AllianceBernstein Holding LP (AB) 2005 Q3 法說會逐字稿

Thank you for standing by and welcome to the Alliance Capital's third quarter 2005 earnings review. At this time all participants are in a listen-only mode. After the formal remarks, there will be a question-and-answer session, and I will give you instructions on how to ask questions at that time. As a reminder, this 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, Jeannie. Good afternoon, everyone, and welcome to the third quarter earnings review for Alliance Capital. As a reminder, this conference call is being webcast and is being supported 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 Lew 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 two of our slide presentation, and in the Risk Factors section of our 2005 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 Gerry Lieberman.

Thank you, Valerie, and good late afternoon to everyone on the call. In short, we are very pleased with both our third quarter financial results and our underlying business. For a start, Alliance Capital Management Holding reported diluted net income and declared a quarterly cash distribution of $0.74 per unit. Both represent an increase of 42% from $0.52 in the same period last year, an increase of 9% from last quarter's $0.68 per unit. On this call, in addition to discussing our financial results, I'll cover a brief overview of the capital markets, discuss our investment performance, review our asset flows, and provide business channel and investment services highlights. Then I'll cover our fourth quarter outlook before I turn the call over to Lew who will share his views of our plans for 2006 and beyond. Finally, we'll open up the call for questions.

Before I begin my detailed discussion, I'd like to outline what we believe are our most significant highlights in the quarter, as you can see on display 3. First, this was a quarter with strong global equity capital depreciation. Second, our investment performance was excellent and extremely competitive. Third, we experienced an acceleration in our organic growth with improving retail net flows, significant fundings of institutional mandates, and a continued strong net flows in private clients. Fourth, our market share and revenues increased in institutional research services and, lastly, our third quarter reflected improving financial results.

In July we provided earnings guidance for this quarter in the range of $0.60 to $0.70 per unit, so the earnings results beat the upper end of our guidance by $0.04 and the analyst consensus by $0.07.

Earnings exceeds our expectations for the quarter as we benefited from strong investment performance in above-trend gains on investments related to our deferred compensation plans. As far as absolute market returns were concerned, equities in the U.S. and abroad were higher in the quarter despite record-breaking oil prices, devastating hurricanes in the Gulf, and rising interest rates. Support for the markets came from stronger-than-expected corporate profits and renewed optimism about the health of the global economy.

While U.S. markets continued to rise in the third quarter, the real news was non-U.S. equity market performance. Turning to display 4, you can see that returns from foreign markets picked up dramatically and were spectacular as measured by the global indices. The MSCI emerging markets index was up 18% for the quarter and 47% for the 12-months ended September. The MSCI EAFE index increased over 10% for the quarter and nearly 26% for the 12 months. And the MSCI World index grew 7% for the quarter and nearly 19% for the 12-month period.

As you can see on display 5, U.S. performance for the quarter was strong with the Russell 100 Growth Index up 4% but the Russell 1000 Value Index up 3.9% and the S&P 500 up 3.6%. Twelve-month returns ending September 30 were in the double digits with value outperforming growth by over 500 basis points. And although bond returns for the quarter were negative as measured by the Lehman Aggregate Bond Index, they gained 2.8% for the 12-month period.

So how did we perform for our clients? Well, turning to display 6, in reference to the performance data on display is 28 through 37 in the appendix, I think you'll see why we characterize our investment results as excellent. Both our growth and value equity services strongly outperformed their respective benchmarks for the quarter and also have outstanding long-term track records. In growth equities, our large-cap growth and global research growth were standouts in their style, while our global and international value services continue to deliver significant premiums.

Our investment performance continues to be excellent in nearly all of our nine U.S. equity services, and our style blend services, services that have been doing extraordinarily well especially in non-U.S. markets continue to enjoy terrific performance as shown on displays 36 and 37.

