AllianceBernstein Holding LP (AB) 2005 Q1 法說會逐字稿

Thank you for standing by, and welcome to the Alliance Capital First Quarter 2005 Earnings Review. (Caller Instructions.) As a reminder, the conference is being recorded and will be replayed for one week.

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

Thank you, Cindy. Good afternoon, everyone, and welcome to the First Quarter Earnings Review. As a reminder, this conference call is being webcast and is support by a slide presentation that can be found on our website at alliancecapital.com. Presenting our quarterly results today is Gerry Lieberman, President and Chief Operating Officer, and Lou Sanders, Chairman and Chief Executive Officer. Bob Joseph, our CFO, will also be available to answer questions at the end of our 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 2 of our slide presentation and in the Risk Factor section of our 2004 Form 10-K. In light of the SEC’s Regulation FD, Management will be limited in responding to inquiries from investors and analysts in a nonpublic 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 Gerry Lieberman. Gerry?

Thank you, Valerie, and good afternoon to everyone on the call. As is our custom, we will cover a brief overview of the capital markets, which are so essential to how we do financially, how we perform for our clients, which ultimately is the most important leading indicator for future net cash flows, a summary of our financial performance, which, of course, is of interest to our unit holders, and a review of our asset flows and the key trends in our distribution channel. I will then turn the call over to Lou, whose comments will focus on the changing character of the equity market and the firm's near and long-range response to those changes. Finally, we'll open up the call for questions of either Lou or me.

So let's begin with a review of the capital markets on display 3. Following the impressive returns we experienced during the fourth quarter of 2004, most equity markets around the world declined during the first quarter of 2005 as the renewed spike in oil prices to over $55 per barrel raised concerns about inflation and rising interest rates. The S&P ended the quarter down 2.1 percent and the MSCI EFA Index was just about flat. Although the market's response to the feds moves to increase interest rates in 2004 was limited, the markets reacted negatively as interest rates rose across the maturity spectrum in the first quarter of 2005.

Accordingly, bond market returns, as measured by the Lehman Aggregate Bond Index, were negative for the first quarter. Value style investing once again outperforming growth in the most recent quarter as measured by the respective Russell Indices, continuing the cycle's dominance of the last five years. But although the quarter's market performance was weak, when looked at in the context of the last 12 months, return across asset classes were positive.

So, how did we perform for our clients? Turning to display 4 and referencing the performance data starting with slide 23 in the Appendix, you will see that we did not perform as well for our clients as we would have liked this quarter. Our U.S. relative returns were generally lackluster and in some cases worse, with especially weak performance in our growth services, a topic that Lou will cover in his remarks later in the call. When you take our relative returns and couple them with the quarter's negative absolute returns in the U.S. for both equities and fixed income, the results are disappointing indeed.

With that said, generally, our non-U.S. relative returns were considerably better than our U.S. performance with many non-U.S. services producing positive returns. In our non-U.S. value-based services, performance versus benchmarks were strong in the quarter. Relative performance was also strong in the last 12 months with the longer time periods with emerging markets a clear standout. While our U.S. value services have underperformed their benchmarks recently, five-year performance continues to be quite strong. And importantly, long-term returns remain competitive throughout our product array.

For those of you who are interested, we have added 8 displays in the Appendix on our performance over various periods to provide additional insight.

Now that I have provided some highlights on performance, I'd like to turn to our firm's financial results. As reported in our news release just after the market closed today, fully diluted Alliance holding earnings per unit were 58 cents for the first quarter. As we announced on April 12th, the earnings came in lower than expectations due to unrealized mark to market losses on compensation and plan related investment, lower than expected advisory fees, and unusually high legal and consulting fees related to the SBA trial, all of which I will discuss later in detail.

As shown on display 5, year-over-year first quarter ending AUM increased 9.8 percent, or $48 billion, to $534 billion. Average AUM increased by 10.7 percent to $538 billion, driven by capital market depreciation and increased net asset inflows into both our institutional investment management and our private client channels as both channels realized improved net and gross organic growth rates.

Revenues for the quarter declined ever so slightly to $750 million as compared to $752 million in the first quarter of 2004. As detailed on display 6, base fees were up by 8.6 percent as the effect of the increased private client and institutional investment management AUM was partially offset by slightly lower retail AUM and an unfavorable mix shift in this channel as well as the lower institutional fixed income fee rates discussed on our call last quarter.

