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AllianceBernstein Holding

Q2 2008 Earnings Call

July 23, 2008 5:00 pm ET

Executives

Lewis Alan Sanders - Chief Executive Officer

Gerald M. Lieberman - Chief Operating Officer

Robert H. Joseph - Chief Financial Officer

Philip Talamo - Director of Investor Relations

Analysts

William Katz - Buckingham Research Group

Craig Seigenthaler - Credit Suisse

Marc Irizzary - Goldman Sachs

Robert Lee - Keefe, Bruyette & Woods

Cynthia Mayer - Merrill Lynch

Roger Smith - Fox-Pitt Kelton

Operator

Welcome to the AllianceBernstein second quarter 2008 earnings review. (Operator Instructions) I would now like to turn the conference over to the host of this call, the Director of Investor Relations for AllianceBernstein, Mr. Philip Talamo.

Phillip Talamo

Thank you [Kayla]. Good afternoon everyone and welcome to our second quarter 2008 earnings review. As a reminder, this conference call is being webcast and is supported by a slide presentation that can be found in the Investor Relations section of our website at www.alliencebernstein.com/portal/investorrelations.

Presenting our results today is our President and Chief Operating Officer, Gerry Lieberman. Lew Sanders, our Chairman and CEO and Bob Joseph, our Chief Financial Officer, will also be available to answer questions at the end of our formal remarks. We would like to take this opportunity to note that some of the information we present today is forward-looking in nature and as such is subject to certain SEC rules and regulations, regarding disclosure. Our disclosure regarding forward-looking statements can be found on page two of our presentation, as well as in the Risk Factor Section of our 2007 10-K. In light of the SEC's Regulation FD management is limited to responding to inquiries from investors and analysts in a non-public forum. Therefore, we encourage you to ask all questions of a material nature on this call. And now I'll turn the call over to Gerry.

Gerald Lieberman

Thank you, Phil, and good afternoon to everyone on the call. Before getting into the specifics for the quarter, I just want to point out the obvious and that is that the trailing 12 months ended June 30, 2008, was the worse period for the global equity markets in about five years. These tumultuous market conditions have not – have had – not surprisingly a negative but not a devastating impact on our results. Accordingly, AUM, revenues, expenses, net income and distributions are all down versus the second quarter of 2007.

With the scene now set, let's get into some specifics. After a strong start to the second quarter of 2008, a severe deterioration that begin in mid-May led to primarily negative returns across most of the global capital markets. Among the [inaudible] indices that we discuss on the next two displays, only the Russell 1000 Growth Index was positive for the quarter and it was barely positive.

On display three, you'll see that the Russell 1000 Growth generated 120 basis points of return. But the Russell 1000 Value Index was down 530 basis points and the S&P 500 lost 270 basis points. The Lehman Aggregate Bond Index was in negative territory for the first time in a year dropping 100 basis points.

The continued weak performance in non-U.S. markets is shown on display four, with all three indices generating negative returns for the second consecutive quarter. Although returns actually improved substantially versus the first quarter, the MSCI EAFE Index was still down 230 basis points. The MSCI World down 170 basis points and the MSCI Emerging Market down 90 basis points.

AllianceBernstein's relative performance was mixed for the second quarter of 2008 as we show on display five. Most equity, value equity services, led broad benchmarks, while our growth equity services had a respectable quarter, generally outperforming their benchmarks. Fixed income services outperformed with all but one services shown in our appendix, outperforming benchmark or peer average returns. As far as suite, all of our alternative investment services, absolutely turns were mixed, but were generally in line with the major global indices with pockets of outperformance. Additional detail on the relative performance of many of our services can be found in the appendix on displays 26 t 35.

I'll begin my discussion of assets under management on display six, with a look at changes, by channel for the three months ended June 30, 2008. During the quarter, total AUM fell to $717 billion, down 3% for the quarter. Down 10% versus last June and 14% off the all time high of $837 billion achieved at the end of October, 2007. Modest net outflows of $4.6 billion increased slightly from the first quarter. Retail again experienced our most significant net outflows at $2.5 billion, as both our institutional and private channels had net outflows of less 1% of the beginning AUM.

