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AllianceBernstein Holding L.P. (NYSE:AB)

Bank of America Merrill Lynch Conference Call

November 15, 2011 3:00 PM ET


Peter Kraus – Chairman and CEO


Cynthia Mayer – Bank of America/Merrill Lynch

Cynthia Mayer

Good afternoon. And welcome to the Alliance presentation, Tuesday. It obviously been kind of a tough year for Alliance with assets under management continuing to show outflows but pace is improving at least based on our estimates for October and despite the outflows, Alliance hit $424 billion as one of the broadest most global asset managers, assets in all product types, pre-channels including very respected private client business.

With us here today is Chairman and CEO, Peter Kraus. Peter has been CEO since late 2008 before which he was at Merrill Lynch and before that Goldman Sachs Asset Management.

So, with that, I’m going to turn over to Peter and then we’ll come back for questions in 25 minutes.

Peter Kraus

Thank you, Cynthia. And I do think we have had our challenges. But I’m pleased to be here talking to all of you about AB and what we are and what we can do in the future? So with that, let me start with an overview of AllianceBernstein. What we are? Where we are? How our business is evolving to meet client needs, our challenges and opportunities?

Secondly, I’d like to review our long-term strategy. We’re nearly three years into executing our long-term strategic plan and that is to position the firm for success, and even with the challenges this market has presented, we are making progress on that. So at the end, I’m happy to take questions as Cynthia mentioned, so let’s start.

So here is a few of AB’s asset management business as it looks today. People who describe us as a value equity shop clearly have been paying them much attention over the last few years. We historically had more of an equity bias for sure.

However, since 2008, we’ve invested in leveraging our strong investment performance in fixed income by launching new products and expanding overseas in both institutional and in retail. We’ve also focused on equity beyond large cap, where we see opportunities for growth and where clients are demanding innovative new products and services.

Today, fixed income represents just over half of our total AUM of $424 billion, core large cap equities is about a quarter and new and growing categories like asset allocation, alternative and equity beyond large cap represents a significant share as well.

Institution remains our largest channel at 56% of AUM but the success we’ve seen in retail particularly with international clients has made that business more prominent in our mix. The stability of private clients has also been a constant drought and important reminder and our global footprint is reflected in a client base that’s now about two-thirds U.S. and one-third non-U.S.

It’s also reflected in our people who are on the ground around the world as you can see, with more than 290 buy and sell-side analysts in major markets on every continent, our dedication to a research driven culture remains and is truly global and integrated.

We also continue to invest in both global expansion and innovation in our industry leading sell-side franchise Sanford C. Bernstein. We now have over 400 SCB employees in seven offices in the U.S., Europe and Asia. We’ve added 16 analysts in Asia this year and expect to meet our target of 12 publishing analysts by the end of next year.

In Europe, our research profile continues to grow. We hosted our Fifth Annual European Conference this year with record attendance that’s tripled since our first conference. And in our new business initiative, derivatives, trading and U.S. electronic trading in Europe keep growing even if the markets have been challenging.

We have held our edge in U.S. research always ranking high in independent annual research review, as well as ranking for their clients. This is a business that averages hundreds of media mentions a month. So we feel very good about our reputation as thought leaders in the business and in growing our profile overseas.

From one leading franchise to the next, our unique private client business also sets AllianceBernstein apart. The stability of the business which we haven’t focused on all that often over the past few years is a testament to the strength of our advisors and their enduring relationships with our clients. We’ve maintained stable AUM and a client base because our people have stayed committed to our investment philosophy and our firm.

Beyond client retention, we well exceed industry standards for other metrics like revenue per advisor. Yields remain steady when the 70 billion in private client AUM and the mix has continued to improve. Private client contributes about a third of our firm’s topline and revenues are up 5% year-to-date. It’s a great business for us and it’s a great business for us to be in.

So that’s who we are and what makes AB unique. Now I want to spend a few minutes on how we’ve been evolving our business over the past three years to be more diversified and to capitalize on the long-term growth opportunities that we see in the global marketplace.

By investing 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 the firm AUM and the fees these asset categories earned have gone from less than 40% of our total on an annualized basis to over 60% today.

