AllianceBernstein Holding LP (AB) 2002 Q4 法說會逐字稿

Please stand by for realtime transcript. Well, come to the Alliance Capital 2002 earnings review. Later there will be a question-and-answer and I'll give you instructions at that time. This conference is being recorded and it will also be replayed. I'll turn it over Miss Valerie Haertel.

Good afternoon. Welcome. The call is being web cast today and supported by a slide presentation that can be found on our website at www.Alliance.com. Bruce Calvert, Chairman and Chief Executive Officer is here, and John Carifa, President & Chief Operating Officer. In addition, Lewis Sanders,Vice Chairman & Chief Investment Officer, Jerry Lieberman, and Robert Joseph, Chief Financial Officer, 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 is subject to S.E.C. regulations. Our disclosure regarding forward-looking statements can be found in our presentation. Management will be limited to responding to inquiries from investors and analysts in a nonpublic forum. We encourage you to ask all questions of a material nature on this call. I'll turn the call over to John Carifa.

Thanks. If you'll turn to page 3 in the displays, we'll take a look at our 4th quarter results, and then after that, we'll talk a little bit about the full year numbers. We ended 2002 with $387 billion of asset on -- assets on management. Obviously for another year, we've had a tough market environment as measured by the S&P 500 which was down 22%, Russell growth -- [ Indiscernible ] Our analyzed fee base fell pretty much in line on the assets and management declined by 15.4% to 1.565 billion dollars. Our average assets under management for the 4th quarter of '02 versus the 4th quarter of '01 declined by 12.7%. So when we look at the financial result, reported revenues down 15.3%, and at the same time, we saw a decline in our operating expenses declining by 13.3%, and that decline was largely due to the decline in staffing levels. As you can see on this display, at the end of the year, we had 4,118 employees, down 7.8%. On net operating -- our net operating earnings came in $152 million, down almost 22% from a year ago.

On the next page, slide number 4, is a summary of our financial results. As I mentioned, our average assets under management declined by 13%, and when we look at revenues, our base fees declined in line with that asset under management decline, falling 12%, as a result of declining markets, performance fees were down 41%, and distribution fees -- distribution revenues fell 21%, and their exposure is more closely linked to growth equity performance. Expenses declined by 13% and net operating earnings came in at 152 million, a decline of 22% from the 4th quarter of '01. Let's take a look on page 5 at our revenues by channel. Retail channel was down 19% because of a higher concentration of growth equity products which reduces both fee and distribution revenues. Institutional business, which has a more balanced mix in its product array than the retail channel declined 14% in line with the drop in average assets under management. On a private client side, lower advanced value performance fees of 16 million and lower transactions charges due to reduced tax selling during the quarter resulted in a revenue decline of 14%. The picture here by the way is a lot different when we look at the full year and we'll get to that later on in our presentation.

Our institutional research services business was up 4%. That's a function of expanded research coverage. We had several new launches, and broader trading capabilities. We added in the outlook and the Nasdaq business. So overall, we saw our -- revenues decline by 15%. Our largest expense category is employee comp and benefits and that was down 18%. We have some detail on that on painful 6. Over the year, we had a 7.8% reduction in the head count, which reduced our base compensation, and because it came as a result of a hiring freeze, and attrition, we actually also saw a decrease in severance costs versus the 4th quarter of last year. Lower operating earnings and performance fees reduced cash in10 -- incentive compensation and on the deferred compensation side, the final -- in connection with the acquisition that occurred over two years ago, and a change in the vesting of the Alliance employees deferred plan increased our expenses by about 12 million. This was partially offset by a decline in the crediting rate on deferred compensation balances due to lower earnings.

