AllianceBernstein Holding L.P. (NYSE:AB)
Q1 2016 Results Earnings Conference Call
April 28, 2016, 08:00 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
Alex Blostein - Goldman Sachs
Robert Lee - KBW
Surinder Thind - Jefferies
Michael Kim - Sandler O'Neill
Bill Katz - Citigroup
Mike Carrier - Bank of America Merrill Lynch
Craig Siegenthaler - Credit Suisse
Thank you for standing by, and welcome to the AB First Quarter 2016 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 like to turn the conference over to your host for this call, the Director of Investor Relations for AB, Ms. Andrea Prochniak. Please go ahead.
Thank you, Chris. Hello, and welcome to our first quarter 2016 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, www.abglobal.com. Peter Kraus, our Chairman and CEO; John Weisenseel, our CFO; and Jim Gingrich, our COO, will present our financial results and take questions after the 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 first quarter 2016 Form 10-Q, 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 the call over to Peter.
Thanks, Andrea. And good morning, everybody, and thanks for joining our first quarter earnings call. I am going to start with a firm-wide overview which you'll find on slide 3.
AB returned to positive net flow territory in the first quarter with $2.2 billion in net inflows. This was due largely to redemption levels that were at or near multi-year lows. Given the market volatility during the quarter it’s not surprise that gross sales were muted versus last years first quarter, sequentially they were up 6%.
We finished the quarter with AUM of $479 billion, down 1% from the first quarter of 2015, but up 2% from year end 2015. As markets recovered in the second half of the quarter and we experienced net inflows. Average AUM was down 3% year-on-year and 1% sequentially.
Slide 4, shows our quarterly flow trends. Firm-wide net inflows of $2.2 billion were driven by net out inflows to our institutional and private wealth channels, which were partially offset by retail net outflows. As you can see from the chart at the top right, $1.8 billion of those net inflows came from institutional were redemptions declined by nearly half on a sequentially basis.
In retail, our net outflows of $600 million improved by $900 million sequentially, retail client activity picked up in March, our sales were up and redemptions were down meaningfully and we were net flow positive for the month. That trend continues to enable us well.
In private wealth, net inflows of $1 billion for the quarter were our highest since the fourth quarter of 2007. Gross sales were at multi-year highs and prospect discussions continue to be quite robust.
Now let's move to slide 5 and talk about investment performance and we'll start with fixed income. Our fixed income performance remains quite strong and we held up well versus the benchmarks during the quarter. In fact, our percentage of assets in out performing services increased for both one and three year periods. The one year increase to 73% from 56%, the three year was 84% up from 80% and we remained at 91% for the five year.
Equities which is on slide 6 had a difficult first quarter affected by our one year – and which affected our one year relative performance numbers. Those longer track records remained quite strong, 47% of our equity assets were in out performing services for the one year at the end of the first quarter, down from 75% to the end of 2015.
Two large services, strategic equities in US Mid Cap Growth fell out of the top half and that drove the decline. For the three year our percentage of out performing assets has increased to 82% from 78%, the five year declined to 52% from 55%. As you can see from the table on the right, we have some stellar performance versus the benchmark across periods among our institutional equity services.
One strategy was highlighting a strategic core equities, all four services, US, global, international and emerging markets were out performing by a very wide margin and ranked top decile among peers for the one and three periods. While still small, and relatively new, they are attracting greater interest to clients for the ability to maximize both up side capture and downside protection.
Turning to our institutional channel on slide 7. We're pleased to return to net flow positive territory in the first quarter with $1.8 billion in net inflows, while growth is hard to combine in this environment, we had significant fundings in US investment Grade credit, Canadian Core Plus, and global fixed income.
As important, our institutional clients are happy and are voting with their feet. Our first quarter redemptions declined by nearly half sequentially. And we continue to engage in very active good client dialogues and we continue to win new business.
We finished the first quarter with a $6.2 billion pipeline of active services, our highest since the first quarter of 2013. From an asset class perspective, fixed income still represents the largest share, though concentrated global growth and commercial real estate debt also ranked among the top 10 mandates in the pipeline.
Geographically no one region accounts for 50% or more in assets. We added diverse new mandates during the first quarter and in April as well. So we feel we're navigating the current environment effectively.
Moving to retail, on slide 8, weak and volatile markets for the first half of the quarter curtailed demand for return seeking asset. We felt this in particular in global high yield end equities. The top left chart shows how industry wide gross sales of fixed income funds in Asia, ex-Japan remained quite muted through the end of January and into February.
