AllianceBernstein Holding LP (AB) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Alliance Capital Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. If you should need assistance during the call, please press "star" then "zero." As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Valerie Haertel, Director of Investor Relations. Please go ahead.

All right. Thank you, Gail (ph). Good afternoon, everyone, and welcome to our third quarter earnings review. I just want to first apologize for getting some of the materials out late to you, as we had technology issues. So we are hopeful that you'll be able to pull the slides off of the website. They are there currently.

As a reminder, this call is being webcast and supported by the slide presentation, I just referenced that can be found on our website at "alliancecapital.com." Presenting our quarterly results today are Alliance Capital's Chief Executive Officer, Lew Sanders and Chief Operating Officer, Jerry Lieberman. Additionally, Bob Joseph, our CFO is present and available to answer questions at the end of the formal remarks.

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 two of our slide presentation and in the Risk Factors section of our 2004 Form 10-K. In light of SEC's regulation FD, management will be limited in responding to inquiries from investors and analysts in a non-public forum, therefore, we encourage you to ask all questions of a material nature on this call.

At this time, I would like to turn the call over to Jerry Lieberman.

Thank you, Valerie, and good afternoon to everyone on the call. As is our custom, we will begin with a brief overview of the capital markets, which are so essential to how we do financially. A very brief overview of how we perform for our clients, which ultimately is the most important leading indicator for future net flows, and finally, an overview of our financial performance, which, of course, is of interest to our unit holders.

I'll then turn the call over to Lew, who will discuss our asset flows, the key trends in our channels, some important comments about our research and investment platforms, as well as comments on the press release that we just issued this afternoon on the sale of our Cash Management business to Federated Investors.

So let's begin with market performance. Continued strong economic growth and record levels of corporate profits in the third quarter were overshadowed by the potential consequence of rapidly rising oil prices and unsettling geopolitical developments. Accordingly, as you can see on page two, the S&P declined approximately 2% in the quarter. And returns in the MSCI EAFE index were slightly negative. Value stocks, once again, outperformed growth, a trend that has persisted for almost all of the post bubble period.

In contrast to stocks, bonds were quite strong in the third quarter, with the Lehman Aggregate Bond index returning 3.2%. Generally speaking, over the last year, equities have performed strongly and fixed income assets have delivered positive returns as well, but virtually all of the gains in equities were in the fourth quarter of 2003. As you will see when we discuss our investment performance, asset flows mirrored the market sentiment with investment choices somewhat defensive in nature. As value equity and fixed income sales outperformed our growth services.

So how did we perform for our clients? If you turn to page three, in reference to performance tables in the appendix after the call, you will note that our overall performance was mixed. But with that said, we have some particularly strong performance in our global and international value equity and our small cap growth equity services. As Lew will elaborate later, flows are following our performance in these services, as we continue to focus on expanding our global presence.

Noteworthy, too, has been the investment performance of our blend equity investment services. The results for which are shown in a new schedule added to our appendix. These services combine the best of both Alliance's growth and Bernstein's value expertise, in a highly attractive risk return attributes. With relatively few firms having comparable expertise, blends (ph) provides the firm with the opportunity to differentiate itself from our competitors both here and abroad.

Now that I've provided some highlights on our performance, I'd like to turn to our financial results, starting with the display on page four. For the third quarter, we announced net income of $153 million as compared to 19 million in last year's comparable quarter. Fully diluted earnings per unit at the holding company level were $0.52 compared to zero last year, when we recorded a charge related to the SEC, New York AG settlement for mutual fund matters and legal proceedings offsetting virtually all of our earnings.

Excluding last year's charge, our profit margins were down by about 2 percentage points in the quarter. The declines came from a weak quarter for transaction revenues and performance fees, higher commission expenses, and a higher level of G&A expenses in part a function of unusual items, all partially offset, just partial offset by a decrease in deferred sales commission amortization.

