AllianceBernstein Holding's (AB) CEO Peter Kraus on Q4 2015 Results - Earnings Call Transcript

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AllianceBernstein Holding LP (NYSE:AB)

Q4 2015 Earnings Call

February 11, 2016 8:00 AM ET


Andrea Prochniak - Head, Investor Relations

Peter Kraus - Chairman & Chief Executive Officer

John Weisenseel - Chief Financial Officer & Senior Vice President

Jim Gingrich - Chief Operating Officer


Michael Kim - Sandler O'Neill & Partners

Adam Beatty - Bank of America Merrill Lynch


Thank you for standing by, and welcome to the AB Fourth Quarter 2015 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 available for replay for one week.

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

Andrea Prochniak

Thank you, Chris. Hello, and welcome to our fourth quarter 2015 earnings review. This conference call is being webcast and accompanied by a slide presentation that's posted in the Investor Relations section of our website, Peter Kraus, our Chairman and CEO; John Weisenseel, our CFO; and Jim Gingrich, our COO, will present our financial results and take questions after our prepared remarks.

Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I'd like to point out the Safe Harbor language on slide one of our presentation.

You can also find our Safe Harbor language in the MD&A of our 2015 Form 10-K, which we filed this morning. Under Regulation FD, management may only address questions of a material nature from the investment community in a public forum. So please ask all such questions during this call. We're also live tweeting today's earnings call. You can follow us on Twitter using our handle @AB_insights.

Now, I'll turn it over to Peter.

Peter Kraus

Thanks, Andrea. Good morning, everybody, and thanks for joining the call. By now, you've all heard about the challenges the asset managers faced in 2015, and in particular, the second half. And we were no different. Looking at the firm-wide overview on slide three, you can see the impact of weak client activity, volatile markets, and heightened economic and geopolitical uncertainty had on our results for both the quarter and for the year.

Gross sales declined 10% year-on-year for the quarter and 2% for the full year. Net flows were negative for the second consecutive quarter, though we ended the year $3.2 billion net positive. AUM for the full year declined about 1% due to negative market performance of $10 billion, average AUM was up 3% for the year, thanks to a stronger first half.

This morning, we released our January AUM numbers, market depreciation drove most of our 2.4% monthly decline. So firm-wide net outflows were negative. By channel, Institutional and Private Client were both net flow positive, Retail was negative.

Clearly, a steep decline in industry-wide global high yield retail fund flows here and in Asia, ex-Japan, that dampened our client activity level in last year's second half continues in 2016.

Slide four shows our quarterly flow trends as a firm and by channel. Total fourth quarter net outflows were $2.5 billion. Three areas sustained significant net outflows; those were passive and retail high yield, which were each $1.7 billion negative, and the other category where we experienced nearly $500 million in outflows as a result of discontinuing our Retail Strategy Fund Series.

Institutional net outflows of $900 million were flat with the prior quarter. Looking at this chart, you can really see the drop-off in client activity in the second half. We sustained $1.8 billion in second half outflows versus positive $8.9 billion in the first half. And Retail gross sales weakened after the first quarter, though redemptions remained stable. This tracks closely with how industry wide high yield flows trended. Private Wealth, redemptions increased in the fourth quarter, consistent with last year.

Now, let's step back for a moment to look at the longer-term trends. We believe these underscore the success of our long-term strategy and the traction we're gaining with clients. We've come a long way in the past five years.

Now I'm on slide five. Five years ago, we were at near record levels of client redemptions and net outflows. Now, we've just finished our second straight net flow positive year as a firm, went 28% higher sales and 43% lower redemptions, and back in the tough days of 2011. Institutional, where we experienced majority of outflows back then, is now our strongest flowing channel with $12.4 billion in on a net basis over the past two years. Our Retail flows have been dominated by high yield fund trends, most notably in Asia, ex-Japan, retail. That's why we peaked in the heady days of 2012 and early 2013, and have steadily declined since this sector has rotated out of favor. Our gross sales fell off most drastically, however, in 2015. And that's entirely due to the decline in high yield.