Across the board, that is across all style blend services and all time periods since their inception, nearly all our style blend services have outperformed their benchmarks. The performance premiums in these services result from research-proven selections of our growth and value teams supplemented by our disciplined approach to rebalancing.

Finally, our fixed income returns were generally competitive in difficult market conditions with our Strategic Core Plus, Core Plus, and Global Investment Services outperforming the respective benchmarks for the quarter.

Now that we have discussed performance in both absolute and relative terms, let's see what's happening to our AU inflows. This quarter we experienced continual improvement in our organic growth including a few significantly large fundings in both our institutional and retail channels. For the quarter and the year, as shown on display 7 and 8, you can see that we've recorded positive flows in all actively managed services -- value, growth, and fixed income.

Overall, net flows were $11.6 billion for the quarter and more than $25 billion for the 12-months ended September 30. The acceleration of our organic growth for the quarter was largely driven by the strength of our global and international services.

Value equity services have strong net flows of 7.6 billion in the quarter and exceeded $20 billion for the 12-month period ended September 30, and most encouraging were the nearly $3 billion in growth equity and net flows for the third quarter, which represented our best quarter and net inflows for our growth equity services in more than four years. Additionally, fixed income services grew, albeit at a more moderate rate. We reported net income flows of nearly 1.3 billion for the three months and 4.6 billion for the 12 months ended September.

On display 8, you see that the last 12 months we brought in just under $83 billion in gross new account sales. That's 27% higher than the corresponding 12-month period. The net inflows of 25 billion is 22 billion better than 12 months ended September 30, while the market -- that's September '04 -- while the market appreciation was nearly $70 billion in a 14% to AUM.

Let's now turn to display 9, and I'll start my discussion of our distribution channel highlights. At September 30, 2005, our institutional investment management channel assets accounted for 62% of our overall AUM, or $342 billion, which was up 8% for the quarter and 23% for the 12 months. As we expected, our net flows for the quarter increased with net flows for three months and 12 months ended at September, and $7 billion and $19 billion, respectively.

We recorded strong flows in our global research growth, global and international value, style blend, and fixed income services. Style blend services, both U.S. and non-U.S., accounted for 25% of new mandates this quarter.

With the significant increase in fundings this quarter, our unfunded pipeline of new business, which we discussed last quarter, is now down from its summer peak, however, it remains high compared to historical standards. As such, we should continue to see strong fundings through the fourth quarter. We also expect to continue a healthy share of new mandates.

Turning to display 10, our retail channel ending AUM was up 6.3% for the quarter to $140 billion and 13% for the 12 months excluding cash management services assets. It was a stronger quarter for retail and, in fact, it was the best quarter for net inflows since 2001. With respect to retail net inflows, we launched a fund in Japan in the third quarter for one of the largest financial institutions in that country, which raised $1.3 billion in AUM in six weeks and increased the awareness of the Alliance-Bernstein brand in that market.

Additionally, we continued to record quite strong net flows into our Luxembourg-based funds. Not only are we starting to feel more confident that our retail business has begun to stabilize, but we also believe that we are positioned globally to continue our retail assets with the introduction of new services geared to the long-term interest of retail investors.

Continuing the involvement of our Wealth Strategy suite of investment services, we launched the Alliance-Bernstein Retirement Strategies on September 1. Retirement Strategies is a series of target date, of lifecycle funds, for IRA and 401K participants. This launch follows the launches of both Wealth Strategies in 2003 for our U.S. clients, and Global Wealth Strategies for our non-U.S. clients in 2004.

Our research shows that the target date funds being marketed in the U.S. today are weighted too heavily toward bonds and cash and that our equity exposure retirement is far too conservative. We believe our service construction will better serve our clients presenting us with an opportunity to capture assets in the retirement space as our effort to restore our retail channel in the U.S. continues.

