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AllianceBernstein Holding L.P. (NYSE:AB)

Q4 2011 Earnings Conference Call

February 10, 2012 8:00 AM ET

Executives

Andrea Prochniak – Director, IR

Peter Kraus – Chairman and CEO

Ed Farrell – Controller and Interim CFO

Jim Gingrich – COO

Analysts

Michael Kim – Sandler O’Neill

Bill Katz – Citigroup

Matthew Kelly – Morgan Stanley

Cynthia Mayer – Bank of America Merrill Lynch

Alex Blostein – Goldman Sachs

Chris Spahr – CLSA

Robert Lee – KBW

Operator

Thank you for standing by, and welcome to the AllianceBernstein fourth 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, and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be replayed for one week.

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

Andrea Prochniak

Thank you, Christie. Good morning, everyone, and welcome to our fourth 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.

Our Chairman and CEO, Peter Kraus; and our Controller and Interim CFO, Ed Farrell, will present our financial results today. Our new Chief Operating Officer, Jim Gingrich, is with us as well. He’ll participate in the question-and-answer portion of this call.

Now I’d like to point out 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 2011 Form 10-K, which we filed this morning.

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

Now, I’ll turn the call over to Peter.

Peter Kraus

Thanks, Andrea, and thank you all for joining us for our fourth quarter earnings call. Today, I’m going to go through our business highlights. Ed will, of course, review the financials. And as Andrea said, I’ve asked Jim Gingrich, our new COO, to join us well. The three of us of course will take any questions that you may have at the end.

Let’s start today’s presentation with slide three. In a year of extremely volatile markets and risk aversion on the part of investors, it was a difficult year for active managers to outperform. Performance in our largest equity services disappointed, and we ended up with greater net outflows in 2011 than in 2010. AUM declined by 15% in 2011 and average AUM was down about 5%. At the same time, however, we had $56 billion in gross sales in 2011 and nearly a $165 billion over the past three years. We are profitable with very little long-term debt and high credit ratings from the agencies. And we’ve returned a $146 million in distributions to our unit holders this year. Also, we finished the year with quarter-to-quarter improvement in gross sales, net outflows and end of period AUM.

Let’s look at the quarterly flow trends those are on slide four. Net outflows improved across all three channels from the third quarter to the fourth. In fact, we had our lowest quarterly outflows since the second quarter 2010, and that includes outflows we sustained as a result of asset sales by the AXA Group. During 2011, AXA sold its Canadian and Australian businesses. We managed about $16 billion for them and expect to lose most of these assets over time. In the fourth quarter, we had outflows associated with these dispositions of nearly $4 billion, representing approximately $5 million in revenues, and we expect to see another $6 billion in outflows in the first half of 2012. This morning, we released our January AUMs, and I’m sure you all saw that it was $421 billion, up 4% from year-end, reflecting a combination of stronger investment returns in performance and lower net outflows across all three channels.

Now, I’ll spend sometime on the channel specifics, starting with institutions on slide five. This business had $17 billion in gross sales in 2011, fuelled largely by ongoing strength in fixed income and customized retirement strategies. Together these two areas represented 80% of our gross sales last year. Our momentum in non-US Fixed Income shows up in our gross sales makeup. Nearly a third were in Asia and Japan. Fixed Income and CRS are the largest share of our pipeline as well.

In the fourth quarter, with several large and expected CRS fundings, our pipeline decreased by $2.7 billion. However, we also had about $1 billion in new Fixed Income mandates to come in and fund during the quarter, those included high yield, investment grade, and global bond opportunities, so these never showed up in the pipeline. Yet, investment performance we all know is what truly drives the business. And slide six shows where our performance was the strongest in last year’s extremely volatile markets.

In Fixed Income, Global Fixed Income and Global Plus beat their benchmarks in 2011. The three-year story is much stronger. More than 85% of our Fixed Income assets are in products that beat their benchmarks for the period.

In Equities, we found that for most of 2011, strategies that focused on shorter-term market dynamics like earnings stability and dividend yield outperformed. While strategies focused on longer-term fundamentals such as earnings growth potential and attractive valuations lagged. Most of our core equity services fall into this category. In the shorter time horizon strategies, we’ve introduced more recently like US and Global Market Neutral and Select US Equities, we did well. In longer time horizon equity strategies standout performers were small and SMID cap growth. In fact, these strategies have delivered top quartile performance with the one, three and five year periods outperforming their benchmarks by anywhere from 500 basis points to nearly 900 basis points.

Turning to our Retail business, which we highlight on slide seven, we delivered gross sales of $31 billion in this channel last year. Two-thirds of those sales were in Fixed Income and the rest mixed amongst equity and index strategies. Asia accounted for more than half the total gross sales in 2011. Our Global High Income product is a top seller in Japan, Hong Kong and Taiwan in every asset class and every region the story in 2011 was the same.