We're actually flowing quite nicely in other areas of the market. We raised $500 million in Japan this year for our U.S. Concentrated Growth Lux Fund. And we were modestly net flow positive in active equities in the U.S. in a year of record outflows for the industry. Finally, our Private Wealth annual flow trends demonstrate how redemptions steadily declined as our investment performance has steadily improved.

Looking at our flows over the past five years, it's clear our trends are improving. Sustaining competitive investment performance will always be a critical factor in attracting clients' inflows. I'm happy with how we've been able to preserve and persevere through quite volatile markets.

Let's start with fixed income on slide six. There is no question that the past year has been challenging for fixed income, yet 56% of our assets were in strategies that outperformed for the one-year period through December. As you know, we have significant Global High Income assets. These assets fell below the tough half mark, bringing down our one-year number.

Our longer term track records, however, remain very strong, with 80% of assets outperforming for the three-year and 91% for the five-year. Investors have shied away from risk assets of late, but our strategies have performed well on a long-term basis. US High Yield and Global High Income are both top half performers for the three-year and five-year periods, and European Income and European High Yield ranked top quartile for the five-year.

In equities, we've built a set of global and diversified offerings designed to meet a range of specific client needs. Today, we have our broadest lineup of equity services ever. And they're building strong track records.

I'm on slide seven now. 74% of our qualifying active equity assets were in outperforming services for the one-year period, and that's at the end of 2015; as well as 73% for the three-year and 53% for the five-year. The problem with asset weighted performance, however, is that it can undervalue top performing smaller services with the best growth opportunities. The strategies in our performance table on the right side of this slide are of different sizes, but all represent what we see as the most important areas of exposure for our clients across market cycles. Some are longstanding services, some are newer and still building track records, all are high conviction.

Among our long-tenured services, US Thematic Research is a reboot that has thrived under new management and direction. It's ranked top decile for the one-year and three-year through December. It's a similar story with US Large Cap Growth, a top decile performer for the one-year period, three-year period and five-year periods. In fact, we attracted client flows to this service last year when no one seemed to be investing in the asset class.

Global Strategic Value and Emerging Markets Growth are other services that have been around for decades and are consistently outperforming today. GSV is top quartile for the three-year, and EMG is top quintile for the one-year and three-year. On the newer end of the spectrum, we have Select US Equity, an absolute return strategy that has both outperformed and steadily gathered assets around the world since we brought the team to AB in 2012.

Select is top quartile for the five-year, top half for the one-year and three-year. Finally, we've had stellar performance in our new suite of low vol strategic core equity services, all four of them. US, Global, International and Emerging Market ranked top decile for the one-year and three-year periods. US, Global and International Strategic Core will have a five-year track record by the end of this year.

I genuinely believe that the reason we've had resilient active equity flows in the past year's challenging environment is because we've been able to provide clients with diverse, relevant, outperforming services that deliver for them. That's how we'll continue to rebuild our equities business going forward. While the gross sales trend I discussed earlier make it clear that clients have been slower to transact, we continue to make progress at building a diverse and profitable pipeline of new business. You can see that on slide eight, our Institutional channel highlights. We finished the year with a more diverse, active pipeline than we had going into it, split 60%/40% between fixed income and equity, multi-asset and alternatives. That compares with a 74%/26% split at the end of 2014. You can see that on the display at the left. We also have finished 2015 with a slightly higher active pipeline of $6 billion and a higher average pipeline fee rate, thanks to the diverse new strategies we added during the year.

You can see the breadth of our new additions in the fourth quarter of 2015 alone at the bottom right. Again, relevance and investment performance have helped us grow advocacy, and earn buy ratings in the double-digits in 2015. Today, we have diversified ratings with every major global consultant and many regional consultants as well. So we feel good about our prospects for this business going forward.

Moving to Retail on slide nine, our story for the year to be summed up in two words, high yield. There's no doubt, the sell-off has been severe, particularly in the second half. But we think the issue is cyclical, not secular. And we see, huge long-term opportunity from here. First of all, we just don't see a 56% annual decline in Asia ex Japan Retail high-yield mutual fund sales in 2015 and a 12% attrition rate in the active U.S. High Yield market in the second half as sustainable. I'm referring to the left side of the slide.