Industry wide global high yield fund sales for January and February combined were down 64% versus the same period a year ago. For bonds, ex-GHY, the decline was 44%. We don’t yet have March industry data, but we know that things begin to turn.
It certainly did for us, ABs total retail sales in the region more than doubled in March from February, driven by strength in GHY and AIP and net flows turned positive.
In US, industry wide high yield fund flows actually turned positive in February and March net inflows of more than $6 billion was the highest since February of 2015, that chart at the top right.
As we highlighted in our last earnings call, historically returns have been quite strong in periods when high yield spreads are well above the long-term average. At that time, it stretch to more than 800 basis points, today they are 590 basis points, still about 120 basis points above the average since 1994, that chart at the bottom left. High yield has returned 6.5% year-to-date and more than 12% since the February markets bottomed.
We were encouraged to see retail investors come back into the market as the first quarter progressed, a trend that continues in April. A bright spot for us in the quarter was US retail, gross sales of $3.9 billion increased by $1 billion sequentially and were our highest since the first quarter of 2008 and net flows of $850 million in the first quarter were our highest since the fourth quarter of 2007.
These exclude $700 million in US sub-advisory outflows we experienced during the quarter, which were largely result of rebalancing in passive mandate. I would like to point out that we also converted our $1.7 billion AB income fund in closed end to open end this quarter, we felt that the funds strong track record we'll be able to grow the AUM.
We anticipated the initial response from investors would redemptions and they've already began. We expect them to continue for several months. These out flows paid on a short term, but its worth as a long-term. It’s the right fund structure for AB income and good opportunity for retail investors. Performance is strong in many of our other retail funds as well. As of quarter end more than 75% of our global equity and fixed income assets were in 4 and 5 stock bonds.
Now let's move to slide 9 and talk about private wealth management. The quarter’s extreme volatility gave us the perfect opportunity to demonstrate the value of our advice and the differentiation of our offering to Bernstein private client. The top half of this slide shows just what a roller coaster ride it was.
Global markets declined by a 11% in the first half of the quarter, than rebounded by 13% to finish the quarter flat. Throughout, we were unwavering in our advice declines to stick to their current allocations and trust in our risk management.
And listen, our first quarter redemption of a 11% was our lowest in years, our gross sales increased by more than 30% year-on-year and our net in flows of $1 billion reached pre-crisis levels.
We also effectively reduced client portfolio volatility with dynamic asset allocations. Since inception DAA has perform as expected, reducing risk in client portfolios by 46% with virtually no impact on returns.
We are differentiating ourselves as well with our new targeted service offerings, these are private vehicles that pursue emerging growth opportunities across asset classes. Our latest target and service offering is in energy fund, we launched in the first quarter, by quarter end the difference were $200 million and growing.
In total, private client has committed $3.4 billion to our suite of targeted services. Having them is enhancing our ability to broaden and grow our client base. Our average new relationship size by assets grew 16% year-on-year in the first quarter.
I am impressed by how the private wealth team successfully navigated our clients through the first quarter’s turbulent market. Through innovation and differentiation we keep driving growth in this business.
To finish our discussion, the businesses with the sale side, which you'll see on slide 10. Revenues of $126 million were flat year-on-year and up 7% sequentially during the quarter, that chart at the top left.
Looking at industry wide trading volumes in the top right chart, you could see that high US trading volumes offset lot of weakness in Europe, though volumes increased sequentially in every region.
We had a similar experience, exchange rates continue to be a challenge for us in Europe, but have improved recently. In Asia, many of our global trading clients have reduced risks. We're only just beginning to see them come back into the emerging market asst class. In the US, after a heightened in January volatility declined in February and flamented in March. You can see that in the display at the bottom left.
Our clients were challenged by sharp drop, particularly hedge funds which took down risk and missed the rally in the second half of the quarter. We felt that as well, but with our differentiated research and trading capabilities we continue to execute effectively and gain share.
Every year the Bernstein difference comes through in the result of independent surveys of portfolio of and trading managers, the recent annual US survey is the latest example. Bernstein Research ranked number one for both quality of research and greatest knowledge of companies and industries, in each case for the 13th consecutive year. And while research has always been our calling card in this business, we are now being recognized with quality of our sales and trading as well.
Bernstein ranked number one in both electronic trading quality and electronic service for the second straight year. It rose to number three for quality of sales and corporate access. And our recognition among managers is one of their most important providers in the commission sharing agreement category doubled, another word of confidence in our trading capabilities.