Transaction charges decreased 51 percent as a result of unusually low portfolio turnover in our U.S. value services, as compared to above-trend turnover last year coupled with the initial effects of our previously announced restructuring of private client pricing. As you may recall, this restructuring eliminates transaction charges for most private clients while raising fees, a change we started to face in this past quarter and will continue to implement through the second quarter. Our objective with this change is to increase the transparency and predictability of asset management costs. And while we expect the change to reduce revenues slightly, it will also greatly reduce the effects that variation and portfolio turnover has historically had on revenue.

Moving to the lower half of the display where we show fees by distribution channel, you can see a decline in retail fees primarily resulting from a mix change away from retail mutual funds to separately managed and sub-advised accounts. The revenue increases in institutional and private client are less than their respective AUM increases primarily as a function of the aforementioned reduction in transaction charges.

Moving ahead to display 7, you can see that distribution revenues decreased 7.3 percent to $108 million. On display 8, we show net distribution activity details as they relate to our retail business. And you'll see that although distribution revenues were lower, the decrease was partially offset by lower distribution plan payments, both a function of lower retail AUM. Including the amortization of deferred sales commissions, net distribution expense declined by 31.3 percent to $20 million, resulting from the continuing decline in B share assets. As noted previously, this will favorably impact distribution expenses throughout 2005.

Turning to display 9, institutional research revenues decreased 5.3 percent as lower pricing and lower market share were partially offset by higher New York Stock Exchange volume.

On display 10, you will see that other revenues decreased 32 percent, mainly the result of unrealized mark to market losses on investment for deferred compensation plans and lower shareholder servicing fees. As you know, the firm awards a significant portion of annual incentive compensation on a deferred basis. We require recipients to select our investment services as [indiscernible] investments for at least 50 percent of the deferred compensation awards, thereby aligning their interests with those of our clients.

We invest in those services as an economic hedge against our future obligations. As a result, awards are pegged to the market returns of the underlying investments that our employees choose and their value will fluctuate quarter to quarter. We record 100 percent of the unrealized gains and losses on the investments each quarter in accordance with GAAP accounting. At the same time, because awards vest readily over four years, we amortize 20 percent of the award each year, including the cumulative gain or loss, as compensation expense, resulting in a timing difference in the recognition of unrealized gains or losses and the corresponding increase or decrease in the value of the award.

However, over the four-year period the net expenses of the firm will be equal to the amount of the original award. The variance is significant this quarter due to market declines which cost unrealized losses during the first quarter of 2005 versus market increases in the prior year's quarter that resulted in unrealized gains. In addition, our increased use of deferred compensation over the past few years and the increased use of our investment services for employee investment options resulted in higher investment balances. We expect to see continued volatility in this line item in the future quarters, although on average the effect on this line should be positive. Finally, dividends and interest income increased as the rate environment has changed year over year.

Now that I've covered retail--I'm sorry, revenues in detail, I'd like to talk about expenses, which begin on display 11. As you can see, operating expenses decreased slightly to $571 million with increases in employee compensation and G&A being offset by lower promotions and servicing. The increase in compensation expense is due primarily to a $6 million increase in base compensation resulting from merit increases, including the effect of changing our annual merit cycle from an April to a January effective date. In addition, we have increased our staffing in Research, Legal, and Compliance, as well as IT with much, if not all, of this investment spending funded by reductions in operations of staffing and the implementation of other cost saving measures. For those of you that are interested, we will provide additional detail on employee compensation and benefits in display 12. But for the call, I'd like to continue with the more important expense categories on this page.

Promotion and servicing costs declined 11.3 percent primarily the result of lower distribution expenses, as I discussed earlier. Also contributing to the decline were lower distribution service costs and lower printing and mailing expenses, the result of firm-wide cost savings initiatives.