New products have performed well to our sales. We have spent the past three years making up for a dry spell in product innovation for retail clients. As you can see the sales impact of that push has been exemplary. Each year we’ve introduced more retail products than before. 57 in total markets around the world and has together garnered $12 billion in new assets. New product sales grew each quarter in 2011 and totaled 20% of gross sales in the fourth quarter. For the year, they were 14% of total sales, more than double 2010 shares. Delivering both innovation and performance helps new offerings like Renminbi Income Plus and EMMA have performed well since launch and earned Industry Innovation Awards in multiple regions and channels.

Innovation is paying-off for our clients in our Private Client business as well. And you can see this on slide 8. Dynamic asset allocation, a strategy for managing volatility which we introduced in Private Client portfolios in April of 2010 has consistently delivered on what we designed it to do. By managing equity exposure and changing market environments, we’ve been to reduce risk by anywhere from 60 basis points to 240 basis points across our client portfolios.

Another happy outcome is we’ve also been able to achieve a positive return for clients with DAA overlay. As importantly, DAA has reinforced our role of trusted advisors to our clients in turbulent times, something that we’re known for. We’ve also kept clients properly invested and that’s resulted in retention levels unlike any other in the global wealth manager industry. I’m proud of how this business stands out from the rest, driven by the long and deep relationships our advisors have with their clients.

Our sell side business, which we highlight on slide nine, is another that’s unique in the industry. We’ve had our challenges here in the fourth quarter when volumes and volatility dropped sharply from the third quarter sites. You can see that in the chart on the bottom left. Yet, in terms of achieving the aggressive goals we set for 2011, this business didn’t miss a beat. In the US, we gained share even as transaction volumes and commission pools dwindle.

Great research makes the difference. Our analysts are top ranked in the US and five new ones launch coverage during the year. We’re getting the same reputation in Europe, where we had just another outstanding II showing. Six of our teams ranked number one in seven sectors. We also grew revenues and share in Europe and delivered record electronic trading results. In Asia, we became a full member of the Hong Kong Stock Exchange in the fourth quarter and we completed our sales and trading build out there. Expanding our global presence on the sell side was one way we demonstrated real progress in the firm-wide strategic initiatives in 2011.

Slide 10, however shows more of the year’s accomplishments, so let’s just take a few. I’d stack our Fixed Income business up against just about any other out there right now in the three-year performance category. And in Equities what worked in the markets in 2011 also worked for us. We need more assets in the areas where we’re outperforming. Our business is more diverse than ever before with Asia, the greatest share of our retail sales, and Europe a growing platform for us both on the buy and sell side.

We have offerings that are not only first to markets like secure retirement services, where we just started with our first client, they’re also best-in-class like CRS where client satisfaction ratings continue to be through the roof and where we’re growing by double digits each year. And on the expense front, we’ve made tough decisions in 2011 about spending space and staff levels that will position us better financially. Even more importantly, we spent 2011 continuing to evolve our business model to where we wanted to be.

As slide 11 illustrates, for three years we’ve been committed to reducing our over concentration in Large Cap Equities and investing in areas where we also see solid long-term growth. We’ve made significant strides. Our assets in areas beyond Large Cap Equities have grown from less than half of our total AUM at the end of 2008 to nearly 80% of that total at the end of 2011, a 44% increase. Fixed Income alone has gone from a third of total assets to more than half through both strong performance and net new assets. And asset allocation assets have doubled.

Our fee base has evolved as well. These areas have grown by 51% during that time. And where they once represented a little over a third of total fees, they are now nearly two-thirds. By growing in areas where our clients increasingly want to be, we’ve replaced nearly 60% of the fee revenues we’ve lost as a result of the Equities business being under pressure. Today we have a momentum in Fixed Income which is now our biggest business and in alternatives, asset allocation, and equities ex-large cap as well. And we also have Large Cap Equities; a business that we believe will provide attractive returns to clients over time.

Looking into 2012, and now I’m on slide 12, we will keep making progress on our long-term strategic initiatives this year. Every day we strive to do better and here is what we’re prioritizing. First, in Equities, we’re maintaining our unrelenting focus on delivering strong returns. At the same time, we’re working to balance our resources with the need of our clients and our own aspirations for this business. We have a strong commitment to our long-standing services. I am confident we can leverage both our core strengths and fundamental growth and value investing, and our new talent and services. Client come first. In this year, we’ll be even more focused on maximizing our institutional and retail sales and marketing efforts. We’ve got the products and distributions platform. This year is about executing efficiently.

