AllianceBernstein Holding LP (AB) 2002 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Alliance Capital third quarter 2002 earnings release teleconference. At this time, all participants are in a listen-only mode. Later there will be a question and answer section, and I will give you instructions at this time.

Should you need assistance while on this call from an operator, press zero, then star. An operator will come on to your line to assist you.

As a reminder, this conference is being recorded and it will also be replayed.

I would now like to turn the conference over to the host for this call, the Director of Investor Relations for Alliance Capital, Ms. Valerie Hartel (ph). Please go ahead

Thank you. Good afternoon, everyone. Welcome to our call. Just as a reminder, the call is being Webcast. It is supported by a slide presentation that can be found on our Web site at www.alliancecapital.com.

Presenting our quarterly results today will be Bruce Calvert, Chairman and CEO, John Carifa, President and COO. In addition, Lew Sanders, Vice Chairman and Chief Investment Officer, Gary Lieberman, EVP of Finance and Operations, and Robert Joseph, SVP and CFO, are also in attendance to answer your questions.

I would like to note that some of the information we present today may be 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 2 of our slide presentation.

In light of SEC's Regulation FD, management will be limited in 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.

At this time, I would like to turn the call over to Bruce Calvert.

Thank you, Val (ph). Let me start by reviewing the highlights on page 3 of your Webcast or handouts. As of the end of the quarter, and as we had reported, assets under management declined to 369 billion. That's down almost 12% from the year-ago period.

Most of that, of course, was a result of what was going on in markets, with the broad market as measured by the S&P down some 20%, growth over the 12 months being down a little more than that, value down about 17%, and the only port in the storm was bonds, measured by the Lehman Aggregate Bond Index. They appreciated 8.6%, or had a total return of 8.6%.

As most of you know, most of the damage was done in the most recent quarter, the third quarter of '02. And in fact, in the case of the value index, more than 100 percent of the damage was done in the third quarter. It declined 18.8%. For both the 12-month period and the three-month period, we had net outflows in our retail business which were partially offset by positive inflows in both institutional and private client businesses. More detail on that in just a moment.

The annualized fee base actually declined slightly less than assets under management, down about 11.3% to just under 1.5 billion. Average AUM (ph), as opposed to point to point AUM (ph), was 391 billion. That's down 12.3% on a 12-month basis.

Thanks primarily to a substantial revenue gain in our institutional research business of roughly 19%, revenues overall dropped less than average AUM (ph). They came in at 650 million, down about 10.4%. Operating expenses at 506 million were down about 3%, and the combination of that resulted in net operating earnings of about 137 million, down 29.6%.

If you turn with me to page 4, just a little bit more color on the AUM (ph) rollup, in this particular case, by investment discipline. Again, a similar pattern here of net outflows from our growth investment disciplines, partially offset by net inflows into our value equity disciplines. And on the fixed income side, net inflows of $2 billion in our longer-term fixed products offset by $2 billion in outflows in our cash management products.

As has been the pattern in recent quarters, of course, the impact of markets swamped the impact of cash flows on overall AUM (ph). There was one change in the pattern, however, and that is, where there was depreciation in both growth equities and value equities, on a percentage basis it was actually slightly more -- slightly higher percentage depreciation in value than it was in growth. That's the first time that that's occurred in a good number of quarters. On the fixed income side there was, again, a modest appreciation. So, overall, a $43 billion reduction in assets under management, 39 of which was simply the result of changing market prices, changing markets.

If we look at the same numbers by retail distribution, on the retail side we had almost $6.5 billion of net outflows, but just over two of that was in the cash management arena. As we indicated earlier, you should expect -- a little over a billion of that was from the final closure of a distribution relationship in Italy.

Conversely, we again had net inflows in our institutional business and strong net inflows as a percentage of beginning AUM (ph) in our private client business. Again, these numbers were swamped by market depreciation, and again, the pattern changed a little bit. For the last several quarters we have reported bigger drops in our retail business, which is -- was more slanted toward growth products, but actually, on a percentage basis, the $12 billion decline there was slightly smaller than the $23 billion decline in institution, where there is a better balance of growth and value.

On the private plan, where there is a value tilt to the overall AUM (ph), the decline was also around 10%. So, again, overall a decline of 43 billion to 369.

If we can turn now to kind of the 12-month compares, the chart on page 6 shows the change in our business overall. And note in particular by investment orientation that, from a year ago, growth equities has dropped from 37% of assets under management to 29. That's a combination of the most severe market depreciation occurring there, coupled with the net outflows. In value equity, net inflows just about offset market depreciation, so it increased as a share of our business from 21 to 24. And of course, in fixed income, long-term fixed income, we had net inflows and market appreciation. So it increased as a percentage of our business.

Again, from a client orientation perspective -- and now, again, we are talking the year, not the quarter -- retail dropped as a share of our business, and that's primarily due to, again, the mix there where growth constituted a significant part of the assets at the beginning of the period, but there also were some modest net outflows.