Display 11 shows our private client channel highlights. Here you can see that our high net worth business has $73 billion in assets with $2 billion in net flows for the quarter. For the 12 month, this channel's assets are up 23%, or $14 billion due to both market appreciation and double-digit organic growth. As we've noted over the past few quarters, we are continuing to invest in our private client business by both opening new offices and adding staff to support our expansion.

This quarter we increased the number of financial advisors by 7% to 255 and by 32% since year-end 2004. We plan to open offices in Atlanta and Denver in the fourth quarter and expect San Diego to open in January of 2006.

Highlights for the institutional research service are shown on display 12. Revenues were higher both in the U.S. and non-U.S. markets totaling $87 million for the quarter, an increase of nearly 17% from a year ago and 14% better than the second quarter. Our strong results were driven by higher market volumes and increase of market share in the U.S., which were partially offset by continued industry-wide pricing pressures. In the non-U.S. markets, we continue to have double-digit organic growth. Broadening our trading classroom to the U.S. and expanding our research term in Europe are proving to be successful strategies. Also in September, we opened our first regional U.S.-based sales office in Los Angeles.

On the sell side research front, we have 37 publishing analysts, and this quarter we increased our coverage to 350 companies from 340. Also, although officially a fourth quarter event, several weeks ago we received significant recognition in the 2005 Institutional Investor All-America poll. Bernstein had its best-ever results, rising to number 8 in the lead table and number 7 in the weighted results. This is yet another tangible example of our commitment to excellence and research. We are very proud of the talent that we have at the firm producing high quality, innovative research that serves our clients' needs and generates revenues for the firm.

Overall, as you can see, we are extremely pleased with our accomplishments this quarter and the progress we've made in each of our distribution channels. Before I start my review of our financial results, I'd like to call your attention to the continuing mix shift in our AUM, not only from a U.S./non-U.S. perspective but also importantly from an equity/fixed income services mix perspective, as you can see on display 13.

As you know, last quarter we sold our cash management assets and, while not a large piece of our total product array, these short-term assets somewhat masked the growth and the profitability dynamics of our long-term, actively managed asset base. Now that these assets are gone, a truer picture of our underlying business is evident. We currently have 70% of our total AUM and equities, up from 66% at September 2004. Such equities have higher fee utilization rates than cash management, and our global and international investment services have higher fees than U.S. assets, we should benefit from a gradual increase in our profitability, over time, while we continue to invest for long-term growth, as Lew will discuss in his remarks later on the call.

Now let's turn to display 14, which highlights our growth and our global franchise at the end of the third quarter. Here you can see that AUM for both global and international services as well as non-U.S. domicile clients are growing faster than the AUM for U.S. assets and U.S. clients. For the 12 months ended September, AUM for clients domiciled outside the U.S. increased by 35%; AUM of global and international investment services increased by 50%.

There are many factors contributing to this trend. The four most important are -- number one, our investment in human capital, especially research and portfolio management in support of our global services suite; number two, the creation of new global and non-U.S. investment services; number three, excellent investment performance; and number four, our investment in non-U.S. distribution and client servicing.

This display demonstrates that our continuing investment in seamless global research resulting in [unintelligible] portfolio construction, our ability to use that research better, and our investment in client services are paying off. Non-U.S. AUM, by client domicile accounts for $166 billion, or 30% of total AUM, while global and international AUM by service accounts for $239 billion, or 43% of our total.

As seen on display 15, our primary contributor to our global asset growth is our style blend service, which have grown by 67% from $44 billion to $74 billion in AUM in the past year, a trend that I have discussed extensively in previous analyst calls.

Now that I've provided some highlights on performance, asset flows, and key trends at our distribution channels, let's turn to our firm's financial results starting on display 16.

Ending AUM increased 13.5% with $66 billion from the prior year to $555 billion. Average AUM increased by 11.4% to $534 billion driven both by capital market appreciation and net asset inflows, primarily in our institutional investment management and private client channels. Excluding the $29 billion of ending cash management assets for the third quarter of 2004, average AUM would have increased by 18.6% year-over-year.