It’s also about ensuring that in Private Client, we continue to be there for our clients with the right advice model for every income goal and investment horizon. Finally, we will be ever vigilant on cost in 2012. We’ve consolidated space in key global markets, we can do more and we will. We’ve reduced real estate expenses, this year we’ll also tackle other expenses like T&E and consultants and other fees. We’ve managed staff levels in response to trends at AUM and fee revenues; we’ll keep doing this as well in 2012. Everyone here plays a part in reducing our cost structure, so we can increase our margins when revenues improve. That’s truer than ever this year and beyond. What’s true as well is that in good times and bad, our people are this firm’s greatest asset. I know how committed we all are to returning our investment and financial performance at levels we know we’re capable of reaching. It will take time, but we will get there.

Now, let me turn it over to Ed, to review the financials.

Ed Farrell

Thank you, Peter. Before I review our financial results, let me briefly discuss the charge we took in the fourth quarter related to the change in our deferred compensation award program. As announced on November 17th, we implemented changes to our long-term incentive award program to better align employee compensation with the firm’s current year financial performance. We expensed all unamortized deferred incentive compensation awards from prior years, resulting in a noncash charge of $587 million. In addition, we expensed a 100% of the current year 2011 awards. As a result, we’ve reported a loss for the fourth quarter and full-year 2011. Our fourth quarter distribution of $0.12 excludes this charge.

Looking at our adjusted results on slide 14, let me review the fourth quarter adjusted financials at a high level, then I’ll go into some detail around the major variances. Sequentially and for the full year, adjusted revenues declined and adjusted expenses were essentially flat. Our adjusted operating margin was 7% in the quarter, down from 17.7% in Q3. In a moment, I’ll address specific items that reduced our margin in the fourth quarter. The full-year margin for 2011 was 17% versus 21.6% in 2010. Adjusted earnings per unit were $0.07 in Q4, a $0.23 decline from Q3. For the full year, adjusted EPU is $1.14 down $0.46 from the prior year. We repurchased 5.8 million units in Q4 at a cost of $75 million. Over the year, we repurchased 13.5 million units at a cost of $221 million to help fund obligations under our incentive compensation award program. For the December 2011 award, we issued 8.7 million units.

Let’s take a look at the GAAP income statement on slide 15. We had GAAP net losses per unit for the fourth quarter and full-year 2011 of $1.97 and $0.90 respectively. This is primarily due to the deferred compensation charge. Again, excluding this noncash charge, we’re paying a distribution of $0.12. Quarterly net revenues of $625 million declined 3% sequentially. Full-year net revenues of $2.8 billion were down 7%. Operating expenses increased a 107% sequentially and 19% for the full-year period, again primarily due to the deferred compensation charge. We had operating and net losses for the fourth quarter and full year.

Now, I’ll review our quarterly revenues and expenses in more detail on slide 16. Base fees declined by $53 million or 11% sequentially. About 60% of this decrease is due to the decline in institution and retail-based fees primarily driven by lower average AUM. The rest can be attributed to Private Client. We pre-bill the majority of our private client assets at the beginning of the quarter based on prior quarter ending AUM. Billable AUM for the fourth quarter was down 10% sequentially after difficult market period. Investment losses of $3 million in the quarter improved from $66 million in losses for Q3. We had gains in our deferred compensation related investments and lower losses in our venture fund.

As you saw in the earlier slide, Bernstein Research revenues decline $26 million or 22% from the prior quarter due to steep decline in volumes that Peter mentioned. Compared to the prior full year, the investment losses increased to $82 million primarily related to our venture fund, deferred compensation related investments, and seed money. Base fees were lower by 6% in line with the decline in average AUM over this period. These declines were offset slightly by an increase in Bernstein Research and distribution revenues. On an adjusted basis, revenues were down 12% sequentially, attributed to lower base fees and lower Bernstein Research revenues. For the full year, adjusted net revenues were down 5% to a lower base fees and higher investment losses.

Now, let’s review our expenses on slide 17. On a GAAP basis, Q4 operating expenses were up a 107% from Q3, due entirely to deferred compensation charge. Total comp and benefits including the charge increased 212% sequentially. Excluding the charge, comp and benefits of $299 million increased 5% as we finalized our annual incentive compensation in the fourth quarter. As we anticipated in our November 17th release, we increased our compensation ratio. The full-year impact of that true-up was realized in the fourth quarter.

In determining compensation for the year, we also made minor modification to adjusted revenue in compensation numbers we used to calculate our full-year comp ratio. In each case, we excluded the revenues and compensation expenses associated with the acquisitions we made in order to implement new strategic initiatives. As a result, our full-year compensation ratio was 50.3%. You can find more detail on this calculation in our 10-K. Headcount at year-end was 3,764 versus 4,256 at year-end 2010, versus the prior full year total comp and benefits excluding the charge declined by 6% in line with the decline in adjusted revenues.

