AllianceBernstein Holding LP (AB) 2005 Q4 法說會逐字稿

Thank you for standing by and welcome to the Alliance Capital fourth quarter 2005 earnings review. [OPERATOR INSTRUCTIONS] 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, Eduardo. Good afternoon, everyone, and welcome to the fourth quarter earnings review. As a reminder, this call is being webcast and is supported by a slide presentation that can be found on our website at alliancecapital.com. Presenting our quarterly results today are Jerry 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 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 Jerry.

Thank you, Valerie, and good afternoon to everyone on the call. It should be no surprise that we are very pleased with both our full year and fourth quarter financial results. Our fourth quarter reflected strong investment performance, strong net AUM flows and improved financial results. So on this call, I'll discuss capital markets performance, our relative investment performance for our clients, our asset flows, business and financial highlights and some of our 2006 initiatives. Then I'll hand the call over to Lew. 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 for the quarter, as outlined on display three. Similar to last quarter, global equity capital markets continued to outperform U.S. equities during the fourth quarter, which benefited our clients and our unit holders through some mix changes, as our global and international investment services and our base of non-U.S. clients increased. In institutional growth equities, our relative investment returns were excellent, and our U.S. style blend services had a strong quarter, as well.

Turning to our asset flows, I'm pleased to report another strong quarter of organic growth, with all three asset management distribution channels and all of our actively managed investment services contributing -- contributing net inflows, several of them record breaking, as I will discuss later. Particularly in our institutional investment channel, we experienced significant fundings of mandates again this quarter, and we continue to see improved retail net flows led by our non-U.S. distribution. In our institutional research services channel, although we had a soft December, higher U.S. revenues continue to be driven by higher market share and volume, albeit with lower revenue yields resulting from the shift to program trading.

Last, but not least, is our improved financial results. As announced earlier today, Alliance Capital Management Holding reported diluted net income and declared a quarterly cash distribution of $1.02 per unit for the fourth quarter ended December 31, 2005, both records for the firm. Our earnings per unit of $1.02 was 27.5% better than fourth quarter '04, and better than the top range of the original guidance that we gave last quarter. We ended the full year with record net income per unit of $3.02 and record assets under management of $579 billion.

Now that I’ve covered the most important quarterly highlights, I will add a little bit more detail and texture to our discussion. As you can see on display four, the MSCI Emerging Markets Index was up 7.2% for the quarter and 34% for the 12 months ended December. The MSCI EAFE Index increased 4.1% for the quarter and nearly 14% for the 12 months, and the MSCI World Index rose 3.1% for the quarter and nearly 10% for the 12-month period. As shown on display 5, U.S. performance for the quarter was weaker, with the Russell 1000 Growth Index up 3%, the Russell 1000 Value Index up only 1.3%, and the S&P 500 up 2.1%. 12-month returns ending December had value outperforming growth by 180 basis points, in spite of growth outperformance for each of the last three quarters. Bottom returns for the quarter and 12-month periods were barely positive, as measured by the Lehman Aggregate Index as the Federal Reserve instituted rate hikes throughout the year.

With that as a backdrop, let's see how we performed for our clients. If you reference the displays 29 through 38, you'll see how we performed for our clients. Importantly, across most of our equity services, our performance for the year was excellent. With few exceptions, relative investment returns were excellent for the quarter across our growth services, as well as our U.S. style blend equity services. In addition, we remained very competitive in fixed income. Additionally, with the outstanding investment performance in growth equities, we believe we are positioned extremely well to gather additional assets, if the shift towards growth style investing continues and managers rebalance their clients’ portfolios.

For the quarter, in institutional growth equities, we outperformed benchmarks in many of our key investment services, including large cap growth, U.S. growth and multicap growth. We exceeded benchmarks by 270 to 370 basis points. For the year, large cap growth, U.S. growth and global research growth were 10.7, 7.5 and 7.3 percentage points better than their respective benchmarks. While growth equities outperformed value equities for the third consecutive quarter, our value equity service still posted good to outstanding returns, especially over the longer term. Our institutional value services, international value, global value, and U.S. strategic value beat their respective benchmarks by 550, 430 and 170 points, respectively, for the year.