Just a look, again, at the composition of that, on page 7. We show the same returns for market segments that we showed on the first page for the one-year period, and again, on the one-year period, growth was down about 500 basis points more than value. But for the most recent quarter, value actually underperformed growth.

In he terms of the year over year comparisons, the businesses that were more heavily weighted toward growth tended to have the strongest head winds.

And coupling with cash flows, on page 8, you can, again, see that over the 12-month period we experienced about $14 billion of outflows in growth equities, you know, offset by some $23 billion of inflows into value equity and fixed income, but again, with an almost $9 billion outflow, primarily because of industry consolidation, but also, some outflows in the cash management business.

So, overall, over the 12 months, 3 billion of net outflows, but again, some $46 billion in market depreciation, and again, over the 12-month period, that was most severe in the growth equity space, some 31 billion of the 46 billion.

Finally, on page 9, the same data by channel. Again, 6 billion of net inflows in our long-term assets, 3 billion of outflows in retail, a good portion of which was the APTA (ph) business, offset by reasonable inflows in both institutional investment management and private client. But again, 9 billion in net outflows in the cash management space. And market depreciation roughly proportionate but skewed slightly more toward growth across the businesses.

On page 10 we discuss our annualized fee base. There really wasn't much of a mix shift as it relates to revenues over the 12-month period. Net-net, fees declined in line with assets under management for retail, institutional, and private client. In fact, realizations were slightly higher at the end of the period than they were a year ago.

In the retail space, that's a combination of things. While we did lose assets, primarily from the market, but also modest outflows and some of our higher fee growth products, that was partly offset by the assets that we lost from the Italian distributor and cash fund -- cash management assets, which tend to be lower fee assets, and in the institutional arena, where realizations are actually higher than they were a year ago, again, there was some lumpiness. We tended to win standard fee business. Some of the business that we lost was larger, lower fee business, but also remember that we're dealing with a graded fee schedule in the institutional business so that market depreciation impacts the lower -- the trail end of the fee schedule.

In the private client business, it's about what you would expect, with bonds simply reflecting a little bit more of the mix. So, unlike some of our past reports, there really is no materially adverse impact here. There is really no fee mix story over this particular time horizon.

With that as a background, I would like to turn it over to John Carifa, who will review our financials and the compares.

Thanks, Bruce. On display 11 is a summary of our operating partnership results for the quarter. As Bruce mentioned, continued declines in global equity markets were the principal factor in our average assets under management declining by 12% from a year ago.

Revenues were down 10%, a little less than the average asset under management decline. A lot of that caused by the improvement that we had in our institutional research services business. We will give you more color on that on the next slide.

We had expenses decline 3% from a year ago, which results in net operating earnings of 137 million for the quarter, or 30% less than the third quarter of 2001.

The slide or display on page 12 gives you more clarity on the change in revenues. Retail declined 19%, as Bruce mentioned, as its product array is more heavily concentrated in the growth equity products, which have suffered the greatest market declines over the last 12 months. The institutional investment management business, which has more exposure to value securities, declined by 9%. Private client business, with a heavy bias towards value as well as balanced portfolios, and where we continue to enjoy strong inflows, their revenues were up 8% from a year ago, and then our institutional research services business was up significantly, some 19% as we experienced higher stock exchange volume and business growth outside the United States, and in Europe in particular. So we saw a 10% decline overall in revenues.

On display 13, expenses fell 3% from last year, salaries were down 6%, as we reduced head count by 3.5% during the quarter and 6% over the past year. Incentive compensation was also down as a result of lower earnings, but deferred compensation was up, principally due to the amortization of the second of three traunches of deferred compensation grants made to former Bernstein employees in connection with that acquisition.

Promotion and servicing was down 11%. That's in direct response to a continued emphasis on cost control. You will note in the footnotes that we have reclassified about $11 million in revenue sharing payments from distribution plan payments to other promotional expenses. I will give you a little more flavor on that on the next slide.

General and administrative expenses were up 10%. There were basically two reasons, one of which was a one-time $4.5 million charge for the subleasing of excess space resulting from the integration of the business of Bernstein into Alliance Capital. That's a one-time charge. The second reason was increased professional fees in connection with ongoing litigation.

On page 14 is a schedule of our net distribution expenses. As I mentioned, we reclassified revenue sharing payments to other promotional fees, and we did that so we can isolate revenues and expenses which relate to 12-B1 (ph) payments and expenses. That's what's on this display.

Net distribution expenses continues to have a drain on earnings and margins. Revenues, which is solely a function of assets under management, were down 19% in line with, basically, declines in the stock market and growth area (ph), in particular, while the expense side is partially fixed. Again, the amortization and the deferred commission. So the expense side in total only declined by 8%, again, while the revenue side declined by 19%. And that resulted in an increase of 40% of net distribution expense.