Year-over-year, the average AUM increased 11.3% or $49 billion, primarily due to market -- capital market appreciation. Revenues for the quarter, however, increased by only 2.8%, to $719 million with advisory fees up only 4% to $498 million. As you can see in the display on page five, the base fee component of advisory fees was up 7.7%, a pace below AUM growth, as $17 million of reductions in our retail mutual fund fee rates reduced our net year-to-year increase by nearly 400 basis points. Also of note was the sharp decrease in transaction charges, which stemmed from lower private client and institutional investment management trading volume this quarter.

As you know, trading activity is volatile and unpredictable on a quarter-to-quarter basis. One item related to transaction charges that I want to mention is that, we began implementing just last week an important change in our private client fee schedule, which for many clients will eliminate transaction charges for US equity services entirely, and increase asset based fees, an important change that Lew will elaborate later in this call. We expect this change to reduce overall costs somewhat for these clients as a group, and thus, the change will reduce our revenues slightly. On the other hand it will remove much of the quarter-to-quarter volatility associated with the transaction charged compartment of revenue.

Going back to page four. We completed revenue our revenue discussion, note that this year's third quarter includes $7 million of other revenues related to reporting requirements of FIN 46. As you know, FIN 46 has no impact on net income, but its adoption created variance to year-over-year and several line item comparisons. Its full effects on the third quarter results can be found on page 31 in the appendix.

Other revenue also reflects a decline in shareholder servicing fees. A result of fewer accounts and lower per account charges as we pass savings onto our investors, thereby lowering our total expense ratios. Institutional research services revenues were up 2.5%, despite difficult industry conditions. Our market share increased by an amount sufficient to more than offset New York Stock Exchange value and it decreased lower New York Stock Exchange volumes and a decreasing commission rate, the trend that continues as this market becomes increasingly competitive.

Now that I'll cover the revenues in detail, I'd like to talk about expenses. Which begin on the display on page six. While revenues were up 2.8%, operating expenses rose by more than 15%. The large increase in expenses were reflected some unusual effects stemming from last year's charges, and a couple of one-time items in the current quarter.

As you can see on page seven, compensation expenses rose by 30.5% to $260 million, much of which is derived from a near doubling of incentive compensation. This increase, however, was entirely attributable to the effects of the market timing charges, which by depressing earnings, reduced third quarter 2003 IC accruals by $41 million. Adjusting for this effect, incentive compensation would be flat with last year and total compensation costs up by 8%. The increase of 9% in base compensation reflects merit increases and the change of mix, as we reduce retail back office positions but increase our investment in our private client sales force and we strengthen our legal and compliance functions.

Our commission expenses increases a greater number of private client financial advisors qualify for production bonuses, and new business volumes rose in both institutional and private client channels. Additionally, higher recruitment fees and higher payroll taxes contributed to the increase of 23.7% infringes and others.

Now that we've covered compensation, let's turn our attention back to page six. Here you can see the promotion service cost declined 5. 5%, the result of lower distribution expenses from the continued B share runoffs. As we noted last quarter, DFC's resulting from strong sales of B shares in the 1999 to 2000 timeframe are gradually reaching full amortization and they are not being replaced with newly capitalized cost since B share sales remain quite low by historic standards. This trend will continue to favorably affect reported distribution expenses throughout all of 2005.

The G&A line is the last expense cost category that I will discuss, and, again, we will give you more detail by turning to page eight. Here you can see that general administrative expenses increased 26.7% to $107 million. Included in that total is $7 million in minority interest, the principal counterpart to the FIN 46 revenue item that I highlighted earlier. Thus eliminating this effect from G&A, the overall expenses came in at $100 million, close to the cost of guidance we provided during our second quarter conference call. The $100 million run rate however, includes a couple of other unusual items.

As expected, we took a $3.5 million charge for the closing of our Scranton facility, the benefits of which will be realized fully in 2005. We recognize as well a $3.5 million impairment in the value of our NYSE and Chicago exchange seats. That was a charge we did not anticipate. In addition to the one-time items, professional fees grew materially in the quarter owing in part to $2.5 million in incremental compliance cost, which will likely continue at a high rate in the fourth quarter before receding in 2005.