As I previously mentioned, our institutional U.S. blend services had a strong quarter, while U.S., global and international style blend all had excellent one-year performance results, beating their benchmarks by 600, 650 and 220 basis points, respectively. The performance premiums for these services result from the research-driven selections of growth and value teams, and are supplemented by our disciplined approach to rebalancing. Retail growth funds also had outstanding performance, with large cap growth, growth in region outperforming the LIBOR averages from 200 to 310 basis points for the quarter, and 280 to 800 basis points for the year. These returns should be a harbinger for better flows in retail in '06. Meanwhile, our retail fixed-income returns were generally competitive in difficult market conditions, with America's government income, ACMGI -- American Income Offshore Investment Services -- outperforming their respective benchmarks for the quarter and retaining their excellent premiums over the longer term.

A final comment on performance. Reviewing quarterly or even yearly performance numbers answers some questions in regards to how we're doing for our clients. But, it's important to understand that we’re not after what's hot. We're about delivering outstanding performance across our style peer services over the long-term. On display 38, we've added the 35 most important institutional services we have and their respective annualized performance premiums before fees. The track record is just outstanding, and we invite you to review them at your convenience. With excellent relative and absolute returns for our clients as a foundation, you can see on display 6 that we recorded positive flows for the quarter in all of our actively managers -- managed services; value equities, growth equities, and fixed income.

Overall, net long-term flows were $10.9 billion, largely driven by strength in our global and international services. For the quarter, value equity service had very strong net flows of $6.4 billion, and most encouraging was the fact that we had another positive quarter of growth equity net flows totaling $3 billion. As you can see in the disposition line, in the fourth quarter we had a reduction of approximately $1.4 billion in AOM -- in AUM, of which approximately $1.1 billion were growth equities and $300 million were fixed income assets. This is the result of our disposition of our South African joint venture interest. We exited this JV because returns on our investment were not meeting our expectations. We wanted to focus our resources on more profitable pursuits. However, we kept our research team in South Africa to ensure that our global research platform has the benefit of local research expertise.

For the year, as shown in display 7, we brought in over $80 billion in growth flows, a firm record, and 200 -- and $27.5 billion in net flows, another firm record. Value equity service fundings led the way, with just under $35 billion and 22 billion in gross and net flows, respectively, both setting firm records for flows in these services. Market appreciation, including our added alpha, increased AUM by $42.7 billion, while our $30 billion of dispositions for the year included cash management, South African and Indian assets under management. The net result was an increase in AUM of 7.4% to $579 billion, or an increase of 13.8%, so that’s over $70 billion of AUM, excluding the disposition.

Let's turn to display 8 and I'll start my discussion with our distribution channel highlight. At December 30, 2005, our institutional investment channel assets accounted for 62% of our overall AUM or $359 billion, which is up 4.8% for the quarter and 15.2% for the year. Our net flows for the three months were $9 billion, and we're well diversified geographically. For the 12 months ended December, we had record inflows of $20 billion for the institutional investment channel, owing mainly to the strength in our global and international style blend services. As we look at the year ahead, we expect to continue to focus on building our global institutional investment platform by leveraging the strength of our full product line suite, including our fixed income services, where we see opportunities to grow our AUM. We will focus on continuing to build up our Asia-Pacific infrastructure and expanding our presence in continental Europe, where we see the greatest opportunities for us in the near and the long-term.

Turn to display 9. Our retail channel AUM was up 3.4% for the quarter to $145 billion and up 7.6% for the 12 months, excluding cash management and Indian assets. It was an improving quarter for retail overall, as non-U.S. net inflows continued at a healthy pace. In the U.S., our separately managed account business strengthened this quarter and our wealth strategy services reached $3 billion in assets. However, despite improving U.S. sales overall, we continued to experience net outflows in the States, but at a slower rate than before. As we noted last quarter, we're feeling more confident that our retail business has begun to stabilize and, in fact, improve from the actions we have taken over the past year or two to reposition this unit and reinvigorate sales. But the rebuilding effort in the U.S. is still a work in progress.

Our asset allocation strategies, like wealth strategies and our target-based funds, are geared for the long-term interest of retail investors. These services have been gaining visibility and presents us with an opportunity to capture assets in the retirement space. Also, our focus on meeting client needs, rather than pushing the hot funds of the quarter, is starting to show results. Similar to institutional investment, we will seek to further expand and enhance our presence in Asia. In retail, our efforts will be focused in Japan, specifically, where we have met with recent success with the introduction last quarter of a new fund through a major Japanese distributor, a relationship we hope to build on. In the U.S., our plan for 2006 is to continue to upgrade and enlarge the sales force, as we target our efforts on the higher-end advisor.