Certainly, the contraction of our large cap equity business has been a major factor in these other areas growing in percentage terms since the end of 2008. But we’ve grown them organically as well.

In the 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 2008 and its fixed income of the $50 billion increases in AUM, $10 billion has come from net new assets we’ve attracted through consistent performance of our new and legacy products.

We’ll keep focusing on these growing areas because they play a critical part in our long-term strategy to position AB for success. The plan we’re executing is build on four primary initiatives, although we’ve mentioned these before maybe I’m repeating.

First and foremost, restore our performance track record and our client confident. Second, diversify our business to provide balance and support stable growth in many different market environments.

Third, meet the evolving client demand for innovative new products and services. And lastly, improve operating leverage and financial performance for our unitholders. For the past three years, we’ve paid steady progress in each of these areas though at times difficult to see but it’s taken one by one.

This slide highlights, where we have top performing strategies for the one, three and five-year periods in the areas that represents the best long-term growth potential. Being competitive in large asset categories is the only way we can win over consultants and clients.

You can see how strong fixed income has been, even taking into a tough third quarter. In many cases, our services are outperforming much larger players in the space. Our global fixed income ranks in the top two quartiles for the one, three and five-year periods. U.S. core fixed income we rank top quartile for the three-year.

Emerging market debt is a $285 billion category that has seen significant flows over the past year, we performed very well over all those periods. In equities, we’re very strong in small and SMID Cap growth, top 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 showing far more services on this slide. Yet, we’re encouraged by the strength we have in the areas beyond large cap equity and we’re focused on diversifying our asset base and client’s offerings. And many of our core large cap services recently in the month of October for example had a very good selling.

We also find an encouraging and investment strategies that are working well in the current equity markets are also working for us. This slide shows some of our investment portfolios at the short duration end 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 performing well. Equity income and U.S. and global market neutral, newer strategies of ours are outperforming for the year-to-date, as this our select equity strategy brought over by Kurt Feuerman.

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

We’ve recognized that the underperformance on the right side of the slide represent a much larger share of equity AUM than the outperformance in the left. But our equity assets are concentrated in -- and our equity assets are concentrated in long duration strategy. I’ll talk more about this in a moment about the new products we are introducing as part of our commitment to deliver a broad set of investment solutions to our clients.

At the same time, we still believe our long-term portfolios are positioned properly. We’ve been in a period when traditional principles of investing like low average long-term earnings growth potential on the growth side and low P/E and price-to-book and value investing seems to no longer imply.

With 40 years of experience tells that the world investing have not changed for good. In fact, we’ve seen more rational markets in the fourth quarter to-date than we have seen all year.

We expect the market will come around on fundamentals like earnings growth, free cash flow, yield and evaluation, and when that time comes our consistency and discipline will once again be considered virtues.

Even when performance turns in a sustainable way in large cap equity and we know that it will we will never return to our over concentration of the past. We see too many opportunities in the world to exploit.

Fixed income is the most obvious example not only is this -- this is our largest AUM now, it’s showing the greatest non-US growth and we have broadened our product offerings and our client base.

Since beginning of 2009, we have launched more than 30 new fixed income products, two-thirds of them for international clients. During that time, international AUM has grown by more than 50%.

Retail another success story for us here and abroad. By refocusing on product innovation we’ve revived and strengthened our client relationship. It’s hard to believe now, but we just -- but we launched just one new product, one new product in all of 2008. Since then, we’ve launched 52 new products but together have gathered $11 billion in assets.

Each year we’ve introduced more products than the year before and with four new launches in the third quarter, we’ve introduced more offerings for year-to-date 2011 than we did in 2010.

Again, we focused on non-US markets for potential growth. Of these new products, 10 were offered to the Japanese marketplace and eight to Asia ex-Japan. You can see that the focus comes through on our year-to-date retail sales more than half are to Asia and Japan.

We’re also under something with new initiatives we’ve cultivated and invested in for years. Game changers like customized retirement strategies, target date funds for DC plans $11 billion today, dynamic asset allocation, a strategy for dampening volatility without sacrificing returns we started in our product line channel and if since taken to both retail and institutional as well $25 billion today. Emerging markets are very important fast growing in part of world $34 billion today. Alternatives in areas that can represent high growth and high return $13 billion today.