G&A expenses increased 9.8 percent to $100 million in the first quarter. The greatest contributor was higher legal and related expenses resulting from the recently concluded trial in Florida. We are extremely pleased that this matter was decided in our favor and is behind us. There will be no appeal and we expect to recover a significant portion of the expenses incurred through our insurance coverage later this year. Higher SOX 404 related audit and consulting fees contributed to increase the professional fees year-over-year, some but not all of which will continue throughout the year. Finally, in regards to G&A expenses, we did incur a $4 million increase in occupancy and related costs as both our private client franchise expanded and we incurred higher telecom and other infrastructure costs.

Now, if we turn to display 13, we can review Alliance Holding's results. Here you can see that Alliance Holding's share of net income of Alliance Capital's earnings is $47 million for the first quarter versus $46 million in the same quarter last year, and our diluted net income per unit is 58 cents. Our distributions per unit for Alliance Holding will be 56 cents for the quarter. Last year, our distribution was 14 cents as the distribution was reduced due to the settlement of mutual fund matters and legal proceedings in the fourth quarter after the distribution for that quarter had been declared. This quarter, we reduced the distribution by 2 cents to cover our recent NASD settlement.

Now, I'd like to review our assets under management starting with the pie charts on display 14. For the four months ended March 31, 2005, we continued to see significant growth in non-U.S. investment services and non-U.S. clients, a trend that I've been pointing out for over a year. By service, our non-U.S. AUM is up 39 percent to $194 billion. And by client domicile, our non-U.S. AUM is up 23 percent to $141 billion. Few managers can match the depth and the breadth of our capabilities in research, money management, and client service around the globe. And we believe that these displays prove that point. We will discuss our globalization prowess later in the call.

This quarter, non-U.S. clients funded nearly 5.1 billion into its [indiscernible] and impressively funded a total of 16.4 billion for the 12 months ended March 31. In terms of services in the first quarter, 3.1 billion was funded in global growth equities and 4 billion was in global value equities.

Turning to display 15, you can see just how balanced our product mix is with equities representing 64 percent of our total AUM and fixed income, 36 percent. Our AUM services were comprised of value equity of 195 billion, fixed income at 192 billion, growth equity at 118 billion, and 29 billion in indexed and structured product services. What you'll also see is our blend services, which combine traditional Alliance capabilities in the growth arena with traditional [indiscernible] and value investing, which comprised $54 billion of our AUM with 24 billion in both value and growth equity. We continue to see increased interest in these services as evidenced by the increase in AUM. Institutional clients, particularly those outside the U.S., as well as the consultants who recommend our services, also continue to be very enthusiastic about our blend services.

Turning to the detail changes in our AUM shown on displays 16 and 17, you can see the activity in assets under management for the three months and 12 months ended March 31, 2005. I'd like to point out that the accelerated inflow into our services have primarily been the result of our significant global presence, and we remain optimistic about our prospects for continuing this strong and favorable trend. Also note that for the quarter we experienced positive net flows in both our equity and our fixed income investment services grossing over $19 billion and netting $16 billion, even as market depreciation reduced our AUM by nearly $9 billion. Unsurprisingly, the highest net flows were in our value equity services. That's $3 billion as our international and global value equity services to outperform [indiscernible - background noise] our significant assets. Outflows in growth equity services stabilized this quarter and inflows accelerated producing positive net flows, an encouraging sign, but still not entirely secure, as Lou will describe shortly.

Our flows for the 12 months ended March 31 by service are shown on display 17. For the 12-month period, primarily due to rising markets in the fourth quarter of 2004, market appreciation and performance reduced our AUM by nearly $34 billion, while strong net asset inflow adds an additional $20 billion. As you can see, value equity and fixed income services experienced significant inflow while growth equity services experienced nearly $8 billion in net outflow. While on display 17, I'd like to remind you that we expect our fixed income assets to drop by approximately $27 billion in the second quarter, resulting from the sale of our cash management services to Federated Investors, a quarter in which we will record a gain on the sale.

Let's turn to display 18 to start our discussion on our distribution channel highlights. At March 31, 2005, institutional assets accounted for 58.3 percent our AUM, or $311 billion. Net long-term flows for the three and 12-month as of March were $4 billion and $18 billion, respectively. We continue to experience strong net asset flow to the global value, global growth, and blend equity services, which offset the attrition in our U.S. large cap equity growth services, as over 70 percent of our new [indiscernible] this quarter were for non-U.S. services. In terms of our unfunded pipeline, we see strong interest in all markets, including the U.S., Europe, and Asia Pacific.