Display 10 shows our private client channel highlights. Here you can see that our high net worth business has $75 billion of assets, with $1 billion in net inflows for the quarter. While net inflows continued, it was at a more moderate rate, owing somewhat to seasonal factors. Additionally, this quarter included transfer of approximately $570 million to the institutional investment channel. For the 12 months, this channel’s assets were up 17.1% or $11 billion, due to both market appreciation and double-digit organic growth. We continue to invest in our private client business, opening new offices and adding staff. This quarter, we increased the number of financial advisors by 8% to 263, or by 36% since year-end 2004. We opened new offices in Atlanta and Denver in the fourth quarter, and are opening an office in San Diego next week. Looking ahead at 2006, we plan to open our first non-U.S. private client office in London in the second half of this year. To support this effort and build a deeper bench in the U.S., we expect to further expand the number of our financial advisors and we’ll have a particular focus on non-U.S. product development to support our London initiative.

Highlights for the institutional research services are shown on display 11. As I explained earlier, higher U.S. revenues continue to be driven by higher market share and volume, despite lower revenue yields due to the accelerating shift to program trading and continuing industry-wide pricing pressure. Revenues totaled $84 million for the quarter, a little lower than our expectations, but an increase of 5.8% from a year ago. In London, we continue to have double-digit organic growth, as revenues were up 20% this quarter and 26% for the full year. Broadening our trading platforms in the U.S. and expanding our research team in Europe are proving to be revenue-generating strategies.

On that score, Sanford C. Bernstein achieved its highest ranking ever in the 2005 Institutional Investor Magazine survey of the best U.S. research firms, ranking in 26 categories overall, placing first in 19 categories and second in five categories. In addition, we are featured on the cover of the institutional edition of II's article on European independent research firms. We continue to be very proud of the talent we have at the firm, producing high quality, innovative research that serves our clients' needs and generates revenues for the firm. As we look ahead to 2006, we plan to initiate Asian distribution of our U.S. and European research, and begin a new electronic trading offering in London. In summary, we're pleased with the accomplishments and progress we've made in each of our four distribution channels, and we're excited about the challenges that lie ahead.

Before I begin -- before I begin my review of financial results, I would like to discuss the diversity of our assets and the continuing mix in our AUM, not only from a U.S., non-U.S. perspective but also, importantly, from an equity fixed income services mix perspective. Turning to the center pair of pie charts on the display 12, you can see that we currently have 72% of our total AUM in equities, up from 64% at December 2004. Since the disposition of our low net fee yielding cash management assets, we are benefiting from the improved quality of the mix in our assets under management. Looking at the two other sets of pie charts you'll get a sense of the global makeup of our firm's business. On the pie charts on the left side of the display, we show that non-U.S. client domiciled in AUM increased by 30% for the year. This compares to 13.8% for the firm as a whole, when you exclude the disposed AUM. Turning to the right side of the display, we show that over the past year, our assets in global and international services grew by 38%, from $182 billion to $257 billion.

As I noted last quarter, there are many factors contributing to this trend. The four most important are, number one, our investment in human capital, especially research in portfolio management in support of our global investment services suite; number two, the creation of non-U.S. investment services; number three, excellent investment performance; and number four, our investment in our non-U.S. distribution and client servicing. This display demonstrates that our continuing investment in seamless global research and resulting borderless 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 $178 billion or 31% of our total AUM, while global and international AUM by service accounts for $250 billion or 44% of our total.

Our primary contributor to our global asset growth is our style blend services as reflected on display 13. At year-end 2004, as you can see in the pie chart on the right side of this display, we had $52 billion in style blend AUM. Now, look at the chart on the left. By the end of '05, our style blend services were $85 billion. That is growth in AUM of over 60% in 12 months. Perhaps more to the point, at the end of 2005, blend services representing 15% of our total AUM versus 0%, when Alliance and Bernstein combined in October of 2000.

