AllianceBernstein Holding LP (AB) 2003 Q3 法說會逐字稿

Ladies and gentlemen. Thank you for standing by and welcome to the Alliance Capital third quarter 2003 earnings review teleconference. At this time all participants are in a listen-only mode. Later there will be a question and answer session and I will give you instruction at that time. Should you require assistance while you are on this call, simply press star, then 0 and you will summon an operator on to the line. A reminder this call is being recorded. I would like to turn the call over to the host of the call, the Director for Investor Relations for Alliance Capital, Ms. Valerie Hartell. Please go ahead.

Thank you, Ken. Good afternoon, everyone. Welcome to our third quarter conference call. Just as a reminder the call is being webcast and is supported by a slide presentation that can be found on the Alliance Capital website.

Presenting our quarterly results today will be Lewis Sanders, Vice Chairman and CEO, and John Cariba, President and Chief Operating Officer. In addition, Bruce Calvert, Chairman, Gerry Lieberman, Executive Vice President of Finance and Operations, and Robert Joseph, Senior VP and CFO are here 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 subject to S.E.C. rules and regulations regarding disclosure. Our disclosure regarding forward-looking statements can be found on page two of our slide presentation. In light of S.E.C.'s regulation FC, management will be limited in responding to inquiries from investors and analysts in a nonpublic forum. Therefore, we you to ask all questions of a material nature on this phone. At this time, I would like to turn the conference over to John Carifa.

Thank you, Valerie. Good afternoon, everyone. Let's turn to display number 3, which is a summary of our third quarter financial results. Continued strong equity markets during the third quarter and the over the past 12 months have resulted in assets under management of $438 billion which is a 2.7% increase for the quarter and almost a 19% from a year ago. The market, as you can see here, is measured by the S&P was up 2.7 during the quarter with growth up up almost 4% and value up a little more than 2%. Stocks outside the United States as measured by the MSCI index were a little up over 8% while bonds were down slightly.

Interestingly, for the first time in several years, the trailing 12-month market returns are quite good. The S&P value in globe stock, index, have all posted positive returns over the past 12 months between 24 and 26%. Bonds as measured by the Lehman index were up about 5.4% over a year ago. So as a result of market appreciation and positive inflows, our average assets under management rose 5.2% for the quarter and a little more than 10% for the 12 months. Revenues for the quarter on a sequential basis rose in concert with the increase in the average assets under management being up 5.7%.

Compared to last year's quarter they were up 7.6%, trailing the rise in our average assets under management but that's mostly due to a slower increase in the distribution revenue line and also a small revenue reduction in our institutional research services business. Expenses on a sequential basis rose 3.9% and 2.7% compared with last year as higher earnings increased incentive compensation and for the quarter we saw an increase in legal and insurance fees. We continue to focus on expense containment as evidenced by our head count numbers which were flat for the quarter and down 4% from last year. As a result of the revenue gains outpacing the expense increases, our margins have increased and net income jumped 11.4% sequentially and 25.6% over last year to $165 million dollars. On display 4, we reference our results versus last year.

As I mentioned our average on assets under management rose by 10% and total revenues climbed by 8%. Base fees, which are closely linked to average assets increased by 11%, pretty much in line with the increase in assets under management. Transaction charges of our managed accounts were up 20% as volumes increased and performance fees were basically flat year over year. Distribution revenues, which partially benefitted by capital markets growth were up 4% and our institutional research services revenues as I mentioned just before fell by 5% as lower revenues -- I'm sorry, lower volumes offset gains that we made in market share.

On the expense side, we saw an increase of 3%, resulting in the net income increase of 26% to $165 million. On display number 5, we take a look at our revenues by business channel, and you will note that revenues by business channel climbed 4% in retail due principally to capital markets growth, the institutional and private client businesses also benefited from capital markets increases but also experienced net new business inflows and higher transaction volumes pushing revenues up 12 and 17%, respectively. Institutional research services dropped 5% again as volume declines offset the gains that we had in market share.

And other revenues almost tripled to $11 million as we mark to market gains on investments was principally fund or deferred compensation plans. Let's now take a look at our expenses, starting on display number 6. Our largest expense category, which is obviously employee compensation and benefits, was up 11%. Base compensation was down 1% from a 4% decline in the head count that I mentioned before, almost entirely offset, however, by severance payments.