Obviously, in a rising market, this could be a profit contributor as it has been in the past, but certainly, in this market environment, it has been a drag on both earnings and margins.

On page 15, in spite of reduced operating expenses, the impact of market declines on fee and distribution revenues, coupled with higher deferred compensation amortization, again, tied to the grants made to the former Bernstein employees, and the one-time space charge pushed margins down to 26.5 % for the quarter, down from 34.5 % a year ago.

And then at the holding company level on display 16, we have an analysis of the per unit earnings, and you look at the middle of the page, you will see that our net operating earnings for the third quarter, again at the holding company, were 47 cents per unit as compared to 68 cents last year, a decline of 31 cents. And we will be distributing 46 cents for the quarter.

On page 17, we would like to take a moment to make a few comments about deferred sales commissions, which appear as an asset on our balance sheet of about $544 million, and this expense through amortization over the estimated recovery period. Deferred sales commissions are payments that we make to financial intermediaries for the sale of our back-end loaded shares, and they are capitalized. The deferred sales commission asset is recovered through future incremental 12-B1 (ph) fees that we receive from the funds, and also from contingent sales charges or exit fees that are levied to investors at the time of redemption.

Future 12-B1 (ph) fees and contingent deferred sales charges are also contingent upon future market levels and redemption rates, and these deferred sales charges are amortized over the estimated recovery period, which is some 5.5 years. A

few words about impairment, on page 18. We evaluate the asset on a periodic basis to determine its value and whether it has been impaired from an accounting standpoint. The value, again, is contingent on estimates of future fees that we (ph) received, 12-B1 fees, and also future contingent deferred sales charges. They are based on assumptions that we make as to market levels in the future and also redemption rates over the recovery period.

So if future fees and contingent deferred sales charges are less than the asset that we have on the books, and management estimates that the amount is not fully recoverable, an impairment loss is recognized for the difference between the asset that we have on the books and the estimated fair value. An estimated fair value is determined by using discounted cash flows, discounted numbers of those future fees, and contingent deferred sales charges. An impairment loss decreases current period earnings, but actually increases future period earnings in an equal amount over the period -- the amortization period, in let's say three to five years. It becomes a timing difference for expense realization.

The status on page 19 is that we have determined that there was no impairment at September 30th, although we were close for the first time. And with markets up in October, that position, by the way, has greatly improved, but a return to declining market levels and higher redemption rates in the future would increase the risk of an impairment.

And then a comment on an accounting change. We will begin -- this is on page 20. We will begin to expense options in the fourth quarter of this year using the fair market method as permitted by FASB Statement No. 123. The accounting change will apply to all employee units, unit options awarded subsequent to December 31, 2001, and as a result we do not expect this change to have a material impact on net income or net operating earnings of Alliance Capital or the holding company for the full year 2002 or 2003.

We will now go back to Bruce for a review of our individual business units

I will just briefly make a few highlights about our distribution units, and then we will focus our attention on your questions.

As we already noted about the retail business -- and I'm on page 21, for those of you who are following along -- we did have net outflows of about 4.4 billion. Most of that, the retail investing public continues to be trend following in nature, and right now, that means away from growth. They were in our larger growth funds, but just over a billion of it was attributable to the final liquidation of, actually, a variety of APTA (ph) portfolios. There was also 2.1 billion in cash management net outflows, again, as we mentioned before.

But we did continue to have positive net flows in the Alliance Bernstein value series of funds. We did continue to have positive flows in our Luxembourg offshore funds. Our college-bound saving plan remains the largest in the country, with some 2.2 billion in AUM (ph). A number of accounts there continue to increase and is currently somewhere over 300,000 accounts.

I will come back to performance in a minute on another slide. It was mixed, but showed the beginnings of improvement, which has continued in October for some of the key funds.

You know, as we continue to look ahead to 2003, we are really focused simply on execution. That's performance and delivering value to customers. We will continue to emphasize our college-bound fund program. We will continue to introduce the style balance -- that is, growth and value portfolios. And we have also seeded some alternative growth portfolios just so that we have a broader product lineup in that space. And as is true for the firm as a whole, but particularly in the retail arena, there will be focus on controlling expenses.

Page 22 simply gives a little more detail on the retail flows. I think we have been through all of that, with the exception of the outflows in the variable annuity sub-advised portfolios, which occurred primarily in one of the ECAT (ph) sub-advised portfolios.

Again, in the managed accounts business, I think that business -- I don't simply mean our business -- that business industry-wide remains under pressure in the current interest rate and return environment. I think that's true for us as well.

Turning to performance, you will note a slight outperformance in the quarter for premier growth. That's been followed by very good performance in October such that, you know, the very recent and long-term numbers will remain competitive. Some of these medium-term numbers will start to look more competitive. The rest of the funds, really, are reasonably competitive on an intermediate and longer-term basis.

I think our biggest problem in retail right now is not relative performance. It is absolute performance, and it is hard for us to look for a major turn in net flows here until the equity markets start to perform a little bit better.