So let’s spend a little more time on few of these. For each year that passes in each new industry survey that comes out, it’s clear all the time that the shift from defined benefit to the defined contribution is here Tuesday.

The DC market could be worse than $6 trillion within the next 10 years and if target did keeps growing like it is, it could be half of that or $3 trillion, 10 times the current market size and larger than all of DC today.

Even a small share in a market that size, represents a sizable business and we think that our unique innovative customized retirement strategies offers a position for us to capture our piece of that opportunity.

In the past five years, we built an 11 billion CRS business. We think it will be multiples of that. We signed blue chip clients like United Technologies, Merck, Yum! Brands in the State of Washington. Two of our largest clients just funded mandates this quarter totaling $2.6 billion.

CRS is not only representing a larger share of potential new institutional business, it was 41% of our $7 billion pipeline at the end of the third quarter. It’s also becoming a more profitable business as more clients hire us for asset management services rather than just to drive path alone.

Dynamic Asset Allocation another differentiated strategy bar that is playing a critical role in our long-term strategy to meet clients evolving needs. We introduced DAA in the private client channel in April of 2010 as the way to mitigate volatility in client portfolios without sacrificing returns. Needless to say, this year’s markets have put this offering to the test.

Slide 14 illustrates how we’ve altered our equity ratings over time to adjust to market dislocations like the Japanese earthquake and European debt crisis. Most recently, we were significantly underweight equities during the market down drift in September.

The bottom left chart shows how our approach is tailored to different client and the bottom right chart shows how in each case we’ve managed with DAA to reduce volatility but not at the expense of returns.

From inception through the end of October, DAA has reduced volatility by 2.1 percentage points for the average 80/20 equity fixed income investor, 1.5 percentage points for the average 60/40 investor and 0.5 percentage points to the average 3070 investors versus accounts without DAA.

And while DAA was designed to mitigate volatility without sacrificing returns, we found that for clients with DAA have on average and slightly 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 feel comfortable on a volatile market with DAA.

This along with the trusted relationships of our advisors, that our advisors have with clients that’s helped us retain relationship and assets through prime time. And to grow DAA business faster than any other new product launch in our history. Today DAA AUM totals $25 billion with about 70% of our clients participating through asset overlay.

Since we’ve taken DDA to the insurance and sub-advisory clients as well with similar sets, using DAA’s volatility management capabilities we could de-risk portfolios in times of high volatility and increase exposure when opportunities seem to outweigh risk.

We now have five of the top 20 U.S. insurers as DAA variable annuity clients. Gross sales have averaged nearly $290 million per month since June and total AUM is $1.4 billion as of the end of September.

We offer other risk management services as well to insurers including expected tail loss parity, a quant only strategy seek to protect against extreme losses, risk completion services that seek to offset active risks for insurers like the crowding that happens when there are too many active managers in a particular trade or factor and leveraging our trading platform to execute on client algorithms that track risk and adjust allocations accordingly.

For example, tracking risk and shipping assets between equity and fixed income in relationship to trends and market volatility. We are introducing Volatility Management in CollegeBoundfund 529 offering as well, which is the nation’s second largest advisor sold college savings program.

With Volatility Management we can reduce exposure to equities based on trends and risks and return environment and de-risking the bond, cash and hedge currency exposure. These services show how we are using our capabilities to meet client needs and tailor specific strategies to any market environment.

Similarly, we are tailoring our emerging markets investment capabilities for clients in our new emerging markets multi-asset offerings EMMA. Emerging markets is an asset class that is really only been around since the mid-90s, but during that time it’s exploded in an area of long-term opportunity and growth.

And we’ve built a track record of success in both value and debt investing, outperforming the benchmark in each case by around three percentage points since we launched the services. We’ve strengthen both. We felt we had something compelling to offer clients looking for multi-asset solution by combining them.

We rolled out EMMA in the U.K. and Europe this summer, then in the U.S. private client and institutional early this fall and we just launched a LUX fund in October. Like DAA, EMMA has designed to dampen volatility without sacrificing returns and managed by the portfolio managers not just a formulaic approach.

And also like DAA, it’s off to a strong start, launched when markets were most volatile, MS Boston inception has been muted by its debt waiting while performance has been better than its equity benchmark. Clients like it too, more proof that we can engage them with new offerings and strategies they are performing well.