Cash incentive compensation rose by 30% pretty much in line with the increase in net income, deferred compensation is up $16 million dollars or 84% as a result of the increase in amortization resulting from the final traunch of deferred compensation that was awarded Bernstein employees last year in connection with the acquisition, and we had a higher interest credit on the Alliance partners plan due to higher earnings. Beginning next quarter quarter, the first traunch of deferred compensation for Bernstein employees that we granted three years ago will be fully amortized resulting in a sequential decline in in this expense category.

Fringes and other had several small increases, and accrual true-up, which raised that line item by $3 million dollars versus a year ago. Okay, turning to display number 7, excluding employee compensation and benefits in total, the other broad expense categories were down as compared to last year. Promotion and servicing declined by 5% as we begin to fully amortize these share sales that took place several years ago and are not being replaced by current sales at the same rate, which reduces our amortization expense. Also continued cost cutting initiatives have helped us maintain and reduce other promotion expense categories, most notably printing and mailing.

General and administrative expense is up 1%, with the benefit of last year's off loading of some extra space being offset by higher legal fees and insurance premiums. Let's turn to display number 8. Last quarter, I reported that continued market improvement had reversed the direction of the net distribution expense drain we had been experiencing over the past several years. In the third quarter the improvement continued as the net expense was down 19% from last year and also down 6% sequentially. There are a lot of moving parts here, but in summary, strong capital markets growth, lower cash management services assets, where we structurally lose money on distribution and the completion of the amortization of the third commission on sales that I mentioned occured several years ago all contributed to the net expense improvement.

On display 9, we are looking at our margins in greater detail. You will note that the contribution to our operating or non-GAAP margin made by both base fee earnings and net distributions expenses. Obviously, capital markets growth, net new business and expense containment has contributed to our progress with our non-GAAP margin increasing to slightly below 30% from 25.6% a year ago and 28.3% in the last quarter. And then finally on display 10, at the holding company level, we are reporting net income and a distribution of 57 cents per unit as compared with 5 1 cents in the second quarter and 46 cents a year ago. Well, that concludes my remarks. I will now turn it over to Lewis Sanders.

Thank you, John. First I want to add just a little color to John's review of the financial results. I characterize the third quarter generally satisfactory and revenue growth accelerated while expense increases were well contained. On the other hand, in the important metrics of organic growth and profitability, we continue to perform at levels below our long-term potential, despite good progress in several of our major businesses. Results were, of course, shaped heavily by the strong underlying tone to the capital market as summarized on page 11. They provided a moderate tail wind financial performance during the third quarter and a very strong stimulus to overall growth over the last 12 months.

We managed to add somewhat to that tail wind with organic growth of about 200 basis points at an annual rate in the third quarter and 300 basis points over the last year. Net inflows of long-term funds under management sourced most of the growth with a contribution from relative investment performance positive but small by historic standards. Weakness in the relative returns of our key large cap growth services in the U.S, as shown on page or display 12, offset relatively strong results in our value services, which we summarize for you in display 13.

Note that our non-U.S. equity services performed well in both investment style and this is a key trend as our global service suite is of increasing importance to the firm's overall success. In general, our long-term performance premiums remain competitive throughout our equity product line. In fixed income, summarized on display 14, you can see that results in several of our key services showed near-term improvement. Process changes in our core and core plus services to ensure close linkage to the firm's competencies in credit research and asset-backed securities is beginning to pay off but it will take time for these process improvements to have their full impact.

We believe, however, that we are on a path to greatly improve our competitive standing in fixed income. As I think you know, this is a major priority for the firm. Performance in our retail services, shown on page or display 15, mirrors the trend just reviewed as these services are, for the most part, derivatives of institutional products. In general, our U.S-focus growth oriented services are trailing their benchmarks with the exception of exceptional performance in mid cap growth having a truly outstanding year. I want to bring attention, too, to results in our key wrap account offering marketed under the Alliance Bernstein Regent brand on the far right of the display.