Finally, the difficult six weeks I alluded to earlier lead to market depreciation of $14 billion. It's for changes in AUM over the last 12 month, shown in display seven, market depreciation was the driver of a 10% or nearly $80 billion decline in assets under management. Net flows were quite modest with retail outflows largely offsetting the net earned inflows into our institutional investments and private client channels.

Display eight summarizes the changes in AUM by investment services for the three months ended June 30th. We incurred net outflows in all three of our primary services, which funded $2.6 billion of asset allocation services, which are reflected in our other column. As you can see, market depreciation of $14.1 billion was due predominantly to value equity services.

Looking at changes in AUM by investment service, for the 12 months ended June 30, 2008 on display nine, you can see that our value equity and fixed income services experienced modest net inflows and our growth equity services brought net outflows of $4.4 billion.

Value equity services suffered the most significant market depreciation at nearly $72 billion as this style investing, which is our largest service, was most exposed to market dislocations. Fixed income was the only service that generated market appreciation during the period, a result particularly important for our private clients.

Turning to distribution channel highlights, I'll begin with institutional investments on display 10. AUM declined 2% in the quarter with market depreciation accounting for the bulk of the decline. Nearly 100 mandates funded by clients in this quarter and this quarter experienced net outflows of $1.4 billion as asset allocation inflows only partially offset at outflows that were concentrated in U.S. services.

Institutional gross sales in the quarter of which 91% were in global and international services, nearly 30% were in fixed income services, were more than offset by outflows. Meanwhile, out pipeline of one, but unfunded, institutional mandates fell by about $1 billion and now stands at $15 million.

Highlights of our retail channel are shown on display 11. Total AUM decreased by 4%, due primarily to market depreciation. Net outflows were primarily in equity services for both the U.S. and non-U.S. markets with outflows lower than first quarter levels.

Turning to display 12, you'll see there our private client channel include modest net outflows. But notably, this is the first time this channel has experienced quarterly net outflows in over seven years; that's clients and prospects reacting to the continued market turbulence. Market depreciation totaled $1.7 billion or 1.7% as out private clients benefitted from effective asset allocation advice.

Turn to display 13 for institutional research service highlights. After a string of record quarters revenue fell sequentially, but we're still up 7%, versus last year's second quarter. The year-over-year growth was driven by our U.S. operations, while the sequential decline occurred globally as market volume decreased from the exceptionally robust first quarter. Also, both our research and training operations had excellent showings in separate surveys. In a leading independent survey on institutional investors covering both U.S. and European equities, Bernstein was again ranked number one on multiple key metrics of research quality. Also an ITG Brokerage Edge Survey, we ranked number one in the U.S. and number two in the U.K./Europe for trading, execution, quality, and value added during 2007 among full-service brokers.

On display 14 you can get a global mix of our AUM. At this [inaudible] on behalf of non-U.S. clients and assets in our global and international services, fell by nearly 4% year-over-year which is substantially lower rate than the 10% decline in total AUM. In stark contrast assets managed on behalf of U.S. clients and U.S. services fell by 13% and 18% respectively. Finally, non-U.S. clients and global and international services each accounted for a larger percent of our total AUM than they did last year at this time by 200 and 400 basis points respectively.

Display 15 shows that during the second quarter of 2008, the total AUM associated with our suite of alternative investment services grew by 5% sequentially. As a reminder, the AUM fingers on the display are predominantly related to hedge funds. But now also includes stand-alone currency mandates, as well as our – the invested capital of our venture capital fund. The increase in alternative investment assets [pursue] to a new stand alone currency mandate, which were somewhat offset by depreciation in hedge fund services.

Finally, clients of our hedge fund services are able to redeem assets semi-annually, with July 1 of 2008 being the most recent redemption date. The hedge fund outflows for July were moderate with a portion of these assets remaining within the firm.

Now let's switch to the income statement, beginning with revenues on display 16. Net revenues at just over $1 billion, declined by 8% versus the prior year quarter, due in large part to lower advisory fees, the result of both lower AUM and lower performance fees. Investing gains and losses includes $25 million in mark-to-market gains on our venture capital fund, 90% of which were earned on behalf of our clients and is consequently offset, and a non-controlling interest in earning caption, shown on display 20.