Revenues for the quarter increased 11.7% to $811 million as compared to $726 million in the third quarter of 2004 with advisory and transaction fees up $51 million, or 10.3%. As detailed on display 17, base fees were up by 14.6%, or $68 million resulting from an increase in average AUM from both market appreciation and inflows and the full impact of the new private client fee structure. Transaction charges decreased 81%, also the result of the new private client fee schedules, as well as the increased use of ECNs, variances that we have discussed on previous analyst calls.

Moving to the lower half of the display, where we show fees by distribution channel, you can see a 22.7% increase in institutional investment management fees. This increase resulted from higher average AUM, which were only partially offset by lower transaction fees. Private client fees increased by 13.3%, the results of higher AUM, which was only partially offset by our new fee structure, as higher base fees more than offset lower transaction charges. Retail fees were only down $9 million despite the sale of our cash management services assets and the resulting loss of $24 million in related revenues.

On display 18, you can see that distribution revenues decreased over 12% to $95 million. Display 19 details in that distribution activity, which is mainly for our retail business, as lower distribution revenues and distribution plan payments were attributable almost entirely to the sale of cash management assets. Additionally, we continue to experience a significant decrease in the amortization of deferred sales commissions resulting from the lower level of D share asset sales.

Including the amortization of deferred sales commissions, net distribution expenses have continued to decline. As noted in previous quarterly reviews, we expect this trend to continue to favorably impact margins.

Turning to display 20, you can see that institutional research services revenues increased an impressive 16.5% from higher volume and market share despite continued lower pricing and unfavorable industry trends for exchange traded securities. Growth in both the U.S. and the UK has contributed to our results.

On display 21 in the investment gains and losses line, we recorded $22 million in unrealized gains, primarily on investments related to our deferred compensation plans. This figure is well ahead of trend, which should average between $4 million to $6 million per quarter. But, of course, it will be highly volatile reflecting the variability on the underlying capital market returns and with a lag, the related deferred expenses will be reflected in higher compensation expense over the remaining investment period.

Additionally, the increase in the other net line was primarily attributed to the gross proceeds of the sale of our local India funds, the net impact of which was less than a penny and a half per unit after netting out all related costs, taxes, and minority interest.

Now that I've covered revenues in detail, I'd like to talk about expenses, which begin on display 22. As you can see, operating expenses increased 2.8% to $580 million. Increases in employee compensation were partly offset by both lower promotion and servicing and lower G&A expenses.

Turning to display 23, you can see that increase in compensation expenses of 25.8%. This was primarily due to $42 million or 43.8% increase in incentive compensation from higher operating earnings and higher net amortization of deferred compensation plans and a $15 million or 23.4% increase in commissions across all of our business units.

Additionally, base compensation increased by $7 million, or 8.2%. This was primarily due to merit increases, an increased hike headcount primarily in our private client and institutional research services channels.

Turning to display 24, note that promotion and servicing costs declined significantly. This is attributed to the sale of our cash management assets and the lower deferred sales commission amortization discussed earlier. You will also see that G&A expenses decreased 10.5% to $96 million in the third quarter primarily due to lower legal costs.

On display 25 and 26, we present a recap of total revenues and expenses to come to a summarized income statement for Alliance Capital and Alliance Holding. On display 25, the net income for Alliance Capital of $202 million for the third quarter was 38.8% better than the same period in 2004 after taking into account higher tax rates due to increased earnings in our non-U.S. corporate subsidiaries. Additionally, you can see that our margins have improved to 28.5% from 22.2% last year, the result of several factors discussed including our investment gains in the runoff of these share amortizations.

Carrying the $212 million of Alliance Capital's net income forward, on display 26, we show Alliance Holdings financial results where you can see the Alliance Holding's share of net income of Alliance Capital's earnings were $61 million for the quarter versus $42 million in the same quarter last year. As I mentioned earlier, our distributions per unit for Alliance Holding will be $0.74, a 42.3% increase from the $0.52 distribution in the same quarter last year.