Let's turn to display 19 for a discussion of our retail channel. India AUM was down 3.7 percent for the quarter and just under 1 percent for the 12-month period, to $158 billion. Although we have slightly negative total net asset flows during the quarter, over 50 percent of those flows were from the rationalization--outflows--50 percent of those outflows were from the rationalization of our mutual funds. In the first quarter, we closed mutual funds that we believed to be no longer strategic to the firm and no longer strategic to our clients, a decision we announced last year. We expect the rationalization process to conclude by the end of the year.

Our market share of sales in long-term U.S. retail funds remained depressed. However, our retail business has stabilized overall as other segments of this channel are growing. Our separately managed account business continues to add AUM. Our Luxemburg-based funds experienced positive net flows and our annuity and sub-advised funds continued to see net asset influence. We feel we are making progress, good progress, in the sub-advised market, which could bode well for flows as the year unfolds.

Finally, we transferred approximately $1 billion in cash management assets to Federated Investors this quarter in connection with the previously announced sale of our cash management services.

Turning to display 20 for private client channel highlights, you can see that our high net worth business now has $65 billion in assets under management and just produced our strongest ever net inflow for a quarter. We continue to invest in this business, opening additional offices and adding staff to existing offices. Our plan is to open new offices in Atlanta, Denver, and San Diego this year. We continue to see great potential in expanding our presence to include other densely populated markets with the right demographics to our services.

Now, let's turn to display 21 to discuss our institutional research services. As I mentioned earlier, revenues were down approximately 5 percent to $75 million for the quarter. This was due to decreases in pricing and market share, which was slightly offset by higher market value. During the quarter, we expanded the European research turn by seven analysts. In the U.S., we launched two new sectors in media and the automotive industries. Even though our revenues are down on this channel, we believe our fundamentals are solid. In a just recently completed survey of our clients, we affirmed the quality of our research where we once again came in first in research quality.

So, to briefly summarize, you should conclude that it was a quarter with very strong gross sales, over $19 billion, and impressive increases in net sales, $6 billion. The revenue increases were depressed by two non-controllable variables in the quarter and one plan change. The first non-controllable variable was the weak capital market performance and its impact on both base fees and other revenues. The second was lower turnover in our portfolios. Our new planned private client fee schedule also reduced transaction fees. Finally, our expenses, although clearly being managed, were hurt by unusually high legal and related costs specifically due to our court case in Florida.

This concludes my formal remarks. Now, I will turn the call over to Lou, whose comments will focus on what the future holds in regards to changing markets, a changing world, and our ever changing firm. We'll close the call by taking questions. Lou?

Thank you, Gerry. Before taking your questions, let me spend a moment and share with you a few thought that might help you better gauge the direction of the firm. First, I want to put our position in U.S. growth services in some perspective. These services completed yet another tough quarter in performance, which capped a period now extending for nearly five years where the growth style, including our large cap growth services in the U.S., have underperformed the market and have underperformed value. In fact, quite remarkably, the return differential between Russell value and the Russell Growth Indices over this span has been a stunning 7900 basis points.

It probably won't surprise you to learn then that the metrics we use to estimate the AXA alpha latent in each style now point to growth as offering the most potential. By way of example, just consider the compression of PE ratios since 2000, using the U.S. as a standard. We began the period with the most richly priced 100 stocks in the S&P 500 at 55 times earnings and the cheapest at 8 times. That relationship is now 20 times for the most expensive and 14 for the cheapest. Other relationships tell a similar story. Said another way, the premium associated with superior growth is very low by historical standards in the marketplace today.

But in response, the acts of risk of our growth strategy have been increased to capture the perceived opportunity. This helps explain why first quarter growth returns fell below the bench mark, especially in the U.S. Our portfolios, skewed to growth attributes as they are, will tend to amplify returns to the style which were, once again, quite negative in the first quarter.

So, we see amplification as desirable given the opportunity in growth. And thus, we think we're well positioned for improved performance when the upturn in this style finally materializes. In contrast, the outstanding opportunity in value is, by our estimates, now well below average. In response, the active risk of our value services has been reduced and is at present among the lowest in our history. Ironically, but predictably, cash flows have been strongest in value, not only for us, but for the industry at large. Client choices are, once again, being influenced by trailing relative returns even as the forces of mean reversion of those returns appear to be building.