In the past, by the way, this crediting rate was included in the interest expense category. The largest change in the employee comp an benefits was on a commission line. Commissions declined by 28 million, resulting from lower sales of retail products, and a $19 million change in the way we fund payments to certain sales management professionals. Instead of a direct charge to the commission expense, these payments are being funded from our cash incentive compensation pool, which is calculated as a percentage of earnings. So this change in funding which we made this quarter for the full year on a net basis reduces our annual expense by about $15 million. Going forward and assuming obviously the same level of payments to these employees, the impact is approximately a $4 million reduction each quarter going forward. Looking at the other expense categories on page 7, promotion and servicing was down 14% due to lower average assets under management, which reduces distribution plan payments, and also continued cost reduction initiatives, for example, in travel and entertainment and printing and mailing. General administrative costs was up 2%. During the 3rd quarter we were able to off load some 80,000 square foot of excess space that was created by the Bernstein acquisition which resulted in a 7% decline in the office expense line. This unfortunately was more than offset by increased legal fees, which rose about 12%. So in total, we saw a 13% decline in expenses.

On page 8 is our net distribution expense. Distribution revenues as you recall are tied solely to assets under management, while the expense side is only partially affected. So as assets decline on net distribution expenses -- our net distribution expenses rise. Thus when assets under management down significantly from a year ago, we saw a 26% increase in the net expense. As an aside, the average assets under management in the retail group were up slightly in the 4th quarter, and accordingly we saw a small reduction in the net expense on a sequential basis. The impact of lower average assets under management on fee and distribution revenues more than offset the decline in expenses resulting in a 4th quarter to 4th quarter drop in margins from 31.9 a year ago to 29.3%. However, sequentially our margins improved from 26.5 to 29.3 and this was because of higher performance fees, the improvement -- and performance fees are mostly realized in the 4th quarter of the year, so accordingly they were higher performance fees. The improvement in the net distribution expense line that I just talked about, and the change in the funding of compensation to certain sales professionals which I also discussed. So sequentially we saw an improvement in the margins.

And then finally on page 10 at the holding company level, again, take a look at the middle of the page, you'll see our net operating earnings were -- -- was down 22% and we'll be distributing to unit holders 52 cents, again, a decline of 22% from a year ago. Now let's take a look at the full year results which have been impacted really by the same dynamics, declining markets and reduced retail sales partially offset by institutional management, private client, and institutional research services, account and business growth. Our average assets under management for the full year were down 7.7%, and accordingly, revenues dropped in line with that decline by 8.4%. Our operating expenses were down 4.1, again, due to the reduction mostly and the staffing level is down 7.8%, and our net operating earnings came down to 632 million. Looking at the P&L summary for the full year, similar to the quarter to quarter analysis, the decline in average assets under management for market depreciation decreased base fees and performance fees and distribution revenues in total by 8%. We were able to reduce expenses by 4%, and our operating earnings for the year fell by 20%.

On page 13, looking at our revenues by channel, similar trends as the quarter except our private client business had revenue growth for the full year as net new business more than offset the declines in performance fees and market depreciation. On the expense side, again, taking a look at our largest expense category, we saw expenses decline by 3%. Base comp was down 6%, again reflecting that lower head count that we talked about. Cash incentive compensation was down 14% from lower earnings and performance fees, and again, the compensation numbers are a function of earnings, it's a percentage of earnings that we realized, and then due to the final crunch of the Sanford Bernstein deferred compensation and the change in the vesting that I mentioned for Alliance's deferred plan and the reduction in the crediting rate that I talked about, we had an increase of some 64% in deferred compensation. Commissions for the full year were flat. We had higher sales in private client and institutional research and our institutional investment management businesses, but that was offset basically offset, lower retail sales and the reclassification from commission expense to being funded by the incentive compensation pool that I talked about before, resulted in a flat number for the full year.

Looking at our other expenses on page 15, lower average assets under management reduced distribution payments and continued cost reduction initiatives brought promotion and servicing down by 9%. General and administrative is up 6% because of higher legal fees, and earlier in the year, we incurred costs in connection with the final relocation of people relating to the Bernstein acquisition. As I mentioned before, we offloaded some space in the 3rd quarter, so the comparisons for the 4th quarter look better than for the full year. When we look at interest and taxes, basically the change there is a result of lower debt levels and lower interest expense. And then on painful 17 -- page 17, our margins declined from 33.7 to 29.2 for the same results I discussed as related to the quarter. On painful 18 is our full -- page 18 is our full year numbers for the company. $2.19 versus 2.77 a decline of 21% and distribution for the full year is $15.15. On page 19, in spite of the environment, over the past five years, we've grown our distributions by 9% per year while the equity markets for this period were basically flat. On page 20, when we look at the overall -- the total return for Alliance Capital, on the long-term we've had solid outperformance, particularly when you look at the three, five, and since inception numbers. With that, I'll stop and I'll turn this presentation over to Bruce.

