AllianceBernstein Holding LP (AB) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank for standing by. Welcome to the Alliance Capital first quarter 2004 earnings call. [Operator Instruction] I would now like to turn the conference over to our host, Director of Investor Relations, Miss Valerie Haertel. Please go ahead.

Thank you. Welcome to our first quarter earnings review. This call is being web cast and supported by a slide presentation that can be found on our web site at www.alliancecapital.com. Presenting our quarterly results today are Lewis Sanders, Alliance Capital's CEO, and Gerald Lieberman, our COO. Bob Joseph, our CFO is available to answer your questions, as well. I would like to take this opportunity 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 the slide presentation and in the risk factors section of our 2003 form 10-K. In light of SEC Regulation FD management will be limited in responding to inquiries from investors in a non-public forum.

Therefore we encourage you to ask all questions of a material nature on this call. At this time, I'd like to turn over to Gerald Lieberman.

Thank you, Valerie. Good afternoon to everyone on the call. My part of today's call will include a brief overview of the capital markets, which are so essential to how we do financially. A brief overview of how we perform for our clients, which ultimately are the most leading indicator for future net cash flows and finally overview of our financial performance, which of course is of interest to our shareholders. I will then turn over to Lew to go over key franchises and performance metrics. So let's begin with market performance. Turning to display on page 3 you'll see at the global equity markets were positive in the first quarter. Although generally at lower rates than we had seen in the previous three quarters is nevertheless still extending a market gain to four consecutive quarters. This was an environment of improved GDP growth and corporate profit gains and amid a backdrop of renewed anxiety over terrorism. International stock case have been especially strong with rise of only and I say only of 4.3% in US dollars. In fact, the east index has outpaced the S&P 500 over the last quarter, year and three years.

Finally, in fixed income, best performing class over the past three years, interest rates dropped in the first quarter contributed once again to solid investment returns in the period. Discussing the market in terms of relative performance, the most important criteria for future success. We would characterize our overall investment performance this quarter as satisfactory. With most of our growth equity value equity and fixed income services exceeding the respectable benchmark. Relative returns for the quarter were especially strong in mid-cap growth, multi-cap growth and global growth services and managed account offering under the Bernstein name. Now that I briefly covered overall market performance and added value, let's turn to overview of our financial results. This afternoon we announced net income of 168 million for the first quarter, which represents increase of approximately 55% over the prior year's quarter. Resulted in 58 cents of diluted net income per unit for Alliance Holding of which we will distribute 14 cents per unit, a topic I will elaborate on later.

Now, our display on page 5 and start with review of the first quarter revenues and see how our unit holders fair. Overwhelmingly financial results reflect tailwinds of a strong 12-month market, which led to increase of 25.7% or $99 billion. As a result our base fees increased 24.3% or $99 million, generally in line with our increase in AUM. This increase is net of $18 million unfavorable impact resulting from our January 1 reductions in U.S. neutral fund management fees. Revenues benefited with strong increases in transaction fees, owning to higher volume and separately managed accounts. The 16.3% increase in distribution fee primarily reflects higher AUM in lexingburg funds and equity services. Institutional research, we're happy to report that revenues were up 37.2% to $80 million.

Albeit over depressed '03 quarter, but up significantly due to increased market share and increased transaction volume and up significantly in the U.S. and Europe. Our disclaimer on page 6 breaks down revenue growth by distribution channel. This display is self-explanatory with comments on the right-hand side of the display. I will call your attention to increase in revenue in our Private Client and Institutional research franchises up 42.6% and 37.2% respectively. Our Private Client channel we have once again generated double-digit organic growth. Market performance added to the rest of this impressive increase. Our Institutional research revenue increase comings from waive of accolade in regard to research, sales and service, a topic Lew will elaborate on later in this call. Our European office opened two years ago and continues to see strong gains. Turning to our expenses displayed on page 7, employee compensation and benefit increased 26% or $57 million since comp and benefits account for over 70% of our expense increase in 47% of our total expenses, I'll discuss this increase in detail when we turn to the next page.