In fact in the last three years we more than tripled our number of CSA clients. Today, CSA clients drive more than one third of our trading volumes and consistently grow faster in non-CSA clients. We continue to prove the institutional clients at Bernstein as a uniquely value added partner in both research and in trading.
Finally, slide 11 recaps some of our accomplishments during the quarter. Diverse array of our equity and fixed income investment service ranked top decile and top quartile among peers across time periods during the quarter. We demonstrated graph and diversity in the geographical mix of our institutional pipeline and retail flows by region and product and in our private wealth client base.
We completed successful fund raised in innovative areas like commercial real estate debt and in energy. And we generated positive net flows in a quarter where growth was hard to come by.
Finally, we maintained our expense discipline and carefully managed resources. These are impressive accomplishment in a challenging environment and I am grateful to all the AB folks everywhere for the hard work they put into achieving them.
Now, I am going to turn it over to John.
Thank you, Peter. As always, I'll 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-Q.
Let's start with the highlights on slide 13. First quarter revenues of $590 million decreased both year-on-year and sequentially. Operating income of $132 million and our margin of 22.4% were also down versus both prior periods.
In each case, lower base fees were the primary driver of the decline in our financial results. Higher compensation and benefit expense contributed to the sequential decline as well. We earned and we'll distribute to our unit-holders $0.40 per unit compared to last years quarter adjusted EPU of $0.45. We delve into these items in more detail on our adjusted income statement on slide 14.
Beginning with revenues, total net revenues of $590 million decreased 7% year-on-year and 3% sequentially. Base fees decreased 8% year-on-year and 5% sequentially, as a result of lower average AUM across all three of our distribution channels.
Base fees declined more in percentage terms than average AUM, reflecting a mix shift from higher to lower fee products, higher than average billing adjustments also contributed to the sequential impact. Bernstein research services revenues were inline with the prior quarter, but increased 7% sequentially primarily due to higher client activity in the US.
Moving to adjusted expenses. All in, our total operating expenses of $458 million decreased 5% year-on-year, but increased 3% sequentially. I'll begin with compensation and benefits expense, which decreased year-on-year with our lower revenues, but increased sequentially due to higher accruals of incentive compensation and severance.
We accrued total compensation, excluding other employment cost such as recruitment and training, as a percentage of adjusted revenues. We accrued compensation at a 50% ratio in the first quarter of both this year and last, higher than the 45.6% in the fourth quarter of 2015.
First quarter promotion and servicing expenses decreased 2% year-on-year and 4% sequentially due to lower T&E expenses, lower marketing costs also contributed to the year-on-year decline.
G&A expenses decreased 2% both year-on-year and sequentially due to lower – due to foreign exchange translation gains and lower professional fee respectively.
Operating income of $123 million for the quarter was down 13% from the prior year, as revenue declines outpaced expense reductions, and decreased 19% from the fourth quarter due to lower revenue paired with higher compensation expenses.
Our operating margin of 22.4% for the quarter was down a 150 basis points from the first quarter of 2015. on a sequentially basis, the entire 430 basis points decline was due to the higher comp ratio.
In addition, our first quarter adjusted operating income of $132 million was $41 million lower than our GAAP operating income, primarily due to the exclusion of a following three items from our adjuster results they are not part of our core or recurring business operations.
First, we realized a $75 million gain from the liquidation of our investment in Jasper Wireless Technologies, which was acquired Cisco Systems. We plan to use a cash proceed receipt to fund incremental repurchases of AB units throughout the year beyond the amount required to offset EPU dilution from expected employee compensation related grants.
We initiated the Jasper Wireless investments several years ago when we contemplated launching a second venture fund. However, we subsequently decided not to proceed with the launch of the second fund and therefore maintain the investments on our balance sheet until we recorded the opportunity to liquidate it.
Second, we recorded net non-cash real estate charge of $28, representing new charges of approximately $29 million relating to the further consolidation of our New York space, offset by changes in estimates related to previously recorded real estate charges.
As a result of vacating and marketing for sublease two additional floors, we expect to generate approximately $3.7 million of annualized occupancy savings provided that we could successfully sub lease the office space based on our current assumptions.
Third, we adopted the new consolidation accounting standard for variable interest entities for GAAP reporting effective January 1, 2016. As a result, we consolidated certain seed investment funds that had been consolidated previously.
Although this reduced GAAP operating income by $6 million it had no effect on net income or EPU. Therefore we de consolidated the seed investment funds for adjusted reporting and in fact adding back the $6 million to our adjusted operating income. All three of these items are included in the GAAP to adjusted reconciliation included in this presentation appendix.