Second, history has shown us two things about High Yield. It bounces back quickly from down years, and investors inevitably seek it out. Take a look at the right side of the slide. Annual High Yield index returns have been positive for 26 years out of the 32 years it's been in existence or 81% of the time. And there's never been an instance when High Yield returns have been negative two years in a row. And in 2015, return was negative 4.5%. The median High Yield spreads since 1994 is 465 basis points. We're at 800-plus basis points today. We're already in the top decile relative to history. Depending on where spreads go from here, the benefits could be significant.

In the past, when spreads have been at or above 600 basis points, the likelihood of a positive return has been 81%. And the U.S. High Yield index has returned 12.2% on average. At 800 basis points or more, there's a 91% chance, with a 26.4% average return. So, we believe now is the time to stick around, not flee. The sell-off has GS up quite nicely, and we had a great entry point relative to history. In the meantime, Retail flows we're seeing in active equity services like, US Large Cap Growth and Concentrated Growth are particularly encouraging even in this environment.

Now, let's turn to Private Wealth Management Business, where we've continually upgraded our investment and price model over the past five years. Slide 10. What we're doing with our U.S. Strategic Equities portfolio is at the core of that. I see it is nothing short of innovative. Our approach, which we lay out at the top of the slide, is very different from the typical unbundled approach of major open architecture firms. We think it's superior. Capital works harder, capital works smarter.

The U.S. Strategic Equities is a portfolio constructed with stocks, not other portfolios. So, there's no risk of over diversification in the cost that comes with it. It's a high-conviction portfolio. It concentrates capital in the best ideas, with few or more concentrated holdings and a larger percentage of assets in our top 10 holdings than others. In other words, we're not watering down our best ideas. And we're positioned to capture both idiosyncratic stock returns and systemic return factors. No other wealth management is taking this approach. Actually, no one else can, as long as they're open architecture and outsource their clients' investments to a third party.

Now, we're introducing this approach to our International Equities portfolio as well, which will further enhance our value proposition to private clients. Bernstein difference is coming through in our absolute and relative performance. The chart at the bottom of this slide shows the performance of a diversified and integrated Bernstein Moderate Growth account relative to bench and peers in 2015.

Across the board, we outperformed the 2015's environment of low beta and elusive alpha. U.S. Strategic Equities outperformed the index by 190 basis points during the year, net of asset management fees and advisory fees. Think about that, net of all fees. We delivered slightly positive performance in non-U.S. equities, even as the index declined by 3.2%, again net of fees, all fees. We performed in munis as well. Overall, we ranked in the 16th percentile versus peers. That's pretty impressive.

Moving to the sell side on slide 11, although fourth quarter suffered from pretty tough comps, Bernstein Research finished 2015 with a 2% increase in revenues, our third consecutive year of growth. That's the chart at the top left. As important, we gained share, as the overall industry commission pool declined. U.S. volatility spiked in the second half of this year, you can see that in the bottom left chart, for a sequential increase of 20% and a year-over-year increase of 25%. As a result, industry trading volumes were strongest in the U.S. That's at top of the right - at the right chart on the right side of the page. In fact, international clients drove a lot of our growth in U.S. trading bloc revenues due to the currency benefits and relatively strong economy. Europe trading volumes and revenues suffer from currency effects, and Asia trading volume, while up for the year, slowed in the second half as global investors lost their appetite for Asian equities.

We also marked another year of progress in our efforts to position Bernstein optimally in global research and global trading. Climbed once again in the Institutional Investor 2016 All-Europe Research Team Annual Survey from number nine to number seven, our highest ranking ever. And we added our Asian research footprint new hires and launched new research efforts. We also grew both revenues and share in global electronic trading and U.S. High Touch. And in a latter case, growing revenues by 3%. Again, in the midst of industry decline.

Finally, I'll finish as I always do, by touching on the progress we've made in keeping our long-term strategy to deliver our clients across all cycles.

I'm on slide 12. In tough markets, we delivered fixed income and equity investment performance that range from resilient to much improved throughout the year. We had our most diverse year yet in Institutional in terms of gross sales, new business pitches, new pipeline mandates and consultant advocacy.