Now that I’ve provided some highlights on performance, asset flows and key trends in our distribution channels, let's turn to our firm's financial results starting on display 14. Revenues for the quarter increased 10.6% to $920 million, as compared to $833 million in the fourth quarter of 2004, with advisory and transaction fees up 13.3% or $78 million. As displayed on display 15, base fees were up 17.8% or $87 million, due primarily to higher average AUM from market appreciation, net inflows and an increase in our private client base fee schedules. However, transaction charges decreased 87%, primarily reflecting the impact of the aforementioned new private client fee schedule. An 18.8% increase in performance fees were primarily from value equity and hedge fund products. Moving to the lower half of the display, where we show fees by distribution channel -- distribution channel, you can see 30.7% increase in our institutional investment channel and a 9.8% increase in private client, both attributable to higher billable AUM. Retail fees were only down 2%, or $4 million, despite the disposition of cash management service assets, and the resulting loss of approximately $25 million in related revenue.

On Slide 16 you can see the distribution revenues decreased 12% to $97 million, while display 17 displays the net distribution activity for our retail business, as lower distribution revenues and planned distribution payments were attributable to the disposition of cash management. Additionally, we continue to experience a significant decrease in the amortization of deferred sales commissions, a decrease we expect to continue through mid-2007. Including the amortization of deferred sales commissions, net distribution is now essentially break even. On Slide 18 we show the components of other revenue. The increase of dividend and interest net was primarily attributed to higher interest and higher brokerage balances, and higher mutual fund dividends and interest on investments held to hedge obligations under our deferred compensation plans. Additionally, other net mainly includes a $7 million gain on the disposition of our South African JV interest.

Now that I covered revenues in detail, revenues had increased 10.6% and I'd like to talk about our 2.9% increase in expenses, with the analysis that begins on display 19. As you can see, increases in employee compensation were significantly offset by lower promotion and servicing expenses and, to a lesser extent, lower G&A. Turning to display 20, you will see the details of the 18.7% or $53 million increase in total compensation expense. $24 million of the increase was attributed to higher incentive compensation, driven by higher operating earnings, and an increase in net amortization of deferred compensation plans. We also had a $15 million, or 26.4%, increase in commissions, as sales across all four distribution channels were up -- up significantly. Base compensation increased only $6 million, or 7.4%, due mainly to merit increases and additional headcount, primarily in our private client channel.

Turning to display 21, note the promotion and servicing costs declined significantly. As I noted earlier, this is attributable to the support previously needed for our cash management services and lower deferred sales commission amortization. G&A was only down $4 million from a high base in the fourth quarter of 2004. While there were several volatile items recorded in the quarter, both pluses and minuses compared to a year ago, the net effect raised the figure about $5 million above our current run rate. Meanwhile, additional private client offices and new space, including London, have increased our facility spending year-over-year.

On display 22 we present a recap of total revenues and expenses to come to a summarized income statement for Alliance Capital. Here you will see that our pretax margin is up 490 basis points to 33.8%, with our net income up to 27%. Additionally, our effective tax rate in the operating Company is up, as a larger portion of our pretax income is derived from non-U.S. businesses. Carrying a 280 -- $290 million of Alliance Capital's net income forward to display 23, we show Alliance Holdings’ financial results. Alliance Holdings’ equity share of Alliance Capital's earnings were $92 million for the fourth quarter, versus $72 million in the same quarter last year, with net income, after taxes, of $85 million or 30.7% better than '04. Our distributions per unit for Alliance Holding will be at $1.02, a 24.4% increase from the $0.82 distribution in the same quarter last year.

In closing, this was both a significant quarter and a great year for us on many fronts, including the fact that earnings for the fourth quarter were better than expectations. This past year we delivered great performance for our clients, and received accolades from consultants, analysts and the industry press. We have strong asset flows and we made significant progress in our aspiration of becoming the most admired asset management firm in the world. I'd like to end my discussion by reiterating some significant trends, a few of which I discussed last quarter, 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 investment services is proving to be an important competitive advantage.

We continue to gather significant assets globally. Few firms have yet to establish a truly global platform with the breadth and the depth of investment services and sales support that we offer. Additionally, and perhaps more important, our excellent investment performance is the result of our focus on having more knowledge and using it better, and doing what is in the best interests of our clients, the ultimate driver of unit holder returns. We continue to invest in and develop our research talents, as well as refine and develop what we believe is a 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. Thank you. Oh, yes, I do want to remind you that we will return to our practice of no longer providing earnings guidance.