Regent is a core-like equity service, actually quite substantial, now some $6 billion in assets under management, whose mission is to profit from strategic change induced by major economic or technological development. This investment approach is distinctive in a market dominated by style-driven services. While a shift in portfolio management leadership, which dates back to '01, disrupted Regent's market position for a while, excellent results since then have reestablished the basis for renewed growth in this service. We are quite optimistic about our prospects here and are pursuing various research related and marketing initiatives to capitalize on the service's potential.

With few exceptions, our value services are outperforming their benchmarks, as you can see in display 16. In fact, in some cases, by substantial amounts, and just as in the institutional space, our non-U.S. value services and retail are doing really well as they are in growth. Finally, investment returns in our private client business remains strong. They're best captured in the balanced benchmark comparison shown on page 17. Since the great bulk of this business consists of multiple services managed to asset allocation targets tailored to meet specific client needs, client satisfaction remains high in this group and continues to benefit even now from the wealth preserving strategies pursued during the stock market bubble.

Turning now to organic growth from cash flow. You can see on display 18, that third quarter net flows from long-term funds were about $2 billion, which equates to about a 2% annualized growth rate. Our value services continued to gain market share both here and abroad, offsetting continued weakness in U.S. growth services and a particularly weak quarter in fixed income, mostly the result of the loss of two very large relationships in the quarter. Total assets under management grew to $438 billion with market appreciation in all services contributing some $12 billion.

Trailing 12-month results tells a roughly similar story as you can see in display 19, with very strong growth and value services combined with moderate inflows into fixed income, more than offsetting attrition and growth. Overall net flows of about $11 billion equate to a 3% organic growth rate, which together with some $62 billion in contribution from investment returns drove AUM up by almost 19%. Growth by major client groups reflects diverging trends as well, and they are summarized for you in displays 20 and 21. But let's now turn to display 22 to explore these trends more thoroughly.

As you can see in the display, our private client business continued to be our fastest-growing unit with net cash flows of more than $1 billion for the quarter and more than $3 billion for the last 12 months. That is equivalent to organic growth of close to 10% in both periods. The demographic profile of this client group continued its upward trend with the ultra high net worth component of this business, that is clients with assets above $10 million, growing the fastest and accounting for almost 50% of new business in the period.

Success here is based on our skills in solving complex wealth management problems implemented through a broad range of highly competitive proprietary asset management services. Services, I might add, that work especially well together and which are tightly integrated from a tax management perspective, a feature difficult to replicate in open architectural alternatives. As noted in last quarter's conference call, we believe the time has arrived to expand our distribution footprint in the United States.

As such, we have approved a plan to double our sales force over the next five years. The field force expansion in existing markets, as well as the development of a number of new markets, having the required demographic profile. We believe we can finance this expansion with no material increase in distribution expense in relation to revenue, assuming trend-like capital market returns. Overall profit margins should benefit as we improve absorption of product costs. We see opportunities to expand our institutional investment management business too. As you can see in display 23, this unit had a strong quarter with organic growth accelerating to a high single-digit annual rate on net flows of about $4 billion. This compares to trailing 12-month net flows of $9 billion, a mid single-digit run rate.

Our success in this market segment in increasingly a function of consultant and client acceptance of our globally integrated investment platform in value, growth, and fixed income. We function with a common set of investment principles in each discipline around the world, utilizing research with a global orientation, a structure which distinguishes us from many of our key competitors, combined with outstanding performance premiums while global services are making for a compelling story. Indeed, of the $8.5 billion in new business that we won in the third quarter, about half were in global value and global growth mandates.

Morover, some 75%, with the client domiciled in non-U.S. markets were an especially strong showing in the UK and in Japan. Looking forward, activity levels remain high and the backlog of new business won but not yet open, remained substantial. To build upon this momentum, our '04 plan includes additional investment in sales and client service in selected non-U.S. markets. Now in contrast to the robust growth in our private client and institutional unit, our retail business deteriorated in the quarter. Modest outflow continued in U.S. long-term funds, while very strong growth in fixed income products in Asia came to a halt in the quarter as competitors entered the market with product features similar to our own.