While we're on this page I'd like to point out that higher trail payment to our mutual fund intermediaries relate to higher AUM levels were partially offset by lower amortization of deferred sales commissions. These DSEs were from strong shares in 1999 and 2000 time and now dropping off to not being replaced by product sales with deferred commission. This trend is increasing amortization will contribute to meaningful margin improvement as well offset growth in promotion and servicing expenses. Also on the G&A line, professional fees of increased as we continue on our way to spending several millions of dollars over two-year period on Sarbanes-Oxley related requirements. And we continue to incur higher lead expenses. Now, let's spend a minute on page 8 to discuss the increase in incentive compensation expense of $33 million or 45.5%, which is actually good news to unit holders and our staff. The good news is that 90% of the increase in incentive compensation is attributable to improved financial result necessary asset management and sell-side research businesses. 10% is attribute to higher amortization of our deferred Alliance partner reps.

This increase in amortization is primarily due to increased use of deferred comp much of which in lieu of cash and last year's incentive compensation awards. It increases partially offset by lower amortization from the old Bernstein. You may recall from our discussion in prior quarters the third and last truant of the SEB deferred comp plan was awarded in third quarter of '02 and amortization of the first trench has now rolled on. The increase in commission expense is due to increase in sales in both sell-side research business and Private Client distribution channel as well as higher AUM-related commission in our Institutional channel. Higher based compensation expense is virtually all merit increase related as we continue to manage cost by keeping our staff level below 41100, 9% below our level in 2001.

Turning to page 9, we have display that shows impact of 2003 mutual fund charges on distribution per unit for this quarter and in the previous quarters. The top half of display we can see the third quarter of 2003 Alliance Capital, the operating partnership earned $165 million before the charge related to our mutual fund matters and legal proceedings, but only 19 million after the charge and after taxes resulting in 0 cents per unit of income in the holding company. Nonetheless you can see in the bottom of the column we paid out 57 cents per unit for that quarter, distribution announced prior to the accounting for the charge.

In the fourth quarter of 2003 shown in the next column, we took another charge, as a result earned only 54 million in the operating partnership and 13 cents per unit in the holding company. In January we explained we were not going to make a distribution that quarter and in fact said we planned to withhold distributions until we earned back the distribution that had been paid out in the previous quarter. So as you can see in the third and fourth columns we are in the $168 million in operating partnership or 58 cents per unit this quarter for the Holding company we are only distributing 14 cents per unit for the quarter.

In summary, the last weak orders (inaudible) paying out 71 cents per unit in distribution and 71 cents per unit on net income. Going forward as we announce indeed our last call we plan to resume our traditional distribution policy based on each quarter's earnings and cash flow. The display on page 10 reflects holding company earnings and distribution of 14 cents per unit quarter over quarter. Before turning over to Lew I want to point out how strong our financials are. We have generated significant cash flow when coupled with the fact we have lower financing and fixed asset expenditure we are able to fully fund operations without additional borrowing. On the positive note of improved margin and cash flow I'll now turn the call over to Lew.

Thank you, Gerald and thank you all for joining us this afternoon. Let me share with you my perspective on first quarter results. As Gerald noted on the most important criteria, by far and away the most important, investing performance for our clients. It was a satisfactory quarter. Most of our growth value and fixed income services exceeded their benchmarks. In process 2 was sell-side research unit showing in the most recent survey on product quality by one of the industry's most respected market research firms. Once again we achieved the highest ratings in the industry and in a number of categories we exceeded the next best competitor by a very wide margin. As for other performance metrics the quarter's results were uneven. Profit margins were up, but from a depressed space. And remain below our long-range potential. Net cash flow as Gerald noted were at record levels in our Private Client, but results remained depressed in the retail channel, not unexpectedly. But were unusually weak among Institutional clients especially in the US.