Notwithstanding these conditions, as Gerry noted, we did see improved flows in growth services in the first quarter. In part, the upturn stems from lasting factors, in particular, the growing acceptance of global research growth, our primary global growth offering, continued growth in Regent, our principal managed account service, and, of course, the strength of style blends, which by design are half growth. But we remain vulnerable to client impatience with the result of our U.S. large cap growth services, which after all, still account for a substantial portion of our assets under management in this product area. So while we think we're doing the right things, I want to caution you all that the upturn in first quarter flows in the growth component of our business cannot be extrapolated safely.

Second, I think it's worth stressing that when you look at us, you need to see us through a global lens, because that's the way the Company is being managed. Our institutional and retail distribution units both have global business charters. And while our private client business is currently U.S. centric, it too eventually will become global. Most importantly, our product platforms are global in character. Now, of course, they are designed to drive country-specific mandates, too, given the strong home country bias of many clients, especially in the U.S. But we believe that integrated global mandates will eventually be seen as the superior investment solution even here. And as such, we expect our business mix to continue to migrate in this direction.

On this score, we expect to launch a tax aware global style in service for the high end of our private client business during the third quarter. And we're working to build the needed administrative and reporting systems to bring this service down-market, if you will, to private clients who have lower levels of assets with us. Such services will improve the quality of our offering and will, in our view, set us still further apart from the competition.

The third point I want to highlight is that you can expect us to continue to invest in research in ways that we think offer the chance to produce informational advantages. Knowing more, using knowledge better is the mantra of this Company, and in our view, is the key to sustainable investment success. And in the quest to know more, we are now building a research team in Shanghai in response to growing significance of China. Having an on the ground understanding of that country has become a strategic imperative since the dynamics of any number of industries are today dominated by developments in China, an influence that will likely grow in the years to come. The goal of this research effort, then, will be outward looking at first, to help us manage money better outside of China. It will also position us, however, to manage money within the country, but that opportunity we think will develop later.

Finally, as part of our efforts to foster innovation in research, we've launched a new unit called Research on Early Stage Growth. Now, it admittedly has a kind of heroic mission. Here's what it is. Find the next Microsoft. Find the next Intel. And at the risk of dating myself, find the next Polaroid, the next Xerox. Now, while industry analysts theoretically [indiscernible] to such opportunities, the pressure to stay current on the incumbents, well, it often leaves inadequate time to evaluate promising immature innovations. And that's what this new team is charged with. No industry boundaries, no geographic constraints. Just scour the globe looking for the next new big thing. And if we think we've found it, we'll pass the coverage over the industry [indiscernible] stay on the hump. This unit [indiscernible] actually a [indiscernible] who recently joined us. And we'll have a staff of four or five people. It is, of course, highly speculative research. It may turn out we drill a lot of wells and most of them come up dry. But we have to try. And in my view, we have a good chance to succeed.

And now, for your questions.

Cindy?

(Caller Instructions.) And we'll start with Mark Constant, Lehman Brothers. Go ahead.

Good afternoon, guys. I was tempted to use a question to ask Lou if Polaroid and Xerox were VC startups or not. But I don't want to waste it on that. The first question actually relates to the Federated transfer. I guess to actually kind of parte [ph] which line on page 16 is it. And maybe more meaningfully, you guys had said in the past that the gain on the sale would approximate the income from the product. I presume that's not perfect timing. Can you give us a little sense of how that will play out?

Yes. We'll get a gain in the quarter probably about 5 cents, Mark. That's after all the transaction fees and the legal. And then, going forward, we'll be getting fees that will more or less compensate for the lost--the opportunity cost of not having the business going forward for--.

--But earn out types fees that are approximated.

Sorry?

Earn out type fees that approximate the lost income going forward?

Exactly. Think of it as an installment sale. All right?

Got it. Okay. Which was it on? 16?

I'm sorry. Which what?

Which line is that in on the fixed income--?

[Indiscernible]. It's cash management. It will be the cash management.

I'm looking at page 16, the reconciliation by investment category. Display 16, I guess it is.

