research services strength and I heard your comments on higher market volumes in August, why don’t you get break that out and maybe gives us a granularity if that was from derivatives or that was some kind of plain vanilla equities commission or if anything lumping there either?

Peter Kraus

I would tell this, nothing lumpy. It was good volume across all other different parts of the firm. The south side group has done an excellent job broadening out their trading platform which includes electronic trading, as well as the traditional face to face trading if you will. We’ve also as you know built out a driver’s capability of the last year which also did well in the quarter.

And so, we would continue to see all of those three elements of the south side business growing. As you know we’ve also in the past building up Asia. Asia also is bringing on clients at an expected to slightly better than expected pace. And so, if volumes continue to be as they were -- we would continue to expect our business to do well.

Now we know volumes are erratic. This is a volatile market and so it’s very difficult to project how that business will perform. But when you have months like August that’s obviously very attractive. We don’t think that August is a necessarily a trend, but clearly when the markets become that active we capture our market share and sometimes better.

Craig Siegenthaler – Credit Suisse

Got it. And then, I mean, from your earlier comments, we really identified institutional redemptions is kind of the key driver of sequential improvement for you guys. I’m wondering, if was there any lumpiness to in that item when you look at the quarter-over-quarter comparison in terms of institutional redemption and June that’s a good run rate because the third quarter is also a very difficult quarter as you pointed out. Is that a level you can actually, if you think you can improve on into kind of the fourth quarter and going forward?

David Steyn

That is a tough question to answer. We chatted in the past, I’ve said I would be very, very extrapolating any quarter in the institutional because they can be so lumpy. But, to answer the first part of the question whether there was any pattern during the quarter, yeah there was. September was materially worse than the two months we proceeded it.

Now that’s not too much of a surprise, particularly in many parts of the world you tend to have seasonal effect in institutional business and the cost just never come from four week holidays in France. So, even in the good year, bad year or great year you’re going to have a seasonal effect within that quarter. That’s the only granularity, I’d give you. I don’t think there is any other particular pattern.

Craig Siegenthaler – Credit Suisse

Got it. Great, David. Thanks for taking my questions.

Operator

The next question comes from the line Robert Lee with KBW. Your line is open.

Robert Lee – KBW

Thanks, good morning guys. First, I have a question with CRS business, just kind of curious, you’ve had -- that’s obviously a decent proportion of your pipeline but can you talk a little bit about your success when you get those mandates in getting some of your own strategies put in place, in addition to your managing kind of a glide path if I understand it correctly. Just trying to get fix by assuming that’s where some of the real revenue upside also comes from if you can manage some of the underlying strategy?

David Steyn

That’s true. We never broke out exactly what proportion of our CRS business we have up sleeves. But you are right that the real -- no time to use those tail, but the real return from CRS is when we can be a part of the investment management sleeve as well as part of the platform, but having said that, this platform alone has a potential to be a profitable business and it is an immensely sticky business.

And what it means is we are in constant dialogue, whether we are a sleeve or not a sleeve, we are a part of the debate, we are sitting at the table, some of the biggest pension plans in the United States of America, which is an enviable place to be. But, the business without sleeves is going to be a good business, the business with sleeves is going to be a better business.

Robert Lee – KBW

Okay. And also question on the real kind of marketing question. You’ve introduced a lot of new strategies including alternatives, you’ve pointed out some of the market neutral on long shot strategies, I’m just curious, how do you integrate those strategies, the thing you are kind of marketing in sales organization, since there are many ways I assume pretty different from what they’ve traditionally marketed.

And I guess as a corollary to that how long does it take now your sales force to kind of get up to speed, I mean, if you introduce some of these strategies first part of this year is it really going to be 2000 -- a year later before you start to see kind of hopefully some RFP activity and pipeline build and trying to get a sense of kind of that.

David Steyn

I could easily take an hour to answer that question, but let me see if I can do it in two minutes. When we merged Alliance Bernstein, we had a sales force in Alliance which was world class selling growth, a sales force at Bernstein is world class at selling value. We spent the next few years making them a general sales force which could sell any equity product in the cost sold backing ever dreamt.