As you can see in display 24, overall we experienced net outflows of $2 billion in long-term funds and another $2 billion in cash management. Trailing 12 month flows looked roughly similar. These results are clearly you unsatisfactory but should be kept in some perspective. Our retail product set, I think you all know his been historically been dominated by growth-oriented equity services leaving us quite vulnerable to the market setting in the post bubble years, weak absolute returns and association with some prominent company-specific failures during that span, negatively impacted our brand equity.

However images in this business are typical. There are times when people overestimate your skills, inappropriately extrapolating recent success and there are other times when your considerable strengths are overshadowed by the issues of the day. We are in one of those latter times in the retail business and we believe we'll come out of it. We are now well into executing our strategy. As we see it, we will eventually synchronize our image in the retail space to the full range of the firm's considerable core competencies now so evident in other market segments. The centerpiece of this effort is built around our wealth strategy family of mutual funds launched in September of this year.

These funds bring to the retail market the same attributes that have made the Bernstein private client business such a success over so many years. They showcase the breadth of our skills by investment style, across many geographies, among various asset classes. They demonstrate the fact that our services work better together than they do alone going to low and in some cases negative correlation in their investment return pattern, a feature which dampened short-run volitility, a prized attribute of retail investors. They also highlight the firm's investment planning and tax management skills.

Most of all, they bring systematic rebalancing to the retail investor, combating this group's tendency, pretty strong tendency to trend follow and undermine their wealth. But our efforts don't stop there, with supporting our expanding product array with a flow of high quality content to financial advisors designed to enhance their ability to serve their clients, this effort, which utilizes multiple venues draws on the full research capabilities of the firm, and in time we believe it will bring considerable lustre to our brand as in the institutional private client channel over the years. Now look, we don't anticipate dramatic improvement in retail cash flows in the near-term, but we do expect to make gradual progress.

Strategy itself, I can report to you is off to an encouraging beginning. Our value services will soon pass through their three-year anniversary in this particular market, a point often associated with wider market acceptance. The Regent managed account service, as noted earlier, is showing strong signs of a growth acceleration. We look for renewed growth in offshore markets, in part a reflection of the additional sales force expansion that we will be undertaking in 2004. It is important to stress, too, that we have not seen any noteworthy shift in cash flows as a function of the various investigations on market timing now under way in the industry. In fact, net retail flows in October are showing some mild improvement, especially in equity services.

Now, as to the state of these various investigations, there is little new to report. I can say that our own investigation has not uncovered any new findings. We have no reason to conclude that any Alliance employee was complicent in late day trading and we have no evidence that Alliance's fund managers were engaged in market times in the funds that they managed. Our investigation, however, is ongoing, including work now underway to determine the effect of market timing on on shareholder returns, if any.

We are of course extending every effort to cooperate with regulatory inquiries into these matters. Finally, turning to our institutional research business, which is highlighted on display 25, revenue, as John pointed out, declined by about 5% as compared to last year. It was hurt by a much larger 12% decline in the market we serve as measured by transaction volume in the United States and an even greater decline of some 24% if we adjust that market volume to exclude program trading, a service we are just now beginning to offer.

Thus, our year-over-year market share improved in our addressable market with strengths throughout the business. Dampening the effects of the contraction in the U.S. as well was the continuing growth of our London-based unit which achieved record revenues in the third quarter, in fact, it was up about 75% versus the comparable period last year.

While the market for research and trading services remains under pressure, our continuing success in distinguishing research and sales with very high quality scores from clients and surveys, from consultants, combined with various initiatives underway in trading, gives us confidence that this unit will stabilize comparative revenues in the fourth quarter and resume its growth in 2004. So, in sum, while we face challenges in the retail arena, we are pleased with our performance in our other major businesses. Most important, we believe we are making progress on our overarching goal, which is to establish the firm as a leader and an innovator in investment research and to translate that knowledge to meeting the investment objectives of our clients. And now let me turn it over to Valerie for your questions..

Ken, we are ready to take questions.

Ladies and gentlemen, if you wish to ask a question, please press star, then 1. You will hear a tone then indicating you have been placed in queue. Management has requested that you please limit your initial questions to two questions in order to provide all opportunity--all callers an opportunity to ask questions. We welcome you to return to the queue to ask any additional follow-up questions. It is Alliance Capital's practice to take all questions in the order in which they are received and to empty the queue before ending the call. Our first question is coming from the line of Ken Worthington from CIBC. Please go ahead.