Thanks. I'm going to try to give a little more of a qualitative assessment of 2002, although there will be some numbers, and the first thing I'd like to do is just sort of read some of these bullets with you and we're on slide 21,, but then I'll go through some other pages that provide a little bit more color. Obviously it was a difficult year just in the sense that global equity markets continued to put pressure on our sum sum and on our revenues. It was also somewhat captured in the market decline, but it continued to be an extremely risk environment characterized by highly volatile markets and this creates a particular challenging investment environment for all of our investment teams, but particularly so for growth equites, which are -- trade longer duration assets. And our credit sensitive fixed income products. Growth equity and fixed income products tended to underperform their bench marks. More on that later.

It was a very strong year for the Bernstein Value services, and all of our products, the long-term results are generally competitive and in some cases, exceptionally competitive. Net flows basically reflect the risk of environments and relative performance trends. John mentioned earlier the one year number, but it's really the three-year performance disparities which we'll look at in a moment between growth, value, and fixed income that are driving flows, and there are outflows in growth equites, inflows in value and fixed income, which were actually larger than the outflows in equites, and we also had outflows largely from consolidation in our cash management business. It was a mixture year for retail. The cross currents were that investors continue to sell growth and technology funds. Conversely, the sales of the value products are building. Those are young products, because Bernstein's only been with us for two years and we've only had product in the market for a little over a year.

We had another good year in the 529 business, slower than it has been, but we've still got the leading state sponsored position with 6.2 billion in assets and some 330,000 a shareholder accounts and we had a positive year in Luxembourg of net positive flows in general across both retail and institutional management, we continue to do very well overseas. In the institutional arena, more than 4-1/2 billion -- well, more than half of the sales came from overseas. Under it was a very strong year for institutional research, [ Indiscernible ] A 11% increase in revenues, but with stable margins, so a good year for earnings, as well. The year-end assets declined from 387 from 452, an average assets were at 415 down from 449, and of course this means that at year-end, assets at 387 billion were below average assets for the previous year. Revenue yields were reasonably stable. We'll take a look at that.

Overall I think we made good progress on expense management and particularly so as the year progressed. Overall, I think it's a year that demonstration straits that our diverse mix of clients and distribution channels as well as a diverse group of high quality investment products, I think they both validate the Bernstein acquisition, which has helped to put us in this more balanced position, and they've created relative stability in the toughest environment that we've had to work in in 30 years. A little bit more about that environment, on page 23, John already looked at the numbers for 2002, but it's interesting to focus on the numbers for three years as well, particularly in the retail area, there is so correlation between three-year kinds of performance numbers and what investors are buying and selling, and they are trend followers. So over the three years, there's an enormous disparity where the growth independent December are down 50% and the value are only down 15%, and international indices are down over 40% and bonds are up over 33%. Not surprisingly investors are selling growth, which is down the most, buying value, and buying fixed income. So those numbers explain a lot about the trends in our business.

Turning to relative performance, looking first at some of our key institutional equity composites, 2002 was a tough year for us, as I said earlier, in our U.S. growth products, underperforming in both of our large cap strategies, large cap growth and discipline growth. We had good results in our international portfolios and particularly so in our emerging markets portfolios, and I think, importantly, the longer term results five and 10 years continue to be very competitive, and for that matter, the three-year results are generally very competitive. On the value side of the business, we had generally speaking a very strong year for the Bernstein value products. I focused first on diversified value. This actually comes in two types, one that's optimized against the value index, one which is the one you're looking at here optimized against the broader market. Both of those strategies performed very well in '02, and they are roughly double in size, strategic value, which had a more difficult value in '02, but continues to have very competitive longer term results.