When we decided to move into fixed income, we took what was essentially an equity sales force, in general equity sales force and we trained it and moved it, inhibited it into an equity and fixed income sales force. So, this firm is a long and deep commitment to a general sales force, what I wonder we’re committed to, because our clients want us to have a general sales force.

Now, having said that alternative is one step, one significant step harder. So, are we junking a general sales force for alternative push? No, not at all, we are training our general sales force as an all free channels, an alternative and the entire range of alternatives which the firm has.

What we have done is to create a specialized team of some of our very, very finest salesmen drawn from all three channels and they are acting -- supporter is the wrong word. They are acting as a sort of added layer to drive strategic initiatives such as alternatives.

So I was anticipating where you are going with questions to how long does it take to get your general sales force up and running we’re trying to kick start that process with a dedicated teamwork and side by side with the general sales force or with very best people.

Robert Lee – KBW

Okay. Great. Thanks for taking my questions.

Operator

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

Ashley Hartigan – Citi

Good morning. This is actually Ashley Hartigan, Bill Katz’s associate. I know that you mentioned some recovery in private client, but what will allocate to get high net worth volumes to more positive number?

Peter Kraus

I think the private client business has been successful in the environment we are operating in. This is a difficult environment for everyone and as David alluded to, when you look at other businesses since we don’t run a cash business and we don’t run a general brokerage business, sometimes it’s difficult to compare our numbers with other businesses, but the private client business has a terrific platform today, stronger, broader, deeper than it has been historically.

We feel that our clients are closer to us than they have ever been, obviously because it’s a difficult time period and I think so what it takes to actually grow that business is commitment to it, consistency to it, strong platform and a diverse platform that gives clients what they need in difficult times.

And I think that’s what we built, so it’s time, Ashley, to get where we need to go, but I think that we’ve proven we got the platform that’s required and we just have to continue to be tenacious in talking to our clients and bringing in new clients and showing new prospects what we can do. That’s what we -- that’s what our plan is and that’s what we’ll do.

Ashley Hartigan – Citi

Great. Thank you. And then also what will it take to get the institutional pipeline through reflecting more measurable increase for net inflows.

Peter Kraus

I like your tenacity on what it will take question, but we appreciate that. Look we are hard at work as David has said in his comments and his answers to the question in servicing clients. I think that the consultant activity that both I commented on and David commented on is much stronger today than it has been in the last couple of years. We see ourselves being included in searches that we haven’t been included before. The pipeline for the last two consecutive quarters has been growing.

We think that we’re having more traction with institutional clients around the world on innovative ideas. Clients are talking to us about how do they navigate these more challenging times and structurally what did they do with their pension plan over the next three to five years, not just what’s the new product today, but how do they sell some of them were challenging issues that they have in developing an investment plan for meeting the long-term investment objectives, earnings objectives for those plans.

So, I think, Ashley, we feel good about what we’re doing in the institutional side of the business notwithstanding the challenge performance that we’ve talked about numerous times with regards to our equity products. But one interesting point which we try to make and I guess I’ll just reiterate it is that our long duration equity services are quite provocative with regards to the elements that we’re exposed to.

We believe that cheap price for earning, cheap yield, cheap cash flow is the right thing to invest in. You can see from the chart I think it was on slide four that that chart shows that those investment activities are just not in favor.

People are just not paying for that, but over time we know that value and we know that will be attractive. In the institutional marketplace investors and clients that are with us and people that are talking to us recognize that and they recognize they need to be exposed to those factors and opportunities and that’s what -- that’s the true value proposition at the equity platform today on the long duration side.

Ashley Hartigan – Citi

Great. Thank for taking my questions.

Operator

You next question comes from the line of Marc Irizarry with Goldman Sachs. Your line is open.

Marc Irizarry – Goldman Sachs

Great. Thanks. Peter or David, can you talk little bit about where you are with DAA in the retail channel. I know you’ve had what looks like some great results and that it seems to be an area where a lot of competition is throwing their hat on the retail side and it seems like that’s may be where some founders and flows are going in these days. Where are you in the process of DAA or any product in the retail channel?

Peter Kraus

Well, Mark DAA has been a big success for us so far in retail, both in the variable annuity products where some of the largest insurance companies of the world have included DAA in their product lineup. That has -- that is resulted in large sales for us, sometimes on a daily basis very attractive inflows.