In Retail, [indiscernible] the industry trend in active equities, generating gross sales growth of 19% for the year and net inflows of $800 million in the midst of record industry outflows. On the innovation front, we celebrated performance, asset-raising milestones across an array of new offerings this year, including real estate private equity, commercial debt, direct middle market lending, Early-Stage Managers in Private Wealth.

Finally, we were able to generate positive net flows, a 30 basis point increase in our full year adjusted operating margin and an incremental margin of 61%. These are strong accomplishments in an increasingly difficult operating environment. I thank all of our people at AB for their relentless efforts in 2015. Conditions seem to have only worsened coming into 2016, but that does nothing to diminish my confidence in AB's business, its talent and its long-term strategy.

Now, I'll turn it over to John for a discussion of financials. John?

John Weisenseel

Thank you, Peter. As always, our remarks today will focus primarily on our adjusted results. You can find our standard GAAP reporting and a reconciliation of GAAP to adjusted results at our presentation's appendix, press release and 10-K.

Let's start with the highlights on slide 14. Fourth quarter revenues of $607 million decreased from the same prior-year period. Operating income of $162 million and our margin of 26.7% declined as well. We earned and will distribute to our unit holders $0.50 per unit compared to last year's fourth quarter adjusted EPU of $0.57.

Lower base and performance fees were the primary drivers of the decline in our financial results. For the year, revenues increased to $2.524 billion, operating income increased to $619 million and operating margin increased by 30 basis points to 24.5%. Higher base fees and a decline in non-compensation expenses contributed to our improved results.

We delve in to these items in more detail on our adjusted income statement on slide 15. Beginning with revenues, fourth quarter net revenues of $607 million were down 7% versus the same period of the prior year. Full year net revenues of $2.524 billion were up 1% from 2014. Fourth quarter base fees decreased 3% as a result of lower average Retail AUM.

For the year, base fees increased 2% due primarily to higher average Institutional and Private Wealth AUM. Fourth quarter performance fees were $4 million as compared to $28 million in the same prior-year period. For the year, performance fees declined by 55% to $24 million. While we have several key services with performance fee calculation periods ending in the fourth quarter, many are dependent upon the U.S. equity market, which only returned about 1% in 2015.

Bernstein Research services fourth quarter revenues declined 8% from the same prior-year period, as a result of lower global client-rating activity, but increased 2% for the full year due to higher activity in the U.S. and Asia. Investment gains and losses include seed investments, our 10% interest in the venture capital fund and our broker dealer investments.

Investment losses were lower year-on-year in both the fourth quarter and full year 2015. This reflects lower fourth quarter seed investment losses and seed investment gains for full year 2015 versus losses for 2014. At quarter end, we had $478 million in seed capital investments, the majority of which is hedged. Seed investments increased $2 million during the fourth quarter primarily due to new net fundings.

Moving to adjusted expenses. All in, our total fourth quarter operating expenses of $445 million decreased 6%. Full year operating expenses of $1.905 billion were relatively flat to the prior year, thanks to diligent expense management.

I'll begin with total compensation of benefits expense, which decreased in the fourth quarter, but increased slightly for the full year, in both cases, in line with the change in net revenues. As you know, we accrued total compensation, excluding other employment costs, such as recruitment and training as a percentage of our adjusted revenues. We accrued compensation at a 45.6% ratio for the fourth quarter and a 48.9% for the full year. For the first nine months of 2015, we accrued at a 50% ratio. However, we were able to accrue compensation at a lower ratio in the fourth quarter and still meet our compensation objectives for the year. The 440 basis point reduction in our comp ratio in the fourth quarter - for the third quarter added approximately $0.10 to our fourth quarter EPU. Going forward, we expect to continue to manage to a comp ratio that will not exceed 50%.

Both fourth quarter and full year 2015 promotion and servicing expenses declined slightly compared to the prior-year comparable periods, primarily the result of lower T&E and marketing costs. Fourth quarter G&A expenses were essentially flat to the same prior-year period and decreased slightly for the full year 2015 due to lower occupancy expenses and foreign exchange translation gains.