The last area I’ll touch on where we are introducing new offerings to meet client’s demands is alternatives. Through small acquisitions and target and team with that, we’ve been building a diverse alternative platform for three years.

Today, we have about $13 billion in alternatives AUM across areas like fund-to-funds, market mutual, long short equity and distressed assets. We’ll keep looking for opportunities that bolster the strategy, which we see is offering high return to clients over the long-term, but we remain selective, as well as in terms of both the teams we bring in and the strategies that they manage.

Of course, our own financial performance is a primary factor and a final tenant of our long-term strategy positions AB for a strong future. The market certainly haven’t made this any easier on us but we still made progress.

The two areas we’ve focused most are in occupancy and IT operations expense and in both areas we’ve achieved quite a bit of rationalization. You saw then in both the third quarter 2010 and in this most recent quarter, we recorded expenses associated with consolidating office space in the New York Metro area and in the City of London.

Overtime, we are aligning our space and expense associated with it with our needs. We’ll keep evaluating this in every major market where we operate and analyzing where it’s possible or feasible to exit leases for sublet space.

We also just announced today, the successful outcome of an effort to enhance our IT operation efficiency, which is underway for quite sometime. We finalized an agreement with State Street to outsource some of our operating services to them.

These include trade settlement, portfolio administration reconciliation, client reporting and performance measurement per investment services totaling about $300 billion AUM.

In the transition AB employees effectively became State Street employees, this improves our operating efficiency and reduce our operational risk in a way that is seamless to our client.

As importantly for us when revenue growth returns, we scaled our business to see an immediate impact on margins. Consequently, we can spend more time focusing on our investments and producing returns, and providing financial success to our unitholders.

So that’s how we’ve made progress over the past three years on all of our key long-term initiatives. What have we done recently, each quarter we update the Street on new accomplishments and here they are for the third quarter.

On the performance front, our global fixed income franchise held up well in difficult times, they’ve maintain high one, three and five year standings. U.S. small and SMID Cap growth and relative value also outperformed.

As for diversification, I mentioned MS launch during the quarter. We also added new mandates to our institutional pipeline and diverse services like U.S, Europe and emerging markets fixed income, as well as Japan equity.

With innovative new offerings we shared that CRS has grown organically by 45% year-to-date. And through the third quarter Dynamic Asset Allocation did exactly what it was designed to do, it reduced volatility and client portfolios during turbulent time. Finally, with financial performance, we finished consolidating our London space and we’ve been diligent in managing expenses in a declining revenue environment.

Even as we demonstrate new progress in our long-term strategic initiatives each quarter, we aren’t satisfied. We’re constantly focused on doing more, faster to restore client confidence and trust and to return to growth.

At the same time, we feel it’s important to recognize how far we’ve come, as a firm doing some extraordinary challenging times in global market and to acknowledge all this going right to the firm right now and there is a lot.

Fixed income franchise continues to outperform virtually across the Board and to grow and to thrive here and abroad. We are seeing pockets of strength in equities. Clients and consultants are engaging with in a way we haven’t seen in years, willing to consider us for searches, when we can show them what we have done in those services and the performance they are looking for.

Our revived retail complex is enduring a period of extreme uncertainty fueled by success of -- success with new products. Our private client business is proving in just how important and valuable strong client relationship and attentive client service are in turbulent times.

And our sell-side research business is one of the very few in the world that is extending its global reach and raising its profile while still contributing significantly to the firms bottom line. To me, that’s a lot to be proud of, I hope you agree and see like we do that there is only more progress to come.

Thanks for your time. Happy to take questions.

Question-and-Answer Session

Cynthia Mayer

Quick question on the State Street outsourcing. How should we think about the savings of that or the -- any impact of current period expenses? It sounded like you were saying it will position you well as the asset base comes back, but what about the current period?

Peter Kraus

So as you know in any kind of an outsourcing like this which is as large as this transaction, there is a lot of incremental expense that needs to be incurred. We need to run duplicate services, duplicative operations, cut mapping over many different processes from our current services to State Street that’s all being absorbed within the process and we’ll have no negative impact on the P&L during the time of the transition. In fact we expect that our expenses will remain relatively constant through that time period.