Hi, good afternoon. First question. Can you help us out a little bit more on how we should look at institutional sales over the next few quarters? You said you had a big pipeline. I guess, first, how big is it and how are the the trading scandals, proposed changes in defined benefit legislation, and even the rise in the equity market, impacted potential contributions made by corporations?

A backlog of one, but unopened institutional mandates approximates $9 billion, roughly similar to where we were three months ago.

Okay.

In addition, there is an activity level as measured by competitions underway, which is robust, and so we have every reason to believe that we will sustain a pretty strong growth rate in this space in the immediate period ahead. As to any issues that might surround this marketplace, either from the standpoint of regulation or business dynamics we don't detect any noteworthy change in the tone to the market.

If anything, I would describe it as quite active, with lots of opportunities for growth, throughout our product line, not only in the United States, but especially in the markets that we serve abroad, and that's a very comprehensive view of those markets, including the UK, the continent, Japan, nonJapan Asia and Australia, lots of activity everywhere.

Okay, great, thank you. In terms of performance, the statistics you provide showed near-term institutional performance in a growth discipline has deteriorated over the last year year but remains strong for the three and five-year period. When do we see the weaker near-term performance start to impact the 3 to 5 year numbers and is that expected to be significant at all?

Well, forecasting relative performance is hardly a precise science. It is instead an outgrowth of consistent application of a successful investment strategy, and so our every expectation is before too long, of wealth services, broadly, will begin to produce return premiums consistent with their history. I would add only that the services in the growth space that have underperformed recently have a large cap high quality orientation. That is their history, and they are very consistent, with a hallmark of successful managers staying within the confines of their explicit strategy.

You know, as I think you as observers of the capital markets know, in the last 12 or 18 months, success in growth has correlated with low price, low capitalization, "unsuccess," if you will, as measured by return on equity, characteristics quite apart from the strategies that we pursue in the long term. I think it goes a long way to explain why, in this relatively short period, these services are performing below their long-term trend. We judge this to be cyclical and so we remain optimisic about our success with those services.

Okay, great. Thanks very much.

The next question comes from Mark Constant of Lehman Brothers. Go ahead.

Hi, good afternoon. First, if I could make a request of maybe becoming a broken record. But great preference would be to releasing the earnings either before or after the market with supplements simultaneously even if it means holding back a day would make things a lot easier in terms of responding real-time during the market. In terms of questions. One question, kind of a cheesy one, but I kind of have to ask since we are trying to be complete with everyone we speak to in these calls, if any of you would address the question, Lew, in particular, if you had any specific knowledge of the actions personally that were uncovered in your investigation before the investigation?

The answer is no.

Okay. I am not surprised by the answer. Huh. Is there anything in the institutional research revenues that was, you know, somewhat unusual in any way, I guess underwriting for you, anything this quarter was it really just sort of the UK and the NASDAQ business having a better market share?

It is the latter. We are inactive in the syndicated, as you know.

Actually, you know what? I've got my other two I will come back in queue for. Okay thanks.

Our next question comes from Cynthia Mayer at Merrill Lynch. Go ahead.

Hi, good afternoon. I just wanted to ask a couple of questions, one about the overseas retail funds last quarter you had very strong slows there and I'm wondering how that compares this quarter.

John, do you want to take that?

Sure. Yes, that's true. We did have significant inflows last quarter, as Lew pointed out, some competitors entered the market and our business relative to that quarter declined significantly. So I think we were basically flat for the quarter or slightly down relative to a robust quarter, versus a good quarter in Q2. Let me see, do we have the numbers?

Yes, the only thing I would add to John's comment, and I would not place great weight on this, but our October results have resumed net positive flows in the retail business overseas.

Okay. And secondly, can you give a little more color on the timing of adding SAs and opening new offices? Is that something that would be--we would begin to see any effects of that in early '04?

You certainly will. This program is approved and underway, and I think that you can probably judge that it will roll roll out in a linear way over the five-year span.

Okay. All right. Thanks.

Next we go back to Ken Worthington at CIBC. Go ahead.