We’ve also populated in the retail marketplace in mutual fund form, the DAA product as well. That’s new meaning that it’s a few months or in some cases just happening. So, we will see but the results to date have reflected the growth in interest on the part of investors in a investment activity that create some shock absorbers in volatile market, where the shock absorbers are not quantitatively driven by simply levels of volatility.

Marc Irizarry – Goldman Sachs

Okay. And then just a question, I guess for add the G&A seems like -- it’s come down a touch, but still this maybe a little bit elevated relative to out the average A1 decline. Is there any -- can you give a sort of the outlook in terms -- can you caps the breaks a little bit harder there and what the operating efficiency initiatives would be in the near term?

Peter Kraus

In the near term, we continue to look at space. We -- our international occupancy costs have gone up and that’s really a function of the rate that we obtained in the overseas location. So, that’s driving it including we’re very focusing on that. As I mentioned, we have consolidated our London location from two spots to one.

So, we anticipate seeing some benefit there in 2012 and another item that attributed to G&As is we record FX gains and losses within G&A and that was adversely impacting from the prior quarters to prior year quarters. But we continue to look at items such as technology, market dated service and other items within that category and we are working hard on it.

Marc Irizarry – Goldman Sachs

There was a FX impact this quarter?

Peter Kraus

Yeah. The FX impact this quarter was about $5 billion.

Marc Irizarry – Goldman Sachs

Okay. And then Peter, before we can just go back to sort of big picture question, the industry seems to be going nontraditional, you’ve obviously been moving a bit more into the alternative share if you will. And just curious on the scope of the alternative products that you are offering today and also the outlook for any transactions or deals to sort of build out, the scope of your alternative product.

Peter Kraus

So, we are exactly where we were last quarter which is focused on building out those services that we have identified as places where we think we’ve got core competencies and where we think we’ve got unique skills. We haven’t changed the lineup of opportunities to any material extent.

We think we’ve got half a dozen internal alternative investment activities that are marketable today and we could offer clients with good strong track records. We’ve got a few others that we’re developing and we’ll continue to do that. The fund to funds business is now fully integrated into the sales effort and into the private clients business and that will continue to grow, hopefully at an accelerated pace.

So that’s the plan. And I don’t think we need to adjust that because if we populate the services we have at even modest levels that will have materially positive impact on the future revenues and profitability of the firm. I think in terms of acquisitions, I’ll say what I’ve always said which is I’m not a huge fan. I think that there are times when you could be opportunistic. We’ve done that.

We’ll continue to do that when we see those kinds of opportunities, we continue to be a franchise that people seek, the distribution system and the distribution strength continues to be a -- from outsiders perspective looking in, a very attractive thing to be a part of and that gives us an opportunity to see lots of increase. But we are choosey and picky and we’ll do what we think make sense within strategies that we’ve discussed.

Marc Irizarry – Goldman Sachs

Okay. Great. Thanks.

Operator

Your next question comes from the line of Jeff Hopson with Stifel Nicolaus. Your line is open.

Jeff Hopson – Stifel Nicolaus

Okay. Thank you. On the institutional side or the redemption still concentrated in large CAP? Any sense if -- is that still a company issue or industry issue as far as you’re concerned in any patterns that you could expect in the future for the large GAAP?

Peter Kraus

Yeah. The redemptions are still concentrated in large CAP within our lines bursting and as long as we have redemptions, I would expect that pattern to continue. Within the industry, I think it’s more complex, there is A shift out of last CAP that’s true, but it’s more a shift, I think there is a three shifts underway on the equity space. One is outer -- out of equities will stop. So, outer equity into fixed income alternatives, whatever has not.

Then the second shift is outer domestic into global and then the third shift is within your domestic pie out of active and into passive. And whether the shifts -- those three shifts turn out to be secular or just very long terms on was semantics that they were for final shifts. And they are happening by the way in just about every pension for marketplace we worked.

Jeff Hopson – Stifel Nicolaus

Okay. Great. Thanks.

Andrea Prochniak

Do we have any follow-up questions?

Operator

We have no further questions at this time.

Andrea Prochniak

Thank you everybody for participating in our conference call, we’ll wrap up now. Feel free to contact Investor Relations with any questions you have throughout the day. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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