What it does give us is expense variability. So when revenues increase or decrease, we will be able to achieve both scales on the way up and not suffer as much on the way down. That variability is extremely valuable to the unitholder and it also allows us to focus as a management team on providing more scaled technology and also producing capabilities to front-end of the business i.e. the investment.

So in the next year plus, we would expect not to see any significant financial effect of the State Street outsourcing, that outsourcing effectively becomes finalized some time in the two years out and then, when there are changes in revenues we’d expect to see some of the financial gains.

Cynthia Mayer

Okay. Maybe one question on the DDA is it?

Peter Kraus


Cynthia Mayer

DAA, thank you. How is that -- what is the fee for that and how should we think about the benefits of it. Is it an overlay fee and it is -- the primary benefits are basically asset retention and just actually a way to bring people in or is it itself quite profitable?

Peter Kraus

In the private client space, we don’t have an incremental fee for the DAA activity because we charge as, I think you all know a fee for all the services that we provide. It has done though in the private client space exactly what you said, which is differentiate us from other people operating in the private client activity.

One of the few firms perhaps the only firm that can actually offer a global asset allocation service that it has dynamic and as effective as this is. Many other organizations offer an asset allocation strategy but either offered in a mutual fund or separate account or they offered as advice, they don’t offer as an active management that is actually run by portfolio managers on a day-to-day basis.

Secondly, when we offer the DAA services outside of the private client channel, they carry fees that are commensurate with the kind of channels in which they operate, so they don’t look any different than any other service that we would sell in either retail space or in a sub-advisor base.

Unidentified Analyst


Peter Kraus

No. Bob, it’s both – it’s institutional and retail and the growth we are seeing outside of the private client sector today is predominantly in the insurance driven variable annuity market, which I guess you could call quasi retail or quasi institutional.

Cynthia Mayer

Can I ask one more?

Peter Kraus

Go ahead.

Cynthia Mayer

So your sell-side research always does really well in the pools and I’m wondering if you feel as though you’re extracting the full value of that yet and also, if there’s going to be -- if you see any consolidation in that business would you be interested in acquiring more in that business?

Peter Kraus

So I think the places where the sell-side business is added fully leverage potential subject to increases or decrease in the marketers in the U.S. market, we’ve been operating here for many, many years and are pretty efficient and pretty well penetrated. We can always do better with our clients. We can always provide more service. The algorithmic activity has grown in the United States and that has provided incremental revenues overtime, but there’s not huge breakout opportunities in the U.S.

However, in Europe and in Asia that is not the case. In Europe, as I said, we just had our Fifth Annual Conference there. And I’d say we’re becoming a well established provider of Bernstein Type Research to the buy side in Europe. And we’re also beginning to establish bigger and bigger trading platforms and more attractive services for that client base. Perhaps the most exciting opportunity that was Asia, where we have a number of analysts publishing at the present time seven moving to 12.

We signed up lots and lots of clients in that space and we’re just beginning to screen on actual trading activities. We have a very differentiated product in that marketplace, while Bernstein always has had a differentiated research product, it’s even more or so in the Asian space that is fewer if anybody that’s actually providing same style of research, same quality, same debt and it’s resonating very well with that client base.

So I think the opportunity longer term for SCB is consistent growth in the United States, we continue to take market share as we go into the global financial crisis and continue to prove that till today. And market share growth in Europe and an establishment of the business and fast growth in the Asian world.

Cynthia Mayer

Just as a follow-up to that. How does the margin of that business compare to the asset management business and if there is a real difference of that that will give you pause about growing it further?

Peter Kraus

I think the -- first of all, there is a little bit of a lack of correlation between the two. As we’ve seen actually in 2008 and even 2011 when markets actually are underperforming, there tends to be a lot of volume that comes with that and actually SCB’s revenues have improved. So we like the fact that there is some lack of correlation between the buy-side business and asset growth end markets and volume.

So wherever the margins grow you are sort of like that, because it’s stabilizing. But secondly, the margins are on the average, slightly below the averages of the asset management business. More importantly, the asset management margins can expand rapidly with large size, that’s more difficult to do in the sell-side business.