The Bernstein value portfolios, international portfolios had an exceptional year, and that's one of the factors that's helping to drive our overseas business wins. Relative value, which is an Alliance strategy, had a tough year, and conversely the long-term results are good and the more recent results are back on track, so in the value space, we're generally, I think both the value and the growth space were well positioned institutionaly. On the fixed income side of the business, as I said earlier, we generally had a tough year in our credit sensitive products, which would include high yield and our global product. Conversely we had a pretty good year in insurance and in markets. What is more encouraging, we did make some changes both organizationally and in terms of leadership of some of the investment teams in if 2nd quarter of last year, and results in the laster part of the year were pretty encouraging across our fixed income products.

Turning now to to retail position, again, I think it's important that you remember when we're looking at absolute returns of let's say plus .59%, that that's still a large negative number and that may be what matters most in the retail channel. But again, like in the institutional side we had a difficult year with premiere growth. The long-term results are competitive. We continued to have good relative performance in technology. It's not clear that retail investors will return to that asset class until the absolute performance turns, and we had another good year in global growth, which is a very important part of our success along with fixed income product in the offshore fund mix.

On the value side, the picture looks exactly like the institutional picture, exceptional performance in the Bernstein value products, a tough year in the relative value product, but a very competitive long-term record. The problem here of course is the performance records are only a year old or now we're getting close to 18 months old. Sales are building here, but we probably need another 6 or 12 or 18 months of performance, and then I think sales will build nicely. On the private client business, this is a -- these are very diversified balanced portfolios with exposure to fixed income, and equity exposure broken down between U.S. equites and international ex-tease and some of the portfolios are roughly 80/20 value to growth, some are invested 50/50, and you see the performance for those portfolios respectively down 7% and town 10% verse a 52% decline in the S&P from March of 'oh oh, when sort -- '00, investors actually have appreciate, they haven't made a lot of money, but they're ahead 9%, versus a 30% decline in the market, and this gives us a very strong competitive position.

Turning to flows, I'll repeat myself, but I think it is the most important factor in explaining the flows, growth equites down 56% over the last three years, value equites, this is performance, down 15%, fixed income up 33%. Not surprisingly for the industry and for Alliance, we've had outflows in growth equites more than offset by net inflows and value equites and fixed income. We had outflows in our small passive fund business and we had 6 about it of net outflows and cash management again largely because of consolidation and acquisition activity in the industry. If we look at the flows by distribution channel, there was 6 billion in net outflows in retail. A little over half of it was in growth and technology funds. About 2-1/2 billion of it was the loss of the of the advisory mandate we had with an Italian mutual fund company which we've talked about on earlier calls, that that was coming. So about 3 and a half billion from that.

Again, in institutional, where I think the investors are less trend followers and likely to put money in both growth and value, we had 4 billion of net inflows and also fixed income, and on the private client business, as I already said, an 11% organic growth rate. Just a little bit more color on slide 32 on the retail business. In the U.S., the net outflows were 1 bill 8. I've already talked about the mix of those sales with the exception of noting that we continued to have good 529 sales. In Luxembourg, we had solid net inflows, again, this is strong demand for some of our fixed income products offshore, and also due to the good performance of global growth trends. In the other non U.S., you basically see the EPTA account loss, and on the variable and sub advised, there was the the loss of a couple of those portfolios, but we were also [INAUDIBLE] by restructuring -- [ Indiscernible ] Which we manage, they consolidated their product line and we lost some portfolios and assets in that process. On asset account business, we continue to have net outflows. I think simply reflecting again that that's mostly an equity business. The relative performance has been pretty good, but the absolute numbers are of course negative.