Fourth quarter operating income of $162 million was down 11% from the prior-year period as revenue declines outpaced expense reductions. Full year 2015 operating income of $619 million was up 2% and our incremental margin was 61% for the year. Fourth quarter operating margin of 26.7% was down 120 basis points year-on-year. Full year 2015 operating margin of 24.5% was up 30 basis points.

In addition, our fourth quarter adjusted operating income of $162 million was $9 million lower than our GAAP operating income, primarily due to the exclusion of a $7 million contingent payment expense credit and approximately $2 million of venture capital investment gains relating to the 90% interest that we do not own but consolidate for GAAP reporting. Of the $7 million contingent payment expense credit, $6 million is from a reduction of our contingent payment liabilities relating to our 2010 acquisition of SunAmerica's Alternative Investments group based upon lower projected revenue-sharing payments and $1 million relates to our 2014 acquisition of CPH Capital.

Full year 2015 adjusted operating income of $619 million was $12 million lower than our GAAP operating income. This was primarily due to the exclusion of the $7 million contingent payment expense credit mentioned earlier and a $7 million venture capital investment gains, also partially offset by $1 million of real estate charges, relating to the true up of sublease assumptions and a $1 million non-controlling interest deduction.

All of these non-GAAP adjustments are outlined in the appendix of this presentation. The full year 2015 effective tax rate for AllianceBernstein L.P. was 6% compared to 6.2% for 2014. We highlight these points on the next slide of this presentation as well.

And with that, Peter, Jim and I are pleased to answer your questions. [Operator Instructions]

Question-and-Answer Session


Please limit your initial questions to two in order to provide all callers an opportunity to ask questions. You are welcome to return to the queue to ask follow-up questions.

The first question is from Michael Carrier with Bank of America. Your line is open. Michael Carrier your line is open, please go ahead.

We'll move on to the next question from William Katz, Citigroup. Your line is open.

Unidentified Analyst

Hi, good morning. This is actually [ph] Justin Tarantin on the line for Bill this morning. Just a couple of questions for you. The first question, just touching on the expense line. Obviously had some comp leverage in 4Q, but just thinking about the environment going forward, are there any other areas of flex that you guys think you can put into place, given the revenue pressure, and just anything that will kind of help support the margin a bit?

John Weisenseel

This is John. If you look at the non-comp expenses in terms of both G&A, promotion and servicing, we were flat fourth quarter to fourth quarter, year-over-year. And we're actually down for the full year 2015 versus 2014. So, obviously, there's a number of factors in there that can fluctuate based on seasonal patterns from quarter-to-quarter as far as T&E marketing spend. The trade execution expense is directly related to the Bernstein Research revenues. But I think, over the long haul, we're going to continue to remain focused on it. And I want to expect them to be relatively stable going forward.

Unidentified Analyst

Okay. Thanks. And then just - same question, just on the Institutional pipeline, just kind of figure out what you guys are kind of seeing there in terms of incremental demand, and then just kind of breaking that demand down, in what areas are you kind of seeing interest from a client base?

Peter Kraus

Well, it's - I think we feel a little bit more confident than we have in the past that the diversified interest across the product line that we've been reporting for the last 18 months and two years continues to take hold. We talked a little bit about the consultant recommendations. I may not get the number exactly right, but mid-teens number of consultant recommendations and low teens for new services represents a - not just a tick up, but a step-up in the attractiveness of the franchise to the global consultant community. That will play through the institutional marketplace all over the world.

I also think that some of the services that we provide today in the credit markets that are not liquid, so the middle market lending services, the mortgage services, both residential and commercial in a very low-yield environment or negative-yield environment for insurance companies and other institutions again are proved to be, and already are proving to be, extremely attractive. So, I think that we will see slow, steady growth in the diversification of mandates coming from the Institutional space. And it will include a greater participation of financial balance sheets than perhaps five years or 10 years ago.

Unidentified Analyst

Okay. That's great. Thanks for taking my questions.


The next question is from Robert Lee with KBW. Your line is open. Robert Lee with KBW. Your line is open. Please go ahead.

The next question is from Michael Kim with Sandler O'Neill. Your line is open.