Now, I'll turn the call over to Lew and then we'll take your questions.

Yes, Jerry, that was an important addendum. Thank you. In addition to reporting fourth quarter earnings, the firm announced that it will be changing its name to AllianceBernstein, a name that we think better reflects the character of our business and the client-centric mission and values now shared by the entire staff. In taking this action, however, we're going to be careful not to lose the best of the heritage and brand equity that Alliance Capital and Bernstein created separately. This was a sacrosanct feature of our combination more than five years ago. Thus, at the product level, we'll be known as Alliance Growth Equities, Bernstein Value Equities, Alliance-Bernstein Style Blend, Alliance-Bernstein Fixed Income and, of course, Bernstein Research.

At the client level, we will continue to be known pretty much as before, but with some minor descriptive changes to simplify and make clearer the focus of our various client service units. The ticker symbol for our limited partnership units will, as of late February, change from AC to AB. Now, of course name changes are in most cases not a very important development. To us, however, it means more. To us, it is an affirmation of the success of our combination, something rare in the financial services industry.

And now for your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Bill Katz at Buckingham Research. Please go ahead.

Thank you and good afternoon, everybody. I just was curious if you could talk a little bit, maybe Jerry and/or Lew, to your point about the mix shift changing and maybe on more of a sequential basis, if you strip out the impact of performance fees, it looks like the revenue yield has about flattened out now. I'm just sort of curious, as you migrate forward, how would you think that that mix or that revenue might look, say, 12 or 24 months out?

Well, I'm not -- you know, Bill, I'm not going to give you a number, but to the extent that we continue to add these non-U.S. services, these are high added-value services and they bring with them better fees. And as we continue to increase and as our client base outside the U.S., even more than in the U.S., they're looking for global and international services. The other thing that's helped our mix here is getting out of the cash management business, particularly the one that we were in, where we were distributing through brokers. This is really a low-yielding investment business that we have, so that's help -- helping the return, also. So, I mean it's a grad -- obviously it's a gradual thing, but the trends are good.

Okay. Second question, and maybe I'm not looking at it the right way or maybe the way I ought to be looking at it, but I certainly appreciate the operating margin at the overall level, but I'm sort of curious, as you look at the change year-on-year between the revenue growth and compensation, it seems like compensation is still outstripping revenue growth, and I'm just sort of curious how that trend may also persist going forward?

The only thing that is outstripping anything because there's a lag is in the commissions. It's in sales commissions, all right, and there's a lag between when we pay the commission and when all the revenues come in on that. So there is no -- I don't understand or don't agree that our incentive compensation is outstripping the growth, when it's based on the earnings of the firm.

Okay, so it's more a function of earnings rather than topline?

Well, the IC pool is based on earnings, we've taken everyone through that before and, as I said, you're looking at, I'm sure, total compensation. It's the sales commissions that are -- that have a faster growth rate, and we'll get that back.

Okay, thank you.

Thank you. Our next question is coming from Jeff Hopson of A.G. Edwards. Please go ahead.

Thank you. I have two questions. Just without trying to back into margins going forward, just could you comment on any magnitude of infrastructure investments that you'll be making in the various locales, as we look forward? And then in terms of the U.S. growth products, as you meet with consultants, would you say that any issue regarding performance, you know, three and four years ago, is that pretty much beyond -- is that an issue any more with the consultants and other clients?

We'll -- Lew and I are going to split the answers to this question. I'll take the infrastructure and Lew will pick up the issue about the consultants and performance. On the infrastructure, what's happening, Jeff, is we did add three new office -- two new offices in the fourth quarter of this year, and we're opening up a new one in the first quarter, so that -- you know, these aren't huge offices, but you rent out the space, you build them out so that -- that starts getting reflected and we'll have a full-year impact of that in '06. And we'll have a full-year impact of all of the offices that were opened during the course of the year. The London space, for our private client, the rent is now in the number, but I still have to build those offices out, also, so this will creep in. But those are the big infrastructure changes, plus IT. We have to build a platform for these new services. But again, we'll build them up. They'll be amortized over a reasonable period of time. These aren't going to rip apart the margins at all.

On your second question, Jeff.

Yes.

First, I think it is important to stress that the growth business today is a very diversified one, across many different services. So by way of example, global and international services, especially global research growth, which is our key offering in that domain, there is no historical performance deficit to recover. To the contrary, those services have performed well for quite some time and recently have achieved, as Jerry reported, very impressive returns.