Our sell-side research business had a good quarter with strong revenue gains and rising market share both here and abroad. Now all these key metrics were mixed and I want to stress ultimately it is the metrics that matter, I personally feel pretty good about the progress the company made in the first quarter. Nowhere was this more apparent than in our retail unit highlights of which are summarized on display 11. We made additions to senior staff in the key area of product management and business development, which greatly strengthened leadership of this business. In fact, I believe our retail unit now has among the strongest management teams in the firm. Their focus during the first quarter was on planning, constructing roadmap to implement multi-part strategy that we've delineated for this business. To recount where we're headed we want to enhance the value proposition that we offer to retail clients beyond substantial improvement already implemented. We want to rationalize our product array, to achieve greater clarity, coherence and ultimately lower cost.

We want to increase our relevance to financial advisors by equipping our sales force with innovative solutions to take advantage of our products and our extensive wealth planning know-how, unique combination. Of course, we want to increase transparency to all constituencies including clients, financial advisors and industry consultants. We expect that progress in these fronts will become increasingly visible as the year unfolds, but that notwithstanding as noted many times before we don't anticipate an early upturn in our retail business. As you can see in the display long-term flows were slightly negative once again in the first quarter and little change from the run rate of last year. This in the context very strong (inaudible) brand equity takes time to rebuild and in this channel we have a lot of rebuilding to do. But, the requisite capabilities are in place. We don't have to recruit. We don't have to invent. But we have to do and will do is execute deliberately and consistently on our plan. Important to this transformation is improving product ratings.

On this score we are pleased that our Alliance Capital Bernstein suite of services, including U.S. large-cap, small-cap, international and global received four-star and in some cases five-star Morning Star ratings as they past their three-year anniversaries. There were ratings improvements in Alliance growth fund and our mid-cap growth fund. Important as well is the continued strong investment performance in region, our largest managed account offering in the retail channel. New business activity continued to build in this service and the first quarter and we believe that this distinctive has considerable future potential. Turning now to the Institutional channel, the firm had an unusually weak quarter with respect to flows as to summarize this in display 12. Net outflows totaled some $6 billion, a figure that contrasts to net inflows of $4 billion in first quarter of '03 and 10 billion for all of last year. Two factors account for this reversal. Continued high level of account attrition and U.S. growth services and slowdown in new account wins in both growth and value, especially in the US.

Now, the account attrition is believed to be performance-related while the firms' long-term record in U.S. large-cap growth remains good, the fact is that short and intermediate term comparisons have deteriorated. The skewness of returns over the last 18 months and the growth subset of capital markets contributed greatly to this result. Returns as I think many of you know, have been highest in smaller volatile companies. Opportunities, which we did seize in our small, mid, and multi-cap services. Adherence to discipline and large-cap which emphasizes established high-quality growth companies worked against us over this period. Now, while staying true to successful discipline can sometimes be painful in the short run it is the only way to succeed in the long run. With recent returns showing some improvement we're hopeful that account attrition will slow over the balance of the year.

In addition to attrition and growth, new account openings in equities pretty much across our entire product array slowed in the first quarter. We believe this slowdown is attributable to hesitancy by some prospects to consider the firm as we were bringing the market timing issues in our mutual funds to resolution. Resulting fall-off from competitions first surfaced late last year and continued some in the first quarter this year, has led to weak innocence funding in the first part of '04. In effect most pronounced in the US. We believe this effect will be transitory given the progress we've made in resolving the market timing issues, continued strong consultant support for our services both here and abroad and our very strong competitive position as we assess it and many services, many services including U.S. value, global value, global growth, global fixed income, particularly strong in emerging markets both growth and value and of course our style blend services which are unique. Now, that's a long list. And while it's not clear just how long the fall-off in competition will last, I can report to you that activity levels have improved noticeably in the early going in the second quarter. Now, in contrast to the retail channel and the Institutional channel growth accelerated in our Private Client business in the first quarter.

As shown in display 13, organic growth was in double-digit with new account setting record for the period. Consistent our plan financial advisor force rose to 190 during the quarter and should reach at least 200 by year-end. That's going to be up about 15% from last year we're on target to open new offices in Tampa and Boston during the third quarter and are considering opening in Philadelphia before year-end an expansion previously planned for '05. We're encouraged by the continued client acceptance of our wealth planning services and the ultrahigh-network market. It's a development, which is driving financial advisor productivity to higher levels. As noted in our last quarterly call we're going to expand the arrays of services we offer in this do main as the year progresses.