In a like matter, S-OX 405-related expenses were quite high in this quarter but should drop substantially next year. Office and related expenses rose by 11.4% for $4 million through the higher occupancy costs at our headquarters at 1345. Last quarter I know that we were consolidating office space to get everyone in New York under one roof. A process that is still ongoing. As a reminder we will incur $3 million in lease termination expenses when we vacate our former Bernstein site in the fourth quarter with the rent savings coming in 2005.

Finally, let's turn to the display on page nine. Here you can see that the Alliance Holding net income is $42 million for the quarter, versus zero last year. And our distributions per unit for lines probably will be $0.52 compared to $0.57 last year. Now, I will turn the call over to Lew, who will add his insight and color to our business initiatives and results.

Thank you, Jerry. As Jerry outlined, financial results in the third quarter were generally lackluster. Profit margins before the effects of the market timing charges we took in '03 were down year on year or that level with the second quarter and remain below what we judge to be our long-range potential.

As can be inferred from Jerry's remarks, however, some relief from high G&A cost, which has been a major source of margin pressure this year, does appear likely in 2005. And you can be sure that as we assemble our plan for next year, careful expense management will continue to have center stage. But improving profitability is not dominantly a cost issue in this firm.

Instead, as I think you all know, it rests primarily on the growth of assets under management in relation to our cost base. But I want you to know, too, that driving this relationship upward is not an explicit management target. Instead, we see it rising naturally if we do our primary job well, which is to deliver superior investment performance to our client.

On this vital issue, I want to digress for a moment and highlight a few points that bear on our strategy. First, we are big believers in the efficacy and commercial potential of global investment platforms. The opportunity to add return and to manage risk and global mandates is, we think, clearly greater than country specific strategies.

Moreover, integrated global investment performs at the very design address a far larger audience than country bounded ones. And at the same time they provide the building blocks to drive local strategies to the degree that clients continue to want them, which they are undoubtedly going to want for some extended period of time.

The potential then to leverage intellectual capital using a global construct, it's just obvious, especially if defined comprehensibly as we do to include asset classes both equity and fixed income, and investment styles, both growth and value. Now why dwell on this point during the third quarter conference call on earnings? Why dwell on it? Because it's central to understanding the growth dynamics of the firm, now and for the foreseeable future.

Take a look at the data in display 10. As you can see, global and non-US assets under management have accounted for all of the company's asset growth over the last 12 months, rising some 43% to $159 billion. Note, too, in the lower part of the display that assets under management for clients domiciled outside of the US are now $112 billion, having risen by 37% over that same 12-month period. In value equity services in the institutional channel, where global penetration is most advanced within the firm, such services now account for more than half of total revenue.

Now, we believe we have clear, competitive advantages in the global arena. The sheer scale of the research required to drive a global process is a major barrier to entry. As are the technology platforms needed to manage complex cross-border risks. So as we look to the future, we see much of our growth sourced from these global investment platforms. And we see a continued high share of the new business coming from offshore clients. In addition to the effects of globalization, the firm's growth dynamics are being influenced by a second trend client acceptance of style blend services.

As Jerry noted, these services draw on our heritage, Alliance as a leading factor in the growth space and Bernstein as a leader in value. We packaged these opposing styles together to compete for both global and regional mandates positioning them as core offerings but with distinctly superior performance attributes. The superiority deriving from negatively correlating contributions to Alpha from the growth and value components of the blend. This has the effect of driving down volatility and through rebalancing actually increases returns.

Style blends for these reasons are gaining considerable attraction, as you can see in display 11. Such services now account for some $44 billion of assets under management. Almost 20 of this total is in the private client channel with style blends are our primary product offering. Style blending is also employed in our well-strategize family of multi-asset class mutual funds.

But even more impressive we think is our success with institutional clients, especially large ones, which at the outset we did not really anticipate. We now manage close to $12 billion in style blend mandates for broad range of such clients a figure that is about doubled in the last 12 months and for which business opportunities continue to develop at a robust rate. Here, again, we see ourselves as having competitive advantages and that few firms are strong in both growth and value and even fewer have this strength on a global scale.

Thus we remain quite optimistic about our prospects for this array of services. And what's remarkable, despite these dynamic sources of growth, the firm's overall organic growth remains quite low. And the reason is clear enough. It's a high rate of attrition in US large cap growth services. As shown in displays 12 and then 13, net outflow in these services were close to 3 billion in the third quarter and some 16 billion over the last 12 months.