In summary, this was a significant quarter for us on many fronts including the fact that earnings were better than expectations. I'd like to end my discussion by pointing out some significant trends that will continue to make important contributions to the growth of our business as evidenced by our results and the changing composition of our assets under management, the breadth of our global and international investments services is proving to be an important competitive advantage. Globally we continue to gather significant assets. Few firms have yet to establish a truly global platform with the breadth and the depth of the services we offer.

Additionally, and perhaps more important is our solid quarterly investment performance across our equity services resulting from our focus on research excellence and doing what is the best interest of our clients, the ultimate driver of unit holder returns. We continue to invest in and develop our research talent as well as refine and develop what we believe is sophisticated and carefully designed suite of investment services tailored to meet the investing needs of our diverse clients in our retail, institutional, and high net worth channels.

Finally, before we turn the call over to Lew, I'd like to address quarterly guidance with you. As outlined in the press release we issued today, we are updating the guidance we provided to you last quarter. We currently estimate that fourth quarter earnings at the holding company level will approximate $0.75 to $0.90 per unit including about $0.10 to $0.20 per unit in performance-related fees. These estimates reflect market conditions through late October and the assumption that trend-like returns resume in equities, 8% an annual rate and fixed income, 5% in the annual rate for the balance of the quarter.

I want to remind you of the obvious -- that market returns are extremely volatile in the short run, subjecting our earnings to an unusual degree of uncertainty. At this time, I'd like to turn the call over to Lew, who will provide his insights on what's in store for us in 2006. Then we'll take your questions. Lew?

Thank you, Gerry. Before taking your questions, let me spend just a few minutes and share with you my perspective on the firm's performance. I, too, continue to be encouraged by the fundamental trends underway. Most important, investment returns for our clients, which have been good. The list of key services with substantial performance premiums is impressive. We believe our competitive position is strengthening and, as Gerry highlighted, it's distinguished not only by good investment results but by the breadth of our global service suite and our style blend offerings, which few firms can match.

Our organic growth rate has accelerated, and while the rate of growth achieved in the third quarter may be hard to sustain, we believe we are positioned to grow faster and has been the case for some time. Profitability is improving and should remain in a gradual uptrend if we continue to meet our targets for client return if, of course, the capital markets provide a setting conducive to sustained growth. Now, these are always very big ifs in our business, especially when measured in the short term and make quarter-to-quarter volatility in our results unavoidable.

We are, however, focused on the long term, and on that score the investments we've made in fundamental and quantitative research appear to be bearing fruit. They are improving the quality and range of our services and elevating our brand equity as thought leaders and innovators in research. But there is still more to be done.

The strategic agenda in 2006 is expansive, and I want to highlight a few key initiatives. On the top of the list is the launch of investment management services for high net worth private clients in the UK. We believe the time is right for such a move as the market structure in that country is changing from a local focus dominated by local firms to a global one. In this context, we think that our global investment planning and service suite will be seen as highly distinctive. And our success in the institutional market, who are now among the largest asset managers in the country, lent considerable credibility to our offering.

Building this business will, of course, take time, but it will be time and money well spent, we think, and if the local UK market is large and London itself, a gateway for substantial transnational private investment capital, which we hope to attract as a byproduct of this effort. Given the dimensions of this opportunity and its complexity, we plan to pause in adding additional private client offices in the U.S. after the opening of Atlanta, San Diego, and Denver in the next several months. That will take us to 18 offices with an FA force of more than 250 in the U.S. Although we'll cease adding offices for a time, we'll nonetheless continue to expand our field force in existing offices with an increase of about 15% planned by year-end '06.

Important actions in new product development are also on the agenda for next year. We plan to launch a stand-alone currency management service packaged initially as an alpha generation source, possibly in portable form. Currency management is a core competency of the firm. We have considerable intellectual capital in this space and have an impressive history of performance as an embedded part of our global value and fixed income products. The market for currency management services is believed to be in excess of $500 billion as measured by assets under management. So this is a significant opportunity.