Displays 14 and 15 recap the channel base cash flows we've just reviewed. Stated now in context of the firms' overall flows. So let's move on and focus on display 16. Look at the business by product group as opposed to channel. As you can see on the far left of the display, value services continue to grow in the first quarter with about $2 billion in net cash flows or roughly a 5% organic growth rate, a respectable showing for business of its scale. But far below, far below the 20% plus pace achieved for all of '03.

Acceleration and account attrition growth services is also evident in the display with the $5 billion net outflow. Now, for the reasons cited earlier we're hopeful flows will improve in both product groups over the balance of the year. Trends and fixed income remain lackluster too in the first quarter with about a billion dollars in net outflows. The second quarter looks more promising to several large mandates a single client which are expected to fund shortly. However it's worth stressing that performance fee nature of these mandates makes their revenue impact uncertain. I should note, too, that there's been important leadership change in fixed income.

Jeff Slagger and Doug Peoples both long-time Alliance fixed income veterans taking the reigns from Cathlean Koshitt has left the firm to become president of Standard & Poor's. You never want to lose great talent, it is marked success on other firms look to us to full till senior management requirements and it is the mark of a great manager, Cathlean, when we can transition leadership from her to people of the caliber of Jeff and Doug. Finally, I want to make a few comments about Institutional research business. Please refer to display 18. As noted earlier, results in the first quarter are quite strong, function growth in the market, but more importantly reflection of sub expansion both in the U.S. and our UK-based operations. U.S. revenues rose by more than 20% and revenues in the UK about tripled.

We're also pleased broad client acceptance of our over the counter trading services as well as recent initiatives in program trading. These trading platforms combined accounted for nearly 30% of overall institutional research revenue, up sharply from last year's first quarter. I tell you what was most exciting. It was client acknowledgment of research and sales excellence in the most recent survey of institutional portfolio managers by a leading market research firm. Once again we were first overall for quality with very strong scores in all of the component parts, including first, for best industry knowledge. First for most creative ideas.

First for client service and first for most trusted. Moreover, our sales force improved its rank from fifth to second in the industry overall for sales quality, a very impressive achievement. These results are the wealth of the financial performance of this business. They also further our single highest business priority a firm-wide priority. It's leadership and innovation in research to drive investor's success. We're quite proud of what our south side team has accomplished on this score. Now for your questions.

Ladies and gentlemen, [Operator Instructions]. Our first question comes from the line of Cynthia Mayer at Merrill Lynch. Please go ahead.

Hi, good afternoon. Could you please update us a little bit on the rationalization within the fund business? Where do you stand in terms of combining funds, eliminating redundancies and how might that translate into cost reduction or head count reduction later on?

Right now we are studying our opportunities, trying to establish as I noted earlier the appropriate roadmap to accomplish our goals. And as you're probably aware this is not a trivial matter. And so we are going to be thoughtful and deliberate and patient before we make these choices. Uh, I'm hopeful that we will have completed our research by the end of the second quarter, that's our expectation. And that you'll begin to see some steps on the rationalization strategy during the second half. don't think you should conclude that there will be in the short run any noteworthy cost reductions associated with that rationalization. The initial objectives here have much more to do with improving the coherence and clarity of our product line and as such improving the ability to effectively support all of our product array in the marketplace. There will be some cost benefits, but I think that they'll come later.

OK. The second question is in terms of the outflows from Institutional growth is there a seasonal component to that in terms of end of year reviews or is that sort of a steady process that's been going on for a while?

That's a very interesting question that you ask and I must tell you that the statistical support for seasonality is very difficult to establish. While there is an intuitive or -- you know, assumption that people will reassess their position with calendar year accounting period inflow being their choices, a careful study of history would not really support that conclusion. I think, too, if you look at our quarterly cash flows by investment style you'll see that the outflows in U.S. growth services began to rise late last year. So I don't really see the first quarter as influence in a noteworthy way by seasonality. On the other hand, I don't think it's appropriate to extrapolate that rate of redemption.