It is true that we suffered some erosion, a noteworthy erosion, in our position in the United States, principally around large cap growth and U.S. growth. Recent results, however, have improved dramatically and we have, as I think you know, invested very aggressively in building our research infrastructure, not only in terms of scale but I think, more importantly, in terms of innovation, both at the fundamental and quantitative level, all of which is -- is a -- a story that we are emphasizing, as you might imagine, with the consulting community, so they can appreciate the full scope of the effort we made to improve the quality of those services. It will take time to accomplish a complete restoration of our brand equity in the U.S., but we are optimistic that in time we will achieve that mission.

Very good. Thank you.

Thank you. Our next question is coming from Mark Constant of Lehman Brothers. Please go ahead.

Thanks. First, just a numbers clarification thing or verbiage, I guess. In the dividends and interest net, the text of the slide references higher dividends and interest on deferred comp investments. Did I hear you add more color on that? I thought you used a different word or two. Were there also planned gains that look at amortized and comp later?

No, let me -- I'll add some color for you, if you like. As you know, when we -- we invest in the investment products for our clients in the deferred compensation plans, and as they go up or down with the market, that gets reflected currently and then amortized over four years.

Right.

There's a little bit of a funny twist here. The income or dividends that are earned on them, we actually give that to the employees on a current basis, so that is not amortized over the four-year period. And, at the end of the year, you may have a -- some funds that pay out a significant amount of dividends and that actually gets reported currently, but there is an offset here. And that is, we're taking the gain or loss, you know, in Alliance and immediately that action gets attributed to -- to the -- to the employees. So the bottom line impact on this particular item is zero, it's just some geography.

And there was no material timing difference, though, like there has been in prior quarters from --

No, no, the timing difference would be on the principal or the investment amount. That's when you have that timing difference. Here it's a total wash to the bottom line.

Got it. Okay. And then, I appreciate the research revenues are only 10% of the total, but it's been a surprisingly volatile, at least sequentially, number over the last few quarters here, and I’m just trying to get a handle on volume versus market share and pricing dynamics there. It's -- it looks like on a year-over-year basis, it was up directly in line, about 3.8%, the same as NYSE volumes, but you obviously had the UK buildout in there, too. Is there -- third quarter was great, fourth quarter, obviously, was lighter from what I kind of thought was the run rate. Is there a -- an erosion in the profitability of that business still, or is it, you know, really -- was it this fourth quarter and the program trading that’s the anomaly?

No, let me first -- this is lumpy. I mean, you know, when clients --

Because I'm trying to look at years.

Yes, but -- because within the quarter-over-quarter, it is lumpy. We have -- no, we don't see a deterioration in share, at all. We see, actually, an increase in the share of what's being -- about what's being listed. There is a change in the mix to lower paying, you know, lower paying services, but we don't have a deterioration here at all. And we're not -- as you know, it's not a high margin business, but other than the last couple weeks in December, we weren't disappointed with what happened this year at all.

Okay. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is coming from Cynthia Mayer of Merrill Lynch. Please go ahead.

Hi, good afternoon. For my two questions, I guess one on -- just on the FA's. I think you mentioned they are up 36%, year-over-year, which seems like a big jump, and I'm wondering when -- how we should think about the timing of the impact of that in terms of net flows? And, also, if you have any projections for '06?

Well, Cynthia, as I think you know, there's a maturity cycle with regard to FA's, especially since our strategy is to train and develop what we judge to be talented professionals, many of whom don't have a lot of prior experience, and that development cycle actually is multi-year. So this very rapid build up in FA headcount naturally is driving down the average experience level with us of the entire FA force and, therefore, degrading productivity. As that group matures, however, we would anticipate productivity gains of substantial magnitude.

Okay. And then let's see, on the net -- net flow question, most areas, obviously, had really great flows. I'm just curious about the index structure, which seems to mostly have -- not be growing. How do you see that fitting in with the rest of the business, and why wouldn't that have flows?

We really don't actually market this, at all. This isn't our space, as it is with a few other firms. We typically do this where it's an accommodation to a client, and we use it, quite frankly, as a way to, over time, get clients to move from this to our blend or other actively managed services. So, it's more of a source of getting clients to move towards active services than anything else, and we're not looking to build the service.