Oh. Display 16. It will be in the--.

--But it's in the flow of cash management?

Exactly. So that shows the quarter and there's $2 billion out that quarter. Most--a majority of that actually went to Federated in that quarter.

Got it. That's what I was trying to figure out.

Yes.

Perfect. Okay. And then, the second question, real quick, could you just give us a sense of the order of magnitude in the legal? It was--looked like the delta could have been in excess of $10 million.

It was 4--you're very close, not in excess, but you're very close to the number. You are very, very close to the number. And there will be a little bit more of that in the second quarter because it's--the trough continued into April. It won't be anything to that extent. And we expect to get all the money back. But the timing is uncertain. So we should get that back. We should get back. And we still have some claims in for some legal expenses for this item from previous quarters. There's always a timing difference between us and the insurance company.

Yes. Okay. Thanks a lot.

We have a question from the line of Bill Katz, Buckingham Research. Go ahead.

Thank you. Good afternoon. I appreciate the comprehensive review. Where would the--this is more of a qualifier, if you will. Where would the $10 million show up in the legal?

It's in the G&A lines. In the--.

--Exclusively in G&A?

It's all in G&A.

Okay. My more meaningful question is I'm just kind of curious. I'm wrestling with your comp sequentially. I guess as I see it, your performance fees are down pretty sharply, your revenues are down pretty sharply, yet your comp was pretty flat. I recognize you accelerated the merit increases. But is there anything else going on there that's maybe not sustainable so that the--which way that might go going forward, I guess, is the question?

Well, the performance fees are actually--they're actually helpful. Are you looking at a sequential number?

He's looking at sequentials. Can I answer the question for you?

Sure.

You're making the assumption implicit in your question that there is a proportional relationship between performance fees and compensation and that assumption is not valid.

Okay. Second question I have goes to private clients. And I'm just wondering if you could put maybe a little more flavor on where the growth is coming from? It's quite strong this quarter. I guess historically one of your best, right? What is it? Is it the new productivity gains from fleshing out the franchise or greater cross-sell? I need just a little more color there.

The productivity of our sales force has been in an uptrend. It's followed from quarter-to-quarter, of course, but it traces a pretty steady uptrend for the last number of years. And as such, you should think of the cash flow improvement as quite broadly based across all regions of the country and not skewed to any particular cohort of financial advisors.

Okay. Thank you.

Does that help, Bill?

Yes, that's helpful. Thank you.

Our next question will be from the line of Ken Worthington, CIBC World Markets. Go ahead.

Thank you. Were there any--was there any impact from FIN 46 in the quarter, and if so, what was it?

No, we're finished with FIN 46.

Excellent.

Thank God.

And two, when looking at G&A, so as we look to the next quarter or the third quarter, we should really be thinking about a run rate closer to $90 million per quarter as opposed to $100 million a quarter?

No, I wouldn't go that far. We still have some real estate coming on as we get into the year. Leases and things that we took on late last year and that we're building up. That will kind of pick some of that up. And we're still going to have some legal expenses from the case. I can't--I haven't even gotten all the bills in yet. And we know we won't--I won't say we know. We don't know what the reimbursements are going to be and when they're going to come.

Okay. Thank you.

And we'll now go to the line of Mark Constant, Lehman Brothers. Go ahead.

I just wanted to follow-up and flesh out a little more the institutional research services delta. Looks like it was down about 5 percent while daily average NYC volume is up about 7.5. You mentioned both market share and pricing. And I know you had some nice market share gains earlier in the year, but it seems like a lot of it--a big delta, if you will, from a pricing standpoint, for that to take--.

--Well, you know, you go year-to-year, Mark, and the effective pricing is down about 10 percent. It's--.

--On a year-over-year basis. On a 12-month basis. Yes, okay.

Yes, on a year-to-year basis. We've actually seen it flatten out the last several months. This year we haven't seen a lot of deterioration. But the period during the course of last year, when you go first quarter this year versus first quarter last year, it's down about 10 percent.

Okay. So this quarter, sequential is more of a mean reversion on market share. Is that fair--sequentially?

I would say it's--I would describe it as being flat more than a mean reversal. All right? It seems to have flattened out a little bit. In fact, it has flattened out. We looked at the numbers yesterday.