Additionally, we recorded $12 million in losses on investments related to our employee deferred compensation investments, which we compares most unfavorable to a $42 million of mark-to-market gains in the second quarter of 2007. As a reminder, these mark-to-market gains and losses have corresponding – we lost that in current and future incentive compensation expense. The substantial decrease in dividend and interest income and a corresponding offsetting decrease in income expense below were largely the result of the outsourcing of our prime brokerage services as well as lower interest rates.

Display 17 provides some additional detail behind advisory fees. Here you can see that lower base fees and a lower long [inaudible] performance fees is contributed to the $50 million or 6% decline in total advisory fees, at a ratio of roughly 60% and 40% respectively.

Our three asset management channels experienced a single digit percent decline in revenue, ranging with 3% down in private client to 9% down in retail, due primarily to lower AUM, as lower performance fees were concentrated in our institutional channel.

Operating expenses, detailed on display 18, declined by 8% year-over-year. I will discuss employee compensation and benefits in more detail on display 9. So I'll begin our expense discussion with promotion and servicing expenses, which fell by 9% or $16 million in the quarter. Lower distribution plan payments, coupled with our increased focus on controlling expenses, such as travel, firm meetings and other discretionary expenses account for the decline.

General and administrative expenses were essentially flat as higher infrastructure costs to support our increased global headcount was offset by our recovery of a significant portion of a cost associated with the employee arbitrations that we discussed last quarter.

Display 19 details employee compensation and benefits, which fell 10% to $428 million. Increased headcounts, primarily hired in the second half of 2007 and 2008 merit increases, merit raises, increased based compensation by 18% versus the second quarter of 2007. While headcount was up 9% versus the prior year quarter we had only 90 employees during the second quarter, after adding only five employees in the first quarter of 2008, taking total headcount up to 5,635 staff members or just under 1% growth for 2008.

Incentive compensation expense is down 25% year-over-year due principally to lower accruals for cash bonuses. Mark-to-market losses on investments related to employee deferred compensation investments, decreased incentive compensation by $7 million versus a $19 million increase a year ago. We disclosed the value of investments relating to our deferred compensation investments on our balance sheet on display 36.

Commissions fell by 10% as declines in our three asset management channels were only slightly offset by the increase in institutional research services commissions. Fringes and other expenses were down 8% predominantly due to lower recruitment expense.

Turning to display 20, the Summarized Income Statement, I'd like to point out a change to this display with respect to how we showed in the caption non-controlling interest and earnings. Historically, the expense impact of this line had been recorded as a part of general administrative expenses. Accounting rules – big thing – that when its expense, becomes material it must be broken out and broken out below the line as a separate item. Due to this quarter's gains in our venture capital fund which I mentioned earlier, we deemed this disclosure appropriate.

In summary, while we continue to aggressively manage expenses, the severe decline in the global markets had a negative impact on our AUM and subsequently on our revenues. As a result income and margins suffered. Net income declined by $55 million or 16% and the operating margin, adjusted for non-controlling interest and earnings expense, fell by 210 basis points to 28.9%.

Finally, the firm's income tax rate increased by approximately 200 basis points to 10% as income generated outside the U.S. continues to grow as a percentage of consolidated income.

As shown on display 21, the holding companies 33.2% share of the operating partnership's earnings generated $93 million in the second quarter of 2008, versus $110 million in the same quarter last year, resulting in net income after taxes of $84 million. Diluted net income and distributions per unit of $0.96 represents a 17% decrease versus the prior year's quarter.

I'll wrap up by reiterating that despite continued global market turmoil and challenging capital market conditions, our singular focus remains providing our client with superior investment returns and world-class service. Operationally we'll continue to very carefully invest in strategic initiatives vital to our long-term growth, while at the same time, intensifying our efforts to control expenses. So, we'll take all of these endeavors to ensure success for the stakeholders of AllianceBernstein. And now, Lew and I'll be happy to address your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bill Katz - Buckingham Research Group.