We also plan to put high emphasis on our newly launched target date retirement funds for the 401K and IRA marketplace. While such funds have been offered by others for some time, Gerry noted we believe we've advanced the state of the art in their design in terms of the asset classes included and the allocation strategy employed. Target date funds provide us with a differentiated entry in the DC market, heretofore a secondary focus of the firm. We believe that the opportunity is global, so we'll be developing the needed technology to manage target date retirement funds to varying currency references in the new year.

Real estate is also on the product development agenda for next year. This is a big asset class. It's quite relevant to the clients we now serve and amenable, we think, to the kind of research we do well. Today we manage about $1.8 billion of real estate-related equity assets in securitized form and additional assets in CMBS in fixed income as part of our multi-sector strategies. We believe that with enhanced research and quantitative support we can substantially expand the size and scope of this activity.

Finally, I want to mention our IT initiatives. IT, information technology, if properly managed, can be a source of competitive advantage as opposed to merely a means of managing quality and costs. We view IT in these terms -- plans for 2006 include a broad range of strategic projects, the most promising of which involves the ability to manage separate accounts on a globally integrated basis for private clients. While this project will likely extend beyond next year, once in place it will further distinguish the firm in what we believe will be an area of growing importance. This is one for you to watch, and we'll keep you posted on our progress.

And now for your questions.

[OPERATOR INSTRUCTIONS] Bill Katz with Buckingham Research.

Pardon me for the background noise, we're having a fire drill in the building. Two questions -- the first question, Lew, just sort of your last commentary about your strategic initiatives for next year and maybe even beyond that, how should we be thinking about the investment spend relative to revenue growth over the next 12 to 24 months in light of your commentary and assuming a "normalized" market backdrop?

I think you should anticipate, as both Gerry and I indicated, that we can fund those initiatives and still achieve a gradual improvement in operating margin.

The second quarter I have is it looks like you had terrific results in Japan. I was just curious if you could provide me with a little more detail of the type of product that was, how scalable is that product in Japan, and can you take that to other countries or is this sort of country-specific opportunity?

It was our merging market growth fund that we launched in the Japan space, and this was a homerun both in the marketplace and the fact we got onto a new platform and the performance was great, and it was well received, but you don't duplicate billions of dollars like this all around the world. But this is a global product, and we expect to see more fundings from it.

Okay, so should I view this as sort of like a one-time offering or are you just sort of in the process now of deepening penetration in an FA or a sales force?

You should look at this as a one-time offering, although we will continue to get flows both in Japan, and we expect we will get flows from this product, this space, in other markets but not a homerun like this.

Ken Worthington from CIBC.

I wanted to follow-up on a Fidelity announcement that it is unbundling research expenses from commissions in its dealing with Lehman Brothers and will be in the future assuming the cost of research from its funds. Alliance Capital has made a number of changes over the last year that add significant benefit to its clients. If Alliance announced something -- announced similar relationships with its brokers, would Alliance's customers benefit long term and is this something that Alliance Capital is considering?

We are always trying to optimize the results for our clients in that context, deploying our research budgets, both internally and externally to achieve that result. And the funds that we allocate to purchase external research are very carefully scrutinized, and we will continue with that policy in the future.

Would Alliance Capital assume that cost of research from the funds themselves?

Alliance Capital, as I think you know, has one of the largest research footprints in the asset management industry, and it's continued to invest aggressively in building its scale, scope, accuracy, and innovation in that arena.

Mark Constant with Lehman Brothers.

Just a couple of things I wanted to make sure I got it straight -- on the remaining cash management that's in fixed income that's the non-retail broker/dealer stuff, did that materially swing the billion-three net flow positive or negative?

No, not at all.

Okay, is it pretty neutral?