Okay. Thanks.

(Caller Instructions.)

Operator, is there anyone else in the queue?

Yes, they are queuing up right now.

Okay, terrific. Thank you.

Ken Worthington, CIBC World Markets.

In the--either in the prepared remarks or in the presentation, I think it was mentioned that attrition in the institutional business is stabilizing. Is it stabilizing in the growth product? And if so, is there anything that's leading to the stability or the stabilization of the attrition?

Yes. It stabilized in the growth services and actually in the U.S. where that attrition has been concentrated. And that's reflex, I think, acknowledgement by the client base that the opportunity in that particular segment of the capsule market is growing. And that was a reassuring development. On the other hand, in my formal remarks I cautioned you to not be completely secure about the durability of those views. Because the plain fact is that there is a strong correlation between trailing relative performance even if the latent opportunity appears large. And attrition, though it could be, although there is no sign of it just yet, but it could be that the attrition will pick up once again if the growth cycle doesn't turn in the period immediately ahead.

Thank you.

I do want to add one additional point. You'll notice that in the first quarter that it was pretty meaningful acceleration of growth inflow in growth. And that's stemming from what I think are durable developments largely around the success of global research growth as a global growth platform here, but especially abroad, and of course, style blend, which carries along with it our growth products wherever they may be located regionally.

Thank you.

We'll now go to the line of Bill Katz, Buckingham Research.

First one, I was wondering if you could sort of quantify how much more of the retail business might be at risk relative to the rationalization of the platform?

It's not material in terms of AUM.

Okay. And then, so in lockstep with that, your shareholder servicing fees have bounced around a little bit of other either quarter-to-quarter or year-to-year. So how should we be thinking about that on a go-forward basis?

They're not going to go up in regards--unless the business changes significantly. Part of this has been rationalization. Part of it, we dropped the fees. We wanted to get lower total expense ratios. So part of it was us changing our TOE so the client got better returns. And part of it we rationalized some expenses. So not all of this is going to the bottom line, Bill. But you won't see an up tick in this unless the business turns. And we have to get more--the driver is going be more clients to work out.

So it was a--.

And although the channel is starting to show some promise, not so much in the retail mutual funds part of their space.

Sorry to belabor this point, but given that, why would your revenues be up so strongly sequentially? Is it just new accounts coming in? That's all setting the fee reduction?

[Indiscernible.]

He's saying four to the first is up. It could be an adjustment in the fourth.

Bill, what we did is we actually have a change in accounting--certain transaction fees that we incur that we used to net in the other revenue line and we're now showing them gross. And so there is roughly a $6 to $7 million gross-up, if you will, in both the shareholder servicing expenses, our revenues, and promotion of servicing expenses. So we've adjusted the first quarter of '04. You'd have to go back and adjust the fourth quarter of '04 and then make the comparison.

Okay. That's very helpful. Thank you very much.

And no impact to the bottom line. I'm sorry.

It's a quarterly rate. It's about $7 million per quarter. $7 million.

Thank you. That's great.

Our next question will be from David Haas, Boz Smith Kelton [ph].

Welcome, David.

Hi. Thank you. Just a question relative to Lou's comments about positioning for performance within the growth industry and for the turn for growth. I guess my question is it seems like you're positioning yourselves for performance, but if we were to get that shift towards growth sooner rather than later, can you maybe discuss what that would mean for your ability to take share of the new flows coming in versus some of the competitors that are out there? It feels like that there are not too many incumbents right now in the growth space.

Well, that's an interesting observation on your part. It reminds me that--what the value setting looked like around '99 or 2000. But the point is that a foundation principal, if you will, of portfolio construction is to increase your active wager as the AXA Alpha opportunity arises. And that's what underway in growth. It isn't a response to any conceived competitive opportunity. It's the appropriate way to manage the money to the benefit of the client. Now when the growth cycle turns, and if I accept your hypothesis it turns soon, it should be down to our benefit from a competitive point of view. But I would stress, in terms of new business, we're at a very long lag because the client response in terms of new clients in any case is one that develops with a considerable time lag against improved performance. On the other hand, the attrition rate should be responsive pretty much immediately.

Okay, that's great. Thank you.

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