William Katz - Buckingham Research Group

Thank you, good afternoon everyone. I was just sort of looking at, deeper into your supplement at some of the relative performance trends and it clearly looks a bit mixed and so I guess the bigger question is, you know, so far we've seen a few asset managers report and the flow stories have been pretty tepid at best. What is it that's going to get the flow story moving from sort of a net outflow mode to a net inflow mode? I'm sort wondering, maybe Lew, your perspective as well, you know, is there anything structurally that's changed in the industry in light of sort the marketplace in the last 12 months, as you sort of answer that question across the three distribution lines.

Lewis Sanders

Well Bill, look, I think it's clear that there's been a broadly based movement to risk aversion on the part investors at large, whether they're wealthy private clients retail clients or, for that matter, very well-heeled institutional clients. You can tell, as I know you've tracked, by the extraordinary growth in funds that focus on liquidity. The last 12 months, they're up a trillion dollars in assets, some 40% in the United States alone, a pattern that's been replicated in many other countries. So the tepid description that applies to long only services, I think it's a function of that phenomenon and it is of course cyclical. So a setting which is more reassuring to investors will likely see a reallocation of that liquidity back to long only mandate and we anticipate during that setting that we will participate.

William Katz - Buckingham Research Group

Okay and the second question is just sort of curious, in the institutional business this particular quarter, you didn't have kind of sort of update on the penetration to define contribution. I'm just sort of curious if that was just not meaningful this quarter or just anything going on there, maybe just a general update of how it's going in retirement services.

Lewis Sanders

It's, it wasn't that there's any change in emphasis here. Indeed, we formalized our effort in defined contribution to the extent of actually establishing a unit dedicated to that purpose and that purpose alone. It is among – it's not the most important initiative in the firm. But the character of that business as you know, especially coming from the immature base from which we are approaching the market is, one, a very long sale cycle. So what I can report to you is that we continue, in our view, to do very well in engaging prospects and in participating in the competitions that are actually present in the marketplace with win rates that make us really feel quite confident that in time this will become a very substantial business for the firm.

William Katz - Buckingham Research Group

Okay, thank you. I'll get back in queue.

Operator

Your next question comes from the line of Craig Siegenthaler - Credit Suisse.

Craig Siegenthaler - Credit Suisse

Hi good evening. First on relative performance, just looking at some of your growth strategies, performance is generally very strong in the second quarter and even good into the longer-term metrics. It's kind of a little bit of the opposite story which [inaudible] from the value front, but I'm a little bit intrigued because flows between both strategies, I mean on a organic growth basis, are actually still strong for the value side. So I'm wondering when are we going to see an improvement in the flows on the growth styles?

Lewis Sanders

Well look, first you have to recognize that very short run changes in relative performance don't immediately reflect themselves in flows. The history of value is one with very strong relative performance over long periods of time. So the fact that value as a style is out of phase in the last 2 month, wouldn't likely seriously disrupt its position in the market and comparably the reemergence of growth as a style is of recent vintage. It takes time before it's reflected in client choice and results in improved flows. We look forward to it, that downstream.

Craig Siegenthaler - Credit Suisse

And Lew, my question was actually more on a relative performance basis than an absolute basis, just looking at even like five year numbers, just look and see when – I guess your question is kind of answering well, the recent shift in growth to value, but I'm actually thinking on a relative standpoint, because some of your competitors on the growth side have already started picking up in terms of growth flows.

Lewis Sanders

Well, we haven't as yet, as you see from the data.

Craig Siegenthaler - Credit Suisse

Second question is on the investment gain revenue line item and maybe – it's good to see the good disclosure here and what I'm wondering is if we can get a little bit better color on the asset mix? So just wondering what is the level of assets which provide returns into that bucket and if we can think about what portion of that is equity sensitive, so we can think about, you know, what marks we should think about into the third quarter?

Lewis Sanders

It's – the substantial majority is equity sensitive.

Craig Siegenthaler - Credit Suisse

And how large is that portfolio?

Gerald Lieberman

It's about [inaudible], in the back, in the back of the appendix.