Attrition here is primarily a function of weak investment performance during the last several years, much of which can be traced to the extreme skewness of capital market returns by size and quality during this span. Recent relative returns show some signs of improvement, which if sustained should eventually bring this attrition to an end.

In the meantime it is worth emphasizing the rest of our growth service suite continues to perform pretty well, including global and international growth, emerging growth and in the US, small, mid, and multi-cap growth. So, the picture in growth is by no means universally weak. Still, it is pretty clear - that a stabilization in our US large cap growth market position would add quite measurably to the firm's overall growth rate.

Naturally, organic growth by channel reflects all of these trends. So, let's take a look at results in these terms. As can you see in display 14, net flows accelerated in the institutional channel in the third quarter. And exceeded $5 billion. The results benefited, however, from large fixed income in-flows from AXA insurance affiliates, the revenues, which are uncertain on performance-based fees on some of these mandates.

Aside from AXA, net inflows remain positive, but as a relatively modest annual rate. Again, they were concentrated in the global value, international value and style blend services, with attrition in US growth services acting as a partial counter way. Results remained quite weak in the retail channel in the third quarter as summarized in display 15.

We think we are making progress in restoring our brand equity in this channel. But as noted in many prior communications, we are starting from a low base and will take considerable time to turn our image around fully. We're pleased with growing client acceptance of our wealth strategies, multi-asset class, multi-style funds. We're pleased with the continued good growth and the alliance Bernstein value funds and in Regent, our managed account services. But as in the institutional channel, substantial attrition and Alliance's traditional growth-oriented services continues to more than offset these in-flows.

Results were also pressured in the third quarter by outflows in our luxed-base mutual funds, as a result of weak industry conditions in the sales of fixed income funds overall to which this business has high relative exposure. In fact, the decline in sales was focused in the ACM American income fund, one of the highest rated funds in the market.

In contrast to the institutionand retail channels, the private client business continued to grow strongly in the third quarter, as shown in display16. Our distribution footprint expansion is on track, with new offices now in operation in Boston and Tampa. Philadelphia is scheduled to open this quarter. We've approved at least three new offices for 2005, including Atlanta and San Diego.

We continue to plan on about doubling our financial advisor force within the US within five years. Noteworthy, too, is our decision to restructure pricing for this client group, an initiative, which we begun to rollout this month. Our objective is to improve the transparency and predictability of overall asset management costs for these clients. Thus, as Jerry noted, we're going to eliminate transaction charges of any kind for US growth and value equities except for very large clients, whose arrangements with the firm will be synchronized with institutional pricing schedules.

For most clients this change will result in somewhat lower overall costs, as the elimination of transaction charges more than offset somewhat higher asset-based fees. Thus, there structuring will restrain revenue growth in this business, this business, not the firm overall, by about 1% or so. It will, however, also reduce the business short run revenue volatility, which is occasionally been pretty meaningful as third quarter results demonstrate.

Displays 17 and 18 go on to summarize flows by all three channels and provide a bit more detail about their character. The common theme is that while redemptions and terminations generally fell in the third quarter from recent run rates, so did the rate of new business. While the data is not statistically persuasive, this pattern appears to be owed to seasonality as opposed to any more lasting trends.

Finally, I want to touch on our institutional research business as summarized on page 19. As Jerry noted, we managed to buck the generally hostile trend in industry conditions during the third quarter and posted modest year-on year and consecutive quarterly revenue growth. Gains were made in both the US and in our London operation. So, we are pretty pleased with this performance.

We are also especially pleased with unit's excellent showing in the latest II Poll on research quality. By all measures, our position improved, earned exclusively as our tradition, from homegrown talent. We are quite proud of this unit's accomplishments. Now, it's in keeping with the firm's mantra, leadership and innovation in research in ways this translate to investment success for our clients, that's what we are here to do.

Now before taking your questions, let me touch briefly on our second announcement today, our decision to sell our cash management business to Federated Investors. This sale is consistent with our desire to focus all of our resources on research-driven services that provide clients with long-term solutions to their investment objectives. Cash management is clearly peripheral in this context.