Looking at our non-compensation expenses, promotion servicing were down 3% sequentially due to lower distribution related payments. The 6% year-over-year rise in promotion servicing can be attributed to increased business activity and new product launches that include T&E, overseas trade execution, and transfer fees. As a reminder, in G&A, we had an insurance recovery in 3Q of about $10 million. Excluding that credit, G&A expenses were flat sequentially. For the full year, G&A expenses excluding the insurance recovery increased 6% due primarily to increased portfolio services and professional fees. We recorded $7 million real estate charges in 2011, primarily related to the disposition of space in London. In 2010, we recorded a $102 million in real estate charges, related primarily to space in the New York area. On an adjusted basis, operating expenses were down 1% sequentially and flat for the full-year 2010.

Slide 18 summarizes the adjustments we make to get from GAAP to adjusted earnings. The deferred compensation adjustment is the net impact of investment gains and losses, employee compensation expense related to the mark-to-market deferred compensation and the noncash charge taken in 4Q 2011. We adjust for non-controlling interest as well. Q4 adjusted operating income was $37 million, a decline from a $107 million in Q3. Adjusted margin was 7% in the quarter. The factors that drove the margin contraction were deleveraging due to lower base fees, Bernstein Research revenues, and the fourth quarter compensation true-up. For the full-year, adjusted operating income was $414 million versus $554 million in 2010.

Now, Peter, Jim and I will answer any questions you might have.

Question-and-Answer Session

Operator

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

Michael Kim – Sandler O’Neill

Hi guys, good morning. First, it seems like CRS continues to gain momentum. So just wondering if the new fee disclosure requirements in the 401(k) channel, if those could have any potential impact, is it potentially a catalyst to gain further market share for the CRS business?

Peter Kraus

Hi Michael, thanks a lot for the question. No, we don’t expect that we’ll have an impact. What’s really resonating with our client is our business model in CRS, which is primarily focused on providing a open architecture and completely independent service of whether or not assets are allocated with AllianceBernstein. And clients like that independence, that’s really what resonates, and that’s why I think it’s continuing to grow, and it’s continuing to have a penetration in large client bases.

Michael Kim – Sandler O’Neill

Okay, fair enough. And then secondly, can you maybe just point to some of the specific reasons why the large cap strategies have underperformed? Is it a function of sector weighting, stock selection, maybe style drift on the part of some of your peers? And then beyond that, what are you doing to address those issues? Have there been any kind of meaningful changes on the investment management side in terms of a turnover more recently?

Peter Kraus

So excellent question, Michael. So we have said quite consistently as I know you have noted that we are very disciplined in our approach to both value and growth. I can’t speak for the competitors, because I don’t obviously know the facts. But that consistency in our core services has given rise to having consistent exposure to what I would characterize as normalized earnings, which are looking out over time in both growth and in value. And when you’re looking at over time in uncertain investment periods, discount rates tend to be high for that and the valuation therefore of those stocks hasn’t been rewarded. I would note that in the last 30 days or 40 days that that has been a significant change in the marketplace. And I suspect you’ve noted as well that when you look at the publicly available Lipper rankings for some of our core services that you’re seeing quite a different picture.

So whether there is persistency in that and how the markets look in the future, we don’t know. But we still remain committed to that style of investing for those services. What we’re doing about it is actually both launching and continuing to grow services that have a shorter time horizon, and those shorter time horizon services have performed well and have gathered assets and continued to, and we’ll continue to exploit that diverse investment platform. And you’ll see that in the future we’re going to invest and grow that.

Michael Kim – Sandler O’Neill

Okay. So no kind of meaningful changes in terms of the PM or analyst staff?

Peter Kraus

Well, some of our core services are larger core services, our PM groups have been consistent for the lives of those strategies and that remains to be the case.

Michael Kim – Sandler O’Neill

Okay. Thanks for taking my questions.

Operator

Our next question comes from the line of Bill Katz of Citigroup. You line is open.

Bill Katz – Citigroup

Okay, thank you. Good morning, everyone. Just coming back to the comp discussion, I was only curious, is that full-year run rate a reasonable outlook on a go-forward basis?

Peter Kraus

Bill, just so that I don’t make a mistake, can you describe what you mean by four-year run rate?

Bill Katz – Citigroup

Full-year, excuse me.

Peter Kraus

Full-year, full-year run rate. So the full-year run rate I think is slightly north of 50%, 50.3%. And we would expect that our accrual rates going forward would be as we said in the past not greater than 50%. And I think last year we accrued at 49% rate, so somewhere in there is we’re likely to find us.