Lewis Sanders

We actually disclose it. If you'd refer to page 36 in the display package, it's 646 million at the end of June. It's a very, very substantial amount of money. So you can see that in the short run in periods of high stock market volatility it impacts quarterly results in a meaningful way.

Craig Siegenthaler - Credit Suisse

Got is. So it's just simply the investments related deferred compensation line on page 36.

Gerald Lieberman

Yes and there's a mix there between mutual funds and hedge funds. I mean if we give –we want the employees to invest alongside our clients and they do so. So the majority of it is equity sensitive, a majority is mutual fund, but a not immaterial amount of that actually is in hedge funds.

Craig Siegenthaler - Credit Suisse

Got it and then also some I guess is in venture capital still?

Lewis Sanders

Actually no.

Gerald Lieberman

It was, and only because we only have one venture capital fund and it was a small amount and so that really does not, you know, I think that in the next round we may see the employer participation, but not in the first one.

Lewis Sanders

The company however, as you'd know from Gerry's remarks, has a general partnership stake in the venture capital fund to the extent of 10% of its investments.

Craig Siegenthaler - Credit Suisse

Okay great, all right. Well, thanks a lot for taking my questions.

Operator

Your next question comes from the line of Marc Irizarry - Goldman Sachs

Marc Irizarry - Goldman Sachs

Oh great, thanks. Just a question on the institutional pipeline, you know it seems like the level of the pipeline has sort of been around this 15 billion level for some time, yet the flows when they come through you know, it doesn't appear that they, you know, ever really hit that run rate and that's probably some of it maybe is on a net flow basis; maybe that you're seeing some, you know, some headwinds in some place, some tailwinds in others. Maybe Lew, can you talk about what you're seeing in terms of the composition of that pipeline and maybe some trends from institutional perspective on asset allocations?

Lewis Sanders

Well first of all if you actually – if you look at the gross inflows in instructional they're running at approximately a 60 billion or so rate. So if you think about the pipeline as having three or four months of duration, 15 billion, and you're replenishing it, it's going to compute to – it's going to be synched up such that the backlog and the reality of flows are in line.

If you study the net flows what you'll see is that new business is down just a little, redemptions are up just a little, as is cash flow out in existing accounts, a function of clients reallocating or in some way requiring funds from their account for other purposes. And that combination has taken what was moderate net inflows to modest net outflows. And as to the tone in market, we're not seeing any noteworthy change. It's a pattern of some level of opportunity, but subdued relative to where we were 12, 15, 18 months ago. And that's throughout all the channels. And indeed the pattern I described applies to all the channels. Really fairly subtle changes, but with the scale of these numbers it swings you from moderate net inflows to modest to net outflows.

Gerald Lieberman

And I think it's also important to the loose comments in regard to cash flow. We have not seen a loss of accounts. We're not losing clients, but cash is flowing out from the clients that we got and that's true both in retail as well as it is in instructional with cash flow going out with some allocation. And so, so far we've been holding onto our clients in all three channels, but the cash flow numbers have increased and you can see that even for the quarter versus the 12 month numbers, it's getting, you know, increased cash flow out.

Marc Irizarry - Goldman Sachs

I guess this is just from just a strategic perspective, I mean when you think about the cash management and liquidity business and being able to you know be a solutions-based model for your clients. Is your product mix and asset mix broad enough to, you know, sort of suit all of those needs?

Lewis Sanders

Well, it's an interesting point you raise. If we were still in the cash management business today, I'm sure our flows would be much, much more impressive than they are, but it's a business that in our judgment is not strategically important. When that capital that today is seeking the safety of liquidity changes its objectives towards mandates with greater opportunity, I don't think we're in anyway disadvantaged in recapturing share at that time.

Gerald Lieberman

As far as a solution-based kind of strategy that we have, we are indeed saying that in retail where this is a fairly new phenomenon that's getting some traction, the redemption rates are significantly lower. This money is much, much stickier than what – anything that we've seen over, you know certainly the last seven, eight years and of course, you can see how sticky the money is in our private client channels. I mean we're still confident that this strategy is the right one for our firm.