We'll retain our competency in managing liquidity. We need it for our mixed income services and for the purposes of the managing temporary cash balances, such as in our exchange reserve facility within our mutual fund family. But beyond that, cash management has no strategic significance to this firm.

As for the financial effects, we estimate that the sale will result in a gain of approximately $0.03 to $0.06 per unit upon closing some time next year. Estimated contingent payments received in the five years following the closing are expected to be similar to the business's anticipated profit contribution over that span. And thus, the overall effect on earnings is expected to be immaterial. As a by-product, however, the retail business will be simplified and its profit margin improved. And now for your questions.

Ladies and gentlemen, if you wish to ask a question, please press "star" then "one" on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from the queue at any time by pressing the "pound "key. Once again, if you wish to ask a question, please press "star" then "one" at this time.

Gayle, this is Valerie, we would also like to ask our callers to limit initial questions to two to provide everyone an opportunity to ask all of their questions. We welcome you to return to the queue to ask follow-ups and it is our practice to take all questions in the order in which they were received and to empty the queue before ending the call. So, Gayle, I think we're ready now to take questions.

And our first question comes from Bill Katz with Buckingham Research. Please go ahead.

OK. Thank you. Sorry, I joined the call a bit late due to a conflicting conference call earlier. I was wondering if you could just sort of back up, I missed your opening remarks and maybe it was covered there. And just talk again about the change in pricing, was it just in the private client area or was this a broader initiative? And then, if you could sort of walkthrough how you might see that maybe impact volumes in going-forward?

About the change in pricing, Bill, is confined exclusively with the private client business. And its effects will be as we described, which is to dramatically reduce transaction charges, once it's fully implemented. It will rollout over a six to nine-month timeframe. And at the same time it will drive up in that business asset-based management fees. The net of which will be ever so slightly depressing to the revenue of the business. There is a benefit here to clients net to net. And we think a benefit ultimately to the business in that by increasing transparency and predictability, both the clients and the firm stand to gain.

OK. And I will get back in the queue to follow-up. I want to ask my second question. Just very curious, if you can comment about the margins that you see outside the United States at this point in time? Are you at a level in terms of scale where you're in different in terms of where organic growth comes from? Or could actually the United -- outside the US be sort of creative if you want to your turns on the revenue.

I'll tell you, Bill, it's an interesting way to frame the question. I think you should think of the company somewhat differently, however. Think of the company as having a center core of intellectual capital that's capable of adding alpha then in a series of disciplines and across multiple asset classes, pretty much everywhere in the world, and having established a distribution presence in three key channels, once again, in almost all of the important geographies of the world. That's really the way to think about the firm's profit structure.

In the early stages of development in any geography or product, the margin will be lower, perhaps even negative. But, if the basis for that service or geography is sizable, then it's a sensible proposition and ultimately adds to the profit structure of the company. That's really the way to think about it.

Thank you.

Our next question comes from Mark Constant with Lehman Brothers. Please go ahead.

Hello

Yes, Mark. You are on.

Did the call up to, and I apologize if you spelled this out. But the A.X.A. inflows, I think, I heard, in your later remarks allude that the institutional flows would have still been something like modestly positive, I think, you said or something, with the 5 billion. So should we presume that the A.X.A. flows were around flourish or something like that?

It's a good estimate.

OK. And looking at the comment that you made about the cash management sales to Federated, putting this all together here on the fly, but I believe their release said something about $93 million in payments over the next five years at current revenue levels. Did I get that piece right, so I can ask my question?

That's their estimate.

Their estimate. The -- but 93 over the five years, and if that amount of money is -- is it overly simplistic to think about it as one-time earnings? And as in general this was obviously extraordinary low marginally product for you, and certainly not a core competency but is that a way to think of it?

I think the way you should think of it from our point of view is that this whole transaction is immaterial to earnings in that manner.

OK. But say - but, I guess I phrased that poorly. From the standpoint of -- if you had -- if the return on cash received from the buyer were the same as your profits, it would be a wash to earnings. In this case, though, it sounds like you're saying that the contingent payments will be a wash with earnings. I'm just trying to distinguish between those two things?