Michael Kim

Hey, guys. Good morning. First, just wanted to touch on the Rhode Island 529 plan loss. Any insight or color into maybe the drivers behind the change, and how fees may have played into that decision? I guess, the replacement manager indicated the fee rate was sort of in the 35 basis point range. So, any incremental color there would be helpful.

Peter Kraus

Well, I think the main issue, Michael, is, is that the model that we had worked with Rhode Island on for some 15-plus years was a single provider model, where we were both the manager, as well as the broad servicer. Rhode Island wanted to pursue a different model that split those activities in two, and that was obviously not the model that we had prosecuted with them over time.

As I've mentioned, I think when we first talked about this that, of course, we were not happy to not continue in that capacity with them. The go-forward value of that contract in a competitive world was not going to be a significant number for the firm. So, if that gives a sense that it was highly competitive then than that would be an accurate description.

Michael Kim

Okay. Fair enough. And then I think, you sort of alluded to this earlier, but any color or data points, as it relates to maybe recapturing some of the Retail fixed income outflows on the equities or alternatives side, both here in the U.S as well as overseas? And then also, somewhat related to that, can you just talk a bit about sort of the recent workforce reductions on the fixed income side as well?

John Weisenseel

Michael, let me take the first question. I think if you look at the progress of our flows in the active equities, you've seen an improvement sequentially in the second half. That reflects some of the success that we've had, in particular, in the Retail channel with some of our equity strategies. We are hopeful that we will continue to see that progress going forward.

And I think, as Peter indicated, the challenge that we have on the fixed income side and Retail is pretty much been confined to our high-yield offerings, both in the U.S. as well as in Asia. Those are at a level that it's very difficult to fathom, continued reduction in growth flows, particularly in Asia, and - again, as Peter indicated, historically, when you have spreads at this level, it's a pretty good opportunity to step into the market. So, our fixed income team is actually very jazzed up about the opportunities that they have in front of them, both in high yield as well as everything else they do.

I was in Asia a couple of weeks ago, and the one anecdote that I thought was really interesting was some meetings I had with the Chairmans of some of our distributors, and the omnipresence of our brand in those marketplaces with their clients is actually quite heartening. And when those investors see the attractiveness of the market, we have every reason to believe that they will be returning and provide positive flow. Size and scale of that may not reach 2012 because that seemed a little heady, but we obviously don't need it to be there.

On the issue of the fixed income business, so our team has been looking at what they believe the next 10 years looks like in the fixed income markets, and what clients are demanding of us today and what they will demand us in the future. And in doing that, they've spent a fair bit of time thinking through how they should reorganize their resources, which come down to head count and people, the kinds of people they need, what they want people to do and how they want to organize research, how they want to organize the alpha producing part of the business, how they want to organize their thinking around the services that they expect to grow, and how they're trying to organize their services around new products that they want to launch. And as a result of that process, there were some changes in head count, which you noted - I think they were publicly reported by new services, they were actually quite small relative to the total. And the precipitating event for that was the changes in the marketplace, the current changes in the business, but importantly, where we thought the business was going to go in the future.

Jim Gingrich

I would just add that just our fixed income team is continually - and hats off to them, continually looking ahead as to what they think the market environment needs - is going to be, and therefore, what they need to do. If you go back a number of years ago, they were quite, I think, right in recognizing that liquidity was going to be a major challenge in the fixed income markets and took steps a number of years ago in their trading organizations, as well as how they integrated trading into the investment process. And this is, again, I think a positive step in terms of what they're doing and is part of the reason that they perform the way they do.

Michael Kim

Okay. That's helpful. Thanks for taking my questions. [Operator Instructions]


The next question is from Michael Carrier with Bank of America. Your line is open.

Adam Beatty

Hi. Good morning. This is Adam Beatty in for Mike. Thanks for letting us back in the queue. Just wanted to ask about kind of the environment for high yield and credit in particular. It's a bit of an unusual situation to have at least a slightly rising rate environment with some credit concerns kind of in the background. So just wanted to get your thoughts on that, Peter, and how it's maybe affecting flows and investor interest. Thanks.