The CAGR of margins in the sell-side businesses is tighter, but then again, there is less volatility to it. So, it’s a little bit less correlated. They create some consistency. It’s got a very good growth track to it. It tends to track long-term volume growth. If you look over 20, 30 years in financial markets you see 12%, 13% growth in transaction volume overtime. And SCB benefits from that and will continue to benefit from that.

Unidentified Analyst


Peter Kraus

Thank you.

Unidentified Analyst

Could you speak a little bit about your niche and the financial advisory business and what your expectations are going forward?

Peter Kraus

Sure. Our financial advisory business first overall is a U.S. based business and we would intend for it to continue to be focused in that area. Secondly, we think that we are unique in that space and it’s hard to say you’re ever unique, but we think we are unique in that space, because one, we’re nation-wide. Two, we offer a product or a service that is very focused on the overall generation of wealth within a risk managed solution set and that’s predominately what we are providing people not product A and product B and product C.

Within that offering of course, we have historically provided our clients with access to our equity product and we continue to do that and we have offered clients access to our municipal services, which we continue to do all of which were managed on an institutional basis. And differently in the last two years, we have actually offered our clients opportunity to invest in alternatives outside of AllianceBernstein.

And so, what we said is, in the long-only world, the dispersion of returns between long-only managers tends to be tight. You are confronted with adverse selection when you are hiring managers, you tend to hire managers that have good performance and fire them when they have bad performance. They have styles and biases. If you stick with them over long periods of time and they are good managers, they outperform. If you fire them when they have weak performance you don’t benefit when they come back. So we tend to have a lot of consistency in the long-only side of the business.

In the hedge front side of the business it’s different the dispersion of returns are much greater, benchmarks are not available, there is more risk, more difficulty in actually determining whether managers stick to what they say they’re going to do. And so there we think you still can’t tell a manager is going to outperform or underperform but you definitely have a higher probability that managers migrate back and forth and that manager is actually changed and that they have unanticipated risks that you need to address.

So we choose managers from the outside point of view in the alternate space but in the long-only spaces we still are committed to our long-only and municipal offerings. That I think is -- continues to be a unique, sorry, intellectual framework for the private clients. In terms of how we prosecute that business from a commercial point of view, we continue to hire new FAs every year. We will not stop that. We will continue to grow that business. It is critical that you have a new group of people each year.

In order to grow the private client business in the mid-single-digits, you need to hire new people, you need to retain your existing base. And if you do that you will be able to grow the business that we call it 5% base. If assets grow at 5% you get the ten if assets grow at slightly more than that. You will feel better and then the existing advisors bring in new assets and that’s how you get the sort of the mid-teens.

So I sort of see the private client business in three pieces, new people you bring in, grow the advisors by 5%, the actual market grows the assets by 5% and if the advisors do the job for which they are compensated they bring in new assets at 5% and you can get mid-teens returns. So over the cycle you actually can grow these businesses in the low-teens to 15% over time.

Unidentified Analyst

Sorry, is this better.

Peter Kraus


Unidentified Analyst

If you think about the location of your business, the wirehouses versus IBD and again, you have a very unique position in many regards. How do you see the fit?

Peter Kraus

Well, I think the wirehouses come from the perspective, historical perspective of being distributors. They have migrated from distribution to managing assets or to managing managers, but they still fit within a very large organization that uses them as a distributor of product.

We are not a distributor of product. We come from the perspective of providing advice on wealth and managing that. That’s a distinct fundamental and structural difference. Where also our compensation system is different, our compensation is focused upon servicing clients and bringing in new assets as opposed to getting a constant percentage of compensation no matter what you sell.

So those differences are structural and I believe are sustainable and will remain. And we have a different intellectual framework that also -- that accomplishes is connected to that strategy and that’s what I think makes the difference and I think that makes it sustainably different.

Now we have to perform like anybody else, but I think if we have reasonable performance that business can grow and you have great performance of growth in that. As we showed in the slide and as I said earlier in my comments, we don’t talk about that often, it’s very sticky, it’s very stable and that’s been with very difficult performance in our part and in very difficult market.

Unidentified Analyst

I only have one microphone, we have to share. Thank you. I wonder, if you could comment a bit on the larger cap equity strategies, you are still trying to turn around and particularly you comment suggested that they are still quite market directional in their success ratio if you will and whether longer-term that’s where you want to be or any thoughts you have on whether you could make them more consistent or less sensitive to the direction of the market I’d say in their performance?