Bill Katz – Citigroup

Okay, it’s helpful. And then coming back and looking at the businesses a little bit, you’ve obviously very strong Fixed Income, obviously very strong non-US, as you think about sort of a more sustainable margin, obviously 7% pretty depressive this quarter, just given the mix shift that’s going on, the geographic shift that’s going on, the business line shift that ‘s going on, what do you think the right margin could be if the industry is sitting around 30% round numbers in a more normalized back drop?

Jim Gingrich

Bill, it’s Jim Gingrich. I – obviously our margin at 7% is not something we’re happy with and is affected by the true-up that we had in the fourth quarter compensation. And I think we all recognize that our revenue is not consistent with our cost structure and our cost structure is not consistent with our revenue, so we’re working quite hard on both. And we would certainly anticipate striving to achieve a normalized margin that would be consistent with peers over time.

Bill Katz – Citigroup

Okay. Just one more big picture question. Thanks for taking my questions. As you look at the Private Client business in particular, it seems like the companies are having more success growing those businesses is to have a more of an open architecture platform. Is there any thoughts to revamping the strategy for the business to try and enhance the growth rate?

Peter Kraus

Thanks Bill for asking that questions, because I love talking about the Private Client business. Look, I think the Private Client business that we have has three very unique strategies and it creates differentiation in the marketplace, and frankly I think it is one of our greatest benefit. So we do three things differently than I think anybody else.

Number one is we rebalance people’s portfolios everyday. So I said in my comments that we have kept people invested in volatile markets, and that level of investment of both Equities and Fixed Income actually over time has provided our clients with better returns we believe than most everybody in the industry.

Secondly, what we do is we provide DAA to them. So the smoother ride concept which we do consistently across all of our clients with an investment process that we run on an everyday basis just like we do value or growth Equities portfolios or Fixed Income portfolios.

And lastly, we don’t engage in what is a very difficult prospect of telling when a manager is going to outperform or underperform. I’ve had a very hard time looking at manager listening to what they’re doing and saying, “Tomorrow, I know you’re going to underperform or I know you’re going to outperform.” So it’s very difficult to make manager selections. We have a number of managers in the firm and many of them have different alpha streams as you know, and we allocate to our private clients a diverse set of managers that have different risks, different time horizons of investing, and we are consistent about that. And we think that that creates a lower friction cost in moving between managers who have recently good track records or recently poor track records.

I would note importantly, however, that in the world of hedge funds where the dispersion of return amongst hedge funds is significantly greater, many times that of a loan-only managers we have an open architecture platform, we use outside managers almost entirely, we’re quite proud of that change, and we do think of that offers to clients open architecture where it really matters.

Bill Katz – Citigroup

Okay, that’s helpful perspective. Thank you very much.

Operator

Our next question comes from the line of Matthew Kelly from Morgan Stanley. Your line is open.

Matthew Kelly – Morgan Stanley

Hi, thanks guys for taking my question. So I was just hoping to get a little bit more color in the start of 2012 on conversations you’re having with the institutional clients and consultants what they’re looking for and how you’re fulfilling their needs.

Peter Kraus

Sure. So let me take that on two levels. I think that there is a continuation in the world – around the world for looking for a set of investment services that provide return but less volatility. That comes in lots and lots of different forms. And I think the institutional marketplace and consultant marketplace is struggling to figure out how to define that, because it’s not easy to define that in the existing sort of siloized asset classes that exist. So how much – how many services do you want to allocate to that are lower volatility and how do you measure that, and how many services are unconstrained investing like Global High Yield or Global Income for us which is a basically unconstrained fixed income service.

Global investing is absolutely still paramount. In fact, I think a few of any investors who think that they can easily select sectors or regions of the world. And so I think that we’re still seeing or witnessing a sense of the part of institutional investors, “Can I find the return on need with less volatility?” Having said that, I also think that we’re having a increasing number of discussions with our clients about how do they allocate to real pure value managers or procure growth managers that the population of managers that institutions are able to talk to, identify and feel comfortable with that are pure in those style has dwindled, maybe even significantly. And so we find ourselves at the table talking with our clients about that. Now, everyone knows that those strategies can be volatile and they have indeed been volatile, but I think an increasing number of clients are interested in that pure form of investing and the returns that can come with it.

Matthew Kelly – Morgan Stanley

Okay, that’s very helpful. So one follow-up from me then on your alternatives platform, anything you’re not currently offering that you think is a big potential win for you or an opportunity set.

Peter Kraus

We’re actually quite comfortable with our alternative platform. We have launched a number of new services. We know by the way in all those services we launched that everything is going to be successful. But we feel that we’ve made all of the right moves in terms of diversified offerings and opportunities and leveraging of our core capabilities within the firm, we now have to produce performance and track records and populate those services.

So I’d say Matthew that for the time being we’re pretty comfortable with the alternative lineup. We have a strong fund-to-funds business in both private equity and hedge funds, and we have five or six very strong internal hedge funds that are – internally managed hedge funds that are growing in assets and some are new and haven’t yet taken new assets, but some are actually out there being offered to clients and growing.