In value, on page 24, we lost a little bit of ground in the quarter, but the year to date numbers, with the exception of growth and income, which is the relative value fund, are in good shape, and where we have long-term numbers in growth and income and balanced and the one-year numbers and the new Alliance Bernstein funds are generally competitive. But again, whereas I think the early part of the year was characterized by money flowing to growth and value, or away from growth toward value and fixed income after the third quarter, it is now more a story of money flowing away from equities to fixed income. We need a better market to change that, both for the industry and for ourselves.

On the institutional side, on page 25, we did have net flows of $1 billion. We continue to win accounts across a wide range of disciplines. Some 70 new accounts were announced -- not funded, but announced during the quarter. 4.8 billion in assets under management. You know, we really here are seeing the benefits of the combination. We are winning accounts in growth, in value, and fixed income.

We are particularly pleased with the rate of wins outside of the United States, which will probably account for about half of our new business this year. Real strength in the large markets of the UK and Japan, but also in some of the smaller developed markets, Canada and Australia.

Here our relative performance position is pretty good. More on that in a moment. And here, relative performance does matter because the sponsors will tend to stay with their long-term asset allocations.

Again, as we look ahead, what we are focused on is execution -- performance, high levels of client service. Here, I think there will be a continued particular focus on international markets, a slight shift of resources at the margin toward those markets, and then the other initiative is to the continue the cross-selling effort, which is starting to bear fruits to existing clients.

A little bit more flavor on page 26 that were outflows and grouts (ph) for the quarter. You know, this was a little bit lumpy. Nearly $1 a billion of that was one foreign central bank who simply decided they needed to reduce their risk exposure and go from equities to cash. The other reflects, you know, changes probably not like retail, not to value or fixed income, but simply portfolio adjustments.

On the value side, global value was particularly strong for us, although we did well in the U.S. We continue to win business in the United States. We did have some wins in the past of an enhanced index area as well. So, again, the total rounds to about a billion of net new business.

On the performance side, here I think our position is quite competitive. We had a good quarter in most of our growth products, and again, we are having a good October. We have a half an hour to go. But it's good up until this point. And the long-term numbers here remain very competitive. So we feel in our institutional business, in growth and in value, on the next page where you see some of the same trends we talked about in retail, a couple of the products underperformed slightly in the quarter. Diversified value is the key U.S. product in terms of size. It has very attractive numbers on a year to date basis and longer term.

The other really important product in the institutional space are the international and global products and, of course, strategic value, which has slightly underperformed for the year is the other important product, which has competitive longer term results, both absolutely and relatively.

Just a word on fixed income. The performance in the quarter was mixed, although it did show improvement in our core composites, and particularly, in the high yield space.

Turning to the private client business, Bernstein Investment Research and Management, here the business has wonderful momentum. It is one of the strongest quarters in the history of the business, with 1.3 billion of net new business. We look like we are on track for a record year and something like 11 or 12% organic growth. We established some 600 new client relationship. We have over 19,000 now in total.

The comparative performance is good, and the emphasis, obviously, is on balanced portfolios. I think a number of the other services around wealth management (inaudible) have improved our competitive position as well.

Again, you may recall that we committed to a very large expansion of the advisor force here a year and a half ago or so, and the real focus now is to continue to improve the productivity of that expansion, which is on track. We want to increase fee realizations through enhanced product profiles. And again, part of that means hedge fund. And there is another one of those in the works for this business. This is probably also a business that we will, again, start to expand physically during the next year.

You can see that the performance here is good. Here we're looking at numbers relative to the S&P 500, so it shows the benefits of having exposure both to value, which is, of course, the asset class that's outperformed, and growth, which had underperformed until lately, but outperformed in the quarter, international and emerging markets and then bonds. And the net of that, on page 31, is with a diversified portfolio, since the bear market started in March of '00, the actual client has experienced a 1.1% gain in their portfolio -- we preserved their wealth -- compared to a 38% decline in the S&P 500.

Finally, a few words about our institutional research business, which has been in the news of late. But the business is doing very well. The revenue growth has been driven by year over year increase in market share, the startup of our European trading capability, a new source of revenue for us. And there have been some pricing pressures in the United States, but they have been partly offset by pricing strength in the UK.

This is another area where we have invested substantially in the business over the last couple of years, and we are now seeing those investments generate substantial growth.

As you all know, and I will ask Lew to comment in a moment, Sally Crawcheck (ph) has resigned as chairman and CEO of the business to take a position at Citibank and, you know, we wish Sally (ph) well. I don't think it's going to, frankly, have much impact on the momentum we have in this business.

Let me just ask Lew Sanders, who has direct oversight responsibility for that business, to comment a little further.

Look, it is always disappointing to lose a talent -- a great talent, in fact -- but I want you to know we at Bernstein are really pretty excited for Sally (ph), and we wish her success in her new endeavor. She had a very steep trajectory with us, and now more broadly in the industry. It is clearly a credit to her.