Finally, - effective tax rate of 5.7% for AllianceBernstein L.P. compares to 6.8% in the first quarter of 2015 and 4.9% in the fourth quarter of last year.
And with that, Peter, Jim and I are please to answer your questions.
[Operator Instructions] The first question is from Alex Blostein with Goldman Sachs. Your line is open.
Thanks. Good morning, everybody. Peter, question for you on the institutional business, nicely see the pipeline continue to grow, curious to hear what kind of what happened over the course of the quarter with the timing of the some of the fundings?
Just feels like the volatility probably cap people little bit on the sideline. So as we enter the second quarter how should we think about the pace of some of those $6 plus billion dollars coming in?
Well, it’s always hard to guess at this Alex, and I think the institutional pipeline maybe breaking down a little bit between conventional DB funders and non-conventional funders, such as insurance companies and some of the other types of funds that are out there.
I think the pension plans are probably a little bit slower. You are right the volatility probably slowed them down and as the markets become a little bit more stable, that could make that an easier world to operate in.
I think the insurance balance sheets on the other hand are reasonably consistent funders even in challenging environment. They have cash flow that’s reasonable predictable, they have to put to work, their businesses grow at reasonably predictable rate, recent terms of sales. And so I think there is less volatility in that part of the world.
So I think you could reasonably assume that if we get to the rest of the year and markets are more benign and even are upper trending, that institutional activity could escalate, but I think it would mostly be the pension plan side of that as opposed to the insurance or similar kind of balance sheet.
Alex, this is John, I would just add to Peter's comments, that in addition to the change in the pipeline that he described during the quarter, we had an additional $3.6 billion in institutional fundings, we call them pass-through. So they came in during the quarter and funded, so they weren’t in last quarter’s pipeline and they are not in the ending balance of this quarter. And that $3.6 billion was actually the highest than what's its been in the past three quarters.
Got it. Thanks for the color. And John, a quick one for you around expenses, there is couple of moving pieces I guess this quarter, as well as some of the savings you guys are trying to get at occupancy. Can you help us kind of guide us through the rest of the year?
So as we think about on the comp side, is there enough flexibility to kind of keep the comp rate inline with last years total level, so kind of like in the 50-ish percent zone I think, and then on the non-comp side, can you just give us a sense kind of how the saving will shake out for the full year?
Sure. I think first on the comp side, at this point it’s really to early to tell. The revenues were down for the first quarter versus the prior year and so we continue to accrue the 50% comp ratio. And I think we'll continue there until we get further along the year and get a little bit more visibility in terms of where revenues would shake up for the full year.
On the non-comp side, the non-comp expenses in terms of both G&A, promotion and servicing were both down this quarter versus the prior year quarter, they were also down sequentially versus the fourth quarter and also keeping in mind for all of last year they were down in 2015 versus 2014. So we continue to chip away there, make progress we talked about, the additional real estate savings that we were going to have from the write offs.
But there are definitely some items in there that can fluctuate from quarter-to-quarter. So if we sample T&E, traditionally its very light in the first quarter and we saw that and we also have trade execution expenses in promotion and servicing which are really a function of the volume of business that we are doing on the sell side.
So although we had a very low, those expenses very low in terms of the first quarter, it would not be appropriate to say run rate, the G&A expenses or the promotion and servicing expense that we have to the first quarter for the balance of the year.
So we're going to continue to keep a tight rate on the expenses, but keep in mind too that we also implied some general inflation charge that go ahead as well.
Understood. Okay, thanks for taking the questions.
Your next question is from Robert Lee with KBW. Your line is open.
Thanks. Good morning, everyone. Just question on private wealth I guess, couple things there. Number one, I guess, what are your thoughts around any impact or incremental cost related to the new DY rules, I mean, clearly you having a direct relationships with end investors as a distributor so to speak, I am assuming there is not a huge amount in retirement accounts, given the size of your client dates. But are you seeing any potential changes or impacts there or just even incremental cost around compliance?
I am sure Rob that there will be some incremental cost or compliance. I don’t think we expect them to be material, it will certainly be some. And I don’t think that we think the guidelines that they ultimately came out, which are more benign than what they were initially proposed, have a material effect on our existing business.
Okay. And maybe the follow up, you mentioned, you know, had a successful close on real estate fund and raising some capital for an energy fund. I want to maybe flush out a little bit some of those alternative strategies. Number one is I guess, is the – is most of the fund raising in many of strategies coming from the private wealth or are you seeing a broadening kind of institutional clientele?
And then also you kind of maybe size what I would call your alternatives platform and really focus I know there is also the direct lending platform that you've built out, just trying to get a better sense of the overall size of kind of that initiative?