And finally, we've already commented on cash management. In the institutional investment management business, we had over $22 billion of wins during 2002. There's two things that are important to note about that other than the magnitude. One is that they were across all of our product lines, one business in -- we won business in growth, value, international growth and value and fixed income, there was some very large portfolios in the fixed income number, and that over half of those wins came from overseas clients -- wins came from overseas clients. We have developed a very strong momentum with the global consulting community and have a much more visible presence now overseas and with a much broader product line. Page 34, we've really already covered. It simply shows the balance in each of our retail -- in each of our distribution channels, and they were reasonably balanced at the end of the year, they continue to be fairly balanced in A AUM terms, but if you turn the page and look in fee terms, again, a point that we've made in the past, our retail business was particularly exposed to growth equites at the start of this year. We have somewhat better balanced, but also an oversize exposure to growth equites in the institutional business, and given what's happened in the markets and to some degree with flows, as we begin 2003, it's a much more balanced business.

You actually saw retail yields decline during the year as we lost some growth equity business, but more simply because of the sharp market declines in that business. In institutional we had an increase in yield, which just reflex a good picks of business won versus business lost and also the structure of those fees when markets declined, they declined at the trail rates. Private clients was really characterized if adjusted for performance fees by Fiesta wilt and the -- stability, and the overall picture was one of fee and yield stability. John's already talked at some length on expense control. I simply wanted to comment on the trends in head count. If you look at the red line, we were still building head count as we have done at the end of '01, when that didn't materialize, we started to bring head countdown and mid-year of '02 with the, we became much more aggressive about that. Not such in terms of layoffs, but really in terms of freeze hiring. combined with some head count reduction. We expect this number to -- and I'll say more about this later, but we expect this number to gradually build to this level over the course of '03, but that will again in part on how markets and business trends develop.

If we look ahead for the year, I suppose the most obvious point is -- well, maybe what I should say first is the usual caveats about relatively low visibility. Much of what will happen to -- in our business will depend on what happens in markets, and we're using our standard forecast of 6 to 7% growth, but obviously, there's a lot of possibilities around that. There are a lot of possibilities in our sales assumptions which I'll get to in a moment, but we're starting the year with AUM at 6.7% lower than average AUM in 2002, so it suggests tougher comparisons earlier in the year until we get the improvements in markets and the new flows from sales. On the retail side of the business, we expect flows to turn positive. Essentially, if you look at current flows, we would characterize the money fund outflows and the EPTA outflows as nonrecurring in nature, recall together that those were over $8 billion. As we noted a couple of charts ago, our product profile now is very balanced in the retail area. The value investment records are maturing, and we hope that means good things for sales of our value portfolios. The toughest part of the assumption is the assumption that at some point this year, the abatement in growth, the growth outflows, will abate. We expect continued net inflows in institutional investment management, and again, we expect particular strengths from overseas, and we expect continued new flows in the private client business, the business flows there have been quite consistent.

Overall, that leads us to an expectation of -- I'm sorry, we're also looking in the research business for moderate growth, but in particular in the research business, improved margins this year. On the revenue side, that's really a function of an assumption of market share gains with some more research rollouts and more trading strategies in place, but offset somewhat by pricing pressure in the industry on a per share basis. But not withstanding that, we do expect margin improvement. We expect modest head count and expense growth as the year process, but we'll monitor that carefully. We can adjust to the realities of market conditions. All of that leads us to think that -- and again, going back to the first point that we're starting in the hole compared to average AUM for 2002, that we'd have sort of a flat issue year compared to '02 and that the most difficult part of that would be the comparisons will be early in the year. We've finished just with a statement of our business position which all of you have seen before, and I think the important thing is that we still believe that we are very well positioned. It's been a very hostile environment for the last two or three years, but I think the business diversity and strengths are seeing us through it reasonably well and I think we're very well positioned for whenever we come out of the other side of this environment. That concludes our remarks, and we'd be happy to listen to your comments or to try to answer your questions.

Thank you. If you wish to ask a he question, press 1 on your touch tone phone. If you are using a speaker phone, pick up your handset. Our first question from Ken Worthington.

Good afternoon. Can you talk a little about the competitive environment to manage to find benefit money and maybe tell us about higher market -- how your marketing strategy is changing? We're hearing that you're using the analysts more in the marketing process than you had in the past. Along the same lines, we're hearing a large number of U.S. companies are adjusting the rates now and market return assumptions and as a result are announcing they're increasing the contributions to the defined benefit business. What do you expect to see in coming quarters and any information on the hit rate would be great.