Peter Kraus

Yeah. That’s a great question. And frankly we spend a fair bit of time thinking about the sort of intellectual framework for this. So part of what you saw in the slide was a reference to short duration and long duration. So the way we are trying to think about what we are doing for clients and what I’m going to describe, I think we are trying to actually build out.

But if you go back 30 year ago, we all invested in equities and bonds and if you -- and then I states to you in U.S. equities and U.S. bonds. And then we describe that wealthier on European equities maybe that little bit differentiated from U.S. equities and then you have large cap and small cap and value and growth that are emerging in one and on SMID whatever and we had all these different asset classes.

And then in 2008, we found out that squeeze all these asset classes look like they’re very correlated, it’s not like that, they’re also correlated with credit. So everything that you did in terms of the diversification actually diminished in terms of the impact that the diversification impact that it had, of otherwise as things weren’t bad and it’s -- it is true as they create diversification. But their actually purer diversification benefit has diminished as larger pools of capital are invested more globally around the world.

But we all think about our equity business is being a beta of one. So why should every manager that we have along on the equity side be a beta one. We do invest in hedge funds, they have less than one beta. So why shouldn’t long only managers also be thought about or think about having betas of less than one.

We also don’t think about the factor exposure in equity. We don’t think about what managers are investing in short duration equities versus long duration equity. What do I mean by that? So, a company whose earnings are certain or relevantly certain with high dividend in a very high discount rate environment are going to have a higher net present value than a company that’s growing either from growth or because it has value earnings that are going to accelerate over time, those longer duration assets or long duration securities much less present value and much more volatile in the market.

So, rather than abandon what we know actually produces value over time, excuse the pun, which is cheap cash flows, we don’t want to do that. We are still committed to the large cap equity strategies we have, but we want investors to think about their portfolios slightly differently and say, look if you decided that you want no exposure to long-term cash flows that are cheap and will grow, we just think that’s dead wrong.

If you agree that you need some exposure, we can debate what manager, but you ought to have some exposure. Now you need some exposure in short duration equity and you need exposure to all these other asset classes and what about betas why should they all be one maybe they should be 0.5 or 0.6 or 0.7. So what we’re trying to do is to approach investors and explain none of us have the governance capability to move into short duration out of short duration into betas of 1 down to betas of 0.5 with the market timing that produces results.

So what we actually need and by the way, none of us thought we are just winding up few large caps small cap value growth that was one reason for diversification same applies to this. So we have to have some diversification in our portfolios and what we’re trying to do is to create a platform of investment services in the equity business that allows clients to view that.

The core vehicle for that is the private client business. That’s what makes us unique the private client is because we can actually allocate the private clients capital to those different factors and those different services. That’s what we’re trying to go. Now, we said it was easy.

Unidentified Analyst


Peter Kraus

I’ve got three minutes and 54 seconds left.

Unidentified Analyst

What are you seeing in terms of institutional mandates, searches activity with consultants and advisors?

Peter Kraus

Well, as I said in my comments, we went through a couple of years where it was pretty tough. But in the last even six months, certainly last three months, we’ve had significantly improved discussions with consultants, it’s not like we stop talking to them, but they’re now talking to us and so -- to answer the gentlemen’s question at the back, some actually are approaching us and saying, we keep looking for deep value managers, they aren’t any left and the reason why they are not lot left is because most people migrated away from that tragedy, because it wasn’t performing particularly well and we can all argue whether that’s right or wrong but that’s one place where we see it.

We see increased activity in the multi-asset DAA space, MS space significant activity in the fixed income, mid small cap, specialized equity services and in this lower volatility long-only space and in the hedge funds that we have developed, not all the hedge funds some are new, but in many of the hedge funds we have.

So that’s making us feel more optimistic about how we can actually build the business now we know that’s a process we’ve done that before. It takes five years to actually make that really big, but once you get started and if you continue to have performance we will have success. And given our relationship with consultants and the significant influence that we’ve had with those organizations over time, I suspect we will be successful there. Well, thank you very much.

Cynthia Mayer

Thank you very much.

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