Matthew Kelly – Morgan Stanley

Okay. One quick follow-up from me and then I’ll jump back in. Just on the trend in terms of active versus passive, what do you guys think is kind of a – what’s your go-forward mentality on EPS and index versus the actively managed products.

Peter Kraus

Look, as you know, we filed with the SEC to have the ability to produce an ETS. So we are watching that space. I think that observers of this space would note that the very large liquid ETS of which there are some, have continued to be liquid and used by many different industry participants. The less liquid, which accounts for the vast majority of the ETS have in fact had less liquidity and are expensive in terms of transaction cost to trade and may not be providing investors with the type of liquidity and opportunities that they wanted.

We also recognize that we – we meaning active managers not just AllianceBernstein are in a time period when active management has underperformed. But we also know when you look over a longer periods of time – first of all, it’s very endpoint sensitive and there are a number of time periods in which you can find that active management has produced serious, significant alpha. And when that occurs, I suspect there will be some pressure on passive investing.

And the last point I would make is that as I said at the outset, institutional investors are looking to find the opportunity to get the return they need. Now they’d like to do that with less volatility, but that wouldn’t always be possible and they know it and so active management will play an increasingly large role over time.

Matthew Kelly – Morgan Stanley

Thank you very much.

Operator

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

Cynthia Mayer – Bank of America Merrill Lynch

Hi, thanks a lot. Wondering if you could talk a little more generally about the impact of AXA on your flows and how the relationship has trended. I think you mentioned you expect to lose $16 billion and $4 billion has gone out. But overall can you give us a sense of how much you still manage for them, how that’s trended, and any color on fees? And also in terms of where this money would be in your statements, is that – would that slide in under the institutional – the non-US institutional redemptions? Thanks.

Peter Kraus

Yes, thanks Cynthia. So look, I’m going to turn it over to Ed in a second, who can talk about the actual numbers that we’ve disclosed in the 10-K which show the total dollars of assets and fees. But we’ve disclosed this time the affect of AXA’s actions as it relates to dispositions or if they made an acquisition and an acquisition, because we thought that those were lumpy kind of one-time activities. We don’t normally and wouldn’t going forward disclose the normal inflows and outflows of the balance sheet, but we do disclose the total dollars. So that’s sort of the policy, if you will. And, now, I’ll turn over to Ed to give you the numbers.

Ed Farrell

Yes Cynthia. In terms of AUM, they account for approximately 22%, 23% of our overall AUM, but they just account for roughly 4% to 5% of our base fees. So although it’s a large mandate in total, the fee realization there is not that great in the overall scheme of things.

Cynthia Mayer – Bank of America Merrill Lynch

Okay, great, thanks. And then just in terms of – it sounds like you’re still being very vigilant on costs and I’m wondering where you see opportunities to cutback, are you thinking more – in terms of being vigilant are you thinking more that as the market has moved up you would simply keep costs fixed, or you actually thinking you can cut them in some places?

Jim Gingrich

This is Jim Gingrich, Cynthia. We – as Peter mentioned, we are really looking hard at our non-compensation expenses, in particular, real estate, we’ve already taken a number of actions, but anticipate taking additional actions going forward. In addition, there are discretionary spending around T&E and consultants professional fees and the like that at these revenue levels, we have to take a particularly hard look at as well.

Cynthia Mayer – Bank of America Merrill Lynch

Okay, thank you.

Operator

Our next question comes from the line of Alex Blostein of Goldman Sachs. Your line is open.

Alex Blostein – Goldman Sachs

Thanks. Good morning, guys. Just to quickly follow-up maybe on Cynthia’s question. On expenses, maybe it would be helpful just to think in two broader buckets. What do you sort of think is your more fixed expense base run rate versus variable, and I guess a lot of the variable piece will come in comp. But even within that, is there ways you could I guess get smaller on the base level, something that I guess tend to be a little bit more fixed in nature.

Peter Kraus

So look Alex, you’ve sort of guided right. What we view – two pools of costs, variable costs and call it non-comp costs. So the comp cost is really where most of the variation is. In the non-comp cost there are just costs that are variable but over longer periods of time. So there are within promotion and servicing, for example volume driven activities like brokerage and clearing or I’ll call BC&E that that is a – that is clearly a volume-driven activity at the sell side. So if volume goes up, particularly if we trade more in Europe or in Asia, the cost per trade in those regions is higher than the cost per trade in the United States. And when this mix shift changes there those costs rise.