And now a question from the line of Bill Hankowsky (ph) at Buckingham Research. Please go ahead.

Thank you. Good afternoon. Couple questions on the institutional discussion Lewis, can you talk about whether there is asset allocation that might be influencing flows?

Well interesting question. And I can make an assertion predicated on relative style of returns that if there was rebalancing underway it would mean direction of value to growth. But as we assess the RFP activity by region and by style, I don't think we're depicting any really strong trends on that score. If there's anything in the data that I think is visible it's a pretty strong market for non-U.S. services. It is a very robust market for emerging markets, plus, global, global particularly among non-U.S. clients and I want to stress, too, that we are -- our assessment is in the industry has remained strong. So our expectation is as I noted in my formal remarks that our participation in that activity will strengthen as the year progresses.

Thank you. The other question sort of centers around margin outlook and obviously a lot of moving parts and different stages of things, but seems like recurrent theme you continue to see greater return on revenue across many businesses. I was wondering at what point you reach a steady state and would be willing to give guidance where you think that number might be?

Well, that's an interesting question and I think you can predict my answer. We are not going to provide that guidance. There is obviously operating leverage in the business and there are many opportunities to reinvest some of our profitability and I think you'll have to accept we will over time make what we think are appropriate judgments on using our cash flow well to grow the business. We see the opportunity we will make the investment.

And now a question from the line of Mark Constant with Lehman Brothers. Please go ahead.

Hi, good afternoon, everyone. One thing I wanted to clarify if I could or elaborate on. If you think about your comments Lewis, with respect to the performance and Institutional side really driving some of the redemption activity and then reconcile that against the composite on slide 21. I mean, I appreciate your commentary about small-cap performance, but very few boxes in that Institutional growth equity comparison that are negative and those that are negative over the primary performance measurement period 1, 3 and 5 are on the large-cap side is this not representative of how we should think about future flows these composites are not indicative or -

Mark, it is actually quite representative because as I think you know if you did distribution on assets under management across the mandates indicated on display 21, to which you were referring, there are highly skewed to the left-hand column. U.S. large-cap growth and U.S. discipline -

I'm sorry, maybe I misunderstood. I thought you were referencing the better performance was -- you were speaking within each discipline, as well?

That's right. I think the display -

I misunderstood.

I just want to clarify it for yours and everyone else's. The 1, 3 and 5-year span our large-cap growth composite has deteriorated from a competitive point of view. Here it is stated against the benchmark. You can make the presumption that our competitive standing as a result has eroded and I think it's evident from this why we are at this point suffering from accelerated rate of attrition in those services. On the other hand results have started to improve and we remain hopeful that in time the services will restore their competitive standing staying true to their style. I think that's a very key point.

Understood.

Business is all about staying true to style even under periods of adversity. I realize that I'm elaborating beyond what you are asking, but nonetheless I want to stress that you can see that where smallness and volatility actually apply are actually part of the mandate mid-cap, small-cap, our performance is actually outstanding. No problem with growth per se as style in this firm. There is merely as we analyze it a moment in time where there has been a very skewed outcome in the capital markets.

OK. I can see the flows against the data make sense. I misunderstood your color earlier. Thank you. The other question I had on the -- you'd mentioned you picked up a couple of big, but low-based fixed income mandates in the second quarter. It's also been announced I guess about 25 or 30% of the Vanguard U.S. growth fund is being reallocated away from you. That's looks like another $2 billion. That is low, too. I haven't pulled up the advisory fees on that, but it is reasonable to suggest that nature of those two transactions is effectively offsetting one another or close or -

I wouldn't look at it quite that way. I think the way I would have you look at it is that Vanguard reallocation had mostly to do with that firm's interest in moving to a multi-manager configuration for a number of their funds. That's a process that has been ongoing at Vanguard for a while.

I'm just try tog get financial impact to you since the fees were lower. Sand I think you can compute it. What I would suggest you do while you are pursuing that computation consider we at the same time won a new mandate at Vanguard in their international value fund. And I think that would be worthwhile for the purposes that you are after looking at that comparison as oppose to offset. Thanks.