Lewis Sanders

I'll just add one other point on your question Marc, about the changing character of the business. I think it's pretty clear that in the long term, there is a shift towards alternatives from long only mandate and it's a market that we, as you know participate in and you should anticipate – you will see meaningfully more from us in the period ahead.

Marc Irizzary - Goldman Sachs

Great, thank you.

Operator

Your next question comes from the line of Robert Lee - Keefe, Bruyette & Woods

Robert Lee - Keefe, Bruyette & Woods

Thank you, good afternoon. Lew, I have a question for you. I know it's generally not your philosophy not to roll out what I'll call kind of one off products, but I mean given the market dislocations of the past year, I mean have you – what kind of thought have you given to, you know, as some of your competitors have had in rolling out specific opportunity products, whether it's in the fixed income space or even in the financial space, I mean could you comment on that a bit?

Gerald Lieberman

Hey Rob, hold on, we're – a second, okay?

Robert Lee, - Keefe, Bruyette & Woods

Sure.

Lewis Sanders

Thank you. Sorry for the interruption, I was just checking on what disclosure constraints might apply here. We are actually active in that domain and because of those constraints, which are merely marketing constraints around registration. I can't describe in detail what we're doing, except to say that we are quite active and achieving some success and as to when we're in a position to report on it definitively we will.

Robert Lee - Keefe, Bruyette & Woods

Okay, fair enough and nothing I guess beat a dead horse – maybe I'll ask a different question. Private client group, I mean I understand it's been the first outflow you've had in about seven years in a given quarter. If I think back to I guess I'll call the last bear market, where you were putting up pretty good flows, if memory serves me, during a pretty difficult period as well. I mean what do you think is kind of different now versus if I thought back to, you know, maybe in a late '01 or '02 where the markets you know were equally challenged or maybe not as dramatic, I guess, but it was a pretty difficult time?

Lewis Sanders

You have to be careful about how one defines bear markets. During the period '01, '02, the value style of investing was actually made very robust recovery and as you know the Bernstein private client business has its heritage in that domain. And indeed had as a result successfully managed its client's assets through an extremely severe general market contraction that had to do with the bursting of their [TNT] bubble. And so our success in '02, from the standpoint of overall flows was a reflection of that phenomenon.

The setting we find ourselves in in '08 is very different. It's the value style that's actually leading this market contraction. And if you look at the overall mix of our AUM in the private client channel, you'll see that while it is a multi-asset affair as part of an overall solution set for these clients, it is even now still skewed to value, which is why it isn't surprising that you're seeing some effect in our flows. If you compare however, these results to other cycles that we've [inaudible] thus far, I think we're doing pretty well in defending our market position during this hostile period. After all this is the first quarterly outflow. It's really quite small and in the last 12 months this business is still positive.

Gerald Lieberman

So it could – includes all of those tumult of the last quarter, of the last 12 months. It also includes April for the tax outflow, so is that fair?

Robert Lee - Keefe, Bruyette & Woods

Great, thank you.

Operator

Your next question comes from the line of Cynthia Mayer - Merrill Lynch

Cynthia Mayer - Merrill Lynch

Hi good afternoon. I was just wondering in terms of the risk aversion you're seeing, whether you can – whether you're seeing any difference really between U.S. clients and overseas clients? Looks like your assets are still tilting to being more from non-U.S. clients, but I don’t know if that's a function of flows or new accounts or what.

Lewis Sanders

You know I just don't have the data at hand Cynthia to comment on whether there's greater risk emerging broadly outside of the United States, as opposed to in. My impression, well I can't support it with client data support here, is that the risk aversion is global as opposed to any particular country. And what you're actually seeing instead is a general slow down in flows for us. A modest pickup in outflows, that is outflows from existing relationships across the board, but that the secular trend towards non-U.S. clients and global and international services continues nonetheless, which is why our share continues to shift as measured in those terms in the company overall. I think it's more about our continuing relative penetration in the global and international arena as opposed to risk aversion by geography.