Well, that was quick. In terms of program trading you said there was a new initiative for you. I assume this is done only on an Agency-only basis. How are you planning on winning new business? Do you have the smart server technology that you are deploying, or some other sort of package program trading strategies?

There is a technology platform that I would describe as competitive. I think the way you should see this initiative, however, is not that it stands alone as a competitive platform, but instead it is part of a suite of services we offer that links our research-based relationship to the multiple means by which institutional clients would like to trade. For much of the history of our institutional services business we gave them very few options on that store. And our goal has been over the last several years to broaden our suite of services such that we could meet their preferences. I think it is in that context, then, that program trading will turn out to gain share for us.

I'm sorry, when did you start the initiative?

About two-years ago, not in program trading, but in terms of broadening the array of trading platforms that we made available to an institution.

And program trading, I'm sorry, when did that?

That has just begun, I'm sorry, just beginning right now. Obviously, the current data deminished.

Okay. You said you had two large fixed income relationships that terminated? Can you give us some more information there?

Well, I can't name the clients, of course, but I can say one was an insurance company where we simply lost the business. Another was a corporate relationship where we were managing short-term liquidity a service that they no longer needed, to develop the need again, we feel we feel confident they will come back to us.

And the insurance mandate, was it price, was it performance?

Well, just, again, I think the specifics about a single client loss wouldn't be terribly helpful, I mean, the nature of this business is that clients made choices for large numbers of reasons, and there isn't anything about that particular loss that has, I think, broader implications for our position in the insurance company market. We are actually doing quite well in that market.

That's what I was after. Thank you.

Next we go to Robert Lee of KBW. Go ahead.

Thank you, good afternoon. My first question is with the rolloff of the first traunch from the Bernstein incentive comp, I guess coming off next quarter, should the depositors, I guess I need to go back and look at my notes to try to size that. Should we just assume that's going to be, you know, offset by some other increase in the comp? We couldn't see any sequential design or flattening out, I would assume?

That's a good assumption.

Secondly--I guess I have a big picture of the institutional business, there have been a fair amount of chatter that maybe consultants were putting too many managers into a box that made it hard to manage within a specific style, and I guess there was some talk about sort of trying to loosen, let managers try to loosen the reigns a little bit, to not be so style box driven. Is that just all talk, do you see any evidence of that or now that the market is back up again, is that talk sort of receded into the background?

[INAUDIBLE] been a signal at the periphery at best. It never gained any currency in the United States.

Thank you.

Next we go to E. Gainer at Gerard Securities. Go ahead.

Yes, can you tell me if you have lost any state pension accounts as a result of the ongoing state investigation?

I think that it is inappropriate to describe the reasons for losing any account, whatever the source. As I mentioned in the answer to the last question, because clients make decisions for multiple reasons, it is rarely a function of some single development. I think you can see from our overall institutional flows, I think you can infer from them, as well as the backlog of one but unopened accounts, as well as my commentary about the high level of new business activity, that we are doing quite well in the institutional market.

Next we go to Cynthia Mayer of Merrill Lynch. Go ahead.

Hi, just a couple more. I am wondering, what is your thinking these days in terms of pension funding shortfalls for '04? I think you a while back thought there might be additional fundings because of that and I am wondering if you think that the equity market coming back eliminates that.

That's an interesting question. What happened to offset the rise in value of equities is that the discount rate applied to the liabilities fell too. So the net deficit for those plans that found themselves in that position really didn't improve particularly during '03. Now, conversely, you can see that rising interest rates might well actually be a principal source of the current deficiency finding some remedy, and that could be forthcoming in '04. But at this point, of course, as the '03 books close, we would anticipate that plans, many plans will find themselves with the need for some, and in some cases, meaningful positive contributions in '04. There already already have been some in '03. But as you know, the funding lags that are built into the regulations here point to '04 as the principal big year on this score. My view is at the front end of the year we will probably see some of it.

Are any of your net flows in 3 Q from that, you think?

I don't think so. When we look at contributions and withdrawals foreign policy existing accounts, there is nothing noteworthy in those trends. Our success is being driven more by a high rate of new account acquisition.

Okay. And just one more. I know you say, you said there hasn't been any effect on net flows from regulatory matters, but I am wondering if you could just give us a sense of G&A costs going forward and extra legal?