Now the sell side is working hard to actually reduce that cost on an ongoing basis, so actually I would say to you if we were standing still and had the same volume last year and this year, we would actually anticipate making some progress than reducing those costs. So even in the non-comp cost which isn’t as connected in variability to revenues, we still see variability or the ability to take down those costs. Rent, which is a very large piece of our non-comp cost is of course variable, but of course over a longer period of time and it’s sticky. So we’re going to continue to work at that notwithstanding – I think it was Cynthia’s comments that you could grow, are you going to leave cost constant? I will tell you that if we grow we’re going to continue to focus on taking rent down and it’s a very large portion of our cost.

Now as it relates to other cost in that sector, meaning in that section of non-comp, yes we believe we can be more efficient in many different ways, but these are all small costs. I mean there is no big thing if you can grab on to. But our view is that we will as a matter – of course as a matter of philosophy develop better and better systems to become more and more efficient at those costs, so go back to the margin. It’s our intention to continue to improve the margin even if we weren’t growing.

Alex Blostein – Goldman Sachs

Understood, that’s very helpful, thanks. And then my second question is you guys put out AUM numbers for the end of the month. Could you talk a little bit more about the flow trends you’re seeing so far in the quarter and then the – I guess more specifically on the institutional pipeline will be helpful to get a sense on where that stands now versus I guess you provided the numbers as of the end of the year.

Peter Kraus

So I’m going to turn it to Ed to talk about the pipeline number if we’ve computed one. I’m not sure that we have for the month. I would say that, look, flows were slightly better. As we said that there were still outflows in all the channels, but they were reduced and that’s a good thing. It’s one month. I don’t extrapolate one month trends, but I think you can say the following. The equity markets were up strongly. As I said, if you look at the publicly available Lipper information, you will see performance for the main equity funds has having been very strong. You’ll make your own – you’ll make your own determination of the relative strength. Our Fixed Income products continue to perform. So on the performance front we feel good. Markets went up, that’s good. And as we noted the outflows were moderate. Now, I’ll turn it to Ed for the –

Ed Farrell

Alex, in terms of the pipeline for the months of the – this is just for the months of January, it’s up about $1 billion from where it was. So our pipeline is about $5 billion at the end of January.

Alex Blostein – Goldman Sachs

Got it. Thank you.

Operator

Our next question comes from the line of Chris Spahr from CLSA. Your line is open.

Chris Spahr – CLSA

Hi, good morning. I just have a few more questions. On expenses and to the extent that you can focus on the non-comp expenses and when you might realize some savings there on the rent, it did seems like you have a lot of negative headwinds on the revenue front going into this year relative to last year given where AUM is starting.

Ed Farrell

This is Ed. In terms of the rent, as Peter and Jim both mentioned, we’re working hard on that front, and we’ve had some success. When we took our charge in 2010 of a $102 million that represented about 300 – over 300,000 square feet. Since that date we’ve actually sublet about half of that space. So we have prospects there for the remaining space. We have – we’re optimistic that some of those potential deals will close in the first half of 2012 and we’ll start seeing the benefit of that shortly thereafter. Some of the deals that we had closed in 2011, they take some time. So we’ll start seeing some realized savings in our occupancy line item in the first half of the year. So I would expect to see some real movements there in 2012.

Chris Spahr – CLSA

So when I look at the full-year adjusted margin of 17% and I know that that includes some noise from the fourth quarter, I – again given that I think revenues unless we have a strong market year are going to be lower on a year-over-year basis. So the – I mean would we expect to see the margin improve just because as these numbers – as these expense numbers start flowing through or could you see more margin deterioration and unimproved till 2013?

Peter Kraus

Look, we can't and won't give you specific answer to that, but I will say this to you that you can like we will every month look at where the market is and looking where our assets and watch our flows, that will give you a sense of what's happening on the revenue line. You can know from this conversation that we are focused on taking the cost down in the non-comp line and that means all of the costs, and we're going to do that whether our revenues go up, stay flat or go down.

In addition to that compensation is highly variable and you've heard our view on how we pay our personnel, and we're going to continue to do that. So the compensation line is as I say highly variable that will be connected revenues and our job in addition to that is to try to continue to take expenses out of the non-comp line and we have various plans in place to do that, and we're going to continue to even if the business grows.

Chris Spahr – CLSA

Thank you.

Operator

We have a follow-up question from Bill Katz of Citigroup. Your line is open.

Bill Katz – Citigroup

Okay, thanks again. Just two modeling questions I guess. Number one, as you mentioned you bought back some units and shares during the quarter, but your end of period number ended pretty higher. Is the end of period a better run rate on a go-forward basis, just given issuance, etcetera?

Peter Kraus

On the share count you mean.

Bill Katz – Citigroup

Yes.

Peter Kraus

Well, I – yes. Probably I think that we're going to continue to be in the market, we have been in the market. At this point, we're not anticipating any change in that. We will re-file and see what we do. But as you can calculate we have repurchased 13 million plus units and we issued 8 million plus units and that's a surplus of 7 million, rounding up.