Peter Kraus

Sure. Well, I think that what's affecting flows and investor interest are a number of things. Number one, leading up to 2014 or the middle of 2014, the unprecedented amount of liquidity that was created in the fixed income markets by Fed QE activity and other Central Bank activity, and that stopped, as you know, in the middle of 2014. And our fixed income team, most notably the senior portfolio managers, have been quite public about the impact of that on liquidity. And the removal of that liquidity in the marketplace started a process, which we've continued to see, of investors being concerned about liquidity and being concerned about price action, and has led to significant unwinds in that business in the mutual fund space.

Secondly, the energy complex with the decline of oil has given rise to concerns - appropriate concerns about either the faults on those securities or challenges in refinancing. And as you know, the portion of the High Yield Index in the United States that's made up of energy has gotten to be significant. I think it's somewhere between 15% or 17%. That also carries with it, concern. As the liquidity issues that we raised over a year and a half ago continued to tighten and become more problematic, other bond issuers who face refinancing challenges become more questionable. How easy is that to do, given that money is coming out of that end market, not going into that market?

As you point out that rates are rising, although slowly, that doesn't - it's not unprecedented to have a time in which rates are rising and market conditions or monetary conditions are tightening, and credit is becoming more challenged. In fact, we see that every time you enter into a softer economic time period, whether it's a recession or just a slowdown. So that doesn't surprise us.

I think what we find interesting here, which is what we said, is the size and scale of the spread increases, the historical precedent of how those spread increases ultimately reversed, and the opportunity to invest now. Obviously, that's a contrarian point of view. Obviously, the market is nervous. We've seen in the last few days, interesting, if not very volatile, markets in Europe around financial institutions, principally banks, have had an impact even on the U.S markets.

There is the Chinese currency question. There are the Chinese markets, the volatility of those markets. All of these things have conspired to turn sentiment to be pretty negative. That's continued to accelerate outflows, continued to move spreads out, and it's continued to make us say, this is a pretty interesting opportunity. So, that's pretty much how we see it. We're not telling you that volatility is going to end tomorrow, but we are saying that given where the markets are today, investing in the near future in the next few months looks like a pretty interesting opportunity.

Adam Beatty

That makes sense. Thank you for all the color. And then I just want to dig into some of the smaller products. They're doing quite well and I know you are working hard to get those on platforms. Kind of what inning do you think we're in, in terms of getting those products out there and having platform share, if you will, that could drive flows later down the road? Thank you.

Peter Kraus

Yeah. That's a good question. Look, I think probably the most interesting set of services in the firm right now is the equity services that we relayed to or we call strategic core. There are four of them that we have, four main products, US, Global, International and Emerging. They have absolutely stellar track records. They are new services, they have four and a half - four year kinds of track records.

The increase in the consultant interest in the platform that we have that I mentioned and the extraordinarily strong downside capture of those services, and frankly, upside participation of those services in these kinds of markets make them be very attractive. And of course, we don't expect those services to outperform in every market condition. But in the market conditions we've had over the last four years that have included both high beta markets, volatile markets, low beta markets and tough alpha markets, these services have performed. They have produced alpha. They've had low downs - or significant downside capture, meaning positive, i.e. not 100%, significantly less; and pretty close to 100% in some cases, better than 100% upside capture. So, that's an example of something that we're very excited about.

Jim Gingrich

And if I was just to add to that, I mean, that's a great example. That is a suite that is maybe still in the dugout, using your analogy, in terms of being on platforms, let alone having recommendations behind - let alone having consultant recommendations behind it. So, across our entire suite, I think we would characterize it as still very much in the early innings. We're - it's just - we continue to make progress step-by-step. And the performance, as Peter indicated, is a leading indicator of the progress we expect to continue to make.

Adam Beatty

Yeah. With that performance, I'm sure it'll be at least on deck soon. Thanks very much for taking our question.


The next question is from Surinder Thind with Jefferies. Your line is open. And it looks like he has removed himself from the queue, and I am showing no further questions at this time.

Andrea Prochniak

Thanks, Chris. We'll finish the conference call now then. Feel free to contact Investor Relations with any follow-up you may have today. Thanks and have a great day.


Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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