Only very generally. I think you can assume that in the third quarter there were legal expenses, net of insurance recoveries. I can report to you that by early October, there was no insurance recoverable as an asset on our balance sheet. I do anticipate that legal expenses will rise in coming quarters, and will probably pose some modest pressure to our profitability.

Okay, great, thanks a lot.

Next we go to Mark Constant at Lehman Brothers.

Thanks, actually, I think Ken got to where I was going on follow-up on the fixed income side, but in essence you're, across all fronts, not just insurance, I presume you're just as confident and feel just as optimistic in the fixed income business as you were two months ago.

Well, I think, Mark, there is work to do there. You can see by our trailing returns in our services position, the core services positioned in the institutional state, that we need to put together a period of success. The reason we are optimistic, if you study our results in sector specialties, services, for instance, driven by credit scoring, services focused on asset-backed securities services focused on emerging market debt. We have excellent histories, not only recently but for a long time. So what we have done as we noted last time in the quarterly conference call, we have revamped our decision-making processes to greatly tighten the linkage between those core competencies and on multisector services defined as core and core plus and we are already seeing the benefits of that and we would anticipate that they will continue and as they build and as our brand equity reflects that sustained success, we expect it to do better in this space.

Okay. Great. The other comment that you made and are going to follow up on, something I had not heard discussed before, the reference to the way that the distribution expenses work in the cash management business, sort of making that an unprofitable -- wondering if someone could just flush out the accounting?

No, that wasn't what John meant. It is profitable. What he meant was that the way that business is structured, it runs a net distribution expense.

That's what I am getting at. How did the accounting on the distribution side vary from the rest of the business and that's really just what I'm trying to understand.

No, in you--if you look at our business, the money front, in general, we receive a 50 basis points management fee. We receive a 25 basis point 12 B 1 fee from the funds and the distribution fee that we pay distributors is north of 25 basis points. It is still profitable but it's greater than the distribution fee we receive. So when we look at those line items, it always shows a loss for cash management services.

Just on the distribution side?

Yes, just on the distribution side.

Thanks.

Uh-huh.

If there are any further questions, now is the time to press star then 1. We have a question that is coming from Jean Harborcourt [INAUDIBLE]. Please go ahead.

Yes, good evening. I just have one question. How did you highlight the money [INAUDIBLE] to a different level of the group. I just wanted to know if you were thinking to do something with moneys you had in your particular relationship or already with them?

Thank you. I think it is way too early for that, yet. It is not impossible that we could be involved, broadening our relationship with AXA somewhere down the road but it is way to early to have substantive discussions about that.

Another one if it's possible. Could you give us your exposure in Bank America, Bank Boston, and tell us, basically, would you be positively impacted by the initially by in the investment?

I am not completely following your question. You are talking about the proposed merger between Banc of America and Bank FleetBoston?

Bank FleetBoston. Yes.

That is a portfolio-related question.

Yes.

I think if you will find, if you study our ownership, which is in the public domain, that we were shareholders of both, mostly on the value side of the firm and the weighting was such that it was a slightly positive net. Is that what you were asking?

Yes, exactly, yes.

Okay, so that's the answer.

But could you give us your exposure globally?

I don't think so. I am not quite sure why you are asking that question. Let me just put it this way. As it relates to our investment returns, and the character of the risks in the portfolios that contain these securities.

Uh-huh.

This is not a substantive development on either score.

Okay. Thank you very much .

Yes, we have one last person in queue. We go to Alex Taft at UBS.

Hello. I joined the call late, so I apologize if this question has been answered, I was wondering, Janus, when they reported a scandal had a big outflow the following month. I was wondering if you could comment, since Alliance Capital Management has been in the headlines if there has been any meaningful change in outflows on the retail or institutional level?

Yes, we did comment on that. What we said was we saw no substantive shift in flows and that if anything our October flows looked slightly better than recent trends, particularly in equity.

Great, thank you very much.

There is no one else in queue at this time.

I believe that ends the call for today. If anyone has followup questions please feel free to call investor relations. Thank you very much.

Ladies and gentlemen. That does conclude our conference for today. Thank you for your participation and thank you for using AT&T executive teleconference. You may now disconnect.