Cynthia Mayer - Merrill Lynch

Got it, that's really helpful. And then, you haven't talked about it for awhile, but I'm wondering what's going on with expanding private client overseas? In this kind of environment is that the sort of thing that you would maybe pull back on a little bit as you control expenses?

Lewis Sanders

Well as you know, we put in place our initial presence in London in '06. We've continued to grow that, build that office out and we are actively considering next steps with regard to expansion offshore. It is true and perhaps that's what prompts your question that a direct physical presence of the variety we have here in the U.S. in markets like London are very high cost up front; it is true. But there are other means to grow that business. And we'll be considering out options on that score as we enter '09. It is a strategic imperative that that business globalize as has all the other parts of the firm.

Cynthia Mayer - Merrill Lynch

Thank you.

Gerald Lieberman

And to add to a long question, a long answer to a short question, both internationally and domestic we did slow down the hiring of financial advisors as the market, you know, as the market started to slow down and our earnings started to slow down. So we gave real heavy investment for about four years running in our, you know, in our footprint domestically and then opening up our first step you know outside the U.S.

Cynthia Mayer - Merrill Lynch

Great. Thanks.

Operator

Your next question comes from the line of Roger Smith - Fox-Pitt Kelton

Roger Smith - Fox-Pitt Kelton

Thanks a lot. I just want to go back to the investment gain line to make sure that I'm fully clear of what's going on there. It looks like if I look at 2007, the second quarter there, it was a $42 million gain on the deferred comp line and then the other piece there, the $4 million, would that be related to venture capital gains in the second quarter or is there really some other piece that gets put into this line?

Lewis Sanders

There are other gains, because the company has seized money for instance in various services, adds up to perhaps $100 million in total, so in an up market there's going to be a gain on that. And that's probably what you're seeing, the mark-to-marking in venture capital, until this quarter, has not been material. Which is why this is the first quarter we had to break it out.

Roger Smith - Foxx-Pitt Kelton

I got you. Okay perfect, thank you very much.

Gerald Lieberman

And Roger, usually the volatility of this line typically is just a mark-to-market under deferred compensation. Because I mean to Lew's point our seed money here is, you know $60, $70, $80, maybe $100 million, you know, at given points in time. That's not what drives this line historically; it's really deferred compensation.

Roger Smith - Fox-Pitt Kelton

I got you.

Lewis Sanders

Yes, but it's deferred compensation 6.5 times the size of the seed money.

Roger Smith - Fox-Pitt Kelton

Right, no, no, no doubt. Okay.

Lewis Sanders

And whatever happens on the venture capital just does go right back in or in the past has gone right back into G&A and kind of go forward basis we'll just see that come out as a separate line item in the expenses.

Gerald Lieberman

You know we'll – if it's to the extent that it's material, we have to break it out. But because it was so – if we go back, way back, I mean we had minority interest that was significant from – we actually had seven or eight joint ventures of things. They're all virtually gone except for one. So what's going to drive this down is activity in our venture capital.

Roger Smith - Fox-Pitt Kelton

Okay I got you. And then just on the alternative investment services there, did go up 5% in the quarter it, you know, I don't know if you talked about this at all, but can we get an idea of whether that pushed some of the funds closer to high water marks or is that more just new flows in there?

Lewis Sanders

It's flows.

Gerald Lieberman

No, its flows and it not in hedge funds; it's more in currency services.

Roger Smith - Fox-Pitt Kelton

Okay great, thanks very much.

Gerald Lieberman

Which is, you know, one of our newer initiatives and it's getting – we're getting traction in currency services.

Roger Smith - Fox-Pitt Kelton

Got you, thanks a lot.

Operator

Your next question comes from the line of Bill Katz.

William Katz - Buckingham Research Group

Just a follow up on that same question on the investment gain versus the non-controlling interest, just trying to box or put together that, you know, $25 million mark-to-market gain in the revenue line, but it's on the, after the I guess this is reported income, it's also a $25 million deduction. Is there any kind of –

Gerald Lieberman

No, no, no, no, no. No, it's a 90% of the 25 is the deduction. All right?