Number one it is new, number two, it is growing, number three is, and it’s got basically four components to it that we've talked about. It’s mostly a private credit platform. So there is a lending part of that that lends to a commercial real estate borrowers, there is lending part of that it lends to residential real estate owners, there is a lending part that is lending to commercial organizations and then is part that lending to infrastructure investments.
The latter is the newest and the smallest and has not yet closed any fundings. The other three have raised capital in various different ways and the energy piece is an extension of the commercial lending activity where we've actually built out a separate team.
The private client activity is special to those businesses effectively, because first we offer those to our private clients when we think we've got something that’s unique and that they would benefit from, later on we sometimes extend that to the institutional marketplace, that doesn’t always happen, tend to fund the capacity of the service and the applicability to the institutional client.
But for example in the commercial real estate debt side, that’s actually very much an institutional vehicle and is quite scalable and I think the last funding of $1.5 plus billion was significantly in excess of what we to fund, mostly because demand in that side was growing.
I think if found that in the commercial lending platform we were lending to companies and its also private clients function and an institutional function, that’s also had success of raising capital and its growing its business.
In the residential mortgage side, historically that started off as both an individual or private client and institutional business and I think it will remain so and I would expect the infrastructure business to be almost entirely institutional.
I would just add, so private credit, as Peter talked about their four legs, private credit being one. The other three are fund to funds business which is – it is both institutional and the private wealth channel.
The second is long short equities which again sits across all three of our channels and the last is real estate equity, which again I would say it’s predominantly in our private client channel, but it’s also quite successful in our institutional channel as well.
I mean, maybe just follow up, would it be fair to assume that lot of these strategies, these direct lending strategies are kind of in for down funds or you may have committed capital but it hasn’t not always or so show up yet in flows or – shown up in flows?
And that I am assuming it’s a fairly high fee structure certainly compared to maybe overall average. So there maybe several billion of kind of committed capital that will kind of flow in over whatever time period next couple of years maybe…
They are virtually all committed structures. They do to our down over time. They carry for the most part a managing fee and a performance fee, some are just fee based, there is a commercial real estate debt for example, its just fee, no performance on that.
But in – if you look across all of them you'll see characteristics of higher fees and two sorts of fees, management fee and performance fee.
Great. Thanks for taking my question.
The next question is from Surinder Thind with Jefferies. Your line is open.
Hi, good morning. Can you talk a little bit about the dynamic of kind of redemption activity here, how are you thinking about those levels, I would have thought that redemption activity would have been up more than what you guys are kind of reporting in the quarter just given all the volatility and stuff? And then maybe how should we think about the current level going forward?
Well, I'll take a shot at that, Surinder, I – first of all I think, guessing at redemption is dicey stuff. It’s hard enough to guess that what your gross sales are, much less guess at redemption.
But we've had very strong performance across the platform in the last you know, three years. And we also sustained in the last few years as you know significant out flows in Asia in the GHY product. And I think that with strong performance and elevated redemptions from that product historically, I don’t think we're surprised at the level of redemptions, the lower level redemptions that we're currently experiencing.
Now our performance would return significantly weaker, I think that that would obviously have an effect on us. The private client business to be specific about, it had a really good performance this year and a number of years of managing volatility well for clients and that’s having an effect on redemption.
I mean, obviously when you have good performance redemption levels are lower. Predicting what they are going to be in the future, I think its very much connected to performance if we continue to perform, I think the redemption levels likely remain lower than they have historically been.
That’s helpful. I was just kind of trying to get a feel for whether you felt for the performance level that you guys are currently at whether or not this is kind of normalize level of activity given any adjustments for the global high yield product?
I hate to say it’s normalized, I really think that’s a challenge to predict that. I don’t think I am surprised or we're surprised that the redemption levels are lower than they historically have been, whether they will stay at this level as normal, I think that that’s a challenge.
I would even speculate that, if we continue to grow assets, even if we keep performance just growth of assets will actually create redemption in the total dollars.
Fair enough. And then maybe turning to the equity part of the franchise. Obviously that part of the business has been trending better for a while now. How should we think about – what its going to take for that, that part of the franchise to get deposit growth, it seems like the environment for equities, at least in the US for active equities is getting more and more challenging, any color on that?
It’s tough. I think you hit the nail on your head. I don’t think anybody is missing the fact that flows in the US equity market for the industry have been really challenging vis-à-vis asset and I personally don’t expect that to change.