Absolutely, that's what the language says; contingent payment makes it a wash with earnings.

OK. Presumably thereafter, it would be somewhat negative but small in the greater proportion -- the greater scheme of things.

Well, I think over five years you can make the assumption whatever costs applied to that business will have disappeared.

Got it. Thank you.

Our next question is from Cynthia Mayer with Merrill Lynch. Please go ahead.

Hi. Good afternoon. I was just wondering the drop in performance fees, was that due to any particular style? And are there any implications in that for the next quarter? In other words, are there sort of watermark issues or anything like that? Or do you start fresh in the next quarter? Then along those lines, I'm just wondering on the -- you mentioned, the A.X.A. asset tab performance fees attached to them. Would those be coming in any particular time of year? Where would we see those?

Performance fees quarter-by-quarter, Cynthia, are extremely volatile, as you know. You should not interpret the weak showing in the third quarter as having implications at all for future quarters. And I think, of course, reminding you and others in the fourth quarter, we accrued performance fees for various hedge fund offerings at the firm, none of which appeared during the first three quarters. And those figures can be substantial, although, not predictable.

OK. On the A.X.A. assets, what's the -- are those a once-a-year performance fee in the fourth quarter, too?

I'm not really -- I don't really recall the details of the arrangement. But you can assume that certainly for the first three quarters of this relationships there will be no such fees.

Right. OK. I will get back in the queue.

Yes.

And we will go to Greg Mason with AG Edwards. Please go ahead.

Good afternoon. Regarding your expansion or concentration on the foreign clients in leveraging your intellectual capital in that area, are there going to be any new labor capital costs or property capital requirements to leverage your international capital in those areas?

We have incurred almost all of them already.

OK.

That infrastructure is in place, and it will need to grow as the client base grows. But in the manner, I think will be quite beneficial to the firm's profitability. I also want to stress that we have not lost interest in US clients. I was merely pointing out there is a large world out there. And it's less well penetrated than is the case in the United States, and as it relates to global services in particular, the number of worthy competitors is far fewer from which one might infer that our growth potential offshore is higher than here. It's not to say, we are not optimistic about our US growth, because we ultimately expect to continue to grow here, too.

OK. And for the second question, looking at this quarter versus last quarter in terms of base fees, last quarter, it doesn't appear that you worked out transaction charges, but the $10 million decline, is that primarily all related to transaction charges? Or was there a change in mix that lowered base fees as well?

It's all transaction charges.

OK. Thank you.

And Ladies and gentlemen, if there are additional questions or follow-up questions, please press "star" and then "one" at this time. We have a follow-up from Bill Katz from Buckingham Research. Please go ahead.

Hi. Thank you for taking the call and answering questions. I just want to go back to sort of the big picture on retail, and so I get your thoughts are there other businesses where you might be looking to carve out that you don't have a core competency on? And if that's the case, when might something like that come to fruition?

There's nothing material, Bill, of that nature.

You were just pointing...

One of the things we have been doing is looking at every one of our joint ventures. None of them, other than Australia, which is of great strategic value, really rises to the level of materiality. So, no, I don't think you should anticipate any note worthy dispositions that would in any way resemble what we have just announced today.

A follow-on, I'm curious, in the retail area, how long should we be thinking about a recovery on the globe side and on the large cap? Is this still a multiyear situation? Or could this be something in 2005?

I would like to believe it's in 2005. But, what we have stressed is that the likelihood is that the recovery here will be in multiyear one. And -- while, there might be some argument to see a steeper exclusion and a steeper recovery, I would rather not forecast it.

We're working hard to achieve that. But our expectations remain that it will take quite a while to turn this unit around in the United States. We really believe we are doing the right things, and you can be sure we are going to be very persevering that. We will not be impatient, if the recovery turns out to be the multiyear. But at the moment that's still our expectation.

Thank you.

And we have follow-up from Cynthia Mayer with Merrill Lynch. Please go ahead.

Hi. Just a quick little one. I'm curious whether the capital gain on the money market business will be distributed to unit holders? The way the gain on the Polish sub was a couple years ago.