As we've said before and we'll elaborate if you like, we do think that over the next few years, there will be substantial net new money coming into the defined pension business. I would say we've really not changed any of our marketing strategies. I'm not sure where you're hearing that analysts are being used more in marketing presentations. The one portfolio that we've talked about that is managed by assets is growth trends, but they're barely involved with that portfolio. Oftentimes institutional clients, when they're -- prospects when they're nearing a final decision will as part of their due diligence want to meet an analyst or two, but I don't see any difference in that today from what it's been over the last several years. We've not disclosed the number of RFPs or the number of calls or talked about our pipeline and that kind of detail. I think we'd simply say that the new business trends are strong both in terms of wins in January and -- and new business activity, and particularly so overseas. I want to remind, however, that the best business wins and not net new business, so the new business trends are fine, but there really is not a change in our strike that. It's -- we market primarily in part through the consultants, and that's as they've expanded Green Bayly, we've expanded with them, that's helped a lot, and we have a large direct sales force that's out calling on corporations and building relationships. And two years ago, that changed a fair amount in size with the Bernstein acquisition, but it really hasn't changed in terms of its basic nature of the effort.

One more question if I may. If interest rates drop another 25 to 50 bips, what kind of earnings income do you expect it would have for Alliance Capital given what your money funds are currently yielding, and if there's any flavor you can give us for the quantity, that would be much appreciated.

The quantity of our money fund assets? B shares?

Yeah. How much money fund assets are in B shares right now for you?

It's less than $1 billion. Small.

Great. That's very helpful. If we see rates decline another 25 to 50 bips, what kind of pressure does that put on you to reduce your management fees in the money fund arena?

Again, we'd have to deal with that -- when it comes. There are many issues to deal with, but the impact again, the 12 B-1 money funds, if you will, are less than $1 billion, so the impact is quite small relative to our earnings.

Thank you. Next question, Cynthia Nev Mayer from Solomon Smith Barney.

a couple of questions. A general one first. I was I wanted to hear you say that three years is kind of a magic number in terms of retail investor psychology for performance and I'm you curious to know if absolute performance were a turn around from here, what kind of a time line would you expect for those to turn positive?

We before -- before we -- our flows you mean?

Yes.

I don't know that I think the market has to turn dramatically for our flows to turn positive. I'm sorry if that was what you understood. I think obviously if markets turn and the character of markets change, it will affect where flows are going in terms of broad product categories, but I think for us, the most important thing in that sense is how the growth stocks do and I think the important thing is that it would stop the outflows. We've got sales in growth products now, and I think just as time goes by and the value products mature, that coupled with the areas where we have strength is what will make the sales turn positive.

Excuse me, I meant in the growth funds. I heard you say you expect the flows to turn positive overall.

Yeah, I don't think it takes a very long period of time for what really has to happen in the growth funds is for the redemption rates. As soon as we start to see positive performance, that's the biggest factor and most important factors. We have to see positive results, absolute returns and we'll start to see a reduction in rates and an increase in sales. As Bruce said before, over the long-term, three-year numbers on a relative basis are very important, but the first thing we need are absolute returns.

A little more on the pipeline. When you look ahead for the year, are you seeing sort of continued -- [ Indiscernible ] On the non U.S. side and are the non U.S. mandates more -- they're more fixed income than equity, right?

No.

Okay.

We've been winning business in our value equity products, in our growth products, we've had one sizable fixed income win from overseas seas, but I would say more of it has been in equites, certainly in numbers of accounts. It's been more equites.

And the pipeline looks that way, too?

Yeah. Again in terms of numbers of accounts.

Right. And a quick detail question on the change in funding of competition for the sales professionals, does that -- just to clarify, that doesn't affect their overall comp, right, or --

no. --

anybody else's overall comp, it's just the shift in funding?