I think that our job is been and we said it publicly we'll say it again, is to both produce performance and produce performance to products that are marginally [ph] different than what you could buy in passive, and I think if we do that I think we will end up with positive flows.
But I think that takes time, you know, we have to get our products on platform. And frankly institutions probably need to decide that they can actually get up in US equity. And to date most of the institutions have moved to US equity exposure other than small cap capacity, and so that’s been a challenge.
I think that the retail flow for us in the US have actually been positive over the last few quarters and that’s a big achievement in an industry that’s had very negative flows in the US retail space. So we're happy about that.
But I look, I think this is the challenge for the whole industry right now and our take on this is, its going to take two things, not just performance, but a product that actually is marginally different than what you could buy in passive.
Fair enough. And then maybe one quick follow up, I noticed you've got a new individual that’s kind of heading up the CRS [ph] business, any color around that or just kind of an update on that business?
Yes, we bought in somebody to I would say augment our team in the retirement space. That’s a business that we knew you would be quite happy with. I don’t think I could tell you that there is anything tremendously new in the quarter.
We continue to be a leader in that space. There were no significant wins in the quarter. But its – we continue to be in very active dialog with clients in terms of new opportunity.
And one of things that we think will grow in the balance of the year is the CIT version of the target date funds, vis-à-vis with Morningstar and with Mercer and that CIT version looks to be promising and has a number of institutions that are talking to us actively about it.
And you know, what we're very pleased with the performance on the multi-manager, both the fund and on the CIT product and its very differentiate, has a ton interest on the product line and so we're very hopeful for how that will develop in the coming quarters.
Thanks a lot guys for the color. That’s it from me.
The next question is from Michael Kim with Sandler O'Neill. Your line is open.
Okay. Most of my questions have been asked. But I guess, first Peter, I know you gave some color on April flow trends across select parts in the retail and the institutional businesses. But just wondering if you could give us any maybe high level commentary on quarter-to-date flows either in aggregate or by channel?
Well, look I don’t want to get too far over our skews here, but I would say that some anecdotes that I think rewarding to us have been consistent progress, including in this month so far of acceptance of our services on platforms and in focus list. And that across equities and fixed income, which just give us more leveragability in the retail environment.
We continue to see positive interest in Asia in some of our traditional services, that as I mentioned in our comments is obviously important to us. And I think that we sill feel like we have work to do in Europe. But as you know we have a new CEO of Europe Jamie Hamon [ph] who came to us from Hempelton and he is doing a terrific and job and of course it’s very early, he hasn’t been here that long, but he is given us insights in capabilities that we didn’t have before and we're optimistic about that.
But I think the question was asked earlier about the equity world and active equities, and the growth of active equities will be a headwind, that will be a challenge. By the way, I think it’s a challenge because investors have concluded that active management can't perform it and I think that that’s a really long conversation.
But I would summit to you that, that we have and we'll continue to have managers that are actually performing and the consistency of that will actually weigh on investors over time.
I would just add, as Peter said, the retail environment as we indicated in our remarks, is a more constructive environment today than what it was beginning of Q1. Now institutional, it’s a lumpy business, I don’t know how things would turn out for month.
It’s a lumpy business that is way to look at it. And as again, I think as we mentioned in the past in our private wealth business, April is tax month, so that is typically what you would expect.
Got it. Okay. And then maybe one for John and I know you remained focused on both investing for growth, as well as staying disciplined on expenses. But just assuming sort of flat markets from here, would you expect expenses to be down year-over-year or maybe similar to the 5% decline we saw in the first quarter?
No, as I was saying, Michael earlier, I don’t think it’s appropriate to take the first quarter numbers an run rate them, and assume that that’s going to be the G&A for the year or the promotion, servicing because again there is something’s where we had FX benefit in the first quarter and we had some lower T&E and lower marketing and lower trade execution expenses.
So, again there are things that fluctuate from time to time here. We're going to continue to stay focused on the expenses. But we're also trying some inflation headwinds as well. So I think looking forward we just have to keep that in mind.
Okay. Fair enough. Thanks.
The next question is from Bill Katz with Citigroup. Your line is open.
Okay, thanks so much. Just inline with expense discussion, is that still commit to and try and generate a 50% plus incremental margin?
Yes. That’s where we grow revenues Bill.
Bill, I mean, I actually feel pretty good about the incremental margin in the current quarter that’s over 50 on the way down.
I understand that, okay….
And by the way, Tim, would let me say to you in my comments that in fact on the way down it was less than 50%
Yes, so I would just…
And the reason why is of course we can't continue to predict that’s sustainable. But I do think it’s important that you noticed that in fact we did control the expenses in a way that actually did produce that margin. And the upside, we had a 60 plus percent margin last year.