And now a question from the line of Robert Lee at Woods. Please go ahead.

Thank you. Good afternoon. Really, just one question. Gerald, you mentioned the increase in cash flow generation particularly b-shares continue to decline as proportion of sales. Given you pretty much after this quarter will have assuming going back to distributing all of net income and my guess would be your cash flow generation is in excess of net income. How would we think of the usage of excess cash flow could there be change in distribution policy, will it mainly be use to fund unit repurchases for deferred comp?

Uh, if we were -- if we keep generating excess cash we'd use it to pay down debt. We don't contemplate returning any units and don't contemplate paying it out distributions that would be larger than we earned in the quarter.

OK. Thank you.

You're welcome.

And a follow-up question from the line of Bill Katz at Buckingham Research. Please go ahead.

That was quick. Lewis, Institutional business servicing business being parity for the firm. Can you detail more what your plans are there? Specifically on toward the trading side?

What I said was that some highest priority is research innovation, research leadership. This was not intended to be confined to research business by any means. To the contrary it is commentary on our strategy as a research firm on the bi-side, as well. I think, as you know we have an extremely large commitment. Growth value, fixed income, quantitative message and other specialized research initiatives which we've talked about previously, strategic change early stage growth, etc. That's what I was stressing that if you asked me to articulate the most important corporate priority it is to establish leadership in research that translates to investment success. On the self-side it is creative ideas that assist our clients making better choices. On bi-side it is adding alpha. That's what we are after.

OK. May be if I could take liberty of asking a follow-up question. In terms of the bi-side, institutional service business could you really elaborate a little bit more in terms of what's driving the non-U.S. market share, is just breadth of product and quality of the product or anything else fundamentally going on helping you take market share?

No, just what you cited. We established a strategy a number of years ago to build research capabilities for a company domiciled outside of the United States to trade dominantly in non-U.S. markets and we built a local sales capability to bring that to the market. As well as a trading capability and we are pleased with the client acceptance of these initiatives both with regard to the product and our sales and trading scales. That's what's going on and we do believe that we have a fair amount to go in terms of market share opportunity in those operations.

And now we have a question from the line of Greg Mason at A.G. Edwards. Please go ahead.

Good afternoon. Regarding your retail asset management and our strategy to rebuild brand equity. Do you expect that will include any ramp-up in advertising going through the remainder of 2004? Then number two you mentioned that you had two wins in your fixed income segment. Can you give any kind of quantification to how much that might be that has not been funded yet?

On the first question you I don't think you should think advertising will play a material role in rebuilding brand equity either in '04 or beyond.

OK.

Second, on fixed income wins I don't really want to quantify it, but I think if you watch the monthly AUM you will be able to compute the dimensions of this one.

Great. Thank you very much.

[Operator Instructions] We have a follow-up question from Mark Constant at Lehman Brothers. Please go ahead.

Just it looked like you reclassified $3 billion between growth and value in the investment orientation. I guess it was between last quarter's release and the February -- I think it was, monthly AUM announcement. Do you have intention of resetting that reconciliation at all?

Mark, that wasn't the nature of that. What we actually did was for our private clients we style diversified, style balanced what was previously all-value strategy in use of services. So that's not reclassification that is actually a change in mandate.

I'm talking about when you look at say equity growth and equity value in December 31, in your previous release it says I think the numbers have changed by $3 billion.

They have - they changed because we moved money from value to growth. That's not a reclassification.

When you move the money you restated -- your presentation reflects where those assets were before because it is the same money?

Same money, right.

But discipline or objective is different now that is why the presentation changed is that right?

You are describing it as historical presentation changed. I think what you are observing is that when we moved the money there was an increase as a result of growth and a decrease in value.

You see what I am saying the historical report of your equity growth and equity value on December 31 is not what it is now. The numbers are different than they were three months ago.

That I can't comment on. Frankly because I don't know then the way I am looking at the data, I don't see that, why don't we this off-line. I want to again say that $3 billion dollars that you are seeing -

That was why.