Lewis Sanders

And Bill what you –

Gerald Lieberman

Sorry, we have a 10% interest in venture capital. The gain, the mark up in the venture capital was 25; the offset is 90% of that which is on behalf of all of our clients. All right, the others, you know, small amounts of money on the line is our – we do have a minority interest, the year in there for the one loan joint venture we're still in. We have a joint venture in Australia. Does that answer your question, Bill?

William Katz - Buckingham Research Group

Sure okay, that's fine and then the other question I have is if you could just talk a little about the headcount, where the growth is coming from?

Gerald Lieberman

Where it's coming from, the less than 1% growth in six months?

William Katz - Buckingham Research Group

Right.

Gerald Lieberman

It's a little – there's a tiny bit, there's a small piece of it in IT, which is not – it's a headcount increase, but it's not an increase on the FPE basic. We've significantly decreased our reliance on consultants and we picked up some good IT folks. So although on a headcount number you see it going up on expense, if anything, it's actually bottom line it's gone down. There's been private investment in private client. We have not stopped increasing our hiring of financial advisors, although at a lower rate than before and the support of the financial advisors. That's primarily where it's been. All right?

William Katz - Buckingham Research Group

Good, thank you

Operator

Your next question comes from the line of Mark Irizarry.

Mark Irizarry - Goldman Sachs

Great thanks, Gerry, just following along for that, can you give a little more color on you know, where sort of the expense forward, expense reductions could potentially from and just, you know, what, how much sort of, you know, expenses is there that you could take out of the cost structure without hurting growth?

Gerald Lieberman

Well, you know, to your point it's we have a delicate balancing act here and we're not a wire house and we're not an organization that typically gets fat when things are good. It's just not, you know, when we go to the roots in the two firms we're a partnership. We generally run lean, so I mean we'll, it all starts with headcount, Marc, it really does. We do not have any plans for a layoff. We do have plans to fund our strategic initiatives and what we're going to work really hard at doing is funding it through attrition, all right, and some efficiencies. So I think what we're looking for here is to keep the headcount flat for the rest of the year. Obviously, instead of compensation we'll be managed based on the earnings of the firm. So to the extent the firm doesn't do well, I mean we'll, you know, that will be something. And we continue, you know, to remind every people all the time around the discretionary spending. But we do not at all expect to have a layoff. There's no place to close anymore. We went through a fairly extensive restructuring about four years ago, where we closed offices down and did consolidations. That's all been done. We don't have excess space right now.

Lewis Sanders

And Marc, I know you know this and Gerry did note it, but I think it's worth re-emphasizing. We have a series of initiatives that we think really matter to the future of this company and we're funding every one of them.

Gerald Lieberman

So it's going to be a challenge of us finding out how we're going to do that. I mean because we don't want to make a trade off here of, you know result for a quarter or a couple of quarters for the future of the firm. On the other hand we understand our responsibility here to manage the expenses.

Lewis Sanders

And I think you can see we've been quite aggressive on that score without sacrificing the support necessary to fund the initiatives that we think really matter.

Marc Irizarry - Goldman Sachs

Great, thanks.

Operator

(Operator Instructions)

Philip Talamo

[Kayla], do we have any further questions?

Operator

You have one final question from the line of Cynthia Mayer - Merrill Lynch.

Cynthia Mayer - Merrill Lynch

Hi, just a very quick follow up. I think you mentioned hedge fund outflows in July were moderate. I'm just wondering if you'd be a little more specific. Is that like under a hundred million and also, how much was the insurance recovery?

Gerald Lieberman

The headcount, I'm sorry, the outflows were around 500 million.

Cynthia Mayer - Merrill Lynch

Okay.

Gerald Lieberman

All right. So not as moderate as a hundred, but not anything significant, remember it's six month, these are six month periods. And the recovery was $8 million.

Cynthia Mayer - Merrill Lynch

Okay, thank you.

Operator

At this time sir there are no questions in queue.

Philip Talamo

All right, well thanks everyone for participating in our call. As always feel free to contact investor relations with any further questions and have a great evening

Operator

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

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Source: AllianceBernstein Holding LP Q2 2008 Earnings Call Transcript
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