I do want to add, Cynthia, that results in those services for the clients are actually quite good because, at our scale, it is possible, even though these services are passive, to take advantage of index construction and other flows that influence computed returns, and actually add just a little to the index return. So while we don't actively market the services, I want you to know that we feel as if we're delivering a sound service to the clients we do have.

And although it's small, it's a profitable little business.

Okay. Great. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is coming from Mark Constant of Lehman Brothers. Please go ahead, sir.

Hi. I was just hoping for a definitional refresher, if you would, please. You obviously break out the unreinvested distributions and the detract from net flows. Are the reinvested dividends and distributions, are those in the cash flow line, or in the sales line, and what is the order of magnitude this quarter?

Oh, I don't -- it'd have to be cash flow, but I don't have the number. We're -- we work hard to keep the -- the sales numbers pretty clean. If anything, we're conservative there and we would rather --

The cash flow line is what we should --

Right, but I don't have a number. I'll see if we -- we'll see if we can get something and you can call Valerie, if that is -- but I don't have a number at hand, Mark.

I'm just grossing it up from, sort of, industry typical reinvestment rates and presuming that it's at least a billion or two, if that’s -- if it’s materially less than that.

Mark, it's something that I don't look at. I really don't have a clue.

Okay, I'll check with Valerie. Thanks.

Is there anything in the numbers that make it look like it is unusual as a percent or anything?

Oh, no, I’m just trying to get a sense of the magnitude.

I got you. Okay.

Thanks.

Thank you. Our next question is coming from Bill Katz at Buckingham Research. Please go ahead.

Okay, thanks, and thanks for taking a second order of questions here. I’m sort of curious if you could talk a little bit more about the retail expansion in the United States. I presume the answer is de novo, but I'm sort of curious about how you're thinking about possibly the use of acquisition to accelerate your market share? And maybe, as part of that, I think last quarter or the quarter before, you mentioned that you'd be thinking about reducing your debt. I was just wondering if you could help prioritize some capital management, overall.

I'll answer question one, and then turn it over to Jerry for two. We have no plans, whatever, to do any acquisitions in the United States. You were right to assume that we will do this entirely organically.

Okay.

And as far as the management of the data on our balance sheet, as we mentioned in the past, we haven't done it earlier because of penalty fees, and when this matures, we're just going to -- we're going to pay it off. So there's no plan for prepayment and there's no plan for an issuance of anything of any consequence.

Okay, and if I could be so brazen as to ask one more question, I’m sort of curious if you could categorize the institutional pipeline, and where are you today, versus maybe where we were in the fall? I think last time you said things had got off to a very good start in the fourth quarter and so it added a little bit as the quarter went on. Have we seen any kind of reversal of that, maybe in a reacceleration?

Well, a reversal's not the term to use, and we were at all-time highs. But we're feeling good about what the pipeline it, but it's not as high as it was in the third quarter. We don't know if this is seasonal, or what, but we're winning more than our fair share of mandates, and we expect a good first quarter of flows.

Thank you.

Thank you. Our next question is coming from Cynthia Mayer at Merrill Lynch. Please go ahead.

Hi, thank you. Along those lines, I'm wondering if you could give a little more color on the fixed income prospects? I think you said you see a lot of opportunity there, and I'm just wondering, is that for overseas clients, for U.S. clients? Is there anything particular you're seeing that makes you think it's looking better than usual?

Well the progress we’ve had overseas has actually been noteworthy, not only institutionally but also in the retail channel. We have several fund offerings, but two in particular, that have extremely impressive performance histories, and we are quite proud of those offerings, actually. And they're doing very well in the marketplace, for the right reasons. At this juncture, there's every reason to believe that they will continue to. We've also had improved success in the institutional channel with our global offerings. In the United States, we have a lot of work to do. But we are, as you know, investing aggressively in the research platform, both credit based and quantitative, with what we think are ultimately going to be important improvements to our competitive profile. So, while it will take time, we're hopeful that our market share ultimately will reflect these investments.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Sir, there appear to be no further questions at this time.

Okay. If there are no further questions, I'd just like to thank everyone for joining us this afternoon and to welcome you to call Investor Relations. We are happy to take your call. Thank you very much.

Thank you. This concludes today's Alliance Capital fourth quarter 2005 earnings review. You may now disconnect.