Not at all, no impact on the composition. It's just the way it's funded. Instead of being a charge against the commission expense, it's being taken out of the incentive compensation pool, and that's a pool that's a function of our operating earnings.

We means it does impact compensation for people in the pool. Per capita concentration goes down. Was that clear?

Yes, there's less left in the pool.

Right, for everybody else.

Okay. So it's just you're allocating it more to the sales basically?

No, what it was is first of all, we felt that it was appropriate that some of these people be paid out of the IC pool as opposed to commissions. As we thought about it, we thought that was just the right way to pay them, but it was also a way to create a real expense reduction in compensation. But it wasn't concentrating on salespeople. Those people might have gotten the same 19 million that they would have gotten, but it was a reduction in overall compensation. What happened is, that 19 million is an expense reduction which actually increases the size of the IC pool moderately given our 30% formula, but then that slightly larger pool has to pay all of the professionals that get IC including now those sales professionals, and their 19 million of compensation. The one thing we could maybe just clarify, on a run rate basis, quarter over quarter, that will show up as a $4 million reduction, each quarter, through the 3rd quarter of next year.

Through the 3rd quarter of '04?

No. Of this year.

Okay.

Cynthia, why don't you give me a call after the call and why don't we move to the next question. I'm just concerned about time.

Thanks.

Next question, mark Constant from Lehman Brothers.

Good afternoon. I want to follow up on a couple of things. One, your point about psychology returns is very well-taken, but in looking at redemption history and recommendations are actually down this year for the industry as a whole and historically it increased after performance bottoms, given your comment about three-year numbers being so important than those deteriorating so much for growth managers, I'm wondering the thinking behind being so optimistic in the flows on a net basis if growth recommendations do pick up. Are you seeing something different than I am?

I'm not sure that the -- I don't know, I don't have the numbers in front of me. The growth fund recommendations are down from a year ago. I don't think that's necessarily correct. But again, I prefaced my comments on that, you know, we -- we're experiencing modest net redemses in the -- in our growth equity products, and in fact those net reexemptions declined from the 3rd quarter to 4th quarter and obviously went down in January, and I think that certainly the four quarters is reflective of the market direction. If we have positive absolute returns, it will do a lot, we suspect, towards stemming the flow of recommendations. Having said that, the area where we see the greatest opportunity again is on the value side, and those funds which have superior track records.

I think that's the point, mark, clearly an abatement of the outflows is the riskiest part of our forecast, but it's only one relatively small factor in why we think our overall sales will turn positive.

Fair enough. You reared several times in the presentation to consolidation in making the money fund on the retail side. It's not really something I'm seeing a lot of other places. I'm wondering, is that just a function of your client list happens to be those that happen to be consolidating? Is that something you see systemly in your channel?

We had a couple of large clients that were -- that were into that, for instance, CSFB direct, which is now Harris Direct, and the Morgan Stanley business, there was an internalization of one and the other was sold and we saw an outflow result of -- as a result of that.

You ran through a bunch of the changes on the compensation side. One of the key points of that commission change to am I something to understand that that will also make it variable with respect to profits instead of just sales volumes?

Exactly.

And you mentioned the crediting rate change and deferred comp going down. That's just moving it within line. That, too, is not necessarily a net impact on earnings?

That's right. That's just a movement. We've previously showed it in the interest line and we decided what it really is, is a change in compensation. It directly impacts the values of our plans and it was a reduction in compensation that we weren't showing as a reduction in compensation.

Does that flow through investment income, then?

No, it's only -- only in the expenses.

And lastly, you mentioned earlier, the accelerated investing of something else in comp?

This is not new. A couple of years ago, we made a change in aligns' deferred compensation plan which had a couple of tradeoffs. It changed a mix between cash and deferred comp in favor of deferred, but at the same time, we shortened the vesting period on the deferred, and that shortened vesting is what's been flowing through the income statement from that plan.

But another leg of that? This is not incremental?

Right. There's no change here.

At this time we have no further questions. Please continue.

I believe if we have no more questions, that concludes our call for today. Thank you very much for participating. If a question arise please feel free to call the investor relations department. Thank you :