Yeah, not at all. We don't expect that to be the case, we don't expect that to be a swing at all. That's going to be very immaterial for us.

Helpful -- and the -- you mentioned in the institutional discussion that you had significant wins. I had to jump on a second light. Did you quantify any of that along with your guidance for this quarter or no?

I didn't give numbers, but we have, including the emerging market one, we had three $1 billion-plus wins including the funds in Japan.

Cynthia Mayer with Merrill Lynch.

On the higher global international flows, is it your sense that the increase is coming as a result of gains in market share or because of an allocation shift in clients? And how much of a danger of rebalancing is there if performance continues to be this good?

Cynthia, I think that you should think of this dominantly as a market share.

Okay, and on the plans that you have for '06, just as a follow-up to the previous question -- if markets were to turn down, say, 10%, how flexible would you be on those? Would you postpone some of those or would you continue with them?

The company's call structure has inherent flexibility built into it. As you know, a very substantial fraction of compensation is a derivative of its profit structure. As to our investments in programs we think are vital to the long-term interests of client returns, we're going to stick with them even in hostile market conditions.

[OPERATOR INSTRUCTIONS] David Haas with Fox-Pitt Kelton.

Just a quick question -- you showed some pretty impressive slides on the growth in the international assets and international customers. I was wondering if you could give us a sense for what the unit growth in the account side has been as well? Clearly, the international markets have risen.

I think the data we've provided separates what is capital market return from what is organic growth. Both were impressive.

Second, I guess, in the U.S. retail business you cited the strength in the international side for retail. But in the U.S. business -- can you give us a sense for the excess capacity there? Is there a fair amount of it, or if you're going to grow that business, do you need to grow the underlying headcount or do you need to do any sort of consolidation of the offices there?

I think the consolidations that were needed, we really did over the past two years in regards to both the infrastructure and the headcount. With that in place, we think we have significant capacity to take on growth in the business for the foreseeable future. So we don't expect any increase in overhead for that franchise, going forward, and we think we have a lot of scalability there, David.

Mark Constant from Lehman Brothers.

I'm hoping I can get two again -- one, it seems like the institutional research sort of market share has been a little more volatile the last few quarters -- market volumes and pricing issues aside. Is that an accurate observation? Is there a reason for that, is question number one?

Mark, I don't know that I would decide the market share as especially volatile. I actually think that what we witnessed in the third quarter, I think and trust, hope and trust, is durable and is a derivative not only of improved penetration in the research services but also a reflection of our expanded capabilities in trading.

Finally, we, as you know, have been building market share now consistently in the UK-based operations serving customers on the Continent as well as in England.

Okay, and just a numbers question for Gerry, if you can just refresh my memory, please -- how much of that $22 million of the deferred comp benefit actually gets offset this quarter in the computation accruals, I can't remember how long the amortization was.

Well, the vesting period is four years.

Four years.

Vesting in four years.

Straight line?

Straight line, pro rata four years. That's how the plans work.

Jeannie, are there any more questions or is that the final?

We do have Cynthia Mayer with a follow-up question.

Okay, thank you.

Cynthia, we missed most of that.

We missed the whole question, Cynthia.

Okay, can you hear me now?

Yes.

Is the full impact of the new private client fee structure completely in by now as well as the move to greater use of ECNs or is there still some more of that to go?

It's completely in on point A, and on point B, that will depend on where best execution lies as time passes. However, the financial significance of additional growth in the ECN venue is diminimis. Consider that of $811 million in third quarter revenues, transaction revenues amounted to $4 million across all of the businesses.

There are no further questions. I would like to turn the floor back to Valerie. Please go ahead for your closing remarks.

I'd just like to say thank you to everyone for participating on the call, and if there are any further questions, please feel free to call Investor Relations. Thank you and have a good evening.

Thank you. This does conclude this evening's Alliance Capital conference call. You may now disconnect and have a wonderful evening.