Yes, it will be, Cynthia.

OK. What were the Regent in-flows? And how does that compare sequentially?

But we haven't actually been disclosing the in-flows there on a specific basis but I will tell you that the in-flows accelerated in the third quarter.

OK. Great.

We'll go to the line of John Hall with Prudential Equity Group. Please go ahead.

Yes. I was wondering, if you could just discuss your participation in the hedge fund business? What's the outlook there, is that a place that you want to put more resources and emphasis on?

We have as the quarter closed a little over $3 billion in hedge funds. In our case you should think of them as derivatives of our core competencies inequities and in fixed income, packaged in hedge fund form to amplify our Alpha generating skills. Our interest in the business lies exclusively in that domain.

At a year ago, there was a discussion amongst regulators and the like about limiting the participation, the hedge fund industry, between those who operated mutual funds. Are all of your current hedged funds structured in such a way that the conflicts that were in the regulators' eyes are not conflicts in your structures now?

We believe so, although, that's not to say that there isn't overlapping management of hedge funds separate accounts and mutual funds. Because once again, remember, that the way, we manage money in many cases is a derivative of the collective contribution of analysts, portfolio managers, quantitative modelers and the like. And our hedge funds in particular are not unique entities but instead, once again, derived from those core competencies.

What we've established -- and we've been very rigorous about this. It's a set of systems and controls to ensure fair and equitable treatment of all clients, where the hedge funds are yet another client and look the same to those processes as any other. And we feel as if we are managing this kind of conflict well.

Were you not able to participate in that business, would you view that as a material event for the firm in either monetary costs or personnel retention costs?

I really don't believe that that is a likely prospect.

Thank you.

And we have a follow-up from Greg Mason with AG Edwards. Please go ahead.

To follow-up on your comments about the strong interest you're seeing in the growth of value blend components, I just want to see, is this interest coming primarily from the institutional or are the retail clients holding onto this as well? And second, if you could give me just a how quick, how long these have been around or are these a relatively new product for you or what the answer is there?

We have launch style blend services in all of our channels. In the case of private clients, it is our primary product offer. And indeed it was one of the principal reasons that Alliance and Bernstein came together, to take advantage of well-established skills and disciplines that produce Alpha about the same magnitude overtime but rarely at the same time. That's the key to understanding the value of this proposition.

Since style cycles can be quite long and quite large, style neutrality packaged this way is systematically balancing remove that's volatility from the consolidated result. While retaining the high Alpha contributions from the active components of the portfolio, moreover style volatility, if it's actually dramatic increases your rebalancing gain. If you buy, what's cheap and fund it with what's expensive and later those prices reverse. That's the essence of this. And that's why we thought that we should take this as our primary proposition to private clients. And then we began to broaden our interests in proceeding with this concept in our other channels.

Our wealth strategy family of multi asset funds is predicated on not only asset class rebalancing but style neutrality and systematic rebalancing across that parameter as well. And those funds, we note here in our displays, are now collectively more than 1 billion in assets and are growing, pretty much everyday. And really should be seen, as the platform from which we will be presenting ourselves to the retail world because it's the very best for this firm.

Thanks.

As finally, in the institutional space, as I noted in my remarks, we originally thought that this concept would gain traction principally in smaller plans, where, if you really, a prepackaged solution might be especially attractive. And in fact what's happened is that solution has had its largest success in very large plants. So if you look at the average mandate size and style blends institutionally, it's actually well above the average for single style mandates, at least thus far. And it's been successful in any number of iterations.

In domestic style blends, that is US focused, in ISA style blends and merging market style blends, global style blends, and it's been appealing to clients around the world, not in anyone geography, but around the world. So we are actually, you can see a quite optimistic about the potential here. And I can tell you that the flow of prospects is quite substantial.

And we now have a follow-up from Mark Constant with Lehman Brothers. Please go ahead.

Again, I just wanted to clarify a couple things that I caught the end of -- on slide four, Jerry, the explanation for the distribution declined addition lower average daily AUM growth, equity B-shares after the semicolon, trying to fill out that sentence in my head?

I'm sorry?