I want you to know it's also a credit to the culture of Bernstein that, yet again, the competition seems to see the need to turn to us to solve their staffing problems. The fact is that Sally (ph) joins a long list of what I want you to think of as Bernstein graduates that have populated the industry and have generally gone on to very distinguished careers.

It is not by accident. It is not by accident at all. This has been a fundamental strategy of the firm since its founding. It is a firm that invests in developing talent, it's the hallmark of the firm, and our ability to turn that talent to success in the marketplace is unmatched.

So it positions us with a deep bench. We don't go outside. We don't need to. We turn to our own talent pool. And so, as I think you may have read, we appointed Lisa Schallet (ph) as the new chairperson and CEO of Sanford Bernstein.

This business is in very able hands with Lisa (ph). She joined the firm, by way of brief background, in 1995, coming from the Boston Consulting Group. She holds a degree in applied math and economics from Brown (ph). She has an MBA from Harvard. She was an II ranked analyst when that was her role in the capital goods sector. Most recently she's been the firm's research director.

Actually, more important than those credentials, as impressive as they are, is the fact that Lisa (ph) embodies what we really prize at Bernstein -- she's smart, she's a person of high integrity, high energy, a record of success and the right reasons (ph). We are confident she's going to be a great leader. In fact, she already has been in building out our research product line.

Finally, she's got one hell of a strong team. She's got Rich Reynolds (ph) in sales management, a recent addition, Matt Andresen (ph) in trading, and many, many others.

We feel good about the prospects of the business. You know what? We feel kind of flattered; flattered that there is this renewed appreciation of the value of independent in-depth research, concepts which, you know, I actually think are synonymous with the brand Bernstein.

So it has been a world where the business has been coming our way, and we believe that will continue. One other thing that Lou mentioned -- we are very pleased, and it was an event during the quarter that Matt Andresen (ph) joined us from Island (ph).

As you all know from past calls, some of our important future initiatives here revolve around NASDAQ trading, program trading, our trading initiative in London, and we think Matt (ph) is the right guy to really make all those activities work.

So, again, you are looking ahead. The plan is to capitalize on the big investments that we made over the last two years. We still have some research launches -- some research product to roll out, but that will be -- those will be modest increments to where we are. We do plan to further expand our sales ability, both in the United States and Europe, and as I indicated earlier, there will be a real focus on the trading activity.

Page 33 is our standard closing. On the other hand, it may be worth repeating. You know, we are in a market where we have been buffeted by the markets where it has been pretty incredible headwind after years of a pretty good tailwind. I think we are positioned still to see our way through that with very strong research and investment capabilities, of great platforms and recognition as growth investors and value investors, a strong lineup of fixed income services, competitive investment results, strong marketing and client service, and I think almost uniquely we are very well positioned in retail, institutional, and the private client businesses.

In the case of the first of the two of those, those aren't domestic businesses but are well positioned international, which is still an important part of your strategy.

We do have a highly valued independent sell-side research and institutional trading operation, which has proven to be a welcome contracyclical business. The financials are in good shape, and we believe that our strategy is as well. To just to try to close with a little bit about guidance, we obviously can't pinpoint a market forecast for the end of the year. so, as always, we use our standard assumptions about markets.

But given those assumptions and current business trends, I think what we would say is that we are comfortable with a range of 215 to 220 for this year, which is -- I think most people cluster around. I would say looking ahead on a very preliminary basis to next year, notwithstanding the fact that, you know, at the end of the September, ending AUM (ph) would have been well below average AUM (ph). We believe, given the strength in some of our businesses, given our focus on expense control, and given our assumption about normal markets, that we can hold earnings roughly flat with those levels next year.

So let us stop there and ask for your questions or comments.

Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch-tone phone. You will hear a tone indicating you have been placed in queue. Please pick up your handset if you are using a speakerphone so that we can hear you well.

Our first question comes from Merrill Lynch. We go to the line of Bill Katz (ph).

Thank you. Good afternoon, everybody. Thanks for the comprehensive remarks. Bruce, you sort of gave away the store at the end. I'm curious if you could dive into the compensation line. There is a lot of moving parts on both the positive and negative. The first question is, as you look out to next year and, let's say you have a tougher environment, would you be thinking about more aggressive reallocation of resources, either domestically, internationally, or further away from retail and institutional?

The other question I have on top of that is it looks like compensation as a percentage of revenue, if you back out the incentive performance impact, steps up meaningfully versus some prior run rate numbers. I'm wondering, was there any other noise in the quarter or is this a new level going forward that we base off of?

Well, there's a lot of questions in there. I don't think there is anything, you know, unusual in the compensation line. I don't think there's any unusual events. You know, I will remind everyone that, in the fourth quarter, we will award the third traunch of the Bernstein awards. Hopefully, we will do some other things to help control to the impact of that on the overall comp line.