Bill Katz – Citigroup

Okay. And second question, sorry to beat the dead horse here, but within the G&A line, can you quantify how big the real estate component is of that number?

Ed Farrell

Within the G&A line, it's about half of the number. The total occupancy, which includes rent and all the cost that go with managing the facilities.

Bill Katz – Citigroup

And so based on the ability to – with the closings coming through and maybe sort of further square footage subleasing, are we talking about a 10%, 15% drop in G&A, just given that kind of weighting average or was that just too severe?

Ed Farrell

I would think that to be conservative would be more like between the 5% and 10% range.

Peter Kraus

But Bill, it's obviously why we are focused on it, because it's such a large percentage of our – I'll call it our non-comp semi-fixed cost. We're just going to be constantly focused on that. And, look, the good news is that we have been able to make available space in the market. I think the market is likely to be stronger over time, I wouldn't say it is a strong market, don't take me wrong on that, but it's less likely to get weaker than where it is right now. And so our capacity to sublease will continue to be modest to better over time.

Bill Katz – Citigroup

So it’ll really be a multiyear to get to the full 10% run rate of reduced overhead, is that fair?

Peter Kraus

It's not possible to accelerate these real estate benefits into a single quarter, it will take time.

Bill Katz – Citigroup

Right, okay. And just one more question again, thanks for your patience. So as you look at your business, again you’re having a very strong growth in some renewals services. Is there any thoughts, doing a little bit more shake up of the business and shed some of the legacy businesses which seem to be a bit of an anchor on both flows and margins of the company?

Peter Kraus

We are committed to our – as you referred to it as legacy, we refer to it as core. And I don't mince words there in the sense that, I don't actually see the legacy business, I think it is a core business of the firm. These investment services in particular in Equities, where we've had challenged performance, it's not the first time it's a little bit longer than some of the past challenging periods. But as I noted in my commentary with institutions, we've had and I've had direct conversations with institutions who have noted that we are one of the few in some cases only just taking value, deep value managers that are still doing what they would like to us do and/or those that haven't got exposure to that are saying, value is really, really inexpensive and I ought to have some exposure to that. So we're not going to change that, Bill that would be mistake.

What we are going to do is what we are doing, which is diversify and create options for clients that they need and want, and that relates to how do they get return with less risk. And, look, there is no fantasy, you can't just produce the same return with lower risk, we all know that, but and so do the clients. And that by the way is why clients will continue to come back to these traditional but core services, because they do provide return over time, although they have volatility.

Bill Katz – Citigroup

Okay. Thanks for taking all my questions. I appreciate it.

Operator

(Operator Instructions). And our next question comes from the line of Robert Lee from KBW. Your line is open.

Robert Lee – KBW

Thank you. Good morning. And I apologize if you had mentioned this in your comments in the start of the call, I jumped on late. But I mean I did hear the comments around some of the AXA business that's scheduled to flow out. But could you update us, if I remember correctly in prior last – I think maybe it was last quarter you had some outflows related from A&P in Australia, I think it was related, and that may have been somewhat related to the change in the joint venture there and you're buying that in. And are there any – was there some more of that in this quarter and if there is certain – is it possible to kind of quantify if there is any kind of asset pool there you think maybe vulnerable over the coming quarters?

Ed Farrell

This is Ed. In terms of the fourth quarter, yes we did have some of that. There was about $3.6 billion that we lost as a result of some AXA dispositions. A part of it was Canada and part of it was Australia. The fees related to that were approximately $4 million – $5 million. We did mention early that we do anticipate adding more outflows as a result of those dispositions AXA had in the first half 2012.

Peter Kraus

Robert and just so you know, we also said, look our policy here is with regards to AXA there are flows that go in and out all year along. We will disclose when they either buy something or sell something. They sold two businesses that affected the assets that we managed for those businesses, the Canadian and the Australian business. And as a result of those sales, the assets went to the seller – to the buyer, sorry.

Robert Lee – KBW

Okay, because I – that's why I wanted to clarify. This isn't – I mean you know still – I believe you still sub-advise various assets first?

Peter Kraus

There is nothing to do with the ongoing business of the subsidiaries of AXA that we are managing these changes and which is our reason for disclosing it. We're created by and initiated by a action on the part AXA to sell those subsidiaries.

Robert Lee – KBW

Great, that was the clarification I was looking for. That was it, thank you.

Peter Kraus

Okay, Robert.

Operator

And I have no further questions in the queue at this time. I will turn the call back over to our presenters.

Andrea Prochniak

Thank you everybody for participating in today's call. You can feel free to contact Investor Relations with any questions you may have. Thanks and have a great day.

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