Okay. I noticed, you had cut headcount by about 150 since the end of the year, how does that factor into your ability to generate or sort of stick to a 50% or better comp ratio?
I think, Bill, I think we're anticipating going above 50%, the headcount its bad at the end of Q1, its about where it was last year at this time. We continue to invest in the parts of the business that are growing. So I would be surprised if that headcount doesn’t creep up somewhat over the course of the year. But the most important point is, is that we don’t anticipate being above 50%.
Got you. Okay. I do have a couple of follow up, and so that into one question. Part one is why go from a close end to an open fund, why not just open a new fund, part two is can you talk a little bit about qualitatively where you're seeing the success on the private client growth in terms of financial advisors and then third, maybe update on you mentioned that on a new platform for the retirement opportunity, what do you think, so flush me out a little bit?
We may have to go back all three of your questions. But let me just deal with the closed end funds. One of the problems of opening a new fund is you don’t have a track record. What is the benefits of having a track record is that investor will actually invest.
One of the issues or one of the opportunities with the closed end funds, and you know, closed end funds as you know run at discount that’s never a good thing for investors, and then if we open it up we obviously eradicate the discount and that long-term track record becomes available for us to market to client.
So the reason why you know, it started new fund versus close fund closed just in the abstract is that you can't use the track record and that’s obviously a valuable asset. What was the second question?
So curious on the private clients, you mentioned it’s a fair time, and you said you are having robust discussions around that, just sort of wondering if you could talk a little, maybe pipeline or where the new business is coming from and can you just help frame out the opportunity a little bit more?
Well, look I think that we are beginning to have the expected longer term growth of that business, I say expected because we believe this is going to happen, we knew its going to take time, we bought new people into the business, we trained them, it takes time for them to get experience in their training but we believe the platform, the strength of the platform the growth – the breadth of the platform, the performance of the platform is ultimately the seasoning of the financial advisory would result in growth. And that is exactly what's happening and it’s growing in numbers, its growing in size and its growing in diversity.
Those were all good things. And expect that it has momentum to, this is not a flash in the pant. You are always impacted by the competitive environment, I think the volatility played a little bit into our hands this year, last year many private clients were not as happy with their previous advisors that they had been, that certainly help given that our performance in our business was quite strong.
And I think clients noticed that. And perspective clients that. And that helped us growth as well.
Okay. I can follow up offline. [indiscernible]. Thank you.
Your next question is from Mike Carrier with Bank of America Merrill Lynch. Your line is open.
Thanks a lot. Peter, maybe just first question, it looks like on the institutional side, private wealth you know, the trend are pretty strong in a pretty challenging environment, in retail you mentioned that redemptions get better and again pretty surprising the environment.
When you look the sales trends and the overall industry it’s been pretty challenging, but when you think about the platforms, that you're on, and maybe some of the differentiated products you know, that you guys have launched in and out there.
I am just trying to get a sense of how many of those like products are getting some traction on the platforms versus that process of just trying to educate and which I know it takes some time, but I just wanted to get a sense on how much maybe traction you're starting to see?
That’s a good question Mike. Look, we've got some really fabulous performing products and I am not going to get them all right, so and I want to treat to everybody fairly. But the US large cap growth just to mention one, has stellar competitive numbers, one, three, five and 10 they are all in single digits in the terms of decile.
US large cap equity is a challenged phase, but yet that service has net positive flows. And it’s also getting attraction around the world, in particular in Japan and Asia. So that’s an example of where we've got a very strong performance story, very strong manager, very strong experienced track record and we're telling that story in the faith of pretty strong headwind and its winning.
The global bond story, the global high yield story, the US high yield story, American income store with regards to opening up the fund, these are also strong stories and we are seeing large distributors begin to understand the value of global bond, and not just the wedded to US taxables and international.
That’s a new change. That we've been talking about that for 10 years or 15 years with clients. But this year we've actually seen institutions embrace the global bond idea, mostly because the global bond is it just intuitively make sense. You're not limiting yourself to some smaller universe, you're actually taking the world and saying I can produce the better return if I actually have the ability to invest in any security in the world, that’s logicable that make sense. And it just didn’t happen before because the world was chopped up into pieces. So we see progress on that front.
As private credit platform that we talked about a lot, we're trying to get institutions to recognize if their normal their natural position is actually to provide liquidity into a market place, if their long-term investors.