Remember that, when we did this transaction a couple of years ago -- and I don't think anyone would doubt the benefits of having done the transaction -- you know, we anticipated that compensation would rise as a percentage of revenues for a period of time, two or three years, and then would gradually stabilize and start to come down. Of course, we didn't have a three-year bear market built into that assumption. But I think in terms of the way things are playing out, that basically still will be a correct assumption

Just another comment. Again, remember that the amortization of the deferred compensation is a fixed number. So when we look at sequential quarters, the comparison against declining revenues will cause it to be an increase from a percentage basis.

As far as, you know, what do we do if things get worse -- I think that was sort of your question, how might we reallocate resources -- you know, I think we simply will continue to study that. We clearly have continued to invest in the businesses that are prospering and doing well. We have been a little more cautious on the retail business, but there we're investing, too, in the sense of broadening our product line, broadening some of our customer relations programs. And we want to position ourselves to be a leader in that business.

So I think we like all of our businesses. It's the idea of diversification. There will be times when some perform better than others, given the environment, and times not. And we will make modest adjustments to those cyclical wins. But we don't plan any substantial reallocation of resources. We are just trying to -- if you will kind of excuse the expression, we are just trying to watch every nickel.

Just a follow-on - just remind me. Is it a $33 million step up as of October on the third traunch?

Roughly. Roughly. I mean, what we have is $96 million of grants every year for three years that are available to be given out. So roughly it's about 30 some-odd going up. The breakage here is we didn't give every single grant at a given time and (inaudible) get it back. That's roughly a good number, Bill (ph).

Okay. The other question I have is around what you are trying to do on the institutional trading business. I was wondering if you could comment a little bit on the dynamics between revenue capture rates, U.S. versus non-U.S. Are you at the trough in terms of what is happening in the U.S.? Maybe more sort of upside there.

And maybe more broad (ph) in concept of the margins, are you now at a point where it is a more meaningful contributor on a margin basis?

I'm not sure if I understand the question. Certainly our institutional business and private client businesses are doing well in the U.S. as well as overseas. On the retail side, we do have positive net flows overseas. We have had outflows here. I think that's primarily a function of a slightly different product mix. Also, we are younger, less mature overseas. It's easier to grow from that base.

Okay. Thank you.

I want to add just a little bit to your question, which I think was directed at institutional research services, Bill (ph).

Right.

We, as I think you know, have invested very aggressively in expanding our product array in trading. That includes a UK operation, a NASDAQ capability here in the U.S., and a new initiative in program trade. We've added significantly to our staff, upgraded quality, built the systems necessary to be competitive. And in effect, what we are doing is greatly strengthening our service profile to our institutional customers. This has all come together with increasing product breadth and research to improve our market share. It is improving in every one of those channels, enlisted (ph) as well as NASDAQ and the UK from a low base (ph).

It's a function of those various investments that we are confident about our potential to continue to take market share broadly in this area.

Sorry, Bill. I missed your question. But if you don't mind, we're going to have to try to give you one more question and then move on and give some other people a shot.

Thank you for being patient. The last question is around, more broadly, capital management. Looks like you repurchased some debt during the quarter and your share count went down. I was wondering if there was more detail behind the actions.

We didn't repurchase debt. We have lower debt levels right now as a function of lower sales volume in the retail business at this point.

What about on the share need - on the unit side?

The units are roughly stable. The level of units hasn't changed - relatively stable. No significant change.

Okay. Thank you.

The next question comes from Mark Constant (ph) with Lehman Brothers. Please go ahead

Happy Halloween, everybody. If I could just circle back to something, Lew, you were talking about. I'm not sure this remotely rises to the level of materiality, even to non-asset management revenues at Bernstein, but some of the branding issues you described in particular.

In light of all the media attention and regulatory scrutiny surrounding equity research and investment banking and all the favorable press you guys have gotten, have you all -- have you at all reconsidered your historical practice of selectively participating in equity underwritings and syndications, or is that something that would change in a recovery where you have deals?

I think your point about materiality applies. Even when we were active in this regard, it was diminimous (ph). I don't think there was a year when it accounted for more a few percent of our total revenue. We only entered a syndication if we were an active advocate of investment in that company as a research firm long prior to any knowledge there would be such a transaction.

I just mean from a perception standpoint - is it something that's not worth doing to you?

It was never worth very much to us. Clearly today it is worth less than that. It has never been part of the Bernstein strategy.

Okay. On an unrelated but related topic, institutional research fees, obviously, nice improvement year over year. But just looking at it on a sequential basis, if I recall from your second quarter comments, you had commented that you had not seen an acceleration of fee pressures really, but yet I'm looking at NYSE volumes I think were up 12% sequentially and sequentially down institutional research fees. Was there something I don't recall having been unusually high in the second quarter? Is there another explanation for that

Our share was down just a smidgen in the quarter.