It was a mandate change.

We can figure it out later. OK. Thank you.

And now a follow-up question from the line of Cynthia Mayer at Merrill Lynch. Please go ahead.

Hi, thanks a lot. How are you finding the recruiting for financial advisors and how competitive is it? How long does it take to basically to break even on that? Should we if you add them all up, expect to see any impact to margins or is it negligible?

It's actually a very good question. I think recruitment is a key component of success and you have to couple that naturally with skill development because our strategy as I think you know is not to pirate from the financial community for like function, but instead find people with the requisite skills and invest in their development. That process before you reach sufficient productivity for the person, if you will, to be profitable to the firm is about a three-year proposition. I think what you should conclude is that this will be largely self-funding out of the internal growth rate of the business.

OK. Thanks. And on regon (ph) what is predominant style in that and can you give the assets in that right now?

The predominant style is profiting from strategic change. Which is neither growth nor value, that way quite distinctive in the marketplace today. It is a service that attempts to isolate important technological and or economic change and build strategy to capitalize on their implication. It also is managed to a risk profile to contain volatility such that the active premium falls within a competitive information ratio. So it is in a sense combination of a forward-looking research-driven strategy that takes you where ever the research suggests you should go, style independent while binding the wagers such that overall volatility falls within acceptable boundaries and it is in my judgment a very exciting service. We're investing in research on the margin to support it and we do think that it has a lot of potential. Right now its assets are -- it's in the range of about $6 or $7 billion.

Now a follow-up from the line of Robert Lee at Woods. Please go ahead.

Thank you. If I remember correctly last quarter, Lew, you talked about enhance the value proposition for retail doing things that may drive down cost from mutual fund service and transfer agency cost, shareholder service cost and things like that. I think that was one of the reasons that that line item declined in Q4. I know it went up this quarter and only 3 million. But should we expect to see as you go through this retooling that ultimately there will be some revenue impact from trying to enhance the value proposition for the fund business?

Yeah, what I think you should assume is that will be driven by cost reduction, which we will have passed on to the customer.

OK. And I guess a follow-up to that, as you have gone back and looked at retail business, some of your competitors, you know, one I can think of has talked about completely outsourcing one of their transfer agency functions and get that risk, if you will, off their backs. Have you gone through your business and do you see opportunities if not save money or may be change the risk profile of the business by doing things like that?

Well, we definitely have lee and just a couple weeks ago we announced a closing of our facility in Straton, Pennsylvania. Some of those jobs will be indeed be outsourced and some will be reallocated to other parts of the firm to allow us to get rid of the overhead with the facility and indeed reduce the risk on couple lines of business. The answer is absolutely.

I don't think you should perceive that to be the first and final step. It is first step of the number.

Follow-up question from Greg Mason at A.G. Edwards. Please go ahead.

Thank you. Regarding the retail distribution channel I was wondering if you could give comments on potential feedback that you might have had from wholesales force. Are they beginning to see some more able to get into the door with a little more positive results from the clients they're out there meeting? Are clients warming up to Alliance Capital name, I guess?

That might be an interesting subject for you to pursue doing your own market research. I'll just suggest to you that anecdotally our sales force I believe is feeling increasingly confident that we are on the right track with our message and that being consistent and persistent and persevering will in time -- and I want to stress in time, perhaps a lot of time -- restore the brand equity that we think our skill level justifies.

And a follow-up from Mark Constant at Lehman Brothers. Go ahead, please.

Gerald, I'm sorry if I missed this, new prepared to Marks but the significance of the edition of the footnote on slide 5 for includes transaction charges that's just to help us better understand the breakdown versus penal breakdown, is that all?

Hold on, let me turn to that.

That's all. I make sure didn't miss anything significant synerios (ph) in the prepared -

Yeah. That's all.

OK. Thanks.

Where it is on the slide. That's right.

Great. Thanks.

And there are no further questions. Please continue.

I believe there are no further questions. If anyone has any follow-up questions please feel free to call Investor Relations. We're happy to take your calls. Thanks very much for dialing into our quarter 2004 earnings conference call.