And the private credit space is a place where if you provide liquidity you can get paid for it, they have to sell liquid securities to buy the yield liquid ones, so the question is what's the value of the liquidity, but its hundreds of basis points, and I think that’s beginning to get peoples attention.
So to your point, its both education, as well as recognition, but I think we've seen more recognition and less education in last six months than we have in the last five years.
Okay. That’s helpful. And then John just two quick ones, first on the expenses, I think you mentioned there was maybe some severance in the comp, I don’t know if it was a significant an update that you wanted to call it?
And then second is, just in terms of pace to buybacks, would that your extra cash that you have from sale, just any idea in terms of pretty consistent or continue to be opportunistic just given the volatility out there in the market?
Sure, Mike. The first question with regards to severance, all I say that it’s larger that what it had been. For example in the first quarter of last year or any quarter of last year actually it was larger. And but we don’t break it out but it is included in the comp ratio as Jim mentioned earlier.
And then on the second item, as far as the buyback, so again, this incrementally. So if you think about it, we tend to issue - net issued to employees about 4 million shares a year, I think last yea may have been about 4.5 million, that’s the shares we issue for compensation base grants, net of withholding and our traditional goal is to buyback back to offset the dilution.
Now what we're going to do with that, that proceeds of 75 million is by an amount in incremental to that, right, so we'd looking to actually bring down the share count and we'll be looking do that throughout the year.
Okay. All right. Thanks a lot.
[Operator Instructions] The next question is from Craig Siegenthaler with Credit Suisse. Your line is open.
Thanks. Good morning. So, just on the $2.8 billion of 1Q tax or bond flows, how did they split by geography, and especially to say non-Japan, Asia?
Not sure I know the answer to that one Craig. But if you follow with Andrea, I bet she could give to you.
Do you have any color on the product contribution?
Contribution to P&L?
No, the net flows by product for taxable bond? I can follow up with that one to.
That’s a top of my head, either. Those are good questions I don’t know them mostly top of my head.
Right. And Peter, one more, in the past you provided really nice…
One more stumper…
Not this one, I think you will have this one.
I need to stop all Craig, those are few toughies.
So Peter, you’ve always provide sort of good perspective on the battle of high active share versus low active share and concentrated equities, I want to see if you have any updates on sort of that discussion and also what sort of the difference between retail and institutional in terms of that battle?
You're right. I can answer that one. So look, that’s what I meant when I said I think that passive active battle is going to continue. I think investors have concluded so far that the way they experience active management in the last 20 years has been unproductive for them.
And when I say experience active management, what I mean is that, investor don’t actually experience active management, manager by manager, they experience it as package, they hire a number of active managers and they look at what happens to them.
And when they look at that, they don’t find positive results, because they are over diversified and the managers probably have too much money and they are challenged and actually producing performance.
Plus and this I think the most fascinating part, if you look at the information that Morningstar puts about, the difference on, the theoretical return of dollar and fund over time versus what the actual investors get by calculating funds in and funds out the actual fund flows, the difference is just staggering. The cost that investors incur through human behavior buying at the top and selling at the bottom are nothing less than a 100 of basis points.
So when you add all that together investors saying, look this is not a good experience for me, so I am going to pass it. Our response to that is look, we don’t think that’s rational, we don’t think its right, we understand why you are doing it, we don’t think that’s right, but the answer the industry has to have and that we are promoting is to have managers who one are very capacity constraint and two, are investing in high conviction ideas and have as I say marginally different portfolio.
So look you can't find 20 stocks in passive, if you going to buy a passive portfolio you are going to get thousands, but if you want an active portfolio in 20 stocks then you have to buy a active manager.
And there is various other things that you can find in active manager, we talked in the bond side many, many times about why ETS are not that attractive and why having an active manger in bonds is a much attractive, the same principle.
So what do I think is actually happening, I think that we're still on the education phase quite frankly Craig, I think we are eating our cooking, we're doing what we think is the right thing to do. But I don’t think the market has turn and has recognized that.
There are few institutional investors who are talking about this and some even fewer who recognize it and of course there are individuals who get it. I do think the high net worth where all the private client where all get more of this than the broad retail world. But I think we have a long way to go and I think the industry has to talk about this much more openly and admit some of the frail piece of the structure in order to actually change it.
Great. Thanks for the color, Peter.
Showing no further questions at this time. I'll turn the call back over to the presenters.
Thanks, everyone for joining our call today. Craig and others feel free to follow up with me, and the rest good day. Thanks so much.
Thank you, everyone for participating in our conference call. Feel free to contact Investor Relations with any further questions. Have a great day.
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