The program trading ...

Just a little bit. Exactly. What happens is there is a lot of program trading that takes place during that quarter. It distorts -- when you measure it this way, what goes on. We expect to get that back this quarter

Okay.

That's an anomaly of the summer, we think, where program trading is a bigger share of what takes place in the market.

OK. The DSC impairment, (inaudible) can you give us a general sense of how close it got and/or how close it is to the end of October?

Well, it was -- I don't think we want to give numbers here. Look, we review this very regularly with the accounting firms and so on. And, you know, I think - just say, the end of the third quarter was the first time that it was a judgment call, that it was an issue for us, and it will continue to be a judgment call. But right now, you know, as of this moment, we've got a reasonable cushion.

Okay. On the option expense comments you made as well, you said not material. Is that accounting liberal definition of material or is that because you don't intend to do very much of it?

We're going to do it. Our levels have never been -- we're not a technology company. So the levels of options aren't that large. And (inaudible) we are talking about a fraction of a cent, a small fraction of a penny for this year, and not much next year.

Last, if I can allow one request/comment. It would be helpful if you could release the analyst supplement at the same time as the press release or even delay the press release until both are ready for purposes of getting some of the flow detail, if that's possible in the future. Thank you very much.

Point taken.

The next question comes from CIBC. We go to the line of Ken Worthington (ph). Please go ahead.

Go ahead, sir. Your line is open. You may have your mute on, Mr. Worthington (ph).

Can you hear me now?

Yes.

Sorry about that. How big an opportunity are underfunded pension plans for you guys? Does the biggest opportunity lie in government or corporate plans or U.S. versus international?

Well, I think that's mostly a U.S. question. Go ahead.

Yeah. Actually, we are now studying this. And the opportunity is definitely U.S. It is pretty much exclusively corporate. And it is potentially quite substantial, although I think it won't develop in size until '04. But it's pretty clear that, in the absence of a truly major equity market recovery, DB (ph) plans broadly in the U.S. are going to be substantially underfunded. I'm going to use a number of somewhere around $150 billion to $200 billion.

I think that it's clear that, while contributions for a while can be delayed, it's not prudent to delay very long. And so we think that there will be increasing momentum on this score as we move into '04.

At the current time, given the state of asset allocation against typical targets, the opportunity is principally in equities and probably a little more growth than value on that score, reflecting how the capital markets have changed current allocations as against typical target (ph) policy.

Okay. Great. You said it probably starts to begin in '04. How long does this last for? Is this a three-year benefit that you may receive? Is this a five-year benefit because it lasts longer than this? Any guesses there?

I think that the era of zero cash contributions to DB (ph) plans in the absence of a major market recovery is over. The data would suggest that there will be sustained cash flow contributions once they begin in '04. Perhaps they will be a little more at first for catch-up purposes, but then after, there will need to be some sustained contribution.

This is really a profound change in the marketplace. I have to tell you, we feel pretty well positioned to capitalize on it.

Okay. Let's see. I guess that's it. Thank you very much.

Thanks.

Our next question comes from Keefe, Bruyette & Woods. We go to the line of Robert Lee (ph).

Thank you. Good afternoon, everyone. Two quick questions. Bruce, I just want to get a little more color on some of your guidance. I guess if you are thinking of 215 to 220 this year, it would indicate you are expecting earnings to be sort of flat with this quarter, maybe even up a little bit. Considering you have the third traunch of Bernstein coming on, average assets, you have a fair amount of room to make up. Are there some other things that are playing into that, or performance fees or something?

Well, there are more performance fees in the fourth quarter on a seasonal basis. That's always the case if you are leaking at fourth quarter versus third quarter. But other than that, no. You know, I think, again, the institutional research business has some momentum, and hopefully we would continue to do some things on the expense side that will help to partly offset the increase of Bernstein payments and so on. But your assumption about the math, meaning that the fourth quarter would be up slightly, would be correct.

Okay. Thanks. Just one other quick question. Going back to the institutional business, I think you sort of (ph) touched on it. I'm curious. Are you seeing a lot of pension plans that really rethink their asset allocation now that bonds outperformed, shifting back to equities, or not making much in the way of changes? We hear mixed things from different companies.

I think mixed things always characterizes this market. It typically coalesces around the classic asset allocation of roughly 60% equity and 40% fixed income. I think the preoccupation of plan sponsors right now is crafting an asset allocation that has some chance of meeting their assumed return on plan assets, which, as we speak, is still a pretty high figure.

And if you look at the reinvestment rate in fixed income, given the level of current yields, it's evident that equities are going to have to loom large in any choices that plan sponsors make. It is evident. Moreover, equities, because they have depreciated relative to fixed income, have lost share of the allocation, which is why I think it is a pretty safe assumption that, when reallocation takes place, it will be back towards rebalancing to target equity levels.

I think -- we haven't seen anything that we could describe as a definitive industry trend or a direction here yet either, in terms of actual flows of money.