The growth equity B-shares explanations for the distribution of revenue decline?

Yes. What's happening here is that by having the lower amount of AUM for B-shares, we have lower revenues...

Lower B-share revenue on average. Got it. OK.

Exactly.

I just wanted to make sure I understood the comment. And then...

More importantly than that is the other side of the thing on the amortization also because, we're not going to be replacing all of the B-share sales from the bubble.

Correct.

We are getting tremendous contribution to the margins on the expense side also.

Yes. I caught that. I just wanted to make sure I wasn't missing a point of transaction, revenue changes or something like that.

I want to take this occasion to point out another effect that speaks for our cash flows as opposed to GAAP earnings. If you look on display 32, our balance sheet estimated at 930 compared to 12/31/03, you will see that deferred sales commissions have declined by more than a $100 million. So our cash earnings are significantly higher at the moment than our GAAP earnings.

And actually as an adjunct against to that, particularly with receiving these proceeds from federated now over the next few years, is there a particular alternative use of cash aside from just sort of the pass through of ongoing earnings as cash flow-- actual change in cash I guess during the period exceeds reported earnings?

I think the latter use, that is passing through those earnings to your unit holders has a very high appeal.

Potentially to exceed the sort of GAAP earnings at the LP level or maybe that operating earnings?

I don't think, you should anticipate that.

OK. I've a last question on the -- this maybe redundant, but I really apologize, but the -- was there a root cause or is it just sort of the inherent volatility that we observe this period in a pretty pronounced way that caused the transaction to charge to decline year-over-year?

I think -- we can both answer this.

Yes. All right.

You have to understand that the transaction charges in investment management accounts is entirely incidental to the investment strategies being applied. And...

It is what it is?

It is what it is. It is not managed in any way. And it therefore, in any quarter for that matter, over a whole year can be either well above trend or well below trend. And in the third quarter, it was not a particularly robust quarter on this parameter.

And you would consider this below trend then.

I would.

OK. Thank you.

And we'll go to the line of Robert Lee with KBW. Please go ahead.

Thank you. Good afternoon. Really quickly, if I remember correctly, you have a fairly sizable passive business. And can you just talk about how that maybe fits into your strategy at this point, and should we be thinking that there maybe another candidate like the cash management business? Or I'm just trying to get a better feel for that. And I have one follow-up question.

I would not compare the passive business to the cash management business. The passive business is, if you will, an extension of a structured equity business, which seeks small advantages, small alpha with extremely low tracking error, and of course an index is essentially the most extreme form of that strategy. And we remain in it because there are some clients, who have an interest in our providing that service in a few cases alongside others.

So, unlike the cash management business, where there was no strategic relationship between our core clients, and those clients, in this case, there is. Moreover, even though the business doesn't grow, nor do we anticipated that it will, and that is the pure passive component of it, it is profitable. And we actually have delivered a very fine product in that space. So, we are fully intend to remain in it.

OK. And just as a follow-up, you talked about in the past the institutional fixed income business, I mean, you have a fairly large fixed income business, but when you compare some of your institutional flows, relative to some of the other large players, who have been doing extremely well, where do you think, you are in the process of investing in that business? What you need to invest? I mean, how should we be thinking of that? You know, that's still maybe a year or two away from where you want it to be. Where do you think you stand in that process?

We feel very good about the leadership of the business as well as the quality of the research teams, their breadth and capabilities, especially in credit scoring, where I think, we have outstanding skill. And most recently, in quantitative methods in that area. We have been moving as we reported to earlier over the past two years to tightly integrate that intellectual capital with the decision-making processes that drive our various products. We encouraged by the success thus far. But this, like the retail business, will take time before it gains traction in the marketplace. So, we -- I don't think we need important investments here. We just need patience and perseverance. I think, we are on the right track. But I wouldn't forecast an early dramatic up-turn in that business either.

OK. Thank you very much.

We have no further questions in the queue at this time. I will turn it back for any closing comments.

Thank you very much for participating on today's call. If you have any further questions, feel free to call Investor Relations. I'm happy to take any follow-ups that you have. And this is a reminder, this slides are on the website for your viewing. Thank you very much. And have a good day.

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