All right. If I could ...

The contributions to DB (ph) plans hasn't really started yet. There's a few companies who are particularly distressed who are moving. But it's just a few. I do think there will be something of a fuse here, as I tried to stress.

If I can follow-up a little bit. Outside the U.S., I have sort of heard anecdotally that you've actually had some European pension investors completely rethink whether they should be in equities at all, or how much. Sort of separate and apart from what is going on here, are you hearing - are you hearing or seeing much of that at all, or is it really just isolated cases here or there?

We are just not. Judging from our own success in winning business, if it were a major trend, it would surprise me.

I think that where the equity culture is well established and well entrenched in the markets, you know, like the UK, Canada, Australia, and even, surprisingly, after all they have been through, Japan, although the ratios are different, I don't think there is any change in that. Is there a change in some of the kind of retail markets that got very hot and now people are rethinking, Italy or Spain, probably so.

Thank you very much.

The next question comes from Brian Badel (ph) at Salomon Smith Barney.

Hi. Thanks. Good afternoon, guys. Just to touch on the pension plan, the institutional arena for the rebalancing, two questions on that. Where do you think right now is roughly the - of your client base, equity and fixed income allocation. And then secondly, at what point do you think the decisions will start being made towards rebalancing a little bit more robustly?

First, we don't collect data on the asset allocation of our client in the institutional arena, as you might imagine. What I can report to you is available as a matter of public record, the federal reserve, in the flow of funds, collects such data. And what they are reporting as of the last reporting period, which was June, it was 55% allocated to equity.

I was trying to get -- I know that data lags (ph) by a couple months.

All you have to do is put market returns on that, and you are going to get the right numbers for September.

Right. As far as reallocation decisions, you said you haven't seen a whole lot of that just yet.

I don't thing you get immediate response. The nature of that market is a very deliberative one. And what you should anticipate is that, over a period of time, but not all at once, plan sponsors will move to get back to what they think appropriate target asset allocations are, and to adjust those allocations to meet the assumed return on plan assets. That's a process that's underway, and quite an intensive one because of the dislocations in the capital markets.

You said you think that would be a shift to growth from value?

I'm making that point only because growth underperformed value during the bear market. Plan sponsors typically look for style neutrality. Those that have a style bias tend to keep them. What they'd be doing then is rebalancing as a function of skews against target allocations that capital markets imposed on their plan.

Right. So they are not through the growth outflow phase, really. It sounds like - that their decision is the shift towards value or - I'm sorry, the shift towards growth is more like an '03 event ...

I think that's right. Again, I think when you think about these trends, you should think about them as very gradual. You just don't see groundswells in that marketplace. It is very deliberative, process-oriented thing. It goes through all kinds of approval, lots of thinking.

Just to be clear, because of the way he said it that time, we are not necessarily seeing shifts away from growth in terms of what sponsors are doing. It is that capital markets have imposed a reduction in their growth exposures on them.

Right.

That's the institutional (ph) retail world, which is a more trend following world. We clearly are seeing continuing shift away from growth. That may now be broadening to be a shift from equities altogether.

That's what you said earlier.

To switch the topic to an initiative. You mentioned a couple big projects you've had over the couple years, building out the private client business and also increasing the servicing and trading in the Bernstein business. Any more big picture projects planned or thought about for the next year that you will be investing in over the next few quarters?

I don't think anything big looms on the horizon, although as I said earlier, when the timing is right, we probably will again resume the expansion of the private client business. And we continue to invest in the institutional research business, although not necessarily at the same rate that we have the last couple years.

Can you point -- the private client business have done so well organically. What are some of the key factors versus other high net worth competitors that's clearly letting you gain market share in this business now?

I think some of it is the brand image we were talking about that spills over to that business; reputation for independent research. I think it is obviously the fact that capital has been preserved during a terrible bear market, and the relative performance is good. We were not involved in providing our customers with IPOs and so on. And, you know, that was actually a negative competitive thing two or three years ago, but it is very positive now.

... expansion of your sales force as well?

We have expanded the sales force and expanded our geographic footprint, and as we reported on other occasions, we have invested and made substantial investments in technology for financial planning

And the target allocation that you gave as an example of being down 1% versus down 38% for an index, is that a typical allocation of the typical client, or is that sort of more of a suggested allocation?

No, no. That was the actual allocation of all our balanced accounts over the span. The reason the results where as good as they were, remember, we began that period with an equity exposure that was exclusively in the value space -- for that matter, in the deep value space. And ass a result, the equity performance was highly defensive as the bubble broke and fixed income returns were positive.

Great. Excellent positioning. One housekeeping thing. You mentioned 4.8 billion of new account wins in the institutional business. Has some of that been funded in the third quarter and some in the fourth, or has that already been factored into the third quarter?

There is some of each. I don't think we can give you that exact breakdown.

Fair enough. Thanks very much.

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